Low Rates Pulled Down TC PipeLines

Pipeline operator TC PipeLines L.P. ( TCP - Analyst Report ) announced weaker-than-expected third-quarter 2012 results, owing to lower transportation rates in Great Lakes along with less interest rates derived from the use of floating debt.

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 64 cents, missing the Zacks Consensus Estimate by a penny. Comparing year over year, earnings dipped 14.7% from the year-ago profit of 75 cents.

Distribution & Cash Flows

TC PipeLines announced its third-quarter 2012 cash distribution of 78 cents per unit ($3.12 per unit annualized), representing a 1.3% increase over the year-earlier quarter. The distribution will be paid on November 14 to unit holders of record as of November 5, 2012.

Total partnership cash flows during the quarter were up 11.6% from the year-earlier level at $48.0 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 $43.0 million during the quarter, up 2.4% from the year-earlier level, driven by an increase in the number of common units outstanding.

Pipeline Systems Performance

Great Lakes: The partnership’s equity income from the Great Lakes plunged 57% year over year to $6 million in the quarter, reflecting less transmission revenues stemming from a drop in short-term rates.

Northern Border Pipeline: Equity income from Northern Border Pipeline was $18.0 million, down 5.3% year over year.

GTN and Bison: TC PipeLines’ equity income from the GTN and Bison pipeline systems came in at $5.0 million and $2.0 million, respectively, remaining flat with respect to the prior-year quarter.

Liquidity

As of September 30, 2012, TC PipeLines had $313.0 million outstanding on the $500.0 million revolver portion of its senior credit facility. The partnership had long-term debt (including current portion) of $692 million, representing debt-to-capitalization ratio of 34.5%.

During the quarter, TC PipeLines incurred maintenance capital expenditure of $4.0 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.

Over the last few years, the partnership has consolidated its business, achieved through a combination of organic efforts and accretive acquisitions. We believe that with investments in low-risk energy infrastructure assets, TC PipeLines will be able to provide stable cash distributions, going forward.

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).