A Closer Look at TC PipeLines' Q2 Earnings

Beyond the headlines, here’s what investors need to know about TC PipeLine’s most recent results.

Aimee Duffy
Aimee Duffy
Jul 25, 2014 at 2:40PM
Energy, Materials, and Utilities

TC PipeLines (NYSE:TCP) reported its second quarter earnings yesterday, posting partnership cash flows of $77 million and net income of $37 million. Both figures were improvements over its numbers from a year ago. They don't do much to tell us how the quarter went or what we can expect from TC PipeLines going forward however, so today we're taking a closer look at some important metrics specific to MLPs, the partnership's operations, as well as management's commentary from the earnings call.

Metrics that matter
Right off the bat we want to look at TC PipeLine's distribution. The partnership has somewhat of a unique history in this regard, in that it only increases its distribution once a year. That just so happens to occur in the second quarter. This year was no exception as management boosted the quarterly payout 3.7% year over year, from $0.81 per unit to $0.84/unit.

No, that is not a typo. TC PipeLines offers one distribution increase a year, and the growth is measly. Have a look at its immediate history:

Source: Yahoo! Finance, company release. 

Make no mistake that is unimpressive distribution growth! That said, the new distribution equates to a current yield of about 6.2% at the time of this writing, which is far better than what many MLPs are posting now.

The partnership's distribution coverage was quite strong this quarter, coming in around 1.48 times distributions, compared to 1.12 times last quarter, and less than 0.90 times coverage a year ago.

Net income per unit increased from $0.40 a year ago to $0.58 in the second quarter. That's excellent growth, attributed not just to strong operational results but minimal equity issuance as well. TC PipeLines grew its weighted average common units by a mere 4.9 million units over the last year. Again, in the specific context of MLPs, that is relatively meager.

On a cash flow per unit basis, we see a similar result to the net income figures. Partnership cash flows per unit came in at $1.24 per unit, compared to $0.73 per unit a year ago.

Now that we've got a feel for the financial story, let's move on to asset performance.

TC PipeLines doesn't give much color on its assets, other than it owns or has a stake in six and that they contribute to its cash flows every quarter. Here is its current lineup:

  • Gas Transmission Northwest (GTN)
  • Northern Border
  • Bison
  • Great Lakes
  • North Baja
  • Tuscarora

And here's how their respective contributions break down year-over-year:

Source: Company release. Dollar figures in millions.

Outside of North Baja, there are gains across all segments compared to a year ago. Going forward, management had this to say:

"...Due to the highly contracted status on the majority of our pipelines, we do not see significant variations in our pipeline's financial results. As such we anticipate third quarter results from our pipelines will be relatively similar to the second quarter."

With that, let's jump to the rest of the key points management raised on the earnings call.

Conference call insight
There was very little future guidance on yesterday's call, other than dropdowns from parent-company TransCanada could transform TC PipeLines, but the timing of those drops depends entirely on what TransCanada decides to do, and when. After laying out the parent-company's plans for growth, we get this gem:

"This is expected to result in substantial growth for our partnership over the next few years and more importantly for our investors and unitholders our asset base will continue to consist of stable long-term cash flow generating pipelines."

In other words, don't expect TC PipeLines to launch any major organic growth projects any time soon. This is a TransCanada cash cow all the way, and nothing more. Interested investors can read the whole transcript here.

Bottom line
TC PipeLines is a strange bird in the MLP space. On the one hand, its distribution growth is embarrassingly small. On the other hand, its yield is remarkably high for such a reliable MLP. Could we see monstrous growth out of TC PipeLines in the future? Absolutely, but the timing of that growth remains unknown, and, frankly, out of the hands of management.  That may be what ultimately dissuades investors from buying in to that ~3.7% distribution growth, despite the impressive yield.