TransCanada's (NYSE:TRP) expansion efforts continued paying dividends during the first quarter as earnings and cash flow kept growing. As a result, the Canadian pipeline giant remains on track to achieve its dividend growth targets. CEO Russ Girling affirmed that view on the quarterly conference call, where he detailed the company's progress on its strategic plan.
1. We continue to advance our expansion program
Girling provided a status report on TransCanada's project backlog.
During the quarter, we also continued to advance our 21 billion Canadian dollar ($16.4 billion) near term capital program by placing approximately $2.7 billion ($2.1 billion) of assets into service. At the same time, we replenished our growth portfolio by adding another $2.5 billion ($2 billion) of NGTL expansions to our inventory of commercially secured projects and we also advanced over $20 billion ($15.7 billion) of medium to long-term projects, including Keystone XL, Coastal GasLink and the Bruce Power life extension program.
As Girling pointed out, TransCanada finished up several projects during the quarter, which will grow earnings in the future. At the same time, it replenished its backlog by adding several new expansions, and it still has a huge slate of projects under development, making it clear that the company has no shortage of growth up ahead.
2. We also lined up more funding
Girling noted that the company continues to steadily secure the financing it needs to build these projects. While TransCanada retains a significant amount of cash flow by only paying out about 65% of what comes in via the dividend, it still has a gap to fill given the massive volume of projects it has underway. It continued to chip away at that need during the quarter by "raising about $650 million ($509 million) of common equity through our dividend reinvestment and aftermarket programs," according to the CEO. That led him to conclude that "our overall financial position remains solid and we are well positioned to fund our capital program going forward."
3. Our MLP isn't a viable funding option at the moment
That funding progress is important given an unexpected development in the quarter when the Federal Regulatory Commission (FERC) revised a long-standing policy and will no longer allow master limited partnerships to collect an allowance for income taxes on certain pipelines. That change could have a major impact on the cash flows of TransCanada's MLP TC Pipelines, LP (NYSE:TCP). While TC Pipelines isn't sure how much this change will impact its cash flow, it took precautionary actions by slashing its distribution to investors. That payout reduction and the related uncertainty has weighed significantly on TC Pipelines' valuation. Because of that, Girling said that "further dropdowns of assets by TransCanada into TC Pipelines is not considered a viable funding option at this time," and he isn't sure if it will be one in the future. However, he did clarify that even without future dropdowns to TC Pipelines, TransCanada believes it has the "financial capacity to fund our existing capital program through our predictable and growing cash flow from operations as well as several other funding alternatives."
4. We're getting closer to moving forward with Keystone XL
TransCanada took a notable step forward in the quarter on its controversial Keystone XL Pipeline by securing enough shippers to ensure the project's economic viability. Overall, the company locked up 500,000 barrels per day under firm 20-year contracts, which "is consistent with the original level of contracting on Keystone XL prior to the denial of the Presidential Permit in November of 2015," according to Girling. Consequently, he said, "we expect to earn a return on total capital that is consistent with the returns on similar projects in our portfolio."
At the same time, the company continued to monitor and participate in a variety of appeals and legal proceedings, which it expects to clear up by the end of this year or in early 2019. Girling noted that "our preparation for construction has commenced and will increase as per the permitting process advances through 2018." As things stand right now, it's on pace to start preliminary construction work on the line in Montana this fall, with full construction starting next year, according to a recent report by Reuters.
5. We have increasing confidence in our dividend growth plan
Even without Keystone XL, TransCanada has enough growth ahead and so to "expect to continue to grow the dividend at an annual average rate at the upper end of 8%-10% through 2020 and another 8%-10% into 2021," according to Girling. Meanwhile, he emphasized that "success in advancing" initiatives like Keystone XL and others coming down the pipeline "could expand our dividend growth outlook."
The future looks appealing
TransCanada reported another solid quarter both financially and operationally. So the company's 5% dividend yield looks safe and appears increasingly likely to increase at around a double-digit annual clip for the next few years. Not only should that forecast provide investors with a lot of income, but it could generate total annual returns in the mid-teens, enough to beat the market.