TransCanada (NYSE: TRP) has been growing at a blistering pace this year. In the first quarter, for example, comparable earnings spiked 16%, and distributable cash flow (DCF) rocketed 25%. Meanwhile, the company grew at an even faster pace last quarter, with DCF and earnings surging 33.3% and 33.7%, respectively. The primary fuel of those rapid growth rates was last July's acquisition of Columbia Pipeline Group.
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That timing is worth noting because it means the Canadian pipeline giant will be going up against a tough comparable quarter, made even more challenging by the recent sale of some of its power and gas pipeline assets. Those factors will weigh on its third-quarter results, which it will report on Thursday morning. However, that doesn't mean the company's growth days are behind it.
A quick look back
For evidence of how much the Columbia deal moved the needle for TransCanada, we only need to see the earnings growth of its U.S. natural gas pipeline business in the second quarter:
As that chart shows, earnings in that segment more than doubled versus the prior year, which when combined with improved performance in three of its four other segments helped fuel its remarkable growth rate last quarter.
The tough comp
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However, since the Columbia deal closed in July 2016, TransCanada enjoyed the full benefit of that transaction in last year's third quarter. In fact, the company produced $473 million of earnings in its U.S. gas pipeline segment in the year-ago quarter, which was 127.4% more than the third quarter of 2015. So, it won't see quite as big an earnings spike there this time around.
Furthermore, the company has since sold its U.S. Northeast merchant power business, which generated $149 million in earnings in the year-ago quarter. In addition, it recently sold interests in two legacy U.S. natural gas pipeline businesses to its master limited partnership, TC Pipelines (NYSE: TCP). While those acquisitions didn't move the needle for TC Pipelines last quarter, it did note that the incremental earnings from those investments helped offset lower revenue in its legacy businesses and higher costs. Those sales mean TransCanada's income will be under a bit of pressure, which adds another headwind to an already tough comparable quarter.
Eyeing the potential offsets
That said, these headwinds don't necessarily mean TransCanada didn't grow earnings in the third quarter. That's because the company has invested billions in expanding its energy infrastructure network over the past year. These projects should help offset some of the lost income from the recent asset sales. For example, the company completed construction of its Mazatlan pipeline last December, so it should provide a boost to earnings in the Mexico gas pipeline segment this quarter. It expected its Grand Rapids Pipeline in Alberta to enter service in August as well, implying it should provide some incremental earnings for the liquids pipeline segment in the third quarter.
TransCanada should also benefit from several other factors. For example, the company expects to realize additional cost savings from the continued integration of Columbia. In the meantime, earnings in its legacy ANR U.S. gas pipeline will continue to benefit from a rate settlement with regulators last August. Finally, drilling activities in North America have increased this year, which should result in higher volumes flowing through TransCanada's systems and boost its volume-based earnings. With these factors added up, TransCanada should have the fuel needed to push earnings higher.
The calm before storming ahead
TransCanada's acquisition of Columbia Pipeline fueled significant earnings and cash flow growth in the first two quarters of this year. However, with that deal now more than a year old, it won't drive results in the third quarter, which might make it seem like the company hit a speed bump. That said, any slowdown will likely be temporary because the company has several billion dollars of growth projects slated to enter service over the next few months. Those expansions should provide the fuel it needs to deliver 8% to 10% compound annual dividend growth through 2020.
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