TransCanada's (NYSE: TRP) strategic growth plan continues bearing fruit for investors. That was evident in the natural gas pipeline giant's second-quarter results, which showed a big spike in earnings thanks to a combination of recently completed growth projects and acquisitions. Given that the company is still in the early stages of executing its growth plan, there's plenty more upside on the way.
Here's a closer look at the quarter, and an overview of what's up ahead for the pipeline giant.
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Drilling down into the numbers
TransCanada delivered a big spike in its underlying earnings this quarter, due in large part to last year's acquisition of U.S. natural gas pipeline company Columbia Pipeline Group, though the deal did mute growth on a per-share basis because the company issued stock to help pay for it. But even with the dilution, the transaction has moved the needle for TransCanada by providing its U.S. natural gas pipelines business with a big boost:
As that chart shows, the Columbia deal helped to more than double the earnings of TransCanada's U.S. natural gas pipeline business. The company also benefited from additional revenue from higher rates on its ANR Pipeline system. Those factors more than offset the sale of stakes in two U.S. natural gas pipelines to its MLP TC Pipelines (NYSE: TCP) during the quarter. The $765 million in cash it received from TC Pipelines can cover some of the costs to build its current slate of growth projects.
Another highlight this quarter was the company's Mexico gas pipeline business, where earnings nearly tripled thanks to the contribution from the recently completed Topolobampo and Mazatlan pipelines. Meanwhile, both the liquids and energy segments generated higher profits. Fueling the earnings growth in liquids was higher volume on the Keystone System, while fewer planned outages at Bruce Power led to improved results for the energy segment.
The lone laggard this quarter was the company's legacy Canadian natural gas pipeline business. The primary reason: lower earnings on its Canadian Mainline system. However, its results should improve in the coming years because the company has secured shippers for additional volumes on the system starting this November.
Still just getting started
CEO Russ Girling appeared pleased with the company's results, stating in the earnings press release that "our diversified portfolio of high-quality, low-risk energy infrastructure assets continued to perform very well in the second quarter of 2017." He noted that not only did profits spike, but that "the growth in earnings was accompanied by a significant increase in net cash provided by operations which rose to CA$1.4 billion from CA$1.1 billion in the same period last year."
That said, the operational and financial highlights of the quarter are only part of the story. The other notable accomplishment was the progress TransCanada made on expanding its slate of strategic growth initiatives. Girling pointed out:
Because of this, the company now has CA$24 billion ($19.3 billion) of near-term projects in execution, which it expects will "generate significant growth in earnings and cash flow and support an expected annual dividend growth rate at the upper end of an 8% to 10% range through 2020."
In addition, TransCanada continues gaining clarity on its medium- and long-term growth opportunities. This July, for example, it launched an open season to secure customer commitments for its proposed Keystone XL pipeline. If it locks up enough customer commitments and gains the necessary approvals, the company could finally move forward with this long-delayed project.
But it wasn't all good news on the long-term-project front. The company noted that Malaysian national energy giant Petronas decided not to move forward with its proposed Pacific NorthWest LNG export facility in British Colombia. As a result, it will not need TransCanada to develop its proposed Prince Rupert Gas Transmission Project. However, it will reimburse TransCanada for its costs on the project thus far.
TransCanada's second-quarter results show that the company's strategic growth plan is delivering the expected results. In fact, the company's doing a bit better than anticipated given that it's expecting that future dividend growth will come in at the upper end of the forecast range through 2020. Meanwhile, it's taking steps to extend that growth further into the next decade by locking up additional projects. This progress suggests that TransCanada should continue creating value for investors in the coming years.
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