**UNITEDSTATES SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

** **

**FORM 10-Q**

** **

**ý**QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934

** **

**For the quarterly periodended June 30, 2005**

 

**or**

** **

**o**TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934

** **

**For the Transition periodfrom           to          **

** **

**Commission FileNumber:  000-26091**

** **

**TCPipeLines, LP**

**(Exact name of registrant as specified in its charter)**

** **
| **Delaware**                                                        | ** ** | **52-2135448**                              |
|---------------------------------------------------------------------|------------|---------------------------------------------|
| **(State or other jurisdiction of incorporation  or organization)** | ** ** | **(I.R.S. Employer Identification Number)** |
| ** **                                                          | ** ** | ** **                                  |
| **110 Turnpike Road, Suite 203  Westborough, Massachusetts**   | ** ** | **01581**                                   |
| **(Address of principal executive offices)**                        | ** ** | **(Zip code)**                              |
| ** **                                                          | ** ** | ** **                                  |
| **508-871-7046**                                                    |
| **(Registrant’s telephone number, including area code)**       |

** **

**Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.**

**Yes **ý       No  o

** **

**Indicateby check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2of the Exchange Act).**

**Yes **ý       No  o

** **

As of August 8, 2005, there were 17,500,000 of the registrant’scommon units outstanding.

 

 

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**TC PIPELINES, LP**

 

**TABLE OF CONTENTS**

 
| **PART I**  |       | **FINANCIAL INFORMATION**                                                                        |       |
|------------------|------------|--------------------------------------------------------------------------------------------------|------------|
|             |       |                                                                                             |       |
| ITEM 1.          |       | Financial Statements                                                                             |       |
|             |       | Statement  of Income – Three and six months ended June 30, 2005 and 2004               |       |
|             |       | Statement of Comprehensive Income – Three and six months ended June 30,  2005 and 2004 |       |
|             |       | Balance Sheet  – June 30, 2005 and December 31, 2004                              |       |
|             |       | Statement  of Cash Flows – Six months ended June 30, 2005 and 2004                     |       |
|             |       | Notes to Condensed Financial Statements                                                          |       |
|             |       |                                                                                             |       |
| ITEM 2.          |       | Management’s Discussion and Analysis of Financial Condition and  Results of Operations      |       |
|             |       | Results of Operations of TC PipeLines, LP                                                        |       |
|             |       | Liquidity and Capital Resources of TC PipeLines, LP                                              |       |
|             |       | Results of Operations of Northern Border Pipeline Company                                        |       |
|             |       | Liquidity and Capital Resources of Northern Border Pipeline Company                              |       |
|             |       | Results of Operations of Tuscarora Gas Transmission Company                                      |       |
|             |       | Liquidity and Capital Resources of Tuscarora Gas Transmission Company                            |       |
|             |       |                                                                                             |       |
| ITEM 3.          |       | Quantitative and Qualitative Disclosures About Market Risk                                       |       |
|             |       |                                                                                             |       |
| ITEM 4.          |       | Controls and Procedures                                                                          |       |
|             |       |                                                                                             |       |
| **PART II** | ** ** | **OTHER INFORMATION**                                                                            | ** ** |
| ** **       | ** ** | ** **                                                                                       | ** ** |
| ITEM 6.          |       | Exhibits                                                                                         |       |

 

**All amounts are stated in United Statesdollars unless otherwise indicated.**

 

2

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**PART I.********FINANCIAL INFORMATION**

**ITEM 1.****         ****FINANCIAL STATEMENTS**

 

**TC PipeLines, LP**

 

**Statementof Income**

 
| **(unaudited)**                                            | ** ** | **Three months ended  June 30** | ** ** | **Six months ended  June 30** | ** ** |
|------------------------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| **(millions of dollars except per unit amounts)**          | ** ** | **2005**                             | ** ** | **2004**                           | ** ** | **2005** | ** ** | **2004** | ** ** |
| Equity  income from investment in Northern Border Pipeline | ** ** | **8.6**                              |       | 12.4                               | ** ** | **20.8** |   | 24.9 |   |
| Equity  income from investment in Tuscarora                | ** ** | **1.8**                              |       | 1.8                                | ** ** | **3.8** |   | 3.6 |   |
| General and  administrative expenses                       | ** ** | **(0.5**                             | **)**      | (0.5                               | )          | **(1.0** | **)** | (1.0 | ) |
| Financial  charges and other                               | ** ** | **(0.2**                             | **)**      | (0.1                               | )          | **(0.5** | **)** | (0.2 | ) |
| **Net  income**                                            | ** ** | **9.7**                              |       | 13.6                               | ** ** | **23.1** |   | 27.3 |   |
|                                                       |       |                                 |       |                               |       |   |   |   |   |
| **Net  income allocation**                                 |       |                                 |       |                               |       |   |   |   |   |
| Common units                                               | ** ** | **9.0**                              |       | 12.3                               | ** ** | **21.7** |   | 24.7 |   |
| Subordinated  units                                        | ** ** | **—**                           |       | 0.7                                | ** ** | **—** |   | 1.4 |   |
| General  partner                                           | ** ** | **0.7**                              |       | 0.6                                | ** ** | **1.4** |   | 1.2 |   |
| ** **                                                 |       | **9.7**                              |       | 13.6                               | ** ** | **23.1** |   | 27.3 |   |
| **Net  income per unit**                                   | ** ** | **$**                                | **0.52**   |                               | $          | 0.74 |   | $ | 1.24 |   | $ | 1.49 |   |
| **Units  outstanding (millions)**                          | ** ** | **17.5**                             |       | 17.5                               | ** ** | **17.5** |   | 17.5 |   |
|                                                            |            |                                      |            |                                    |            |  |  |  |  |  |  |  |  |

 

**Statement of Comprehensive Income**

 
| **(unaudited)**                                                          | ** ** | **Three months ended  June 30** | ** ** | **Six months ended  June 30** | ** ** |
|--------------------------------------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| **(millions of dollars)**                                                | ** ** | **2005**                             | ** ** | **2004**                           | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net income                                                               | ** ** | **9.7**                              |       | 13.6                               | ** ** | **23.1** |   | 27.3 |   |
| Other  comprehensive income                                              |       |                                 |       |                               |       |   |   |   |   |
| Change  associated with current period hedging transactions of investees | ** ** | **(0.1**                             | **)**      | (0.1                               | )          | **(0.2** | **)** | (0.2 | ) |
| **Total  comprehensive income**                                          | ** ** | **9.6**                              |       | 13.5                               | ** ** | **22.9** |   | 27.1 |   |

 

See accompanying notes to thecondensed financial statements.

 

3

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**TC PipeLines, LP**

 

**Balance Sheet**

 
| **(millions of dollars)**                  | *** *** | **June 30  2005** | *** *** | **December 31  2004** | *** *** |
|--------------------------------------------|--------------|------------------------|--------------|----------------------------|--------------|
| ** **                                 | *** *** | **(unaudited)**        | *** *** | *** ***               | *** *** |
| **Assets**                                 |         |                   |         |                       |         |
| Current  assets                            |         |                   |         |                       |         |
| Cash                                       | ** **   | **3.2**                |         | 2.5                        |         |
| Investment  in Northern Border Pipeline    | ** **   | **278.8**              |         | 290.1                      |         |
| Investment  in Tuscarora                   | ** **   | **39.0**               |         | 39.5                       |         |
| ** **                                 |         | **321.0**              |         | 332.1                      |         |
| **Liabilities  and Partners’ Equity** |         |                   |         |                       |         |
| Current  liabilities                       |         |                   |         |                       |         |
| Accrued  liabilities                       | ** **   | **0.7**                |         | 0.7                        |         |
| Current  portion of long-term debt         | ** **   | **24.0**               |         | 6.5                        |         |
| ** **                                 |         | **24.7**               |         | 7.2                        |         |
| Long-term  debt                            | ** **   | **—**             |         | 30.0                       |         |
| Partners’  equity                     |         |                   |         |                       |         |
| Common units                               | ** **   | **288.9**              |         | 287.4                      |         |
| General  partner                           | ** **   | **6.4**                |         | 6.3                        |         |
| Other  comprehensive income                | ** **   | **1.0**                |         | 1.2                        |         |
| ** **                                 |         | **296.3**              |         | 294.9                      |         |
| ** **                                 |         | **321.0**              |         | 332.1                      |         |

 

**Statementof Cash Flows**

 
| **(unaudited)**                                  | ** ** | **Six months ended June 30** | ** ** |
|--------------------------------------------------|------------|-----------------------------------|------------|
| **(millions of dollars)**                        | ** ** | **2005**                          | ** ** | **2004** | ** ** |
| ** **                                       |       |                              |       |   |   |
| **Cash  Generated From Operations**              |       |                              |       |   |   |
| Net income                                       | ** ** | **23.1**                          |       | 27.3 |   |
| Add/(deduct):                                    |       |                              |       |   |   |
| Decrease in  operating working capital           | ** ** | **—**                        |       | 0.2 |   |
| ** **                                       |       | **23.1**                          |       | 27.5 |   |
| **Investing  Activities**                        |       |                              |       |   |   |
| Return of  capital from Northern Border Pipeline | ** ** | **11.1**                          |       | 6.4 |   |
| Return of  capital from Tuscarora                | ** ** | **0.5**                           |       | — |   |
| Investment  in Northern Border Pipeline          | ** ** | **—**                        |       | (39.0 | ) |
| ** **                                       |       | **11.6**                          |       | (32.6 | ) |
| **Financing  Activities**                        |       |                              |       |   |   |
| Distributions  paid                              | ** ** | **(21.5**                         | )          | (20.3 | ) |
| Long-term  debt issued                           | ** ** | **—**                        |       | 20.0 |   |
| Long-term  debt repaid                           | ** ** | **(12.5**                         | **)**      | — |   |
| ** **                                       |       | **(34.0**                         | **)**      | (0.3 | ) |
| **Increase  / (decrease) in cash**               | ** ** | **0.7**                           |       | (5.4 | ) |
| **Cash,  beginning of period**                   | ** ** | **2.5**                           |       | 7.5 |   |
| **Cash,  end of period**                         | ** ** | **3.2**                           |       | 2.1 |   |
|                                             |       |                              |       |   |   |
| Interest  payments made                          | ** ** | **0.5**                           |       | 0.2 |   |

 

Seeaccompanying notes to the condensed financial statements.

 

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**TC PipeLines, LP**

 

**Notes to Condensed Financial Statements**

**(unaudited)**

 

##### ***Note 1*****   ****Basis of Presentation**

TC PipeLines, LP, and its subsidiary limited partnerships, TC PipeLinesIntermediate Limited Partnership and TC Tuscarora Intermediate LimitedPartnership, all Delaware limited partnerships, are collectively referred toherein as TC PipeLines or the Partnership. The Partnership was formed by TransCanada PipeLines Limited, a subsidiaryof TransCanada Corporation (collectively referred herein as TransCanada), toacquire, own and participate in the management of United States-based pipelineassets.  The Partnership commencedoperations on May 28, 1999. 

 

The financial statements have been preparedby management in accordance with U.S. generally accepted accounting principles(U.S. GAAP).  Amounts are stated inUnited States dollars.  Othercomprehensive income recorded by TC PipeLines arises through its equityinvestments in Northern Border Pipeline Company (Northern Border Pipeline) andTuscarora Gas Transmission Company (Tuscarora) and relates to cash flow hedgestransacted by Northern Border Pipeline and Tuscarora.  Since a determination of many assets,liabilities, revenues and expenses is dependent upon future events, thepreparation of these financial statements requires the use of estimates andassumptions which have been made using careful judgment.  In the opinion of management, these financialstatements have been properly prepared within reasonable limits of materialityand include all adjustments (consisting of normal recurring accruals) necessaryto present fairly the results of operations for the three and six months ended June 30,2005 and 2004, the financial position as at June 30, 2005 and December 31,2004 and cash flows for the six months ended June 30, 2005 and 2004.

 

The results of operations for the three andsix months ended June 30, 2005 and 2004 are not necessarily indicative ofthe results that may be expected for a full fiscal year.  The interim financial statements should beread in conjunction with the Partnership’s financial statements and notesincluded in TC PipeLines’ annual report on Form 10-K for the year ended December 31,2004.

 

##### ***Note 2*****   ****Investment in Northern Border Pipeline**

The Partnership owns a 30% general partner interest in Northern BorderPipeline, a partnership which owns a 1,249-mile United States interstatepipeline system that transports natural gas from the Montana-Saskatchewanborder to markets in the Midwestern United States.  The remaining 70% partnership interest inNorthern Border Pipeline is held by Northern Border Partners, L.P. (NorthernBorder Partners), a publicly traded limited partnership.  The 2% general partnership interest in NorthernBorder Partners is controlled by affiliates of ONEOK, Inc. (ONEOK), whichhold a 1.65% general partner interest, and TransCanada, parent of TC PipeLines’general partner, which holds the remaining 0.35% general partner interest.  The Northern Border Pipeline system isoperated by Northern Plains Natural Gas Company (Northern Plains), a whollyowned subsidiary of ONEOK.  NorthernBorder Pipeline is regulated by the Federal Energy Regulatory Commission(FERC).  

 

The Partnership uses the equity method ofaccounting for its investment in Northern Border Pipeline.  TC PipeLines’ equity income for the three andsix months ended June 30, 2005 and 2004 includes 30% of the net income ofNorthern Border Pipeline for the same periods. There were no undistributed earnings from Northern Border Pipeline as atJune 30, 2005 and December 31, 2004. 

 

**Thefollowing table sets out summarized financial information representing 100% ofthe operations of Northern Border Pipeline for the three and six months ended June 30,2005 and 2004 and as at June 30, 2005 and December 31, 2004.  TC PipeLines has held its general partnerinterest since May 28, 1999.**

 

5

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**Northern Border Pipeline Income Statement**

 
| **(unaudited)**           | ** ** | **Three months ended June 30** | ** ** | **Six months ended June 30** | ** ** |
|---------------------------|------------|-------------------------------------|------------|-----------------------------------|------------|
| **(millions of dollars)** | ** ** | **2005**                            | ** ** | **2004**                          | ** ** | **2005** | ** ** | **2004** | ** ** |
| Revenues                  | ** ** | **69.8**                            |       | 81.5                              | ** ** | **152.6** |   | 164.8 |   |
| Costs and  expenses       | ** ** | **(16.7**                           | **)**      | (16.1                             | )          | **(34.1** | **)** | (33.1 | ) |
| Depreciation              | ** ** | **(14.3**                           | **)**      | (14.6                             | )          | **(28.7** | **)** | (29.1 | ) |
| Financial  charges        | ** ** | **(10.6**                           | **)**      | (9.9                              | )          | **(21.2** | **)** | (20.1 | ) |
| Other income              | ** ** | **0.6**                             |       | 0.4                               | ** ** | **0.8** |   | 0.5 |   |
| Net income                | ** ** | **28.8**                            |       | 41.3                              | ** ** | **69.4** |   | 83.0 |   |

 

NorthernBorder Pipeline amortized $0.4 million and $0.7 million in the three and sixmonths ended June 30, 2005, respectively, related to terminated interestrate swap agreements as a reduction to financial charges from accumulated othercomprehensive income.  

 

**NorthernBorder Pipeline Balance Sheet**

 
| **(millions of dollars)**                  | *** *** | **June 30  2005** | *** *** | **December 31  2004** | *** *** |
|--------------------------------------------|--------------|------------------------|--------------|----------------------------|--------------|
| ** **                                 | *** *** | **(unaudited)**        | *** *** | *** ***               | *** *** |
| **Assets**                                 |         |                   |         |                       |         |
| Cash and  cash equivalents                 | ** **   | **1.9**                |         | 20.3                       |         |
| Other current  assets                      | ** **   | **33.4**               |         | 39.0                       |         |
| Plant,  property and equipment, net        | ** **   | **1,525.2**            |         | 1,543.8                    |         |
| Other assets                               | ** **   | **21.2**               |         | 20.2                       |         |
| ** **                                 |         | **1,581.7**            |         | 1,623.3                    |         |
| **Liabilities  and Partners’ Equity** |         |                   |         |                       |         |
| Current  liabilities                       | ** **   | **45.4**               |         | 47.8                       |         |
| Reserves and  deferred credits             | ** **   | **4.2**                |         | 4.5                        |         |
| Long-term  debt                            | ** **   | **602.8**              |         | 603.9                      |         |
| Partners’  equity                     |         |                   |         |                       |         |
| Partners’  capital                    | ** **   | **926.3**              |         | 963.3                      |         |
| Accumulated  other comprehensive income    | ** **   | **3.0**                |         | 3.8                        |         |
| ** **                                 |         | **1,581.7**            |         | 1,623.3                    |         |

 

##### ***Note 3*****   ****Investment in Tuscarora**

The Partnership owns a 49% general partner interest in Tuscarora, ageneral partnership which owns a 240-mile United States interstate pipelinesystem that transports natural gas from Oregon, where it interconnects toTransCanada’s Gas Transmission Northwest Corporation system (GTN), to northernNevada.  The remaining general partnerinterests in Tuscarora are held 50% by Sierra Pacific Resources and 1% byTransCanada.  The Tuscarora pipelinesystem is operated by Tuscarora Gas Operating Company, a wholly ownedsubsidiary of Sierra Pacific Resources. Sierra Pacific Power Company (Sierra Pacific Power) a wholly-ownedsubsidiary of Sierra Pacific Resources is Tuscarora’s largest shipper,accounting for approximately 69% of total available capacity through 2017.  On September 1, 2000, the Partnershipacquired its interest in Tuscarora from a subsidiary of TransCanada.  As a result of the acquisition allocation, anannual amortization of $0.4 million has been included in the Partnership’sequity income from Tuscarora.  Theamortization period ends in 2025. Tuscarora is regulated by the FERC. 

 

The Partnership uses the equity method ofaccounting for its investment in Tuscarora. TC PipeLines’ equity income for the three and six months ended June 30,2005 and 2004 includes 49% of the net income of Tuscarora for the sameperiods.  There were no undistributedearnings from Tuscarora as at June 30, 2005 and December 31, 2004.

 

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The following table sets out summarizedfinancial information representing 100% of the operations of Tuscarora for thethree and six months ended June 30, 2005 and 2004 and as at June 30,2005 and December 31, 2004.  TCPipeLines has held its general partner interest since September 1, 2000.

 

**Tuscarora Income Statement**

 
| **(unaudited)**           | ** ** | **Three months ended June 30** | ** ** | **Six months ended June 30** | ** ** |
|---------------------------|------------|-------------------------------------|------------|-----------------------------------|------------|
| **(millions of dollars)** | ** ** | **2005**                            | ** ** | **2004**                          | ** ** | **2005** | ** ** | **2004** | ** ** |
| Revenues                  | ** ** | **8.0**                             |       | 8.0                               | ** ** | **16.3** |   | 16.3 |   |
| Costs and  expenses       | ** ** | **(1.1**                            | **)**      | (1.2                              | )          | **(2.2** | **)** | (2.4 | ) |
| Depreciation              | ** ** | **(1.6**                            | **)**      | (1.5                              | )          | **(3.1** | **)** | (3.1 | ) |
| Financial  charges        | ** ** | **(1.4**                            | **)**      | (1.6                              | )          | **(2.9** | **)** | (3.1 | ) |
| Other income              | ** ** | **0.1**                             |       | —                            | ** ** | **0.1** |   | — |   |
| Net income                | ** ** | **4.0**                             |       | 3.7                               | ** ** | **8.2** |   | 7.7 |   |

 

**TuscaroraBalance Sheet**

 
| ** **                                 | ** **   | **June 30** | ** **   | **December 31** | ** **   |
|--------------------------------------------|--------------|------------------|--------------|----------------------|--------------|
| **(millions of dollars)**                  | ** **   | **2005**         | ** **   | **2004**             | ** **   |
| ** **                                 | *** *** | **(unaudited)**  | *** *** | *** ***         | *** *** |
| **Assets**                                 |         |             |         |                 |         |
| Cash and  cash equivalents                 | ** **   | **3.7**          |         | 3.6                  |         |
| Other  current assets                      | ** **   | **2.7**          |         | 3.0                  |         |
| Plant,  property and equipment, net        | ** **   | **134.5**        |         | 136.9                |         |
| Other assets                               | ** **   | **1.4**          |         | 1.4                  |         |
| ** **                                 |         | **142.3**        |         | 144.9                |         |
| **Liabilities  and Partners’ Equity** |         |             |         |                 |         |
| Current  liabilities                       | ** **   | **7.2**          |         | 6.9                  |         |
| Long-term  debt                            | ** **   | **73.5**         |         | 75.9                 |         |
| Partners’  equity                     |         |             |         |                 |         |
| Partners’  capital                    | ** **   | **61.5**         |         | 62.0                 |         |
| Accumulated  other comprehensive income    | ** **   | **0.1**          |         | 0.1                  |         |
| ** **                                 |         | **142.3**        |         | 144.9                |         |

 

##### ***Note 4*****   ****Credit Facilities and Long-Term Debt**

On May 28,2003, the Partnership renewed its $40.0 million unsecured two-year revolvingcredit facility (TransCanada Credit Facility) with TransCanada PipeLine USALtd., an affiliate of the general partner. The TransCanada Credit Facility may bear interest, at the option of thePartnership, at a one-, two-, three-, or six-month London Interbank OfferedRate (LIBOR) plus 1.25%.  The purpose ofthe TransCanada Credit Facility is to provide borrowings to fund capitalexpenditures, to fund capital contributions to Northern Border Pipeline,Tuscarora and any other entity in which the Partnership directly or indirectlyacquires an interest, to fund working capital and for other general businesspurposes, including temporary funding of cash distributions to unitholders andthe general partner, if necessary.  At December 31,2004, the Partnership had $6.5 million borrowings outstanding under theTransCanada Credit Facility.  Theinterest rate on the TransCanada Credit Facility at December 31, 2004 was3.75%.  On February 22, 2005, thePartnership repaid in full its $6.5 million outstanding balance on theTransCanada Credit Facility.  On July 31,2005, the TransCanada Credit Facility expired and was not renewed as there wereno anticipated drawings required under the facility.  

 

On March 8, 2004 the Partnership renewedits $30.0 million unsecured credit facility (Revolving Credit Facility) withBank One, NA, as administrative agent. Loans under the Revolving Credit Facility may bear interest

 

7

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at the option of the Partnership, at a one-, two-, three-, or six-monthLIBOR plus 1.25% or at a floating rate based on the higher of the federal fundseffective rate plus 0.5% and the prime rate. The Revolving Credit Facility matures on February 28, 2006.  Amounts borrowed may be repaid in part or infull prior to that time without penalty. The Revolving Credit Facility may be used to fund capital expenditures,to fund capital contributions to Northern Border Pipeline, Tuscarora and anyother entity in which the Partnership directly or indirectly acquires aninterest, to fund working capital and for other general business purposes,including temporary funding of cash distributions to unitholders and thegeneral partner, if necessary.  TheRevolving Credit Facility requires that the Partnership’s total debt, as of thelast day of any fiscal quarter, be no more than the lesser of (i) 35% ofcapitalization as at the last day of such fiscal quarter, or (ii) 2.5times the consolidated adjusted EBITDA (net income plus interest expense,income taxes and depreciation and amortization) for the period consisting ofsuch fiscal quarter and the three preceding fiscal quarters.  On May 23, 2005, the Partnership repaid$6.0 million on its Revolving Credit Facility. The Partnership had $24.0 million and $30.0 million outstanding underthe Revolving Credit Facility at June 30, 2005 and December 31,2004.  The interest rate on the RevolvingCredit Facility averaged 4.26% and 2.33% for the six months ended June 30,2005 and 2004, respectively, and at June 30, 2005 and December 31,2004, the interest rate was 4.46% and 3.72%, respectively.  

 

**Note 5****    NetIncome per Unit**

Net income per unit is computed by dividing net income, after deductionof the general partner’s allocation, by the weighted average number of commonand subordinated units outstanding.  Thegeneral partner’s allocation is equal to an amount based upon the generalpartner’s 2% interest, adjusted to reflect an amount equal to incentivedistributions.  Net income per unit wasdetermined as follows:

 
| **(unaudited)**                                    | ** ** | **Three months ended  June 30** | ** ** | **Six months ended  June 30** | ** ** |
|----------------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| **(millions of dollars except per  unit amounts)** | ** ** | **2005**                             | ** ** | **2004**                           | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net income                                         | ** ** | **9.7**                              |       | 13.6                               | ** ** | **23.1** |   | 27.3 |   |
| Net income  allocated to general partner           |       |                                 |       |                               |       |   |   |   |   |
| General  partner interest                          | ** ** | **(0.2**                             | **)**      | (0.3                               | )          | **(0.4** | **)** | (0.6 | ) |
| Incentive  distribution income allocation          | ** ** | **(0.5**                             | **)**      | (0.3                               | )          | **(1.0** | **)** | (0.6 | ) |
| ** **                                         |       | **(0.7**                             | **)**      | (0.6                               | )          | **(1.4** | **)** | (1.2 | ) |
| Net income  allocable to units                     | ** ** | **9.0**                              | ** ** | 13.0                               |       | **21.7** | ** ** | 26.1 |   |
| Weighted  average units outstanding *(millions)*   | ** ** | **17.5**                             |       | 17.5                               | ** ** | **17.5** | ** ** | 17.5 |   |
| Net income  per unit                               | ** ** | **$**                                | **0.52**   |                               | $          | 0.74 | ** ** | **$** | **1.24** |   | $ | 1.49 |   |
|                                                    |            |                                      |            |                                    |            |  |  |  |  |  |  |  |  |

 

**Note 6****    Distributions**

On July 14, 2005, the Board of Directors of the general partnerdeclared the Partnership’s 2005 second quarter cash distribution.  The second quarter cash distribution ispayable on August 12, 2005 to unitholders of record as of July 29,2005.  The total cash distribution of$10.8 million will be paid in the following manner: $10.1 million to commonunitholders (including $1.2 million to the general partner as holder of2,035,106 common units), $0.5 million to the general partner as holder of theincentive distribution rights, and $0.2 million to the general partner inrespect of its 2% general partner interest.

 

**Note 7****    AccountingPronouncements**

In March 2005, the Financial Accounting Standards Board (FASB)issued Interpretation (FIN) No. 47, “Accounting for Conditional AssetRetirement Obligations - an interpretation of FASB Statement (SFAS) No. 143.”The statement clarifies the term conditional asset retirement obligation, asused in SFAS No. 143 and when an entity would have sufficient informationto reasonably estimate the fair value of an asset retirement obligation. The 

 

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effective date of this interpretation is no later than the end of thefiscal year ending after December 15, 2005.  The effect of adopting FIN 47 is not expectedto be material to TC PipeLines’ results of operations or financial position.

 

**Note 8****    SubsequentEvents**

Northern Border Pipeline declared a distribution of approximately $39.4million on August 1, 2005.  ThePartnership received its 30% share ($11.8 million) on August 1, 2005.

 

Tuscarora declared a distribution of approximately $4.2 million on July 14,2005.  The Partnership received its 49%share ($2.1 million) on July 29, 2005.

 

9

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**ITEM 2.  MANAGEMENT’S DISCUSSIONAND ANALYSIS OF FINANICAL CONDITION ANDRESULTS OF OPERATIONS**

 

**Cautionary Statement RegardingForward-Looking Information**

# **Anumber of statements made by TC PipeLines in this quarterly report areforward-looking and relate to, among other things, anticipated financialperformance, business prospects, strategies, market forces and commitments ofTC PipeLines.  All forward-lookingstatements are based on the Partnership’s beliefs as well as assumptions madeby and information currently available to the Partnership.  The Partnership assumes no obligation toupdate any such forward-looking statements to reflect events or circumstancesas occurring after the date hereof. Words such as “anticipate”, “believe”, “estimate”, “expect”, “plan”, “intend”,“forecast”, and similar expressions, identify forward-looking statements.  These statements reflect the Partnership’scurrent views with respect to future events and are subject to various risks,uncertainties and assumptions including:**

# ** **

•              the Partnership’s30% general partner interest in Northern Border Pipeline and 49% generalpartner interest in Tuscarora represent its only material assets.  As a result, the Partnership is dependentupon Northern Border Pipeline and Tuscarora for all of its available cash;

 

•              majority control andoperation of Northern Border Pipeline by affiliates of ONEOK and any furtherdevelopments in the Enron bankruptcy proceedings affecting Northern BorderPipeline’s settled claims; 

 

•              regulatorydecisions, particularly those of the FERC; 

 

•              the ability ofNorthern Border Pipeline to recontract its capacity at maximum transportationrates; 

 

•              the failure of ashipper on either one of the pipelines in which the Partnership has an interestto perform its contractual obligations;

 

•              the ability ofaffiliates of Sierra Pacific Resources to continue to meet their contractualobligations to Tuscarora; 

 

•              the availability ofWestern Canadian natural gas for import into the United States; 

 

•              the amount ofstorage capacity in western Canada and overall strong demand for storageinjection;  and

 

•              prevailingeconomic conditions, particularly conditions of the capital and equity markets;

 

# **andother risks discussed in the Partnership’s filings with the Securities andExchange Commission (SEC), including the Partnership’s annual report on Form 10-Kfor the year ended December 31, 2004. By its nature, such forward-looking information is subject to variousrisks and uncertainties, which could cause TC PipeLines’ actual results andexperience to differ materially from the anticipated results or otherexpectations expressed in this quarterly report.**

# ** **

# **Results of Operations of TC PipeLines, LP**

*As a resultof the Partnership’s ownership interests in both Northern Border Pipeline andTuscarora, the following discusses first the results of operations andliquidity and capital resources of TC PipeLines, then those of each of NorthernBorder Pipeline and Tuscarora in their entirety.*

 

The following discussions ofthe financial condition and results of operations of the Partnership, NorthernBorder Pipeline and Tuscarora should be read in conjunction with the financialstatements and notes thereto of the Partnership included elsewhere in this report(see Item 1.  Financial Statements).  For more detailed information regarding thebasis of presentation for the following financial information, see the notes tothe condensed financial statements of the Partnership.  

 

***Overview***

TC PipeLines, LP was formed in 1998 as a Delaware limited partnershipto acquire, own and participate in the management of United States-basedpipeline assets.  TC PipeLines, LP andits subsidiary limited partnerships,

 

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TC PipeLines Intermediate Limited Partnership and TC TuscaroraIntermediate Limited Partnership, are collectively referred to herein as “TCPipeLines” or “the Partnership.”  TCPipeLines GP, Inc., an indirect wholly owned subsidiary of TransCanadaPipelines Limited, which is a wholly owned subsidiary of TransCanada, is thegeneral partner of the Partnership.  ThePartnership owns a 30% general partner interest in Northern Border Pipeline anda 49% general partner interest in Tuscarora.

 

***Investment in Northern BorderPipeline Company***

Northern Border Pipeline owns a 1,249-mile United States interstatepipeline system that transports natural gas from the Montanan-Saskatchewanborder near Port of Morgan, Montana to natural gas markets in the MidwesternUnited States.  The Partnership acquiredits 30% interest in Northern Border Pipeline from affiliates of its generalpartner.  The Partnership has one memberand 30% of the voting power of the Northern Border Pipeline management committee.

 

The remaining 70% general partner interest inNorthern Border Pipeline is held by Northern Border Partners, a publicly tradedlimited partnership.  The generalpartners of Northern Border Partners are Northern Plains and Pan Border GasCompany (Pan Border), both subsidiaries of ONEOK, and Northwest Border PipelineCompany, a subsidiary of TransCanada. TransCanada has one member and 12.25% of the voting power on theNorthern Border Pipeline management committee. Northern Plains and Pan Border Gas collectively have two members and57.75% of the voting power of the Northern Border Pipeline managementcommittee.  Northern Plains also servesas the operator of the Northern Border Pipeline system.  

 

#### ***Investment in Tuscarora Gas Transmission Company***

Tuscarora owns a 240-mile United States interstatepipeline system that originates at an interconnection point with facilities ofGTN, a wholly-owned subsidiary of TransCanada, near Malin, Oregon and runssoutheast through northeastern California and northwestern Nevada.  The Partnership owns a 49% general partnerinterest in Tuscarora.

 

The remaininggeneral partner interest in Tuscarora is held 50% by Tuscarora Gas PipelineCo., a wholly-owned subsidiary of Sierra Pacific Resources and 1% by TCPLTuscarora Ltd., an indirect wholly owned subsidiary ofTransCanada.

 

Tuscarora increased its contracted capacityfrom 127 million cubic feet per day (mmcfd) to approximately 180 mmcfd in 2002by completing an expansion of its pipeline system.  The expansion consisted of the two compressorstations and an 11-mile pipeline extension from a point near the previousterminus of the Tuscarora pipeline system near Reno, Nevada to Wadsworth,Nevada.  

 

Tuscarora completed construction of theBarrick Lateral, a 0.5 mile lateral that provides transportation service to anew electric generation customer located near Tracy, Nevada.  The construction of the lateral was completedon time and commissioned for service to Barrick Goldstrike on June 25,2005.   

 

***Critical Accounting Policy***

TC PipeLines accounts for its interests in both Northern BorderPipeline and Tuscarora using the equity method of accounting as detailed innotes 2 and 3 to the condensed financial statements.  The equity method of accounting isappropriate where the investor does not control an investee, but rather is ableto exercise significant influence over the operating and financial policies ofan investee.  TC PipeLines is able toexercise significant influence over its investments in Northern Border Pipelineand Tuscarora as evidenced by its representation on their respective managementcommittees.

 

The 30% general partner interest in NorthernBorder Pipeline and 49% general partner interest in Tuscarora are currently thePartnership’s only material sources of income. The Partnership’s results of operations are influenced by and reflectthe same factors that influence the financial results of Northern BorderPipeline and Tuscarora, respectively.

 

***Second Quarter 2005 Compared with SecondQuarter 2004***

Net income decreased $3.9 million, or 29%, to $9.7 million in thesecond quarter of 2005, compared to $13.6 million for the same period in2004.  The decrease was primarily due tolower equity income from Northern Border Pipeline.

 

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Equity income from the Partnership’s investment in Northern BorderPipeline decreased $3.8 million, or 31%, to $8.6 million in the second quarterof 2005, compared to $12.4 million for the same period in 2004.  The decrease in equity income from NorthernBorder Pipeline was primarily due to lower revenues in the second quarter of2005 compared to the same period in 2004. The decrease was primarily due to a decrease in revenue associated withuncontracted and discounted capacity, partially offset by an increase inshort-term and other transportation service revenue.  Equity income from the Partnership’sinvestment in Tuscarora remained at $1.8 million in the second quarter of 2005,compared to the same period in 2004.

 

The Partnership recorded general and administrative expenses of $0.5million in each of the second quarters of 2005 and 2004, respectively.

 

The Partnership recorded financial charges and other of $0.2 millionand $0.1 million in the second quarter of 2005 and 2004, respectively.  The increase was primarily due to higheraverage interest rates.

 

***Six Months Ended June 30, 2005 Comparedwith Six Months Ended June 30, 2004***

Net income decreased $4.2 million, or 15%, to $23.1 million in thefirst six months of 2005, compared to $27.3 million for the same period in2004.  The decrease was primarily due tolower equity income from Northern Border Pipeline.

 

Equity income from the Partnership’s investment in Northern BorderPipeline decreased $4.1 million, or 16%, to $20.8 million in the first sixmonths of 2005, compared to $24.9 million for the same period in 2004.  The decrease in equity income from NorthernBorder Pipeline was primarily due to lower revenues in the first six months of2005, compared to the same period in 2004. The decrease was primarily due to a decrease in revenue associated withuncontracted and discounted capacity, partially offset by an increase inshort-term and other transportation service revenue.  In addition, the leap year in 2004 providedan additional day of transportation revenue in 2004 as compared to 2005.  

 

Equity income from the Partnership’s investment in Tuscarora increased$0.2 million, or 6%, to $3.8 million in the first six months of 2005, comparedto $3.6 million for the same period in 2004. The increase in equity income from Tuscarora was due to lower operatingexpenses and financial charges. Tuscarora’s operating expenses decreased primarily due to therenegotiation of lower rates for maintenance contracts in 2005, while thedecrease in financial charges was due to lower average outstanding debt balancein 2005. 

 

The Partnership recorded general and administrative expenses of $1.0million in each of the first six months of 2005 and 2004. 

 

Financial charges and other were $0.5 million and $0.2 million in thefirst six months of 2005 and 2004, respectively.  The increase was primarily due to higheraverage interest rates. 

 

**Liquidity and Capital Resources of TCPipeLines, LP**

 

***Debt and Credit Facilities***

TC PipeLines’ debt and credit facilities outstanding at June 30,2005 are as follows:

 
| ** **                 | ** ** | **Payments Due by Period** | ** ** |
|----------------------------|------------|----------------------------|------------|
| ** **                 | ** ** | ** **                 | ** ** | **Less than 1** | ** ** | **Long-term** | ** ** |
| **(millions of dollars)**  | ** ** | **Total**                  | ** ** | **year** | ** ** | **portion** | ** ** |
|                       |       |                       |       |   |   |   |   |
| Revolving  Credit Facility |       | 24.0                       |       | 24.0 |   | — |   |
| Total                      |       | $                          | 24.0       |   | $ | 24.0 |   | $ | — |   |
|                            |            |                            |            |  |  |  |  |  |  |  |

 

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***Cash Distribution Policy of TC PipeLines, LP***

The Partnership has made distributions of Available Cash, as defined inthe Partnership Agreement, in the following manner:

•  First, 98% to the common units, pro rata, and2% to the general partner, until there is distributed for each outstanding unitan amount equal to the minimum quarterly distribution for that quarter; and

•  Thereafter, in a manner whereby the generalpartner has rights (referred to as incentive distribution rights) to receiveincreasing percentages of excess quarterly cash distributions over specifiedcash distribution thresholds.

 

After the distributions described above are met, additional AvailableCash from Operating Surplus (as defined in the Partnership Agreement) for thatquarter will be distributed among the unitholders and the general partner inthe following manner:

•  First, 85% to all units, pro rata, and 15% tothe general partner, until each unitholder has received a total of $0.5275 forthat quarter;

•  Second, 75% to all units, pro rata, and 25%to the general partner, until each unitholder has received a total of $0.6900for that quarter; and

•  Thereafter, 50% to all units, pro rata, and50% to the general partner.

 

The distribution to the general partner described above, other than in itscapacity as a holder of 2,035,106 units that are in excess of its aggregate 2%general partner interest, represents the incentive distribution rights.

 

***2005 Second Quarter Cash Distribution***

On July 14, 2005, the Board of Directors of the general partnerdeclared the Partnership’s 2005 second quarter cash distribution.  The second quarter cash distribution ispayable on August 12, 2005 to unitholders of record as of July 29,2005.  The total cash distribution of$10.8 million will be paid in the following manner: $10.1 million to commonunitholders (including $1.2 million to the general partner as holder of2,035,106 common units), $0.5 million to the general partner as holder of theincentive distribution rights, and $0.2 million to the general partner inrespect of its 2% general partner interest.

 

***Cash Flows from Operating Activities***

Cash flows provided by operating activities decreased $4.4 million, or16%, to $23.1 million in the first six months of 2005, compared to $27.5million for the same period in 2004.  Thedecrease was primarily due to lower equity income from Northern Border Pipelinein the first six months of 2005, compared to the same period in 2004.  In the first six months of 2005 and 2004, thePartnership received cash distributions of $31.9 million and $31.3 million,respectively, from its equity investment in Northern Border Pipeline.  The increase in cash distributions fromNorthern Border Pipeline was mainly due to higher earnings partially offset byhigher maintenance capital spending in both the fourth quarter of 2004 andfirst quarter of 2005, compared to the same period in 2003.  The cash distributions received include $11.1million and $6.4 million classified as return of capital in the first sixmonths of 2005 and 2004, respectively. The Partnership also received cash distributions of $4.3 million and$3.6 million, respectively, from its equity investment in Tuscarora.  The increase in cash distributions fromTuscarora was mainly due to higher earnings in both the fourth quarter of 2004and first quarter of 2005.  The cashdistributions received include $0.5 million classified as return of capital inthe first six months of 2005. Distributions received in the first six months of 2005 are based on therespective equity investments’ financial results for the fourth quarter of 2004and first quarter of 2005.

 

***Cash Flows from Investing Activities***

Cash received (used) in investing activities was $11.6 million and$(32.6) million in the first six months of 2005 and 2004, respectively.  The Partnership made a $39.0 millioninvestment in Northern Border Pipeline in the first six months of 2004.  Cash distributions received from NorthernBorder Pipeline which were classified as return of capital were $11.1 millionand $6.4 million for the six months ended June 30, 2005 and 2004,respectively.  

 

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***Cash Flows from Financing Activities***

Cashflows used in financing activities were $34.0 million in the first six monthsof 2005, compared to $0.3 million for the same period in 2004.  

 

In the first six months of 2005, the Partnership paid$21.5 million in cash distributions in the following manner:  $20.1 million to common unitholders(including $2.8 million to the general partner as holder of 2,809,306 and2,035,106 common units, in the first and second quarter of 2005, respectively),$1.0 million to the general partner as holder of the incentive distributionrights, and $0.4 million to the general partner in respect of its 2% generalpartner interest.  This compares to $20.3million that was paid in the first six months of 2004.

 

During the first six months of 2005, the Partnershiprepaid in full its $6.5 million outstanding balance on the TransCanada CreditFacility and repaid $6.0 million on its Revolving Credit Facility.  On July 31, 2005, the TransCanada CreditFacility expired and was not renewed as there were no anticipated drawingsrequired under the facility.  During thefirst six months of 2004, the Partnership borrowed $20.0 million on its RevolvingCredit Facility to fund cash calls issued by Northern Border Pipeline.

 

***Capital Requirements***

To the extent TC PipeLines has any capital requirements with respect toits investments in Northern Border Pipeline and Tuscarora or makes acquisitionsduring the remainder of 2005, TC PipeLines expects to fund these requirementswith operating cash flows, debt and/or equity.

 

**Results of Operations of Northern BorderPipeline Company**

*In the following discussion of the results ofNorthern Border Pipeline, all amounts represent 100% of the operations ofNorthern Border Pipeline, in which the Partnership has held a 30% interestsince May 28, 1999.*

 

The discussion and analysis of Northern Border Pipeline’s financialcondition and operations are based on Northern Border Pipeline’s financialstatements, which were prepared in accordance with U.S. GAAP.  

 

***Overview***

For Northern Border Pipeline, there are several major business driversas summarized in the “Management’s Discussion and Analysis of FinancialCondition and Results of Operations - Results of Northern Border PipelineCompany - Overview”, included in TC PipeLines’ annual report on Form 10-Kfor the year ended December 31, 2004. 

 

As of December 31, 2004, approximately 88% of the natural gasNorthern Border Pipeline transported was produced in the Western CanadaSedimentary Basin.  Therefore, thecontinuous supply of Canadian natural gas is crucial to Northern BorderPipeline’s long-term financial condition. Of equal importance is the demand for natural gas in the MidwesternUnited States markets that Northern Border Pipeline serves, including theChicago market area.  Some of thesignificant factors that may impact Northern Border Pipeline’s customers’desire to move natural gas on its interstate pipeline include:

• the amount of Canadian natural gas available for export, which isimpacted by Canadian supply and demand;

• the ability to transport Canadian gas more economically on otherpipelines;

• the amount of storage capacity for Canadian gas and demand for storageinjection;

• availability of natural gas from other supply sources that could betransported to the Midwestern United States; 

• the demand for natural gas in other markets, which may affect the supplyin the Midwestern United States, primarily as a result of temperature and/orhydro electric generation levels; and

• the natural gas market price spread between Alberta, Canada and theMidwestern United States.

 

For a discussion about market factors that may impact supply and demandfor natural gas, please refer to TC PipeLines’ annual report on Form 10-Kfor the year ended December 31, 2004, Item 1.  “Business of Northern Border Pipeline Company– Demand for Transportation Capacity”, as well as our subsequent filings withthe SEC.  

 

Northern Border Pipeline’s operating revenue is derived fromtransportation contracts under its tariff regulated by the FERC.  The tariff specifies the maximum rateNorthern Border Pipeline can charge its customers, which is determined througha ratemaking process.  During thisprocess, which is called a rate case in the industry, a determination isreached by the FERC, either through a hearing or a settlement on a just maximumrate that includes

 

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recovery of its prudent cost-based investment and a reasonable returnfor its investors.  Northern BorderPipeline’s firm transportation customers are obligated to pay a fee forcapacity on its pipeline, regardless of how much natural gas they actuallytransport, in addition to a fee based on the volume of natural gastransported.  Northern Border Pipeline’sinterruptible transportation customers pay a fee based only on the volumes ofnatural gas transported.

 

***Known Trends and Uncertainties***

*Canadian Supply**–***NorthernBorder Pipeline’s projections assume that Canadian supply will remain fairlystable and import levels will be flat in 2005.

 

*Natural Gas Storage Levels**–***Northern Border Pipelineobserved rising demand for storage of Canadian natural gas during the secondquarter of 2005 and advises that it believes this may be primarily due to anincreased price differential between summer natural gas prices in the UnitedStates compared with projected natural gas prices for the coming winter season.  The changing mix of natural gas users mayalso be a factor in the growing demand for storage, from the steady demand ofindustrial users to temperature-sensitive residential, commercial, and electricgeneration users.  Northern BorderPipeline anticipates additional storage projects in Alberta, Canada to be inservice in 2006.

 

*Seasonality**–***Supplyand demand in the various geographic regions of the United States as a resultof weather conditions can significantly affect one another as the marketattempts to balance each region’s natural gas needs.  In addition to traditional winter heatingdemand load, Canadian supply helps service Western United States’ summer demandfor natural gas for electric generation. This market may be sensitive to precipitation levels that affect thesupply of hydro electric generation. During the summer, in the Western United States, the effects of lowhydro electric generation levels combined with high temperature demand loadsimpact Canadian natural gas pricing.  Inthe Midwestern United States, pipeline infrastructure is designed to meetwinter heating demand load.  During thesummer when there is excess pipeline capacity, there is greater competitionfrom other supply sources.  Winter seasonis considered to be November to March, and summer season is considered tobe the remaining months.  Peak summerseason for electric generation includes July, August, and September.  During the second quarter of 2005, NorthernBorder Pipeline observed weakened demand for natural gas consistent withtypical seasonal demand factors.

 

*Competition**–***In2005, new supply from the Rockies via Cheyenne Plains Pipeline as well asnatural gas from the San Juan and Permian Basins has been redirected fromWestern United States markets into the Mid-continent region creating greatersupply competition in the Midwestern United States market.  Cheyenne Plains is expected to complete anexpansion project that will increase its pipeline capacity by 170 milliondekatherms per day by early 2006.

 

*Contracting Risk **–***Naturalgas supply and demand may significantly impact Northern Border Pipeline’sbusiness; however, a significant portion of its revenue is generated from itslong-term firm transportation contracts. As long as Northern Border Pipeline’s capacity is fully contracted,under normal circumstances, it can expect to collect operating revenueregardless of short-term market dynamics that may impact natural gasflows.  When Northern Border Pipeline isnot fully contracted it is directly affected by the current market fundamentalsand is most sensitive to changes in supply and demand for natural gas whichimpacts the demand for its capacity.

 

As previously disclosed, Northern Border Pipeline had uncontractedcapacity during the second quarter of 2005, on its Port of Morgan, Montana to Ventura,Iowa portion of its pipeline.  Expiringlong-term transportation contracts were replaced with primarily short-termcontracts.  When demand is light relativeto supply, Northern Border Pipeline’s customers may not want to commit for longperiods to a certain rate if they believe the cost supported by the market willbe lower.  Seasonal demand suggests thatthis situation is more likely to impact Northern Border Pipeline’s revenues atcertain times of the year.  Accordingly,Northern Border Pipeline advises that it believes throughput on its system maybe more seasonal in the future and some discounting may be required to maximizerevenue.

 

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*Growth Projects**–***NorthernBorder Pipeline is focused on modifying its existing systems to meet marketdemand.  Organic growth projectscurrently underway include Northern Border Pipeline’s Chicago III ExpansionProject, a proposed expansion of its pipeline system into the Chicago marketarea.  Northern Border Pipeline has filedits application for a certificate of public convenience and necessity for theconstruction and operation of the facilities. Northern Border Pipeline anticipates the issuance of a certificate bythe FERC during the third quarter of 2005. This project is fully subscribed and estimated to cost approximately $21million.  It will add 130 mmcfd oftransportation capacity from Harper, Iowa to Chicago, Illinois.  

 

Please refer to TC PipeLines’ annual report on form 10-K for the periodended December 31, 2004 for more information about the Chicago IIIExpansion Project.

 

***Regulatory Developments***

*Rate Case***–**Under the terms of Northern Border Pipeline’s 1999 ratecase, it must file a new rate case by November 1, 2005.  Elements to be decided in the rate caseinclude billing units, rate base, Northern Border Pipeline’s depreciation rateon transmission plant, return on equity, rate design and issues related to theinclusion of an income tax allowance. Northern Border Pipeline advises that it believes the new rate wouldtake effect on May 1, 2006.  Theresulting rate may be subject to reduction based upon FERC’s review.  The outcome will be finally determined byFERC approval of a settlement or decided by the FERC based on hearings.

 

*Income Tax Allowance*– In May 2005, the FERC issued a policy statement permitting the inclusionin rates of an income tax allowance for partnership interests if the partnershave an actual or potential income tax liability on that income.  Northern Border Pipeline’s present ratesreflect an allowance for income taxes.  

 

More information regarding Northern Border Pipeline’s upcoming ratecase and income tax allowance can be found in TC PipeLines’ 2004 annual reporton Form 10-K for the year ended December 31, 2004, in Item 1.  “Business of Northern Border Pipeline Company– FERC Regulation.”

 

***Recent Developments*****

During the second quarter of 2005, Northern Border Pipeline hadavailable capacity on the Port of Morgan, Montana to Ventura, Iowa portion ofits pipeline which remained uncontracted. Northern Border Pipeline discounted transportation rates on a short-termbasis to maximize overall revenue, and has since contracted all of itsavailable capacity based on summer design on the Port of Morgan, Montana toVentura, Iowa portion of its pipeline through September of 2005.  Currently, Northern Border Pipeline expectsits revenue for 2005 will be $15 million to $18 million lower than 2004 revenuewhich generally reflected contracting nearly all capacity at maximum ratelevels.  

 

In June 2005, Northern Border Pipeline executed term sheets with athird party for the sale of its unsecured claims for transportation contractsand associated guarantees held against Enron Corporation and Enron NorthAmerica Corporation.  Proceeds from thesale are expected to be $11.1 million. In 2004, Northern Border Pipeline adjusted its allowance for doubtfulaccounts to reflect an estimated recovery of $1.1 million for the claims.  In the second quarter of 2005, NorthernBorder Pipeline made a favorable adjustment to its allowance for doubtfulaccounts of $0.6 million to reflect the agreements for sale.  As a result of the sale, Northern BorderPipeline anticipates recognizing additional income of $9.4 million later in2005 of which our share would be approximately $2.8 million.

 

In July 2005, the Minnesota legislature passed an omnibus taxbill, which included a provision restoring the sales tax on pipeline fuel andequipment purchases.  The provision iseffective for purchases made after July 31.  As a result, the value of the gas providedin-kind and used in the operation of Northern Border Pipeline’s compressorstations will be taxed.  Northern BorderPipeline estimates this additional tax will be approximately $1.5 million to$2.0 million of additional taxes per year, which will result in a negativeearnings impact to TC PipeLines of approximately $0.5 million to $0.6 million.  Northern Border Pipeline is evaluatingwhether there is a legal basis for challenging the imposition of this tax onits operations.

 

***Critical Accounting Policies and Estimates***

In Northern Border Pipeline’s financial reporting process, it makesassumptions and uses estimates that affect the reported amount of the assetsand liabilities, disclosure of contingent assets and liabilities, and thereported amount

 

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 of revenue and expenses duringthe reporting period.  Actual resultscould differ from these estimates if the underlying assumptions are incorrect.  Any effects on Northern Border Pipeline’sfinancial position or results of operations resulting from revisions to theseestimates are recorded in the period during which the facts that gave rise tothe revision become known.  Key estimatesused by Northern Border Pipeline’s management include:

• the economic useful life of Northern Border Pipeline’s assets used todetermine depreciation and amortization;

• the fair value used to determine possible asset impairment charges;

• the fair value used to record derivative assets and liabilities;

• the fair value of assets acquired; and

• the amount of expense accruals.  

 

In general, there have been no significant changes in Northern BorderPipeline’s critical accounting policies since December 31, 2004.  For a detailed discussion of these policies,please refer to TC PipeLines’ annual report on Form 10-K for the periodended December 31, 2004, Notes to Northern Border Pipeline’s FinancialStatements – Note 2 - Summary of Significant Accounting Policies.

 

Northern Border Pipeline’s accounting policies conform to SFAS No. 71,“Accounting for the Effects of Certain Types of Regulation.”  Accordingly, certain assets that result fromthe ratemaking process are reflected on the balance sheet as regulatoryassets.  Northern Border Pipelineconsiders factors such as regulatory changes and the impact of competition todetermine the probability of future recovery of these assets.  If Northern Border Pipeline determines futurerecovery is no longer probable, it would be required to write-off theregulatory assets at that time.  As of June 30,2005, Northern Border Pipeline reflected regulatory assets of $12.4 millionthat it expects to recover from its customers over varying time periods up to44 years.  

 

Northern Border Pipeline’s long-lived assets are recorded at originalcost.  Northern Border Pipeline estimatesthe economic useful lives of its assets based on historical experience andmakes adjustments when changes in planned use, technological advances, or otherfactors show that a different life is more appropriate.  The depreciation rates for Northern BorderPipeline’s regulated interstate pipelines are determined by the FERC’sratemaking process.  Revisions to theestimated economic useful lives of Northern Border Pipeline’s assets wouldimpact its depreciation and amortization expense in future periods.

 

Northern Border Pipeline’s uses derivative instruments to mitigateinterest rate risk related to its financing activities.  Northern Border Pipeline records itsderivatives at fair value according to SFAS No. 133, “Accounting forDerivative Instruments and Hedging Activities.” The fair value of a derivativeinstrument is determined by the present value of its future cash flows, basedon market prices from third party sources. The accounting treatment for changes in the derivative’s fair valuedepends on whether it has been designated and qualifies as part of a hedgerelationship.  Is specific hedge criteriaare met, the derivative’s gains and losses may offset the hedged item’s relatedresults in the income statement.  As of June 30,2005, Northern Border Pipeline had no derivative financial instrumentsoutstanding. 

 

Northern Border Pipeline recognizes revenues when transportationservice is provided to its customers according to each transportationcontract.  Under Northern Border Pipeline’sfirm transportation agreements, its customers are obligated to pay a fee forcapacity on its pipeline, regardless of how much natural gas is actuallytransported.

 

***Results of Operations***

The followingtables set out summarized financial information for Northern Border Pipelinefor the three and six months ended June 30, 2005 and 2004 and as at June 30,2005 and December 31, 2004.  Amountsdiscussed represent 100% of the operations of Northern Border Pipeline, inwhich the Partnership has held a 30% interest since May 28, 1999.

 

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**NorthernBorder Pipeline Income Statement**

 
| **(unaudited)**           | ** ** | **Three months ended June 30** | ** ** | **Six months ended June 30** | ** ** |
|---------------------------|------------|-------------------------------------|------------|-----------------------------------|------------|
| **(millions of dollars)** | ** ** | **2005**                            | ** ** | **2004**                          | ** ** | **2005** | ** ** | **2004** | ** ** |
| Revenues                  | ** ** | **69.8**                            |       | 81.5                              | ** ** | **152.6** |   | 164.8 |   |
| Costs and  expenses       | ** ** | **(16.7**                           | **)**      | (16.1                             | )          | **(34.1** | **)** | (33.1 | ) |
| Depreciation              | ** ** | **(14.3**                           | **)**      | (14.6                             | )          | **(28.7** | **)** | (29.1 | ) |
| Financial  charges        | ** ** | **(10.6**                           | **)**      | (9.9                              | )          | **(21.2** | **)** | (20.1 | ) |
| Other income              | ** ** | **0.6**                             | ** ** | 0.4                               |       | **0.8** |   | 0.5 |   |
| Net income                | ** ** | **28.8**                            |       | 41.3                              | ** ** | **69.4** |   | 83.0 |   |

 

**NorthernBorder Pipeline Balance Sheet**

 
| ** **                                 | ** **   | **June 30** | ** **   | **December 31** | ** **   |
|--------------------------------------------|--------------|------------------|--------------|----------------------|--------------|
| **(millions of dollars)**                  | ** **   | **2005**         | ** **   | **2004**             | ** **   |
| *** ***                               | *** *** | **(unaudited)**  | *** *** | *** ***         | *** *** |
| **Assets**                                 |         |             |         |                 |         |
| Cash and  cash equivalents                 | ** **   | **1.9**          |         | 20.3                 |         |
| Other  current assets                      | ** **   | **33.4**         |         | 39.0                 |         |
| Plant,  property and equipment, net        | ** **   | **1,525.2**      |         | 1,543.8              |         |
| Other assets                               | ** **   | **21.2**         |         | 20.2                 |         |
| ** **                                 |         | **1,581.7**      |         | 1,623.3              |         |
| **Liabilities  and Partners’ Equity** |         |             |         |                 |         |
| Current  liabilities                       | ** **   | **45.4**         |         | 47.8                 |         |
| Reserves and  deferred credits             | ** **   | **4.2**          |         | 4.5                  |         |
| Long-term  debt                            | ** **   | **602.8**        |         | 603.9                |         |
| Partners’  equity                     |         |             |         |                 |         |
| Partners’  capital                    | ** **   | **926.3**        |         | 963.3                |         |
| Accumulated  other comprehensive income    | ** **   | **3.0**          |         | 3.8                  |         |
| ** **                                 |         | **1,581.7**      |         | 1,623.3              | ** **   |

 

***Second Quarter 2005 Compared with SecondQuarter 2004***

Net income decreased $12.5 million, or 30%, to $28.8 million in thesecond quarter of 2005, compared to $41.3 million for the same period in2004.  The decrease was primarily due tothe revenue impact from uncontracted and discounted capacity during 2005 on thePort of Morgan, Montana to Ventura, Iowa portion of the pipeline.

 

Revenues decreased $11.7 million, or 14%, to $69.8 million in thesecond quarter of 2005, compared to $81.5 million for the same period in2004.  The reduction was primarily due toa $13.0 million decrease in revenue associated with uncontracted and discountedcapacity, partially offset by a $1.3 million increase in short-term and othertransportation service revenue.   

 

Costs and expenses increased by $0.6 million in the second quarter of2005, compared to the same period last year, primarily due to an increase intaxes other than income of $1.1 million in the second quarter of 2005,reflecting tax adjustments made in the second quarter of 2005 and 2004 toreflect actual tax amounts.  Partially offsettingthis increase is a decrease of $0.5 million in operations and maintenanceexpense in the second quarter of 2005, compared to the same period last year.  In the second quarter of 2005, allowance fordoubtful accounts was reduced by approximately $0.6 million related tobankruptcy claims against Enron and Enron North America and general andadministrative expenses decreased by approximately $0.4 million.  The second quarter of 2004 included a creditof approximately $1.2 million to true-up corporate charges, which was partiallyoffset by $0.7 million of amortization expense for the renewal of aright-of-way easement.  

 

18

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Financial charges increased $0.7 million in the second quarter of 2005,or 7% to $10.6 million, compared to $9.9 million for the same period in 2004,as a result of higher average interest rates partially offset by lower averagedebt outstanding.

 

***Six Months Ended June 30, 2005 Comparedwith Six Months Ended June 30, 2004***

Net income decreased $13.6 million, or 16%, to $69.4 million in thefirst six months of 2005, compared to $83.0 million for the same period in2004.  The decrease was primarily due tothe revenue impact from uncontracted and discounted capacity during 2005 on thePort of Morgan, Montana to Ventura, Iowa portion of the pipeline.  

 

Revenues decreased $12.2 million, or 7%, to $152.6 million in the firstsix months of 2005, compared to $164.8 million for the same period in 2004,primarily due to a $13.0 million decrease in revenue associated withuncontracted and discounted capacity, partially offset by a $1.3 millionincrease in short-term and other transportation service revenue during thesecond quarter of 2005.  In addition,revenues in the first six months of 2004 reflected one additional day oftransportation revenue, compared to the same period in 2005, due to leap year. 

 

Costs and expenses increased $1.0 million in the first six months of2005, compared to the same period last year, primarily due to an increase intaxes other than income reflecting tax adjustments made in the second quarterof 2005 and 2004 to reflect actual tax amounts. Operations and maintenance expense was flat in the first six months of2005, compared to the same period last year.  

 

Financial charges increased $1.1 million in the first six months of2005, or 5% to $21.2 million, compared to $20.1 million for the same period in2004 as a result of higher average interest rates partially offset by loweraverage debt outstanding.

 

**Liquidity and Capital Resources of NorthernBorder Pipeline Company**

Northern Border Pipeline advises that it believes its liquidity isadequate to fund future recurring operating activities and investments.  Northern Border Pipeline relies on itsoperating cash flow and the credit facility listed in the following table tomeet its short-term liquidity needs. Northern Border Pipeline expects to meet its other liquidity needs byissuing long-term debt.  The timing andNorthern Border Pipeline’s ability to issue debt will depend on variousfactors, including:

•      theprevailing market conditions;

•      interestrates;

•      NorthernBorder Pipeline’s financial condition; and

•      NorthernBorder Pipeline’s credit rating.

 

***Debt and Credit Facilities***

Northern Border Pipeline’s debt and credit facilities outstanding as ofJune 30, 2005 are as follows:

 

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| ** **                                           | ** ** | ** ** | ** ** | **Payments Due by Period** | ** ** |
|------------------------------------------------------|------------|------------|------------|----------------------------|------------|
| ** **                                           | ** ** | ** ** | ** ** | **Less than 1**            | ** ** | **Long-term** | ** ** |
| **(thousands of dollars)**                           | ** ** | **Total**  | ** ** | **year**                   | ** ** | **portion** | ** ** |
|                                                 |       |       |       |                       |       |   |   |
| $175 million  Pipeline Credit Agreement due 2010 (a) |       | $          | —     |                       | $          | — |   | $ | — |   |
| 6.25% senior  notes due 2007                         |       | 150,000    |       | —                     |       | 150,000 |   |
| 7.75% senior  notes due 2009                         |       | 200,000    |       | —                     |       | 200,000 |   |
| 7.50% senior  notes due 2021                         |       | 250,000    |       | —                     |       | 250,000 |   |
| Total                                                |       | $          | 600,000    |                       | $          | — |   | $ | 600,000 |   |

 

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(a) Northern Border Pipeline isrequired to pay a facility fee of 0.075% on the principal commitment amount ofits

credit agreement.

 

On May 16, 2005, Northern Border Pipeline entered into a five-year$175 million revolving credit agreement (2005 Pipeline Credit Agreement) withseveral financial institutions.  Underthis agreement, Northern Border Pipeline borrowed $29 million to pay the entirebalance on its existing $175 million revolving credit agreement and terminatedthat agreement.  The borrowings of $29million were subsequently repaid in the second quarter of 2005.  Northern Border Pipeline may select thelender’s base rate or the LIBOR plus a spread that is based on its long-termunsecured debt ratings as the interest rate on the loan.  Northern Border Pipeline is required tocomply with certain financial, operational, and legal covenants, including themaintenance of EBITDA to interest expense ratio of greater than 3 to 1 and debtto EBITDA ratio of no more than 4.50 to 1. If Northern Border Pipeline consummates one or more acquisitions in whichthe total purchase price exceeds $25 million, the allowable ratio of debt toadjusted EBITDA is increased to 5 to 1 for two calendar quarters following theacquisition.  If Northern Border Pipelinebreaches any of these covenants, the balance outstanding may become due andpayable immediately.  As of June 30,2005, Northern Border Pipeline was in compliance with the covenants of itscredit agreement.

 

***Cash Flows from Operating Activities***

**Net cash provided by operating activities declined $7.9million in the first six months of 2005, compared to the same period in 2004,primarily as a result of lower operating revenues of $12.2 million, partiallyoffset by higher interest expense of $1.1 million for 2005.  Offsetting this net decrease were $0.8million received for Northern Border Pipeline’s bankruptcy claims against Enronand Enron North America, $1.8 million received for miscellaneous receivablesand $3.0 million decreased accounts payable reflected in 2004 related to thepayment of 2002/2003 corporate charges.**

** **

***Cash Flows from Investing Activities***

**Net cash used in investing activities increased $5.6million in the first six months of 2005, compared to the same period in2004.  For 2005, $1.6 million is relatedto the Chicago III Expansion Project, a proposed expansion of the NorthernBorder Pipeline system into the Chicago market area.  The remaining capital expenditures for 2005and 2004 are primarily related to renewals and replacements of existingfacilities.  In the first six months of2005, total capital expenditures were $4.5 million, which were primarilyrelated to renewals and replacements of existing facilities.**

** **

**Total capital expenditures for 2005 are estimated to beapproximately $37 million, which includes approximately $12 million for theChicago III Expansion Project.  Theremaining capital expenditures for 2005 are primarily related to renewals andreplacements of existing facilities. Please refer to TC PipeLines’ annual report on Form 10-K for theyear ended December 31, 2004, for more information about the Chicago IIIExpansion Project.**

** **

**NorthernBorder Pipeline currently anticipates funding its 2005 capital expendituresprimarily with borrowing under its credit agreement and using operating cashflow.**

 

20

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***Cash Flows from Financing Activities***

**Net cash used in financing activities increased $1.4million in the first six months of 2005, compared to the same period in 2004,primarily as a result of higher distributions paid to Northern Border Pipeline’spartners.**

** **

***Impact of Enron’s Chapter 11 Filing on NorthernBorder Pipeline’s Business***

** **

**In June 2005,Northern Border Pipeline executed term sheets with a third party for the saleof its unsecured claims for transportation contracts and associated guaranteesheld against Enron and Enron North America. Proceeds from the sale are expected to be $11.1 million.  In 2004, Northern Border Pipeline adjustedits allowance for doubtful accounts to reflect an estimated recovery of $1.1million for the claims.  In the secondquarter of 2005, Northern Border Pipeline made an adjustment to its allowancefor doubtful accounts of $0.6 million to reflect the agreements for thesale.  As a result of the sale, NorthernBorder Pipeline anticipates recognizing additional income of $9.4 million laterin 2005 of which our share would be approximately $2.8 million.**

** **

**In June 2005,Enron filed an amended motion in the bankruptcy court seeking approval toterminate the Enron Gas Pipeline Benefit Trust (Trust) and to distribute itsassets among certain identified companies, one being Northern Plains.  If Enron’s relief is granted, as requested,Northern Plains would assume retiree benefits liabilities, estimated as of November 17,2004, of approximately $2.3 million with an asset allocation of approximately$1.7 million.  Northern Natural GasCompany, a participant in the Trust through June 30, 2002, along withother parties have filed a motion to strike Enron’s amended motion allegingthat allocation of assets and liabilities of the Trust should be decided in apending lawsuit filed in the United States District Court for the District ofNebraska and not in the bankruptcy court.**

** **

**Pleaserefer to TC PipeLines’ annual report on Form 10-K for the year ended December 31,2004 and TC PipeLines’ quarterly report on Form 10-Q for the quarter endedMarch 31, 2005, for the full discussion of Impacts of Enron’s Chapter 11Filing on Northern Border Pipeline’s business.**

** **

**Results of Operations of Tuscarora GasTransmission Company**

*In the following discussion of the results ofTuscarora, all amounts represent 100% of the operations of Tuscarora, in whichthe Partnership has held a 49% interest since September 1, 2000.*

 

***Overview***

Tuscarorais a Nevada general partnership formed in 1993. Its general partners are TC Tuscarora Intermediate Limited Partnership,a direct subsidiary of TC PipeLines, which holds a 49% general partnerinterest, Tuscarora Gas Pipeline Co., a wholly owned subsidiary of SierraPacific Resources, which holds a 50% general partner interest and TCPLTuscarora Ltd., an indirect wholly owned subsidiary of TransCanada, which holdsthe remaining 1% general partner interest in Tuscarora.

 

The management of Tuscarora is overseen by amanagement committee that determines the policies of, has authority over theaffairs of, and approves the actions of Tuscarora.  The management committee participates in themanagement of the construction, maintenance and operation of the Tuscarorapipeline system. Tuscarora owns a 240-mile, 20-inch diameter, United States interstate pipeline system thatoriginates at an interconnection point withfacilities of GTN, a wholly-owned subsidiary of TransCanada, near Malin,Oregon and runs southeast through northeastern California and northwesternNevada. The Tuscarora pipeline system terminates near Wadsworth,Nevada.  Deliveries are also madedirectly to the local gas distribution system of Sierra Pacific Power, asubsidiary of Sierra Pacific Resources. Along its route, deliveries are made in Oregon, northern California andnorthwestern Nevada.

 

The Tuscarora pipeline system was constructedin 1995 and was placed into service in December 1995.  In January 2001, Tuscaroracompleted construction of the Hungry Valley lateral, a 14-mile, 16-inchpipeline extension that serves as Tuscarora’s second connection into Reno,Nevada.  On December 1, 2002,Tuscarora completed and placed into service another expansion of its pipelinesystem.  The 2002 Tuscarora expansionconsisted of two compressor stations and an 11-mile pipeline extension from apoint near the previous terminus of the Tuscarora 

 

21

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pipeline system near Reno, Nevada to Wadsworth, Nevada.  The expansion increased Tuscarora’scontracted capacity from 127 mmcfd to approximately 180 mmcfd.  The new capacity is contracted underlong-term firm transportation contracts ranging from ten to fifteen years.  

 

Tuscarora completed construction of the Barrick Lateral, a 0.5 milelateral that provides transportation service to a new electric generationcustomer located near Tracy, Nevada.  Theconstruction of the lateral was completed on time and commissioned for serviceto Barrick Goldstrike on June 25, 2005.  

 

Tuscarora has firm transportation contracts for over 95% of itscontracted capacity, including contracts held by Sierra Pacific Power for 69%of the total available capacity, the majority of which expires on October 31,2017.  As of June 30, 2005, theweighted average contract life on the Tuscarora pipeline system wasapproximately 12.4 years.

 

***Critical Accounting Policies***

Tuscarora’s accounting policies conform to SFAS No. 71, “Accountingfor the Effects of Certain Types of Regulation.”  Accordingly, certain assets that results fromthe regulated ratemaking process are recorded that would not be recorded byentities not accounting under SFAS No. 71.

 

***Results of Operations***

The following tables set out summarized financial information forTuscarora for the three and six months ended June 30, 2005 and 2004 and asat June 30, 2005 and December 31, 2004.  Amounts discussed represent 100% of theoperations of Tuscarora, in which the Partnership has held a 49% interest sinceSeptember 1, 2000.

 

**Tuscarora Income Statement**

 
| **(unaudited)**           | ** ** | **Three months ended June 30** | ** ** | **Six months ended June 30** | ** ** |
|---------------------------|------------|-------------------------------------|------------|-----------------------------------|------------|
| **(millions of dollars)** | ** ** | **2005**                            | ** ** | **2004**                          | ** ** | **2005** | ** ** | **2004** | ** ** |
| Revenues                  | ** ** | **8.0**                             | ** ** | 8.0                               | ** ** | **16.3** | ** ** | 16.3 |   |
| Costs and  expenses       | ** ** | **(1.1**                            | **)**      | (1.2                              | )          | **(2.2** | **)** | (2.4 | ) |
| Depreciation              | ** ** | **(1.6**                            | **)**      | (1.5                              | )          | **(3.1** | **)** | (3.1 | ) |
| Financial  charges        | ** ** | **(1.4**                            | **)**      | (1.6                              | )          | **(2.9** | **)** | (3.1 | ) |
| Other Income              | ** ** | **0.1**                             | ** ** | —                            |       | **0.1** | ** ** | — |   |
| Net income                | ** ** | **4.0**                             | ** ** | 3.7                               |       | **8.2** | ** ** | 7.7 |   |

 

**TuscaroraBalance Sheet**

 
| ** **                                 | ** **   | **June 30** | ** **   | **December 31** | ** **   |
|--------------------------------------------|--------------|------------------|--------------|----------------------|--------------|
| **(millions of dollars)**                  | ** **   | **2005**         | ** **   | **2004**             | ** **   |
| ** **                                 | *** *** | **(unaudited)**  | *** *** | *** ***         | *** *** |
| **Assets**                                 |         |             |         |                 |         |
| Cash and  cash equivalents                 | ** **   | **3.7**          |         | 3.6                  |         |
| Other  current assets                      | ** **   | **2.7**          |         | 3.0                  |         |
| Plant,  property and equipment, net        | ** **   | **134.5**        |         | 136.9                |         |
| Other assets                               | ** **   | **1.4**          |         | 1.4                  |         |
| ** **                                 |         | **142.3**        |         | 144.9                |         |
| **Liabilities  and Partners’ Equity** |         |             |         |                 |         |
| Current  liabilities                       | ** **   | **7.2**          |         | 6.9                  |         |
| Long-term  debt                            | ** **   | **73.5**         |         | 75.9                 |         |
| Partners’  equity                     |         |             |         |                 |         |
| Partners’  capital                    | ** **   | **61.5**         |         | 62.0                 |         |
| Accumulated  other comprehensive income    | ** **   | **0.1**          |         | 0.1                  |         |
| ** **                                 |         | **142.3**        |         | 144.9                |         |

 

22

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***Second Quarter 2005 Compared with SecondQuarter 2004***

Netincome increased $0.3 million, or 8%, to $4.0 million in the second quarter of2005, compared to $3.7 million for the same period in 2004.  The increase was primarily due to a decreasein financial charges.

 

Revenuesearned by Tuscarora remained flat at $8.0 million in the second quarter of 2005when compared to the same period in 2004.

 

Costsand expenses decreased $0.1 million, or 8%, to $1.1 million in the secondquarter of 2005, compared to $1.2 million for the same period in 2004.  The decrease was primarily due to therenegotiation of lower rates for maintenance contracts in 2005.  Depreciation increased $0.1 million, or 7%,to $1.6 million in the second quarter of 2005, compared to $1.5 million for thesame period in 2004 mainly due to higher gross plant balance.  

 

Financialcharges decreased $0.2 million, or 13%, to $1.4 million in the second quarterof 2005, compared to $1.6 million for the same period in 2004.  The decrease reflects lower average debtoutstanding in 2005.  

 

Otherincome of $0.1 million in the second quarter of 2005 was due to higher interestincome resulting from higher interest rates and increased cash balance.

 

***Six Months Ended June 30, 2005 Compared with Six Months Ended June 30,2004***

Netincome increased $0.5 million, or 6%, to $8.2 million in the first six monthsof 2005, compared to the $7.7 million for the same period in 2004.  The increase was primarily due to lower costsand expenses and decrease in financial charges.

 

Revenuesearned by Tuscarora remained flat at $16.3 million in the first six months of2005 when compared to the same period in 2004. Costs and expenses decreased $0.2 million, or 8%, to $2.2 million in thefirst six months of 2005, compared to $2.4 million for the same period in2004.  The decrease was primarily due tothe renegotiation of lower rates for maintenance contracts in 2005.  

 

Financialcharges decreased $0.2 million, or 6%, to $2.9 million in the first six monthsof 2005, compared to $3.1 million for the same period in 2004.  The decrease reflects lower average debtoutstanding in 2005.  

 

Otherincome of $0.1 million in the first six months of 2005 was due to higherinterest income resulting from higher interest rates and increased cashbalance.

 

**Liquidity and Capital Resourcesof Tuscarora Gas Transmission Company**

 

***Debt and Credit Facilities***

Tuscarora’s debt and credit facilities outstanding at June 30,2005 are as follows:

 
| ** **                           | ** ** | **Payments Due by Period** | ** ** |
|--------------------------------------|------------|----------------------------|------------|
| ** **                           | ** ** | ** **                 | ** ** | **Less Than** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **(millions of dollars)**            | ** ** | **Total**                  | ** ** | **1 Year** | ** ** | **1-3 Years** | ** ** | **4-5 Years** | ** ** | **After 5 Years** | ** ** |
|                                 |       |                       |       |   |   |   |   |   |   |   |   |
| Series A  Senior Notes due 2010 |       | 63.5                       |       | 3.7 |   | 6.9 |   | 6.2 |   | 46.7 |   |
| Series B  Senior Notes due 2010 |       | 6.5                        |       | 0.4 |   | 0.9 |   | 1.1 |   | 4.1 |   |
| Series C  Senior Notes due 2012 |       | 8.3                        |       | 0.7 |   | 1.7 |   | 1.6 |   | 4.3 |   |
| Operating  Leases                    |       | 0.4                        |       | 0.1 |   | 0.2 |   | 0.1 |   | — |   |
| Commitments (1)                      |       | 1.6                        |       | 0.7 |   | 0.9 |   | — |   | — |   |
| Total                                |       | $                          | 80.3       |   | $ | 5.6 |   | $ | 10.6 |   | $ | 9.0 |   | $ | 55.1 |   |
|                                      |            |                            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(1)   Tuscarora’s commitments relate to a contractwith a third party for maintenance services on certain components of itspipeline-related equipment. The contract expires in November 2007.

 

23

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Short-term liquidity needs will be met by operating cash flows.  Long-term capital needs may be met throughthe issuance of long-term indebtedness.

 

***Cash Flows from Operating Activities***

Cash provided by operating activities decreased $0.6 million to $11.9million in the first six months of 2005, compared to $12.5 million for the sameperiod in 2004.  The decrease wasprimarily due to a reduction in working capital partially offset by an increasein net income primarily due to lower costs and expenses.

 

***Cash Flows from Investing Activities***

Cash used in investing activities remained relatively the same at $0.7million in the first six months of 2005 and 2004.

 

***Cash Flows from Financing Activities***

Cash used in financing activities increased $1.4 million to $11.1million in the first six months of 2005, compared to $9.7 million for the sameperiod in 2004, primarily due to higher distributions paid to partners in2005.  Distributions paid to Tuscarora’spartners were $8.7 million and $7.4 million in the first six months of 2005 and2004, respectively.  Tuscarora repaid$2.4 million and $2.3 million on its long-term debt in the first six months of2005 and 2004, respectively.

 

**Sierra Pacific Resources**

Sierra Pacific Power, a wholly owned subsidiary of Sierra PacificResources, is Tuscarora’s largest shipper with approximately 69% of the totalavailable capacity through 2017. 

 

**In 2003, the Bankruptcy Courtgranted Enron Power Marketing Inc.’s motion for a summary judgment with respectto claims against Nevada Power Company and Sierra Pacific Power (together, theUtilities) of approximately $235 million and $102 million, respectively, ofliquidated damages, for power supply contracts terminated by Enron PowerMarketing in May 2002.  TheUtilities filed a Notice of Appeal from the Bankruptcy Court judgment with theU.S. District Court.**

** **

**On October 11, 2004, the U.S.District Court rendered a decision vacating an earlier judgment by theBankruptcy Court against the Utilities in favor of Enron, and remanded the caseback to the Bankruptcy Court for fact-finding. Subsequently, the Utilities filed a motion seeking clarification of theU.S. District Court’s rulings with respect to certain of their claims.  On December 23, 2004, the U.S. DistrictCourt ruled on this motion and affirmed the Bankruptcy Court’s holding that theUtilities, by failing to rescind their contracts with Enron immediately upondiscovering fraud, ratified those contracts and further held that BankruptcyCourt jurisdiction over the case is proper. A trial date of November 7, 2005 has been set in the BankruptcyCourt to review the issues remanded by the U.S. District Court with respect toEnron’s claims against the Utilities. **

** **

** Sierra Pacific Power to-date remains currenton its shipping contracts with Tuscarora.**

 

24

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**ITEM 3.  QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

**TCPipeLines may**be exposed tomarket risk through changes in interest rates. The Partnership does not have any material foreign exchange risks.  TC PipeLines’ interest rate exposure resultsfrom its Revolving Credit Facility, which is subject to variability in LIBORinterest rates.  At June 30, 2005,TC PipeLines had $24.0 million outstanding on its Revolving CreditFacility.  In the first six months of2005, there were no material changes to TC PipeLines’ interest rate exposure.

** **

The Partnership is also influenced by the same factors that influenceNorthern Border Pipeline and Tuscarora. Neither Northern Border Pipeline nor Tuscarora owns any of the naturalgas it transports, therefore, neither assumes any of the related natural gascommodity price risk.

 

Northern Border Pipeline may be exposed to market risk through changesin interest rates.  Northern BorderPipeline may utilize financial instruments to manage interest rate risk toreduce its exposure to fluctuations and achieve a more predictable cashflow.  Northern Border Pipeline hasestablished policies and procedures to assess risk and to approve, report andmonitor its financial instrument activities. Northern Border Pipeline does not use these instruments for tradingpurposes.  

 

Northern Border Pipeline’s interest rate exposure is a result ofvariable rate borrowings.  To reduce itssensitivity to interest rate fluctuations, Northern Border Pipeline maymaintain a portion of its consolidated debt portfolio in fixed-rate debt.  Northern Border Pipeline may also useinterest rate swap agreements to manage interest expense by converting aportion of fixed-rate debt to variable-rate debt.  As of June 30, 2005, Northern BorderPipeline did not have variable-rate debt or interest rate swapsoutstanding.  

 

Northern Border Pipeline records in long-term debt amounts received orpaid related to terminated interest rate swap agreements for fair value hedgeswith such amounts amortized to interest expense over the remaining life of theinterest rate swap agreement.  During thethree and six months ended June 30, 2005, Northern Border Pipelineamortized approximately $0.5 million and $1.1 million, respectively, as adecrease to interest expense.  NorthernBorder Pipeline expects to amortize approximately $0.5 million in each of theremaining quarters of 2005.

 

25

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**ITEM 4.  CONTROLS AND PROCEDURES**

 

**Evaluation of disclosure controls andprocedures. **

Based on their evaluation of the Partnership’s disclosure controls andprocedures as of the end of the period covered by this quarterly report, thePresident and Chief Executive Officer and Chief Financial Officer of thegeneral partner of the Partnership have concluded that the Partnership’sdisclosure controls and procedures were effective in ensuring that theinformation required to be disclosed by the Partnership in the reports that itfiles or submits under the Securities Exchange Act of 1934 is recorded,processed, summarized and reported within the time periods specified in the SEC’srules and forms.

 

There were no changes in the Partnership’s internal control over financialreporting during the most recent fiscal quarter that have materially affectedor are reasonably likely to materially affect the Partnership’s internalcontrol over financial reporting.

 

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**PART II. OTHER INFORMATION**

**ITEM 6. EXHIBITS**

 
| **Exhibits  No**. |       | **Description**                                                                                                                                                                                                                               |
|-------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **        | ** ** | ** **                                                                                                                                                                                                                                    |
| 10.1              |       | Northern Border Pipeline Company Revolving  Credit Agreement (incorporated by reference to Exhibit 10.1 to Northern  Border Pipeline Company’s current report on Form 8-K filed May 20,  2005 (File No. 333-88577)). |
|              |       |                                                                                                                                                                                                                                          |
| 31.1              |       | Certification of President and Chief  Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of  2002.                                                                                                                      |
|              |       |                                                                                                                                                                                                                                          |
| 31.2              |       | Certification of Chief Financial Officer  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                     |
|              |       |                                                                                                                                                                                                                                          |
| 32.1              |       | Certification of President and Chief  Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of  2002.                                                                                                                      |
|              |       |                                                                                                                                                                                                                                          |
| 32.2              |       | Certification of Chief Financial Officer  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                     |

 

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### **SIGNATURES**

### ** **

 

Pursuant to the requirements of the Securities and Exchange Act of1934, the Registrant has duly caused this report to be signed on its behalf bythe undersigned thereunto duly authorized.

 

 
| ** **                 | **TC PipeLines, LP**             |
|----------------------------|----------------------------------|
| ** **                 | (a Delaware Limited Partnership) |
|                       |                             |
|                       | By:                              | TC  PipeLines GP, Inc., its general partner |
|                       |                             |
|                       | By:                              | /s/ Russell K. Girling |   |
| Date:  August 8, 2005 |                             | Russell  K. Girling |
|                       |                             | Chief  Financial Officer (duly authorized officer) |
|                       |                             |
|                       | By:                              | /s/ Amy Leong |   |
| Date: August 8, 2005  |                             | Amy Leong |
|                       |                             | Controller  (duly authorized officer) |

 

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