TC PipeLines Misses Bottom Line

Pipeline operator TC PipeLines L.P. (TCP - Analyst Report) announced weaker-than-expected second-quarter 2012 results, hurt by low equity income from Great Lakes along with higher operating charges.

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 60 cents, below the Zacks Consensus Estimate of 66 cents and the year-ago profit of 69 cents.

Distribution & Cash Flows

TC PipeLines announced its second quarter 2012 cash distribution of 78 cents per unit ($3.12 per unit annualized), representing a 1.3% increase over the year-earlier quarter as well as preceding quarter.

This is the 13th consecutive annual hike announced by the company. It will be paid on August 14 to unit holders of record as of August 3, 2012.

Total partnership cash flows during the quarter were up 8.3% from the year-earlier level at $52.0 million, mainly on the receipt of cash distributions from TC PipeLines’ interests in the Gas Transmission Northwest LLC (GTN) and Bison Pipeline LLC – that were purchased from the parent TransCanada Corp. (TRP - Snapshot Report) in May last year. These were somewhat negated by the decrease in cash distributions from Great Lakes.

TC PipeLines paid distributions of $42.0 million during the quarter, up 20% from the year-earlier level, driven by an increase in the number of common units outstanding and a rise in the quarterly distribution.

Pipeline Systems Performance

Great Lakes: The partnership’s equity income from the Great Lakes decreased 53% year over year to $8 million in the quarter, reflecting less transmission revenues stemming from lower short-term rates.

Northern Border Pipeline: Equity income from Northern Border Pipeline remained year over year flat at $16.0 million.

GTN and Bison: TC PipeLines’ equity income from the GTN and Bison pipeline systems came in at $4.0 million and $3.0 million, respectively.

Liquidity

As of June 30, 2012, TC PipeLines had $321.0 million outstanding on the $500.0 million revolver portion of its senior credit facility. The partnership had long-term debt (including current portion) of $700 million, representing debt-to-capitalization ratio of 34.6%.

During the quarter, TC PipeLines incurred maintenance capital expenditure of $5.0 million and expended $1.0 million on growth projects.

Rating & Recommendation

We are maintaining our long-term Neutral recommendation on TC PipeLines units, as we see limited near-term price upside.

We also like TC PipeLines’ steady cash-flow generating pipeline assets, which provide stability and financial capacity to deliver cash distributions in a disciplined manner. However, we remain concerned as TC PipeLines’ value will likely remain clouded, as the partnership struggles with weak natural gas fundamentals. Additionally, we remain wary of cost overruns on expansion projects (which lead to lower returns).

TC PipeLines units currently retain a Zacks #3 Rank, which implies a Hold rating for a period of one to three months.