TC Pipelines Stays Neutral - Analyst Blog
06 October 2011 - 4:11AM
Zacks
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.
ENBRIDGE ENERGY (EEQ): Free Stock Analysis Report
ENERGY TRAN EQT (ETE): Free Stock Analysis Report
TC PIPELINES (TCLP): Free Stock Analysis Report
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