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

We are maintaining our Neutral recommendation on pipeline operator TC Pipelines L.P. (TCLP) owing its impressive asset portfolio and healthy financial profile, partially offset by the weak macro environment and operational hindrances.

The partnershipenjoys stakes in natural gas transportation assets like the Northern Border Pipeline, which generate stable, recurring and low-risk earnings and cash flows. Northern Border’s market share position enables TC Pipelines to maintain strong relationships with shippers. Coupled with continued robust demand for Canadian gas in the U.S., this should help the partnership in re-contracting its pipeline capacity.

We appreciate the partnership’s acquisition of North Baja Pipeline, LLC for about $395 million. The acquired assets complement TC Pipelines’ business with a low-risk, regulated energy infrastructure asset backed by long-term contracts, as well as strong business fundamentals that lead to stable cash flows.

Additionally, with a debt-to-capitalization ratio of approximately 34% (as of June 30, 2011) and $500 million available for future borrowings under its revolving credit facility, the partnership remains in excellent financial health to operate in the current credit-constrained environment.

Despite these positive aspects, TC Pipelines posted disappointing second-quarter 2011 results, with earnings per unit (EPU) of 69 cents failing to meet the Zacks Consensus Estimate of 75 cents due to higher costs.

The partnership’s growth prospects remain restricted by the concerns about the long-term availability of natural gas transported by Northern Border Pipeline Company due to the growing maturity of the pipeline’s catchment area –– the Western Canadian Sedimentary Basin.

Moreover, TC Pipelines, being a master limited partnership is typically dependent on equity and debt markets for growth finance. Market turmoil from issues such as the recent subprime crisis, which hinders access to debt/equity markets, will impact its growth momentum.

TC Pipelines also faces stiff competition from peers such as Enbridge Energy Management LLC (EEQ) and Energy Transfer Equity, L.P. (ETE). Hence, we foresee limited upside potential for the partnerships’ units in the near to medium term.

 
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