On Jan. 4, 2013, the Nebraska Department of Environmental Quality (NDEQ) issued its final evaluation report to Governor Dave Heineman on the proposed re-route of TransCanada Corp’s (TSX: TRP, NYSE: TRP) Keystone XL crude oil pipeline.
Among its key conclusions the NDEQ pointed out that the new route avoids the Nebraska Sandhills, an environmentally sensitive area that was defined as such by state and local agencies in 2001. The NDEQ also concluded that construction and operation of the 1,179-mile extension of the Keystone Pipeline System is expected to have “minimal environmental impacts in Nebraska.”
The final report also noted that construction of Keystone XL will result in USD418.1 million in economic benefits and support up to 4,560 new or existing jobs in Nebraska. The project will generate USD16.5 million in taxes from pipeline construction materials and is expected to yield up to USD13 million in local property tax revenues in its first full year of operation.
Critically, the NDEQ concluded that normal operation of the pipeline is expected to have no effect on ground or surface water quality or use along the pipeline route in Nebraska. The NDEQ noted that even in the event of a spill the impact on water resources would be localized and wouldn’t impact the Ogallala Aquifer as a whole.
In addition to implementing a specific “emergency response plan” for the pipeline and assuming responsibility for clean-up, remediation and compensation related to oil released, TransCanada has agreed to 57 “special conditions” for construction, operation and maintenance “more rigorous” than industry standards that will make Keystone XL safer than typical pipelines built in the US.
TransCanada will bury the pipeline deeper underground than usual, install more data sensors and remote-controlled shut-off valves and conduct more inspections and more frequent maintenance.
The company will also use “special techniques” to reduce disturbance and enhance pipeline safety near wetlands, rivers, residential and commercial areas, steep terrain and fragile soils.
The NDEQ also pointed out that the physical and chemical properties of crude oil transported in Keystone XL will be similar to the light and heavy crude oils already being transported in pipelines across the US.
According to legislation adopted by the Nebraska State Legislature, the Gov. Heineman has 30 days to review and provide a decision regarding the proposed re-route.
TransCanada, although its profile in the US is all about Keystone XL and the political controversy surrounding it, is about much more than that project.
For example, the company also announced last week that it’s been chosen by Progress Energy Canada Ltd, the entity resulting from Progress Energy Resources Corp’s acquisition by Malaysia’s state-owned oil and gas company Petronas, to design, build, own and operate the proposed CAD5 billion Prince Rupert Gas Transmission project.
This pipeline will transport natural gas primarily from the North Montney gas-producing region near Fort St. John, British Columbia, to the recently announced Pacific Northwest LNG export facility in Port Edward near Prince Rupert, British Columbia. Progress and TransCanada expect to finalize definitive agreements in early 2013.
Along with its previously announced Coastal GasLink Pipeline project, this is the second major natural gas pipeline proposed to Canada’s West Coast for TransCanada and is another expression of confidence in the company’s ability to design, build and run pipelines.
TransCanada has also proposed an extension to its existing NOVA Gas Transmission Ltd (NGTL) system in northeast BC to connect both to the Prince Rupert Gas Transmission project and to additional North Montney gas supply from Progress and other parties. The initial capital cost estimate for the new NGTL project is approximately CAD1 billion to CAD1.5 billion, with a forecast for the extension to come on line by the end of 2015.
The Prince Rupert project and the Coastal GasLink Pipeline project to Kitimat would together add more than 870 miles to TransCanada’s Western Canadian natural gas transmission systems.
TransCanada, if management does what it has the last nine years, will announce what’s become an annual dividend increase when it reports fourth-quarter and full-year results for 2012 on or about Feb. 13, 2013.
The company reported net income of CAD369 million (CAD0.52 per share) for the three months ended Sept. 30, 2012, down from CAD386 million (CAD0.55 per share) for the third quarter of 2011. Comparable earnings–a metric more closely watched by analysts–fell to CAD349 million (CAD0.50 per share) from CAD416 million (CAD0.59 per share) a year ago.
Expectations were for comparable earnings of CAD0.52 per share. Outages at Bruce Power, Western Power and Sundance A as well as reduced earnings from certain natural gas pipelines, including the Canadian Mainline, ANR and Great Lakes, offset better performance from operating elements of the Keystone Pipeline System and recently commissioned assets.
Bruce Power resumed full generation in November 2012. Sundance A will remain out of service until the fall of 2013.
Low natural gas prices impacted TransCanada, as more of the fuel remained in storage. Natural gas averaged USD2.893 per million British thermal units during the quarter, down 29 percent from a year earlier. Natural gas futures averaged USD3.54 during the fourth quarter, recovering rather well after hitting a 10-year low on the New York Mercantile Exchange in April.
Revenue was CAD2.12 billion, up from CAD2.04 billion in the third quarter of 2011.
Management regularly boosts the quarterly payout by about CAD0.02 per share every year around this time since 2004. TransCanada declared CAD0.27 per share per quarter, or CAD1.08 annualized, for 2003. In 2012 the company declared CAD0.44 per share per quarter, or CAD1.76 annualized, about 63 percent more than what it paid 10 years ago.
The pipeline and power company has never cut its payout and continued its annual increases throughout the Great Recession of 2007 to 2009.
Bay Street has a neutral-to-bullish stance on TransCanada, with seven analysts rating the stock a “buy,” eight calling it a “hold” and two recommending it a “sell.” The average 12-month price target, based on the 15 out of 17 that provide one, is CAD49.68.
So far in 2013 six analysts with “buy” ratings–according to Bloomberg’s standardization of broker-speak–have reiterated their advice. Scotia Capital boosted its 12-month price target from CAD52 to CAD55–the highest among analysts who provide such a figure–while once again rating the stock “sector outperform.”
Veritas Investment Research and Edward Jones each reiterated their respective “buy” ratings on the stock, while Credit Suisse, BMO Capital Markets and RBC Capital Markets still rate TransCanada “outperform.” Veritas raised its 12-month target from CAD47.50 to CAD50. Credit Suisse and BMO stuck with CAD52 targets and RBC maintained its CAD51 forecast. Edward Jones doesn’t provide 12-month price targets with its recommendations.
CIBC World Markets raised its 12-month target to CAD49.50 but retained a “sector perform” rating. TD Securities kept a “hold” rating and a CAD50 target, while Deutsche Bank raised its target from CAD45.14 to CAD51.13 but maintained a “hold” rating. FirstEnergy Capital Corp raised its target, from CAD45 to CAD51, but kept a “market perform” rating. Canaccord Genuity Corp boosted its target from CAD47 to CAD49 but still rates the stock “hold.”
Of the 12 analysts that have issued updated analyses thus far in 2013 National Bank Financial is the only one with a “sell” rating on TransCanada. National Bank has rated the stock “underperform” with a CAD42.50 12-month price target since Feb. 1, 2012.
Based on TransCanada’s CAD48.50 closing price on the TSX on Tuesday, Jan. 15, and the consensus 12-month price target among analysts covering the stock of CAD49.68 the implied upside is 2.4 percent. Including the CAD0.44 per share dividend declared Oct. 30, 2012, and payable Jan. 31 (to shareholders of record as of Dec. 31, 2012) as well as three payments during 2013 at the likely raised rate of CAD0.46, total return potential is about 6.2 percent.
As of this writing TransCanada is yielding 3.6 percent. That figure has come down since mid-summer 2012, as the stock has rallied from a closing price of CAD41.70 on June 26 on the Toronto Stock Exchange (TSX) to CAD48.50 as of Jan. 15. From June 26, 2012, the stock has generated a Canadian-dollar total return of 19.3 percent and a US-dollar total return of 24.2 percent. For 2012 it returned 9.9 percent in local terms and 12.3 percent in US dollar terms.
Over the past 10 years the stock has outperformed the S&P/TSX Composite Index, the S&P/TSX Energy Index, the S&P 500 Index and the MSCI World Index.Keystone XL is a significant project. It is but one of many, however, with which TransCanada is currently involved. With or without it the company will continue to build wealth for shareholders for the long term.
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