Based upon the number of near-term challenges, we have lowered
our recommendation for natural gas transporter
TC PipeLines L.P.
) to Underperform from Neutral.
TC PIPELINES (TCP): Free Stock Analysis
TRANSCDA CORP (TRP): Free Stock Analysis
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Calgary, Alberta-based TC PipeLines, L.P. is a master limited
partnership (MLP) with interests in six pipeline systems: the
Northern Border Pipeline Company, Great Lakes Gas Transmission,
L.P, the Tuscarora Gas Transmission Company, the North Baja
Pipeline, LLC, Bison Pipeline, LLC, and Gas Transmission
The partnership - an indirect, wholly-owned subsidiary of
) - is facing headwinds on its contracting efforts for the Great
Lakes pipeline system on the back of structural challenges. While
almost 80% of its contracted capacity expired on November 1,
2012, we do not expect this to get replenished under long-term
contracts anytime soon due to several structural challenges
(indecision associated with the future tolling structure,
competitive landscape etc.). This has led to heightened
uncertainty regarding the pipeline system's future.
The recent settlement with Northern Border - that is expected to
lower TC PipeLines' equity earnings and cash flows - has also
been a negative. As per the agreement, Northern Border's current
transportation rates will be reduced by approximately 11%,
thereby pulling down the partnership equity earnings and cash
As usual, we remain concerned about weak natural gas
fundamentals, which are likely to limit TC PipeLines' ability to
generate positive earnings surprises. The pipeline operator's
dependence on equity and debt markets for growth finance also
remains an issue.
We also remain concerned about lower spending by consumers and
businesses on transportation fuels, which adversely impacts TC
PipeLines' cash flows and distributions. Additionally, we remain
wary of cost overruns on expansion projects (which lead to lower
Considering these factors, we see TC PipeLines as a risky bet
from which ordinary investors should exit.