By Tim Kiladze
If you’re just an average investor, no one would blame you for thinking that TransCanada Corp. (TRP) is purely a pipeline operator. Pretty much any time the company’s name has been mentioned in the past few months, the discussion has centered on its Keystone XL pipeline.
But dig through historical financial statements and you’ll notice one glaring fact: Pipelines aren’t driving the company’s growth. Power generation is.
Going back a decade, earnings before interest, taxes, depreciation and amortization from the pipelines division have been stuck in a lull around the $3-billion mark, with a high of $3.3 billion in 2008 and a low of $2.7 billion in 2001. Last year the unit provided EBITDA of $2.8 billion.
Its energy unit, which is dominated by power generation, is a drastically different story. Since posting EBITDA of $383 million in 2001, there has been growth in every single year except one, reaching an EBITDA of $1.1 billion last year. That’s growth of 187% in 10 years.
With that in mind, the company’s latest $470-milion solar acquisition makes all the more sense. By scooping up nine Ontario solar power projects from Canadian Solar Solutions Inc. the firm not only beefs up its energy division, it also branches out into solar, a sector it previously did not play in. (Before this, it played in natural gas, nuclear, coal, hydro and wind generation, mainly in Alberta, Ontario, Quebec and the northeastern United States.)
Plus, all nine of the new projects have 20-year power purchase agreements with the Ontario Power Authority, which means there’s virtually no risk for TransCanada. That’s an important feature for the company because it got into some trouble in New York City, where it purchased the Ravenswood plant. Since that purchase in 2008, capacity prices have collapsed and TransCanada has got stuck in a battle with the New York Independent System Operator power authority.
At its latest investor meeting in November, before the latest deal was struck, TransCanada noted that 55% of its energy EBITDA would come from long-term contracts by 2013, up from 44% in 2010.
And while its North American power generation capacity was weighted 52% to natural gas, BMO Nesbitt Burns analyst Ben Pham noted that TransCanada said it wants to explore more natural gas opportunities, as well as renewable energy assets. In part that’s because its 1.1 gigawatt power purchase agreements for coal-fired power in Alberta expires in December 2020.