Following the recent distribution increase and strong operating results, we have upgraded pipeline operator TC PipeLines L.P. (TCLP) to ‘Outperform’ from ‘Neutral’.
Formed in 1998, Calgary, Alberta-based TC PipeLines is a master limited partnership (“MLP”), with 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.
With its investments in low-risk energy infrastructure assets, the partnership has been able to historically provide stable cash distributions. Over the last few years, TC PipeLines has consolidated its business, achieved through a combination of organic efforts and accretive acquisitions.
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%. In particular, the 25% IDR cap (which only a handful of MLPs have adopted until now) allows limited partners to benefit from the partnership’s growth. We also like TC PipeLines’ steady cash-flow generating pipeline assets, which provide the stability and financial capacity to deliver cash distributions in a disciplined manner.
The partnership recently reported better-than-expected third-quarter 2010 results, reflecting strong contributions from the Northern Border and Great Lakes systems. Importantly, TC PipeLines raised its third quarter 2010 cash distribution to 75 cents per unit ($3.00 per unit annualized), representing an increase of approximately 2.7%, both sequentially and year over year.
TC PipeLines’ distribution hike is in sync with its goal of providing a stable and growing cash distribution to unitholders. The partnership has a proven history of distribution growth with 8 quarterly hikes (or a 27% increase) since July 2006.
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.
As such, we believe TC PipeLines is well positioned going forward and view it as an attractive investment. Our long-term Outperform recommendation is supported by a Zacks #2 Rank (short-term Buy rating). TC PipeLines competes in the ‘Oil and Gas Pipelines’ industry with firms like Buckeye Partners, L.P. (BPL), Enbridge Energy Partners, L.P. (EEP) etc.