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TransCanada’s Growth Engine Kicked Into High Gear in Q4

Matthew DiLallo, The Motley Fool

TransCanada (NYSE: TRP) recently closed the books on a record year by delivering strong fourth-quarter results. The Canadian energy infrastructure giant placed 4 billion Canadian dollars ($3 billion) of expansion projects into service, which helped drive full-year earnings and cash flow up by 16%. Meanwhile, with another CA$9 billion ($6.8 billion) of capital projects nearing completion and several billion more in the pipeline, the company expects to continue growing at a healthy rate for the next several years.

Drilling down into the results

Metric

Q4 2018

Q4 2017

Year-Over-Year Change

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

$2.45 billion

$1.90 billion

28.9%

Comparable distributable cash flow (DCF)

$1.88 billion

$1.45 billion

29.7%

DCF per share

$1.89

$1.45

30.3%

Data source: TransCanada. All figures in Canadian dollars (current exchange rate 1 USD = .75 CAD). 

As expected, TransCanada's financial results improved significantly during the fourth quarter, thanks in part to the recent completion of several expansion projects across its diverse asset footprint:

TransCanada's earnings by segment in the fourth quarter of 2018 and 2017

Data source: TransCanada. Chart by author. All figures in Canadian dollars. 

Earnings in TransCanada's Canadian gas pipeline segment surged 44% year over year due to higher rates on the Mainline and NGTL systems. U.S. natural gas pipeline earnings, meanwhile, jumped 34% thanks to the recent completion of expansions projects on its Columbia system, additional sales contracts on ANR and Great Lakes, and the positive impact of U.S. tax reform. The Mexico gas pipeline segment delivered 31% year-over-year profit growth mainly due to the timing of when the company could recognize revenue on those systems. Finally, liquids pipelines earnings rose 34% due to higher volumes on the Keystone Pipeline System and an increased contribution from liquids marketing activities as both volumes and margins improved.

TransCanada's energy segment was the lone laggard as earnings slumped 22% compared to last year's fourth quarter due to a weaker performance at Bruce Power as a result of lower volumes caused by an increase in outages as well as the sale of both Cartier Wind and Ontario Solar.

A pipeline in a green field heading off to the mountains.

Image source: Getty Images.

A look at the outlook

"With our existing asset base expected to benefit from supportive market fundamentals and CA$36 billion ($27.2 billion) of secured growth projects currently under way, approximately CA$9 ($6.8 billion) billion of which is commissioning or nearing completion, earnings and cash flow are forecast to continue to rise," stated CEO Russ Girling in the earnings release. That expanded cash flow should "support annual dividend growth of eight to 10% through 2021," according to the CEO, which led the company to declare an 8.7% dividend increase for 2019.

Girling further noted, "Looking ahead, we will also continue to carefully advance more than CA$20 billion ($15 billion) of projects under development including Keystone XL and the Bruce Power life extension program. Success in advancing these and other growth initiatives that are expected to emanate from TransCanada's five operating businesses across North America could extend our growth outlook well into the next decade."

With such a large slate of capital projects under way and in development, TransCanada has a large funding need that it's working to address. The company is hoping to be able to finance these projects without issuing too much more equity -- which would dilute existing shareholders -- while at the same time maintaining its leverage target. Because of that, Girling noted that the company "continue[s] to progress various portfolio management activities," including by recently announcing the sale of its Coolidge generating station in a deal that will bring in $465 million when it closes by midyear. It's also considering bringing on financial partners to help fund part of the construction of its large Coastal GasLink and Keystone XL projects.

Plenty of fuel to continue growing

TransCanada's expansion efforts paid off in 2018 as it delivered double-digit earnings and cash flow growth, which enabled the company to increase its dividend once again, marking the 19th straight year. There's plenty more growth where that came from since the company has tens of billions of dollars of additional expansions under way and in development. That makes the Canadian pipeline giant an ideal stock for both income and growth investors to consider buying.

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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.