After hitting a speed bump in the third quarter due to asset sales, TransCanada (TRP 0.60%) started growing earnings and cash flow again in the fourth quarter thanks to recently completed expansions. Those growth projects have the company on pace to deliver double-digit annual earnings growth for the next several years.
With that visible growth coming down the pipeline, TransCanada had the confidence to increase its dividend 10.4% for 2018, which was above the high end of its forecast range. Meanwhile, that fast-paced income growth now appears more likely to continue further out into the future after the company secured another important expansion project and made progress on an even bigger one.
Image source: Getty Images.
Drilling down into the numbers
As the table below shows, TransCanada's earnings and cash flow improved ever-so-slightly versus the year-ago quarter:
|
Metric |
Q4 2017 |
Q4 2016 |
Year-Over-Year Change |
|---|---|---|---|
|
Comparable earnings before interest, taxes, depreciation, and amortization (EBITDA) |
$1.9 billion |
$1.9 billion |
0.7% |
|
Comparable distributable cash flow (DCF) |
$1.3 billion |
$1.3 billion |
1.4% |
|
DCF per share |
$1.45 |
$1.50 |
-3.3% |
Data source: TransCanada. All figures in Canadian dollars.
That said, while those metrics improved overall, on a per-share basis, DCF slipped due to a higher share count after TransCanada issued new stock over the past year to help finance its expansion efforts.
That small issue aside, TransCanada delivered a solid quarter overall, with stable to growing earnings in four of its five operating segments:
Data source: TransCanada. In millions of Canadian dollars. Chart by author.
Leading the way higher was the liquids pipeline segment, which benefited from two factors. First, volumes on the company's legacy Keystone pipeline were higher during the quarter even though TransCanada temporarily shut that line down after it started leaking. In addition to that, TransCanada benefited from the start-up of its Northern Courier and Grand Rapids projects. The other main factor fueling growth this quarter was the company's U.S. natural gas pipelines, mainly due to lower operating costs on its Columbia system by capturing acquisition synergies.
Meanwhile, the company generated stable, though slightly weaker earnings in both the Canadian and Mexican gas pipeline businesses. While profits in Mexico dipped, that was mainly due to foreign exchange fluctuations. Canada, on the other hand, slipped due to lower results on its legacy mainline system.
The greatest decline came from TransCanada's energy segment. However, that was because the company sold off its U.S. northeast power generation assets in the second quarter and closed the sale of its Ontario solar portfolio in the fourth quarter to help pay off debt related to the Columbia acquisition and finance expansion projects.
Image source: Getty Images.
A look at what's ahead
While earnings in the fourth quarter were only marginally higher, full-year results were much better because TransCanada benefited from holding the recently departed energy assets earlier in the year. Overall, EBITDA rose 11% while funds generated from operations were 9% higher. However, even with the energy assets leaving the portfolio, TransCanada should grow at a high rate in 2018 since the company placed $5 billion of expansion projects into service last year and finished up its large Leach XPress project in the U.S. last month.
Meanwhile, it has several more projects on pace to enter service in the coming years. In Canada, for example, the company has $7.2 billion of capital projects under way after recently securing another $2.4 billion expansion of its NGTL System this month. Those projects should enter service in phases over the next several years, with the last one slated to start up in early 2021. TransCanada also has a multibillion-dollar backlog of projects under way in the U.S., including the WB XPress, Mountaineer XPress, and Gulf XPress, which should all enter service by year's end. Finally, the company has several billion dollars of pipelines under construction in Mexico, with two expected to enter service by year's end and another in 2019.
That visible growth leads TransCanada to continue believing it can grow its dividend at the upper end of an 8% to 10% range through 2020, with an additional 8% to 10% increase expected in 2021. Meanwhile, dividend growth beyond 2021 is becoming more visible. Not only did the company recently lock up the additional expansions in Canada, but it's moving closer to starting construction of the Keystone XL project after it was able to secure enough contracts with shippers to ensure the commercial viability of the pipeline. If it can obtain the necessary permits and easements for the proposed route, construction could start next year, which would put the line in service by 2021. That would help lock in fast-paced dividend growth well beyond the current forecast.
A solid dividend stock for the long term
TransCanada's fourth-quarter results demonstrate that its strategic plan is working. The company's underlying operations continue to perform well, which means its 4.4%-yielding dividend is on solid ground. Meanwhile, the progress on its expansion projects will fuel higher than expected dividend growth this year, and keep it on pace to continue growing at or above the high end of its forecast for the next several years.
