TC PipeLines Raises Distribution

Pipeline operator TC PipeLines L.P. (TCLP) raised its second quarter 2011 cash distribution to 77 cents per unit ($3.08 per unit annualized), representing an increase of approximately 2.7% sequentially and 5.5% year over year. The cash distribution is the 49th consecutive quarterly distribution paid by it. TC PipeLines’ new distribution is payable on August 12 to unitholders of record as on July 31, 2011.

Calgary, Alberta-based TC PipeLines is a master limited partnership (“MLP”), with stakes in 5,560 miles of federally regulated U.S. interstate natural gas pipelines that cater to domestic and Eastern Canadian markets.

The partnership has significant interests in four pipeline systems: the Northern Border Pipeline Company (“NBPL”), the Tuscarora Gas Transmission Company, Great Lakes Gas Transmission, L.P, and the North Baja Pipeline, LLC. Recently, TC PipeLines acquired a 25% interest each in two other major U.S. gas pipelines – Gas Transmission Northwest LLC and Bison Pipeline LLC – from parent TransCanada Corp. (TRP - Snapshot Report) for $605 million.

TC PipeLines’ announced distribution hike is in sync with its goal of providing a stable and growing cash distribution to the unitholders. The partnership has a proven history of distribution growth with 9 quarterly hikes (or more than 30% increase) since July 2006.

TC PipeLines, which is slated to report its second-quarter results on July 27, has bolstered its cash flows in recent times on the back of strong contribution from the partnership’s portfolio of six pipeline assets.

TC PipeLines units currently retain a Zacks #3 Rank, which translates into a short-term Hold rating. We are also maintaining our long-term Neutral recommendation on the stock.

We believe future growth prospects for the partnership have improved considerably following the North Baja Pipeline acquisition and the subsequent capping of general partner incentive distribution rights (“IDRs”) at 25% (which allows limited partners to benefit from the partnership’s growth). 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.

However, at current valuations, we find it difficult to justify a sufficient potential return to support a higher rating. We expect TC PipeLines’ value to remain clouded, as the partnership struggles with weak natural gas fundamentals. Consequently, we see the stock performing in line with the broader market.

Read the full analyst report on TCLP

Read the full analyst report on TRP