TransCanada weathers challenging environment
There’s a reason investors look to the midstream segment of the energy sector when times are difficult — periods of slow economic growth don’t stop the world from using energy sources every day.
It’s one reason TransCanada Corp.’s first-quarter numbers didn’t disappoint Friday as it reported earnings that beat consensus estimates for both earnings and cash flow.
Investors who bought a $10 TransCanada share back in 2000 would be looking at a $50 value today, not counting compound annual growth of seven per cent in the dividend since then.
That works out to a 13 per cent return to shareholders on an annual basis, and there was talk at Friday’s annual meeting about the possibility of augmenting the dividend. Not bad, especially at a time when shipping volumes are down, the company effectively risked $2.5 billion in the Keystone XL process and has so far put $700 million on the line toward winning approval for its Energy East pipeline.
Contrast that with the $5 million cost to get the green light for a project in Mexico.
Chief executive Russ Girling made the point Friday that delays on approvals — or the rejection of applications as happened with KXL — need to be understood in terms of the quantum of potential revenues lost to the Canadian economy by not having access to tidewater or the Gulf Coast.
He illustrated that point by outlining the math on 3.5 million barrels a day, multiplied by the $10 per barrel differential (more or less) and years of delay.
The numbers add up very quickly.
“That’s a significant hit to the economy. Delays are costing our economy billions of dollars,” he said.
“Those are numbers that have come out of the economy and continue to come out of the economy because we haven’t gotten these things done over the last few years.
“There isn’t anything I can think of that would provide that kind of stimulus than bringing that $10 differential into our provincial and federal coffers and into companies’ hands, who will re-invest it into job creation.”
While Girling was measured in his comments regarding Quebec’s recent decision to submit Energy East to a full environmental review, it’s hard not to wonder how galling it must be for him to still hear the Quebec premier supporting a federal bailout of Bombardier, even after it signed two orders for its aircraft in recent weeks.
TransCanada isn’t asking for any money.
It just wants support — and ultimately a permit — for Energy East, a project that will contribute to the creation of more than 90,000 jobs across the country.
The good news, perhaps, is that TransCanada has a 60-year history of delivering natural gas to Quebeckers and therefore understands how the province’s regulatory system works.
The issue is whether Quebec’s approach will be complementary to — or duplicative of — the ongoing National Energy Board process.
That said, is Girling optimistic about the recent positions and initiatives on greenhouse gas emissions taken by the provincial and federal governments as they relate to TransCanada’s objectives?
“We are all well aware how difficult this has been. Moving these things forward isn’t going to be the responsibility of any one individual,” he said after the meeting Friday. “I think everyone is trying to row in the same direction and I sense that (Premier Rachel Not- ley) is out there trying to do the best she can, trying to advance this cause, but one trip doesn’t get you there. We know that.
“We are all going to have to continue to push our message out and do our best to get through the regulatory processes.”
With the first quarter in the rear-view mirror, FirstEnergy’s Steven Paget said the company has set itself quite an agenda for the remainder of 2016, including work related to its US$13-billion acquisition of Columbia Pipeline Group in Ma at sour rch. “This quarter anticipates other quarters. Not only have they talked about augmenting the dividend rate, they have the asset sales to complete as part of the Columbia acquisition, they have to integrate the Columbia acquisition and they have to deal with the approval process associated with Energy East,” Paget said.
After integrating Columbia, TransCanada will have 91,000 kilometres of natural gas pipeline capacity and 664 billion cubic feet of working gas storage capacity on its books.
The company will still have to solve the ‘small’ problem of its main line, which accounted for one-sixth of the company’s EBITDA (earnings before interest, depreciation, amortization, taxes) but is running at about half its six bcf/day capacity.
The problem, of course, is that it can’t change tolls on other lines to offset diminished volumes on the main line, which serves a market that is increasingly taking its natural gas from the Utica and Marcellus regions of the United States. Girling briefly addressed the main line challenges Friday, citing the rapid transformation of the North American natural gas industry. That has resulted in “gas-ongas” competition that requires producers to become more active in marketing their product.
The real answer likely lies somewhere in the middle, with producers and TransCanada looking at ways to make it work better for both sides.
It can’t be an ‘either/or’ outcome. As this year’s annual meeting season unfolds, it’s not easy to find the rays of optimism. TransCanada provided a sprinkling Friday. Undaunted by onerous and evolving regulatory processes and the tough environment faced by its customers, the company remains focused on the future and the value it aims to create from assets it has built over the past 65 years in Canada, the United States and Mexico.
In the best of all possible worlds, next year’s annual meeting will see Girling outlining the construction schedule for Energy East rather than talking about the regulatory process.
Unlike commodity prices, that remains one variable Canada can control.