Last year was a truly transformational one for TransCanada (TRP 0.80%). The North American pipeline giant completed a major acquisition and a slew of expansion projects, which fueled double-digit earnings growth, enabling the company to boost its dividend 10.6%. There's plenty more growth in the pipeline, which has TransCanada expecting to continue producing robust dividend growth for the next several years.
Drilling down into the numbers
TransCanada ended 2016 with a bang, delivering a 24% year-over-year increase in fourth-quarter EBITDA, which pushed its full-year earnings up 12% compared to 2015. That's despite weaker earnings from two of the company's core segments. Instead, the company more than made up for that weakness thanks to robust growth elsewhere:
Data source: TransCanada. Chart by author. In millions of Canadian dollars.
As that chart shows, the star of the quarter was the company's U.S. natural gas pipeline segment. Earnings nearly doubled due primarily to the acquisition of Columbia Pipeline Group. In addition to that, the company also benefited from higher rates on its ANR system. Meanwhile, earnings in the Mexico gas pipeline segment more than doubled thanks to contributions from the recently completed Topolobampo and Mazatlan pipelines. Finally, energy earnings edged up thanks to higher realized prices on volumes in its western Canadian power assets and higher earnings from natural gas storage. That said, TransCanada is in the process of selling its U.S. Northeast power assets, which will cause energy profitability to decline in 2017.
The strong results across those three segments helped TransCanada more than offset weakness in its Canadian natural gas pipeline segment, which has been under pressure due to rising output from U.S. shale plays. The company has been trying to entice leading Canadian gas producers Encana (ECA +3.42%) and Canadian Natural Resources (CNQ +1.32%) to sign up for more capacity on its mainline system by offering a significant reduction in tolls. However, neither Encana nor Canadian Natural Resources have been willing to commit to the volumes because the tolls are still not cheap enough to make Canadian gas competitive with U.S. shale plays.
In addition to the struggles within its legacy Canadian gas pipeline business, TransCanada's liquids pipelines were also under pressure last quarter. That's after the company experienced lower volumes on its Marketlink pipeline, which more than offset higher volumes on its Keystone pipeline.
Image source: TransCanada.
What management said
In commenting on the results, CEO Russ Girling said that,
Excluding specific items, we generated record financial results in 2016. Comparable earnings per share increased 12% when compared to 2015 while net cash provided by operations exceeded 5 billion [Canadian dollars] for the first time in the Company's history.
As Girling notes, last year was truly the company's best from an operational and financial standpoint, despite the weakness in its Canadian gas and liquids pipelines segments. Thanks to its strategic initiatives, the company generated double-digit earnings growth and pushed cash flow up to a new record.
However, as good as last year was, the best is still yet to come according to Girling because last year,
Was also a transformational year for TransCanada. The Columbia acquisition reinforced our position as one of North America's leading energy infrastructure companies with an extensive pipeline network linking the continent's most prolific natural gas supply basins to its most attractive markets and provided us with another growth platform. Today we are advancing an industry leading CA$23 billion near-term capital program that is expected to generate significant growth in earnings and cash flow and support an expected annual dividend growth rate at the upper end of an eight to 10% range through 2020.
The Columbia transaction alone was a game-changer for the company because it added a slew of growth projects to its pipeline. Overall, the company expects to invest $7.1 billion over the next several years to expand that system, with $2.3 billion of those investments entering service this year, which should fuel incremental cash flow. In addition to that, the company has another $2.5 billion of projects in Mexico under construction that should be in service by the end of next year. Once complete, these pipelines will boost its annual EBITDA from that country to $575 million. Finally, the company has several projects under construction in its NGTL gas pipeline system in western Canada, which should reverse that segment's earnings decline. Overall, it plans to invest CA$5.4 billion in the system through 2020, though CA$1.6 billion of those projects should enter service and start generating cash flow this year. That clearly visible near-term growth has Girling confident that the company can deliver close to 10% annual dividend growth through 2020.
Investor takeaway
TransCanada capped a transformational year by delivering excellent fourth-quarter results. The company's growth strategy to focus on the U.S. and Mexico gas markets is really paying off, enabling the company to more than offset weakness in its home country. Further, with a boatload of projects under way, the company has complete confidence that it can continue to deliver robust dividend growth for the foreseeable future.
