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TC PipeLines Shy of Estimates

TCP TRP

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Pipeline operator TC PipeLines L.P. (TCP - Analyst Report) announced weak fourth-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 higher earnings from ‘Other Pipes’, together with contributions from the recently acquired 25% interests in two other major U.S. gas pipelines – Gas Transmission Northwest LLC (GTN) and Bison Pipeline LLC – bought from parent TransCanada Corp. (TRP - Snapshot Report) in May last year.  

The Calgary, Alberta-based master limited partnership (“MLP”) – with stakes in over 5,550 miles of federally regulated U.S. interstate natural gas pipelines that cater to domestic and Eastern Canadian markets – reported earnings per unit (EPU) of 70 cents, below the Zacks Consensus Estimate of 72 cents and the year-ago profit of 79 cents.

Distribution & Cash flows

Prior to the earnings release, TC PipeLines announced its fourth 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 third quarter 2011 distribution.

The cash distribution is the 51st consecutive quarterly distribution paid by it. TC PipeLines’ new distribution was paid on February 14 to unitholders of record as on January 31, 2012.

Total partnership cash flows during the quarter was up 61.1% from the year-earlier level to $83.3 million, mainly due to the receipt of cash distributions from TC PipeLines’ interests in the GTN and Bison pipeline systems. These were somewhat negated by higher costs, as well as the decrease in cash distributions from Northern Border and the Great Lakes.

TC PipeLines paid distributions of $42.0 million during the quarter, up 18.6% from the year-earlier level, driven by an increase in the number of common units outstanding and a rise in the quarterly distribution starting relative to the fourth quarter of 2010.

Pipeline Systems Performance

Great Lakes: The partnership’s equity income from the Great Lakes decreased 30.6% year-over-year to $10.2 million in the quarter, reflecting lower transmission revenues stemming from un-contracted long haul capacity and unseasonal weather.

Northern Border Pipeline: Equity income from Northern Border Pipeline (“NBPL”) was down 2.1% year over year from $19.5 million to $19.1 million, primarily due to the low gas price environment and weak basis spreads across North America.

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 higher North Baja revenues.

GTN and Bison: TC PipeLines’ equity income from the GTN and Bison pipeline systems came in at $4.4 million and $3.3 million, respectively.

Liquidity

As of December 31, 2011, TC PipeLines had $363.0 million outstanding on the $500.0 million revolver portion of its senior credit facility. During the December quarter, the partnership repaid the $300.0 million senior term loan, which was refinanced with a withdrawal on its senior revolving credit facility. In July last year, TC PipeLines amended and increased its revolving credit facility from $250.0 million to $500.0 million, while extending the tenure to July 2016.

Rating & 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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