**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

** **

**ý QUARTERLY REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

** **

**For the quarterly period ended March 31, 2005**

** **

**or**

** **

**o TRANSITION REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

** **

**For the Transition periodfrom              to            **

** **

**Commission File Number:  000-26091**

** **

**TC PipeLines, LP**

**(Exactname of registrant as specified 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)**

 

**Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.**

**Yes **ý       No  o

 

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

Yes  ý       No  o

 

As of May 9, 2005, therewere 17,500,000 of the registrant’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, 2005 and 2004                       |   |
|        | Statement of  Comprehensive Income – Three months ended March 31, 2005 and 2004         |   |
|        | Balance Sheet  – March 31, 2005 and December 31, 2004                                   |   |
|        | Statement of Cash Flows – Three  months ended March 31, 2005 and 2004                   |   |
|        | Notes to  Condensed Financial Statements                                                     |   |
|        |                                                                                         |   |
| ITEM  2.    | Management’s  Discussions and Analysis of Financial Condition and Results of Operations |   |
|        |                                                                                         |   |
|        | Results of  Operations of TC PipeLines, LP                                                   |   |
|        | Liquidity  and Capital Resources of TC PipeLines, LP                                         |   |
|        | Results  of Operations of Northern Border Pipeline Company                                   |   |
|        | Liquidity  and Capital Resources of Northern Border Pipeline Company                         |   |
|        | Results  of Operations of Tuscarora Gas Transmission Company                                 |   |
|        | Liquidity  and Capital Resources of Tuscarora Gas Transmission Company                       |   |
|        |                                                                                         |   |
| ITEM  3.    | Quantitative  and Qualitative Disclosures About Market Risk                                  |   |
|        |                                                                                         |   |
| ITEM 4.     | Controls and  Procedures                                                                     |   |
|        |                                                                                         |   |
| **PART II** | **OTHER INFORMATION**                                                                        |   |
|        |                                                                                         |   |
| ITEM 5.     | Other Information                                                                            |   |
|        |                                                                                         |   |
| ITEM  6.    | Exhibits                                                                                     |   |

 

**All amounts are stated in UnitedStates dollars unless otherwise indicated.**

 

2

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**PART I. FINANCIAL INFORMATION**

**ITEM 1. FINANCIAL STATEMENTS**

 

**TCPipeLines, LP**

 

**Statement of Income**

 
| ** **                                                 | ** ** | **Three months ended** | ** ** |
|------------------------------------------------------------|------------|------------------------|------------|
| **(unaudited)**                                            | ** ** | **March 31**           | ** ** |
| **(millions of dollars except per  unit amounts)**         | ** ** | **2005**               | ** ** | **2004** | ** ** |
| Equity income  from investment in Northern Border Pipeline | ** ** | **12.2**               | ** ** | 12.5 |   |
| Equity income  from investment in Tuscarora                | ** ** | **2.0**                | ** ** | 1.8 |   |
| General and  administrative expenses                       | ** ** | **(0.5**               | **)**      | (0.5 | ) |
| Financial  charges and other                               | ** ** | **(0.3**               | **)**      | (0.1 | ) |
| **Net  income**                                            | ** ** | **13.4**               | ** ** | 13.7 |   |
|                                                       |       |                   |       |   |   |
| **Net  income allocation**                                 |       |                   |       |   |   |
| Common units                                               | ** ** | **12.7**               |       | 12.4 |   |
| Subordinated  units                                        | ** ** | **—**             |       | 0.7 |   |
| General partner                                            | ** ** | **0.7**                |       | 0.6 |   |
| ** **                                                 |       | **13.4**               |       | 13.7 |   |
| **Net  income per unit**                                   | ** ** | **$**                  | **0.72**   |   | $ | 0.75 |   |
|                                                       |       |                   |       |   |   |   |   |
| **Units  outstanding (millions)**                          | ** ** | **17.5**               |       | 17.5 |   |

 

**Statementof Comprehensive Income**

 
| ** **                                                               | ** ** | **Three months ended** | ** ** |
|--------------------------------------------------------------------------|------------|------------------------|------------|
| **(unaudited)**                                                          | ** ** | **March 31**           | ** ** |
| **(millions of dollars)**                                                | ** ** | **2005**               | ** ** | **2004** | ** ** |
| Net income                                                               | ** ** | **13.4**               |       | 13.7 |   |
| Other  comprehensive income                                              |       |                   |       |   |   |
| Change  associated with current period hedging transactions of investees | ** ** | **(0.1**               | **)**      | (0.1 | ) |
| **Total  comprehensive income**                                          | ** ** | **13.3**               |       | 13.6 |   |

 

See accompanying notes to the condensed financialstatements.

 

3

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**BalanceSheet**

 
| ** **                                 | ** **   | **March 31,**   | ** **   | **December 31,** | ** **   |
|--------------------------------------------|--------------|-----------------|--------------|------------------|--------------|
| **(millions of dollars)**                  | ** **   | **2005**        | ** **   | **2004**         | ** **   |
| ** **                                 | *** *** | **(unaudited)** | *** *** | **(audited)**    | *** *** |
| **Assets**                                 |         |            |         |             |         |
| Current assets                             |         |            |         |             |         |
| Cash                                       | ** **   | **2.6**         |         | 2.5              |         |
| Investment in  Northern Border Pipeline    | ** **   | **286.0**       |         | 290.1            |         |
| Investment in  Tuscarora                   | ** **   | **39.4**        |         | 39.5             |         |
| ** **                                 |         | **328.0**       |         | 332.1            |         |
| **Liabilities  and Partners’ Equity** |         |            |         |             |         |
| Current  liabilities                       |         |            |         |             |         |
| Accrued  liabilities                       | ** **   | **0.5**         |         | 0.7              |         |
| Current portion  of long-term debt         | ** **   | **30.0**        |         | 6.5              |         |
| ** **                                 |         | **30.5**        |         | 7.2              |         |
| Long-term debt                             | ** **   | **—**      |         | 30.0             |         |
|                                       | ** **   | ** **      |         |             |         |
| Partners’ equity                      |         |            |         |             |         |
| Common units                               | ** **   | **290.0**       |         | 287.4            |         |
| General partner                            | ** **   | **6.4**         |         | 6.3              |         |
| Other  comprehensive income                | ** **   | **1.1**         |         | 1.2              |         |
| ** **                                 |         | **297.5**       |         | 294.9            |         |
| ** **                                 |         | **328.0**       |         | 332.1            |         |

 

**Statement of Cash Flows**

 
| **(unaudited)**                                     | ** ** | **Three months ended March 31,** | ** ** |
|-----------------------------------------------------|------------|----------------------------------|------------|
| **(millions of dollars)**                           | ** ** | **2005**                         | ** ** | **2004** | ** ** |
| **Cash  Generated From Operations**                 |       |                             |       |   |   |
| Net income                                          | ** ** | **13.4**                         |       | 13.7 |   |
| Add/(deduct):                                       |       |                             |       |   |   |
| Distributions  received in excess of equity income  | ** ** | **—**                       |       | (0.4 | ) |
| Decrease /  (increase) in operating working capital | ** ** | **(0.2**                         | **)**      | 0.1 |   |
| ** **                                          |       | **13.2**                         | ** ** | 13.4 |   |
| **Investing  Activities**                           |       |                             | ** ** |   |   |
| Return of  capital from Northern Border Pipeline    | ** ** | **4.0**                          | ** ** | 2.0 |   |
| Return of capital  from Tuscarora                   | ** ** | **0.1**                          | ** ** | — |   |
| Investment in  Northern Border Pipeline             | ** ** | **—**                       | ** ** | (19.5 | ) |
| ** **                                          |       | **4.1**                          | ** ** | (17.5 | ) |
| **Financing  Activities**                           |       |                             | ** ** |   |   |
| Distributions  paid                                 | ** ** | **(10.7**                        | **)**      | (10.1 | ) |
| Long-term debt  issued                              | ** ** | **—**                       | ** ** | 9.0 |   |
| Long-term debt  repaid                              | ** ** | **(6.5**                         | **)**      | — |   |
| ** **                                          |       | **(17.2**                        | **)**      | (1.1 | ) |
| **Increase  / (decrease) in cash**                  | ** ** | **0.1**                          |       | (5.2 | ) |
| **Cash,  beginning of period**                      | ** ** | **2.5**                          |       | 7.5 |   |
| **Cash,  end of period**                            | ** ** | **2.6**                          |       | 2.3 |   |

 

See accompanying notes tothe condensed financial statements.

 

4

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**TC PipeLines, LP**

 

**Notes to Condensed FinancialStatements**

**(unaudited)**

 

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

 

TC PipeLines, LP, and itssubsidiary limited partnerships, TC PipeLines Intermediate Limited Partnershipand TC Tuscarora Intermediate Limited Partnership, all Delaware limitedpartnerships, are collectively referred to herein as TC PipeLines or thePartnership.  The Partnership was formedby TransCanada PipeLines Limited, a subsidiary of TransCanada Corporation(collectively referred herein as TransCanada), to acquire, own and participatein the management of United States-based pipeline assets.  The Partnership commenced operations on May28, 1999.

 

The financial statements have been prepared bymanagement in accordance with U.S. generally accepted accounting principles(U.S. GAAP).  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. Amounts are stated in United States dollars.

 

Since a determination of many assets, liabilities,revenues and expenses is dependent upon future events, the preparation of thesefinancial statements requires the use of estimates and assumptions which havebeen made using careful judgment.  In theopinion of management, these financial statements have been properly preparedwithin reasonable limits of materiality and include all adjustments (consistingof normal recurring accruals) necessary to present fairly the results ofoperations for the three months ended March 31, 2005 and 2004, the financialposition as at March 31, 2005 and December 31, 2004 and cash flows for thethree months ended March 31, 2005 and 2004.

 

The results of operations for the three months endedMarch 31, 2005 and 2004 are not necessarily indicative of the results that maybe expected for a full fiscal year.  Theinterim financial statements should be read in conjunction with the Partnership’sfinancial statements and notes included in TC PipeLines’ Annual Report on Form10-K for the year ended December 31, 2004.

 

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

 

The Partnership owns a30% general partner interest in Northern Border Pipeline, a partnership whichowns a 1,249-mile United States interstate pipeline system that transportsnatural gas from the Montana-Saskatchewan border to markets in the midwesternUnited States.  The remaining 70%partnership interest in Northern Border Pipeline is held by Northern BorderPartners, L.P. (Northern Border Partners), a publicly traded limitedpartnership.  The 2% general partnershipinterest in Northern Border Partners is controlled by affiliates of ONEOK, Inc.(ONEOK), which hold a 1.65% general partner interest, and TransCanada, parentof TC PipeLines’ general partner, which holds the remaining 0.35% generalpartner interest.  The Northern BorderPipeline system is operated by Northern Plains Natural Gas Company (NorthernPlains), a wholly owned subsidiary of ONEOK. Northern Border Pipeline is regulated by the Federal Energy RegulatoryCommission (FERC).

 

The Partnership uses the equity method of accountingfor its investment in Northern Border Pipeline. TC PipeLines’ equity income for the three months ended March 31, 2005and 2004 includes 30% of the net income of Northern Border Pipeline for thesame periods.  There were noundistributed earnings from Northern Border Pipeline as at March 31, 2005 andDecember 31, 2004.

** **

**The following table sets out summarizedfinancial information representing 100% of the operations of Northern BorderPipeline for the three months ended March 31, 2005 and 2004 and as at March 31,2005 and December 31, 2004.  TC PipeLineshas held its general partner interest since May 28, 1999.**

 

5

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**NorthernBorder Pipeline Income Statement**

 
| **(unaudited)**           | ** ** | **Three months ended March 31,** | ** ** |
|---------------------------|------------|---------------------------------------|------------|
| **(millions of dollars)** | ** ** | **2005**                              | ** ** | **2004** | ** ** |
| Revenues                  | ** ** | **82.8**                              |       | 83.3 |   |
| Costs and  expenses       | ** ** | **(17.4**                             | **)**      | (17.0 | ) |
| Depreciation              | ** ** | **(14.4**                             | **)**      | (14.5 | ) |
| Financial  charges        | ** ** | **(10.6**                             | **)**      | (10.2 | ) |
| Other income              | ** ** | **0.2**                               |       | 0.1 |   |
| Net income                |       | **40.6**                              |       | 41.7 |   |

 

Northern BorderPipeline has amortized $0.4 million for each of the three months ended March31, 2005 and 2004, respectively related to terminated interest rate swapagreements as a reduction to financial charges from accumulated other income.

 

**NorthernBorder Pipeline Balance Sheet**

 
| ** **                                 | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| **(millions of dollars)**                  | ** ** | **2005**           | ** ** | **2004**              | ** ** |
| ** **                                 | ** ** | **(unaudited)**    | ** ** | **(audited)**         | ** ** |
| **Assets**                                 |       |               |       |                  |       |
| Cash and cash  equivalents                 | ** ** | **26.1**           |       | 20.3                  |       |
| Other current  assets                      | ** ** | **37.0**           |       | 39.0                  |       |
| Plant, property  and equipment, net        | ** ** | **1,534.3**        |       | 1,543.8               |       |
| Other assets                               | ** ** | **21.3**           |       | 20.2                  |       |
| ** **                                 |       | **1,618.7**        |       | 1,623.3               |       |
| **Liabilities  and Partners’ Equity** |       |               |       |                  |       |
| Current  liabilities                       | ** ** | **57.6**           |       | 47.8                  |       |
| Reserves and  deferred credits             | ** ** | **4.5**            |       | 4.5                   |       |
| Long-term debt                             | ** ** | **603.3**          |       | 603.9                 |       |
| Partners’ equity                      |       |               |       |                  |       |
| Partners’  capital                    | ** ** | **949.9**          |       | 963.3                 |       |
| Accumulated  other comprehensive income    | ** ** | **3.4**            |       | 3.8                   |       |
| ** **                                 |       | **1,618.7**        |       | 1,623.3               |       |

 

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

 

The Partnership owns a49% general partner interest in Tuscarora, a general partnership which owns a240-mile United States interstate pipeline system that transports natural gasfrom Oregon, where it interconnects to TransCanada’s Gas Transmission NorthwestCorporation system (GTN), to northern Nevada. The remaining general partner interests in Tuscarora are held 50% bySierra Pacific Resources and 1% by TransCanada. The Tuscarora pipeline system is operated by Tuscarora Gas OperatingCompany, a wholly owned subsidiary of Sierra Pacific Resources.  Sierra Pacific Power Company (Sierra PacificPower) a wholly-owned subsidiary of Sierra Pacific Resources is Tuscarora’slargest shipper, accounting for approximately 69% of total available capacitythrough 2017.  On September 1, 2000, thePartnership acquired its interest in Tuscarora from a subsidiary ofTransCanada.  As a result of theacquisition allocation, an annual amortization of $0.4 million has beenincluded in the Partnership’s equity income from Tuscarora.  The amortization period ends in 2025.  Tuscarora is regulated by the FERC.

 

The Partnership uses theequity method of accounting for its investment in Tuscarora.  TC PipeLines’ equity income for the threemonths ended March 31, 2005 and 2004 includes 49% of the net income ofTuscarora for the same periods.  Therewere no undistributed earnings from Tuscarora as at March 31, 2005 and December31, 2004.  

 

6

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The following table setsout summarized financial information representing 100% of the operations ofTuscarora for the three months ended March 31, 2005 and 2004 and as at March31, 2005 and December 31, 2004.

**TC PipeLines has held its generalpartner interest since September 1, 2000.**

 

**Tuscarora Income Statement**

 
| **(unaudited)**           | ** ** | **Three months ended March 31,** | ** ** |
|---------------------------|------------|----------------------------------|------------|
| **(millions of dollars)** | ** ** | **2005**                         | ** ** | **2004** | ** ** |
| Revenues                  | ** ** | **8.3**                          |       | 8.3 |   |
| Costs and  expenses       | ** ** | **(1.1**                         | **)**      | (1.2 | ) |
| Depreciation              | ** ** | **(1.5**                         | **)**      | (1.6 | ) |
| Financial  charges        | ** ** | **(1.5**                         | **)**      | (1.5 | ) |
| Net income                | ** ** | **4.2**                          |       | 4.0 |   |

 

**Tuscarora Balance Sheet**

 
| ** **                                 | ** ** | **March  31,**  | ** ** | **December  31,** | ** ** |
|--------------------------------------------|------------|-----------------|------------|-------------------|------------|
| **(millions  of dollars)**                 | ** ** | **2005**        | ** ** | **2004**          | ** ** |
| ** **                                 | ** ** | **(unaudited)** | ** ** | **(audited)**     | ** ** |
| **Assets**                                 |       |            |       |              |       |
| Cash and cash  equivalents                 | ** ** | **6.7**         |       | 3.6               |       |
| Other current  assets                      | ** ** | **3.0**         |       | 3.0               |       |
| Plant, property  and equipment, net        | ** ** | **135.5**       |       | 136.9             |       |
| Other assets                               | ** ** | **1.4**         |       | 1.4               |       |
| ** **                                 |       | **146.6**       |       | 144.9             |       |
| **Liabilities  and Partners’ Equity** |       |            |       |              |       |
| Current  liabilities                       | ** ** | **8.5**         |       | 6.9               |       |
| Long-term debt                             | ** ** | **75.9**        |       | 75.9              |       |
| Partners’ equity                      |       |            |       |              |       |
| Partners’  capital                    | ** ** | **62.1**        |       | 62.0              |       |
| Accumulated  other comprehensive income    | ** ** | **0.1**         |       | 0.1               |       |
| ** **                                 |       | **146.6**       |       | 144.9             |       |

 

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

 

On May 28, 2003, thePartnership renewed its $40.0 million unsecured two-year revolving creditfacility (TransCanada Credit Facility) with TransCanada PipeLine USA Ltd., anaffiliate of the general partner.  TheTransCanada Credit Facility may bear interest, at the option of the Partnershipat a one-, two-, three-, or six-month London Interbank Offered Rate (LIBOR)plus 1.25%.  The purpose of theTransCanada Credit Facility is to provide borrowings to fund capitalexpenditures, to fund capital contributions to Northern Border Pipeline,Tuscarora and any other entity in which the Partnership directly or indirectlyacquires an interest, to fund working capital and for other general businesspurposes, including temporary funding of cash distributions to unitholders andthe general partner, if necessary.  OnFebruary 22, 2005, the Partnership repaid in full its $6.5 million outstandingbalance on the TransCanada Credit Facility. At March 31, 2005 and December 31, 2004, the Partnership had nil and$6.5 million borrowings outstanding, respectively, under the TransCanada CreditFacility.  The interest rate on theTransCanada Credit Facility at December 31, 2004 was 3.75%.

 

On March 8, 2004 thePartnership renewed its $30.0 million unsecured credit facility (RevolvingCredit Facility) with Bank One, NA, as administrative agent.  Loans under the Revolving Credit Facility maybear interest, at the option of the Partnership, at a one-, two-, three-, orsix-month LIBOR plus 1.25% or at a floating rate based on the higher of thefederal funds effective rate plus 0.5% and the prime rate.  The Revolving Credit Facility matures onFebruary 28, 2006.  Amounts borrowed maybe repaid in part or in full prior to that time without penalty.  The Revolving Credit Facility may be used tofund capital expenditures, to fund capital contributions to Northern Border 

 

7

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Pipeline, Tuscarora and any other entity in which thePartnership directly or indirectly acquires an interest, to fund workingcapital and for other general business purposes, including temporary funding ofcash distributions to unitholders and the general partner, if necessary.  The Revolving Credit Facility requires thatthe Partnership’s total debt, as of the last day of any fiscal quarter, to beno more than the lesser of (i) 35% of capitalization as at the last day of suchfiscal quarter, or (ii) 2.5 times the consolidated adjusted EBITDA (net incomeplus interest expense, income taxes and depreciation and amortization) for theperiod consisting of such fiscal quarter and the three preceding fiscalquarters.  The Partnership had $30.0million outstanding under the Revolving Credit Facility at March 31, 2005 andDecember 31, 2004.  The interest rate onthe Revolving Credit Facility averaged 3.81% and 2.39% for March 31, 2005 and2004, respectively and at March 31, 2005 and December 31, 2004, the interestrate was 3.99% and 3.72%, respectively.

 

**Note 5    Net Income per Unit**

 

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

** **
| ** **                                            | ** ** | **Three months ended** | ** ** |
|-------------------------------------------------------|------------|------------------------|------------|
| **(unaudited)**                                       | ** ** | **March 31**           | ** ** |
| **(millions of dollars except per  unit amounts)**    | ** ** | **2005**               | ** ** | **2004** | ** ** |
| Net income                                            | ** ** | **13.4**               |       | 13.7 |   |
| Net income  allocated to general partner              |       |                   |       |   |   |
| General partner  interest                             | ** ** | **(0.2**               | **)**      | (0.3 | ) |
| Incentive  distribution income allocation             | ** ** | **(0.5**               | **)**      | (0.3 | ) |
| ** **                                            |       | **(0.7**               | **)**      | (0.6 | ) |
| Net income  allocable to units                        | ** ** | **12.7**               |       | 13.1 |   |
| Weighted average  units outstanding* (millions)* | ** ** | **17.5**               |       | 17.5 |   |
| Net income per  unit                                  | ** ** | **$**                  | **0.72**   |   | $ | 0.75 |   |
|                                                       |            |                        |            |  |  |  |  |

 

**Note 6    Distributions**

 

On April 19, 2005, theBoard of Directors of the general partner declared the Partnership’s 2005 firstquarter cash distribution.  The firstquarter cash distribution is payable on May 13, 2005 to unitholders of recordas of April 29, 2005.  The total cashdistribution of $10.7 million will be paid in the following manner: $10.0million to common unitholders (including $1.2 million to the general partner asholder of 2,035,106 common units), $0.5 million to the general partner asholder of the incentive distribution rights, and $0.2 million to the generalpartner in respect of its 2% general partner interest.

 

**Note 7    Subsequent Events**

 

Northern Border Pipelinedeclared a distribution of approximately $52.4 million on April 27, 2005.  The Partnership received its 30% share ($15.7million) on May 2, 2005.

 

Tuscarora declared adistribution of approximately $4.5 million on April 12, 2005.  The Partnership received its 49% share ($2.2million) on April 29, 2005.

 

8

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**ITEM2.  MANAGEMENT’S DISCUSSIONS AND RESULTSOF OPERATIONS**

 

**Cautionary Statement RegardingForward-Looking Information**

 

# **A number of statements made by TCPipeLines in this quarterly report are forward-looking and relate to, amongother things, anticipated financial performance, business prospects,strategies, market forces and commitments of TC PipeLines.  All forward-looking statements are based onthe Partnership’s beliefs as well as assumptions made by and informationcurrently available to the Partnership. The Partnership assumes no obligation to update any such forward-lookingstatements to reflect events or circumstances as occurring after the datehereof.  Words such as “anticipate”, “believe”,“estimate”, “expect”, “plan”, “intend”, “forecast”, and similar expressions,identify forward-looking statements. These statements reflect the Partnership’s current views with respect tofuture events and are subject to various risks, uncertainties and assumptionsincluding:**

 

·                                          the Partnership’s 30% general partnerinterest in Northern Border Pipeline and 49% general partner interest inTuscarora represent its only material assets. As a result, the Partnership is dependent upon Northern Border Pipelineand Tuscarora for all of its available cash;

 

·                                          majority control and operation ofNorthern Border Pipeline by affiliates of ONEOK and any further developments inthe Enron bankruptcy proceedings;

 

·                                          regulatory decisions, particularly thoseof the FERC;

 

·                                          the ability of Northern Border Pipelineto recontract its capacity at maximum transportation rates;

 

·                                          the failure of a shipper on either one ofthe pipelines in which the Partnership has an interest to perform its contractualobligations;

 

·                                          the ability of affiliates of SierraPacific Resources to continue to meet their contractual obligations toTuscarora;

 

·                                          the availability of Western Canadiannatural gas for import into the United States;

 

·                                          prevailing economic conditions,particularly conditions of the capital and equity markets;

 

# **and other risks discussed in thePartnership’s filings with the Securities and Exchange Commission (SEC),including the Partnership’s Annual Report on Form 10-K for the year endedDecember 31, 2004.  By its nature, suchforward-looking information is subject to various risks and uncertainties,which could cause TC PipeLines’ actual results and experience to differmaterially from the anticipated results or other expectations expressed in thisquarterly report.**

 

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

* *

*Asa result of the Partnership’s ownership interests in both Northern BorderPipeline and Tuscarora, the following discusses first the results of operationsand liquidity and capital resources of TC PipeLines, then those of each ofNorthern Border Pipeline and Tuscarora in their entirety.*

 

The following discussions of the financial condition and results ofoperations of the Partnership, Northern Border Pipeline and Tuscarora should beread in conjunction with the financial statements and notes thereto of thePartnership included elsewhere in this report (see Item 1.  Financial Statements).  For more detailed information regarding thebasis of presentation for the following financial information, see the notes tothe condensed financial statements of the Partnership.

 

***Overview***

 

TC PipeLines, LP wasformed in 1998 as a Delaware limited partnership to acquire, own andparticipate in the management of United States-based pipeline assets.  TC PipeLines, LP and its subsidiary limitedpartnerships, TC PipeLines Intermediate Limited Partnership and TC TuscaroraIntermediate Limited Partnership, are collectively referred to herein as “TCPipeLines” or “the Partnership.”  TCPipeLines GP, Inc., an indirect wholly owned subsidiary of TransCanadaPipelines Limited, which is a wholly owned subsidiary of TransCanada, is thegeneral 

 

9

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partner of thePartnership.  The Partnership owns a 30%general partner interest in Northern Border Pipeline and a 49% general partnerinterest in Tuscarora.

 

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

 

Northern Border Pipelineowns a 1,249-mile United States interstate pipeline system that transportsnatural gas from the Montanan-Saskatchewan border near Port of Morgan, Montanato natural gas markets in the midwestern United States.  The Partnership acquired its 30% interest inNorthern Border Pipeline from affiliates of its general partner.  The Partnership has one member and 30% of thevoting power of the Northern Border Pipeline management committee.

 

The remaining 70% generalpartner interest in Northern Border Pipeline is held by Northern BorderPartners, a publicly traded limited partnership.  The general partners of Northern BorderPartners are Northern Plains and Pan Border Gas Company (Pan Border), bothsubsidiaries of ONEOK, and Northwest Border Pipeline Company, a subsidiary ofTransCanada.  TransCanada has one memberand 12.25% of the voting power on the Northern Border Pipeline managementcommittee.  Northern Plains and PanBorder Gas collectively have two members and 57.75% of the voting power of theNorthern Border Pipeline management committee. Northern Plains also serves as the operator of the Northern Border Pipelinesystem.

** **

#### ***Investmentin Tuscarora Gas Transmission Company***

 

Tuscaroraowns a 240-mile United States interstate pipeline system that originates at aninterconnection point with facilities of GTN, a wholly-owned subsidiary ofTransCanada, near Malin, Oregon and runs southeast through northeasternCalifornia and northwestern Nevada.  ThePartnership owns a 49% general partner interest in Tuscarora.

 

The remaining general partnerinterest in Tuscarora is held 50% by Tuscarora Gas Pipeline Co., a wholly-ownedsubsidiary of Sierra Pacific Resources and 1% by TCPL Tuscarora Ltd., an indirectwholly owned subsidiary of TransCanada.

 

Tuscarora increased its contracted capacity from 127million cubic feet per day (mmcfd) to approximately 180 mmcfd in 2002 by completingan expansion of its pipeline system.  Theexpansion consisted of the two compressor stations and an 11-mile pipelineextension from a point near the previous terminus of the Tuscarora pipelinesystem near Reno, Nevada to Wadsworth, Nevada.

 

***CriticalAccounting Policy***

 

TC PipeLines accounts forits interests in both Northern Border Pipeline and Tuscarora using the equitymethod of accounting as detailed in notes 2 and 3 to the condensed financialstatements.  The equity method of accountingis appropriate where the investor does not control an investee, but rather isable to exercise significant influence over the operating and financialpolicies of an investee.  TC PipeLines isable to exercise significant influence over its investments in Northern BorderPipeline and Tuscarora as evidenced by its representation on their respectivemanagement committees.

 

The 30% general partnerinterest in Northern Border Pipeline and 49% general partner interest inTuscarora are currently the Partnership’s only material sources of income.  The Partnership’s results of operations areinfluenced by and reflect the same factors that influence the financial resultsof Northern Border Pipeline and Tuscarora, respectively.

 

**First Quarter 2005 Compared withFirst Quarter 2004**

 

Net income decreased $0.3million, or 2%, to $13.4 million in the first quarter of 2005, compared to$13.7 million for the same period in 2004. The decrease is primarily due to lower equity income from Northern BorderPipeline.

 

Equity income from thePartnership’s investment in Northern Border Pipeline decreased $0.3 million, or2%, to $12.2 million in the first quarter of 2005, compared to $12.5 millionfor the same period in 2004.  NorthernBorder Pipeline’s revenues were lower and costs and expenses higher in thefirst quarter of 2005 than compared to the same period in 2004.  The decrease in revenues is primarily due tothe leap year in 2004 which provided an additional day of transportationrevenue in 2004 as compared to 2005.  Theincrease in operations and maintenance expense is 

 

10

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primarily due toincreases in salary and benefit expenses. Equity income from the Partnership’s investment in Tuscarora increased$0.2 million, or 11%, to $2.0 million in the first quarter of 2005, compared to$1.8 million for the same period in 2004. Tuscarora’s revenues remained relatively flat and operating expensesdecreased primarily due to the renegotiation of lower rates for maintenancecontracts in 2005.

 

The Partnership recordedgeneral and administrative expenses of $0.5 million in each of the firstquarters of 2005 and 2004, respectively.

 

The Partnership recordedfinancial charges and other of $0.3 million and $0.1 million in the firstquarter of 2005 and 2004, respectively. This increase is primarily due to higher average debt balances.

 

**Liquidity and Capital Resourcesof TC PipeLines, LP**

 

***Debtand Credit Facilities***

 

TC PipeLines’ debt andcredit facilities outstanding at March 31, 2005 are as follows:

 
| ** **                 | ** ** | **Payments Due by Period** | ** ** |
|----------------------------|------------|----------------------------|------------|
| ** **                 | ** ** | ** **                 | ** ** | **Less Than 1** | ** ** | **Long-term** | ** ** |
| **(millions of dollars)**  | ** ** | **Total**                  | ** ** | **Year** | ** ** | **Portion** | ** ** |
|                       |       |                       |       |   |   |   |   |
| Revolving Credit  Facility |       | 30.0                       |       | 30.0 |   | — |   |
| Total                      |       | $                          | 30.0       |   | $ | 30.0 |   | $ | — |   |
|                            |            |                            |            |  |  |  |  |  |  |  |

 

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

 

The Partnership has madedistributions of Available Cash, as defined in the Partnership Agreement, inthe 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 specified cashdistribution thresholds.

 

After the distributionsdescribed above are met, additional Available Cash from Operating Surplus (asdefined in the Partnership Agreement) for that quarter will be distributedamong the unitholders and the general partner in the 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 thegeneral partner described above, other than in its capacity as a holder of 2,035,106units, that are in excess of its aggregate 2% general partner interest,represent the incentive distribution rights.

 

***2005First Quarter Cash Distribution***

 

On April 19, 2005, theBoard of Directors of the general partner declared the Partnership’s 2005 firstquarter cash distribution.  The firstquarter cash distribution is payable on May 13, 2005 to unitholders of recordas of April 29, 2005.  The total cashdistribution of $10.7 million will be paid in the following manner: $10.0million to common unitholders (including $1.2 million to the general partner asholder of 2,035,106 common units), $0.5 million to the general partner asholder of the incentive distribution rights, and $0.2 million to the generalpartner in respect of its 2% general partner interest.

 

11

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***CashFlows from Operating Activities***

 

Cash flows provided byoperating activities decreased $0.2 million, or 1%, to $13.2 million in thefirst quarter of 2005, compared to $13.4 million for the same period in 2004.  The decrease is primarily due to lower equityincome from Northern Border Pipeline in the first quarter of 2005 compared tothe same period in 2004.  In the firstquarter of 2005 and 2004, the Partnership received cash distributions of $16.2million and $14.5 million, respectively, from its equity investment in NorthernBorder Pipeline.  The cash distributionsreceived include $4.0 million and $2.0 million classified as return of capitalin the first quarter of 2005 and 2004, respectively.  The increase in cash distributions fromNorthern Border Pipeline is primarily due to higher fourth quarter cash flow in2004 relative to the same period in 2003. Distributions paid in the first quarter are based on the results of thefourth quarter of the previous year.  Theincrease in cash flow is primarily attributed to an increase in net income and partiallyoffset by an increase in capital expenditures in the fourth quarter of 2004 ascompared to the fourth quarter of 2003. The Partnership also received cash distributions of $2.1 million and$1.5 million, respectively, from its equity investment in Tuscarora.  The cash distributions received include $0.1million and nil classified as return of capital in the first quarter of 2005and 2004, respectively.

 

***CashFlows from Investing Activities***

 

Cash received (used) ininvesting activities was $4.1 million and $(17.5) million in the first quarterof 2005 and 2004, respectively.  ThePartnership made a $19.5 million investment in Northern Border Pipeline in thefirst quarter 2004.  The Partnershiprecorded $4.0 million as return of capital from Northern Border Pipeline in thefirst quarter of 2005 compared to $2.0 million for the same period in 2004.

 

***CashFlows from Financing Activities***

 

Cash flows used infinancing activities were $17.2 million in the first quarter of 2005, comparedto $1.1 million for the same period in 2004. The increase is due to the Partnership’s increase in quarterly cashdistribution from $0.55 per unit to $0.575 per unit and repayment of the Partnership’sshort-term debt under its TransCanada credit facility in the first quarter of2005.

 

In the first quarter of2005, the Partnership paid $10.7 million in cash distributions on February 14,2005 to unitholders of record as of January 31, 2005.  The total cash distribution of $10.7 millionwas paid in the following manner: $10.0 million to common unitholders(including $1.6 million to an affiliate of TransCanada as holder of 2,800,000common units and $1.6 million to the general partner as holder of 2,809,306common units), $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.  Thiscompares to $10.1 million that was paid in the first quarter of 2004.

 

On February 22, 2005, thePartnership repaid in full its $6.5 million outstanding balance on theTransCanada Credit Facility.  Theinterest rate on the TransCanada Credit Facility at December 31, 2004 was3.75%.

 

The Partnership had $30.0million outstanding under the Revolving Credit Facility at March 31, 2005 andDecember 31, 2004, respectively.  ThePartnership borrowed nil and $9.0 million on its Revolving Credit Facility inthe first quarter of 2005 and 2004, respectively.  The interest rate on the Revolving CreditFacility averaged 3.81% and 2.39% for March 31, 2005 and 2004, respectively andat March 31, 2005 and December 31, 2004, the interest rate was 3.99% and 3.72%,respectively.

 

***CapitalRequirements***

 

To the extent TCPipeLines has any capital requirements with respect to its investments inNorthern Border Pipeline and Tuscarora or makes acquisitions during theremainder of 2005, TC PipeLines expects to fund these requirements withoperating cash flows, debt and/or equity.

 

**Results of Operations of NorthernBorder Pipeline Company**

* *

*In thefollowing discussion of the results of Northern Border Pipeline, all amountsrepresent 100% of the operations of Northern Border Pipeline, in which thePartnership has held a 30% interest since May 28, 1999.*

 

The discussion andanalysis of Northern Border Pipeline’s financial condition and operations arebased on Northern Border Pipeline’s financial statements, which were preparedin accordance with U.S. GAAP.  

 

12

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***Overview***

 

For Northern BorderPipeline, there are several major business drivers as summarized in the “Overview,Results of Operations of Northern Border Pipeline Company”, included in TCPipeLines’ Annual Report on Form 10-K for the year ended December 31, 2004.

 

As previously disclosedin “Management’s Discussion and Analysis of Financial Condition and Results ofOperations — Results of Operations of Northern Border Pipeline Company -Overview” in TC PipeLines’ Annual Report Form on 10-K for the year endedDecember 31, 2004, Northern Border Pipeline had approximately 800 mmcfd or 28%of summer design capacity under contracts that expired or are due to expire byMay 31, 2005.  Most of this capacity isavailable from Port of Morgan, Montana to the Ventura, Iowa deliverypoint.  Northern Border Pipeline previouslydisclosed a possible reduction of $7 million to $14 million to 2005 net incomeand cash flow and that the impact could vary outside this range depending onactual natural gas basis differentials. As a result of contracting activity to date, Northern Border Pipelinenow advises that it believes a greater reduction is likely.

 

For the month of April,approximately 600 mmcfd of Northern Border Pipeline’s firm transportationcapacity was available for contracting. Northern Border Pipeline advises that it believes this firm capacity wasnot contracted for the month primarily due to the unusually high summer towinter price differentials causing greater than average natural gas storage injectionsfrom Western Canadian supply sources. The impact to Northern Border Pipeline’s revenues for the month of Aprilis estimated to be a reduction of approximately $6 million.

 

As of May 1, 2005,Northern Border Pipeline advised it has 340 mmcfd that remains available forcontracting in May.  Northern BorderPipeline advises that it believes that the greatest risk of unsold capacityexists during the second quarter but some weakness could continue through thebalance of the year based on weather conditions and mid-continent pricing.  Consequently, Northern Border Pipelineadvises that it now believes that the most likely range of impact on itsrevenues from unsold capacity in 2005 is $15 million to $28 million.

 

Due to the difficulty inpredicting all of the variables that can affect the marketability of NorthernBorder Pipeline’s capacity, this estimate is subject to change.

 

***CriticalAccounting Policies***

 

Certain amounts includedin or affecting Northern Border Pipeline’s financial statements and relatednote disclosures must be estimated, requiring Northern Border Pipeline to makecertain assumptions with respect to values or conditions that cannot be knownwith certainty at the time the financial statements are prepared.  The preparation of financial statements inconformity with U.S. GAAP requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of the financial statements andthe reported amounts of revenues and expenses during the reporting period.  Actual results could differ from thoseestimates.  Any effects on NorthernBorder Pipeline’s business, financial position or results of operationsresulting from revisions to these estimates are recorded in the period in whichthe facts that gave rise to the revision become known.

** **

**Northern Border Pipeline’s significant accounting policiesare summarized in Note 2 — Notes to Northern Border Pipeline’s FinancialStatements included in TC PipeLines’ Annual Report on Form 10-K for the yearended December 31, 2004.  Certain ofNorthern Border Pipeline’s accounting policies are of more significance in itsfinancial statement preparation process than others.**

** **

**Northern Border Pipeline’s accounting policies conform toStatement of Financial Accounting Standards (SFAS) No. 71, “Accounting for theEffects of Certain Types of Regulation”. Accordingly, certain assets that result from the regulated ratemakingprocess are recorded that would not be recorded by entities not accountingunder SFAS No. 71.  Northern BorderPipeline continually assesses whether the regulatory assets are probable offuture recovery by considering such factors as regulatory changes and theimpact of competition.  If future recoveryceases to be probable, Northern Border Pipeline would be required to write-offthe regulatory assets at that time.  AtMarch 31, 2005, Northern Border Pipeline has reflected regulatory assets of$12.1 million, which are being recovered, or are expected to be recovered fromits shippers over varying periods up to 44 years.**

** **

**NorthernBorder Pipeline’s long-lived assets are stated at original cost.  Northern Border Pipeline must use estimatesin determining the economic useful lives of those assets.  Useful lives are based on historicalexperience and are adjusted when changes in planned use, technological advancesor other factors show that a different life would be more appropriate.  The deprecation rate used for utilityproperty is an integral part of Northern Border Pipeline’s FERC tariff.  Any revisions to the estimated economicuseful lives of Northern Border Pipeline’s assets will change its deprecationand amortization expense prospectively For utility property, no retirement gain or loss is included in incomeexcept in the case of retirements or sales of entire regulated operatingunits.  The original cost of**

 

13

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**utilityproperty retired is charged to accumulated depreciation and amortization, netof salvage and cost of removal.**

 

**Northern Border Pipeline’s accounting for financialinstruments is in accordance with SFAS No. 133, “Accounting for DerivativeInstruments and Hedging Activities.” SFAS No. 133**requires that every derivative instrument be recorded onthe balance sheet as either an asset or liability measured at its fairvalue.  The statement requires thatchanges in the derivative’s fair value be recognized currently in earningsunless specific hedge accounting criteria are met.  Special accounting for qualifying hedgesallows a derivative’s gains and losses to offset related results of the hedgeditem in the income statement.  At March31, 2005, Northern Border Pipeline had no derivative financial instrumentsoutstanding.

 

***Resultsof Operations***

 

The following tables setout summarized financial information for Northern Border Pipeline for the threemonths ended March 31, 2005 and 2004 and as at March 31, 2005 and December 31,2004.  Amounts discussed represent 100%of the operations of Northern Border Pipeline, in which the Partnership hasheld a 30% interest since May 28, 1999.

 

**NorthernBorder Pipeline Income Statement**

 
| **(unaudited)**           | ** ** | **Three months ended March 31,** | ** ** |
|---------------------------|------------|----------------------------------|------------|
| **(millions of dollars)** | ** ** | **2005**                         | ** ** | **2004** | ** ** |
| Revenues                  | ** ** | **82.8**                         |       | 83.3 |   |
| Costs and  expenses       | ** ** | **(17.4**                        | **)**      | (17.0 | ) |
| Depreciation              | ** ** | **(14.4**                        | **)**      | (14.5 | ) |
| Financial  charges        | ** ** | **(10.6**                        | **)**      | (10.2 | ) |
| Other income              | ** ** | **0.2**                          |       | 0.1 |   |
| Net income                | ** ** | **40.6**                         |       | 41.7 |   |

 

**Northern Border Pipeline Balance Sheet**

 
| ** **                                 | ** ** | **March  31,**  | ** ** | **December  31,** | ** ** |
|--------------------------------------------|------------|-----------------|------------|-------------------|------------|
| **(millions  of dollars)**                 | ** ** | **2005**        | ** ** | **2004**          | ** ** |
| ** **                                 | ** ** | **(unaudited)** | ** ** | **(audited)**     | ** ** |
| **Assets**                                 |       |            |       |              |       |
| Cash and cash  equivalents                 | ** ** | **26.1**        |       | 20.3              |       |
| Other current  assets                      | ** ** | **37.0**        |       | 39.0              |       |
| Plant, property  and equipment, net        | ** ** | **1,534.3**     |       | 1,543.8           |       |
| Other assets                               | ** ** | **21.3**        |       | 20.2              |       |
| ** **                                 |       | **1,618.7**     |       | 1,623.3           |       |
| **Liabilities  and Partners’ Equity** |       |            |       |              |       |
| Current  liabilities                       | ** ** | **57.6**        |       | 47.8              |       |
| Reserves and  deferred credits             | ** ** | **4.5**         |       | 4.5               |       |
| Long-term debt                             | ** ** | **603.3**       |       | 603.9             |       |
| Partners’ equity                      |       |            |       |              |       |
| Partners’  capital                    | ** ** | **949.9**       |       | 963.3             |       |
| Accumulated  other comprehensive income    | ** ** | **3.4**         |       | 3.8               |       |
| ** **                                 |       | **1,618.7**     |       | 1,623.3           |       |

 

***FirstQuarter 2005 Compared with First Quarter 2004***

 

Net income decreased $1.1million, or 3% in the first quarter of 2005, to $40.6 million, compared to$41.7 million for the same period in 2004. This decrease is primarily due to lower operating revenues and increasesin operations and maintenance expenses.

 

Revenues decreased $0.5million, or 1% in the first quarter of 2005, to $82.8 million, compared to$83.3 million in the same period in 2004. The decrease is primarily a result of there being one less day oftransportation revenue in the first quarter of 2005 than in 2004 due to leapyear.

 

14

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Costs and expensesincreased $0.4 million in the first quarter of 2005, to $17.4 million, comparedto $17.0 million for the same period in 2004. Operations and maintenance expenses increased $0.5 million.  The increase is primarily due to increases insalary and benefit expenses.

 

Financial chargesincreased $0.4 million in the first quarter of 2005, to $10.6 million, comparedto $10.2 million for the same period in 2004 due to an increase in averageinterest rates partially offset by a decrease in average debt outstanding.

 

**Liquidity and Capital Resourcesof Northern Border Pipeline Company**

 

***Debtand Credit Facilities***

 

Northern Border Pipeline’sdebt and credit facilities outstanding at March 31, 2005 are as follows:

 
| ** **                                                           | ** ** | ** ** | ** ** | **Payments Due by Period** | ** ** |
|----------------------------------------------------------------------|------------|------------|------------|----------------------------|------------|
| ** **                                                           | ** ** | ** ** | ** ** | **Less Than 1**            | ** ** | **Long-term** | ** ** |
| **(thousands of dollars)**                                           | ** ** | **Total**  | ** ** | **Year**                   | ** ** | **portion** | ** ** |
|                                                                 |       |       |       |                       |       |   |   |
| $175 million  Pipeline Credit Agreement, average 3.32%, due 2005 (a) |       | 5,000      |       | 5,000                      |       | — |   |
| Senior Notes due  2007                                               |       | 150,000    |       | —                     |       | 150,000 |   |
| Senior Notes due  2009                                               |       | 200,000    |       | —                     |       | 200,000 |   |
| Senior Notes due  2021                                               |       | 250,000    |       | —                     |       | 250,000 |   |
| Total                                                                |       | $          | 605,000    |                       | $          | 5,000 |   | $ | 600,000 |   |
|                                                                      |            |            |            |                            |            |  |  |  |  |  |

 

----

(a)  Northern Border Pipeline is required to pay afacility fee of 0.125% on the principal commitment amount on its creditagreement.

 

Short-term liquidityneeds will be met by operating cash flows and through the Pipeline CreditAgreement or a similar facility.  NorthernBorder Pipeline advises that it has commenced discussions with financialinstitutions regarding replacement of the Pipeline Credit Agreement, whichexpires in May 2005, and expects to have a facility with similar terms andconditions in place prior to expiration. At May 6, 2005, Northern Border Pipeline has $32.0 million borrowedunder the Pipeline Credit Agreement. Long-term capital needs may be met through the ability to issuelong-term indebtedness.

 

***CashFlows from Operating Activities***

** **

**Cash flowsprovided by operating activities were $59.5 million in the first quarter of2005 as compared to $57.8 million for the same period in 2004.  The increase in cash flows from operatingactivities is primarily the result of an increase in accruals due to timing ofpayments.**

** **

***Cash Flows from Investing Activities***

 

Capital expenditures were$4.7 million for the first quarter of 2005 as compared to $0.3 million for thesame period in 2004.  The capitalexpenditures for 2005 and 2004 were primarily related to renewals andreplacements of existing facilities.

** **

**Total capital expenditures for 2005 are estimated to beapproximately $39.0 million, which includes approximately $14.0 million for theChicago III Expansion Project, a proposed expansion of the Northern BorderPipeline system into the Chicago market area. Please refer to TC PipeLines’ Annual Report on Form 10-K for moreinformation on this expansion project. The remaining capital expenditures for 2005 are primarily related torenewals and replacements of existing facilities.  Northern Border Pipeline currentlyanticipates funding its 2005 capital expenditures primarily by borrowing on itscredit facility and using operating cash flows.**

** **

***Cash Flows from Financing Activities***

** **

**Cash flows used in financing activities were $49.1 millionfor the first quarter of 2005 as compared to $40.2 million for the same periodin 2004.    Distributions to partnerswere $54.1 million and $48.2 million in the first quarters of 2005 and 2004,respectively.  The increase in distributionsis primarily due to an increase in net income offset partially by an**

 

15

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**increase in capital expenditures in the fourth quarter of2004 as compared to the same period in 2003. Distributions paid in the first quarter are based on the results of thefourth quarter of the previous year.**

** **

**In thefirst quarter of 2004, Northern Border Pipeline received contributions of $65.0million from its partners and $57.0 million was used to retire its existingbank debt.  In the first quarter of 2005, Northern Border Pipeline had debtborrowings of $13.0 million and debt retirements of $8.0 million.**

** **

***Update on the Impact of Enron’s Chapter 11 Filingon Northern Border Pipeline’s Business***

** **

**Pleaseread TC PipeLines’ Annual Report on Form 10-K for the year ended December 31,2004 for the full discussion of Impacts of Enron’s Chapter 11 Filing onNorthern Border Pipeline’s business.**

** **

**As aresult of a settlement agreement, approved by the Bankruptcy Court in March2005, among Enron North America (ENA), Enron and Northern Border Pipeline, eachof ENA and Enron have agreed to allow Northern Border Pipeline’s claim of approximately$20.6 million. Based upon this settlement among the parties, at December 31,2004 Northern Border Pipeline adjusted its allowance for doubtful accounts toreflect a $1.1 million estimated recovery for previously billed amounts underthe transportation contracts.  NorthernBorder Pipeline advises that it estimates it could recognize additional income,through future operating results, of $6 million to $9 million for the claims inthe Enron bankruptcy proceedings. However, Northern Border Pipeline advises that there can be noassurances on the amounts actually recovered or timing of distributions underthe Chapter 11 Plan.**

 

**Results of Operations ofTuscarora Gas Transmission Company**

* *

*In thefollowing discussion of the results of Tuscarora, all amounts represent 100% ofthe operations of Tuscarora, in which the Partnership has held a 49% interestsince September 1, 2000.*

 

***Overview***

 

Tuscarora is a Nevadageneral partnership formed in 1993.  Itsgeneral partners are TC Tuscarora Intermediate Limited Partnership, a directsubsidiary of TC PipeLines, which holds a 49% general partner interest, TuscaroraGas Pipeline Co., a wholly owned subsidiary of Sierra Pacific Resources, whichholds a 50% general partner interest and TCPL Tuscarora Ltd., an indirectwholly owned subsidiary of TransCanada, which holds the remaining 1% generalpartner interest in Tuscarora.

 

The management of Tuscarora is overseen by a managementcommittee that determines the policies of, has authority over the affairs of,and approves the actions of Tuscarora. The management committee participates in the management of theconstruction, maintenance and operation of the Tuscarora pipeline system.

 

Tuscarora owns a 240-mile, 20-inch diameter, United Statesinterstate pipeline system that originates at an interconnection pointwith facilitiesof GTN, a wholly-owned subsidiary of TransCanada, near Malin, Oregon andruns southeast through northeastern California and northwestern Nevada.  The Tuscarora pipeline systemterminates near Wadsworth, Nevada. Deliveries are also made directly to the local gas distribution systemof Sierra Pacific Power, a subsidiary of Sierra Pacific Resources.  Along its route, deliveries are made inOregon, northern California and northwestern Nevada.

 

The Tuscarora pipeline system was constructed in 1995and was placed into service in December 1995. In January 2001, Tuscarora completed construction of the HungryValley lateral, a 14-mile, 16-inch pipeline extension that serves as Tuscarora’ssecond connection into Reno, Nevada.  OnDecember 1, 2002, Tuscarora completed and placed into service another expansionof its pipeline system.  The 2002Tuscarora expansion consisted of two compressor stations and an 11-milepipeline extension from a point near the previous terminus of the Tuscarorapipeline system near Reno, Nevada to Wadsworth, Nevada.  The expansion increased Tuscarora’scontracted capacity from 127 mmcfd to approximately 180 mmcfd.  The new capacity is contracted underlong-term firm transportation contracts ranging from ten to fifteen years.

 

In 2005, Tuscaroraexpects to construct the Barrick Lateral, a 0.5 mile lateral that will providetransportation service to a new electric generation customer located nearTracy, Nevada.  The construction of thelateral is expected to cost $0.6 million.

 

Tuscarora has firmtransportation contracts for over 95% of its contracted capacity, includingcontracts held by 

 

16

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Sierra Pacific Power for69% of the total available capacity, the majority of which expires on October31, 2017.  As of March 31, 2005, theweighted average contract life on the Tuscarora pipeline system wasapproximately 12.4 years.

 

***CriticalAccounting Policies***

 

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

 

***Resultsof Operations***

 

The following tables setout summarized financial information for Tuscarora for the three months endedMarch 31, 2005 and 2004 and as at March 31, 2005 and December 31, 2004.  Amounts discussed represent 100% of theoperations of Tuscarora, in which the Partnership has held a 49% interest sinceSeptember 1, 2000.

 

**TuscaroraIncome Statement**

 
| **(unaudited)**           | ** ** | **Three months ended March 31,** | ** ** |
|---------------------------|------------|----------------------------------|------------|
| **(millions of dollars)** | ** ** | **2005**                         | ** ** | **2004** | ** ** |
| Revenues                  | ** ** | **8.3**                          |       | 8.3 |   |
| Costs and  expenses       | ** ** | **(1.1**                         | **)**      | (1.2 | ) |
| Depreciation              | ** ** | **(1.5**                         | **)**      | (1.6 | ) |
| Financial  charges        | ** ** | **(1.5**                         | **)**      | (1.5 | ) |
| Net income                | ** ** | **4.2**                          |       | 4.0 |   |

 

**Tuscarora Balance Sheet**

 
| ** **                                 | ** ** | **March  31,**  | ** ** | **December  31,** | ** ** |
|--------------------------------------------|------------|-----------------|------------|-------------------|------------|
| **(millions  of dollars)**                 |       | **2005**        | ** ** | **2004**          | ** ** |
| * *                                   | * *   | **(unaudited)** | ** ** | **(audited)**     | ** ** |
| **Assets**                                 |       |            |       |              |       |
| Cash and cash  equivalents                 | ** ** | **6.7**         |       | 3.6               |       |
| Other current  assets                      | ** ** | **3.0**         |       | 3.0               |       |
| Plant, property  and equipment, net        | ** ** | **135.5**       |       | 136.9             |       |
| Other assets                               | ** ** | **1.4**         |       | 1.4               |       |
| ** **                                 |       | **146.6**       |       | 144.9             |       |
| **Liabilities  and Partners’ Equity** |       |            |       |              |       |
| Current  liabilities                       | ** ** | **8.5**         |       | 6.9               |       |
| Long-term debt                             | ** ** | **75.9**        |       | 75.9              |       |
| Partners’ equity                      |       |            |       |              |       |
| Partners’  capital                    | ** ** | **62.1**        |       | 62.0              |       |
| Accumulated  other comprehensive income    | ** ** | **0.1**         |       | 0.1               |       |
| ** **                                 |       | **146.6**       |       | 144.9             |       |

 

***FirstQuarter 2005 Compared with First Quarter 2004***

 

Net income increased $0.2million, or 5%, to $4.2 million in the first quarter of 2005, compared to $4.0million for the same period in 2004.  Theincrease is primarily due to lower costs and expenses and depreciation.

 

Revenues earned byTuscarora remained flat at $8.3 million in the first quarter of 2005 whencompared to the same period in 2004.

 

Costs and expensesdecreased $0.1 million, or 8%, to $1.1 million in the first quarter of 2005,compared to $1.2 million for the same period in 2004.  The decrease is primarily due to therenegotiation of lower rates for maintenance contracts in 2005.

 

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Depreciation decreased$0.1 million, or 6%, to $1.5 million in the first quarter of 2005, compared to$1.6 million for the same period in 2004. The decrease reflects a reduction in the depreciation rate applied tocompressor equipment.

 

Financial charges of $1.5million remained relatively the same in the first quarter of 2005 and 2004,respectively.

 

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

 

***Debtand Credit Facilities***

 

Tuscarora’s debt andcredit facilities outstanding at March 31, 2005 are as follows:

 
| ** **                      | ** ** | **Payments Due by Period** | ** ** |
|---------------------------------|------------|----------------------------|------------|
| ** **                      | ** ** | ** **                 | ** ** | **Less Than** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **(millions of dollars)**       | ** ** | **Total**                  | ** ** | **1 Year** | ** ** | **1-3 Years** | ** ** | **4-5 Years** | ** ** | **After 5 Years** | ** ** |
|                            |       |                       |       |   |   |   |   |   |   |   |   |
| Series A Senior  Notes due 2010 |       | 65.3                       |       | 3.7 |   | 10.3 |   | 51.3 |   | — |   |
| Series B Senior  Notes due 2010 |       | 6.8                        |       | 0.4 |   | 1.4 |   | 5.0 |   | — |   |
| Series C Senior  Notes due 2012 |       | 8.7                        |       | 0.7 |   | 2.5 |   | 1.6 |   | 3.9 |   |
| Operating Leases                |       | 0.4                        |       | 0.1 |   | 0.2 |   | 0.1 |   | — |   |
| Commitments (1)                 |       | 1.8                        |       | 0.7 |   | 1.1 |   | — |   | — |   |
| Total                           |       | $                          | 83.0       |   | $ | 5.6 |   | $ | 15.5 |   | $ | 58.0 |   | $ | 3.9 |   |
|                                 |            |                            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(1)     Tuscarora’s commitmentsrelated to a contract with a third party for maintenance services on certaincomponents of its pipeline-related equipment. The contract expires in November2007.

 

Short-term liquidityneeds will be met by operating cash flows. Long-term capital needs may be met through the issuance of long-termindebtedness.

 

***CashFlows from Operating Activities***

 

Cash flows provided byoperating activities decreased $1.0 million, or 12%, to $7.4 million comparedto $8.5 million for the same period in 2004. The decrease is primarily due a reduction in working capital.

 

***CashFlows from Investing Activities***

 

Cash flows used ininvesting activities remained relatively the same at $0.2 million in the firstquarter of 2005 and 2004, respectively.

 

***CashFlows from Financing Activities***

 

Cash flows used infinancing activities increased $1.1 million, or 37%, to $4.2 million comparedto $3.1 million for the same period in 2004. The increase is due to higher cash distributions paid to Tuscarora’spartners.

 

**Sierra Pacific Resources**

** **

**SierraPacific Power, a wholly owned subsidiary of Sierra Pacific Resources, isTuscarora’s largest shipper with approximately 69% of the total availablecapacity through 2017.   In August 2003,the bankruptcy court granted Enron Power Marketing Inc.’s motion for a summaryjudgment with respect to claims against Nevada Power Company and Sierra PacificPower (together, the Utilities) of approximately $235 million and $102 million,respectively, of liquidated damages, for power supply contracts terminated byEnron Power Marketing in May 2002.    OnOctober 11, 2004, the U.S. District Court for the Southern District of New Yorkvacated a prior summary judgment by the Bankruptcy Court calling for theUtilities to pay Enron a total of approximately $336 million for terminatedcontracts.  Subsequently, the Utilitiesfiled a motion seeking clarification of the court’s rulings with respect tocertain of their claims.  On December 2,2004, the District Court enjoined the Utilities from participating in the FERChearings that were scheduled to begin December 13, 2004 in the companies’ongoing dispute with Enron Power Marketing over terminated powercontracts.  On December 23, 2004, theDistrict Court affirmed the Bankruptcy Court’s holding that the Utilities, byfailing to rescind their contracts with Enron immediately upon discoveringfraud in 2001, ratified those contracts and further held that Bankruptcy Courtjurisdiction over the case is proper.  Atrial date was set for April 18, 2005 in the Bankruptcy Court to review the issuesremanded by the**

 

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** **

**DistrictCourt with respect to Enron’s claims against the Utilities.  However on April 12, 2005, Nevada PowerCompany filed a formal petition to delay the trial requiring more time toreview evidence.  In April 2005, a federaljudge in New York rejected the Utilities claims against Enron Power Marketingand affirmed the decision of the Bankruptcy Court.  A trial date of May 23, 2005 has now been setby the Bankruptcy Court.**

 

**SierraPacific Power to-date remains current on its shipping contracts with Tuscarora.**

 

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**ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUTMARKET RISK**

 

TC PipeLines may beexposed to market risk through changes in interest rates.  The Partnership does not have any materialforeign exchange risks.  TC PipeLines’interest rate exposure results from its Revolving Credit Facility and itsTransCanada Credit Facility, which are subject to variability in LIBOR interestrates.  At March 31, 2005, TC PipeLineshad $30.0 million outstanding on its Revolving Credit Facility.  Since the first quarter of 2005, there hasnot been any material change to TC PipeLines’ interest rate exposure.

 

The Partnership is alsoinfluenced by the same factors that influence Northern Border Pipeline andTuscarora.  Neither Northern BorderPipeline nor Tuscarora owns any of the natural gas it transports, therefore,neither assumes any of the related natural gas commodity price risk.

 

Northern Border Pipelineuses financial instruments in the management of its interest rateexposure.  A control environment has beenestablished which includes policies and procedures for risk assessment as wellas the approval, reporting and monitoring of financial instrumentactivities.  At March 31, 2005, NorthernBorder Pipeline has no outstanding interest rate swap agreements.

 

Northern Border Pipeline’sinterest rate exposure results from variable rate borrowings from commercialbanks.  To mitigate potentialfluctuations in interest rates, Northern Border Pipeline attempts to maintain asignificant portion of its debt portfolio in fixed rate debt.  Northern Border Pipeline also uses interestrate swap agreements as a means to manage interest expense by converting aportion of fixed rate debt into variable rate debt.  At March 31, 2005, Northern Border Pipelinehad $5.0 million of variable rate debt outstanding (approximately 1% of itsdebt portfolio) and no interest rate swaps outstanding.

 

Northern Border Pipelinerecorded long-term debt amounts received or paid related to terminated interestrate swap agreements for cash flow hedges with such amounts amortized tointerest expense over the remaining life of the interest rate swapagreement.  During the first quarter of2005, Northern Border Pipeline amortized approximately $0.6 million as adecrease to interest expense and expects to amortize approximately $0.5 millionin each of the remaining quarters of 2005.

 

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**PARTII.  OTHER INFORMATION**

**ITEM 4.  CONTROLS AND PROCEDURES**

 

**Evaluationof disclosure controls and procedures.**

 

Based on theirevaluation of the Partnership’s disclosure controls and procedures as of theend of the period covered by this quarterly report, the President and ChiefExecutive Officer and Chief Financial Officer of the general partner of thePartnership have concluded that the Partnership’s disclosure controls andprocedures were effective in ensuring that the information required to bedisclosed by the Partnership in the reports that it files or submits under theSecurities Exchange Act of 1934 is recorded, processed, summarized and reportedwithin the time periods specified in the SEC’s rules and forms.

 

There were no changes inthe Partnership’s internal control over financial reporting during the mostrecent fiscal quarter that have materially affected or are reasonably likely tomaterially affect the Partnership’s internal control over financial reporting.

 

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**ITEM5.  OTHER INFORMATION**

 

On May 4, 2005, the FERCissued a policy statement as a result of its request for comments on the propertax allowance treatment for capital structures involving partnerships and otherforms of ownership.  Under the newpolicy, an income tax allowance would be permitted on all partnership interestsif the owner of that interest has an actual or potential income tax liabilityon that income.  As previously disclosedin TC PipeLines’ Annual Report on Form 10-K for the year ended December 31,2004, Northern Border Pipeline’s tariff provides for an income taxallowance.  Northern Border Pipelineadvises that it believes that the policy statement generally is a positivedevelopment regarding income tax allowance in the derivation of rates forpipelines.  In the event the policystatement is applied to Northern Border Pipeline, the issue of whether aparticular owner has an actual or potential income tax liability and relatedmatters may be resolved in individual rate proceedings.

 

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**ITEM 6.  EXHIBITS**

 
| **Exhibits****No.** | ** ** | **Description**                                                                                                     |
|---------------------|------------|---------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                |
| 31.1                |       | Certification of  President and Chief Executive Officer pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002. |
| 31.2                |       | Certification of Chief  Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                |
| 32.1                |       | Certification of  President and Chief Executive Officer pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002. |
| 32.2                |       | Certification of Chief  Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                |

 

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### **SIGNATURES**

 

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

 

 
| ** **        | ** ** | **TC PipeLines, LP**              |
|-------------------|------------|-----------------------------------|
|              |       | (a Delaware Limited  Partnership) |
|              |       |                              |
|              |       | By:                               | TC PipeLines GP, Inc.,  its general partner |
|              |       |                              |
|              |       | By:                               | /s/ Russell K. Girling |   |
| Date: May 9, 2005 |       |                              | Russell K. Girling |
|              |       |                              | Chief Financial Officer  (duly authorized officer) |
|              |       |                              |
|              |       | By:                               | /s/ Amy Leong |   |
| Date: May 9, 2005 |       |                              | Amy Leong |
|              |       |                              | Controller (duly  authorized officer) |

 

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