**UNITED STATES SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-Q**

 

**ý** QUARTERLY REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934

 

**For the quarterly period** ended March 31,2006

 

**or**

 

**o** TRANSITION REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934

 

**For the Transition period from           to           **

 

**Commission File Number:  000-26091**

 

**TC PipeLines, LP**

**(Exact name of registrant asspecified in its charter)**

 

| **Delaware**                                       | ** ** | **52-2135448**                               |
|----------------------------------------------------|------------|----------------------------------------------|
| **(State or other jurisdiction of  incorporation** | ** ** | **(I.R.S. Employer Identification  Number)** |
| **or organization)**                               | ** ** | ** **                                   |
| ** **                                         | ** ** | ** **                                   |
| **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 mark if the registrant (1) has filedall reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.**

**Yes**ý                                                             No o

 

**Indicate by check mark whether the registrant is a largeaccelerated filer, an accelerated filer, or a non-accelerated filer. Seedefinition of “accelerated filer and large accelerate filer” in Rule 12b-2of the Exchange Act.**

**Large accelerated filer**o                                                                                                             Accelerated filer ý                                                                                          Non-accelerated filer o

 

**Indicate by check mark whether the registrant is a shellcompany (as defined in Rule 12b-2 of the Exchange Act).**

**Yes**o                                                             No ý

 

As of May 4, 2006, there were 17,500,000 of theregistrant’s common units outstanding.

 

 

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**TC PIPELINES, LP**

 
| ** **                                                                       | ** **                                                                                   |
|----------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------|
| **TABLE OF CONTENTS**                                                            |                                                                                         |
| ** **                                                                       |                                                                                         |
| **PART I**                                                                  | **FINANCIAL INFORMATION**                                                                    |   |
| ** **                                                                       | ** **                                                                                   |   |
| Item 1.                                                                          | Financial Statements                                                                         |   |
|                                                                             |                                                                                         |   |
|                                                                             | Statement  of Income – Three months ended March 31, 2006 and 2005                  |   |
|                                                                             | Statement of Comprehensive Income – Three months ended March 31,  2006 and 2005    |   |
|                                                                             | Balance  Sheet – March 31, 2006 and December 31, 2005                         |   |
|                                                                             | Statement  of Cash Flows – Three months ended March 31, 2006 and 2005              |   |
|                                                                             | Statement of Changes in Partners’ Equity – Three months ended March 31,  2006 |   |
|                                                                             | Notes to 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  1A.                                                                        | Risk  Factors                                                                                |   |
|                                                                             |                                                                                         |   |
| Item 6.                                                                          | Exhibits                                                                                     |   |
|                                                                             |                                                                                         |   |
| **All amounts are stated in United States  dollars unless otherwise indicated.** |                                                                                         |

 

2

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**PART I.FINANCIAL INFORMATION**

**ITEM 1.FINANCIAL STATEMENTS**

 

**TCPipeLines, LP**

 

**Statement of Income**

 
| **(unaudited)**                                            | ** ** | **Three months ended  March 31** | ** ** |
|------------------------------------------------------------|------------|---------------------------------------|------------|
| **(millions of dollars except per unit amounts)**          | ** ** | **2006**                              | ** ** | **2005** | ** ** |
| ** **                                                 | ** ** | ** **                            | ** ** | ** ** | ** ** |
| Equity income from investment in Northern  Border Pipeline | ** ** | **11.2**                              |       | 12.2 |   |
| Equity income from investment in Tuscarora                 | ** ** | **2.0**                               |       | 2.0 |   |
| General and administrative expenses                        | ** ** | **(0.6**                              | **)**      | (0.5 | ) |
| Financial charges and other                                | ** ** | **(0.2**                              | **)**      | (0.3 | ) |
| **Net income**                                             | ** ** | **12.4**                              |       | 13.4 |   |
|                                                       |       |                                  |       |   |   |
| **Net income allocation**                                  | ** ** | ** **                            | ** ** | ** ** | ** ** |
| Common units                                               | ** ** | **11.7**                              |       | 12.7 |   |
| General partner                                            | ** ** | **0.7**                               |       | 0.7 |   |
|                                                       | ** ** | **12.4**                              |       | 13.4 |   |
|                                                       | ** ** | ** **                            |       |   |   |
| **Net income per unit**                                    | ** ** | **$**                                 | **0.67**   |   | $ | 0.72 |   |
| ** **                                                 | ** ** | ** **                            |       |   |   |
| **Units outstanding (millions)**                           | ** ** | **17.5**                              |       | 17.5 |   |
|                                                            |            |                                       |            |  |  |  |  |

 

**Statementof Comprehensive Income**

 
| **(unaudited)**                                                          | ** ** | **Three months ended  March 31** | ** ** |
|--------------------------------------------------------------------------|------------|---------------------------------------|------------|
| **(millions of dollars)**                                                | ** ** | **2006**                              | ** ** | **2005** | ** ** |
| ** **                                                               | ** ** | ** **                            | ** ** | ** ** | ** ** |
| Net income                                                               | ** ** | **12.4**                              |       | 13.4 |   |
| Other comprehensive income                                               |       |                                  |       |   |   |
| Change  associated with current period hedging transactions of investees | ** ** | **(0.1**                              | **)**      | (0.1 | ) |
| **Total comprehensive income**                                           | ** ** | **12.3**                              |       | 13.3 |   |

 

See accompanying notes to the financial statements.

 

3

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**Balance Sheet**

 
| **(millions of dollars)**                 | ** ** | **March 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|-------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                | ** ** | **(unaudited)**          | ** ** | ** **                  | ** ** |
| ** **                                | ** ** | ** **               | ** ** | ** **                  | ** ** |
| **Assets**                                | ** ** | ** **               | ** ** | ** **                  | ** ** |
| Current assets                            |       |                     |       |                        |       |
| Cash and  short-term investments          | ** ** | **1.8**                  |       | 2.3                         |       |
| Investment in Northern Border Pipeline    | ** ** | **276.7**                |       | 274.5                       |       |
| Investment in Tuscarora                   | ** ** | **38.7**                 |       | 38.9                        |       |
|                                      | ** ** | **317.2**                |       | 315.7                       |       |
| **Liabilities and Partners’ Equity** | ** ** | ** **               | ** ** | ** **                  | ** ** |
| Current liabilities                       |       |                     |       |                        |       |
| Accrued  liabilities                      | ** ** | **0.5**                  |       | 0.6                         |       |
| Current  portion of long-term debt        | ** ** | **13.5**                 |       | 13.5                        |       |
|                                      | ** ** | **14.0**                 |       | 14.1                        |       |
| Partners’ equity                     |       |                     |       |                        |       |
| Common units                              | ** ** | **296.1**                |       | 294.4                       |       |
| General  partner                          | ** ** | **6.5**                  |       | 6.5                         |       |
| Accumulated  other comprehensive income   | ** ** | **0.6**                  |       | 0.7                         |       |
|                                      | ** ** | **303.2**                |       | 301.6                       |       |
|                                      | ** ** | **317.2**                |       | 315.7                       |       |

 

Subsequent Events (Note 4 and Note 8)

 

**Statementof Cash Flows**

 
| **(unaudited)**                                           | ** ** | **Three months ended  March 31, 2006** | ** ** |
|-----------------------------------------------------------|------------|---------------------------------------------|------------|
| **(millions of dollars)**                                 | ** ** | **2006**                                    | ** ** | **2005** | ** ** |
| ** **                                                | ** ** | ** **                                  | ** ** | ** ** | ** ** |
| **Cash Generated From Operations**                        | ** ** | ** **                                  | ** ** | ** ** | ** ** |
| Net income                                                | ** ** | **12.4**                                    |       | 13.4 |   |
| Add/(deduct):                                             |       |                                        |       |   |   |
| Decrease in operating working capital                     | ** ** | **(0.1**                                    | **)**      | (0.2 | ) |
|                                                      | ** ** | **12.3**                                    | ** ** | 13.2 |   |
| **Investing Activities**                                  | ** ** | ** **                                  | ** ** | ** ** | ** ** |
| Return of capital from Northern Border  Pipeline          | ** ** | **2.3**                                     | ** ** | 4.0 |   |
| Return of capital from Tuscarora                          | ** ** | **0.2**                                     | ** ** | 0.1 |   |
| Investment in Northern Border Pipeline                    | ** ** | **(4.6**                                    | **)**      | — |   |
|                                                      | ** ** | **(2.1**                                    | **)**      | 4.1 |   |
| **Financing Activities**                                  | ** ** | ** **                                  | ** ** | ** ** | ** ** |
| Distributions paid                                        | ** ** | **(10.7**                                   | **)**      | (10.7 | ) |
| Long-term debt repaid                                     | ** ** | **—**                                  | ** ** | (6.5 | ) |
|                                                      | ** ** | **(10.7**                                   | **)**      | (17.2 | ) |
| **Increase/(decrease) in cash**                           | ** ** | **(0.5**                                    | **)**      | 0.1 |   |
| **Cash and short-term investments, beginning  of period** | ** ** | **2.3**                                     |       | 2.5 |   |
| **Cash and short-term investments, end of  period**       | ** ** | **1.8**                                     |       | 2.6 |   |
|                                                      |       |                                        |       |   |   |
| Interest payments made                                    | ** ** | **0.2**                                     |       | 0.3 |   |

 

See accompanying notes to the financial statements.

 

4

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**Statement of Changes in Partners’ Equity**

 
| **(unaudited)**                                  | ** **   | **Common Units**         | ** ** | **General  Partner**       | ** ** | **Accumulated  Other  Comprehensive  Income** | ** ** | **Partners’ Equity**  | ** ** |
|--------------------------------------------------|--------------|--------------------------|------------|----------------------------|------------|-----------------------------------------------|------------|----------------------------|------------|
| ** **                                       | *** *** | **(millions  of units)** | ** ** | **(millions  of dollars)** | ** ** | **(millions  of dollars)**                    | ** ** | **(millions  of dollars)** | ** ** | **(millions  of units)** | ** ** | **(millions  of dollars)** | *** *** |
|                                             |         |                     |       |                       |       |                                          |       |                       |       |   |   |   |   |
| Partners’ equity at December 31, 2005  |         | 17.5                     |       | 294.4                      |       | 6.5                                           |       | 0.7                        |       | 17.5 |   | 301.6 |   |
| Net income                                       |         | —                   |       | 11.7                       |       | 0.7                                           |       | —                     |       | — |   | 12.4 |   |
| Distributions paid                               |         | —                   |       | (10.0                      | )          | (0.7                                          | )          | —                     |       | — |   | (10.7 | ) |
| Other comprehensive income                       |         | —                   |       | —                     |       | —                                        |       | (0.1                       | )          | — |   | (0.1 | ) |
| **Partners’ equity at March 31, 2006** | ** **   | **17.5**                 | ** ** | **296.1**                  | ** ** | **6.5**                                       | ** ** | **0.6**                    | ** ** | **17.5** | ** ** | **303.2** | ** ** |

 

See accompanying notes to the financial statements.

 

5

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**Notes to Financial Statements**

**(unaudited)**

 

##### ***Note1*****            ****Basis of Presentation**

 

TC PipeLines, LP, and its subsidiary limited partnerships, TC PipeLinesIntermediate Limited Partnership and TC Tuscarora Intermediate LimitedPartnership, all Delaware limited partnerships, are collectively referred toherein as TC PipeLines or the Partnership. TC PipeLines was formed byTransCanada PipeLines Limited, a subsidiary of TransCanada Corporation (collectivelyreferred to herein as TransCanada), to acquire, own and participate in themanagement of United States (U.S.) - based pipeline assets. The Partnershipcommenced operations on May 28, 1999.

 

The financial statements have been preparedby management in accordance with U.S. generally accepted accounting principles(U.S. GAAP). Amounts are stated in U.S. dollars. Other comprehensive incomerecorded by TC PipeLines arises through its equity investments in NorthernBorder Pipeline Company (Northern Border Pipeline) and Tuscarora GasTransmission Company (Tuscarora) and relates to cash flow hedges transacted byNorthern Border Pipeline and Tuscarora. Since a determination of many assets,liabilities, revenues and expenses is dependent upon future events, thepreparation of these financial statements requires the use of estimates andassumptions which have been made using careful judgment. In the opinion ofmanagement, these financial statements have been properly prepared withinreasonable limits of materiality and include all adjustments (consisting ofnormal recurring accruals) necessary to present fairly the results ofoperations for the three months ended March 31, 2006 and 2005, thefinancial position as at March 31, 2006 and December 31, 2005, cashflows for the three months ended March 31, 2006 and 2005, and statement ofpartners’ equity at March 31, 2006.

 

The results of operations for the threemonths ended March 31, 2006 and 2005 are not necessarily indicative of theresults that may be expected for a full fiscal year. The interim financialstatements should be read in conjunction with the Partnership’s financialstatements and notes included in TC PipeLines’ annual report on Form 10-Kfor the year ended December 31, 2005.

 

##### ***Note2*****            ****Investment in Northern Border Pipeline**

 

At March 31, 2006, the Partnership owned a 30% general partnerinterest in Northern Border Pipeline, a Texas general partnership which owns a1,249-mile United States interstate pipeline system that transports natural gasfrom the U.S. - Canadian border near Port of Morgan, Montana to a terminus nearNorth Hayden, Indiana for its customers. Northern Border Pipeline’s pipelinesystem connects with multiple pipelines providing shippers access to thevarious natural gas markets served by those pipelines. The remaining 70%partnership interest in Northern Border Pipeline was held by Northern BorderPartners, L.P. (Northern Border Partners), a publicly traded limitedpartnership. The 2% general partnership interest in Northern Border Partnerswas controlled by affiliates of ONEOK, Inc. (ONEOK), which held a 1.65%interest, and TransCanada, parent of TC PipeLines’ general partner, which heldthe remaining 0.35% general partner interest. The Northern Border Pipelinesystem is operated by Northern Plains Natural Gas Company, LLC (NorthernPlains), a wholly owned subsidiary of ONEOK. Northern Border Pipeline isregulated by the Federal Energy Regulatory Commission (FERC).

 

In April 2006, the Partnership completedthe acquisition of a 20% general partnership interest in Northern BorderPipeline. The Partnership and Northern Border Partners each now hold a 50%interest in Northern Border Pipeline. The 2% general partnership interest inNorthern Border Partners is now controlled by ONEOK. A subsidiary ofTransCanada will become the operator of Northern Border Pipeline in April 2007.Additional information about the acquisition is included in this section underNote. 8  Subsequent Events.

 

The Partnership uses the equity method ofaccounting for its investment in Northern Border Pipeline. TC PipeLines’ equityincome for the three months ended March 31, 2006 and 2005 includes 30% ofthe net income of Northern Border Pipeline for the same periods. There were noundistributed earnings from Northern Border Pipeline as at March 31, 2006and December 31, 2005.

 

The following table sets out summarizedfinancial information representing 100% of the operations of Northern BorderPipeline for the three months ended March 31, 2006 and 2005 and as at March 31,2006 and December 31, 2005. TC PipeLines has held its general partnerinterest since May 28, 1999.

 

6

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**NorthernBorder Pipeline Income Statement**

 
| **(unaudited)**           | ** ** | **Three months ended  March 31** | ** ** |
|---------------------------|------------|---------------------------------------|------------|
| **(millions of dollars)** | ** ** | **2006**                              | ** ** | **2005** | ** ** |
| Revenues                  | ** ** | **79.8**                              |       | 82.8 |   |
| Costs and expenses        | ** ** | **(17.5**                             | **)**      | (17.4 | ) |
| Depreciation              | ** ** | **(14.6**                             | **)**      | (14.4 | ) |
| Financial charges         | ** ** | **(10.7**                             | **)**      | (10.6 | ) |
| Other income              | ** ** | **0.4**                               |       | 0.2 |   |
| Net income                | ** ** | **37.4**                              |       | 40.6 |   |

 

NorthernBorder Pipeline amortized approximately $0.4 million for each of the threemonths ended March 31, 2006 and 2005, respectively, related to terminatedinterest rate swap agreements as a reduction to financial charges fromaccumulated other comprehensive income.

 

Certain reclassifications weremade to Northern Border Pipeline’s 2005 financial statements to conform tothe current year presentation.

 

**NorthernBorder Pipeline Balance Sheet**

 
| **(millions of dollars)**                 | ** ** | **March 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|-------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                | ** ** | **(unaudited)**          | ** ** | ** **                  | ** ** |
| **Assets**                                | ** ** | ** **               | ** ** | ** **                  | ** ** |
| Cash and cash equivalents                 | ** ** | **15.0**                 |       | 22.0                        |       |
| Other current assets                      | ** ** | **34.4**                 |       | 45.7                        |       |
| Plant, property and equipment, net        | ** ** | **1,511.5**              |       | 1,516.1                     |       |
| Other assets                              | ** ** | **22.6**                 |       | 20.9                        |       |
|                                      | ** ** | **1,583.5**              |       | 1,604.7                     |       |
| **Liabilities and Partners’ Equity** | ** ** | ** **               | ** ** | ** **                  | ** ** |
| Current liabilities                       | ** ** | **52.7**                 |       | 56.0                        |       |
| Reserves and deferred credits             | ** ** | **5.1**                  |       | 4.8                         |       |
| Long-term debt                            | ** ** | **608.4**                |       | 628.9                       |       |
| Partners’ equity                     |       |                     |       |                        |       |
| Partners’  capital                   | ** ** | **915.4**                |       | 912.7                       |       |
| Accumulated  other comprehensive income   | ** ** | **1.9**                  |       | 2.3                         |       |
|                                      | ** ** | **1,583.5**              |       | 1,604.7                     |       |

 

##### ***Note3*****            ****Investment in Tuscarora**

 

The Partnership owns a 49% general partner interest in Tuscarora, aNevada general partnership, which owns a 240-mile United States interstatepipeline system that transports natural gas from Oregon, where it interconnectsto TransCanada’s Gas Transmission Northwest System (GTN), to northern Nevada. Theremaining general partner interests in Tuscarora are held 50% by Sierra PacificResources and 1% by TransCanada. The Tuscarora pipeline system is operated byTuscarora Gas Operating Company, a wholly owned subsidiary of Sierra PacificResources. Sierra Pacific Power Company (Sierra Pacific Power) a wholly-ownedsubsidiary of Sierra Pacific Resources is Tuscarora’s largest shipper,accounting for approximately 69% of total available capacity through 2017. On September 1,2000, the Partnership acquired its interest in Tuscarora from a subsidiary ofTransCanada. As a result of the acquisition allocation, an annual amortizationof $0.4 million has been included in the Partnership’s equity income fromTuscarora. The amortization period ends in 2025. Tuscarora is regulated by theFERC.

 

The Partnership uses the equity method ofaccounting for its investment in Tuscarora. TC PipeLines’ equity income for thethree months ended March 31, 2006 and 2005 includes 49% of the net incomeof Tuscarora 

 

7

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for the same periods. There were no undistributed earnings fromTuscarora as at March 31, 2006 and December 31, 2005. The followingtable sets out summarized financial information representing 100% of the operationsof Tuscarora for the three months ended March 31, 2006 and 2005 and as at March 31,2006 and December 31, 2005. TC PipeLines has held its general partnerinterest since September 1, 2000.

 

**Tuscarora Income Statement**

 
| **(unaudited)**           | ** ** | **Three months ended  March 31** | ** ** |
|---------------------------|------------|---------------------------------------|------------|
| **(millions of dollars)** | ** ** | **2006**                              | ** ** | **2005** | ** ** |
| Revenues                  | ** ** | **8.3**                               |       | 8.3 |   |
| Costs and expenses        | ** ** | **(1.2**                              | **)**      | (1.1 | ) |
| Depreciation              | ** ** | **(1.6**                              | **)**      | (1.5 | ) |
| Financial charges         | ** ** | **(1.4**                              | **)**      | (1.5 | ) |
| Other income              | ** ** | **0.1**                               |       | — |   |
| Net income                | ** ** | **4.2**                               |       | 4.2 |   |

 

**Tuscarora Balance Sheet**

 
| **(millions of dollars)**                 | ** ** | **March 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|-------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                | ** ** | **(unaudited)**          | ** ** | ** **                  | ** ** |
| **Assets**                                | ** ** | ** **               | ** ** | ** **                  | ** ** |
| Cash and cash equivalents                 | ** ** | **6.4**                  |       | 3.8                         |       |
| Other current assets                      | ** ** | **3.0**                  |       | 3.0                         |       |
| Plant, property and equipment, net        | ** ** | **130.2**                |       | 131.6                       |       |
| Other assets                              | ** ** | **1.4**                  |       | 1.4                         |       |
|                                      | ** ** | **141.0**                |       | 139.8                       |       |
| **Liabilities and Partners’ Equity** | ** ** | ** **               | ** ** | ** **                  | ** ** |
| Current liabilities                       | ** ** | **8.2**                  |       | 6.8                         |       |
| Long-term debt                            | ** ** | **71.1**                 |       | 71.1                        |       |
| Partners’ equity                     |       |                     |       |                        |       |
| Partners’  capital                   | ** ** | **61.6**                 |       | 61.8                        |       |
| Accumulated  other comprehensive income   | ** ** | **0.1**                  |       | 0.1                         |       |
|                                      | ** ** | **141.0**                |       | 139.8                       |       |

 

##### ***Note4*****            ****Credit Facilities and Long-Term Debt**

##### * *

On February 28, 2006 the Partnership renewed a$20.0 million unsecured credit facility (Revolving Credit Facility) withJPMorgan Chase Bank, NA, as administrative agent. Loans under the RevolvingCredit Facility may bear interest, at the option of the Partnership, at aone-, two-, three-, or six-month LIBOR plus 0.75% or 1.00% if total debt isgreater than or equal to 15% of capitalization, or at a floating rate based onthe higher of the federal funds effective rate plus 0.5% and the prime rate. TheRevolving Credit Facility matures on February 27, 2007. Amounts borrowed may berepaid in part or in full prior to that time without penalty. TheRevolving Credit Facility may be used to fund capital expenditures, tofund capital contributions to Northern Border Pipeline, Tuscarora and any otherentity in which the Partnership directly or indirectly acquires an interest, tofund working capital and for other general business purposes, includingtemporary funding of cash distributions to unitholders and the general partner,if necessary. The maximum leverage ratio permitted under the Revolving Credit Facilityprovides that the Partnership’s total debt, as at the last day of the first,second and third quarters of 2006, shall not be greater than the lesser of (i) 56.5%of capitalization or (ii) 5 times consolidated adjusted EBITDA (net incomeplus interest expense and cash distributions less equity earnings) for the fourquarter period then ended. Commencing on the last day of the fourth quarter of2006, the maximum leverage ratio reverts to the 

 

8

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existing ratio,which is the lesser of (i) 35% of capitalization as at the last day of such fiscal quarter, or (ii) 2.5times the consolidated adjusted EBITDA for the period consisting of such fiscalquarter and the three preceding fiscal quarters. The Partnership had $13.5million outstanding under the Revolving Credit Facility at March 31, 2006and December 31, 2005. The interest rate on the Revolving Credit Facilityaveraged 5.55% and 4.40% for March 31, 2006 and December 31, 2005,respectively and at March 31, 2006 and December 31, 2005, theinterest rate was 5.61% and 5.62%, respectively.

 

On March 31,2006, the Partnership entered into an unsecured credit agreement for a $310million credit facility (Bridge Loan Credit Facility) with Citigroup GlobalMarkets Inc. and UBS Loan Finance (UBS), as joint lead arrangers and joint bookmanagers, Citicorp North America, Inc., as administrative agent and alender, UBS, as syndication agent and a lender, Mizuho Corporate Bank, Ltd. andBank of Tokyo-Mitsubishi UFJ, as co-documentation agents and lenders, andSunTrust Bank, as a lender. Borrowings under the Bridge Loan Credit Facilitywill bear interest, at the option of the Partnership, on theLIBOR or the base rate plus, in either case, an applicable margin. The baserate will equal the higher of Citibank’s base rate or 0.5% above the federalfunds rate. The applicablemargin is based on the Partnership’s leverage ratio. The applicable marginranges between 0.875% and 1.250% for LIBOR loans and between 0% and 0.250% forbase rate loans. The applicable margin increases by 0.125% per annum on March 31,2007 and further increases by 0.25% per annum on September 30, 2007. TheBridge Loan Credit Facility matures on March 31, 2008, at whichtime all amounts outstanding will be due and payable. The Bridge Loan Credit Facility requires that the Partnership maintaina leverage ratio of no more than 4.5 to 1.0 times at any time and an interestcoverage ratio of not less than 3.5 to 1.0 at the end of any fiscal quarter. OnApril 5, 2006, the Partnership borrowed $307 million under the Bridge LoanCredit Facility to finance the purchase price and $10 million in transactioncosts payable in connection wit the Partnership’s acquisition of an additional20% general partnership interest in Northern Border Pipeline. The remaining $3million commitment under the Bridge Loan Credit Facility was terminated.

 

**Note 5****             Net Income per Unit**

 

Net income per unit is computed by dividing net income, after deductionof the general partner’s allocation, by the weighted average number of commonunits outstanding. The general partner’s allocation is equal to an amount basedupon the general partner’s 2% interest, adjusted to reflect an amount equal toincentive distributions. Net income per unit was determined as follows:

 
| **(unaudited)**                                   | ** ** | **Three months ended  March 31** | ** ** |
|---------------------------------------------------|------------|---------------------------------------|------------|
| **(millions of dollars except per unit amounts)** | ** ** | **2006**                              | ** ** | **2005** | ** ** |
| Net income                                        | ** ** | **12.4**                              |       | 13.4 |   |
| Net income allocated to general partner           |       |                                  |       |   |   |
| General  partner interest                         | ** ** | **(0.2**                              | **)**      | (0.2 | ) |
| Incentive  distribution income allocation         | ** ** | **(0.5**                              | **)**      | (0.5 | ) |
|                                              | ** ** | **(0.7**                              | **)**      | (0.7 | ) |
| Net income allocable to units                     | ** ** | **11.7**                              |       | 12.7 |   |
| Weighted average units outstanding *(millions)*   | ** ** | **17.5**                              |       | 17.5 |   |
| Net income per unit                               | ** ** | **$**                                 | **0.67**   |   | $ | 0.72 |   |
|                                                   |            |                                       |            |  |  |  |  |

 

**Note 6****             Distributions**

 

On April 18, 2006, the Board of Directors of the general partnerdeclared the Partnership’s 2006 first quarter cash distribution. The firstquarter cash distribution is payable on May 15, 2006 to unitholders ofrecord as of April 28, 2006. The total cash distribution of $10.7 millionwill be paid in the following manner: $10.0 million to common unitholders(including $1.2 million to the general partner as holder of 2,035,106 commonunits), $0.5 million to the general partner as holder of the incentivedistribution rights, and $0.2 million to the general partner in respect of its2% general partner interest.

 

9

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**Note 7****             Capital Requirements**

 

The Partnership contributed $3.1 million in the three months ended March 31,2006, representing its then 30% share of a $10.3 million cash call issued byNorthern Border Pipeline to its partners on March 29, 2006. The funds wereused by Northern Border Pipeline to fund the Chicago III Expansion Project. Thepayment to Northern Border Pipeline was funded through the use of cash fromoperations. The Partnership also incurred costs of $1.5 million for the threemonths ended March 31, 2006, related to the acquisition of an additional20% of general partner interest in Northern Border Pipeline.

 

**Note 8****             Subsequent Events**

 

On April 6, 2006, TC PipeLines announced it has closed itsacquisition of an additional 20% general partnership interest in NorthernBorder Pipeline for approximately $297 million plus $10 million in transactioncosts payable to a subsidiary of TransCanada. TC PipeLines has also indirectlyassumed approximately $120 million of debt of Northern Border Pipeline. TCPipeLines now holds a 50% interest in Northern Border Pipeline. TC PipeLines anticipatesto account for its interest in Northern Border Pipeline using equityaccounting.

 

The Partnership initially funded the transaction through the BridgeLoan Credit Facility and intends to refinance the loan under this facility witha combination of equity and debt.

 

In connection with this transaction, in April 2007,a subsidiary of TransCanada will become the operator of Northern BorderPipeline, which is currently operated by Northern Plains.

 

Northern Border Pipeline declared and paid a distribution ofapproximately $48.6 million on May 1, 2006. The Partnership received its50% share ($24.3 million) on May 1, 2006.

 

Tuscarora declared a distribution of approximately $4.5 million on April 17,2006. The Partnership received its 49% share ($2.2 million) on April 28,2006.

 

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**ITEM 2. MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANICAL CONDITION AND RESULTS OF OPERATIONS**

 

**TCPipeLines, LP**

 

**Cautionary Statement RegardingForward-Looking Information**

 

# **A numberof statements made by TC PipeLines in this quarterly report are forward-lookingand relate to, among other things, anticipated financial performance, businessprospects, strategies, market forces and commitments of TC PipeLines. Allforward-looking statements are based on the Partnership’s beliefs as well asassumptions made by and information currently available to the Partnership. ThePartnership assumes no obligation to update any such forward-looking statementsto reflect events or circumstances as occurring after the date hereof. Wordssuch as “anticipate”, “believe”, “estimate”, “expect”, “plan”, “intend”, “forecast”,and similar expressions, identify forward-looking statements. Readers arecautioned not to place undue reliance on this forward-looking information,which is as of the date of this Form 10-Q. These statements reflect thePartnership’s current views with respect to future events and are subject tovarious risks, uncertainties and assumptions including:**

# ** **

•                                          thePartnership’s 50% general partner interest in Northern Border Pipeline and 49%general partner interest in Tuscarora represent its only material assets. As aresult, the Partnership is dependent upon Northern Border Pipeline andTuscarora for all of its available cash;

 

•                                          operationof Northern Border Pipeline by affiliates of ONEOK and any further developmentsin Enron’s filing of bankruptcy protection;

 

•                                          regulatorydecisions, particularly those of the FERC;

 

•                                          ordersby the FERC which are significantly different than Northern Border Pipeline’sassumptions related to the November 2005 rate case;

 

•                                          theability of Northern Border Pipeline to recontract its capacity and thetransportation rates at which that capacity is contracted;

 

•                                          theability of Northern Border Pipeline and Tuscarora to recover costs in itsrates;

 

•                                          thefailure of a shipper on either one of the pipelines in which the Partnershiphas an interest to perform its contractual obligations;

 

•                                          theability of affiliates of Sierra Pacific Resources to continue to meet theircontractual obligations to Tuscarora;

 

•                                          theavailability of Western Canadian natural gas for import into the United States;

 

•                                          theamount of storage capacity in Western Canada and overall strong demand forstorage injection;  and

 

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

 

# **and otherrisks are discussed in the Partnership’s filings with the Securities andExchange Commission (SEC), including under Item 1A, “Risk Factors,” in thePartnership’s annual report on Form 10-K for the year ended December 31,2005. By its nature, such forward-looking information is subject to variousrisks and uncertainties, which could cause TC PipeLines’ actual results andexperience to differ materially from the anticipated results or otherexpectations expressed in this quarterly report.**

 

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

 

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

 

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

 

***Overview***

 

TC PipeLines, LP was formed in 1998 as a Delaware limited partnershipto acquire, own and participate in the management of United States-basedpipeline assets. TC PipeLines, LP and its subsidiary limited partnerships, TCPipeLines Intermediate Limited Partnership and TC Tuscarora IntermediateLimited Partnership, are collectively referred to herein as “TC PipeLines” or “thePartnership.”  TC PipeLines GP, Inc.,an indirect wholly owned subsidiary of TransCanada PipeLines Limited, which isa wholly owned subsidiary of TransCanada, is the general partner of thePartnership. At March 31, 2006, the Partnership owned a 30% generalpartner interest in Northern Border Pipeline and a 49% general partner interestin Tuscarora. More information about the Partnership’s acquisition of anadditional 20% general partner interest in Northern Border Pipeline is includedin this section under “Recent Developments.”

 

***Recent Developments***

 

On April 6, 2006, TC PipeLines announced it has closed itsacquisition of an additional 20% general partnership interest in NorthernBorder Pipeline for approximately $297 million plus $10 million in transactioncosts payable to a subsidiary of TransCanada. TC PipeLines has also indirectlyassumed approximately $120 million of debt of Northern Border Pipeline. TCPipeLines now holds a 50% interest in Northern Border Pipeline. TC PipeLines anticipatesto account for its interest in Northern Border Pipeline using equityaccounting.

 

The Partnership initially funded the transaction through a bridge loancredit facility and intends to refinance the loan under this facility with acombination of equity and debt.

 

In connection with this transaction, in early2007 a subsidiary of TransCanada will become operator of Northern BorderPipeline, which is currently operated by Northern Plains.

 

***Investment in Northern BorderPipeline Company***

 

Northern Border Pipeline owns a 1,249-mile United States interstatepipeline system that transports natural gas from the United States – Canadianborder near Port of Morgan, Montana to a terminus near North Hayden, Indianafor its customers. Northern Border Pipeline’s pipeline system connects withmultiple pipelines providing shippers access to the various natural gas marketsserved by those pipelines. The Partnership owns a 50% general partner interestin Northern Border Pipeline.

 

The remaining 50% general partner interest inNorthern Border Pipeline is held by Northern Border Partners, a publicly tradedlimited partnership. The management committee of Northern Border Pipelineconsists of four members. TC PipeLines and Northern Border Partners eachdesignated two members of the management committee and each have 50% of thevoting power of the management committee.

 

Northern Plains, an affiliate of NorthernBorder Partners, currently serves as the operator of the Northern BorderPipeline system. In early 2007 a subsidiary of TransCanada will become operatorof Northern Border Pipeline.

 

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

 

Tuscarora owns a 240-mile United Statesinterstate pipeline system that originates at an interconnection point withfacilities of GTN, a wholly-owned subsidiary of TransCanada, near Malin, Oregonand runs southeast through northeastern California and northwestern Nevada. ThePartnership owns a 49% general partner interest in 

 

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Tuscarora.

 

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

 

Tuscarora increased its contracted capacityfrom 127 million cubic feet per day (mmcfd) to approximately 180 mmcfd in 2002by completing an expansion of its pipeline system. The expansion consisted oftwo compressor stations and an 11-mile pipeline extension from the previousterminus of the Tuscarora pipeline system at a point near Reno, Nevada toWadsworth, Nevada. Tuscarora completed construction of the Barrick Lateral, a0.5 mile lateral that provides transportation service to a new electricgeneration customer located near Tracy, Nevada. The construction of the lateralwas completed on time and commissioned for service to Barrick Goldstrike on June 25,2005.

 

***Critical Accounting Policy***

 

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

 

The 50% general partner interest in NorthernBorder Pipeline and 49% general partner interest in Tuscarora are currently thePartnership’s only material sources of income. The Partnership’s results of operationsare influenced by and reflect the same factors that influence the financialresults of Northern Border Pipeline and Tuscarora, respectively.

 

There has been no change to the Partnership’scritical accounting policies during the three months ended March 31, 2006.

 

***Recent Account Pronouncements***

 

There were no new standards issued by the FASB or other regulatorybodies during the three months ended March 31, 2006 that had a materialimpact on the Partnership’s results of operations.

 

***Operating Results***

 

Net income was $12.4 million for the three months ended March 31,2006, a decrease of $1.0 million, or 7%, compared to $13.4 million for the sameperiod in 2005 primarily as a result of lower equity income from NorthernBorder Pipeline.

 

Equity income from the Partnership’s investment in Northern BorderPipeline decreased $1.0 million, or 8%, to $11.2 million for the three monthsended March 31, 2006, compared to $12.2 million for the same period in2005. The decrease in equity income from Northern Border Pipeline was primarilydue to lower firm transportation revenue during the quarter. Equity income fromthe Partnership’s investment in Tuscarora remained at $2.0 million for thethree months ended March 31, 2006, compared with the same quarter in 2005.

 

The Partnership’s general and administrative expenses were $0.6 millionfor the three months ended March 31, 2006, an increase of $0.1 millioncompared to the same period in 2005, primarily due to higher salaries andbenefits as well as timing of expenses incurred.

 

The Partnership’s financial charges and other were $0.2 million for thethree months ended March 31, 2006, a decrease of $0.1 million compared tothe same quarter in 2005, due to lower average debt outstanding partiallyoffset by higher average interest rates.

 

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

 

***Debt and Credit Facilities***

 

The following table summarizes TC PipeLines’ debt and credit facilitiesoutstanding as of March 31, 2006:

 

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| ** **                | ** ** | **Payments Due by Period** | ** ** |
|---------------------------|------------|----------------------------|------------|
| **(millions of dollars)** | ** ** | **Total**                  | ** ** | **Less than 1  year** | ** ** | **Long-term  portion** | ** ** |
|                      |       |                       |       |   |   |   |   |
| Revolving Credit Facility |       | 13.5                       |       | 13.5 |   | — |   |
| Total                     |       | $                          | 13.5       |   | $ | 13.5 |   | $ | — |   |
|                           |            |                            |            |  |  |  |  |  |  |  |

 

On March 31, 2006, thePartnership entered into an unsecured credit agreement for a $310 millioncredit facility (Bridge Loan Credit Facility) with Citigroup Global MarketsInc. and UBS Loan Finance (UBS), as joint lead arrangers and joint bookmanagers, Citicorp North America, Inc., as administrative agent and alender, UBS, as syndication agent and a lender, Mizuho Corporate Bank, Ltd. andBank of Tokyo-Mitsubishi UFJ, as co-documentation agents and lenders, andSunTrust Bank, as a lender. Borrowings under the Bridge Loan Credit Facilitywill bear interest, at the option of the Partnership, at theLIBOR or the base rate plus, in either case, an applicable margin. The baserate will equal the higher of Citibank’s base rate or 0.5% above the federalfunds rate. The applicablemargin is based on the Partnership’s leverage ratio. The applicable marginranges between 0.875% and 1.250% for LIBOR loans and between 0% and 0.250% forbase rate loans. The applicable margin increases by 0.125% per annum on March 31,2007 and further increases by 0.25% per annum on September 30, 2007. TheBridge Loan Credit Facility matures on March 31, 2008, at whichtime all amounts outstanding will be due and payable. The Bridge Loan Credit Facility requires that the Partnership maintaina leverage ratio of no more than 4.5 to 1.0 times at any time and an interestcoverage ratio of not less than 3.5 to 1.0 at the end of any fiscal quarter. OnApril 5, 2006, the Partnership borrowed $307 million under the Bridge LoanCredit Facility to finance the purchase price and $10 million in transactioncosts payable in connection wit the Partnership’s acquisition of an additional20% general partnership interest in Northern Border Pipeline. The remaining $3million commitment under the Bridge Loan Credit Facility was terminated.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

The distribution to the general partner described above, other than inits capacity as a holder of 2,035,106 units that are in excess of its aggregate2% general partner interest, represents the incentive distribution rights.

 

***2006 First Quarter Cash Distribution***

 

On April 18, 2006, the Board of Directors of the general partnerdeclared the Partnership’s 2006 first quarter cash distribution. The firstquarter cash distribution is payable on May 15, 2006 to unitholders ofrecord as of April 28,

 

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2006. The total cash distribution of $10.7 million will be paid in thefollowing manner: $10.0 million to common unitholders (including $1.2 millionto the general partner as holder of 2,035,106 common units), $0.5 million tothe general partner as holder of the incentive distribution rights, and $0.2 millionto the general partner in respect of its 2% general partner interest.

 

***Cash Flows from Operating Activities***

 

Cash flows provided by operating activities was $12.3 million for thethree months ended March 31, 2006, compared with $13.2 million for thesame quarter in 2005. Cash provided by operating activities decreased $0.9million primarily due to lower distributions resulting from lower equity incomefrom Northern Border Pipeline during the three months ended December 31,2005, compared with the same quarter in 2005. For the three months ended March 31,2006 and 2005, the Partnership received cash distributions of $13.5 million and$16.2 million, respectively, from its equity investment in Northern BorderPipeline. The decrease in cash distributions from Northern Border Pipeline wasprimarily due to lower revenues and higher operations and maintenance expensesduring the fourth quarter of 2004 compared to the same period in 2005. The cashdistributions received include $2.3 million and $4.0 million classified asreturn of capital in the three months ended March 31, 2006 and 2005,respectively. For the three months ended March 31, 2006 and 2005, thePartnership also received cash distributions of $2.2 million and $2.1 million,respectively, from its equity investment in Tuscarora. The increase in cashdistributions from Tuscarora was mainly due to higher earnings in fourthquarter of 2005 compared to the same period in 2004. Distributions received inthe three months ended March 31, 2006 are based on the respective equityinvestments’ financial results for the fourth quarter ended December 31,2005.

 

***Cash Flows from Investing Activities***

 

Cash received (used) in investing activities was $(2.1) million for thethree months ended March 31, 2006, compared with $4.1 million for the samequarter in 2005. The Partnership made an equity contribution of $3.1 million,representing its then 30% share of a cash call issued by Northern BorderPipeline to its partners on March 20, 2006. The Partnership also incurredcosts of $1.5 million for the three months ended March 31, 2006, relatedto the acquisition of an additional 20% of general partner interest in NorthernBorder Pipeline. Cash distributions received from Northern Border Pipelinewhich were classified as return of capital were $2.3 million and $4.0 millionfor the three months ended March 31, 2006 and 2005, respectively. Cashdistributions received from Tuscarora which were classified as return ofcapital were $0.2 million and $0.1 million for the three months ended March 31,2006 and 2005, respectively.

 

***Cash Flows from Financing Activities***

 

Cash flows used in financing activities were$10.7 million for the three months ended March 31, 2006, compared to $17.2million for the same quarter in 2005.

 

For the three monthsended March 31, 2006, the Partnership paid $10.7 million in cashdistributions in the following manner: $10.0 million to common unitholders (including $1.2 million to thegeneral partner as holder of 2,305,106 common units), $0.5 million to the generalpartner as holder of the incentive distribution rights, and $0.2 million to thegeneral partner in respect of its 2% general partner interest.

 

For the threemonths ended March 31, 2005, the Partnership repaid in full its $6.5million outstanding balance on the TransCanada Credit Facility. On July 31,2005, the TransCanada Credit Facility expired and was not renewed as there wereno anticipated drawings required under the facility.

 

***Capital Requirements***

 

To the extent TC PipeLines has any capital requirements with respect toits investments in Northern Border Pipeline and Tuscarora or makes acquisitionsduring the remainder of 2006, TC PipeLines expects to fund these requirementswith operating cash flows, debt and/or equity.

 

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**Results of Operations of Northern BorderPipeline Company**

 

*In the following discussion of the results ofNorthern Border Pipeline, all amounts represent 100% of the operations ofNorthern Border Pipeline, in which the Partnership now holds a 50% interestsince April 6, 2006.*

 

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

 

***Overview***

 

Northern Border Pipeline is a Texas general partnership that was formedin 1978. Northern Border Pipeline provides natural gas transportation servicesand is a leading transporter of natural gas imported from Canada into the U.S. AtMarch 31, 2006, TC PipeLines owned a 30% general partner interest andNorthern Border Partners owned the remaining 70%. TC PipeLines and NorthernBorder Partners are publicly traded partnerships.

 

In April 2006, Northern Border Partners completed the sale of a20% partnership interest in Northern Border Pipeline to TC PipeLines. NorthernBorder Partners and TC PipeLines each now own a 50% interest in Northern BorderPipeline. Additional information about the transaction is included in this section under“Recent Developments.”

 

Northern Border Pipeline provides natural gas transportation servicesand is a leading transporter of natural gas imported from Canada into the U.S. NorthernBorder Pipeline transports natural gas along 1,249 miles of pipeline with adesign capacity of approximately 2.4 Bcf/d that extends from theMontana-Saskatchewan border to a terminus near North Hayden, Indiana. NorthernBorder Pipeline’s transportation network provides pipeline access to theMidwestern U.S. from natural gas reserves in the Western Canada SedimentaryBasin, which is located in the Canadian provinces of Alberta, British Columbiaand Saskatchewan. Northern Border Pipeline’s transportation contracts includespecifications regarding the receipt and delivery of natural gas at points alongits system. The type of transportation contract, either firm or interruptibleservice, determines the basis by which each customer is charged. Customers withfirm service transportation agreements pay a fee known as a demand charge toreserve pipeline capacity, regardless of use, for the term of their contracts. Firmservice transportation customers also pay a fee known as a commodity chargethat is based on the volume of natural gas they transport. Customers with interruptible servicetransportation agreements may utilize available capacity on NorthernBorder Pipeline’s system after firm service transportation requests aresatisfied. Interruptible service customers are assessed a commodity charge only.For the year ended December 31, 2005, approximately 97% of NorthernBorder Pipeline’s revenue was derived from demand charges and the remaining 3%was attributable to commodity charges.

 

Construction of Northern Border Pipeline’ssystem was initially completed in 1982 followed by expansions or extensions in 1991,1992, 1998, 2001 and 2005. In April 2006, the Chicago IIIExpansion Project went into service as planned, adding 130 MMcf/d oftransportation capacity on the eastern portion of the pipeline into the Chicagoarea

 

***Recent Developments***

 

*Purchase and Sale of Partnership Interest*–In April 2006, Northern Border Partners completed the sale of a 20%partnership interest in Northern Border Pipeline to TC PipeLines under thePartnership Interest Purchase and Sale Agreement dated as of December 31,2005. Northern Border Partners and TC PipeLines each now own a 50% interest inNorthern Border Pipeline.

 

As a result of the transaction, Northern Border Pipeline’s GeneralPartnership Agreement was amended and restated effective April 6, 2006. Themajor provisions adopted or changed included the following:

 

•                  TheManagement Committee will consist of four members. Each partner will designatetwo members and TC PipeLines will designate one of its members as chairman.

 

•                  TheManagement Committee will designate the members of the Audit Committee, whichwill consist of three members. One member will be selected by the partner whoseaffiliate is the operator and two members will be selected by the otherpartner. 

 

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•                  NorthernPlains will be Northern Border Pipeline’s operator until April 1, 2007. EffectiveApril 1, 2007, an affiliate of TransCanada will become Northern BorderPipeline’s operator.

 

*Operating Agreement*–In April 2006, Northern Border Pipeline entered into an OperatingAgreement with an affiliate of TransCanada. Under the new Operating Agreement,the TransCanada affiliate will become Northern Border Pipeline’s operatoreffective April 1, 2007.

 

*Chicago III Expansion Project*– In April 2006, the Chicago III Expansion Project went into service asplanned, adding 130 MMcf/d of transportation capacity on the eastern portion ofNorthern Border Pipeline’s system into the Chicago area.

 

**CRITICAL ACCOUNTING ESTIMATES**

 

The preparation of financial statements in accordance with U.S. GAAPrequires Northern Border Pipeline to make estimates and assumptions, withrespect to values or conditions which cannot be known with certainty, thataffect the reported amount of assets and liabilities and the disclosure ofcontingent assets and liabilities at the date of the financial statements. Suchestimates and assumptions also affect the reported amounts of revenue andexpenses during the reporting period. Although Northern Border Pipelinebelieves these estimates are reasonable, actual results could differ from itsestimates.

 

There has been no change to Northern Border Pipeline’s criticalaccounting estimates during the first quarter ended March 31, 2006. Informationabout Northern Border Pipeline’s critical accounting estimates is includedunder Item 7. “Management’s Discussion and Analysis of Financial Condition andResults of Operations - Critical Accounting Estimates,” in its annual report onForm 10-K for the year ended December 31, 2005.

 

***Known Trends and Uncertainties***

 

Northern Border Pipeline continues to expect that Canadian natural gasexport volumes in 2006 will remain near 2005 levels despite increasedproduction in Canada as a result of the greater number of Canadian drillingrigs in operation. Northern Border Pipeline also continues to expect U.S.demand for natural gas in 2006 will be similar to 2005 levels. Residentialdemand for natural gas fell below normal levels during the 2005-2006 heatingseason as a result of the warm temperatures in January and relativelynormal temperatures in February. However, the Energy Information Administrationprojects that increased industrial demand in 2006 will offset the reduceddemand of residential users.

 

Northern Border Pipeline continues to expect that revenue in 2006 willbe comparable with 2005 revenue, although market conditions have changed. In April andMay of 2005, Northern Border Pipeline did not sell all of its firmtransportation capacity due to decreased demand for Canadian natural gas as aresult of greater supply competition in the Midwestern U.S. and increasednatural gas storage injections. When storage levels approached full capacityand summer temperatures were higher than normal during the third quarter of2005, demand for Northern Border Pipeline’s transportation capacity increased. Naturalgas storage levels in Western Canada were higher during the first quarter of2006 compared with the first quarter of 2005 and the five-year average for thesame period as a result of relatively warm winter temperatures. Increased naturalgas throughput on the TransCanada pipeline system to Eastern markets, due in part togreater demand for Canadian natural gas supply as a result of lingering supplydisruptions related to Hurricanes Katrina and Rita, is expected to slow storageinjection activity in Western Canada during the second quarter of 2006. Inaddition, Western U.S. demand for Canadian natural gas is expected to modestlydecline in 2006 compared with 2005 due to the return of normal snowpack in theregion that will cause gas-fired electric generation to be displaced withhydroelectric generation. 

 

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***Results of Operations***

 

The following tables set out summarized financial information forNorthern Border Pipeline for the three months ended March 31, 2006 and2005 and as at March 31, 2006 and December 31, 2005. Amountsdiscussed represent 100% of the operations of Northern Border Pipeline, inwhich the Partnership holds a 30% interest as at March 31, 2006.

 

**Northern Border Pipeline Income Statement**

 
| **(unaudited)**           | ** ** | **Three months ended  March** | ** ** |
|---------------------------|------------|-------------------------------|------------|
| **(millions of dollars)** | ** ** | **2006**                      | ** ** | **2005** | ** ** |
| Revenues                  | ** ** | **79.8**                      |       | 82.8 |   |
| Costs and expenses        | ** ** | **(17.5**                     | **)**      | (17.4 | ) |
| Depreciation              | ** ** | **(14.6**                     | **)**      | (14.4 | ) |
| Financial charges         | ** ** | **(10.7**                     | **)**      | (10.6 | ) |
| Other income              | ** ** | **0.4**                       |       | 0.2 |   |
| Net income                | ** ** | **37.4**                      |       | 40.6 |   |

 

**Northern Border Pipeline Balance Sheet**

 
| **(millions of dollars)**                 | ** ** | **March 31  2006** | ** ** | **December 31  2005** | ** ** |
|-------------------------------------------|------------|-------------------------|------------|----------------------------|------------|
| ** **                                | ** ** | **(unaudited)**         | ** ** | ** **                 | ** ** |
| **Assets**                                | ** ** | ** **              | ** ** | ** **                 | ** ** |
| Cash and cash equivalents                 | ** ** | **15.0**                |       | 22.0                       |       |
| Other current assets                      | ** ** | **34.4**                |       | 45.7                       |       |
| Plant, property and equipment, net        | ** ** | **1,511.5**             |       | 1,516.1                    |       |
| Other assets                              | ** ** | **22.6**                |       | 20.9                       |       |
|                                      | ** ** | **1,583.5**             |       | 1,604.7                    |       |
| **Liabilities and Partners’ Equity** | ** ** | ** **              | ** ** | ** **                 | ** ** |
| Current liabilities                       | ** ** | **52.7**                |       | 56.0                       |       |
| Reserves and deferred credits             | ** ** | **5.1**                 |       | 4.8                        |       |
| Long-term debt                            | ** ** | **608.4**               |       | 628.9                      |       |
| Partners’  equity                    |       |                    |       |                       |       |
| Partners’  capital                   | ** ** | **915.4**               |       | 912.7                      |       |
| Accumulated  other comprehensive income   | ** ** | **1.9**                 |       | 2.3                        |       |
|                                      | ** ** | **1,583.5**             |       | 1,604.7                    |       |

 

***Operating Results***

 

**Net income was $37.4 million for the three monthsended March 31, 2006, a decrease of $3.2 million, or 8%, compared with$40.6 million for the same period last year primarily as a result of the lowerfirm transportation revenue during the quarter.**

 

Revenues declined $3.0 million for the three months ended March 31,2006, compared with the same period last year primarily as a result ofdiscounted transportation rates, transportation capacity that was sold forshorter transportation paths and some unsold firm transportation capacity in March 2006.

 

Costs and expenses, depreciation, financial charges and other income duringthe first quarter of 2006 were comparable with the same quarter last year.

 

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

 

Northern Border Pipeline’s principal sources of liquidity include cashgenerated from operating activities and bank credit facilities. Northern BorderPipeline funds its operating expenses, debt service and cash distributions toits partners primarily with operating cash flow. Capital resources formaintenance and growth expenditures are funded by a variety of sources,including cash generated from operating activities, borrowings under bankcredit facilities, issuance of senior unsecured notes or equity contributionsfrom Northern Border Pipeline’s partners. Northern Border Pipeline’s ability toaccess capital markets for debt under reasonable terms depends on its financialcondition, credit ratings and market conditions. Northern Border Pipelinebelieves that its ability to obtain financing at reasonable rates and historyof consistent cash flow from operating activities provide a solid foundation tomeet its future liquidity and capital resource requirements.

 

***Debt and Credit Facilities***

 

The following table summarizes Northern Border Pipeline’s debt andcredit facilities outstanding as of March 31, 2006:

 
| ** **                                           | ** ** | ** ** | ** ** | **Payments Due by Period** | ** ** |
|------------------------------------------------------|------------|------------|------------|----------------------------|------------|
| **(millions of dollars)**                            | ** ** | **Total**  | ** ** | **Less than 1  year**      | ** ** | **Long-term  portion** | ** ** |
|                                                 |       |       |       |                       |       |   |   |
| $175 million Pipeline Credit Agreement due  2010 (a) |       | $          | 7          |                       | 7          |   | $ | — |   |
| 6.25% senior notes due 2007                          |       | 150        |       | —                     |       | 150 |   |
| 7.75% senior notes due 2009                          |       | 200        |       | —                     |       | 200 |   |
| 7.50% senior notes due 2021                          |       | 250        |       | —                     |       | 250 |   |
| Total                                                |       | $          | 607        |                       | $          | 7 |   | $ | 600 |   |
|                                                      |            |            |            |                            |            |  |  |  |  |  |

 

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(a)  Northern Border Pipeline is required to pay a facility fee of0.075% on the principal commitment amount of its credit agreement.

 

***Revolving Credit Agreement***

 

As of March 31, 2006, Northern Border Pipeline had outstandingborrowings of $7.0 million under its $175 million revolving credit agreementand was in compliance with the covenants of its agreement. The weighted averageinterest rate related to the borrowings on Northern Border Pipeline’s creditagreement was 5.16% at March 31, 2006.

 

***Cash Flows from Operating Activities***

 

**Cash provided by operating activities was $57.6million for the three months ended March 31, 2006, compared to $59.5million for the same quarter in 2005. Cash provided by operating activitiesdecreased $1.9 million primarily due to decreased cash received from NorthernBorder Pipeline’s customers as a result of lower operating revenue during thequarter as discussed in this section under “Operating Results.”**

 

***Cash Flows from Investing Activities***

 

Cash used in investing activities was $9.9 million for the three monthsended March 31, 2006, compared to $4.7 million for the same quarter in 2005.Growth capital expenditures, which increased by $6.3 million, were partiallyoffset by lower maintenance capital expenditures of $1.1 million. Growthcapital expenditures for the three months ended March 31, 2006 included$6.7 million related to the Chicago Expansion Project. Northern Border Pipelineused operating cash flow and equity contributions from its partners to fund theChicago III Expansion Project.

 

***Cash Flows from Financing Activities***

 

Cash used in financing activities was $54.7 million for the threemonths ended March 31, 2006, compared to $49.1 million for the samequarter in 2005. Northern Border Pipeline received equity contributions fromits partners of $10.3 million during the three months ended March 31, 2006to fund approximately 50% of the Chicago III Expansion Project capital costs. Distributionsto partners, which are calculated using operating results from the precedingquarter, decreased $9.1 million during the three months ended March 31,2006 compared with the same period last year due to lower net income andincreased maintenance capital expenditures during the fourth quarter of 2005.

 

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The net change in Northern Border Pipeline’s long-term borrowings was arepayment of $20.0 million in the first quarter of 2006 compared with netborrowings of $5.0 million for the same quarter last year.

 

**Recent Accounting Pronouncements**

 

In December 2004, the FASB issued SFAS No. 123R, “Share-BasedPayment,” which requires companies to expense the fair value of share-basedpayments and includes changes related to the expense calculation forshare-based payments. Northern Plains adopted SFAS No. 123R as of January 1,2006, and will charge Northern Border Pipeline for its proportionate share ofthe expense recorded by Northern Plains. The impact of adopting SFAS No. 123Rdoes not have a material impact on Northern Border Pipeline’s results ofoperations or financial position.

 

**Results of Operations of Tuscarora GasTransmission Company**

 

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

 

***Overview***

 

Tuscarora is a Nevada general partnershipformed in 1993. Its general partners are TC Tuscarora Intermediate LimitedPartnership, a direct subsidiary of TC PipeLines, which holds a 49% generalpartner interest, Tuscarora Gas Pipeline Co., a wholly owned subsidiary ofSierra Pacific Resources, which holds a 50% general partner interest and TCPLTuscarora Ltd., an indirect wholly owned subsidiary of TransCanada, which holdsthe remaining 1% general partner interest in Tuscarora.

 

The management of Tuscarora is overseen by amanagement committee that determines the policies of, has authority over theaffairs of, and approves the actions of Tuscarora. The management committeeparticipates in the management of the construction, maintenance and operationof the Tuscarora pipeline system. Tuscarora owns a 240-mile, 20-inchdiameter, United States interstate pipelinesystem that originates at an interconnection point with facilities of GTN, a wholly-ownedsubsidiary of TransCanada, near Malin, Oregon and runs southeast throughnortheastern California and northwestern Nevada. The Tuscarora pipeline system terminates near Wadsworth, Nevada.Along its route, deliveries are made in Oregon, northern California andnorthwestern Nevada. Deliveries are also made directly to the local gasdistribution system of Sierra Pacific Power, a subsidiary of Sierra PacificResources.

 

The Tuscarora pipeline system was constructedin 1995 and was placed into service in December 1995. In January 2001,Tuscarora completed construction of the Hungry Valley lateral, a 14-mile,16-inch pipeline extension that serves as Tuscarora’s second connection intoReno, Nevada. On December 1, 2002, Tuscarora completed and placed intoservice another expansion of its pipeline system. The 2002 Tuscarora expansionconsisted of two compressor stations and an 11-mile pipeline extension from apoint near the previous terminus of the Tuscarora pipeline system near Reno,Nevada to Wadsworth, Nevada. The expansion increased Tuscarora’s contractedcapacity from 127 mmcfd to approximately 180 mmcfd. The new capacity iscontracted under long-term firm transportation contracts ranging from ten tofifteen years.

 

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

 

Tuscarora has firm transportation contracts for over 95% of itsavailable capacity, including contracts held by Sierra Pacific Power for 69% ofthe total available capacity, the majority of which expires on October 31,2017. As of March 31, 2006, the weighted-average contract life on theTuscarora pipeline system was approximately 12.2 years.

 

***Recent Developments***

 

*Cost and Revenue Study –*Inaccordance with a letter agreement executed on September 25, 2001 with thePublic Utilities Commission of Nevada (PUCN), Tuscarora had an obligation tofile a cost and revenue study with the FERC, within a reasonable timeframefollowing the third anniversary of the in-service date of its 2002 expansion

 

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project. The project was placed into service on December 1, 2002. Asa result of that requirement, Tuscarora and the PUCN entered into settlementdiscussions with respect to a potential rate adjustment. On April 26, 2006the PUCN approved a settlement with Tuscarora. The settlement results in a firmtransportation rate of $0.40/decatherm per day (dth-day) beginning June 1,2006. This is a 17% reduction to the current rate of $0.4811/dth-day, orapproximately $5 million reduction in Tuscarora’s annual revenues. In addition,the settlement results in a rate protest moratorium of 48 months to June 1,2010, including a moratorium of rates protests related to expansion projectswhere Tuscarora proposes to price the expansion at the settlement rate. Thereis no requirement to file a cost and revenue study or rate case at the end ofthe moratorium period. The settlement also terminates the September 2001requirement for Tuscarora to file a cost and revenue study. Tuscarora hasoffered all of its firm shippers the opportunity to participate in thesettlement. Following their responses, the settlement will be filed with theFERC for approval.

 

***Critical Accounting Policies***

 

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

 

***Results of Operations***

 

The following tables set out summarized financial information forTuscarora for the three months ended March 31, 2006 and 2005 and as at March 31,2006 and December 31, 2005. Amounts discussed represent 100% of theoperations of Tuscarora, in which the Partnership has held a 49% interest sinceSeptember 1, 2000.

 

**Tuscarora Income Statement**

 
| **(unaudited)**           | ** ** | **Three months ended  March 31** | ** ** |
|---------------------------|------------|---------------------------------------|------------|
| **(millions of dollars)** | ** ** | **2006**                              | ** ** | **2005** | ** ** |
| Revenues                  | ** ** | **8.3**                               |       | 8.3 |   |
| Costs and expenses        | ** ** | **(1.2**                              | **)**      | (1.1 | ) |
| Depreciation              | ** ** | **(1.6**                              | **)**      | (1.5 | ) |
| Financial charges         | ** ** | **(1.4**                              | **)**      | (1.5 | ) |
| Other income              | ** ** | **0.1**                               |       | — |   |
| Net income                | ** ** | **4.2**                               |       | 4.2 |   |

 

**Tuscarora Balance Sheet**

 
| **(millions of dollars)**                 | ** ** | **March 31  2006** | ** ** | **December 31  2005** | ** ** |
|-------------------------------------------|------------|-------------------------|------------|----------------------------|------------|
| ** **                                | ** ** | **(unaudited)**         | ** ** | ** **                 | ** ** |
| **Assets**                                | ** ** | ** **              | ** ** | ** **                 | ** ** |
| Cash and cash equivalents                 | ** ** | **6.4**                 |       | 3.8                        |       |
| Other current assets                      | ** ** | **3.0**                 |       | 3.0                        |       |
| Plant, property and equipment, net        | ** ** | **130.2**               |       | 131.6                      |       |
| Other assets                              | ** ** | **1.4**                 |       | 1.4                        |       |
|                                      | ** ** | **141.0**               |       | 139.8                      |       |
| **Liabilities and Partners’ Equity** | ** ** | ** **              | ** ** | ** **                 | ** ** |
| Current liabilities                       | ** ** | **8.2**                 |       | 6.8                        |       |
| Long-term debt                            | ** ** | **71.1**                |       | 71.1                       |       |
| Partners’ equity                     |       |                    |       |                       |       |
| Partners’  capital                   | ** ** | **61.6**                |       | 61.8                       |       |
| Accumulated  other comprehensive income   | ** ** | **0.1**                 |       | 0.1                        |       |
|                                      | ** ** | **141.0**               |       | 139.8                      |       |

 

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***Operating Results***

 

Net income remained flat at $4.2 million forthe three months ended March 31, 2006, compared with the same period lastyear.

 

Revenues earned by Tuscarora remained flat at$8.3 million for the three months ended March 31, 2006, compared with thesame period last year.

 

Costs and expenses increased $0.1 million, or9%, to $1.2 million in the three months ended March 31, 2006, compared to$1.1 million for the same period last year due to higher operations andmaintenance expense. Depreciation increased $0.1 million, or 7%, to $1.6million in the three months ended March 31, 2006, compared to $1.5 millionfor the same period last year due to a higher gross plant balance. Financialcharges decreased $0.1 million, or 7%, to $1.4 million in the three monthsended March 31, 2006, compared to $1.5 million for the same period lastyear due to lower average debt outstanding.

 

**Liquidityand Capital Resources of Tuscarora Gas Transmission Company**

 

***Debt and Credit Facilities***

 

The following table summaries Tuscarora’s debt and credit facilitiesoutstanding as of March 31, 2006:

 
| ** **                          | ** ** | **Payments Due by Period** | ** ** |
|-------------------------------------|------------|----------------------------|------------|
| **(millions of dollars)**           | ** ** | **Total**                  | ** ** | **Less Than  1 Year** | ** ** | **1-3 Years** | ** ** | **4-5 Years** | ** ** | **After 5 Years** | ** ** |
|                                |       |                       |       |   |   |   |   |   |   |   |   |
| Series A Senior Notes due 2010 |       | 61.6                       |       | 3.6 |   | 6.7 |   | 51.3 |   | — |   |
| Series B Senior Notes due 2010 |       | 6.3                        |       | 0.4 |   | 0.9 |   | 5.0 |   | — |   |
| Series C Senior Notes due 2012 |       | 8.0                        |       | 0.8 |   | 1.7 |   | 1.6 |   | 3.9 |   |
| Operating Leases                    |       | 0.3                        |       | 0.1 |   | 0.2 |   | — |   | — |   |
| Commitments (1)                     |       | 1.1                        |       | 0.7 |   | 0.4 |   | — |   | — |   |
| Total                               |       | $                          | 77.3       |   | $ | 5.6 |   | $ | 9.9 |   | $ | 57.9 |   | $ | 3.9 |   |
|                                     |            |                            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(1)  Tuscarora’s commitments relate to a contract with a thirdparty for maintenance services on certain components of its pipeline-relatedequipment. The contract expires in November 2007.

 

Short-term liquidity needs will be met by operating cash flows. Long-termcapital needs may be met through the issuance of long-term indebtedness.

 

***Cash Flows from Operating Activities***

 

Cash provided by operating activities was $7.1 million for the threemonths ended March 31, 2006, compared to $7.4 million for the same quarterin 2005. Cash provided by operating activities decreased $0.3 million primarilydue to a reduction in working capital.

 

***Cash Flows from Investing Activities***

 

Cash used in investing activities was $0.1 million for the three monthsended March 31, 2006, compared to $0.2 million for the same quarter in2005. The decreased use of cash was primarily due to higher growth capitalexpenditures in 2005, which were related to the Barrick Lateral.

 

***Cash Flows from Financing Activities***

 

Cash used in financing activities was $4.4 million for the three monthsended March 31, 2006, compared to $4.2 million for the same quarter in2005. The increased use of cash was due to higher cash distributions paid toTuscarora’s partners in 2006.

 

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**Sierra Pacific Resources**

 

**Sierra Pacific Power, a wholly owned subsidiary of SierraPacific Resources, is Tuscarora’s largest shipper with approximately 69% of thetotal available capacity through 2017. Sierra Pacific Power, along with NevadaPower Company, (together, the Utilities) have been involved in Enron PowerMarketing Inc.’s (Enron’s) bankruptcy proceedings, including a lawsuit filed byEnron against the Utilities asserting claims for termination payments Enronclaimed it was owed under purchased power contracts with the Utilities.**

 

**On February 1, 2006, the Utilities completed thesettlement of long-term, ongoing litigation involving more than $300 million interminated contracts between Enron and the Utilities in accordance with theterms of the Settlement Agreement, entered into as of November 15, 2005among the Utilities and Enron (the “Settlement Agreement”). As part of thesettlement, the Utilities were granted an allowed, general unsecured claim(Unsecured Claim) from Enron in the aggregate amount of $126.5 million. TheUtilities expect to realize no less than 30% of the face value of the UnsecuredClaim. In addition, the Utilities paid Enron an aggregate amount of $129million to settle Enron’s claim of more than $300 million for payments oncontracts Enron terminated in 2002. The Utilities funded the terminationpayment amounts through available cash resources. Approximately $63.6 millionheld in escrow pursuant to the terms of a stipulation between Enron and theUtilities has been returned to the Utilities. This would result in theUtilities’ net payment to be no more than $30 million.**

 

**Sierra Pacific Power remains current on its shippingcontracts with Tuscarora.**

 

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

 

**TCPipeLines, LP**

 

**TC PipeLines may be exposed to marketrisk through changes in interest rates. The Partnership does not have anymaterial foreign exchange risks. TC PipeLines’ interest rate exposure resultsfrom its Revolving Credit Facility, which is subject to variability in LIBORinterest rates. At March 31, 2006, TC PipeLines had $13.5 millionoutstanding on its Revolving Credit Facility. If LIBOR interest rates changedby one percent compared to the rates in effect at March 31, 2006, therewould be no material change to TC PipeLines’ interest rate exposure. Thisamount has been determined by considering the impact of the hypotheticalinterest rates on variable rate borrowings outstanding as of March 31,2006.**

 

The Partnership is also influenced by the same factors that influenceNorthern Border Pipeline and Tuscarora. Neither Northern Border Pipeline norTuscarora owns any of the natural gas it transports, therefore, neither assumesany of the related natural gas commodity price risk.

 

Northern Border Pipeline utilizes both fixed- and variable-rate debtand is exposed to market risk due to the floating interest rates on its creditfacility. Northern Border Pipeline regularly assesses the impact of interestrate fluctuations on future cash flows and evaluate hedging opportunities tomitigate its interest rate risk.

 

Northern Border Pipeline maintains a significant portion of its debt atfixed rates to reduce its sensitivity to interest rate fluctuations andutilizes interest rate swap agreements to convert fixed-rate debt tovariable-rate debt to manage interest expense. As of March 31, 2006, 99%of Northern Border Pipeline’s outstanding debt was at fixed rates and therewere no interest rate swap agreements outstanding.

 

If interest rates hypothetically increased 1% on Northern BorderPipeline’s variable-rate borrowings outstanding at March 31, 2006, its interestexpense would increase and 2006 projected net income would decrease byapproximately $0.1 million.

 

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**PART I.FINANCIAL INFORMATION (Concluded)**

**ITEM 4. CONTROLSAND PROCEDURES**

 

**TCPipeLines, LP**

 

**Evaluation of disclosure controls andprocedures.**

 

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

 

There were no changes in the Partnership’s internal control overfinancial reporting during the most recent fiscal quarter that have materiallyaffected, or are reasonably likely to materially affect, the Partnership’sinternal control over financial reporting.

 

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**PART II.OTHER INFORMATION**

**ITEM 1A. RISKFACTORS**

 

**TCPipeLines, LP**

 

The following risk factor was disclosed in the Partnership’s annualreport on Form 10-K for the year ended December 31, 2005, and ishereby removed as a result of the close of the Partnership’s acquisition of anadditional 20% general partnership interest in Northern Border Pipeline.

 

***We may be unable to complete the transaction toacquire an additional 20% general partnership interest in Northern BorderPipeline from Northern Border Partners.***

 

On February 14,2006, we entered into a partnership interest purchase and sale agreement datedas of December 31, 2005 with Northern Border Pipeline to acquire anadditional 20% partnership interest in Northern Border Pipeline. The purchaseand sale agreement contains customary and other closing conditions that, if notsatisfied or waived, would result in the sale not occurring, including: continuedaccuracy of the representations and warranties contained in the agreement;performance by each party of its obligations under the purchase and saleagreement; consummation of ONEOK’s purchase of Northwest Border fromTransCanada; consummation of the acquisition of certain ONEOK business segmentsby Northern Border Partners; and the absence of any decree, order, injunctionor law that prohibits, restricts or substantially delays the transaction ormakes the transaction unlawful. In addition, on March 2, 2006, a holder oflimited partnership units of Northern Border Partners filed a class actionand derivative complaint on behalf of a putative class of all holders oflimited partnership units against Northern Border Partners, ONEOK, NorthernPlains, and related entities involved in the Transactions, which, among otherthings, seeks to enjoin the Transactions or to rescind the Transactions if theTransactions are completed prior to entry of a final judgment in the case.

 

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**PART II.OTHER INFORMATION (Concluded)**

**ITEM 6. EXHIBITS**

 

**TCPipeLines, LP**

 

**Exhibits**

 
| **No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|---------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.1    |       | First Amended and Restated General  Partnership Agreement of Northern Border Pipeline Company dated as of April 6,  2006 by and between Northern Border Intermediate Limited Partnership and TC  Pipelines Intermediate Limited Partnership. (Incorporated by reference to Exhibit 3.1  to Northern Border Pipeline Company’s Form 8-K filed April 12, 2006  (File No. 333-87753)).                                                        |
|    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.2    |       | Consent and Amendment to Operating  Agreement dated as of April 6, 2006 by and between Northern Border  Pipeline Company and Northern Plains Natural Gas Company, LLC. (Incorporated  by reference to Exhibit 10.1 to Northern Border Pipeline Company’s Form 8-K  filed April 12, 2006 (File No. 333-87753)).                                                                                                                             |
|    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.3    |       | Operating Agreement dated as of April 6,  2006 by and between Northern Border Pipeline Company and TransCan Northwest  Border Ltd. (Incorporated by reference to Exhibit 10.2 to Northern  Border Pipeline Company’s Form 8-K filed April 12, 2006 (File No. 333-87753)).                                                                                                                                                                  |
|    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.4    |       | Transaction Fee Agreement dated as of April 6,  2006 by and between TC PipeLines, LP and TransCan Northwest Border Ltd.                                                                                                                                                                                                                                                                                                                                             |
|    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.5    |       | Credit Agreement dated as of March 31,  2006 by and among TC PipeLines, LP, Citigroup Global Markets Inc. and UBS  Loan Finance LLC (“UBS”), as joint lead arrangers and joint book managers,  Citicorp North America, Inc., as administrative agent and a lender, UBS,  as syndication agent and a lender, Mizuho Corporate Bank, Ltd. and Bank of  Tokyo-Mitsubishi UFJ., as co-documentation agents and lenders, and SunTrust  Bank, as a lender. |
|    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.6    |       | Sixth Amendment to Credit Agreement dated  as of August 22, 2000 by and among TC PipeLines, LP, the Lenders party  thereto and JPMorgan Chase Bank, National Association, as agent, dated as of March 31,  2006.                                                                                                                                                                                                                                               |
|    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 31.1    |       | Certification of President and Chief  Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of  2002.                                                                                                                                                                                                                                                                                                                                                 |
|    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 31.2    |       | Certification of Chief Financial Officer  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                |
|    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 32.1    |       | Certification of President and Chief  Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of  2002.                                                                                                                                                                                                                                                                                                                                                 |
|    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 32.2    |       | Certification of Chief Financial Officer  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                |

 

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