**UNITED STATES SECURITIES ANDEXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

** **

**FORM 10-Q**

 

| **ý****        QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|---------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                              |
| **For the quarterly period****ended March 31, 2003**                                                                                              |
|                                                                                                                                              |
| **or**                                                                                                                                            |
|                                                                                                                                              |
| **o****        TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**     |

 

**Commission File Number:  000-26091**

 

**TC PipeLines, 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)

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.

Yes  ý   No  o

 

Indicate by check markwhether the registrant is an accelerated filer (as defined in Rule 12b-2 of theExchange Act).

Yes  ý   No  o

 

As of May 15, 2003 therewere 15,627,129 of the registrant’s common units outstanding**.**

** **

 

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**TCPipeLines, LP**

 

**Tableof Contents**

 
| PART I.  |                                                                                        | FINANCIAL INFORMATION                                                           |
|----------|---------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------|
|     |                                                                                        |                                                                            |
| ITEM  1. | Financial Statements                                                                        |
|     |                                                                                        |                                                                            |
|     |                                                                                        | Statement  of Income - Three months ended March 31, 2003 and 2002               |
|     |                                                                                        |                                                                            |
|     |                                                                                        | Statement of  Comprehensive Income - Three months ended March 31, 2003 and 2002 |
|     |                                                                                        |                                                                            |
|     |                                                                                        | Balance  Sheet - March 31, 2003 and December 31, 2002                           |
|     |                                                                                        |                                                                            |
|     |                                                                                        | Statement of Cash Flows - Three  months ended March 31, 2003 and 2002           |
|     |                                                                                        |                                                                            |
|     |                                                                                        | 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 5.  |                                                                                        | Other  Information                                                              |
|     |                                                                                        |                                                                            |
| ITEM  6. | Exhibits and Reports on  Form 8-K                                                           |

 

2

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**PART I****.   FINANCIALINFORMATION**

**ITEM 1****.   FINANCIALSTATEMENTS**

 

**TCPipeLines, LP**

 

**Statementof Income**

 
| **Three months ended March 31 (unaudited)  (millions of dollars, except per unit amounts)** |   | **2003**   |     | **2002** |   |
|---------------------------------------------------------------------------------------------|--------|------------|----------|----------|--------|
| Equity  Income from Investment in Northern Border Pipeline                                  |   | **11.0**   |     | 11.3     |   |
| Equity  Income from Investment in Tuscarora                                                 |   | **1.3**    |     | 1.1      |   |
| General  and Administrative Expenses                                                        |   | **(0.4**   | **)**    | (0.4     | )      |
| Financial  Charges                                                                          |   | **—** |     | (0.1     | )      |
| Net  Income                                                                                 |   | **11.9**   |     | 11.9     |   |
|                                                                                        |   |       |     |     |   |
| **Net  Income Allocation**                                                                  |   |       |     |     |   |
| Common  units                                                                               |   | **10.3**   |     | 9.7      |   |
| Subordinated  units                                                                         |   | **1.2**    |     | 1.8      |   |
| General  partner                                                                            |   | **0.4**    |     | 0.4      |   |
|                                                                                        |   | **11.9**   |     | 11.9     |   |
|                                                                                        |   |       |     |     |   |
| Net  Income per Unit                                                                        |   | **$**      | **0.66** |     | $      | 0.66 |   |
|                                                                                        |   |       |     |     |   |
| Units  Outstanding (millions)                                                               |   | **17.5**   |     | 17.5     |   |
|                                                                                             |        |            |          |          |        |  |  |

 

**Statementof Comprehensive Income**

 
| **Three months ended March 31 (unaudited)  (millions of dollars)** |   | **2003** |   | **2002** |   |
|--------------------------------------------------------------------|--------|----------|--------|----------|--------|
| Net  Income                                                        |   | **11.9** |   | 11.9     |   |
| Other  Comprehensive Income                                        |   |     |   |     |   |
| Change  associated with current period hedging transactions        |   | **(0.1** | **)**  | 0.2      |   |
| Total  Comprehensive Income                                        |   | **11.8** |   | 12.1     |   |

 

Seeaccompanying Notes to Condensed Financial Statements.

 

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**TCPipeLines, LP**

 

**Balance Sheet**

 
| **(millions of dollars)**                  |   | **March 31,  2003** |   | **December  31, 2002** |   |
|--------------------------------------------|--------|---------------------|--------|------------------------|--------|
|                                       |   | **(unaudited)**     |   |                   |   |
| **Assets**                                 |   |                |   |                   |   |
| Current Assets                             |   |                |   |                   |   |
| Cash                                       |   | **4.0**             |   | 6.4                    |   |
|                                       |   |                |   |                   |   |
| Investment  in Northern Border Pipeline    |   | **241.3**           |   | 242.9                  |   |
| Investment  in Tuscarora                   |   | **39.9**            |   | 36.7                   |   |
|                                       |   | **285.2**           |   | 286.0                  |   |
|                                       |   |                |   |                   |   |
| **Liabilities  and Partners’ Equity** |   |                |   |                   |   |
| Current  Liabilities                       |   |                |   |                   |   |
| Accounts  payable                          |   | **0.5**             |   | 0.6                    |   |
|                                       |   |                |   |                   |   |
| Long-Term  Debt                            |   | **8.5**             |   | 11.5                   |   |
|                                       |   |                |   |                   |   |
| Partners’  Equity                     |   |                |   |                   |   |
| Common  units                              |   | **241.0**           |   | 238.9                  |   |
| Subordinated  units                        |   | **27.2**            |   | 27.0                   |   |
| General  partner                           |   | **6.0**             |   | 5.9                    |   |
| Other  comprehensive income                |   | **2.0**             |   | 2.1                    |   |
|                                       |   | **276.2**           |   | 273.9                  |   |
|                                       |   | **285.2**           |   | 286.0                  |   |

 

**Statementof Cash Flows**

 
| **Three months ended March 31**(unaudited)  (millions of dollars)** |   | **2003**  |   | **2002** |   |
|---------------------------------------------------------------------|--------|-----------|--------|----------|--------|
|                                                                |   |      |   |     |   |
| **Cash  Generated from Operations**                                 |   |      |   |     |   |
| Net  income                                                         |   | **11.9**  |   | 11.9     |   |
| Add/(Deduct):                                                       |   |      |   |     |   |
| Distributions  received in excess of equity income                  |   | **1.7**   |   | 0.3      |   |
| (Increase)/decrease  in operating working capital                   |   | **(0.1**  | **)**  | 0.1      |   |
|                                                                |   | **13.5**  |   | 12.3     |   |
| **Investing  Activities**                                           |   |      |   |     |   |
| Investment  in Tuscarora                                            |   | **(3.3**  | **)**  | —   |   |
|                                                                |   |      |   |     |   |
| **Financing  Activities**                                           |   |      |   |     |   |
| Distributions  paid                                                 |   | **(9.6**  | **)**  | (9.0     | )      |
| Reduction  of long-term debt                                        |   | **(3.0**  | **)**  | —   |   |
|                                                                |   | **(12.6** | **)**  | (9.0     | )      |
|                                                                |   |      |   |     |   |
| **(Decrease)/Increase  in Cash**                                    |   | **(2.4**  | **)**  | 3.3      |   |
| **Cash,  Beginning of Period**                                      |   | **6.4**   |   | 9.2      |   |
| **Cash,  End of Period**                                            |   | **4.0**   |   | 12.5     |   |

 

See accompanying Notes to Condensed Financial Statements.

 

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**TCPipeLines, LP**

 

**Notes toCondensed Financial Statements**

**(unaudited)**

 

**Note 1    Basisof Presentation**

 

TC PipeLines, LP, and itssubsidiary limited partnerships, TC PipeLines Intermediate Limited Partnershipand TC Tuscarora Intermediate Limited Partnership, all Delaware limitedpartnerships, are collectively referred to herein as TC PipeLines or the Partnership.  The Partnership commenced operations on May28, 1999.

 

The financial statements have been prepared bymanagement in accordance with accounting principles generally accepted in theUnited States.  Other comprehensiveincome recorded by TC PipeLines arises through its equity investments inNorthern Border Pipeline Company (Northern Border Pipeline) and Tuscarora GasTransmission Company (Tuscarora) and relates to cash flow hedges transacted byNorthern Border Pipeline and Tuscarora. Amounts are stated in United States dollars.

 

Since a determination of many assets, liabilities,revenues and expenses is dependent upon future events, the preparation of thesefinancial statements requires the use of estimates and assumptions which havebeen made using careful judgment.  Inthe opinion of management, these financial statements have been properlyprepared within reasonable limits of materiality and include all adjustments(consisting primarily of normal recurring accruals) necessary to present fairlythe results of operations for the three months ended March 31, 2003 and 2002,the financial position as at March 31, 2003 and December 31, 2002 and cashflows for the three months ended March 31, 2003 and 2002.

 

The results of operations for the three months endedMarch 31, 2003 and 2002 are not necessarily indicative of the results that maybe expected for a full fiscal year.  Theinterim financial statements should be read in conjunction with thePartnership’s financial statements and notes included in TC PipeLines’ AnnualReport on Form 10-K for the year ended December 31, 2002.

 

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

 

The Partnership owns a30% general partner interest in Northern Border Pipeline, a partnership whichowns a 1,249-mile United States interstate pipeline system that transportsnatural gas from the Montana-Saskatchewan border to markets in the midwesternUnited States.  The remaining 70%partnership interest in Northern Border Pipeline is held by Northern BorderPartners, L.P., a publicly traded limited partnership.  The 2% general partnership interest inNorthern Border Partners, L.P. is controlled by affiliates of Enron Corp.(Enron), which hold a 1.65% general partner interest, and TransCanada PipeLinesLimited (TransCanada), parent of TC PipeLines’ general partner, which holds theremaining 0.35% general partner interest. The Northern Border pipeline system is operated by Northern PlainsNatural Gas Company, a wholly owned subsidiary of Enron.  Northern Border Pipeline is regulated by theFederal Energy Regulatory Commission (FERC).

 

TC PipeLines uses the equity method of accounting forits investment in Northern Border Pipeline. TC PipeLines’ equity income for the three months ended March 31, 2003and 2002 represents 30% of the net income of Northern Border Pipeline for thesame periods.  Retained earnings of TCPipeLines at March 31, 2003 and December 31, 2002 include undistributedearnings from Northern Border Pipeline of nil and $1.3 million,respectively.  The following sets outsummarized financial information representing 100% of the

 

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operations of Northern Border Pipeline for the three months ended March31, 2003 and 2002 and as at March 31, 2003 and December 31, 2002.

 

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| **Three months ended March 31 (unaudited)(millions of dollars)** |   | **2003**  |       | **2002** |       |
|------------------------------------------------------------------|--------|-----------|------------|----------|------------|
| **Northern  Border Pipeline Income Statement**                   |   |      |       |     |       |
| Revenues                                                         |   | **79.9**  | ** ** | 78.2     |       |
| Costs and expenses                                               |   | **(16.8** | **)**      | (13.8    | )          |
| Depreciation                                                     |   | **(14.5** | **)**      | (14.5    | )          |
| Financial charges                                                |   | **(11.8** | **)**      | (13.0    | )          |
| Other income/(expense)                                           |   | **(0.1**  | **)**      | 0.8      | ** ** |
| Net income                                                       |   | **36.7**  | ** ** | 37.7     | ** ** |

 

Northern Border Pipelinehas recorded other comprehensive income of $(0.4) million and $1.2 million, forthe three months ended March 31, 2003 and 2002, respectively.

* *
| **(unaudited)  (millions of dollars)**      |   | **March 31,  2003** |       | **December  31,  2002** |       |
|---------------------------------------------|--------|---------------------|------------|-------------------------|------------|
|                                        |   |                |       | **(audited)**           |       |
| **Northern  Border Pipeline Balance Sheet** |   |                |       |                    |       |
| **Assets**                                  |   |                |       |                    |       |
| Cash  and cash equivalents                  |   | **19.0**            | ** ** | 25.4                    | ** ** |
| Other  current assets                       |   | **54.8**            | ** ** | 40.8                    | ** ** |
| Plant,  property and equipment, net         |   | **1,618.4**         | ** ** | 1,636.0                 | ** ** |
| Other  assets                               |   | **36.4**            | ** ** | 37.8                    | ** ** |
|                                        |   | **1,728.6**         |       | 1,740.0                 | ** ** |
| **Liabilities  and Partners’ Equity**  |   |                |       |                    |       |
| Current  liabilities                        |   | **141.2**           | ** ** | 130.9                   | ** ** |
| Reserves  and deferred credits              |   | **6.0**             | ** ** | 15.4                    | ** ** |
| Long-term  debt, net of current maturities  |   | **777.0**           | ** ** | 783.9                   | ** ** |
| Partners’  Equity                      |   |                |       |                    |       |
| Partners’  capital                     |   | **798.0**           | ** ** | 803.0                   | ** ** |
| Accumulated  other comprehensive income     |   | **6.4**             | ** ** | 6.8                     | ** ** |
|                                        |   | **1,728.6**         |       | 1,740.0                 | ** ** |

 

##### ***Note 3    Investmentin Tuscarora Gas Transmission Company***

 

The Partnership owns a49% general partner interest in Tuscarora, a partnership that owns a 240-mileUnited States interstate pipeline system that transports natural gas fromOregon, where it interconnects with facilities of PG&E National EnergyGroup, Gas Transmission Northwest, to northern Nevada.  The remaining general partner interests inTuscarora are held 50% by Sierra Pacific Resources and 1% by TransCanada.  The Tuscarora pipeline system is operated byTuscarora Gas Operating Company, a wholly owned subsidiary of Sierra Pacific Resources.  Sierra Pacific Power Company, a subsidiaryof Sierra Pacific Resources, is Tuscarora’s largest shipper, accounting forapproximately 68% of Tuscarora’s available capacity.  Tuscarora is regulated by the FERC.

 

The Partnership uses theequity method of accounting for its investment in Tuscarora.  TC PipeLines’ equity income for the threemonths ended March 31, 2003 and 2002 represents 49% of the net income ofTuscarora for the same

 

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periods.  Retained earnings ofTC PipeLines at each of March 31, 2003 and December 31, 2002 includeundistributed earnings from Tuscarora of $0.6 million and $0.8 million,respectively.  The following sets outsummarized financial information representing 100% of the operations ofTuscarora for the three months ended March 31, 2003 and 2002 and as at March31, 2003 and December 31, 2002.

 
| **Three months ended March 31(millions of dollars)** |   | **2003**   |       | **2002** |   |
|------------------------------------------------------|--------|------------|------------|----------|--------|
| **Tuscarora  Income Statement**                      |   |       |       |     |   |
| Revenues                                             |   | **7.4**    | ** ** | 5.6      |   |
| Costs and expenses                                   |   | **(1.2**   | **)**      | (0.6     | )      |
| Depreciation                                         |   | **(1.6**   | **)**      | (1.2     | )      |
| Financial charges                                    |   | **(1.6**   | **)**      | (1.5     | )      |
| Other income                                         |   | **—** | ** ** | 0.1      |   |
| Net income                                           |   | **3.0**    | ** ** | 2.4      |   |

 

Tuscarora has recordedother comprehensive income of less than $(0.1) million and $(0.4) million forthe three months ended March 31, 2003 and 2002, respectively.

 
| **(millions of dollars)**                  |   | **March 31,  2003** |       | **December  31,  2002** |       |
|--------------------------------------------|--------|---------------------|------------|-------------------------|------------|
|                                       |   |                |       | **(audited)**           |       |
| **Tuscarora  Balance Sheet**               |   |                |       |                    |       |
| **Assets**                                 |   |                |       |                    |       |
| Cash  and cash equivalents                 |   | **4.8**             | ** ** | 0.6                     | ** ** |
| Other  current assets                      |   | **2.6**             | ** ** | 4.3                     | ** ** |
| Plant,  property and equipment, net        |   | **147.0**           | ** ** | 148.4                   | ** ** |
| Other  assets                              |   | **1.2**             | ** ** | 1.2                     | ** ** |
|                                       |   | **155.6**           |       | 154.5                   | ** ** |
| **Liabilities  and Partners’ Equity** |   |                |       |                    |       |
| Current  liabilities                       |   | **8.9**             | ** ** | 14.6                    | ** ** |
| Long-term  debt                            |   | **85.4**            | ** ** | 85.3                    | ** ** |
| Partners’  Equity                     |   |                |       |                    |       |
| Partners’  capital                    |   | **61.2**            | ** ** | 54.2                    | ** ** |
| Accumulated  other comprehensive income    |   | **0.1**             | ** ** | 0.4                     | ** ** |
|                                       |   | **155.6**           |       | 154.5                   | ** ** |

 

##### ***Note 4    CreditFacilities and Long-Term Debt***

 

On September 30, 2002,the Partnership renewed its unsecured credit facility (Revolving CreditFacility) with Bank One, NA, as administrative agent of the creditfacility.  Under the renewed RevolvingCredit Facility, the Partnership may borrow up to an aggregate principal amountof $20.0 million.  Loans under theRevolving Credit Facility bear interest at a floating rate.  The Revolving Credit Facility matures onJuly 31, 2004.  Amounts borrowed may

 

8

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be repaid in part or in full prior to that time without penalty.  The Revolving Credit Facility may be used tofinance capital expenditures and for other general purposes.  At March 31, 2003 and December 31, 2002, thePartnership had borrowings of $8.5 million and $11.5 million, respectively,outstanding under the Revolving Credit Facility.  The fair value of the Revolving Credit Facility approximates its carryingvalue because the interest rate is a floating rate.  The interest rate on the Revolving Credit Facility averaged 2.70%and 2.76% for the three months ended March 31, 2003 and 2002, respectively,and, at March 31, 2003 and December 31, 2002, the interest rate was 2.70%.

 

On May 28, 2001, the Partnership renewed its $40.0million unsecured two-year revolving credit facility (TransCanada CreditFacility) with TransCanada Pipeline USA Ltd., an affiliate of the GeneralPartner.  The TransCanada Credit Facilitybears interest at London Interbank Offered Rate plus 1.25%. The purpose of theTransCanada 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.  AtMarch 31, 2003 and December 31, 2002 the Partnership had no amount outstandingunder the TransCanada Credit Facility.

 

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

 

Net income per unit iscomputed by dividing net income, after deduction of the General Partner’sallocation, by the weighted average number of common and subordinated unitsoutstanding.  The General Partner’sallocation is equal to an amount based upon the General Partner’s 2% interest,adjusted to reflect an amount equal to incentive distributions.  Net income per unit was determined asfollows:

 
| **Three months ended March 31(millions of dollars, except per  unit amounts)** |   | **2003** |     | **2002** |   |
|--------------------------------------------------------------------------------|--------|----------|----------|----------|--------|
| Net  income                                                                    |   | **11.9** |     | 11.9     |   |
| Net  income allocated to General Partner                                       |   | **(0.2** | **)**    | (0.2     | )      |
| Adjustment  to reflect incentive distribution income allocation                |   | **(0.2** | **)**    | (0.2     | )      |
|                                                                           |   | **(0.4** | **)**    | (0.4     | )      |
| Net  income allocable to units                                                 |   | **11.5** |     | 11.5     |   |
| Weighted  average units outstanding (millions)                                 |   | **17.5** |     | 17.5     |   |
| Net  income per unit                                                           |   | **$**    | **0.66** |     | $      | 0.66 |   |
|                                                                                |        |          |          |          |        |  |  |

 

##### ***Note 6    SubordinatedUnit Conversion***

 

On August 1, 2002,936,435 subordinated units, representing one-third of the then outstandingsubordinated units held by the General Partner, upon satisfaction of the testsset forth in the partnership agreement, automatically converted into an equalnumber of common units as provided for in the partnership agreement of TCPipeLines.

 

##### ***Note 7    Distributions***

 

On April 21, 2003, theBoard of Directors of the General Partner declared a cash distribution of$0.525 per unit for the three months ended March 31, 2003.  The distribution totaling approximately $9.6million is payable on May 15, 2003 in the following manner: $8.2 million to theholders of common units as of the close of business on April 30, 2003, $1.0million to the General Partner as holder of the subordinated units, $0.2million to the General Partner as holder of incentive distribution rights and$0.2 million to the General Partner in respect of its 2% general partnerinterest.

 

##### ***Note 8    AccountingPronouncements***

** **

SFASNo. 143, “Accounting for Asset Retirement Obligations,” became effective forthe Partnership on January 1, 2003.  Asthe Partnership does not directly own any long-lived assets, no assetretirement obligation has been recorded on its balance sheet.

 

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**ITEM 2****.  MANAGEMENT’S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS**

 

# **CautionaryStatement Regarding Forward-Looking Information**

# ** **

# **This quarterly report includesforward-looking statements regarding future events and the future financialperformance of TC PipeLines, LP.  Allforward-looking statements are based on the Partnership’s beliefs as well asassumptions made by and information currently available to thePartnership.  Words such as “anticipates”,“believes”, “estimates”, “expects”, “plans”, “intends”, “forecasts”, andsimilar expressions, identify forward-looking statements within the meaning ofthe Private Securities Litigation Reform Act. These statements reflect the Partnership’s current views with respect tofuture events and are subject to various risks, uncertainties and assumptionsincluding:**

 

•                                          regulatorydecisions, particularly those of the Federal Energy Regulatory Commission(FERC);

 

•                                          majoritycontrol and operation of Northern Border Pipeline Company by affiliates ofEnron Corp., and as a result, any further developments in the Enron bankruptcyproceedings, Enron’s announcement to create a new pipeline operating company,and bankruptcy-related regulatory issues, including the potential denial by theSecurities and Exchange Commission (SEC) of Enron’s application for exemptionfrom the Public Utility Holding Company Act and any impact of such denial onNorthern Border Pipeline Company and the Partnership;

 

•                                          thefailure of a shipper on either one of the Partnership’s pipelines to performits contractual obligations, including Sierra Pacific Power Company, theshipper of approximately 68% of Tuscarora Gas Transmission Company’s capacity;

 

•                                          theability of Northern Border Pipeline Company to recontract the 36% of itscapacity that is set to expire in September and October 2003;

 

•                                          costof acquisitions;

 

•                                          futuredemand for natural gas;

 

•                                          overcapacityin the industry;

 

•                                          conflictsof interest between TransCanada, the owner of the Partnership’s generalpartner, on the one hand, and the Partnership, on the other hand; and

 

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

 

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# **and other risks discussed in thePartnership’s filings with the SEC, including the Partnership’s Annual Reporton Form 10-K for the year ended December 31, 2002.  If one or more of these risks or uncertainties materialize, or ifthe underlying assumptions prove incorrect, actual results may vary materiallyfrom those described in the forward-looking statements.**

 

# **Results**of Operations of TCPipeLines, LP

 

TC PipeLines, LP wasformed in 1998 as a Delaware limited partnership to acquire, own andparticipate in the management of United States based pipeline assets.  TC PipeLines, LP, and its subsidiary limitedpartnerships, TC PipeLines Intermediate Limited Partnership and TC TuscaroraIntermediate Limited Partnership, all Delaware limited partnerships, arecollectively referred to herein as TC PipeLines or the Partnership.  TC PipeLines GP, Inc., a wholly ownedsubsidiary of TransCanada PipeLines Limited, is the general partner of thePartnership.  The Partnership owns a 30%general partner interest in Northern Border Pipeline and a 49% general partnerinterest in Tuscarora.

 

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***Investment in Northern Border Pipeline Company***

 

Northern Border Pipelineowns a 1,249-mile United States interstate pipeline system that transportsnatural gas from the Montana-Saskatchewan border to 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 managementcommittee.

 

The remaining 70% generalpartner interest in Northern Border Pipeline is held by Northern BorderPartners, L.P., a publicly traded limited partnership.  The general partners of Northern BorderPartners are Northern Plains and Pan Border, both Enron affiliates, andNorthwest Border Pipeline Company, a subsidiary of TransCanada.  TransCanada has one member and 12.25% of thevoting power on the Northern Border Pipeline management committee.  TransCanada and TC PipeLines collectivelyhave two members and an aggregate 42.25% of the voting power of the NorthernBorder Pipeline management committee. Northern Plains and Pan Border collectively have two members and 57.75%of the voting power of the Northern Border Pipeline management committee.  Northern Plains also serves as the operatorof the Northern Border pipeline system.

 

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

 

Tuscarora owns a 240-mileUnited States interstate pipeline system that transports natural gas fromOregon, where it interconnects with facilities of PG&E National EnergyGroup, Gas Transmission Northwest, to northern Nevada.  The remaining general partner interests inTuscarora are held 50% by Sierra Pacific Resources and 1% by TCPL TuscaroraLtd., an indirect subsidiary of TransCanada. The Tuscarora pipeline system is operated by Tuscarora Gas OperatingCompany, a wholly owned subsidiary of Sierra Pacific Resources.  Sierra Pacific Power Company, a subsidiaryof Sierra Pacific Resources, is Tuscarora’s largest shipper, accounting forapproximately 68% of Tuscarora’s available capacity.

 

On December 1, 2002,Tuscarora completed and placed into service an expansion of its pipelinesystem.  The expansion consisted of theaddition of two compressor stations, located along the Tuscarora mainline, aswell as an 11-mile pipeline extension from Tuscarora’s previous terminus nearReno, Nevada to Wadsworth, Nevada.  Theexpansion increased Tuscarora’s capacity to approximately 182 million cubicfeet per day.   The project had acapital budget of $43.0 million but was completed at a capital cost ofapproximately $39.0 million.  The newcapacity is contracted under long-term firm contracts ranging from ten tofifteen years. Under the terms of these transportation contracts, approximately70% of the new contracted capacity came into effect upon commencement ofservice.  The remaining

 

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30% of new contractedcapacity will come into effect by the end of 2003.

 

##### ***Critical Accounting Policy***

 

##### *TCPipeLines accounts for its investments in both Northern Border Pipeline andTuscarora using the equity method of accounting as detailed in notes two andthree to the financial statements.  Theequity method of accounting is appropriate where the investor does not controlbut is able to exercise significant influence over the operating and financialpolicies of an investee.  TC PipeLinesis able to exercise significant influence over its investments in NorthernBorder Pipeline and Tuscarora as evidenced by its representation on theirrespective management committees.*

 

Since the interests inNorthern Border Pipeline and Tuscarora are currently the Partnership’s onlysignificant sources of income, the Partnership’s results of operations areinfluenced by and reflect the same factors that influence the financial resultsof Northern Border Pipeline and Tuscarora, respectively.

##### * *

##### ***First Quarter 2003 Compared with First Quarter 2002***

 

Net income of $11.9million for first quarter 2003 equaled net income reported for the same periodlast year.  2003 first quarter netincome reflects a decrease in equity income from Northern Border Pipeline andan increase in equity income from Tuscarora.

 

Equity income from thePartnership’s investment in Northern Border Pipeline decreased $0.3 million, or3%, to $11.0 million for first quarter 2003, compared to $11.3 million for thesame period last year.  In first quarter2003, Northern Border Pipeline’s revenues were higher than the same period lastyear.  First quarter 2002 revenuesreflected uncollectible revenues from transportation capacity held by EnronNorth America, an Enron subsidiary that filed for bankruptcy protection inDecember 2001 (TC PipeLines’ share of revenues lost on this capacity was $0.5million).  Also, Northern BorderPipeline’s interest expense was lower during first quarter 2003 compared to thesame period last year due primarily to lower average interest rates and loweraverage debt balances outstanding.  Thisresulted in an increase of $0.4 million to the Partnership’s equityincome.  These increases to thePartnership’s equity income were more than offset by increases in NorthernBorder Pipeline’s operations and maintenance expense as well as taxes otherthan income.  First quarter 2003operations and maintenance expense reflected higher power costs for certaincompressor stations (see “Results of Operations of Northern Border PipelineCompany - Update on Company Use Gas FERC Filing”) and higher employee benefitsexpenses as compared to the same period last year.  During first quarter 2002, Northern Border Pipeline received afuel tax refund, resulting in an unfavorable variance in taxes other thanincome when compared to first quarter 2003. The combined effect

 

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of these increased expenses at Northern Border Pipeline during firstquarter 2003 is a $0.9 million decrease to equity income from NorthernBorder.  Further reducing thePartnership’s first quarter 2003 equity income by approximately $0.3 millionwas the variance in Northern Border Pipeline’s other income/(expense).  In first quarter 2003, Northern BorderPipeline accrued interest expense related to the refunds required by the orderissued by the FERC on March 27, 2003 (see "Results of Northern BorderPipeline Company—Update on Company Use Gas FERC Filing").  In first quarter 2002, Northern BorderPipeline recorded interest income related to the fuel tax refund.

 

Equity income from thePartnership’s investment in Tuscarora increased $0.2 million, or 18%, to $1.3million for first quarter 2003, compared to $1.1 million for the same periodlast year. Tuscarora’s revenues increased $1.8 million primarily due to newtransportation contracts from the expansion. TC PipeLines’ share was $0.8 million. This increase was partially offset by increased operations andmaintenance expense and depreciation expense, both resulting from Tuscarora’sexpansion.  The combined effect of theseincreases in expenses reduced the Partnership’s equity income by $0.4 million.

 

The Partnership recordedgeneral and administrative expenses of $0.4 million for first quarter 2003,equaling the general and administrative expenses for the same period in 2002.

 

The Partnership recordedfinancial charges of less than $0.1 million and $0.1 million for first quarter2003 and 2002, respectively.

 

# **Liquidity andCapital Resources of TC PipeLines, LP**

# ** **

# ***CashDistribution Policy of TC PipeLines, LP***

 

During the subordinationperiod, which generally cannot end before June 30, 2004, the Partnership willmake distributions of Available Cash as defined in the partnership agreement inthe following manner:

•                  First,98% to the common units, pro rata, and 2% to the General Partner, until thereis distributed for each outstanding common unit an amount equal to the minimumquarterly distribution for that quarter;

•                  Second,98% to the common units, pro rata, and 2% to the General Partner, until thereis distributed for each outstanding common unit an amount equal to any arrearagesin payment of the minimum quarterly distribution on the common units for thatquarter and for any prior quarters during the subordination period;

•                  Third,98% to the subordinated units, pro rata, and 2% to the General Partner, untilthere is distributed for each outstanding subordinated unit an amount equal tothe minimum quarterly distribution for that quarter; and

•                  Thereafter,in a manner whereby the General Partner has rights (referred to as incentivedistribution rights) to receive

 

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increasing percentages of excess quarterly cashdistributions over specified cash distribution thresholds.

 

#### ***2003First Quarter Cash Distribution***

 

**On April 21, 2003, the Boardof Directors of the General Partner declared the Partnership’s 2003 firstquarter cash distribution in the amount of $0.525 per unit.  This distribution will be paid on May 15,2003 to unitholders of record as of April 30, 2003.  The first quarter cash distribution, totaling $9.6 million, willbe paid in the following manner: $8.2 million to common unitholders (including$1.5 million to an affiliate of TransCanada as holder of 2,800,000 common unitsand $0.5 million to the General Partner as holder of 936,435 common units),$1.0 million to the General Partner as holder of the subordinated units, $0.2million to the General Partner as holder of incentive distribution rights, and$0.2 million to the General Partner in respect of its 2% general partnerinterest.**

#### *** ***

#### ***CashFlows from Operating Activities***

 

Cash flows provided byoperating activities increased $1.2 million, or 10%, to $13.5 million for firstquarter 2003, compared to $12.3 million for the same period last year.  In first quarter 2003 and 2002, the Partnershipreceived cash distributions of $12.5 million and $11.8 million, respectively,from its equity investment in Northern Border Pipeline.  The Partnership also received cashdistributions of $1.5 million and $1.0 million from its equity investment inTuscarora in first quarter 2003 and 2002, respectively.

 

***Cash Flows from Investing Activities***

 

In first quarter 2003,the Partnership made an equity contribution of $4.1 million to Tuscarorarelated to Tuscarora’s 2002 expansion project, which was partially offset by a$0.8 million return of capital from Tuscarora.

 

# ***CashFlows from Financing Activities***

 

In first quarter 2003,the Partnership paid $9.6 million in cash distributions: $8.2 million to commonunitholders (including $1.5 million to an affiliate of TransCanada as holder of2,800,000 common units and $0.5 million to the General Partner as holder of936,435 common units), $1.0 million to the General Partner as holder of thesubordinated units, $0.2 million to the General Partner, as holder of incentivedistribution rights, and $0.2 to the General Partner in respect of its 2%general partner interest.  This comparesto cash distributions of $9.0 million, which were paid by the Partnership infirst quarter 2002.

 

On September 30, 2002,the Partnership renewed its unsecured credit facility (Revolving CreditFacility) with Bank One, NA, as administrative agent of the creditfacility.  Under the renewed RevolvingCredit Facility, the Partnership may borrow up to an

 

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aggregate principal amount of $20.0 million.  Loans under the Revolving Credit Facility bear interest, at theoption of the Partnership, at a one-, two-, three-, or six-month LondonInterbank Offered Rate (LIBOR) plus 1.25% or at a floating rate based on thehigher of the federal funds effective rate plus 0.5% or the prime rate.  The Revolving Credit Facility matures onJuly 31, 2004.  Amounts borrowed may berepaid in part or in full prior to that time without penalty.  The Revolving Credit Facility may be used tofinance capital expenditures and for other general purposes.  In the first quarter of 2003 the Partnershipmade principal re-payments on the Revolving Credit Facility of $3.0million.  At March 31, 2003 and May 15,2003, the Partnership had borrowings of $8.5 million outstanding under theRevolving Credit Facility.  The interestrate on the Revolving Credit Facility averaged 2.7% for the three months endedMarch 31, 2003 and was 2.7% at March 31, 2003.

 

On May 28, 2001, thePartnership renewed its $40.0 million unsecured two-year revolving creditfacility (TransCanada Credit Facility) with TransCanada PipeLine USA Ltd., anaffiliate of the General Partner.  TheTransCanada Credit Facility bears interest at LIBOR plus 1.25%.  The purpose of the TransCanada CreditFacility is to provide borrowings to fund capital expenditures, to fund capitalcontributions to Northern Border Pipeline, Tuscarora, and any other entity inwhich the Partnership directly or indirectly acquires an interest, to fundworking capital and for other general business purposes, including temporaryfunding of cash distributions to unitholders and the General Partner, ifnecessary.  At March 31, 2003 and May15, 2003, the Partnership had no amount outstanding under the TransCanadaCredit Facility.

 

# ***CapitalRequirements***

 

To the extent TCPipeLines has any capital requirements with respect to its investments inNorthern Border Pipeline and Tuscarora or makes acquisitions during theremainder of 2003, TC PipeLines expects to fund these requirements withoperating cash flows, debt and/or equity.

# ** **

# **Results ofOperations of Northern Border Pipeline Company**

*** ***

***Critical Accounting Policies***

 

Certain amounts included in or affecting NorthernBorder Pipeline’s Financial Statements and related disclosures must beestimated, requiring it to make certain assumptions with respect to values orconditions that cannot be known with certainty at the time the financialstatements are prepared.  Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenues and expensesduring the reporting period.  Actualresults could differ

 

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from thoseestimates.  Any effects on NorthernBorder Pipeline’s business, financial position or results of operationsresulting from revisions to these estimates are recorded in the period in whichthe facts that give rise to the revision become known.

 

Certainof Northern Border Pipeline’s accounting policies are of more significance inits financial statement preparation process than others.  Northern Border Pipeline’s accountingpolicies conform to Statement of Financial Accounting Standards (SFAS) No. 71,“Accounting for the Effects of Certain Types of Regulation.”  Accordingly, certain assets that result fromthe regulated ratemaking process are recorded that would not be recorded underaccounting principles generally accepted in the United States of America fornonregulated entities.  Northern BorderPipeline continually assesses whether the regulatory assets are probable offuture recovery by considering such factors as regulatory changes and theimpact of competition.  If futurerecovery ceases to be probable, Northern Border Pipeline would be required towrite-off the regulatory assets at that time. At March 31, 2003, Northern Border Pipeline has reflected regulatoryassets of $10.2 million, which are being recovered from its shippers overvarying periods of time.  NorthernBorder Pipeline’s long-lived assets are stated at original cost.  Northern Border Pipeline must use estimatesin determining the economic useful lives of those assets.  For utility property, no retirement gain orloss is included in income except in the case of retirements or sales of entireregulated operating units.  The originalcost of utility property retired is charged to accumulated depreciation andamortization, net of salvage and cost of removal.  Northern Border Pipeline’s accounting for financial instrumentsfollows SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.”  SFAS No. 133 requires that everyderivative instrument be recorded on the balance sheet as either an asset orliability measured at its fair value. The statement requires that changes in the derivative’s fair value berecognized currently in earnings unless specific hedge accounting criteria aremet.  Special accounting for qualifyinghedges allows a derivative’s gains and losses to offset related results on thehedged item in the income statement.  AtMarch 31, 2003, Northern Border Pipeline’s balance sheet included assets fromderivative financial instruments of $20.2 million.

 

In 2001, the FinancialAccounting Standards Board issued SFAS No. 143, “Accounting for AssetRetirement Obligations.”  SFASNo. 143 requires entities to record the fair value of a liability for anasset retirement obligation in the period in which it is incurred, if theliability can be reasonably estimated. When the liability is initially recorded, the carrying amount of the relatedasset is increased by the same amount. Over time, the liability is accreted toits future value and the accretion is recorded to expense. The initialadjustment to the asset is depreciated over its useful life. Upon settlement ofthe liability, an entity either settles the obligation for its recorded amountor incurs a gain or loss. Northern Border Pipeline advises that, in someinstances, it is obligated by contractual terms or regulatory requirements toremove facilities or perform other remediation upon retirement. Northern BorderPipeline further advises that it was unable to reasonably estimate and recordliabilities for its obligations that fall under the provisions of thisstatement because it cannot reasonably estimate when such obligations would besettled. Effective January 1, 2003, Northern Border Pipeline adopted SFAS No.143, which did not have a material impact on its financial position or resultsof operations.

 

The following sets outsummarized financial information for Northern Border Pipeline for the threemonths ended March 31, 2003 and 2002 and as at March 31, 2003 and December 31,2002. Amounts discussed 

 

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represent 100% of theoperations of Northern Border Pipeline, in which the Partnership has held a 30%interest since May 28, 1999.

* *
| **Three months ended March 31 (unaudited)   (millions of dollars)** |   | **2003**  |       | **2002** |       |
|---------------------------------------------------------------------|--------|-----------|------------|----------|------------|
| **Northern Border Pipeline Income Statement**                       |   |      | ** ** |     | ** ** |
| Revenues                                                            |   | **79.9**  | ** ** | 78.2     |       |
| Costs and expenses                                                  |   | **(16.8** | **)**      | (13.8    | )          |
| Depreciation                                                        |   | **(14.5** | **)**      | (14.5    | )          |
| Financial charges                                                   |   | **(11.8** | **)**      | (13.0    | )          |
| Other income/(expense)                                              |   | **(0.1**  | **)**      | 0.8      |       |
| Net income                                                          |   | **36.7**  | ** ** | 37.7     |       |

* *
| **(millions of dollars)**                   |   | **March 31,  2003** |       | **December  31,   2002** |       |
|---------------------------------------------|--------|---------------------|------------|--------------------------|------------|
|                                        |   | **(unaudited)**     |       | **(audited)**            |       |
| **Northern  Border Pipeline Balance Sheet** |   |                |       |                     |       |
| **Assets**                                  |   |                |       |                     |       |
| Cash  and cash equivalents                  |   | **19.0**            | ** ** | 25.4                     |       |
| Other  current assets                       |   | **54.8**            | ** ** | 40.8                     |       |
| Plant,  property and equipment, net         |   | **1,618.4**         | ** ** | 1,636.0                  |       |
| Other  assets                               |   | **36.4**            | ** ** | 37.8                     |       |
|                                        |   | **1,728.6**         |       | 1,740.0                  | ** ** |
| **Liabilities  and Partners’ Equity**  |   |                | ** ** |                     |       |
| Current  liabilities                        |   | **141.2**           | ** ** | 130.9                    |       |
| Reserves  and deferred credits              |   | **6.0**             | ** ** | 15.4                     |       |
| Long-term  debt, net of current maturities  |   | **777.0**           | ** ** | 783.9                    |       |
| Partners’  Equity                      |   |                | ** ** |                     |       |
| Partners’  capital                     |   | **798.0**           | ** ** | 803.0                    |       |
| Accumulated  other comprehensive income     |   | **6.4**             | ** ** | 6.8                      |       |
|                                        |   | **1,728.6**         |       | 1,740.0                  |       |

 

***Update on Company Use Gas FERC Filing***

 

In February 2003,Northern Border Pipeline filed to amend its FERC tariff to clarify thedefinition of company use gas, which is gas supplied by its shippers for itsoperations, by adding detailed language to the broad categories that comprisecompany use gas.  Northern BorderPipeline had included in its collection of company use gas, quantities thatwere equivalent to the cost of electric power at its electric-driven compressorstations during the period of June 2001 through January 2003.  On March 27, 2003, the FERC issued an orderrejecting Northern Border Pipeline’s proposed tariff sheet revision andrequiring refunds with interest within 90 days of the order.  The refunds with interest are approximately$10.3 million and are recorded in accounts payable on Northern BorderPipeline’s balance sheet as of March 31, 2003. Northern Border Pipeline madethe refunds to its shippers in May 2003.

 

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## ***FirstQuarter 2003 Compared with First Quarter 2002***

 

NorthernBorder Pipeline’s net income decreased $1.0 million for the firstquarter of 2003, as compared to the same period in 2002.  Net income was reduced by higher operatingexpenses and decreases in other income (expense), partially offset by increasesin operating revenues and reductions in interest expense.

 

Operating revenuesincreased $1.7 million for the first quarter of 2003, as compared to the sameperiod in 2002.  The 2002 results wereimpacted by uncollected revenues associated with the transportation capacitypreviously held by Enron North America Corp., which filed for Chapter 11bankruptcy protection in December 2001 (see “Update On The Impact Of Enron’sChapter 11 Filing On Northern Border Pipeline’s Business”).  For the first quarter of 2002, the revenueslost on this capacity totaled approximately $1.5 million.

 

Costs and expensesconsist of operations and maintenance expenses and taxes other than income.

 

Operationsand maintenance expenses increased $1.7 million for the first quarter of 2003,as compared to the same period in 2002, due primarily to the cost forelectricity to power Northern Border Pipeline’s electric-drivencompressors.  Previously, NorthernBorder Pipeline included in its collection of company-use gas quantities thatwere equivalent to the cost of electric power (see “Update on Company Use GasFERC Filing”).  Operations andmaintenance expenses also include an increase in employee benefits expenses.

 

Taxesother than income increased $1.3 million for the first quarter of 2003, ascompared to the same period in 2002. The 2002 amount included a refund of use taxes previously paid on exemptpurchases.

 

Financial chargesdecreased $1.2 million for the first quarter of 2003, as compared to the sameperiod in 2002, due to a decrease in Northern Border Pipeline’s averageinterest rate as well as a decrease in average debt outstanding.

 

Other income (expense)decreased $0.9 million for the first quarter of 2003, as compared to the sameperiod in 2002.  The 2003 amountincludes $0.3 million of estimated interest expense for refunds required by theorder issued by the FERC on March 27, 2003 (see “Update on Company Use GasFERC Filing”).  The 2002 amount included$0.6 million of income primarily related to interest received on the refund ofuse taxes.

 

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**Liquidityand Capital Res****ources of Northern Border Pipeline Company**

# ** **

# ***Debtand Credit Facilities***

 

Northern BorderPipeline’s debt and credit facilities outstanding at March 31, 2003, areas follows:

 
|                                                             |   | **Payments  Due by Period** |   |
|------------------------------------------------------------------|--------|-----------------------------|--------|
|                                                             |   | **Total**                   |   | **Current   Portion (Less   Than 1 Year)** |   | **Long-  Term   Portion** |   |
|                                                             |   | **(In  Millions)**          |   |
| 1992  Series D Senior Notes, average 8.57%, due 2003             |   | 65.0                        |   | 65.0 |   | — |   |
| $175  million Pipeline Credit Agreement, average 2.18%, due 2005 |   | 83.0                        |   | — |   | 83.0 |   |
| 6.25%  Senior Notes due 2007                                     |   | 225.0                       |   | — |   | 225.0 |   |
| 7.75%  Senior Notes due 2009                                     |   | 200.0                       |   | — |   | 200.0 |   |
| 7.50%  Senior Notes due 2021                                     |   | 250.0                       |   | — |   | 250.0 |   |
| Total                                                            |   | 823.0                       |   | 65.0 |   | 758.0 |   |

 

At March 31, 2003,Northern Border Pipeline had outstanding $65 million of Series D Senior Notesissued in a $250 million private placement under a July 1992 note purchaseagreement.  The Series D Senior Notesmature in August 2003.  Northern BorderPipeline anticipates borrowing under the Pipeline Credit Agreement to repay theSeries D Senior Notes.

 

Northern Border Pipelinehas outstanding interest rate swap agreements with notional amounts totaling$225 million that expire in May 2007. Under the interest rate swap agreements, Northern Border Pipeline makespayments to counterparties at variable rates based on the LIBOR and in returnreceives payments based on a 6.25% fixed rate. At March 31, 2003, the average effective interest rate on NorthernBorder Pipeline’s interest rate swap agreements was 2.70%.

 

Short-term liquidityneeds will be met by operating cash flows and through the Pipeline CreditAgreement.  Long-term capital needs maybe met through the ability to issue long-term indebtedness.

 

# ***CashFlows from Operating Activities***

 

Cashflows provided by operating activities were $43.3 million in the first quarterof 2003 as compared to $52.8 million for the comparable period in 2002.  The $9.5 million decrease in 2003 from 2002was primarily related to a reduction in prepayments that Northern BorderPipeline had required certain shippers make for transportation services.

 

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# ***CashFlows from Investing Activities***

 

Capital expenditures were$1.9 million for the first quarter of 2003 as compared to $2.1 million for thecomparable period in 2002.  The capitalexpenditures for 2003 and 2002 were primarily related to renewals andreplacements of existing facilities.

 

Totalcapital expenditures for 2003 are estimated to be $11 million primarily relatedto renewals and replacements of existing facilities.  Northern Border Pipeline advises that it currently anticipatesfunding its 2003 capital expenditures primarily by borrowing on debt facilitiesand using operating cash flows.

 

# ***CashFlows from Financing Activities***

 

Cashflows used in financing activities were $47.8 million for the first quarter of2003 as compared to $46.2 million for the comparable period in 2002.  Distributions to partners were $41.8 millionand $39.2 million in the first quarter of 2003 and 2002, respectively.  Distributions paid in the current quarterare computed based on the previous quarter's operating results.  A distribution of approximately $32.4 millionwas declared for the first quarter of 2003 and paid May 1, 2003.  In addition to being impacted by theoperating results for the quarter, the first quarter distribution was reducedto reflect the impact of the refunds ordered by the FERC on March 27, 2003 (see“Update on Company Use Gas FERC Filing”) in accordance with the currentlyapproved distribution formula.

 

For2003 and 2002, borrowings on long-term debt totaled $22.0 million and $20.0million, respectively.  Total paymentson debt were $28.0 million and $27.0 million in 2003 and 2002, respectively.

 

# ***Updateon the Impact of Enron’s Chapter 11 Filing on Northern Border Pipeline’sBusiness***

 

As more fully discussedin TC PipeLines’ Annual Report on Form 10-K for the year ended December 31,2002, on December 2, 2001, Enron Corp. and certain of its wholly-ownedsubsidiaries filed a voluntary petition for bankruptcy protection under Chapter11 of the United States Bankruptcy Code.

 

Numerous shareholder andemployee class action lawsuits have been initiated against Enron, its formerindependent accountants, legal advisors, executives, and board members. Enronhas received several requests for information from different federal and stateagencies, including the FERC, and committees of the United States House ofRepresentatives and Senate. Some of the information requested from Enron mayinclude information about Northern Border Pipeline. Northern Border Pipelineadvises that while it has not been subject to these investigations or lawsuits,it is possible that in the documentation production by Enron, confidential,proprietary or commercially sensitive information concerning Northern BorderPipeline may have been produced. It is also possible that some of thisinformation may be made available to the public.

 

Further and relating toEnron’s bankruptcy, on April 17, 2003, Northern Border Pipeline filed with theSEC a current report on Form 8-K describing the possible effects of a potentialaffirmation by the SEC of an initial decision (Initial Decision) by theadministrative law judge (ALJ) issued on February 6, 2003 denying Enron’s applicationfor exemption from the requirements of the Public Utility Holding Company Act(PUHCA).  As set forth in more detailbelow, Enron has filed a petition with the SEC requesting a reversal of theInitial Decision.  Until the SEC acts onthis petition, the Initial Decision is stayed. The text of the Form 8-K reads as follows:

 

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Northern Border Partners,L.P. owns a 70% general partner interest in Northern Border Pipeline.  Two of Northern Border Partners’ generalpartners, Northern Plains Natural Gas Company and Pan Border Gas Company, areowned by Enron.  In addition, all of thecommon stock of Portland General Electric Company (PGE) is owned by Enron.  As the owner of PGE’s common stock, Enron isa holding company for purposes of PUHCA. Following Enron’s acquisition of PGE in 1997, Enron annually filed astatement claiming an exemption from all provisions of PUHCA (except theprovision which addresses the acquisition of public utility company affiliates)under Section 3(a)(1).  Due to Enron’sbankruptcy filing in December 2001, Enron is no longer able to providenecessary financial information needed to file the exemption statement.  As a result, in February 2002, Enron appliedto the SEC for an order of exemption under Section 3(a)(1).  To be eligible for this exemption, PGE’sutility activities must, among other things, be predominantly intrastate incharacter.

 

Following the submissionof testimony by the parties to the proceeding, a hearing on Enron’s applicationwas held on December 5, 2002.  OnFebruary 6, 2003, the ALJ issued an Initial Decision holding that PGE does notmeet the criteria to be predominantly intrastate in character, thereby denyingEnron’s application for exemption.  OnFebruary 27, 2003, Enron filed a petition for review with the SEC requestingthat the SEC review the ALJ’s Initial Decision, reverse such Initial Decision,and find that Enron is entitled to an exemption from PUHCA.  Filing of the petition stays the effect ofthe Initial Decision until such time as the SEC acts on the petition.  As directed by the SEC, the Division ofInvestment Management filed a response to the petition on March 25, 2003 urgingthe SEC to reject the petition and affirm the ALJ’s Initial Decision.  The SEC could act on the petition at anytime.  Possible actions that the SECcould take include setting the matter for further hearings before the fullCommission or summarily affirming, reversing or modifying the InitialDecision.  If the SEC affirms theInitial Decision, Enron would be required to register as a holding companyunder PUHCA and Northern Plains and Pan Border would presumptively becomesubsidiaries within the newly registered Enron holding company system.  Further, because of the voting interest heldby Enron through its general partner interests in Northern Border Partners,Northern Border Partners and certain of its subsidiaries, including NorthernBorder Pipeline, would also presumptively become subsidiaries within the Enronholding company system.

 

PUHCA imposes a number ofrestrictions on the operation of registered holding companies and theirsubsidiaries within the registered holding company system, including therequirement of SEC approval of securities issuances and certain restrictions onthe ability to own or acquire businesses. PUHCA also regulates transactions between companies in a holding companysystem.  Operations under PUHCA can 

 

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become materially moreexpensive and cumbersome than operations by companies that are not subject to,or exempt from, PUHCA.  Northern BorderPipeline advises that if it was to become a subsidiary of a registered holdingcompany under PUHCA, it would become subject to regulation by the SEC not onlywith respect to the acquisition of the securities of public utilities, but alsowith respect to, among other things, the acquisition of assets and interests inany other business, declaration and payment of certain cash distributions;intra-system borrowings or indemnifications; sales, services or constructiontransactions with other holding company system companies; the issuance of debtor equity securities; and borrowings under credit facilities.  At this time, Northern Border Pipelineadvises that it cannot predict how regulations under PUHCA would impact itsoperations, although if it receives the exemptions or orders referred to below,Northern Border Pipeline advises that it believes that it will be able toconduct its operations in a manner consistent with its current operationswithout material cost or delay.

 

If Enron’s exemptionapplication is denied by the SEC, Northern Border Pipeline advises that itcannot estimate the amount of time that the SEC will provide for Enron toregister as a holding company under PUHCA at which time Enron and its holdingcompany system would become subject to PUHCA. Northern Border Pipeline advises that it intends to seek orders from theSEC that, if granted, would minimize the impacts as described above of PUHCA onits operations.  Northern BorderPipeline also advises that it may seek exemptions for its operations fromregulation under PUHCA.  Similar ordersand exemptions have been granted by the SEC to other operating subsidiaries ofholding companies under PUHCA.  Noassurance can be given that Northern Border Pipeline will be successful inobtaining all of the orders or exemptions that it intends to seek or that itsoperations will not be subject to the full regulatory impact of PUHCA.

 

On April 18, 2003 TCPipeLines filed a current report on Form 8-K, reporting Northern BorderPipeline’s April 17, 2003 current report on Form 8-K.  While TC PipeLines currently does not anticipate that the outcomeof the SEC’s determination will have a material impact on its ability toconduct its operations or to meet its obligations, the Partnership cannotguarantee that further regulatory developments may not have an impact on itsoperations.

 

For risks associated withEnron’s Chapter 11 filing, please read the Partnership’s Annual Report on Form10-K for the year ended December 31, 2002 - “Item 7. Management’s Discussion and Analysis of Financial Condition andResults of Operations - Results of Operations of Northern Border Pipeline Company- Update on the Impact of Enron’s Chapter 11 Filing on Northern BorderPipeline’s Business - Possible Effects.”

 

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# **Results of Op**erations ofTuscarora Gas Transmission Company

*** ***

***Critical Accounting Policy***

 

Tuscarora’s accountingpolicies conform to SFAS No. 71, “Accounting for the Effects of Certain Typesof Regulation.”  Accordingly, certainassets that result from the regulated ratemaking process are recorded thatwould not be recorded under generally accepted accounting principles fornonregulated entities.

 

Effective January 1,2003, Tuscarora adopted SFAS No. 143, “Accounting for Asset RetirementObligations,” which did not have a material impact on its financial position orresults of operations.

 

The following sets outsummarized financial information for Tuscarora for the three months ended March31, 2003 and 2002 and as at March 31, 2003 and December 31, 2002.  Amounts discussed represent 100% of theoperations of Tuscarora, in which the Partnership has held a 49% interest sinceSeptember 1, 2000.

 
| **Three months ended March 31 (unaudited)   (millions of dollars)** |   | **2003**   |       | **2002** |       |
|---------------------------------------------------------------------|--------|------------|------------|----------|------------|
| **Tuscarora Income Statement**                                      |   |       | ** ** |     | ** ** |
| Revenues                                                            |   | **7.4**    | ** ** | 5.6      |       |
| Costs and expenses                                                  |   | **(1.2**   | **)**      | (0.6     | )          |
| Depreciation                                                        |   | **(1.6**   | **)**      | (1.2     | )          |
| Financial charges                                                   |   | **(1.6**   | **)**      | (1.5     | )          |
| Other income                                                        |   | **—** | ** ** | 0.1      |       |
| Net income                                                          |   | **3.0**    | ** ** | 2.4      |       |

 

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| **(millions of dollars)**                  |   | **March 31,   2003** |       | **December  31,   2002** |   |
|--------------------------------------------|--------|----------------------|------------|--------------------------|--------|
|                                       |   | **(unaudited)**      |       | **(audited)**            |   |
| **Tuscarora  Balance Sheet**               |   |                 |       |                     |   |
| **Assets**                                 |   |                 |       |                     |   |
| Cash  and cash equivalents                 |   | **4.8**              | ** ** | 0.6                      |   |
| Other  current assets                      |   | **2.6**              | ** ** | 4.3                      |   |
| Plant,  property and equipment, net        |   | **147.0**            | ** ** | 148.4                    |   |
| Other  assets                              |   | **1.2**              | ** ** | 1.2                      |   |
|                                       |   | **155.6**            |       | 154.5                    |   |
| **Liabilities  and Partners’ Equity** |   |                 | ** ** |                     |   |
| Current  liabilities                       |   | **8.9**              | ** ** | 14.6                     |   |
| Long-term  debt                            |   | **85.4**             | ** ** | 85.3                     |   |
| Partners’  Equity                     |   |                 | ** ** |                     |   |
| Partners’  capital                    |   | **61.2**             | ** ** | 54.2                     |   |
| Accumulated  other comprehensive income    |   | **0.1**              | ** ** | 0.4                      |   |
|                                       |   | **155.6**            |       | 154.5                    |   |

 

## ***FirstQuarter 2003 Compared with First Quarter 2002***

 

Net income increased $0.6million, or 25%, to $3.0 million for first quarter 2003, compared to $2.4million for the same period last year. This increase is primarily due to higher revenue, partially offset byhigher operations and maintenance expense and depreciation expense.

 

Revenues earned byTuscarora increased $1.8 million, or 32%, to $7.4 million for first quarter2003, compared to $5.6 million for the same period last year.  This increase is due to incremental revenuesbeing generated from new transportation contracts, including those resultingfrom the expansion.

 

Costs and expensesincurred by Tuscarora increased $0.6 million, or 100%, to $1.2 million forfirst quarter 2003, compared to $0.6 million for the same period lastyear.  This increase mainly reflects thehigher operations and maintenance expenses required to run the two newcompressor stations that were placed into service December 1, 2002.

 

Depreciation recorded byTuscarora increased $0.4 million, or 33%, to $1.6 million for first quarter2003, compared to $1.2 million for the same period last year.  This increase reflects the larger asset baseresulting from the expansion in 2002.

 

Financial charges ofTuscarora increased $0.1 million, or 7%, to $1.6 million for first quarter2003, compared to $1.5 million for the same period last year.  This increase is due primarily to higheraverage debt balances in first quarter 2003.

 

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**Liquidityand Cap****ital Resources of Tuscarora Gas Transmission Company**

 

### ***CashFlows from Operating Activities***

 

Cash flows provided byoperating activities increased $1.1 million to $5.1 million in first quarter2003 compared to $4.0 million in the same period last year primarily due tochanges in working capital and increased net income relating to Tuscarora’sexpansion.

 

### ***CashFlows from Investing Activities***

 

In first quarter 2003,Tuscarora used $0.2 million for capital expenditures primarily related to its2002 expansion.

 

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In first quarter 2002,Tuscarora used $1.4 million of cash primarily related to the construction ofthe 2002 expansion facilities.

 

### ***CashFlows from Financing Activities***

 

Infirst quarter 2003, Tuscarora reported cash flows used in financing activitiesof $0.7 million compared to cash flows from financing activities of $8.0million last year.  In first quarter2003, Tuscarora repaid the $4.6 million balance outstanding on its revolvingcredit facility which expired on January 3, 2003.  Tuscarora received contributions from partners of $8.5 millionand paid cash distributions of $3.0 million as well as a return of capital toits partners of $1.6 million in first quarter 2003.

 

Infirst quarter 2002, Tuscarora received proceeds of $10.0 million from theissuance of its Series C Secured Notes and paid $0.3 million in related issuancecosts.  In addition, Tuscarora paid cashdistributions of $1.9 million.

 

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**ITEM 3.****  QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

**TC PipeLines’ interest rateexposure results from its Revolving Credit Facility, which is subject tovariability in LIBOR interest rates. Since December 31, 2002, there has not been any material change to TCPipeLines’ interest rate exposure.**

 

The Partnership’s marketrisk sensitivity is also influenced by and reflects the same factors thatinfluence Northern Border Pipeline. Neither Northern Border Pipeline nor Tuscarora owns any of the naturalgas they transport, and, therefore, do not assume any of the related naturalgas commodity price risk.

 

Northern BorderPipeline’s interest rate exposure results from variable rate borrowings fromcommercial banks.  To mitigate potentialfluctuations in interest rates, Northern Border Pipeline attempts to maintain asignificant portion of its debt portfolio in fixed rate debt.  Northern Border Pipeline also uses interestrate swaps as a means to manage interest rate expense by converting a portionof fixed rate debt into variable rate debt to take advantage of declining interestrates.  Northern Border Pipeline advisesthat there have not been any material changes in market risk exposures thatwould affect the quantitative and qualitative disclosures presented as ofDecember 31, 2002, in Item 7A of TC PipeLines’ Annual Report on Form 10-K.

 

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**ITEM 4.****  CONTROLS ANDPROCEDURES**

 

**Controls and Procedures**

 

a)              *Evaluation of disclosure controls andprocedures. *Based on theirevaluation of the Partnership’s disclosure controls and procedures as of a datewithin 90 days of the filing of this quarterly report, the President and ChiefExecutive Officer and Chief Financial Officer of the general partner of thePartnership have concluded that the disclosure controls and procedures areeffective.

 

*b)**            Changesin internal controls.*There were no significant changes in thePartnership’s internal controls or in other factors that could significantlyaffect these controls subsequent to the date of their evaluation.

 

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**PART II.****  OTHERINFORMATION**

**ITEM5.  OTHER INFORMATION**

 

**TCPipeLines, LP**

 

Mirant Americas EnergyMarketing, LP is currently obligated for approximately 10% of Northern BorderPipeline's contracted firm capacity. Mirant's firm contracts expire in October2006 and December 2008. Mirant also manages the assets of Pan-Alberta Gas Ltd.,including the contracts of Pan-Alberta Gas (U.S.)(Pan-Alberta), which isobligated for approximately 20% of Northern Border Pipeline's contracted firmcapacity. Pan-Alberta's firm contracts expire October 31, 2003. Mirant hasrecently announced the sale of its Canadian natural gas aggregator servicescontracts and a significant portion of its natural gas transportation contractsto Cargill Limited. The announcement did not identify which transportationcontracts were included but did state that Cargill would assume the managementservices to operate the aggregator business of Pan-Alberta Gas Ltd. Mirant'sannouncement indicates the transaction is expected to close later this yearpending regulatory approvals.

 

Northern Border Pipelineadvises that it has recently reached agreement with an investment grade shipperfor approximately 125 million cubic feet per day of transportation capacity fora one-year period extending from November 1, 2003 through October 31,2004.  The capacity extends from Port ofMorgan, Montana to interconnections in Northern Border Pipeline’s market areas,with the majority of the capacity extending to the Chicago area.  The agreement is at the maximumtransportation rate available under Northern Border Pipeline's tariff and isexpected to yield approximately $18.8 million in revenue over its term.  Northern Border Pipeline further advisesthat, with this agreement, the percentage of system capacity under contractsthat expire before November 1, 2003, has been reduced from 42% to 36%.

 

In TC PipeLine's AnnualReport on Form 10-K for the year ended December 31, 2002, it was reported thatNorthern Border Pipeline was selected for an industry-wide audit ofFERC-assessed annual charges.  On April10, 2003, the FERC issued its final report finding Northern Border Pipeline wascompliant.

 

**ITEM 6.****  EXHIBITS ANDREPORTS ON FORM 8-K**

 

(a)               Exhibits

 

99.1                     Certification of President and ChiefExecutive Officer Regarding Periodic Report Containing Financial Statements.

 

99.2                     Certification of Chief Financial OfficerRegarding Periodic Report Containing Financial Statements.

 

(b)              Reportson Form 8-K

 

1.                                 Reporton Form 8-K dated and filed on January 30, 2003 reporting that TC PipeLines, LPissued a press release announcing fourth quarter results for the period endedDecember 31, 2002.

2.                                 Reporton Form 8-K dated April 17, 2003 and filed on April 18, 2003 reporting thatNorthern Border Pipeline filed an 8-K with the SEC describing the possible effectsof the potential denial of Enron’s petition to be exempt from the requirementsof the Public Utility Holding Company Act. If Enron’s petition is denied, Northern Border Pipeline Company wouldbecome a subsidiary within the Enron holding company system.

3.                                 Reporton Form 8-K dated April 21, 2003 and filed on April 22, 2003 reporting that TCPipeLines, LP issued a press release announcing first quarter results for theperiod ended March 31, 2003.

 

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### **SIGNATURES**

 

Pursuant to therequirements of the Securities and Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 

 
|                     |   | **TC PipeLines, LP**              |
|--------------------------|--------|-----------------------------------|
|                     |   | (a Delaware Limited  Partnership) |
|                     |   |                              |   |
|                     |   | By:                               | TC PipeLines GP, Inc.,  its general partner |
|                     |   |                              |   |
|                     |   | By:                               | /s/  Russell K. Girling |
| Date:  May 15, 2003 |   |                              | Russell K. Girling |
|                     |   |                              | Chief Financial Officer  (duly authorized officer) |
|                     |   |                              |   |
|                     |   | By:                               | /s/  Theresa Jang |
| Date:  May 15, 2003 |   |                              | Theresa Jang |   |
|                     |   |                              | Controller (duly  authorized officer) |   |

 

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### **CERTIFICATIONS**

 

I, Ronald J. Turner,certify that:

 

1.               Ihave reviewed this quarterly report on Form 10-Q of TC PipeLines, LP;

 

2.               Basedon my knowledge, this quarterly report does not contain any untrue statement ofa material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by this quarterlyreport;

 

3.               Basedon my knowledge, the financial statements, and other financial informationincluded in this quarterly report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this quarterly report;

 

4.               Theregistrant’s other certifying officer and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

a)              designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this quarterly report is being prepared;

 

b)             evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c)              presentedin this quarterly report our conclusions about the effectiveness of thedisclosure controls and procedures based on our evaluation as of the EvaluationDate;

 

5.               Theregistrant’s other certifying officer and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee of theregistrant’s board of directors (or persons performing the equivalentfunction):

 

a)              allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

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b)             anyfraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls; and

 

6.               Theregistrant’s other certifying officer and I have indicated in this quarterlyreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 
| Dated:  May 15, 2003 |   |                                       |
|---------------------------|--------|--------------------------------------------|
|                      |   |                                       |
|                      |   | /s/ Ronald J. Turner                       |
|                      |   | Ronald J. Turner                           |
|                      |   | President and Chief  Executive Officer     |
|                      |   | TC PipeLines GP, Inc.,  as general partner |

 

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I, Russell K. Girling,certify that:

 

1.               Ihave reviewed this quarterly report on Form 10-Q of TC PipeLines, LP;

 

2.               Basedon my knowledge, this quarterly report does not contain any untrue statement ofa material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by this quarterlyreport;

 

3.               Basedon my knowledge, the financial statements, and other financial informationincluded in this quarterly report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this quarterly report;

 

4.               Theregistrant’s other certifying officer and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

a)              designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this quarterly report is being prepared;

 

b)             evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c)              presentedin this quarterly report our conclusions about the effectiveness of thedisclosure controls and procedures based on our evaluation as of the EvaluationDate;

 

5.               Theregistrant’s other certifying officer and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee of theregistrant’s board of directors (or persons performing the equivalentfunction):

 

a)              allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

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b)             anyfraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls; and

 

6.               Theregistrant’s other certifying officer and I have indicated in this quarterlyreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 
| Dated:  May 15, 2003 |   |                                       |
|---------------------------|--------|--------------------------------------------|
|                      |   |                                       |
|                      |   | /s/ Russell K. Girling                     |
|                      |   |                                       |
|                      |   | Russell K. Girling                         |
|                      |   | Chief Financial Officer                    |
|                      |   | TC PipeLines GP, Inc.,  as general partner |

 

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