Calgary, Alberta-based TC PipeLines, L.P. (TCLP) is a master limited partnership (MLP), with interests in three pipeline systems: the Northern Border Pipeline Company (NBPL), the Tuscarora Gas Transmission Company, and the recently acquired Great Lakes Gas Transmission, L.P. The partnership owns a 50% partner interest (increased from 30% in April 2006) in the 1,249-mile Northern Border Pipeline, which stretches from the Montana-Saskatchewan border to the U.S. Midwest and carries about 22% of the natural gas shipped from Canada to the U.S. The other 50% partnership interest in the pipeline is held by ONEOK Partners, L.P. (ONEOK), formerly Northern Border Partners, L.P., a publicly traded limited partnership.

In Tuscarora Gas Transmission Company (Tuscarora), the partnership has a 99% interest. The partnership originally held a 49% interest in this pipeline, which increased to the current level following the acquisition of Sierra Pacific's 50% stake. The Partnership's general partner interests in Northern Border Pipeline and Tuscarora represented its only material assets at December 31, 2006. Equity income from Northern Border and Tuscarora accounted for 91% and 9%, respectively, of the partnership's 2006 earnings.

In February 2007, the partnership closed the acquisition of a 46.45% interest in the Great Lakes Gas Transmission, L.P. from El Paso Corporation (LP). The remaining 53.55% interest in Great Lakes is held by TransCanada. Great Lakes was originally constructed as an operational loop of the TransCanada Mainline Northern Ontario system. It receives natural gas from TransCanada at the Canadian border near Emerson, Manitoba, and extends across Minnesota, northern Wisconsin and Michigan, and redelivers gas to TransCanada at the international border at Sault Ste. Marie, Michigan and St. Clair, Michigan. The Great Lakes system consists of approximately 2,115 miles of pipelines with a design capacity of 2,600 MMcf/d. Average throughput was 2,244 MDth/d in 2006.

The partnership was formed by TransCanada Corporation (TCP) to manage its U.S. pipeline assets. TransCanada Corporation retains the general partner interest in the partnership. It was also holding roughly 12% limited partner interest previously, which has since come down to roughly 6% following the recent private placement of $600 million worth of LP units.

Our continued Buy recommendation on TCLP units reflects the partnership's attractive valuation and a much improved distribution-growth profile following the completion of approximately $1.5 billion worth of acquisitions in the recent past. Ahead of the fourth-quarter 2007 results, the partnership raised its quarterly distribution by 1% sequentially and 11% year over year to the annualized run rate of $2.66 per unit. We estimate that distribution growth in the 7% to 10% range is sustainable over the next 12 to 18 months from its existing asset base.

Inline with its peer group, TCLP units have been under pressure in recent days. This, combined with its significant discount relative to the peer pipeline MLP group, makes TCLP units an attractive story on valuation grounds. Currently, TCLP units are trading at a yield spread of 419 basis points to the 10-year Treasury bond, compared to the peer group's average of 368 basis points. We believe that greater appreciation of the partnership's growth prospects will help bring down its discount to the group. Our new $38 price objective, reduced from $40 before, reflects a target distribution of $2.93 (10% above current levels) and a target yield of 7.75%. Our target yield assumes a reduction in the partnership's yield spread relative to our 12-month 10-year Treasury yield of 4.25% to 350 basis points, still at a discount to the peer group. Our reduced Treasury yield outlook (4.25% vs. 5% before) reflects recessionary concerns and the Fed's aggressive easing posture.

The partnership owns stakes in natural gas transportation assets that generate stable, recurring, and low-risk earnings and cash flows. Of particular significance is its stake in the Northern Border Pipeline, a key player in natural gas transportation from western Canada to the U.S Midwest. Northern Border's strong market share position enables it to maintain strong relationships with shippers. This, coupled with continued strong demand for Canadian gas in the U.S, should help the partnership with re-contracting its pipeline capacity. In April 2006, the Chicago III Expansion Project went into service, adding approximately 130 MMcf/d of transportation capacity from Harper, Iowa to the Chicago market area. This expansion is fully subscribed by four shippers under long-term firm service transportation agreements, with terms ranging between 5 to 10 years. Currently, 72% of Northern Border Pipeline's design capacity is contracted on a firm basis through the end of the year, with the weighted average life of contracts at 1.8 years.

The partnership has also been active on the acquisition front in the recent past. In addition to the acquisition of a 20% additional interest in NBPL in April 2006, the partnership also completed the acquisition of Sierra Pacific's 50% interest in Tuscarora Gas Transmission Company in December 2006 for $100 million, taking its total holding in the company to 99%. We believe this transaction to have positive impact on the partnership's earnings and distributable cash flows going forward. Tuscarora has firm transportation contracts for over 95% of its available contracted capacity. As of year-end 2006, the weighted average contract life on the Tuscarora pipeline system was approximately 11.4 years. More recently, the partnership has closed its previously announced acquisition of a 46.45% interest in the 2,115 mile Great Lakes pipeline system from El Paso for $962 million, including the assumption of approximately $212 million in debt. The acquisition was partially financed through a private placement of 17.36 million common units for gross proceeds of $600 million which closed concurrently with the acquisition, while the balance was funded through debt. The acquisition provides the partnership with additional stable cash flows as well as greater portfolio diversity. All in all, the partnership has made more than $1.5 billion worth of acquisitions since April 2006.

While the partnership's long-term distribution-growth prospects are relatively weaker than our preferred MLPs (EPD and NS), largely owing to limited organic growth projects, they have nevertheless improved significantly following recent acquisitions. The partnership's current annualized distribution run rate of $2.64 per unit represents a 10% year over year increase. This represents an attractive and relatively safe spread of 413 basis points over the current 10-year Treasury yield, one of the highest in our coverage universe.


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