TCLP TC Pipelines, LP - Common Units Representing Limited Partnership Interests (MM)

Pipeline operator TC PipeLines L.P. (TCLP) announced weaker-than-expected second-quarter 2011 results, reflecting higher costs. 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 69 cents, below the Zacks Consensus Estimate of 75 cents.

However, compared to the year-earlier period, TC PipeLines’ earnings per unit rose 17.0% (from 59 cents to 69 cents) due to higher equity income from Great Lakes and Northern Border pipeline systems. Results were also helped 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) in May.

Distribution & Cash flows

Prior to the earnings release, TC PipeLines raised its second quarter 2011 cash distribution to 77 cents per unit ($3.08 per unit annualized), representing an increase of approximately 2.7% sequentially and 5.5% year over year. The cash distribution is the 49th consecutive quarterly distribution paid by it. TC PipeLines’ new distribution is payable on August 12 to unitholders of record as on July 31, 2011.

Total partnership cash flows during the quarter was up 3.3% from the year-earlier level to $47.7 million, mainly due to the increase in cash distributions from Northern Border and the Great Lakes, somewhat negated by higher costs. TC PipeLines paid distributions of $35.4 million during the quarter, up 2.9% from the year-earlier level, driven by a rise in the quarterly distribution starting in the third quarter of 2010.

Pipeline Systems Performance

Great Lakes: The partnership’s equity income from the Great Lakes increased 29.8% year-over-year to $17.0 million in the quarter, reflecting depreciation expense reductions following the settlement with Federal Energy Regulatory Commission (FERC) in May 2010 as well as the cumulative impact of a Michigan tax law amendment that eliminates Michigan business tax at the partnership level.

Northern Border Pipeline: Equity income from Northern Border Pipeline (“NBPL”) was up 32.8% year over year from $12.2 million to $16.2 million, primarily due to improved demand for transportation services.

Other Pipes (Tuscarora & North Baja): Net income from Tuscarora and North Baja was up 11.1% year over year to $10.0 million, driven by healthy cash flows from long term contracts.

Liquidity

As of June 30, 2011, TC PipeLines had $14.0 million outstanding on the $250.0 million revolver portion of its senior credit facility and $300.0 million outstanding under the term loan portion of the senior credit facility. The partnership recently 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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