TransCanada's (TRP 0.66%) growth engine accelerated in the third quarter, fueled by the roughly 7 billion Canadian dollars ($5.4 billion) of expansion projects the company has completed over the past year. In addition to delivering fast-paced growth, TransCanada also achieved several important strategic milestones, including securing all the funding it needs for 2018. Meanwhile, it's well on its way to securing the financing for its growing backlog of expansion projects beyond this year, which gives the company increasing confidence that it can grow its dividend at an 8% to 10% annual rate at least through 2021.
Drilling down into the numbers
|
Metric |
Q3 2018 |
Q3 2017 |
Change (YOY) |
|---|---|---|---|
|
Comparable earnings before interest, taxes, depreciation, and amortization (EBITDA) |
$2.06 billion |
$1.67 billion |
20.3% |
|
Comparable distributable cash flow (DCF) |
$1.41 billion |
$1.17 billion |
20.8% |
|
DCF per share |
$1.56 |
$1.34 |
16.4% |
Data source: TransCanada. All figures in Canadian dollars. Current exchange rate 1 Canadian dollar = $0.76.
TransCanada's earnings and cash flow expanded by more than 20% compared to the year-ago quarter, driven mainly by recently completed expansion projects in its U.S. gas pipeline and liquids businesses:
Data source: TransCanada Corporation.
Earnings from U.S. natural gas pipelines surged 48% year over year due to growth projects on its Columbia system entering service, additional sales contracts on its ANR and Great Lakes systems, and improved commodity prices and volumes in its midstream assets. Meanwhile, earnings in the liquids pipelines segment rocketed 54% due to the completion of the Grand Rapids and Northern Courier pipelines as well as higher marketing activities and volumes flowing through the Keystone Pipeline System. Finally, earnings on its natural gas pipelines in Mexico jumped almost 30% due to the timing of recently completed projects.
Those strong results helped more than offset weakness in TransCanada's Canadian natural gas pipelines and energy segments. Earnings in Canada dipped 4% year over year due to lower profitability on its Canadian Mainline system, while energy earnings slipped about 8% due to the sale of its U.S. Northeast power-generation business and Ontario solar assets.
Image source: Getty Images.
A look at what's ahead
TransCanada currently expects to place CA$10 billion ($7.6 billion) of additional capital projects into service by the early part of 2019. The company noted that it secured all the funding needed to finish these projects. Through the end of last month, it had raised a total of CA$9.1 billion ($7 billion) by securing long-term debt at low rates, issuing new equity, agreeing to sell its stake in the Cartier Wind power facilities, and securing reimbursement for predevelopment costs on Coastal GasLink. It intends on bridging the rest of the gap with internally generated cash flow.
That near-term wave of projects is only the beginning, since TransCanada is currently progressing CA$36 billion ($27.5 billion) of expansions, which is up significantly from the CA$28 billion ($21.4 billion) it had underway at the end of the second quarter. Fueling the rise is the sanctioning of the Coastal GasLink project, securing additional expansions on its NGTL system in western Canada, and getting approval for an investment in the Bruce Power nuclear facility.
These projects -- which should come online in the 2022 to 2023 time frame -- when combined with the more than CA$20 billion ($15.3 billion) of longer-term projects it has in development, have the company well positioned to "extend our growth outlook well into the next decade," according to CEO Russ Girling. The company also believes it can fund a significant portion of its growing backlog with internally generated cash flow, incremental debt, and joint venture capital, which is the route it's exploring to help finance Coastal GasLink. That should enable the company to avoid issuing too many new shares to bridge the gap outside of its dividend reinvestment plan.
The weight should start lifting
TransCanada's earnings and cash flow through the first nine months of 2018 are more than 10% above the level they were during the same period of 2017. Despite that growth, TransCanada's stock has lost around 20% of its value this year due to concerns about its ability to fund its expansion projects. However, with its near-term funding secured, TransCanada has increasing confidence in its ability to achieve its plan to boost its 5.5%-yielding dividend by 8% to 10% annually through 2021. Meanwhile, with more projects coming down the pipeline, the company could extend that growth further into the future.
