A Closer Look at TransCanada Corporation (USA) (TRP)’s Earnings

An application for a toll increase is currently pending with Canada’s National Energy Board. Beyond that, the company hopes to convert part of the Mainline system from natural gas to crude oil. The Mainline is actually comprised of a group of five pipes; converting just one to crude oil would allow TransCanada to ship 900,000 barrels per day from Alberta to Ontario. The conversion is still in the early stages and lacks important details like potential end points, shipping commitments, estimated costs, and construction timetable, though the company hopes to begin the regulatory application by the end of this year.

It seemed like every other analyst on the TransCanada conference call had a question about the Mainline. Make no mistake, if you are considering adding TransCanada to your portfolio you must take a long hard look at this situation.

The dividends
Somehow, despite all this not so great news, TransCanada increased its dividend 5% to $1.84 on an annualized basis. An analyst pointedly asked management about the increase on the heels of $1.89 of EPS, which indicates a very high payout ratio for the company. Donald Marchand, TransCanada’s CFO fielded the question:

Dividend growth will follow earnings growth. We’ve talked about some of the anomalies of 2012. We do have a lot of projects coming onstream. We also still have a lot of capital that’s tied up in projects that aren’t generating any revenue yet.

He then goes on to list the Gulf Coast project, Keystone XL, and the Bruce power project, stating management feels comfortable that TransCanada will grow back into a normal payout ratio of 70%-80%.

Foolish takeaway
Though there was some good news here, it really wasn’t a great quarter for TransCanada, especially given the performance of some of its midstream peers. But despite the lackluster results, the stock has only fallen 2% since the earnings release. Investors may be content to hold on to see the results of a massive $12 billion injection of capital over the next three years, and the U.S. government’s final decision on Keystone XL, which is expected in the first half of this year.

The article A Closer Look at TransCanada’s Earnings originally appeared on Fool.com and is written by Aimee Duffy.

Fool contributor Aimee Duffy has no position in any stocks mentioned. Click here to see her holdings and a short bio. If you have the energy, follow her onTwitter, where she goes by @TMFDuffy. The Motley Fool recommends Enterprise Products Partners L.P.

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