TC PipeLines Raises Quarterly Cash Distribution

Yesterday, natural gas pipeline systems operator TC PipeLines, LP (TCLP - Analyst Report) raised its second quarter 2009 cash distribution to $0.73 per unit (or $2.92 per unit annualized), from $0.705 per unit (or $2.82 per unit annualized). The Calgary, Alberta-based master limited partnership’s (MLP) new distribution is payable on August 14 to unitholders of record on July 31, 2009. The cash distribution is the 41st successive quarterly distribution paid by TC PipeLines and represents a 3.5% year-over-year increase. 

We believe that the distribution hike reflects TC PipeLines’ ability to deliver solid, sustainable cash distribution following the recent North Baja Pipeline acquisition and the subsequent capping of general partner Incentive Distribution Rights (IDRs) at 25%. 

The North Baja acquisition complements TCLP’s business by providing a low-risk, regulated energy infrastructure asset backed by long-term contracts, and strong business fundamentals that provide stable cash flows.
 
In particular, the 25% IDR cap (which only a handful of MLPs have adopted till now) allows the limited partners to benefit from the partnership’s growth. Additionally, this strongly positions the partnership to continue future acquisitions and expansion projects by lowering the cost of capital and bolstering its competitive position. 

IDRs refer to the percentage of profits received by the general partner (responsible for the management and operation of the partnership) before the limited partners (or investors) get their cut. 

We continue to like TC PipeLines for its steady cash-flow generating pipeline assets that provide it with the stability and financial capacity to deliver cash distributions in a disciplined manner. We believe that the recent addition of quality assets from its general partner has significantly improved the partnership’s growth prospects. As such, we maintain our Buy recommendation on TCLP units ahead of its second quarter results, expected on July 30. 

MLPs are securities having a unique corporate structure that exhibit hybrid financial features (fixed income as well as equity).