Canadian energy infrastructure giant TC Energy (NYSE:TRP) designed its business to withstand the ups and downs of the volatile oil market. That durability was apparent during the third quarter as the energy company delivered solid financial results despite the turbulent market conditions. Because of that, its 6%-yielding dividend remains on a very sustainable foundation.  

Drilling down into TC Energy's third-quarter results

Metric

Q3 2020

Q3 2019

Change

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

$2.294 billion

$2.344 billion

-2.1%

Comparable funds generated from operations

$1.663 billion

$1.802 billion

-7.7%

Cash flow per share

$1.74

$1.93

-9.8%

Dividend payout ratio

47%

39%

16.7%

Data source: TC Energy. NOTE: All figures in Canadian dollars. CA$1=$0.75

TC Energy benefited from its diversified energy infrastructure portfolio during the third quarter:

TC Energy's earnings in the third quarter of 2020 and 2019.

Data source: TC Energy. Chart by the author.

As that chart shows, TC Energy's natural gas assets partially offset the weakness in its liquids and power divisions.

The company's Canadian operations benefited from higher rates and recently completed expansion projects. That more than offset lower income tax revenue flow through on its NGTL System. Meanwhile, its U.S. gas assets benefited from lower operating costs and the sale of natural gas from some of its storage facilities. Finally, its Mexican operations benefited from the Sur de Texas pipeline that entered service in September of 2019.

Offsetting those fuel sources was a decline in earnings from its liquids pipelines because of lower oil prices, which caused fewer uncontracted volumes to flow on its Keystone Pipeline System. Meanwhile, the power-and-storage segment's results declined because the company took unit six of its Bruce Power nuclear plant offline earlier this year to replace a major component and extend the life of that facility. The company also sold its Ontario natural gas-fired power plants this April, which impacted this segment's comparable earnings.

A pipeline and an oil pump at sunset.

Image source: Getty Images.

A look at what's ahead for TC Energy

Thanks to its business model's overall resiliency, which helps insulate it from fluctuations in commodity prices and volumes, TC Energy's full-year outlook remains unchanged.

Meanwhile, the company continues to advance an industry-leading 37 billion Canadian dollar ($27.8 billion) backlog of secured capital projects. Once complete, about 98% of the company's EBIDTA will come from regulated or long-term contracted assets, which are relatively immune to fluctuations in volumes and commodity prices. That highly visible backlog of stable cash-generating assets, combined with its strong balance sheet, gives TC Energy the confidence that it can increase its dividend by another 8% to 10% next year and grow it at a 5% to 7% annual pace after that.

A potential further complement to that outlook is the proposed acquisition of its MLP, TC Pipelines (NYSE:TCP). TC Energy has offered to buy all the outstanding common units of its affiliate that it doesn't already own in an all-stock deal, valuing it at $1.48 billion. If successful, the transaction would simplify its corporate structure and reduce costs.

While the bulk of its current backlog and portfolio focuses on fossil fuels, TC Energy is "well-positioned to capture future growth opportunities ... as the world ... transitions to a cleaner energy future," stated CEO Russ Girling. The company has developed and operated renewable energy assets in the past and will likely pursue new opportunities in that sector in the future to complement its emission-free nuclear power plant.

A rock-solid energy-powered dividend

As TC Energy's third-quarter results showed, its business is relatively immune to fluctuations in oil prices and volumes. Because of that, it generated very stable cash flow, giving the funds to pay its 6%-yielding dividend with room to spare. Meanwhile, it has an extensive growth-project backlog that should fuel healthy dividend growth for several years. That makes it one of the safest options for dividend investors in the energy sector.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.