In late 2015, energy infrastructure giant TransCanada Corp. (NYSE: TRP) launched on an ambitious growth plan that it anticipates will fuel 8% to 10% annual dividend growth through 2020, an acceleration from its prior pace of 7% compound annual increases. So far, the company has made excellent progress on that plan, which was evident in its recent second-quarter report.
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CEO Russ Girling ran through a highlight reel of his company's accomplishments on the accompanying conference call. Here are four things he wanted investors to know about its progress last quarter.
No 1: We're a well-oiled machine
Girling led off his prepared remarks by saying:
As highlighted in our quarterly report to shareholders released earlier this morning, our portfolio of high-quality, low-risk energy infrastructure assets continue to perform very well. As evidence of this can be seen in our strong second-quarter financial results, which continue to support our board of directors' decision earlier this year to increase our quarterly common dividend...10.6% over the dividend in 2016.
As he pointed out, the company delivered excellent performance during the quarter. One metric that supports that claim was the growth in distributable cash flow, which rose to 936 million Canadian dollars ($736 million) -- up 33.3% on an absolute basis and 8% per share, due to steady performance by its legacy assets, as well as fresh gains from recent acquisitions and growth projects. That rapidly expanding cash flow stream is what enabled the company to boost its dividend above the high end of its target range this year.
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No. 2: Our project backlog continues to expand
Girling then turned his attention to the growth that's still coming down the pipeline:
During the quarter, we also continued to advance our CA$24 billion ($18.9 billion) near-term capital program, which includes CA$2.2 billion ($1.7 billion) of additional growth opportunities announced in the past weeks in our Canadian Natural Gas Pipelines business. This portfolio of commercially secured, and rate-regulated projects largely remains on time and on budget.
The CEO made a few important points. First, TransCanada's backlog grew during the quarter after it secured additional projects, which will help solidify its near-term growth potential while extending it out into the future. These new additions are another sign that the energy industry is starting to recover from a downturn that resulted in the deferral or cancellation of several midstream projects. Now, drilling activities in North America are on the rise, fueling demand for more infrastructure and driving a noticeable uptick in new project announcements across the sector. For example, Enbridge (NYSE: ENB) recently announced that it secured CA$1.5 billion of pipeline growth projects, while Kinder Morgan (NYSE: KMI) added a net $500 million in projects to its backlog last quarter and has more on the way. Finally, Girling noted that TransCanada's expansions are moving along as expected, which is great to hear considering the problems some of its peers have had in completing projects over the past year.
No. 3: We made excellent progress on our financing initiatives
TransCanada currently has more projects in development than it can fund with excess cash flow.
To help fund that program, we raised about CA$2.5 billion ($2 billion) in the quarter, which included a $765 million sale to our U.S. MLP (TC Pipelines (NYSE: TCP)). During the quarter, we completed the sale of our U.S. Northeast Power portfolio, which allowed us to fully retire the Columbia acquisition bridge facility.
TransCanada will need more than CA$30 billion ($23.6 billion) to finance both its growth initiatives and shareholder distributions through 2019. However, it only expects to generate about $20 billion ($15.7 billion) in cash flow, leaving it with a gap to plug. It made notable progress raising that money last quarter by completing several asset sales, including another drop-down transaction with TC Pipeline. Meanwhile, it issued low-cost debt both at TC Pipeline and on its balance sheet, which demonstrates that it has open access to the capital markets to finance its expansion projects.
No. 4: We're already working on the next growth phase
Girling concluded his prepared remarks by stating:
And finally, during the quarter, we continued to advance a number of other strategic initiatives that will enhance the predictability and stability of our earnings and cash flow and position us for additional long-term dividend growth.
Despite having a massive backlog that should keep it busy for the next few years, TransCanada is already working to secure its next slate of projects so it can extend dividend growth well into the 2020s. For example, the company recently launched an open season to solicit shippers for its Keystone XL project. Overall, the company has more than CA$45 billion of long-term projects in development, which increases the likelihood that it can continue growing at a healthy clip for years to come.
Steady as it goes
As Girling laid out, TransCanada is doing an excellent job executing on its growth strategy. In fact, its plan is literally paying big dividends for investors and should continue doing so, given its progress. While the company's share price reflects this success -- it's up more than 10% this year -- TransCanada still offers a compelling yield of nearly 3.6%, with a payout that should rise at a healthy rate over the coming years, meaning it still makes it a great option for income-seeking investors.
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Matt DiLallo owns shares of Kinder Morgan and has the following options: short January 2018 $30 puts on Kinder Morgan, long January 2018 $30 calls on Kinder Morgan, and short December 2017 $19 puts on Kinder Morgan. The Motley Fool owns shares of and recommends Enbridge and Kinder Morgan. The Motley Fool has a disclosure policy.