** **

**UNITED STATES SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

** **

**FORM 10-Q**

** **

**xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934**

** **

**For the quarterly periodended June 30, 2006**

** **

**or**

** **

**oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGEACT OF 1934**

** **

**For the Transition period from**               to               

**Commission FileNumber:  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 if the registrant (1) has filed all reports required to be filedby 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**x                    Noo

**Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerate filer” in Rule12b-2 of the Exchange Act.Large accelerated filer**o                                   Acceleratedfiler x                                     Non-acceleratedfiler o

**Indicateby check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act).Yes**o                    Nox

**As ofAugust 4, 2006, there were 17,500,000 of the registrant’s common unitsoutstanding.**

 

 

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** **

**TCPIPELINES, LP**

**TABLEOF CONTENTS**
| **PART I**  |       | **FINANCIAL INFORMATION**                                                                   |
|-------------|------------|---------------------------------------------------------------------------------------------|
|        |       |                                                                                        |
| Item 1.     |       | Financial Statements                                                                        |
|        |       | Statement  of Income — Three and six months ended June 30, 2006 and 2005               |
|        |       | Statement of  Comprehensive Income — Three and six months ended June 30, 2006 and 2005 |
|        |       | Balance  Sheet — June 30, 2006 and December 31, 2005                                   |
|        |       | Statement  of Cash Flows — Six months ended June 30, 2006 and 2005                     |
|        |       | Statement of  Changes in Partners’ Equity — Six months ended June 30, 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                                                                                    |

 

**Allamounts are stated in United States dollars unless otherwise indicated.**

 

2

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**PART I.  FINANCIAL INFORMATION**

**ITEM1.  FINANCIAL STATEMENTS**

**TC PipeLines, LP**

**Statement ofIncome**
| ** **                                                                      | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|---------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| **(unaudited)**                                                                 | ** ** | **June 30**                 | ** ** | **June 30**               | ** ** |
| **(millions of dollars except per unit amounts)** | ** ** | **2006**                         | ** ** | **2005**                       | ** ** | **2006** | ** ** | **2005** | ** ** |
| Equity income from  investment in Northern Border Pipeline                      | ** ** | **12.3**                         |       | 8.6                            | ** ** | **23.5** |   | 20.8 |   |
| Equity income from  investment in Tuscarora                                     | ** ** | **1.6**                          |       | 1.8                            | ** ** | **3.6** |   | 3.8 |   |
| General and  administrative expenses                                            | ** ** | **(0.7**                         | **)**      | (0.5                           | )          | **(1.3** | **)** | (1.0 | ) |
| Financial charges and  other                                                    | ** ** | **(4.2**                         | **)**      | (0.2                           | )          | **(4.4** | **)** | (0.5 | ) |
| **Net income**                                                                  | ** ** | **9.0**                          |       | 9.7                            | ** ** | **21.4** |   | 23.1 |   |
|                                                                            |       |                             |       |                           |       |   |   |   |   |
| **Net income allocation**                                                       |       |                             |       |                           |       |   |   |   |   |
| Common units                                                                    | ** ** | **8.3**                          |       | 9.0                            | ** ** | **20.0** |   | 21.7 |   |
| General partner                                                                 | ** ** | **0.7**                          |       | 0.7                            | ** ** | **1.4** |   | 1.4 |   |
|                                                                            | ** ** | **9.0**                          |       | 9.7                            | ** ** | **21.4** |   | 23.1 |   |
| **Net income per common unit**                                                  | ** ** | **$**                            | **0.47**   |                           | $          | 0.52 |   | $ | 1.14 |   | $ | 1.24 |   |
| **Units outstanding (millions)**                                                | ** ** | **17.5**                         |       | 17.5                           | ** ** | **17.5** |   | 17.5 |   |
|                                                                                 |            |                                  |            |                                |            |  |  |  |  |  |  |  |  |

 

**Statement ofComprehensive Income**
| ** **                                                               | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|--------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| **(unaudited)**                                                          | ** ** | **June 30**                 | ** ** | **June 30**               | ** ** |
| **(millions of dollars)**                                      | ** ** | **2006**                         | ** ** | **2005**                       | ** ** | **2006** | ** ** | **2005** | ** ** |
| Net income                                                               | ** ** | **9.0**                          |       | 9.7                            | ** ** | **21.4** |   | 23.1 |   |
| Other comprehensive  income                                              |       |                             |       |                           |       |   |   |   |   |
| Change  associated with current period hedging transactions of investees |       | **(0.2**                         | **)**      | (0.1                           | )          | **(0.3** | **)** | (0.2 | ) |
| **Total comprehensive income**                                           | ** ** | **8.8**                          |       | 9.6                            | ** ** | **21.1** |   | 22.9 |   |

 

See accompanyingnotes to the financial statements.

3

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

**ITEM1.  FINANCIAL STATEMENTS (Continued)**

**TC PipeLines, LP**

**Balance Sheet**

** **
| ** **                                 | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| **(millions of dollars)**        | ** ** | **2006**          | ** ** | **2005**              | ** ** |
| ** **                                 | ** ** | **(unaudited)**   | ** ** | ** **            | ** ** |
| **Assets**                                 |       |              |       |                  |       |
| Current assets                             |       |              |       |                  |       |
| Cash and short-term investments            | ** ** | **0.8**           |       | 2.3                   |       |
| Investment in  Northern Border Pipeline    | ** ** | **571.0**         |       | 274.5                 |       |
| Investment in  Tuscarora                   | ** ** | **38.1**          |       | 38.9                  |       |
| Other assets                               | ** ** | **0.8**           |       | —                |       |
|                                       | ** ** | **610.7**         |       | 315.7                 |       |
| **Liabilities  and Partners’ Equity** |       |              |       |                  |       |
| Current  liabilities                       |       |              |       |                  |       |
| Accrued liabilities                        | ** ** | **1.5**           |       | 0.6                   |       |
| Current portion of long-term debt          | ** ** | **1.0**           |       | 13.5                  |       |
|                                       | ** ** | **2.5**           |       | 14.1                  |       |
| Long-term debt                             | ** ** | **307.0**         |       | —                |       |
| Partners’ equity                      |       |              |       |                  |       |
| Common units                               | ** ** | **294.3**         |       | 294.4                 |       |
| General partner                            | ** ** | **6.5**           |       | 6.5                   |       |
| Accumulated other comprehensive income     | ** ** | **0.4**           |       | 0.7                   |       |
|                                       | ** ** | **301.2**         |       | 301.6                 |       |
|                                       | ** ** | **610.7**         |       | 315.7                 |       |
| Subsequent events (Note  9)                |       |              |       |                  |       |

 

**Statement of CashFlows**
| ** **                                                | ** ** | **Six months ended** | ** ** |
|-----------------------------------------------------------|------------|--------------------------------|------------|
| **(unaudited)**                                           | ** ** | **June 30**               | ** ** |
| **(millions of dollars)**                       | ** ** | **2006**                       | ** ** | **2005** | ** ** |
| **Cash  Generated From Operations**                       |       |                           |       |   |   |
| Net income                                                | ** ** | **21.4**                       |       | 23.1 |   |
| Add:                                                      |       |                           |       |   |   |
| Decrease in  operating working capital                    | ** ** | **0.9**                        |       | — |   |
| Amortization of  other assets                             | ** ** | **0.1**                        |       | — |   |
|                                                      | ** ** | **22.4**                       |       | 23.1 |   |
| **Investing  Activities**                                 |       |                           |       |   |   |
| Return of  capital from Northern Border Pipeline          | ** ** | **14.3**                       |       | 11.1 |   |
| Return of  capital from Tuscarora                         | ** ** | **0.8**                        |       | 0.5 |   |
| Investment in  Northern Border Pipeline                   | ** ** | **(311.1**                     | **)**      | — |   |
| Other assets                                              | ** ** | **(0.9**                       | **)**      | — |   |
|                                                      | ** ** | **(296.9**                     | **)**      | 11.6 |   |
| **Financing  Activities**                                 |       |                           |       |   |   |
| Distributions  paid                                       | ** ** | **(21.5**                      | **)**      | (21.5 | ) |
| Long-term debt  issued                                    | ** ** | **308.0**                      |       | — |   |
| Long-term debt  repaid                                    | ** ** | **(13.5**                      | **)**      | (12.5 | ) |
|                                                      | ** ** | **273.0**                      |       | (34.0 | ) |
|                                                      |       |                           |       |   |   |
| **Increase/(decrease)  in cash**                          | ** ** | **(1.5**                       | **)**      | 0.7 |   |
| **Cash  and short-term investments, beginning of period** | ** ** | **2.3**                        |       | 2.5 |   |
| **Cash  and short-term investments, end of period**       | ** ** | **0.8**                        |       | 3.2 |   |
|                                                      |       |                           |       |   |   |
| Interest payments made                                    | ** ** | **3.3**                        |       | 0.5 |   |

 

See accompanyingnotes to the financial statements.

4

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

**ITEM1.  FINANCIAL STATEMENTS (Continued)**

**TC PipeLines, LP**

**Statement ofChanges in Partners’ Equity**
| ** **                                  | ** ** | ** **            | ** ** | ** **           | ** ** | ** **           | ** ** | **Accumulated**                | ** ** | ** **         | ** ** | ** **           | ** ** |
|---------------------------------------------|------------|-----------------------|------------|----------------------|------------|----------------------|------------|--------------------------------|------------|--------------------|------------|----------------------|------------|
| ** **                                  | ** ** | ** **            | ** ** | ** **           | ** ** | ** **           | ** ** | **Other**                      | ** ** | ** **         | ** ** | ** **           | ** ** |
| ** **                                  | ** ** | ** **            | ** ** | ** **           | ** ** | **General**          | ** ** | **Comprehensive**              | ** ** | ** **         | ** ** | ** **           | ** ** |
| **(unaudited)**                             | ** ** | **Common Units** | ** ** | **Partner**          | ** ** | **Income**           | ** ** | **Partners’ Equity** | ** ** |
| ** **                                  | ** ** | **(millions**         | ** ** | **(millions**        | ** ** | **(millions**        | ** ** | **(millions**                  | ** ** | **(millions**      | ** ** | **(millions**        | ** ** |
| ** **                                  | ** ** | **of units)**    | ** ** | **of dollars)** | ** ** | **of dollars)** | ** ** | **of dollars)**           | ** ** | **of units)** | ** ** | **of dollars)** | ** ** |
|                                        |       |                  |       |                 |       |                 |       |                           |       |               |       |                 |       |
| Partners’ equity  at December 31, 2005 |       | 17.5                  |       | 294.4                |       | 6.5                  |       | 0.7                            |       | 17.5               |       | 301.6                |       |
| Net income                                  |       | —                |       | 20.0                 |       | 1.4                  |       | —                         |       | —             |       | 21.4                 |       |
| Distributions  paid                         |       | —                |       | (20.1                | )          | (1.4                 | )          | —                         |       | —             |       | (21.5                | )          |
| Other  comprehensive income                 |       | —                |       | —               |       | —               |       | (0.3                           | )          | —             |       | (0.3                 | )          |
| **Partners’ equity at June 30,  2006** | ** ** | **17.5**              | ** ** | **294.3**            | ** ** | **6.5**              | ** ** | **0.4**                        | ** ** | **17.5**           | ** ** | **301.2**            | ** ** |

 

See accompanying notes tothe financial statements.

 

5

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

**ITEM1.  FINANCIAL STATEMENTS (Continued)**

**TC PipeLines, LP**

**Notes to Financial Statements(unaudited)**

##### **Note1    Basis of Presentation**TC PipeLines, LP, and its subsidiary limitedpartnerships, TC PipeLines Intermediate Limited Partnership and TC TuscaroraIntermediate Limited Partnership, all Delaware limited partnerships, arecollectively referred to herein as TC PipeLines or the Partnership.  TC PipeLines was formed by TransCanadaPipeLines 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 Partnership commenced operations on May28, 1999.

Thefinancial statements have been prepared by management in accordance with U.S.generally accepted accounting principles (U.S. GAAP).  Amounts are stated in U.S. dollars. Since adetermination of many assets, liabilities, revenues and expenses is dependentupon future events, the preparation of these financial statements requires theuse of estimates and assumptions which have been made using carefuljudgment.  In the opinion of management,these financial statements have been properly prepared within reasonable limitsof materiality and include all adjustments (consisting of normal recurringaccruals) necessary to present fairly the results of operations for the threeand six months ended June 30, 2006 and 2005, the financial position as at June 30,2006 and December 31, 2005, cash flows for the six months ended June 30, 2006and 2005, and statement of partners’ equity at June 30, 2006.

Theresults of operations for the three and six months ended June 30, 2006 and 2005are not necessarily indicative of the results that may be expected for a fullfiscal 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-K forthe year ended December 31, 2005.

##### **Note2    Investment in Northern BorderPipeline**The Partnership owns a 50 per cent general partnerinterest in Northern Border Pipeline, a Texas general partnership which owns a1,249-mile U.S. interstate pipeline system that transports natural gas from theU.S. - Canadian border near Port of Morgan, Montana to a terminus near NorthHayden, Indiana.  Northern BorderPipeline’s pipeline system connects with multiple pipelines providing shippersaccess to the various natural gas markets served by those pipelines.  The other 50 per cent partnership interest inNorthern Border Pipeline is held by ONEOK Partners, L.P. (ONEOK), formerlyknown as Northern Border Partners, L.P., a publicly traded limitedpartnership.  The Northern BorderPipeline system is operated by ONEOK Partners G.P., LLC (ONEOK Partners G.P.),formerly known as Northern Plains Natural Gas Company, LLC, a wholly ownedsubsidiary of ONEOK.  Northern BorderPipeline is regulated by the Federal Energy Regulatory Commission (FERC).

On April 6, 2006,the Partnership completed the acquisition of an additional 20 per cent generalpartnership interest in Northern Border Pipeline. The Partnership uses theequity method of accounting for its investment in Northern BorderPipeline.  TC PipeLines’ equity incomefor the three and six months ended June 30, 2006 includes 30 per cent of thenet income of Northern Border Pipeline up to April 6, 2006 and 50 per centthereafter.  There were no undistributedearnings from Northern Border Pipeline as at June 30, 2006 and December 31,2005.

**Thefollowing table sets out summarized financial information representing 100 percent of the operations of Northern Border Pipeline.**

6

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

**ITEM1.  FINANCIAL STATEMENTS (Continued)**

**TC PipeLines, LP**

**Notes to Financial Statements(unaudited)**

**NorthernBorder Pipeline Income Statement**
| ** **                          | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|-------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| **(unaudited)**                     | ** ** | **June 30**                 | ** ** | **June 30**               | ** ** |
| **(millions of dollars)** | ** ** | **2006**                         | ** ** | **2005**                       | ** ** | **2006** | ** ** | **2005** | ** ** |
| Revenues                            | ** ** | **71.5**                         |       | 69.8                           | ** ** | **151.3** |   | 152.6 |   |
| Costs and  expenses                 | ** ** | **(20.7**                        | **)**      | (16.7                          | )          | **(38.2** | **)** | (34.1 | ) |
| Depreciation                        | ** ** | **(14.8**                        | **)**      | (14.3                          | )          | **(29.4** | **)** | (28.7 | ) |
| Financial  charges                  | ** ** | **(10.9**                        | **)**      | (10.6                          | )          | **(21.6** | **)** | (21.2 | ) |
| Other income                        | ** ** | **0.3**                          |       | 0.6                            | ** ** | **0.7** |   | 0.8 |   |
| Net income                          | ** ** | **25.4**                         |       | 28.8                           | ** ** | **62.8** |   | 69.4 |   |

 

**NorthernBorder Pipeline Balance Sheet**
| ** **                                 | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| **(millions of dollars)**        | ** ** | **2006**          | ** ** | **2005**              | ** ** |
| ** **                                 | ** ** | **(unaudited)**   | ** ** | ** **            | ** ** |
| **Assets**                                 |       |              |       |                  |       |
| Cash and cash  equivalents                 | ** ** | **8.1**           |       | 22.0                  |       |
| Other current  assets                      | ** ** | **34.5**          |       | 45.7                  |       |
| Plant, property  and equipment, net        | ** ** | **1,503.7**       |       | 1,516.1               |       |
| Other assets                               | ** ** | **21.7**          |       | 20.9                  |       |
|                                       | ** ** | **1,568.0**       |       | 1,604.7               |       |
| **Liabilities  and Partners’ Equity** |       |              |       |                  |       |
| Current  liabilities                       | ** ** | **218.1**         |       | 56.0                  |       |
| Reserves and  deferred credits             | ** ** | **5.2**           |       | 4.8                   |       |
| Long-term debt                             | ** ** | **451.0**         |       | 628.9                 |       |
| Partners’ equity                      |       |              |       |                  |       |
| Partners’ capital                     | ** ** | **892.2**         |       | 912.7                 |       |
| Accumulated other comprehensive income     | ** ** | **1.5**           |       | 2.3                   |       |
|                                       | ** ** | **1,568.0**       |       | 1,604.7               |       |

 

Northern Border Pipeline records in accumulated other comprehensiveincome amounts related to terminated interest rate swap agreements for cashflow hedges and amortizes these amounts to interest expense over the term ofthe hedged debt.

##### **Note3    Investment in Tuscarora**The Partnership owns a 49 per cent general partnerinterest in Tuscarora, a Nevada general partnership, which owns a 240-mile U.S.interstate 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 northwesternNevada.  The remaining general partnerinterests in Tuscarora are held 50 per cent by Sierra Pacific Resources and 1per cent by TransCanada.  The Tuscarorapipeline system is operated by Tuscarora Gas Operating Company, a wholly ownedsubsidiary of Sierra Pacific Resources. Sierra Pacific Power Company (Sierra Pacific Power), a wholly-ownedsubsidiary of Sierra Pacific Resources, is Tuscarora’s largest shipper,accounting for approximately 69 per cent of total available capacity through2017.  As a result of the acquisitionallocation, an annual amortization of $0.4 million has been included in thePartnership’s equity income from Tuscarora. The amortization period ends in 2025. Tuscarora is regulated by the FERC.

The Partnershipuses the equity method of accounting for its investment in Tuscarora.  TC PipeLines’ equity income for the three andsix months ended June 30, 2006 and 2005 includes 49 per cent of the net incomeof Tuscarora for the same periods.  Therewere no undistributed earnings from Tuscarora as at June 30, 2006 and December31, 2005.

The followingtable sets out summarized financial information representing 100 per cent ofthe

7

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

**ITEM1.  FINANCIAL STATEMENTS (Continued)**

**TC PipeLines, LP**

**Notes to Financial Statements(unaudited)**

operations of Tuscarora.

**TuscaroraIncome Statement**
| ** **                          | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|-------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| **(unaudited)**                     | ** ** | **June 30**                 | ** ** | **June 30**               | ** ** |
| **(millions of dollars)** | ** ** | **2006**                         | ** ** | **2005**                       | ** ** | **2006** | ** ** | **2005** | ** ** |
| Revenues                            | ** ** | **7.6**                          |       | 8.0                            | ** ** | **15.9** |   | 16.3 |   |
| Costs and  expenses                 | ** ** | **(1.3**                         | **)**      | (1.1                           | )          | **(2.4** | **)** | (2.2 | ) |
| Depreciation                        | ** ** | **(1.5**                         | **)**      | (1.6                           | )          | **(3.1** | **)** | (3.1 | ) |
| Financial  charges                  | ** ** | **(1.4**                         | **)**      | (1.4                           | )          | **(2.8** | **)** | (2.9 | ) |
| Other income                        | ** ** | **0.1**                          |       | 0.1                            | ** ** | **0.1** |   | 0.1 |   |
| Net income                          | ** ** | **3.5**                          |       | 4.0                            | ** ** | **7.7** |   | 8.2 |   |

 

**TuscaroraBalance Sheet**
| ** **                                 | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| **(millions of dollars)**        | ** ** | **2006**          | ** ** | **2005**              | ** ** |
| ** **                                 | ** ** | **(unaudited)**   | ** ** | ** **            | ** ** |
| **Assets**                                 |       |              |       |                  |       |
| Cash and cash  equivalents                 | ** ** | **3.5**           |       | 3.8                   |       |
| Other current  assets                      | ** ** | **2.4**           |       | 3.0                   |       |
| Plant, property  and equipment, net        | ** ** | **128.7**         |       | 131.6                 |       |
| Other assets                               | ** ** | **1.4**           |       | 1.4                   |       |
|                                       | ** ** | **136.0**         |       | 139.8                 |       |
| **Liabilities  and Partners’ Equity** |       |              |       |                  |       |
| Current  liabilities                       | ** ** | **6.5**           |       | 6.8                   |       |
| Long-term debt                             | ** ** | **68.8**          |       | 71.1                  |       |
| Partners’ equity                      |       |              |       |                  |       |
| Partners’ capital                     | ** ** | **60.6**          |       | 61.8                  |       |
| Accumulated other comprehensive income     | ** ** | **0.1**           |       | 0.1                   |       |
|                                       | ** ** | **136.0**         |       | 139.8                 |       |

 

##### **Note4    Credit Facilities and Long-Term Debt**On February 28, 2006, the Partnership renewed a $20million unsecured credit facility (Revolving Credit Facility).  Loans under the Revolving Credit Facility maybear interest, at the option of the Partnership, at a one-, two-, three-, orsix-month LIBOR plus 0.75 per cent or 1.00 per cent if total debt is greaterthan or equal to 15 per cent of capitalization, or at a floating rate based onthe higher of the federal funds effective rate plus 0.5 per cent and the primerate.  The Revolving Credit Facility maturesin February 2007.  Borrowings on thefacility are limited to maximum leverage rates specified in the agreement.  The Partnership had $1 million and $13.5million outstanding under the Revolving Credit Facility at June 30, 2006 andDecember 31, 2005, respectively.  Theinterest rate on the Revolving Credit Facility averaged 5.57 per cent and 4.26per cent for the six months ended June 30, 2006 and 2005, respectively, and atJune 30, 2006 and December 31, 2005, the interest rate was 5.92 per cent and 5.62per cent, respectively.

On March 31, 2006, thePartnership entered into an unsecured credit agreement for a $310 millioncredit facility (Bridge Loan Credit Facility) with a banking syndicate.  Borrowings under the Bridge Loan CreditFacility bear interest, at the option of the Partnership, at the LIBOR or thebase rate plus an applicable margin.  The Bridge Loan Credit Facility matures on March 31, 2008, atwhich time all amounts outstanding will be due and payable.  Borrowingsunder the facility are limited to maximum leverage rates specified in theagreement.  On April 5, 2006, thePartnership borrowed $307 million under the Bridge Loan Credit Facility tofinance the purchase price and $10 million in a transaction fee payable inconnection with the acquisition of an additional 20 per

8

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

**ITEM1.  FINANCIAL STATEMENTS (Continued)**

**TC PipeLines, LP**

**Notes to Financial Statements(unaudited)**

cent generalpartnership interest in Northern Border Pipeline.  The remaining $3 million commitment under theBridge Loan Credit Facility was terminated. The interest rate on the BridgeLoan Credit Facility averaged 6.10 per cent to June 30, 2006 and the interestrate was 6.14 per cent as at June 30, 2006.

**Note 5    NetIncome per Common Unit****Net income per unit is computed by dividing netincome, after deduction of the general partner’s allocation, by the weightedaverage number of common units outstanding. The general partner’s allocation is equal to an amount based upon thegeneral partner’s 2 per cent interest, adjusted to reflect an amount equal toincentive distributions.  Net income perunit was determined as follows:

 
| ** **                                                                      | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|---------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| **(unaudited)**                                                                 | ** ** | **June 30**                 | ** ** | **June 30**               | ** ** |
| **(millions of dollars except per unit amounts)** | ** ** | **2006**                         | ** ** | **2005**                       | ** ** | **2006** | ** ** | **2005** | ** ** |
| Net income                                                                      | ** ** | **9.0**                          |       | 9.7                            | ** ** | **21.4** |   | 23.1 |   |
| Net income  allocated to general partner                                        |       |                             |       |                           |       |   |   |   |   |
| General partner interest                                                        | ** ** | **(0.2**                         | **)**      | (0.2                           | )          | **(0.4** | **)** | (0.4 | ) |
| Incentive distribution income allocation                                        | ** ** | **(0.5**                         | **)**      | (0.5                           | )          | **(1.0** | **)** | (1.0 | ) |
|                                                                            | ** ** | **(0.7**                         | **)**      | (0.7                           | )          | **(1.4** | **)** | (1.4 | ) |
| Net income  allocable to common units                                           | ** ** | **8.3**                          |       | 9.0                            | ** ** | **20.0** |   | 21.7 |   |
| Weighted average  units outstanding *(millions)*                                | ** ** | **17.5**                         |       | 17.5                           | ** ** | **17.5** |   | 17.5 |   |
| Net income per common  unit                                                     | ** ** | **$**                            | **0.47**   |                           | $          | 0.52 | ** ** | **$** | **1.14** |   | $ | 1.24 |   |
|                                                                                 |            |                                  |            |                                |            |  |  |  |  |  |  |  |  |

 

**Note 6    Distributions**On July 21, 2006, the Board of Directors of the generalpartner declared the Partnership’s 2006 second quarter cash distribution.  The second quarter cash distribution ispayable on August 14, 2006 to unitholders of record as of July 31, 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 per cent general partner interest.

**Note 7        Capital Requirements**The Partnership contributed $3.1 million in the first quarterof 2006, representing its then 30 per cent share of a $10.3 million cash callissued by Northern Border Pipeline.  Thefunds were used by Northern Border Pipeline to fund the Chicago III ExpansionProject.  The payment to Northern BorderPipeline was funded through cash from operations.

**Note 8    Acquisition**On April 6, 2006, the Partnership acquired an additional 20per cent general partnership interest in Northern border Pipeline forapproximately $297 million plus a $10 million transaction fee payable to asubsidiary of TransCanada, bringing the partnership’s total interest to 50 percent.  Through the acquisition TCPipeLines indirectly assumed approximately $120 million of debt of NorthernBorder Pipeline.  The Partnership funded thetransaction through a bridge loan credit facility and intends to refinance theloan with a combination of equity and debt. In connection with this transaction, a subsidiary of TransCanada willbecome the operator of Northern Border Pipeline in April 2007.

9

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#  

**PART I.  FINANCIAL INFORMATION (Continued) ITEM 1.  FINANCIAL STATEMENTS (Concluded)**

**TC PipeLines, LP**

**Notes to Financial Statements(unaudited)**

The acquisitionwas accounted for using the purchase method of accounting.  The purchase price was allocated using anestimate of fair value of the net assets at the date of acquisition.  The difference between the purchase price andthe fair value was recorded as part of our investment in Northern BorderPipeline.  The $10 million transactionfee payable to a subsidiary of TransCanada, who will become the operator ofNorthern Border Pipeline in April 2007, has been recorded as part of ourinvestment in Northern Border Pipeline and is being amortized over the term ofthe related operating agreement.

The following proforma statements of income for the three months and six months ended June 30,2006 and June 30, 2005 have been prepared as if the acquisition occurred at thebeginning of the respective periods:
| ** **                                                                      | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|---------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| **(unaudited)**                                                                 | ** ** | **June 30**                 | ** ** | **June 30**               | ** ** |
| **(millions of dollars except per unit amounts)** | ** ** | **2006**                         | ** ** | **2005**                       | ** ** | **2006** | ** ** | **2005** | ** ** |
| Equity income  from investment in Northern Border Pipeline                      | ** ** | **12.5**                         |       | 14.4                           | ** ** | **30.9** |   | 34.7 |   |
| Equity income  from investment in Tuscarora                                     | ** ** | **1.6**                          |       | 1.8                            | ** ** | **3.6** |   | 3.8 |   |
| General and  administrative expenses                                            | ** ** | **(0.7**                         | **)**      | (0.5                           | )          | **(1.3** | **)** | (1.0 | ) |
| Financial  charges and other                                                    | ** ** | **(4.9**                         | **)**      | (5.1                           | )          | **(9.9** | **)** | (10.4 | ) |
| **Net  income**                                                                 | ** ** | **8.5**                          |       | 10.6                           | ** ** | **23.3** |   | 27.1 |   |
|                                                                            |       |                             |       |                           |       |   |   |   |   |
| **Net  income allocation**                                                      |       |                             |       |                           |       |   |   |   |   |
| Common units                                                                    | ** ** | **7.9**                          |       | 9.9                            | ** ** | **21.9** |   | 25.6 |   |
| General partner                                                                 | ** ** | **0.6**                          |       | 0.7                            | ** ** | **1.4** |   | 1.5 |   |
|                                                                            | ** ** | **8.5**                          |       | 10.6                           | ** ** | **23.3** |   | 27.1 |   |
| **Net income  per common unit**                                                 | ** ** | **$**                            | **0.45**   |                           | $          | 0.56 | ** ** | **$** | **1.25** |   | $ | 1.46 |   |
| **Units outstanding (millions)**                                                | ** ** | **17.5**                         |       | 17.5                           | ** ** | **17.5** |   | 17.5 |   |
|                                                                                 |            |                                  |            |                                |            |  |  |  |  |  |  |  |  |

 

**Note 9        Subsequent Events**Northern Border Pipeline declared and paid a distribution ofapproximately $36.5 million on August 1, 2006. The Partnership received its 50 per cent share ($18.2 million) on August1, 2006.

Tuscarora declared adistribution of approximately $3.8 million on July 14, 2006.  The Partnership received its 49 per centshare ($1.8 million) on July 31, 2006.

10

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**PART I.  FINANCIAL INFORMATION (Continued) ITEM 2.  MANAGEMENT’S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

**TC PipeLines, LP**

**Cautionary Statement RegardingForward-Looking Information**A number of statements made by TC PipeLines in this quarterly report areforward-looking and relate to, among other things, anticipated financialperformance, business prospects, strategies, market forces and commitments ofTC PipeLines.  All forward-lookingstatements are based on the Partnership’s beliefs as well as assumptions madeby and information currently available to the Partnership.  The Partnership assumes no obligation toupdate any such forward-looking statements to reflect events or circumstancesas occurring after the date hereof. Words such as “anticipate”, “believe”, “estimate”, “expect”, “plan”, “intend”,“forecast”, and similar expressions, identify forward-looking statements.  Readers are cautioned not to place unduereliance on this forward-looking information, which is as of the date of thisForm 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 per cent general partner interest in Northern Border Pipelineand 49 per cent general partner interest in Tuscarora represent its onlymaterial assets.  As a result, thePartnership is dependent upon Northern Border Pipeline and Tuscarora for all ofits 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 theirrates;

·                                          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 and demand for Western Canadian natural gas for import into theU.S.;

·                                          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 other risks are discussed in the Partnership’sfilings with the Securities and Exchange Commission (SEC), including under Item1A, “Risk Factors,” in the Partnership’s annual report on Form 10-K for theyear ended December 31, 2005.  By itsnature, such forward-looking information is subject to various risks anduncertainties, which could cause TC PipeLines’ actual results and experience todiffer materially from the anticipated results or other expectations expressedin this quarterly report.

11

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**PART I.  FINANCIAL INFORMATION (Continued) ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS (Continued)**

**TC PipeLines, LP**

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

*Asa result of the Partnership’s ownership interests in both Northern BorderPipeline and Tuscarora, the following discusses the results of operations and liquidity and capital resources of TCPipeLines, then those of each of Northern Border Pipeline and Tuscarora.*

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).

***Overview*******TC PipeLines, LP was formed in 1998 as a Delaware limitedpartnership to acquire, own and participate in the management of U.S.-basedpipeline assets.  TC PipeLines, LP andits subsidiary limited partnerships, TC PipeLines Intermediate LimitedPartnership and TC Tuscarora Intermediate Limited Partnership, are collectivelyreferred to herein as “TC PipeLines” or “the Partnership.”  TC PipeLines GP, Inc., an indirect whollyowned subsidiary of TransCanada, is the general partner of thePartnership.  At June 30, 2006, thePartnership owned a 50 per cent general partner interest in Northern BorderPipeline and a 49 per cent general partner interest in Tuscarora.

***RecentDevelopments***On April 6, 2006, TC PipeLines acquired an additional 20per cent general partnership interest in Northern Border Pipeline forapproximately $297 million, plus a $10 million transaction fee payable to asubsidiary of TransCanada.  Through theacquisition, TC PipeLines has also indirectly assumed approximately $120million of debt of Northern Border Pipeline. TC PipeLines now owns a 50 per cent interest in Northern BorderPipeline.  TC PipeLines continues toaccount for its interest in Northern Border Pipeline using equity method of accounting.  The Partnership funded the acquisition with a$307 million bridge loan credit facility. The Partnership intends to refinance this loan with a combination ofequity and debt.

In connection with this transaction, in April 2007 asubsidiary of TransCanada will become operator of Northern Border Pipeline,which is currently operated by ONEOK Partners GP.

***Investment in Northern Border Pipeline Company***Northern Border Pipeline owns a 1,249-mile U.S.interstate pipeline system that transports natural gas from the U.S. - Canadianborder near Port of Morgan, Montana to a terminus near North Hayden, Indianafor its customers.  Northern BorderPipeline’s pipeline system connects with multiple pipelines providing shippersaccess to the various natural gas markets served by those pipelines.

Theremaining 50 per cent general partner interest in Northern Border Pipeline isheld by ONEOK Partners, L.P., formerly known as Northern Border Partners, L.P.,a publicly traded limited partnership. The management committee of Northern Border Pipeline consists of fourmembers.  TC PipeLines and ONEOKPartners, L.P. each designate two members of the management committee and eachhave 50 per cent of the voting power of the management committee.

#### ***Investment in Tuscarora GasTransmission Company***Tuscarora ownsa 240-mile U.S. 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.

The Partnership owns a 49 per centgeneral partner interest in Tuscarora.  Theremaining general partner interest in Tuscarora is held 50 per cent byTuscarora Gas Pipeline Co., a wholly-owned subsidiary of Sierra PacificResources and 1 per cent by TCPL Tuscarora Ltd., an indirect wholly-ownedsubsidiary of TransCanada.

***CriticalAccounting Policy***TC PipeLines accounts for its interests in both NorthernBorder Pipeline and Tuscarora using the equity method of accounting as detailedin notes 2 and 3 to the financial statements. The equity method of accounting is appropriate where the investor doesnot control an investee, but rather is able to exercise significant influenceover the operating and financial policies of an investee.  TC PipeLines is able to exercise significantinfluence over its investments in Northern Border Pipeline and Tuscarorabecause of its representation on their management committees.

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**PART I.  FINANCIAL INFORMATION (Continued) ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS (Continued)**

**TC PipeLines, LP**

The 50per cent general partner interest in Northern Border Pipeline and 49 per centgeneral partner interest in Tuscarora are currently the Partnership’s onlymaterial sources of income.  ThePartnership’s results of operations are affected by and reflect the samefactors that affect the operating results of Northern Border Pipeline andTuscarora.

Therehas been no change to the Partnership’s critical accounting policies during thesix months ended June 30, 2006.

***RecentAccounting Pronouncements***There were no new standards issued by the FASB or otherregulatory bodies during the six months ended June 30, 2006 that had a materialimpact on the Partnership’s results of operations.

***SecondQuarter 2006 Compared with Second Quarter 2005***Net income decreased $0.7 million, or 7 per cent, to $9.0million in the second quarter of 2006, compared to $9.7 million for the sameperiod in 2005.  The decrease wasprimarily due to increased interest expense for the financing of the additional20 per cent interest in Northern Border Pipelines, partially offset by anincrease in equity income from Northern Border Pipeline.

Equity income fromthe Partnership’s investment in Northern Border Pipeline increased $3.7 million,or 43 per cent, to $12.3 million for the three months ended June 30, 2006,compared to $8.6 million for the same period in 2005.  The increase in equity income from NorthernBorder Pipeline was primarily due to the Partnership’s additional 20 per centgeneral partner interest which contributed $4.7 million in equity income,partially offset by a reduction in Northern Border Pipeline’s net income dueprimarily to increased operations and maintenance expenses.

Equity income fromthe Partnership’s investment in Tuscarora decreased $0.2 million, or 11 percent, to $1.6 million for the three months ended June 30, 2006, compared withthe same quarter in 2005.  The decreasein equity income from Tuscarora was primarily due to lower revenues.  Revenues decreased due primarily to newtransportation rates which were put into effect on June 1, 2006 as a result ofa rate settlement with customers.

ThePartnership’s general and administrative expenses were $0.7 million for thethree months ended June 30, 2006, an increase of $0.2 million compared to thesame period in 2005, primarily due to higher salaries and benefits as well astiming of certain expenses.

ThePartnership’s financial charges and other were $4.2 million for the threemonths ended June 30, 2006, an increase of $4.0 million compared to the samequarter in 2005, due to increased debt.

***SixMonths Ended June 30, 2006 Compared with Six Months Ended June 30, 2005***Net income decreased $1.7 million, or 7 per cent, to$21.4 million in the first six months of 2006, compared to $23.1 million forthe same period in 2005.  The decreasewas primarily due to increased interest expense related to the $307 millionbridge loan credit facility, partially offset by an increase in equity incomefrom Northern Border Pipeline resulting from the Partnership’s additional 20per cent general partner interest.

Equityincome from the Partnership’s investment in Northern Border Pipeline increased$2.7 million, or 13 per cent, to $23.5 million in the first six months of 2006,compared to $20.8 million for the same period in 2005.  The increase in equity income from NorthernBorder Pipeline was due to the Partnership’s additional 20 per cent generalpartner interest which contributed $4.7 million in equity income, partiallyoffset by a reduction in Northern Border Pipeline’s net income due primarily toincreased operations and maintenance expenses.

Equity income fromthe Partnership’s investment in Tuscarora decreased $0.2 million, or 5 percent, to $3.6 million in the first six months of 2006, compared to $3.8 millionfor the same period in 2005.  Thedecrease in equity income from Tuscarora was primarily due to lower revenues.  Revenues decreased due primarily to newtransportation rates which were put into effect on June 1, 2006 as a result ofa settlement achieved with customers.

ThePartnership recorded general and administrative expenses of $1.3 million forthe first six months of 2006, which increased by $0.3 million when compared tothe same period in 2005.  General andadministrative expenses increased primarily due to higher salaries andbenefits.

ThePartnership’s financial charges and other were $4.4 million for the first sixmonths of 2006, an increase of $3.9 million compared to the same period in2005, due to increased debt.

13

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** **

**PART I.  FINANCIAL INFORMATION (Continued) ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS (Continued)**

**TC PipeLines, LP**

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

***Debtand Credit Facilities***The following table summarizes TC PipeLines’ debt andcredit facilities outstanding as of June 30, 2006:
| ** **                          | ** ** | **Payments Due by Period** | ** ** |
|-------------------------------------|------------|-------------------------------------------|------------|
| ** **                          | ** ** | ** **                                | ** ** | **Less than 1** | ** ** | **Long-term** | ** ** |
| **(millions of dollars)** | ** ** | **Total**                                 | ** ** | **year** | ** ** | **portion** | ** ** |
|                                |       |                                      |       |   |   |   |   |
| Revolving Credit  Facility          |       | 1.0                                       |       | 1.0 |   | — |   |
| Bridge Loan  Credit Facility        |       | 307.0                                     |       | — |   | 307.0 |   |
| Total                               |       | $                                         | 308.0      |   | $ | 1.0 |   | $ | 307.0 |   |
|                                     |            |                                           |            |  |  |  |  |  |  |  |

 

On March 31, 2006, the Partnership entered into anunsecured credit agreement for a $310 million credit facility (Bridge LoanCredit Facility) with a banking syndicate. Borrowings under the Bridge Loan Credit Facility bear interest, at theoption of the Partnership, at the LIBOR or the base rate plus an applicablemargin.  The Bridge Loan Credit Facilitymatures on March 31, 2008, at which time all amounts outstanding will be dueand payable.  Borrowings under thefacility are limited to maximum leverage rates specified in the agreement.  On April 5, 2006, the Partnership borrowed$307 million under the Bridge Loan Credit Facility to finance the purchaseprice and $10 million in a transaction fee payable in connection with the acquisitionof an additional 20 per cent general partnership interest in Northern BorderPipeline.  The remaining $3 millioncommitment under the Bridge Loan Credit Facility was terminated.  The interest rate on the Bridge Loan CreditFacility averaged 6.10 per cent to June 30, 2006 and the interest rate was 6.14per cent as at June 30, 2006.  ThePartnership was in compliance with all financial covenants as of June 30, 2006.

***Cash Distribution Policy of TCPipeLines, LP***

The Partnership has madedistributions of Available Cash (as defined in the Partnership Agreement) inthe following manner:
    - First, 98 per cent to the common units, pro rata,     and 2 per cent to the general partner, until there is distributed for each     outstanding unit an amount equal to the minimum quarterly distribution for     that quarter; and
    - Thereafter, in a manner whereby the general     partner has rights (referred to as incentive distribution rights) to     receive increasing percentages of excess quarterly cash distributions over     specified cash distribution 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 per cent to all units, pro rata, and 15     per cent to the general partner, until each unitholder has received a     total of $0.5275 for that quarter;
    - Second, 75 per cent to all units, pro rata, and 25     per cent to the general partner, until each unitholder has received a     total of $0.6900 for that quarter; and
    - Thereafter, 50 per cent to all units, pro rata,     and 50 per cent to the general partner.

The distribution to thegeneral partner described above, other than in its capacity as a holder of2,035,106 units that are in excess of its aggregate 2 per cent general partnerinterest, represents the incentive distribution rights.

***2006Second Quarter Cash Distribution***On July 21, 2006, the Board of Directors of the generalpartner declared the Partnership’s 2006 second quarter cash distribution.  The second quarter cash distribution ispayable on August 14, 2006 to unitholders of record as of July 31, 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

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**PART I.  FINANCIAL INFORMATION (Continued) ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS (Continued)**

**TC PipeLines, LP**

million to the generalpartner as holder of the incentive distribution rights, and $0.2 million to thegeneral partner in respect of its 2 per cent general partner interest.

***CashFlows from Operating Activities***Cash flows provided by operating activities decreased$0.7 million, or 3 per cent, to $22.4 million for the six months ended June 30,2006, compared to $23.1 million for the same period in 2005.  The decrease was primarily due to higherinterest expense related to the bridge loan credit facility.  For the six months ended June 30, 2006 and2005, the Partnership received cash distributions of $37.8 million and $31.9million, respectively, from its equity investment in Northern BorderPipeline.  The increase in cashdistributions from Northern Border Pipeline was primarily due to thePartnership’s acquisition of an additional 20 per cent general partnerinterest.  The cash distributionsreceived include $14.3 million and $11.1 million classified as return ofcapital in the six months ended June 30, 2006 and 2005, respectively.  For the six months ended June 30, 2006 and2005, the Partnership also received cash distributions of $4.4 million and $4.3million, respectively, from its equity investment in Tuscarora.  The increase in cash distributions fromTuscarora was mainly due to higher earnings in fourth quarter of 2005 comparedto the same period in 2004.  Distributionsreceived in the first six months of 2006 are based on the respective equityinvestments’ financial results for the six months ended March 31, 2006.

***CashFlows from Investing Activities***Cash received (used) in investing activities was $(296.9)million and $11.6 million for the six months ended June 30, 2006 and 2005,respectively.  The Partnership incurredcosts of approximately $297 million plus $10 million in a transaction fee payableto a subsidiary of TransCanada for the acquisition of an additional 20 per centgeneral partnership interest in Northern Border Pipeline.  The Partnership made an equity contributionof $3.1 million, representing its then 30 per cent share of a cash call issuedby Northern Border Pipeline to its partners on March 20, 2006.

Cashdistributions received from Northern Border Pipeline which were classified asreturn of capital were $14.3 million and $11.1 million for the six months endedJune 30, 2006 and 2005, respectively. Cash distributions received from Tuscarora which were classified asreturn of capital were $0.8 million and $0.5 million for the six months endedJune 30, 2006 and 2005, respectively.

***CashFlows from Financing Activities***Cash flows received (used) in financing activities were$273.0 million for the six months ended June 30, 2006, compared to $(34.0)million for the same period in 2005.

In April 2006, TC PipeLines borrowed $307 million under the Bridge Loan Credit Facility to financethe Partnership’s acquisition of an additional 20 per cent general partnershipinterest in Northern Border Pipeline. Offsetting this issuance of debt was the net repayment of $12.5 millionon the Revolving Credit Facility.

For the six months ended June 30, 2006, the Partnership paid $21.5million in cash distributions in the following manner:  $20.1 million to common unitholders(including $2.4 million to the general partner as holder of 2,305,106 commonunits), $1.0 million to the general partner as holder of the incentive distributionrights, and $0.4 million to the general partner in respect of its 2 per centgeneral partner interest.

***CapitalRequirements***To the extent TC PipeLines has any capital requirementswith respect to its investments in Northern Border Pipeline and Tuscarora ormakes acquisitions during the remainder of 2006, TC PipeLines expects to fundthese requirements with operating cash flows, debt and/or equity.

**Results ofOperations of Northern Border Pipeline Company**

*In thefollowing discussion of the results of Northern Border Pipeline, all amountsrepresent 100 per cent of the operations of Northern Border Pipeline, in whichthe Partnership now holds a 50 per cent interest since April 6, 2006.*

Thediscussion and analysis of Northern Border Pipeline’s financial condition andoperations are based on Northern Border Pipeline’s financial statements, whichwere prepared in accordance with U.S. GAAP.

 

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** **

**PART I.  FINANCIAL INFORMATION (Continued) ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS (Continued)**

**TC PipeLines, LP**

***Overview***

Northern Border Pipelineis a Texas general partnership that was formed in 1978.  Northern Border Pipeline provides natural gastransportation services and is a leading transporter of natural gas importedfrom 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.  Northern Border Pipeline’s customers withfirm service transportation agreements pay a fee known as a demand charge toreserve pipeline capacity, regardless of use, for the term of theircontracts.  Firm service transportationcustomers also pay a fee known as a commodity charge that is based on thevolume of natural gas they transport.  Customers with interruptible servicetransportation agreements may utilize available capacity on Northern BorderPipeline’s system after firm service transportation requests aresatisfied.  Interruptible servicecustomers are assessed a commodity charge only.

Construction of Northern Border Pipeline’s system wasinitially completed in 1982 followed by expansions or extensions in 1991, 1992,1998, 2001 and 2005.  In April2006, the Chicago III Expansion Project went into service as planned, adding130 MMcf/d of transportation capacity on the eastern portion of the pipelineinto the Chicago area.

***RecentDevelopments***

*Purchase and Sale of PartnershipInterest*— In April 2006, ONEOK Partners sold a 20 per centpartnership interest in Northern Border Pipeline to TC PipeLines.  ONEOK Partners and TC PipeLines each now owna 50 per cent interest in Northern Border Pipeline.

In April 2006,Northern Border Pipeline’s general partnership agreement was amended andrestated as a result of the acquisition. The major provisions adopted or changed included the following:

·                  TheManagement Committee consists of four members. Each partner designates two members and TC PipeLines designates one ofits members as chairman.

·                  TheManagement Committee designates the members of the Audit Committee, whichconsists of three members.  One member isselected by the partner’s designated members of the Management Committee whoseaffiliate is the operator and two members are selected by the other partner’sdesignated members of the Management Committee.

·                  ONEOKPartners G.P., formerly known as Northern Plains Natural Gas Company, LLC, isNorthern Border Pipeline’s operator until April 1, 2007.  Effective April 1, 2007, an affiliate ofTransCanada will become Northern Border Pipeline’s operator under a new operatingagreement, described briefly below.

*Operating Agreement*—In April 2006, Northern Border Pipeline entered into an operating agreementwith an affiliate of TransCanada.  Underthe new operating agreement, the TransCanada affiliate will become NorthernBorder Pipeline’s operator effective April 1, 2007.

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

***CriticalAccounting Estimate***

**Provisionfor Rate Refunds******—****NorthernBorder Pipeline is subject to regulation by the FERC.  Northern Border Pipeline transports gas forshippers under a tariff regulated by the FERC that specifies the calculation ofamounts to be paid by shippers and the general terms and conditions oftransportation service on its pipeline system. From time to time, certain revenue collected may be subject to possiblerefunds upon final FERC orders. Accordingly, estimates of rate refund reserves are recorded consideringregulatory proceedings and advice of counsel. As required by the provisions of the settlement of Northern BorderPipeline’s last rate case, on November 1, 2005, they filed a rate case with theFERC.  The new rates were effective May1, 2006, and are being collected subject to refund until final resolution ofthe rate case.  No assurances can be providedas to the financial outcome of Northern Border Pipeline’s 2005 rate caserelative to its current rate structure. As of June 30, 2006, an estimated refund liability of approximately $2.3million related to Northern Border Pipeline’s current rate case was 

16

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**PART I.  FINANCIAL INFORMATION (Continued) ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS (Continued)**

**TC PipeLines, LP**

recorded by NorthernBorder Pipeline.  Northern Border Pipelineanticipates that its current rate case will be resolved and any refunds, ifrequired, will be paid by the end of 2007.

***KnownTrends and Uncertainties***

Northern Border Pipelinecontinues to expect that Canadian natural gas export volumes in 2006 willremain near 2005 levels.  Northern BorderPipeline also continues to expect U.S. demand for natural gas in 2006 will besimilar to 2005 levels.  The EnergyInformation Administration projects that industrial demand in 2006 isincreasing and will offset the reduced residential demand experienced duringthe 2005-2006 heating season as a result of warmer-than-normal temperatures.

Anincrease in natural gas throughput on the TransCanada pipeline system toEastern U.S. markets, due to increased storage injections in Eastern Canada andlingering supply disruptions related to Hurricanes Katrina and Rita, causedfewer natural gas supplies to be available for transportation on NorthernBorder Pipeline’s system.

Duringthe second quarter of 2006, demand for Canadian natural gas in the Western U.S.was much higher than expected primarily due to warmer-than-average temperaturesin the Western U.S.  The return of normalsnowpack and heavier-than-average precipitation in the region during the2005-2006 winter season were anticipated to cause gas-fired electric generationto be displaced with hydroelectric generation; however, the warmer temperaturescreated additional demand for gas-fired electric generation in addition tohydroelectric generation.  Demand in theMidwestern U.S. during the second quarter of 2006 remained moderate.

Naturalgas storage injections and withdrawals in Western Canada also affect natural gasavailable for transportation on Northern Border Pipeline’s system.  During the first quarter of 2006, WesternCanada storage inventories were above average due to lower demand associatedwith the warm winter season.  During thesecond quarter of 2006, Western Canada storage injections slightly declined ona relative basis to the prior year due to the increased throughput to easternmarkets.  At June 30, 2006, working gasin storage was comparable to last year’s high levels, which Northern BorderPipeline believes will favorably impact demand for transportation service inthe third quarter of 2006.

NorthernBorder Pipeline’s contracted capacity averaged approximately 87 per cent duringthe three months ended June 30, 2006, compared with average contracted capacityof 85 per cent for the same period last year. At June 30, 2006, 84 per cent of Northern Border Pipeline’s capacity wascontracted on a firm basis through December 31, 2006.  Northern Border Pipeline anticipates that2006 demand for its capacity will be similar to 2005 demand based on theirexpectations of Canadian natural gas supply and demand for natural gas in themarkets that Northern Border Pipeline serves. Northern Border Pipeline believes that discounting transportation rateson a short-term basis may be necessary to maximize revenue and anticipate thatthe level of discounting in the future may vary from 2005 depending uponcurrent market conditions.

***RegulatoryDevelopments***

On November 1, 2005,Northern Border Pipeline filed a rate case with the FERC as required by theprovisions of the settlement of Northern Border Pipeline’s last rate case.  The rate case filing proposes, among otherthings, a 7.8 per cent increase to Northern Border Pipeline’s revenuerequirement; a change to its rate design approach with a supply zone and marketarea utilizing a fixed rate per dekatherm and a dekatherm-mile rate,respectively; a compressor usage surcharge primarily to recover costs relatedto powering electric compressors; an increase in the depreciation rate fortransmission plant; the implementation of a short-term rate structure on aprospective basis; and the continued inclusion of income taxes in the ratecalculation.

InDecember 2005, the FERC issued an order that identified issues that were raisedin the proceeding, accepted the proposed rates but suspended their effectivenessuntil May 1, 2006.  Since May 1, 2006,the new rates have been collected subject to refund until final resolution ofthe rate case.  As of June 30, 2006, anestimated refund liability of approximately $2.3 million related to NorthernBorder Pipeline’s current rate case was recorded on its balance sheet.  The FERC also issued a procedural schedulethat set a hearing commencement date of October 4, 2006, with an initialdecision scheduled for February 2007.  OnMay 31, 2006, the FERC staff and certain interveners in the case filed theirtestimony.  Settlement discussions areongoing.

17

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*** ***

**PART I.  FINANCIAL INFORMATION (Continued) ITEM 2.  MANAGEMENT’S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS (Continued)**

**TC PipeLines, LP**

***Resultsof Operations***

The following tables setout summarized financial information for Northern Border Pipeline for the threeand six months ended June 30, 2006 and 2005 and as at June 30, 2006 andDecember 31, 2005.  Amounts discussedrepresent 100 per cent of the operations of Northern Border Pipeline, in whichthe Partnership holds a 50 per cent interest as at June 30, 2006.

**Northern Border Pipeline Income Statement**
| ** **                          | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|-------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| **(unaudited)**                     | ** ** | **June 30**                 | ** ** | **June 30**               | ** ** |
| **(millions of dollars)** | ** ** | **2006**                         | ** ** | **2005**                       | ** ** | **2006** | ** ** | **2005** | ** ** |
| Revenues                            | ** ** | **71.5**                         |       | 69.8                           | ** ** | **151.3** |   | 152.6 |   |
| Costs and  expenses                 | ** ** | **(20.7**                        | **)**      | (16.7                          | )          | **(38.2** | **)** | (34.1 | ) |
| Depreciation                        | ** ** | **(14.8**                        | **)**      | (14.3                          | )          | **(29.4** | **)** | (28.7 | ) |
| Financial  charges                  | ** ** | **(10.9**                        | **)**      | (10.6                          | )          | **(21.6** | **)** | (21.2 | ) |
| Other income                        | ** ** | **0.3**                          |       | 0.6                            | ** ** | **0.7** |   | 0.8 |   |
| Net income                          | ** ** | **25.4**                         |       | 28.8                           | ** ** | **62.8** |   | 69.4 |   |

 

**NorthernBorder Pipeline Balance Sheet**

|                                            | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| **(millions of dollars)**        | ** ** | **2006**          | ** ** | **2005**              | ** ** |
| ** **                                 | ** ** | **(unaudited)**   | ** ** | ** **            | ** ** |
| **Assets**                                 |       |              |       |                  |       |
| Cash and cash  equivalents                 | ** ** | **8.1**           |       | 22.0                  |       |
| Other current  assets                      | ** ** | **34.5**          |       | 45.7                  |       |
| Plant, property  and equipment, net        | ** ** | **1,503.7**       |       | 1,516.1               |       |
| Other assets                               | ** ** | **21.7**          |       | 20.9                  |       |
|                                       | ** ** | **1,568.0**       |       | 1,604.7               |       |
| **Liabilities  and Partners’ Equity** |       |              |       |                  |       |
| Current  liabilities                       | ** ** | **218.1**         |       | 56.0                  |       |
| Reserves and  deferred credits             | ** ** | **5.2**           |       | 4.8                   |       |
| Long-term debt                             | ** ** | **451.0**         |       | 628.9                 |       |
| Partners’ equity                      |       |              |       |                  |       |
| Partners’ capital                     | ** ** | **892.2**         |       | 912.7                 |       |
| Accumulated other comprehensive income     | ** ** | **1.5**           |       | 2.3                   |       |
|                                       | ** ** | **1,568.0**       |       | 1,604.7               |       |

 

***SecondQuarter 2006 Compared with Second Quarter 2005***

Net income was $25.4million for the three months ended June 30, 2006, a decrease of $3.4 million,or 12 per cent, compared with $28.8 million for the same period last year,primarily due to increased operations and maintenance expense, depreciation andamortization, taxes other than income and interest expense and decreased otherincome.

Revenues, net ofthe provision for rate refunds, increased $1.7 million, or 2 per cent, for thethree months ended June 30, 2006, compared with the same period last year dueto increased revenue of $1.5 million associated with a compressor usagesurcharge charged to Northern Border Pipeline’s customers effective May 1,2006, included in the increased rates that were proposed in their current ratecase, and additional revenue of $1.0 million due to contracts related to theChicago III Expansion Project; partially offset by lower revenue of $0.8million related to decreased demand for other transportation services.  Northern Border Pipeline reserved $2.3million of transportation revenue during the second quarter of 2006, as theproposed rates are subject to possible refunds upon final FERC orders.  Additional information about Northern BorderPipeline’s current rate case is included in this section under “RegulatoryDevelopments.”

Costs and expensesincreased $4.0 million, or 24 per cent, for the three months ended June 30,2006, compared with the same period last year as a result of increased generaland administrative expenses, electric compression charges associated with thenew Chicago III Expansion Project compressor station, rate case expenses 

18

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**PART I.  FINANCIAL INFORMATION (Continued) ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS (Continued)**

**TC PipeLines, LP**

and the reduction ofNorthern Border Pipeline’s allowance for doubtful accounts related tobankruptcy claims against Enron Corp. and Enron North America Corp. in thesecond quarter of 2005.

***SixMonths Ended June 30, 2006 Compared with Six Months Ended June 30, 2005***

Net income was $62.8million for the six months ended June 30, 2006, a decrease of $6.6 million, or10 per cent, compared with $69.4 million for the same period of 2005, primarilydue to the increased second quarter operations and maintenance expenses, decreasedfirst quarter operating revenue, increased depreciation and amortization, taxesother than income and interest expense and decreased other income.

Revenues, net ofthe provision for rate refunds, decreased $1.3 million, or 1 per cent, for thesix months ended June 30, 2006, compared with the same period last year primarilydue to decreased firm demand revenue and commodity charges of $3.0 million as aresult of discounted transportation rates, transportation capacity that wassold for shorter transportation paths and some unsold capacity in March 2006,partially offset by the increased revenue during the second quarter of 2006described above.

Costs and expensesincreased $4.1 million, or 12 per cent, for the six months ended June 30, 2006,compared with the same period last year due to increased expenses during thesecond quarter of 2006.

**Liquidity andCapital Resources of Northern Border Pipeline Company**

Northern Border Pipeline’sprincipal sources of liquidity include cash generated from operating activitiesand bank credit facilities.  NorthernBorder Pipeline funds its operating expenses, debt service and cashdistributions to its partners primarily with operating cash flow.  Capital resources for maintenance and growthexpenditures are funded by a variety of sources, including cash generated fromoperating activities, borrowings under Northern Border Pipeline’s creditagreement, issuance of senior unsecured notes and/or equity contributions fromNorthern Border Pipeline’s partners. Northern Border Pipeline’s ability to access the capital markets toissue debt securities under reasonable terms depends on its financialcondition, credit ratings and market conditions.  Northern Border Pipeline believes that itsability to obtain financing and its history of consistent cash flow fromoperating activities provide a solid foundation to meet its short- andlong-term liquidity and capital resource requirements.

***Debtand Credit Facilities***

The following tablesummarizes Northern Border Pipeline’s debt and credit facilities outstanding asof June 30, 2006:
| ** **                                           | ** ** | ** ** | ** ** | **Payments Due by Period** | ** ** |
|------------------------------------------------------|------------|------------|------------|-------------------------------------------|------------|
| ** **                                           | ** ** | ** ** | ** ** | **Less than 1**                 | ** ** | **Long-term** | ** ** |
| **(millions of dollars)**                  | ** ** | **Total**  | ** ** | **year**                                  | ** ** | **portion** | ** ** |
|                                                 |       |       |       |                                      |       |   |   |
| $175 million  Pipeline Credit Agreement due 2010 (a) |       | $          | 19.0       |                                      | 19.0       |   | $ | - |   |
| 6.25% senior  notes due 2007                         |       | 150.0      |       | 150.0                                     |       | - |   |
| 7.75% senior  notes due 2009                         |       | 200.0      |       | -                                         |       | 200.0 |   |
| 7.50% senior  notes due 2021                         |       | 250.0      |       | -                                         |       | 250.0 |   |
| Total                                                |       | $          | 619.0      |                                      | $          | 169.0 |   | $ | 450.0 |   |
|                                                      |            |            |            |                                           |            |  |  |  |  |  |

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(a)             NorthernBorder Pipeline is required to pay a facility fee of 0.075% on the principalcommitment amount of its credit agreement.

***RevolvingCredit Agreement***

As of June 30, 2006,Northern Border Pipeline had outstanding borrowings of $19.0 million under its$175 million revolving credit agreement and was in compliance with thecovenants of its agreement.  Thecovenants are described in Item 7, “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations—Liquidity and Capital Resources,”in Northern Border Pipeline’s annual report on Form 10-K for the year endedDecember 31, 2005.  The weighted averageinterest rate related to the borrowings on our credit agreement was 6.35 percent at June 30, 2006.

19

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**PART I.  FINANCIAL INFORMATION (Continued) ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS (Continued)**

**TC PipeLines, LP**

***CashFlows***

Northern Border Pipeline’scash flows from operating activities decreased $4.3 million from the sameperiod last year primarily due to decreased cash received from customers as aresult of lower operating revenue for first quarter of 2006; expendituresrelated to its current rate case; increased cash paid for interest; and cashreceived in 2005 of $0.8 million related to Northern Border Pipeline’s EnronCorp. and Enron North America Corp. bankruptcy claims.  Cash used in investing activities was $6.7million higher for the six months ended June 30, 2006, compared to the sameperiod last year primarily due to growth capital expenditures related to theChicago III Expansion Project of $9.9 million, which were partially offset bylower maintenance capital expenditures

Northern BorderPipeline received equity contributions from its partners of $10.3 millionduring the first quarter of 2006 to fund approximately 50 per cent of theChicago III Expansion Project capital costs. Distributions to partners, which are calculated using operating resultsfrom the preceding quarter, decreased $12.9 million compared with the sameperiod last year primarily due to lower net income.

***RecentAccounting Pronouncements***

There were no newstandards issued by the FASB or other regulatory bodies during the six monthsended June 30, 2006 that had a material impact on Northern Border Pipeline’sresults of operations.

**Results ofOperations of Tuscarora Gas Transmission Company**

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

***Overview***

Tuscarora is aNevada general partnership formed in 1993.  Tuscarora owns a 240-mile, 20-inchdiameter, U.S. interstate pipeline system thatoriginates at an interconnection point withfacilities of GTN, a wholly-owned subsidiary of TransCanada, near Malin,Oregon and runs southeast through northeastern California and northwesternNevada. The Tuscarora pipeline system terminates near Wadsworth,Nevada.  Along its route, deliveries aremade in Oregon, northern California and northwestern Nevada.  Deliveries are also made directly to thelocal gas distribution system of Sierra Pacific Power, a subsidiary of SierraPacific Resources.

Tuscarorahas firm transportation contracts for over 95 per cent of its availablecapacity, including contracts held by Sierra Pacific Power for 69 per cent ofthe total available capacity, the majority of which expires on October 31,2017.  As of June 30, 2006, theweighted-average contract life on the Tuscarora pipeline system wasapproximately 11.9 years.

***RecentDevelopments***

*Cost andRevenue Study —*In accordance with a letter agreementexecuted on September 25, 2001 with the Public Utilities Commission of Nevada(PUCN), Tuscarora had an obligation to file a cost and revenue study with theFERC, within a reasonable timeframe following the third anniversary of thein-service date of its 2002 expansion project. The project was placed into service on December 1, 2002.  As a result of that requirement, Tuscaroraand the PUCN entered into settlement discussions with respect to a potentialrate adjustment.  On April 26, 2006 thePUCN approved a settlement with Tuscarora. The settlement results in a firm transportation rate of $0.40/decathermper day (dth-day) beginning June 1, 2006. This is a 17 per cent reduction to the current rate of $0.4811/dth-day,or approximately $5 million reduction in Tuscarora’s annual revenues.  In addition, the settlement results in amoratorium on all rate actions before the FERC by any party to the settlementfor a period of 48 months to May 1, 2010, including rate actions related toexpansion projects where Tuscarora proposes to price the expansion at thesettlement rate.  There is no requirementto file a cost and revenue study or rate case at the end of the moratorium period.  The settlement also terminates the September2001 requirement for Tuscarora to file a cost and revenue study.  All firm shippers have signed on with theagreement settlement.  The settlement wasapproved by the FERC on July 3, 2006.  Acompliance filing was made July 7, 2006 for the new tariffs, which are to beeffective as of June 1, 2006.  Approvalfor this filing is expected to be received by the end of September 2006.

***Resultsof Operations***

The following tables setout summarized financial information for Tuscarora for the three and six monthsended June 30, 2006 and 2005 and as at June 30, 2006 and December 31,2005.  Amounts discussed represent 100per cent of the operations of Tuscarora, in which the Partnership has held a 49per cent interest since September 1, 2000.

20

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**PART I.  FINANCIAL INFORMATION (Continued) ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS (Continued)**

**TC PipeLines, LP**

**Tuscarora Income Statement**
| ** **                          | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|-------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| **(unaudited)**                     | ** ** | **June 30**                 | ** ** | **June 30**               | ** ** |
| **(millions of dollars)** | ** ** | **2006**                         | ** ** | **2005**                       | ** ** | **2006** | ** ** | **2005** | ** ** |
| Revenues                            | ** ** | **7.6**                          |       | 8.0                            | ** ** | **15.9** |   | 16.3 |   |
| Costs and  expenses                 | ** ** | **(1.3**                         | **)**      | (1.1                           | )          | **(2.4** | **)** | (2.2 | ) |
| Depreciation                        | ** ** | **(1.5**                         | **)**      | (1.6                           | )          | **(3.1** | **)** | (3.1 | ) |
| Financial  charges                  | ** ** | **(1.4**                         | **)**      | (1.4                           | )          | **(2.8** | **)** | (2.9 | ) |
| Other income                        | ** ** | **0.1**                          |       | 0.1                            | ** ** | **0.1** |   | 0.1 |   |
| Net income                          | ** ** | **3.5**                          |       | 4.0                            | ** ** | **7.7** |   | 8.2 |   |

 

**TuscaroraBalance Sheet**
| ** **                                 | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| **(millions of dollars)**        | ** ** | **2006**          | ** ** | **2005**              | ** ** |
| ** **                                 | ** ** | **(unaudited)**   | ** ** | ** **            | ** ** |
| **Assets**                                 |       |              |       |                  |       |
| Cash and cash  equivalents                 | ** ** | **3.5**           |       | 3.8                   |       |
| Other current  assets                      | ** ** | **2.4**           |       | 3.0                   |       |
| Plant, property  and equipment, net        | ** ** | **128.7**         |       | 131.6                 |       |
| Other assets                               | ** ** | **1.4**           |       | 1.4                   |       |
|                                       | ** ** | **136.0**         |       | 139.8                 |       |
| **Liabilities  and Partners’ Equity** |       |              |       |                  |       |
| Current  liabilities                       | ** ** | **6.5**           |       | 6.8                   |       |
| Long-term debt                             | ** ** | **68.8**          |       | 71.1                  |       |
| Partners’ equity                      |       |              |       |                  |       |
| Partners’ capital                     | ** ** | **60.6**          |       | 61.8                  |       |
| Accumulated other comprehensive income     | ** ** | **0.1**           |       | 0.1                   |       |
|                                       | ** ** | **136.0**         |       | 139.8                 |       |

 

***SecondQuarter 2006 Compared with Second Quarter 2005***

Net income decreased $0.5million, or 13 per cent, to $3.5 million in the second quarter of 2006,compared to $4.0 million for the same period in 2005.  The decrease was primarily due to the lowerrevenues.

Revenuesearned by Tuscarora decreased $0.4 million, or 5 per cent, to $7.6 million inthe second quarter of 2006, compared to $8.0 million for the same period in2005.  The decrease was mainly due to thelower rates charged for the month of June 2006.

Costsand expenses increased $0.2 million, or 18 per cent, to $1.3 million in thesecond quarter of 2006, compared to $1.1 million for the same period in2005.  The increase was primarily due tomaintenance costs to repair the washout of Susanville Lateral.  Depreciation of $1.5 million for the secondquarter of 2006 remained relatively consistent with the same period in 2005,when the depreciation totaled $1.6 million.

Financialcharges and other income remained flat at $1.4 million and $0.1 million,respectively, in the second quarter of 2006 when compared to the same period in2005.

***SixMonths Ended June 30, 2006 Compared with Six Months Ended June 30, 2005***

Net income decreased $0.5million, or 6 per cent, to $7.7 million for the six months ended June 30, 2006,compared to $8.2 million for the same period in 2005.  The decrease was primarily due to the lowerrevenues.

Revenuesearned by Tuscarora decreased $0.4 million, or 2 per cent, to $15.9 million inthe first six months of 2006, compared to $16.3 million for the same period in2005.  The decrease is mainly due to thelower rates charged for the month of June 2006.

Costsand expenses increased $0.2 million, or 9 per cent, to $2.4 million for the sixmonths ended June 30, 2006, compared to $2.2 million for the same period in2005.  The increase was primarily due tomaintenance costs to 

21

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**PART I.  FINANCIAL INFORMATION (Continued) ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS (Concluded)**

**TC PipeLines, LP**

repair the washout ofSusanville Lateral.  Depreciationremained flat at $3.1 million in the first six months of 2006 when compared tothe same period in 2005.

Financial chargesdecreased $0.1 million, or 3 per cent, to $2.8 million for the six months endedJune 30, 2006, compared to $2.9 million for the same period last year.  The decrease is mainly due to less debtoutstanding.  Other income remained flat at$0.1 million for the first six months of 2006, compare to the same period in2005.

**Liquidity andCapital Resources of Tuscarora Gas Transmission Company**

***Debtand Credit Facilities***

The following tablesummaries Tuscarora’s debt and credit facilities outstanding as of June 30,2006:

 
| ** **                          | ** ** | **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     |       | 59.8                                      |       | 3.5 |   | 6.5 |   | 49.8 |   | — |   |
| Series B Senior  Notes due 2010     |       | 6.2                                       |       | 0.5 |   | 1.0 |   | 4.7 |   | — |   |
| Series C Senior  Notes due 2012     |       | 7.6                                       |       | 0.8 |   | 1.7 |   | 1.6 |   | 3.5 |   |
| Operating Leases                    |       | 0.3                                       |       | 0.1 |   | 0.2 |   | — |   | — |   |
| Commitments(1)                      |       | 0.9                                       |       | 0.7 |   | 0.2 |   | — |   | — |   |
| Total                               |       | $                                         | 74.8       |   | $ | 5.6 |   | $ | 9.6 |   | $ | 56.1 |   | $ | 3.5 |   |
|                                     |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)             Tuscarora’scommitments relate to a contract with a third party for maintenance services oncertain components of its      pipeline-related equipment.  The contract expires in November 2007.

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

***CashFlows***

Tuscarora’s cash providedby operating activities decreased $0.7 million to $11.2 million compared to thesame period last year primarily due to lower revenues and a reduction inworking capital.

Cash used in investingactivities decreased $0.5 million to $0.2 million for the first six months of2006, compared to the same period in 2005 due to higher growth capitalexpenditures in 2005, which were related to the Barrick Lateral.

Cash used in financingactivities was $0.2 million higher compared to the same period in 2005 due to higher cash distributionspaid to Tuscarora’s partners in 2006.

22

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**PARTI.  FINANCIAL INFORMATION (Continued) ITEM 3.  QUANTITATIVE AND QUALITATIVEDISCUSSIONS ABOUTMARKET RISK**

**TC PipeLines, LP**

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 Bridge Loan Credit Facility andRevolving Credit Facility, which are subject to variability in LIBOR interestrates.  At June 30, 2006, TC PipeLineshad $307 million outstanding on its Bridge Loan Credit Facility and $1 millionoutstanding on its Revolving Credit Facility. If LIBOR interest rates changed by 1 per cent compared to the rates ineffect at June 30, 2006, our interest expense for the six months ended June 30,2006 would have changed by approximately $0.7 million.  This amount has been determined byconsidering the impact of the hypothetical interest rates on variable rate borrowingsoutstanding as of June 30, 2006.

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 Pipelineutilizes both fixed- and variable-rate debt and is exposed to market risk dueto the floating interest rates on its credit agreement.  Northern Border Pipeline regularly assessesthe impact of interest rate fluctuations on future cash flows and evaluateshedging opportunities to mitigate its interest rate risk.

Northern Border Pipelinemaintains a significant portion of its debt at fixed rates to reduce itssensitivity to interest rate fluctuations and utilizes interest rate swapagreements to convert fixed-rate debt to variable-rate debt to manage interestexpense.  As of June 30, 2006, 97 percent of Northern Border Pipeline’s outstanding debt was at fixed rates andthere were no interest rate swap agreements outstanding.

If interest rateshypothetically increased 1 per cent on Northern Border Pipeline’s variable-rateborrowings outstanding at June 30, 2006, its interest expense would increaseand 2006 projected net income would decrease by approximately $0.2 million.

23

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**PARTI.  FINANCIAL INFORMATION (Concluded) ITEM 4.  CONTROLS AND PROCEDURESTC PipeLines, LP**

**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 and thatinformation required to be disclosed by the Partnership in the reports that thePartnership files or submits under the Exchange Act is accumulated andcommunicated to the management of the general partner of the Partnership,including the President and Chief Executive Officer and Chief FinancialOfficer, as appropriate to allow timely decisions regarding requireddisclosure.

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

 

24

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**PART II.  OTHER INFORMATIONITEM 1A.  RISK FACTORS**

**TC PipeLines, LP**

*Thefollowing risk factor was disclosed in the Partnership’s annual report on Form10-K for the year ended December 31, 2005, and is hereby removed as a result ofthe close of the Partnership’s acquisition of an additional 20 per cent generalpartnership interest in Northern Border Pipeline.*

***We may be unableto complete the transaction to acquire an additional 20 per cent generalpartnership interest in Northern Border Pipeline from Northern Border Partners.***

***OnFebruary 14, 2006, we entered into a partnership interest purchase and saleagreement dated as of December 31, 2005 with Northern Border Pipeline toacquire an additional 20 per cent partnership interest in Northern BorderPipeline.  The purchase and saleagreement contains customary and other closing conditions that, if notsatisfied or waived, would result in the sale not occurring, including:continued accuracy of the representations and warranties contained in theagreement; performance by each party of its obligations under the purchase andsale agreement; 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.  Inaddition, on March 2, 2006, a holder of limited partnership units of NorthernBorder Partners filed a class action and derivative complaint on behalf of aputative class of all holders of limited partnership units against NorthernBorder Partners, ONEOK, Northern Plains, and related entities involved in theTransactions, which, among other things, seeks to enjoin the Transactions or torescind the Transactions if the Transactions are completed prior to entry of afinal judgment in the case.***

25

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**PART II.  OTHER INFORMATION (Continued)ITEM 1A.  RISK FACTORS (Continued)**

**TC PipeLines, LP**

The following newor modified risk factors should be read in conjunction with the risk factorsdisclosed in Part I, Item 1A, “Risk Factors,” in our annual report on Form 10-Kfor the year ended December 31, 2005:

***We are dependent on Northern Border Pipeline andTuscarora and may not be able to generate sufficient cash from thedistributions from each of Northern Border Pipeline and Tuscarora to enable usto pay the expected quarterly distribution on the TC PipeLines common unitsevery quarter.***

Theactual amount of cash we will have available to distribute to our commonunitholders will significantly depend upon numerous factors relating to each ofNorthern Border Pipeline’s and Tuscarora’s businesses, most of which are beyondour control and the control of our general partner, including:

·                  the amount ofcash distributed to us by Northern Border Pipeline and Tuscarora;

·                  the tariff andtransportation charges collected by Northern Border Pipeline and Tuscarora fortransportation services on their pipeline systems;

·                  the outcome ofNorthern Border Pipeline’s rate case pending before the FERC;

·                  the ability ofNorthern Border Pipeline to recontract capacity for maximum transportationrates as existing contracts terminate;

·                  the amount ofcash required to be contributed by us to either Northern Border Pipeline orTuscarora in the future;

·                  success ofpipelines competing with Northern Border Pipeline and Tuscarora;

·                  increases inNorthern Border Pipeline’s and Tuscarora’s maintenance and operating costs; and

·                  expansion costsrelated to these systems.

Other factors that affectthe actual amount of cash that we will have available for distribution to ourunitholders include the following:

·                  the amount ofcash set aside and the adjustment in reserves made by our general partner inits sole discretion;

·                  the amount ofour operating costs, including payments to our general partner;

·                  requiredprincipal and interest payments on our debt;

·                  the cost ofacquisitions, including related debt service payments; and

·                  our issuance ofdebt and equity securities.

***If any significant shipper fails to perform itscontractual obligations, Northern Border Pipeline’s or Tuscarora’s respectivecash flows and financial condition could be adversely impacted.***

As of December 31, 2005, each of the four largestcustomers on the Northern Border Pipeline system accounted for more than 10 percent of its revenue. Sierra Pacific Power, a wholly owned subsidiary of SierraPacific Resources, is Tuscarora’s largest shipper, with firm contracts forapproximately 69 per cent of its capacity. Sierra Pacific Resources and SierraPacific Power have below-investment grade credit ratings.  If any of the

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**PART II.  OTHER INFORMATION (Continued)ITEM 1A.  RISK FACTORS (Continued)**

**TC PipeLines, LP**

significantshippers on either Northern Border Pipeline or Tuscarora fail to meet theircontractual obligations, our ability to make cash distributions to ourunitholders at current levels may be adversely affected.

***Northern Border Pipeline and Tuscarora may not be ableto maintain existing customers or acquire new customers when the currentshipper contracts expire or customers may choose to recontract for shorterperiods or at less than maximum rates.***

Demand for natural gas is seasonal.  Capacity that is contracted under firmservice transportation agreements is not impacted by seasonal throughputvariations but when transportation agreements expire, seasonal demand canimpact Northern Border Pipeline’s ability to recontract firm servicetransportation capacity.  Accordingly,throughput on Northern Border Pipeline may experience seasonal fluctuations anddiscounting of rates may be required to maximize revenue.

The renewal or replacement of existing contracts withcustomers of Northern Border Pipeline depends on a number of factors beyondNorthern Border Pipeline’s control, including:

·                  the supply ofnatural gas in Canada and the U.S.;

·                  competition fromalternative sources of supply in the U.S.;

·                  competition fromother pipelines; and

·                  the price of,and demand for, natural gas in markets served by the Northern Border Pipelinesystem.

Because of ongoing changes in these factors andcustomers’ ability to adjust to changing market conditions, Northern BorderPipeline may sell a significant portion of available capacity on a short-termbasis. The weighted average life of these Northern Border Pipeline’s contractshas generally declined over-time. ** **Additionally, if the forwardnatural gas basis differentials do not support maximum rates, Northern BorderPipeline may sell portions of its capacity at discounted rates.  In 2005, Northern Border Pipeline discountedtransportation rates on the Port of Morgan, Montana to Ventura, Iowa portion ofthe Northern Border Pipeline to maximize revenue as a large number of firmtransportation contracts expired and were not renewed.  In 2005, revenue from firm servicetransportation decreased $16.2 million as a result of uncontracted anddiscounted capacity.  Although NorthernBorder Pipeline advises that it believes that 2006 demand for itstransportation capacity is anticipated to be similar to 2005 demand based onNorthern Border Pipeline’s expectation of Canadian natural gas supply anddemand for natural gas in the Midwestern U.S., the level of discounting in 2006may vary from 2005 discounting levels depending upon current marketconditions.  Any inability by NorthernBorder Pipeline to renew existing contracts at maximum rates or at all may havean adverse impact on Northern Border Pipeline’s revenue, and, as a result, cashdistributions made to us.

Tuscarora competes in the northern Nevada natural gastransmission market with Paiute, owned by Southwest Gas Co. of Las Vegas,Nevada. The Paiute pipeline interconnects with Northwest Pipeline Corp. at theNevada-Idaho border and transports natural gas from British Columbia and theU.S. Rocky Mountain Basin to the northern Nevada market. As a result ofcompetition from the Paiute pipeline, Tuscarora’s proposed 2005 expansion wascanceled pursuant to the October 2004 settlement with the potential expansionshippers.

TransCanada’s main pipeline systems transport naturalgas from the same natural gas reserves in Western Canada that are used byNorthern Border Pipeline’s and Tuscarora’s customers. TransCanada is notprohibited from actively competing with Northern Border Pipeline and Tuscarorafor the transport of Western Canadian natural gas.

***The long-term financial conditions of Northern BorderPipeline and Tuscarora, and as a result, of TC PipeLines, are dependent on thecontinued availability of natural gas from the Alberta hub for import into theU.S.***

The development of additional natural gas reservesrequires significant capital expenditures by others for exploration anddevelopment drilling and the installation of production, gathering, storage,transportation and other facilities that permit natural gas to be produced anddelivered to pipelines that interconnect with Northern Border

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**PART II.  OTHER INFORMATION (Continued)ITEM 1A.  RISK FACTORS (Continued)**

**TC PipeLines, LP**

Pipeline’s or Tuscarora’s pipeline systems. Low pricesfor natural gas, regulatory limitations, or the lack of available capital forthese projects could adversely affect the development of additional reservesand the production, gathering, storage, pipeline transmission, import andexport of natural gas supplies.

In addition, the internal demand for Canadian naturalgas may increase, as a result of increased demand for electricity generationand other industrial requirements, including the development of oil sandsprojects, which may require substantial amounts of natural gas.  This higher internal demand may reduce theamount of gas available for import to the U.S.. In the longer term, a portion of the Alberta hub gas supply may comefrom proposed gas pipelines from the North Slope of Alaska and the MackenzieDelta of Canada and from the continued growth of coal bed methaneprojects.  Cancellation or delays in theconstruction of such pipelines or such projects could adversely affect us. Ifthe availability of Alberta hub natural gas were to decline, existing shipperson the Northern Border Pipeline and Tuscarora pipeline system may be unlikelyto extend their contracts and Northern Border Pipeline and Tuscarora may beunable to find replacement shippers for lost capacity. Furthermore, additionalnatural gas reserves may not be developed in commercial quantities and insufficient amounts to fill the capacities of each of the Northern BorderPipeline and Tuscarora pipeline systems.

***Northern Border Pipeline’s and Tuscarora’s businessesdepend in part on the level of demand for Western Canadian natural gas in themarkets the pipeline systems serve. If demand for Western Canadian natural gasdecreases, shippers may not enter into or renew contracts.***

Northern Border Pipeline’s and Tuscarora’s businessesdepend in part on the level of demand for Western Canadian natural gas in themarkets the pipeline systems serve. The volumes of natural gas delivered tothese markets from other sources affect the demand for both Western Canadiannatural gas and use of these pipeline systems. Demand for Western Canadiannatural gas also influences the ability and willingness of shippers to use theNorthern Border Pipeline and Tuscarora pipeline system to meet the demand thatthese pipeline systems serve.

In addition, existing customers may not extend theircontracts if the cost of delivered natural gas from other producing regionsinto the markets served by Northern Border Pipeline and Tuscarora is lower thatthe cost of natural gas delivered by Northern Border Pipeline and Tuscarora.  Northern Border Pipeline and Tuscarora may beunable to find additional customers to replace the lost demand ortransportation fees.  Our financialperformance depends to a large extent on the capacity contracted on ourpipeline systems. Decreases in the volumes transported by our systems, whethercaused by supply or demand factors in the markets these systems serve,competition or otherwise, can directly and adversely affect our revenues andresults of operations.

***If the FERC requires that Northern Border Pipeline’sor Tuscarora’s tariff be changed, Northern Border Pipeline’s or Tuscarora’srespective cash flows may be adversely affected.***

Northern Border Pipeline and Tuscarora are subject toextensive regulation by the FERC. The FERC’s regulatory authority is notlimited to but extends to matters including:

·                  transportationof natural gas;

·                  rates andcharges;

·                  construction ofnew facilities;

·                  acquisition,extension or abandonment of services and facilities;

·                  accounts andrecords;

·                  depreciation andamortization policies; and

·                  operating termsand conditions of service.

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**PART II.  OTHER INFORMATION (Continued)ITEM 1A.  RISK FACTORS (Continued)**

**TC PipeLines, LP**

Given the extent of regulation by the FERC andpotential changes to regulations, we cannot predict:

·                  the likelyfederal regulations under which Northern Border Pipeline or Tuscarora willoperate in the future;

·                  the effect thatregulation will have on financial position, results of operations and cashflows of Northern Border Pipeline, Tuscarora or ourselves;

·                  whether our cashflow will be adequate to make distributions to unitholders.

The outcome of pending or future proceedings beforethe FERC may adversely affect the amount of cash Northern Border Pipeline orTuscarora is able to distribute to us.

***The outcome of Northern Border Pipeline’s pending ratecase could adversely impact the amount of cash distributed to us by NorthernBorder Pipeline.***

In November 2005, Northern Border Pipeline filed arate case with the FERC requesting (1) a 7.8 per cent increase in NorthernBorder Pipeline’s revenue requirement; (2) a change to its rate designestablishing a new supply zone and market area utilizing a fixed rate perdekatherm and a dekatherm-mile rate, respectively; (3) an increase in thedepreciation rate for transmission plant; (4) the implementation of ashort-term rate structure on a prospective basis; (5) continued inclusion of anincome tax allowance in the rate calculation; ; (6) a roll-in of certainacquisition and expansion costs; (7) a decrease in rate base; and (8) otherchanges to its rates.  A number ofNorthern Border Pipeline’s customers and other interested parties haveprotested the proposed changes and have claimed that Northern Border Pipeline’srates should be lower than its proposed rates or its rates in effect prior tothe rate case.     Northern BorderPipeline’s proposed rates went into effect on May 1, 2006, subject to refundpending the outcome of the rate case. Any FERC determination that Northern Border Pipeline’s rates should beless than its proposed rates may have an adverse impact on the cash distributedto us.  If the FERC determines thatNorthern Border Pipeline’s rates  shouldbe below its proposed rates or its rates in effect prior to the rate case,Northern Border would be required  (1) tocharge its customers those lower rates prospectively, following the FERC’sfinal determination on the rates, and (2) to refund its customers the difference between the currentlyeffective rates it began charging on May 1, 2006, and the rates that were ineffect prior to the rate case for the period from May 1, 2006 until the FERC’sfinal determination on the rates goes into effect.  Northern Border Pipeline is accruing cashreserves in an amount equal to that difference. Any FERC determination adverseto Northern Border Pipeline in its rate case may have an adverse impact on thecash distributed to us.

In May 2005, the FERC issued a policy statementpermitting the inclusion of an income tax allowance in the rates forpartnership interests held by partners with an actual or potential income taxliability. On December 16, 2005, the FERC issued its first significantcase-specific pipeline review of the income tax allowance issue in anotherpipeline company’s rate case.  TheFERC  reaffirmed its new income taxallowance policy and directed the subject pipeline to provide certain evidencenecessary for the pipeline to determine its income tax allowance. The new taxallowance policy and the December 16 order have been appealed to the D.C. Circuit.As a result, the ultimate outcome of these proceedings is not certain and couldresult in changes to the FERC’s treatment of income tax allowances in cost ofservice. Depending upon how the policy statement on income tax allowances isapplied in practice to pipelines owned by partnerships, and whether it isultimately upheld or modified on judicial review, could affect the tariffs ofFERC-regulated oil and natural gas pipelines like us.  We cannot predict the outcome of the case onappeal and its potential effect on Northern Border Pipeline’s rate case, orwhat, if any, effect any such outcome may have on Northern Border Pipeline.Northern Border Pipeline’s present rates and recent rate case filing reflectsan allowance for income taxes of 35 per cent regardless of the partners’taxpaying status.  Any FERC actionsregarding this issue in Northern Border Pipeline’s rate case that may adverselyaffect Northern Border Pipeline could have an adverse effect on the cashdistributions we receive from it.

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**PART II.  OTHER INFORMATION (Continued)ITEM 1A.  RISK FACTORS (Continued)**

**TC PipeLines, LP**

***Wemay be unable to cause Northern Border Pipeline to take or not to take certainactions unless the other owner agrees.***

Until April 1, 2007, the day to day management of theaffairs of Northern Border Pipeline, including any expansion projects andoperation of the pipelines, is the sole responsibility of Northern Plains, anaffiliate of ONEOK. The major policies of Northern Border Pipeline areestablished by the management committee, which consists of four members, two ofwhom are designated by us and two of whom are designated by an affiliate ofONEOK.  The management committee requiresthe affirmative vote of a majority of the partners’ ownership interests to acton most activities.  Certain activitiesrequire the unanimous consent of the committee, such as the filing of theapplication for regulatory authority to construct and operate new facilitiesand any changes to the cash distribution policy.  Because of these provisions, without theconcurrence of ONEOK, we may be unable to cause Northern Border Pipeline totake or not to take certain actions, even though those actions may be in thebest interest of us or Northern Border Pipeline.

***If Northern Border Pipeline or Tuscarora do notmaintain or increase their respective rate bases by successfully completingFERC-approved projects, the amount of revenue attributable to the return on therate base they collect from their shippers will decrease over time.***

The Northern Border Pipeline and Tuscarora pipelinesystems are generally allowed to collect from their customers a return on theirassets or “rate base” as reflected in their financial records as well asrecover that rate base through depreciation. The amount they may collect fromcustomers decreases as the rate base declines as a result of, among otherthings, depreciation and amortization. In order to avoid a reduction in thelevel of cash available for distributions to its partners based on its currentFERC-approved tariff, each of these pipelines must maintain or increase itsrate base through projects that maintain or add to existing pipelinefacilities. These projects will depend upon many factors including:

·                  sufficientdemand for natural gas;

·                  an adequatesupply of proved natural gas reserves;

·                  availablecapacity on pipelines that connect with these pipelines;

·                  the execution ofnatural gas transportation contracts;

·                  the approval ofany expansion or extension of the pipeline systems by their respectivemanagement committees;

·                  obtainingfinancing for these projects;

·                  receipt andacceptance of necessary regulatory approvals; and

·                  the FERC’sdetermination of the pipelines’ rate base.

Northern Border Pipeline’s and Tuscarora’s ability tocomplete these projects is also subject to numerous business, economic,regulatory, competitive and political uncertainties beyond their control, andneither Northern Border Pipeline nor Tuscarora may be able to complete theseprojects.

***Northern Border Pipeline’s and Tuscarora’s  pipeline integrity program may imposesignificant costs and liabilities.***

The U.S. Department of Transportation issuedfinal rules (effective March 2001 with respect to hazardous liquid pipelinesand February 2004 with respect to natural gas pipelines) requiring pipelineoperators to develop integrity management programs to comprehensively evaluatetheir pipelines, and take measures to protect pipeline

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**PART II.  OTHER INFORMATION (Continued)ITEM 1A.  RISK FACTORS (Continued)**

**TC PipeLines, LP**

segments located in what the rules refer to as “highconsequence areas.” The final rule resulted from the enactment of the PipelineSafety Improvement Act of 2002. At this time, we cannot predict the ultimatecosts of compliance with this rule because those costs will depend on thenumber and extent of the pipeline testing and any subsequent repairs found tobe necessary. Northern Border Pipeline and Tuscarora will continue our pipelineintegrity testing programs to assess and maintain the integrity of thepipelines. The results of this work could cause Northern Border Pipeline andTuscarora to incur significant and unanticipated capital and operatingexpenditures for repairs or upgrades deemed necessary to ensure the continuedsafe and reliable operation of our pipelines.

***Northern Border Pipeline’s and Tuscarora’sindebtedness may limit their ability to borrow additional funds, makedistributions to us or capitalize on business opportunities.***

As of June 30, 2006, Northern Border Pipeline andTuscarora had $620.0 million and $73.5 million of debt outstanding,respectively.  This substantial level ofdebt could have important consequences to Northern Border Pipeline andTuscarora and us, including the following:

·                  their ability toobtain additional financing, if necessary, for working capital, capitalexpenditures, acquisitions or other purposes may be impaired or such financingmay not be available on favorable terms;

·                  they will need aportion of their cash flow to make interest payments on the debt, reducing thefunds that would otherwise be available for operations, future businessopportunities and distributions to us, which will reduce our ability to makedistributions to our unitholders;

·                  their debt levelwill make them more vulnerable to competitive pressures or a downturn in ourbusiness or the economy generally; and

·                  their debt levelmay limit our flexibility in responding to changing business and economicconditions.

Their ability to service their debt will depend upon,among other things, future financial and operating performance, which will beaffected by prevailing economic conditions and financial, business, regulatoryand other factors, some of which are beyond our control.

In addition, under the terms of these financingarrangements, Northern Border Pipeline and Tuscarora are  prohibited from making cash distributionsduring an event of default under its debt instruments. Provisions in NorthernBorder Pipeline’s debt instruments limit its ability to incur indebtedness andengage in specific transactions that could reduce its ability to capitalize onbusiness opportunities that arise in the course of its business.  Under Tuscarora’s debt instruments, Tuscarorahas granted a security interest in certain of its transportation contracts,which is available to noteholders upon an event of default.  In addition, our third party credit facilityrequires us to maintain certain financial ratios and our revolving creditfacility contains restrictions on incurring additional debt and makingdistributions to partners.

Any future refinancing of Northern Border Pipeline’s,Tuscarora’s or our existing indebtedness or any new indebtedness could havesimilar or greater restrictions.

***Increases in interest rates could materially adverselyaffect our business, results of operations, cash flows and financial condition.***

In addition to our exposure to commodity prices, wehave significant exposure to increases in interest rates. As of June 30, 2006,we had approximately $308.0 million of debt, all of which was at variableinterest rates. From time to time, we may enter into interest rate swaparrangements, which could increase our exposure to variable interest rates. Asa result, our results of operations, cash flows and financial condition, couldbe materially adversely affected by significant increases in interest rates.

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**PART II.  OTHER INFORMATION (Continued)ITEM 1A.  RISK FACTORS (Concluded)**

**TC PipeLines, LP**

An increase in interest rates may also cause acorresponding decline in demand for equity investments, in general, and in particularfor yield-based equity investments such as our common units. Any such reductionin demand for our common units resulting from other more attractive investmentopportunities may cause the trading price of our common units to decline.

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** **

**PART II.  OTHER INFORMATION (Concluded)ITEM 6.  EXHIBITS**

**TC PipeLines, LP**

**No.****                          Description**

 31.1                                                                        Certificationof President and Chief Executive Officer pursuant to Section 302 of theSarbanes-Oxley Act of  2002.

 31.2                                                                        Certificationof Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of2002.

 32.1                                                                        Certificationof President and Chief Executive Officer pursuant to Section 906 of theSarbanes-Oxley Act of 2002.

 32.2                                                                        Certificationof Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of2002.

 

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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/ Gregory A. Lohnes |
| Date: August 4, 2006 |   |                             | Gregory A. Lohnes |
|                 |   |                             | Chief Financial Officer (duly authorized officer) |
|                 |   |                             |   |
|                 |   | By:                              | /s/ Amy Leong |
| Date: August 4, 2006 |   |                             | Amy Leong |
|                 |   |                             | Controller (duly authorized officer) |

 

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