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A Closer Look at TransCanada Corporation (USA) (TRP)’s Earnings

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The Canadian midstream giants have finally reported fourth-quarter earnings, as both TransCanada Corporation (USA) (NYSE:TRP) and Enbridge Inc (USA) (NYSE:ENB) released their information last week. TransCanada reported on Wednesday, missing analysts’ expectations on EPS and revenue. Now that the dust has settled, let’s take a closer look.

General rundown
Revenue was up slightly to $2.09 billion, but fourth-quarter net income fell year over year, from $376 million in 2011 to $306 million in 2012. Earnings per share came in at $0.43, short of the $0.49 analysts were expecting.

Unlike Enterprise Products Partners L.P. (NYSE:EPD), which also experienced a drop in net income but still managed to set several full-year records, TransCanada hasn’t had a great year overall. Let’s take a closer look at its fourth-quarter performance to see if we can gain any insight on a brighter future.

Q4: Digging deeper
All three of TransCanada’s business segments declined year over year in the fourth quarter. Here is how the EBITDA picture looks unit by unit:

Unit Q4 2012 Q4 2011 % Change
Natural Gas Pipelines $690 $716 (3.6)%
Oil Pipelines $172 $179 (3.9)%
Energy $222 $254 (12.6)%

Source: Company release. Dollar figures in millions.

Let’s start with the energy segment, which experienced the biggest percentage drop. There were all sorts of things going wrong here, beginning with the Sundance A force majeure, and ending with the Bruce A life extension outage. Neither unit generated any revenue in the fourth quarter. They both belong to TransCanada’s Western Power business unit, which was the only portion of the energy segment to experience a decline. Eastern Power and U.S. Power both increased earnings year over year.

Next up is the oil pipelines segment, which only declined $7 million on the quarter, which management attributed to increased business development activity and related costs. Its Keystone pipelines (not the XL portion) generated $180 million in EBITDA, which was a $1 million increase year over year.

Finally we have the company’s largest segment: natural gas pipelines. Lower revenue and higher costs on both the ANR and Great Lakes systems stung TransCanada this quarter, as EBITDA on those systems declined $10 million and $9 million, respectively. However, the biggest problem in this segment continues to be TransCanada’s mainline pipeline.

All the buzz about the Keystone XL approval means that people not only forget that TransCanada has other assets; its biggest problem isn’t its oil sands line, but the fact that no one wants to ship gas on the Mainline anymore. Take a look at the system’s EBITDA numbers over the last five years:

Year Mainline EBITDA
2008 $1,141
2009 $1,133
2010 $1,054
2011 $1,058
2012 $994

Source: Company releases. Numbers in millions.

For the full year 2008, the Mainline earned TransCanada well over a $1 billion. By 2012, it failed to reach the billion dollar mark. The Mainline is in dire straits, which is why TransCanada is planning to make a change.

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