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TransCanada Corporation's Expansion Efforts Are Paying Dividends

By Matthew DiLallo – Apr 28, 2018 at 7:16AM

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The Canadian energy infrastructure giant still has plenty of fuel left in the tank even after the recent wave of project completions.

TransCanada (TRP -2.28%) picked up where it left off last quarter when it returned to growth mode after hitting a speed bump in the third quarter due to asset sales. Powering the results was the continued strong performance of its legacy assets as well as a contribution from the roughly 7 billion Canadian dollars' ($5.5 billion) worth of expansion projects it has placed into service over the past year. Meanwhile, with another CA$11 billion ($8.6 billion) of projects on pace for completion by year-end, 2018 should be an exceptional year for the Canadian energy infrastructure giant.

Drilling down into the numbers

Metric

Q1 2018

Q1 2017

Year-Over-Year Change

Comparable earnings before interest, taxes, depreciation, and amortization (EBITDA)

$2.1 billion

$2.0 billion

4.8%

Comparable distributable cash flow (DCF)

$1.4 billion

$1.3 billion

8%

DCF per share

$1.64

$1.55

5.8%

Data source: TransCanada Corporation. All figures in Canadian dollars. Current exchange rate: 1 Canadian dollar = $0.78.

One number worth noting is that distributable cash flow increased on a per-share basis this quarter. That number had been declining in recent quarters because the company sold new shares to help pay for its expansion initiatives. However, with those projects starting to enter service, they're fueling growth in its liquids pipeline business as well as the U.S. and Mexico gas pipeline segments:

A chart showing TransCanada's earnings by segment in the first quarter of 2018 and 2017.

Data source: TransCanada. Chart by the author.

The liquids business benefited from the addition of the Grand Rapids and Northern Courier pipelines, which entered service in the second half of last year. TransCanada also transported higher volumes of oil on its legacy Keystone pipeline in the U.S.

Meanwhile, earnings in TransCanada's U.S. gas pipeline segment rose thanks to recently completed projects on the Columbia Gas and Columbia Gulf systems that it acquired in 2016 as well as higher sales on its ANR system and improving commodity prices in its midstream business. In Mexico, the company benefited from higher revenue from its operations in the country. Those positives more than offset some weakness in the company's Canadian natural gas pipeline business as well as the sharp drop in energy earnings due to asset sales.

Sunset through the twists of a pipeline system.

Image source: Getty Images.

What's coming down the pipeline?

TransCanada currently has CA$21 billion ($16.3 billion) of expansion projects still underway, including CA$11 billion ($8.6 billion) that it expects to finish this year. The company has already invested CA$7 billion ($5.5 billion) of this capital in 2018, putting it well on its way to finishing these expansions so that it can enjoy the associated earnings and cash flows. While the company has had some speed bumps along the way, including incurring an additional $500 million of costs to build its Mountaineer XPress and WB XPress projects in the U.S. due to regulatory delays and increased contractor costs because of high regional demands, it remains on track with its expansion plan overall. That's important because "this program is expected to generate significant additional growth in earnings and cash flow and support annual dividend growth at the upper end of an eight to 10% range through 2020 and an additional eight to 10% in 2021," according to CEO Russ Girling.

The company added no projects to its backlog this quarter. However, it did continue making progress on those it has in development, including Keystone XL. There are several pending court cases that need to be resolved before construction of that project can start -- a final court decision is expected later this year or in early 2019. If everything goes its way, it could begin construction on the pipeline next year, which would put it into service two years later. Keystone XL is one of CA$20 billion ($15.6 billion) in projects TransCanada has in development, which led Girling to say that "success in advancing these and other projects into construction and operation could extend our dividend growth outlook beyond 2021."

A solid start to what looks like a fantastic year

TransCanada's earnings and cash flow growth rates accelerated during the quarter, which should continue throughout 2018 given the considerable slate of expansion projects it expects to finish this year. This outlook suggests the company should have no problem meeting its dividend growth forecast. Meanwhile, it could extend that outlook further into the future if it can secure new projects and win its court battles to build Keystone XL, which would be great news for income investors. 

Matthew DiLallo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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