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Leigh Baldwin & Co.

112 Albany Street, Cazenovia, NY 13035 | Phone: (315) 655-2964 Toll Free: 1-800-659-8044

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Stock of the Week

TC PipeLines

December 30th 2012 TC PipeLines
NYSE Symbol: TCP
Industry: natural gas pipeline MLP
Price as of 12/28: $39.28

Our 2012 Bull run has hit a snag heading into year end. The major averages closed down 2% for the week as Washington couldn't come up with a last minute fiscal cliff deal. The pullback in my opinion is healthy based on the phenomenal run we had this year. A nice 5% correction would provide good upside for the major averages heading into 2013. In the meantime, investors remain cautious as usual. This week we'll avoid the market volatility by recommending an MLP that reported sold earnings this past week. The stock of the week is TC Pipelines. As the names suggests, TC Pipelines is a gas pipeline company with aggregate capacity of 8.9 billion cubic feet per day. By focusing on pipelines and avoiding more-cyclical midstream operations, such as gathering and processing, TC maximizes cash-flow stability, which bodes well for steady distribution payments. And even though the business is steady, the stock has become unusually volatile. The recent pullback, now not far from the lows for the year, provides a healthy dividend yield of 8%. Income investors seeking relatively stable distribution payments with some growth potential may want to consider TC Pipelines LP, a pure-play natural gas pipeline master limited partnership (MLP).

This past Friday, TC PipeLines, LP TCP reported third-quarter earnings largely in line with expectations. Partnership cash flows of $48 million were up 11.6% over last year, but the company's Great Lakes pipeline continues to struggle with lower negotiated transportation rates on short-term contracts. Revenues for the line were therefore $17 million lower. Management suggested rates may not recover until normalized winter weather conditions, natural gas liquids prices, and natural gas storage levels bring higher throughput. Additionally, there remains uncertainty regarding Mainline tolls, a pipeline operated by parent company, TransCanada, which feeds into Great Lakes. Beginning Nov. 1, 2012, only 22% of Great Lakes' available capacity will be contracted.TC PipeLines declared a cash distribution of $0.78 per unit, representing a 1.3% increase over the third quarter of 2011. Distribution coverage was 1.1 times.

The recent pull back in the stock is a good indication business for TC Pipelines has slowed, However the company's conservative approach and parent company, industry heavyweight TransCanada TRP, will support modest distribution growth as TC rides the coattails of TransCanada's multi-billion dollar expansion plans in the coming years. Despite some volume risk, TC's favorable contracts, regulatory barriers to entry, and historically high coverage ratios create a compelling case for the stability of its distributions. Factoring in future unit increases, the company anticipates 5% annual distribution growth over the same period providing further dividend growth in the future. A steady business and a recent correction provides an opportunity for income investors to get in this MLP for a great dividend yield and a little capital appreciation to boot.