TC PipeLines, L.P. (TCP-NYSE)

Transcription

1 February 16, 2015 TC PipeLines, L.P. (TCP-NYSE) NEUTRAL Current Recommendation Prior Recommendation Outperform Date of Last Change 09/23/2014 Current Price (02/13/15) $68.99 Target Price $72.00 SUMMARY We are maintaining our Neutral recommendation on TC PipeLines ahead of the year-end results. The natural gas transporter is facing headwinds on its contracting efforts for the Great Lakes pipeline system on the back of structural challenges. The most recent settlement with Northern Border which lowered the partnership s equity earnings and cash flows has also been a negative. As usual, we remain concerned about weak natural gas fundamentals. However, we expect the partnership s recent stake purchases in some major U.S. gas systems to be immediately accretive to earnings and distributable cash. As it is, we are a fan of TC PipeLines steady cashflow generating pipeline assets. Consequently, we see the stock performing in line with the broader market. SUMMARY DATA 52-Week High $ Week Low $45.74 One-Year Return (%) Beta 0.44 Average Daily Volume (sh) 169,679 Units Outstanding (mil) 64 Market Capitalization ($mil) $4,385 Short Interest Ratio (days) 4.94 Institutional Ownership (%) 51 Insider Ownership (%) 1 Annual Cash Dividend $3.36 Dividend Yield (%) Yr. Historical Growth Rates Sales (%) 63.0 Earnings Per Unit (%) -2.7 Dividend (%) 2.9 using TTM EPU 26.6 using 2015 Estimate 25.8 using 2016 Estimate 22.2 Zacks Rank *: Short Term 1 3 months outlook 3 Hold * Definition / Disclosure on last page Risk Level * Average, Type of Stock Large-Blend Industry Oil/Gas Prod Pi Zacks Industry Rank * 167 out of 267 ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) A 82 A 85 A 88 A 341 A A 82 A 80 A 139 E 388 E E 133 E 137 E 141 E 548 E E Earnings Per Unit Estimates (EPU is operating earnings before non-recurring items, but including employee stock options expenses) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2013 $0.52 A $0.40 A $0.58 A $0.63 A $2.13 A 2014 $0.90 A $0.58 A $0.48 A $0.65 E $2.61 E 2015 $0.75 E $0.61 E $0.68 E $0.63 E $2.67 E 2016 $3.11 E Projected EPU Growth - Next 5 Years % Zacks Investment Research, All Rights reserved S. Riverside Plaza, Chicago IL 60606

2 OVERVIEW Calgary, Alberta-based TC PipeLines, L.P. (TCP) is a master limited partnership (MLP), with interests in six pipeline systems: the Northern Border Pipeline Company (NBPL), Great Lakes Gas Transmission, L.P, the Tuscarora Gas Transmission Company, the North Baja Pipeline, LLC, Bison Pipeline, LLC, and Gas Transmission Northwest, LLC. The Northern Border Pipeline Company: The partnership owns a 50% partner interest (increased from 30% in April 2006) in the 1,249-mile Northern Border Pipeline, which stretches from the Montana-Saskatchewan border to the U.S. Midwest and carries about 22% of the natural gas shipped from Canada to the U.S. The other 50% partnership interest in the pipeline is held by ONEOK Partners, L.P. (ONEOK), formerly Northern Border Partners, L.P., a publicly traded limited partnership. Great Lakes Gas Transmission, L.P.: In February 2007, the partnership closed the acquisition of a 46.45% interest in the Great Lakes Gas Transmission, L.P. from El Paso Corporation. The remaining 53.55% interest in Great Lakes is held by TransCanada. The Great Lakes system was originally constructed as an operational loop of the TransCanada Mainline Northern Ontario system. It receives natural gas from TransCanada at the Canadian border near Emerson, Manitoba, and extends across Minnesota, northern Wisconsin and Michigan, and redelivers gas to TransCanada at the international border at Sault Ste. Marie and St. Clair, both in Michigan. The Great Lakes system consists of approximately 2,115 miles of pipelines with a design capacity of 2,600 million cubic feet per day (MMcf/d). The Tuscarora Gas Transmission Company: TC PipeLines owns the Tuscarora Gas Transmission Company (Tuscarora). The partnership originally held a 49% interest in this pipeline, which increased to 98% following the acquisition of Sierra Pacific s 49% stake in December On December 31, 2007, the partnership purchased the remaining 2% stake in Tuscarora, increasing its ownership interest to 100%. The North Baja Pipeline, LLC: On July 1, 2009, TC PipeLines completed the buyout of North Baja Pipeline, LLC from Canadian energy infrastructure provider TransCanada Corporation for about $395 million in cash and common units. North Baja system is an 80-mile natural gas pipeline, which runs Southwestern Arizona to a point on the California/Mexico border and connects with a natural gas pipeline system in Mexico. Bison Pipeline, LLC: TC PipeLines owns a 100% interest in Bison Pipeline, a 303-mile gas pipeline, which originates from the Powder River Basin in Wyoming and connects to the Northern Border system in Morton County, North Dakota. Gas Transmission Northwest, LLC: Lastly, TC PipeLines has a 70% interest in Gas Transmission Northwest, LLC (GTN), which is a 1,353-mile pipeline system that carries natural gas to third-party pipelines and market in Washington, Oregon and California. REASONS TO BUY The partnership owns stakes in natural gas transportation assets, which generate stable, recurring and low-risk earnings and cash flows. Of particular significance is its stake in the Northern Border Pipeline, a key link in natural gas transportation from western Canada to the U.S Midwest. Equity Research TCP Page 2

3 In July 2009, TC PipeLines completed the buyout of North Baja Pipeline, LLC for about $395 million. The North Baja system is an 80-mile natural gas pipeline that runs through Southwestern Arizona to a point on the California/Mexico border and connects with a natural gas pipeline system in Mexico. The acquisition complements TC PipeLines business by providing a low-risk, regulated energy infrastructure asset backed by long-term contracts, as well as strong business fundamentals that lead to stable cash flows. As part of this transaction, the partnership also announced an agreement to cap the general partner incentive distribution rights (IDRs) at 25%. This makes TC PipeLines particularly attractive for common unitholders, given the relative lower threshold for earnings and cash flow accretion from the partnership s growth opportunities. TC PipeLines has established a track record of providing stable and growing cash distribution to unitholders. The partnership has a proven history of distribution growth with 15 hikes in as many years. TC PipeLines recent acquisition of additional interests in three major U.S. gas pipelines Gas Transmission Northwest LLC and Bison Pipeline LLC from parent TransCanada Corp. is expected to be immediately accretive to TC Pipelines' distributable cash flow. REASONS TO SELL There are reasonable 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. This limits the pipeline s long-term growth prospects. The contracting scene for Great Lakes Gas Transmission looks bleak, with very few users renewing their long-term contracts over the past five years due to several structural challenges (indecision associated with the future tolling structure, competitive landscape etc.). This has lead to heightened uncertainty regarding the pipeline system s future. In September 2012, TC PipeLines reached a settlement deal with Northern Border customers for modification of transportation rates and other services. Per the revised arrangement effective January 2013 Northern Border s transportation rates were lowered by approximately 11%, thereby reducing the partnership equity earnings and cash flows. TC PipeLines high natural gas exposure raises its sensitivity to gas price fluctuations. In particular, with the commodity s fundamentals still challenging and the market oversupplied, there is considerable risk to the partnership s long-term earnings. MLPs (like TC PipeLines) typically depend 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 MLP growth prospects. Equity Research TCP Page 3

4 RECENT NEWS Fourth Quarter 2014 Results Announcement TC PipeLines plans to release its fourth quarter and full year 2014 results on Feb 25, VALUATION TC PipeLines trailing 12-month P/CF multiple is 19.4, compared to the 16.8 average for the peer group and 15.1 for the S&P 500. The partnership s trailing 12-month EV/EBITDA multiple is 17.5, compared to the industry average of With its investments in low-risk energy infrastructure assets, TC PipeLines has been able to provide stable cash distributions. Over the last few years, the partnership has consolidated its business through a combination of organic efforts and accretive acquisitions. In the near term, the partnership stands to benefit from growth in its pipeline volumes. Additional positives for TC PipeLines include its solid balance sheet and strong contractual position on its Tuscarora and North Baja pipelines. We also view the partnership s recent acquisition of 45% additional ownership interests in two pipeline systems as a bullish event for unitholders. But at the same time, 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 volatile, we do not see any price upside for TC PipeLines stock during the next few quarters. This is corroborated by our continued Neutral recommendation and the $72 price target (20.2X trailing twelve-month cash flow). Equity Research TCP Page 4

5 Key Indicators F1 F2 Est. 5-Yr EPU Gr% P/CF 5-Yr High 5-Yr Low TC PipeLines LP (TCP) Industry Average S&P Tesoro Logistics L.P. (TLLP) Delek Logistics Partners L.P. (DKL) Summit Midstream Partners L.P. (SMLP) Valero Energy Partners L.P. (VLP) TTM is trailing 12 months; F1 is 2015 and F2 is 2016, CF is operating cash flow P/B Last Qtr. P/B 5-Yr High P/B 5-Yr Low ROE D/E Last Qtr. Div Yield Last Qtr. EV/EBITDA TC PipeLines LP (TCP) Industry Average S&P Equity Research TCP Page 5

6 Earnings Surprise and Estimate Revision History Equity Research TCP Page 6

7 DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of TCP. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1121 companies covered: Outperform %, Neutral %, Underperform 7.2%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively. Analyst QCA Lead Analyst Reasons for Update Nilanjan Choudhury Nilanjan Choudhury Nilanjan Choudhury Routine Update Equity Research TCP Page 7