Why the Downgrade?
The Calgary, Alberta-based master limited partnership (MLP) reported weaker-than-expected fourth-quarter 2012 results on Feb 8, 2013. Earnings per unit (EPU) came in at 56 cents, missing the Zacks Consensus Estimate by 7 cents. Comparing year over year, earnings fell 20.0% from the year-ago profit of 70 cents. The disappointment resulted from lower transportation rates in the Great Lakes along with low income from other pipeline systems.
In fact, TC PipeLines' cash flows during the quarter were down 5.6% from the year-earlier level at $54.0 million. The decrease was mainly on account of lower cash distributions from TC PipeLines' interests in Gas Transmission Northwest LLC ("GTN") and the Great Lakes.
Moreover, TC PipeLines delivered negative earnings surprises in the last 6 quarters with an average miss of 6.42%.
A combination of all these factors has lowered earnings estimates for TC PipeLines in the last 30 days. The Zacks Consensus Estimate for first quarter of 2013 has gone down by 2.98% to 65 cents per unit while for 2013, the estimate dropped 2.35% to $2.49 per unit.
In the near-to-intermediate term, TC PipeLines is poised to suffer from lower transportation rates on Northern Border and substantial uncontracted capacity at Great Lakes. Moreover, with natural gas fundamentals remaining weak, we do not foresee any price upside for the TC PipeLines stock during the next few quarters.
We also remain concerned about lower spending by consumers and businesses on transportation fuels, which hurt TC PipeLines' cash flows and distributions. Additionally, we remain wary of cost overruns on expansion projects (which result in lower returns).
Other Stocks to Consider
Not all MLP's in the energy sector are performing as poorly as TC PipeLines. The stocks of Delek Logistics Partners LP ( DKL ), NuStar Energy LP ( NS ) and Summit Midstream Partners LP ( SMLP ) are worth considering. All these carry a Zacks Rank #2 (Buy).
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.