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TC PipeLines Misses Mark

TRP

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Pipeline operator TC PipeLines L.P. announced weak third-quarter 2011 results, reflecting lower equity income from Great Lakes and Northern Border pipeline systems, as well as higher financing charges. These were partially offset by contributions from the recently acquired 25% interests in two other major U.S. gas pipelines – Gas Transmission Northwest LLC and Bison Pipeline LLC – bought from parent TransCanada Corp. (TRP - Snapshot Report) in May.   

The Calgary, Alberta-based master limited partnership (“MLP”) – with stakes in 5,560 miles of federally regulated U.S. interstate natural gas pipelines that cater to domestic and Eastern Canadian markets – reported earnings per unit (EPU) of 75 cents, below the Zacks Consensus Estimate of 81 cents and the year-ago profit of 82 cents.

Distribution & Cash flows

Prior to the earnings release, TC PipeLines announced its third quarter 2011 cash distribution of 77 cents per unit ($3.08 per unit annualized), representing a 2.7% increase over the year-earlier quarter and equal to the second quarter 2011 distribution.

The cash distribution is the 50th consecutive quarterly distribution paid by it. TC PipeLines’ new distribution is payable on November 14 to unitholders of record as on October 31, 2011.

Total partnership cash flows during the quarter was down 5.1% from the year-earlier level to $43.1 million, mainly due to higher costs, somewhat negated by the increase in cash distributions from Northern Border and the Great Lakes.

TC PipeLines paid distributions of $42.0 million during the quarter, up 22.1% from the year-earlier level, driven by an increase in the number of common units outstanding and a rise in the quarterly distribution starting in the fourth quarter of 2010.

Pipeline Systems Performance

Great Lakes: The partnership’s equity income from the Great Lakes decreased slightly (by 2.1%) year-over-year to $14.3 million in the quarter, reflecting ongoing uncertainty regarding future tolls for the upstream portion of the pipeline system.

Northern Border Pipeline: Equity income from Northern Border Pipeline (“NBPL”) was down 6.7% year over year from $21.0 million to $19.6 million, primarily due to lower rates for transportation services.

Other Pipes (Tuscarora & North Baja): Net income from Other Pipes that include results from Tuscarora and North Baja was up 9.7% year over year to $10.2 million, driven by lower financial charges.

Liquidity

As of September 30, 2011, TC PipeLines had $67.0 million outstanding on the $500.0 million revolver portion of its senior credit facility and $300.0 million outstanding under the term loan portion of the senior credit facility. In July, the partnership amended and increased its revolving credit facility from $250.0 million to $500.0 million, while extending the tenure to July 2016.

Our Recommendation

TC PipeLines units currently retain a Zacks #3 Rank, which translates into a short-term Hold rating. We are also maintaining our long-term Neutral recommendation on the stock.

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