This past year has been a good one for TransCanada (NYSE:TRP). Overall, investors have earned a more-than-11% total return since January, thanks to in large part to the groundwork it laid in 2016. That's because the company benefited from the acquisition of a fast-growing U.S. gas pipeline system, which combined with other growth projects to enable it to boost the dividend 10.6% this year. Meanwhile, the company spent the bulk of this year building projects that will fuel growth in future years.
Because of those efforts, investors should expect more of the same from TransCanada in 2018. In addition to that, they should get some clarity on what the future holds for two of the company's largest long-term projects.
The building boom continues
TransCanada entered the year with roughly 21 billion Canadian dollars ($16.6 billion) in growth projects in its five-year backlog. The company expects to place about CA$5.6 billion ($4.4 billion) of those expansions into service by year-end, which keeps it on pace to grow earnings at a 10% compound annual rate through 2020. As a result, TransCanada recently announced that it would increase its dividend 10% next year and that it should continue growing the payout by that rate through at least 2020.
Overall, the company expects to place nine expansion projects into service in 2018 to support its growth forecast. The largest investment is in TransCanada's U.S. natural gas pipeline business, where it plans on finishing $4 billion in pipelines. Meanwhile, the company also has three expansions in its Mexico gas pipeline unit that should enter service next year, which represent another $2.5 billion in investments. Finally, it expects to finish the CA$1.1 billion ($870 million) Napanee power plant, and about CA$500 million ($394 million) of new oil and gas pipelines in Canada.
Longer-term visibility should improve
In addition to continuing the construction on its massive backlog of near-term projects this year, TransCanada also made good headway on its next phase of growth. The company was able to secure CA$3 billion ($2.4 billion) of new projects, which boosted its five-year backlog up to CA$24 billion ($18.9 billion). Those incremental projects increased the company's earnings growth visibility, which enabled it to extend its dividend growth forecast through 2021, where it expects to provide investors with an 8% to 10% increase. However, it wasn't all good news on the project front this year: TransCanada canceled two major projects, including pulling the plug on the gargantuan Energy East pipeline.
However, one reason the company chose to abandon that project is that it finally received the necessary approvals to build its long-delayed Keystone XL Pipeline. That said, the company still has some work to do before it can begin construction, including maintaining its permits after the legacy Keystone Pipeline sprung a leak a few weeks ago in South Dakota, which led the state to warn that it could revoke the company's permit to construct Keystone XL. TransCanada also still needs to firm up customer support for the project since costs will likely rise after regulators in Nebraska only approved the pipeline's alternative route. That said, investors should expect there to be a resolution on this project next year. If it does move forward with construction, it will take the company at least two years to complete the more-than-$8 billion pipeline. However, that investment could fuel significant cash flow growth for the company early next decade, which would provide further visibility into its ability to continue increasing the dividend beyond the current timeframe.
In addition to that project, TransCanada should also find out whether it can build its proposed CA$4.8 billion ($3.8 billion) Coastal GasLink project in western Canada. The pipeline would support Royal Dutch Shell's proposed CA$40 billion ($31.6 billion) LNG Canada project, which would liquefy natural gas produced in western Canada and export it to global markets via tanker. Shell and its partners hope to green light the project next year if they can work out the remaining details, which would enable TransCanada to build Coastal GasLink and provide even more clarity to the company's post-2020 dividend growth potential.
Expect the future to become even clearer next year
For the most part, TransCanada has 2018 all sewn up. The pipeline company gets about 95% of its income from predictable sources like long-term contracts, which gives it high confidence in its near-term forecast. As a result, investors can expect double-digit earnings growth next year along with a 10% dividend boost. In addition to that, investors should expect 2018 to bring more clarity to TransCanada's longer-term growth potential, which could finally see it secure two long-delayed major pipeline projects. If that happens, the company could extend its dividend growth outlook well past 2021.