Canadian pipeline giant TransCanada (NYSE: TRP) is in the midst of an ambitious growth program that will see it invest 23 billion Canadian dollars over the next several years to expand its energy infrastructure portfolio. These projects are expected to fuel 8% to 10% annual dividend growth through 2020. While the company has already lined up the bulk of the capital it needs to finance these growth projects and pay its dividend, it's still a bit short of the total requirement. That's where its master limited partnership,TC Pipelines (NYSE: TCP), comes into play because that entity could help bridge the gap by participating infuture dropdown transactions with its parent company.
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Minding the gap
Overall, TransCanada anticipates that it will need more than CA$30 billion to finance its expansion projects, fund the acquisition of Columbia Pipeline Partners, and maintain a growing dividend. However, as the slide below shows, its cash flow from operations will cover a little more than CA$20 billion of that amount when factoring in its dividend reinvestment plan:
Data source: TransCanada investor presentations.
That leaves somewhere around CA$10 billion in capital that the company will need to secure from outside sources. TransCanada anticipates that it will have a variety of options, including at-the-market stock sales, debt, preferred or hybrid security sales, and dropdown transactions to TC Pipelines.
TransCanada has already offered its MLP two such opportunities. First, it has proposed to sell its 49.3% interest in the Iroquois Gas Transmission System, which it owns as part of a joint venture withDominion Resources (NYSE: D). In addition, TransCanada has offered its remaining 11.8% interest in the Portland Gas Transmission System to its MLP. TC Pipelines already owns a 49.9% stake in that system, which it acquired from its parent last year for $223 million. TransCanada hasn't disclosed the terms of either of its latest sales so it's unclear how much cash it might receive from these two transactions.
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Image source: TransCanada.
More dropdowns coming down the pipeline?
Even after completing these sales TransCanada will have plenty of additional assets that it could drop down to TC Pipeline in the future. The company still owns 100% of the ANR Pipeline, which will benefit from a recent rate case settlement that includes $837 million of maintenance capital spending. It also owns an interest in the Great Lakes Pipeline, which TC Pipelines already has a 46% stake in making it a likely candidate for a future dropdown.
On top of that, TransCanada recently bolstered its U.S. gas pipeline business by spending $13 billion to acquire Columbia Pipeline Group and followed that up by agreeing to pay $915 million for the rest of Columbia's MLP Columbia Pipeline Partners. In doing so, it not only acquired assets that are currently operating but it picked up a pipeline filled with growth projects, with the company expected to spend $7.1 billion to expand the Columbia network over the next few years. As a result, TransCanada will have a growing pipeline of future dropdown opportunities for its MLP.
TransCanada has an enormous backlog of growth projects that it needs to finance over the next few years. However, unlike its U.S. rivals, the company doesn't plan to rely on the capital markets to fund these projects. Instead, it intends to use a combination of internally generated cash flow and drop down transactions with its MLP to do the bulk of the heavy lifting. Because of that, there's minimal risk that TransCanada will run into the same funding issues that have plagued its U.S. counterparts.
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