Will 2018 Be TransCanada Corporation's Best Year Yet?

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Overall, 2017 has been a solid year for TransCanada (NYSE: TRP). Through the third quarter, the Canadian pipeline giant's earnings have risen 15%, while cash flow is up 12%. This puts the company on pace to set records this year. That growth pushed the stock up about 7% through mid-December, and it's now within striking distance of its all-time high.

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That said, there's ample fuel left for TransCanada to continue growing next year. In fact, the company has already told investors to expect 10% earnings growth, as well as a dividend increase by that same rate. Those factors suggest that 2018 could be the company's best year yet.

Switching fuels

One of the main drivers of TransCanada's growth this year was its acquisition of Columbia Pipeline Group in mid-2016, which helped fuel a more than 50% year-over-year surge in earnings by the company's U.S. gas-pipeline segment. However, the acquisition-driven boost from that deal ran out of gas last quarter. Because of that, the company will rely on organic growth to power results in 2018, barring an unexpected acquisition.

The company already has a head start on next year's growth since it expects to place 5.7 billion Canadian dollars ($4.4 billion) of expansions into service by the end of 2017, with many of these projects just entering service. For example, it finished up the CA$1 billion ($780 million) Northern Courier Pipeline last month to coincide with the upcoming start-up of Suncor Energy's (NYSE: SU) Fort Hills oil sands mine. Because of that timing, the volume flowing through that system should increase in 2018 as Suncor ramps up output from its facility. In addition to that project, TransCanada placed $700 million of U.S. natural-gas pipelines into service last month, and it has another $1.6 billion project expected to start up early next year.

TransCanada should bring several more projects online in 2018. For example, it hopes to finish $2.5 billion of gas pipelines in Mexico, which will double the size of its business in that country, as well as finish another $4 billion of U.S. gas pipelines next year. Meanwhile, in Canada, it has a CA$1.1 billion ($850 million) power plant slated to enter service next year, as well as another CA$500 million ($388 million) in oil and gas pipelines. Because long-term, fee-based contracts underpin these projects and the bulk of its existing portfolio, TransCanada expects 2018's earnings to be about 10% higher than 2017's record.

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No big equity overhang to hold down shares

Despite having a record year financially, TransCanada's stock currently sits about 14% below its all-time high. That's partially because the company issued a boatload of new shares in 2016 to finance the Columbia deal, as well as some of its expansion projects.

That said, while 2018 will be a heavy spending year for the company since it has CA$9.2 billion ($7.2 billion) of expansion projects to finance, it doesn't expect to issue any equity to fund that investment. In fact, it shouldn't need to sell much, if any, new stock to finance the remaining CA$18 billion ($14 billion) left on its near-term growth project backlog. That's because TransCanada believes it has enough levers to pull so it can avoid diluting investors any further.

For starters, the company expects cash flow from operations to supply it with about CA$21 billion ($16 billion) of the CA$27.5 billion ($21.4 billion) it needs for both capital expenditures (capex) and the dividend through 2020. Meanwhile, the company believes it can bridge the rest of the gap through a combination of new debt, preferred stock, and asset sales, including those to its MLP TC Pipelines (NYSE: TCP).

Dropdowns could become an important avenue to raise money in the future because TransCanada could begin selling some of the pipelines it acquired from Columbia to TC Pipelines to raise some cash for expansion projects. It did something similar earlier this year when it sold interests in two legacy pipelines to TC Pipelines for $765 million, enabling it to continue earning income from those lines through its stake in TC Pipelines, while getting the cash it needed to help finance expansion.

Everything is in place for a banner year

Because TransCanada doesn't need to sell any equity to fund its expansion plans next year, shares won't be held back by the overhang of additional dilution. That should allow the stock at least to rise alongside earnings, if not head even higher. If that happens, it could push the stock past its all-time high, making 2018 the best one yet for investors.

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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.