TransCanada Corporation Hit a Speed Bump in Q3

TransCanada's (NYSE: TRP) financial results went in reverse during the third quarter, with earnings and cash flow declining sharply. While that's quite a departure from the rapid growth rate the company posted in the first two quarters of this year, it wasn't entirely unexpected. That's because the company was going up against a tough comparable quarter and it recently closed several asset sales.

That said, TransCanada's speed bump shouldn't slow it down very long because the company expects to put the finishing touches on several expansion projects by the end of the year. Those expansions and others to follow should restart the company's growth engine in the coming quarters.

Drilling down into the results

As the table below shows, TransCanada's earnings and cash flow were significantly lower than they were in the year-ago period:

Driving that decline were the company's energy and U.S. natural gas pipeline segments:

Energy earnings plunged because the company closed the sale of its U.S. Northeast power assets last quarter. The company put those electric plants up for sale last year so that it could pay down the loan it took out to buy Colombia Pipeline Group.

That deal had fueled TransCanada's growth for the past year by driving up results in its U.S. natural gas pipelines segment. However, since the transaction closed in July of last year, it made for a tough comparable quarter for the company this time around. In addition to that tough comp, earnings were also under pressure due to the timing of contributions to Columbia Gas' pension plan. Finally, TransCanada recently sold stakes in two natural gas pipelines to its MLPTC Pipelines (NYSE: TCP), which had a slight impact on its earnings in the third quarter.

The company partially offset those weak spots by delivering stronger results in its Mexico natural gas pipelines and liquids pipelines segments. In Mexico, TransCanada benefited from putting the Mazatlan pipeline into service. Meanwhile, liquids pipelines' earnings got a boost from higher volumes flowing through the Keystone Pipeline System, as well as some incremental income from the August completion of the Grand Rapids pipeline.

Fully fueled and ready to grow

While TransCanada's earnings took a step back last quarter, that's just a blip for a company that still has plenty of growth ahead of it from in-process expansion projects. For example, earlier this month the company's U.S. natural gas pipeline segment placed its Rayne XPress and Gibraltar Midstream projects into service. Meanwhile, its liquids pipelines segment followed up the Grand Rapids project by putting the Northern Courier project into service this month. That pipeline supports Suncor Energy's (NYSE: SU) massive Fort Hills mine in the oil sands region. It's a crucial piece of infrastructure because it will enable Suncor Energy to move oil out of its latest mine while providing TransCanada with rising income as Suncor ramps its volumes. Finally, TransCanada has 2.3 billion Canadian dollars ($1.8 billion) of projects in its NGTL system in Canada that should enter service by year-end.

TransCanada has several more projects slated for start-up in 2018. In January, it should complete the $1.6 billion Leach XPress project in its U.S. natural gas pipelines segment, followed by the $600 million Mountaineer XPress by the end of the year. Meanwhile, in Mexico, it has three projects scheduled to enter service next year, which will nearly double the size of its portfolio in the country to $5 billion. Finally, it expects to finish its CA$1.1 billion ($870 million) Napanee power plant in Canada next year.

These projects should fuel steady earnings growth for TransCanada over the next year. Furthermore, the company should also benefit from several rate adjustments and new contracts. For example, it secured additional capacity contracts for its Canadian mainline gas pipeline, which should improve volumes and earnings on that system in the future. Meanwhile, its Northern Border pipeline, which it owns via its stake in TC Pipelines, recently reached an agreement with shippers on a new rate that should boost earnings at its MLP. These and other rate cases should bolster the profitability of TransCanada's legacy systems in the coming years.

A high-yield growth stock for the long term

Don't let TransCanada's third-quarter results fool you; the company still has plenty of growth left in the tank. Its massive CA$24 billion ($18.9 billion) expansion project backlog supports the view that the pipeline giant can grow its dividend by an 8% to 10% compound annual rate through 2020. TransCanada stock remains an excellent option for income seekers because they can collect a 4%-plus yield that should rise at a rapid pace over the next few years.

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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.