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On Jun 24, 2013, we upgraded natural gas transporter TC PipeLines L.P. (TCP - Analyst Report) to Neutral from Underperform. Our new investment thesis is supported by a Zacks Rank #3 (Hold).

Why the Upgrade?

We expect TC PipeLines’ proposed purchase of additional stakes in two major U.S. gas systems from parent TransCanada Corp. (TRP - Snapshot Report) to be immediately accretive to earnings and distributable cash. We also like TC PipeLines’ steady cash-flow generating pipeline assets, which provide stability and financial capacity to deliver cash distributions in a disciplined manner.

Detailed Analysis

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.

TC PipeLines’ impending deal to increase its stake in two important U.S. gas pipelines – Gas Transmission Northwest LLC and Bison Pipeline LLC – to 70% from the pre-existing 25% is expected to improve the partnership’s distributable cash flow immediately. The transaction will also lower its relative exposure to the Great Lakes, which is presently experiencing earnings and cash flow inconsistency.

Finally, 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 13 hikes in as many years.

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 major price upside for TC PipeLines stock during the next few quarters.

Stocks That Warrant a Look

While we expect TC PipeLines to perform in line with its peers and industry levels in the coming months and advice investors to wait for a better entry point before accumulating units, one can look at Delek Logistics Partners L.P. (DKL - Snapshot Report) and Summit Midstream Partners L.P. (SMLP - Snapshot Report) as good buying opportunities. These energy pipeline partnerships – sporting a Zacks Rank #1 (Strong Buy) – have solid secular growth stories with potential to rise significantly from current levels.

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