By Philippe de Montigny

TransCanada Corp., an energy infrastructure company, saw a 14 per cent dip in profits in 2012 while its top leader got a lofty raise.

The company’s net income dropped by $238 million during the last fiscal year. While TransCanada stocks lost value for shareholders, president and chief executive officer Russ Girling took home an annual paycheque of $8.7 million, a 26 per cent increase over his 2011 compensation.

 

Carleton University professor André Plourde, an expert in energy economics, said the decline is largely due to delays in restarting Bruce A, a nuclear power plant in Ontario in which TransCanada invested.

“They lost $149 million on Bruce A alone in 2012,” Plourde said. “I would expect that this was an unusual situation.”

Also unusual is the CEO’s salary hike during that lower-income year.

“It may be a complete happenstance,” Plourde said. “There’s no doubt that performance will matter in terms of what the salary of the CEO is.”

While the year’s financial targets were not met, a TransCanada circular reports that Girling “secured significant projects that support future growth.” Executives’ compensation breaks into a base salary as well as short-term and long-term monetary incentives. These incentives usually consist of company stocks and options.

The increase in long-term compensation for these growth-generating projects outweighed the decline in short-term compensation for the poor performance in 2012. 

Revamping Bruce A, for instance, was an investment for long-term growth that cut into the year’s profitability.

Parts of the power plant were offline for maintenance throughout the fiscal year, so less power could be generated for revenue and the company paid out to fix its facility, according to the 2012 annual report.

Plourde said the company expected the nuclear power plant to resume its operations in late November 2012, but another shutdown had to be sustained.

The planned outage of another power plant—the coal-fired Sundance A west of Edmonton—also pulled down the company’s income, he explained.

 

Natural gas a finicky business

Low energy prices also slashed TransCanada’s revenues from its natural gas pipelines in 2012.

The company is responsible for nearly 11,800 megawatts of electricity, which is enough to power close to 12 million of homes. More than a third of this energy is from natural gas, the fuel source also responsible for powering massive oil sands operations.

Market conditions however have made it more difficult for TransCanada and other companies producing and distributing natural gas to get the biggest bang for their buck.

“The $1.89 per share we earned in 2012 was impacted by cyclically low gas and power prices,” CEO Russ Girling wrote in the annual report. He also outlined the decreases in the volumes of gas pushed through the pipelines.

Expert André Plourde questions TransCanada’s future in the natural gas business.

“Natural gas production in Western Canada is falling,” he said. “You fix infrastructure to keep it safe and now you’re not filling it at capacity.”

He said that TransCanada kept a good track record in terms of safety, but maintaining age-old pipelines is costly. With more frequent spills and occasional explosions, increasing regulatory pressures are bound to choke profitability, he predicts.

Though it lies outside the 2012 fiscal year, incidents like the recent explosion in southern Manitoba are drawing attention to the “old pipes,” as Plourde puts it.

“It’s coming at a bad time in the sense that TransCanada has to reevaluate its business model,” he said.

The natural gas challenges faced in 2012 could resurface in future fiscal years, he said, but TransCanada hopes that expanding oil infrastructure—namely with the Keystone XL project on the line—will generate long-term income growth.

More public scrutiny on gas pipelines usually means tighter regulation, Plourde said. And tighter regulation increases costs, eating into the company’s profits.

“They’re going to have trouble with natural gas.”