** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

**FORM 10-Q**

** **

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

** **

**For the quarterly period ended September 30, 2005**

** **

**or**

** **

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

** **

**For the Transition period from             to            **

** **

**Commission File Number:  000-26091**

**TC PipeLines, LP**

**(Exactname of registrant as specified in its charter)**

** **

| **Delaware**                                       | ** ** | **52-2135448**                               |
|----------------------------------------------------|------------|----------------------------------------------|
| **(State  or other jurisdiction of incorporation** | ** ** | **(I.R.S.  Employer Identification Number)** |
| **or  organization)**                              | ** ** | ** **                                   |
| ** **                                         | ** ** | ** **                                   |
| **110 Turnpike Road, Suite 203**                   | ** ** | ** **                                   |
| **Westborough, Massachusetts**                     | ** ** | **01581**                                    |
| **(Address  of principal executive offices)**      | ** ** | **(Zip  code)**                              |

** **

**508-871-7046**

**(Registrant’stelephone number, including area code)**

** **

** **

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

**Yes **ý                   No  o

** **

** **

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

**Yes **ý                   No  o

** **

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

** **

**Yes**o                    No  ý

** **

**As ofNovember 7, 2005, there were 17,500,000 of the registrant’s common unitsoutstanding.**

** **

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** **

**TC PIPELINES, LP**

** **

**TABLE OF CONTENTS**

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

 

 

 

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

 

2

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**PART I.  FINANCIAL INFORMATION**

**ITEM 1.  FINANCIAL STATEMENTS**

 

**TC PipeLines, LP**

 

** **

**Statement ofIncome**

** **
| ** **                                                | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|-----------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| **(unaudited)**                                           | ** ** | **September 30**       | ** ** | **September 30**      | ** ** |
| **(millions of dollars except per  unit amounts)**        | ** ** | **2005**               | ** ** | **2004**              | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                      |       |                   |       |                  |       |   |   |   |   |
| Equity income from investment in Northern Border Pipeline | ** ** | **13.9**               |       | 11.3                  | ** ** | **34.7** |   | 36.2 |   |
| Equity income from investment in Tuscarora                | ** ** | **1.7**                | ** ** | 1.8                   |       | **5.5** | ** ** | 5.4 |   |
| General and administrative expenses                       | ** ** | **(0.5**               | **)**      | (0.3                  | )          | **(1.5** | **)** | (1.3 | ) |
| Financial charges and  other                              | ** ** | **(0.3**               | **)**      | (0.2                  | )          | **(0.8** | **)** | (0.4 | ) |
| **Net income**                                            | ** ** | **14.8**               | ** ** | 12.6                  |       | **37.9** | ** ** | 39.9 |   |
|                                                      |       |                   |       |                  |       |   |   |   |   |
| **Net income allocation**                                 |       |                   |       |                  |       |   |   |   |   |
| Common units                                              | ** ** | **14.1**               |       | 11.9                  | ** ** | **35.8** |   | 36.6 |   |
| Subordinated units                                        | ** ** | **—**             |       | —                | ** ** | **—** |   | 1.4 |   |
| General partner                                           | ** ** | **0.7**                |       | 0.7                   | ** ** | **2.1** |   | 1.9 |   |
| ** **                                                |       | **14.8**               | ** ** | 12.6                  | ** ** | **37.9** |   | 39.9 |   |
|                                                      |       |                   |       |                  |       |   |   |   |   |
| **Net income per unit**                                   | ** ** | **$**                  | **0.81**   |                  | $          | 0.68 | ** ** | **$** | **2.05** |   | $ | 2.17 |   |
|                                                      |       |                   |       |                  |       |   |   |   |   |
| **Units outstanding (millions)**                          | ** ** | **17.5**               |       | 17.5                  | ** ** | **17.5** |   | 17.5 |   |
|                                                           |            |                        |            |                       |            |  |  |  |  |  |  |  |  |

 

** **

**Statementof Comprehensive Income**

 
| ** **                                                               | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|--------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| **(unaudited)**                                                          | ** ** | **September 30**       | ** ** | **September 30**      | ** ** |
| **(millions of dollars)**                                                | ** ** | **2005**               | ** ** | **2004**              | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                                     |       |                   |       |                  |       |   |   |   |   |
| Net income                                                               | ** ** | **14.8**               |       | 12.6                  | ** ** | **37.9** |   | 39.9 |   |
| Other comprehensive income                                               |       |                   |       |                  |       |   |   |   |   |
| Change associated with current period hedging transactions of  investees | ** ** | **(0.1**               | **)**      | (0.1                  | )          | **(0.3** | **)** | (0.3 | ) |
| **Total comprehensive income**                                           | ** ** | **14.7**               |       | 12.5                  | ** ** | **37.6** |   | 39.6 |   |

 

See accompanying notes to the condensedfinancial statements.

 

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**Balance Sheet**

** **
| ** **                                 | ** ** | **September 30** | ** **   | **December 31** | ** **   |
|--------------------------------------------|------------|------------------|--------------|-----------------|--------------|
| **(millions of dollars)**                  | ** ** | **2005**         | ** **   | **2004**        | ** **   |
| ** **                                 | ** ** | **(unaudited)**  | *** *** | *** ***    | *** *** |
|                                       |       |             |         |            |         |
| **Assets**                                 |       |             |         |            |         |
| Current assets                             |       |             |         |            |         |
| Cash and short-term investments            | ** ** | **1.4**          |         | 2.5             |         |
|                                       |       |             |         |            |         |
| Investment in Northern  Border Pipeline    | ** ** | **280.7**        |         | 290.1           |         |
| Investment in Tuscarora                    | ** ** | **39.0**         |         | 39.5            |         |
|                                       | ** ** | **321.1**        |         | 332.1           |         |
| **Liabilities and Partners’  Equity** |       |             |         |            |         |
| Current liabilities                        |       |             |         |            |         |
| Accrued liabilities                        | ** ** | **0.8**          |         | 0.7             |         |
| Current portion of long-term debt          | ** ** | **20.0**         |         | 6.5             |         |
|                                       | ** ** | **20.8**         |         | 7.2             |         |
| Long-term debt                             | ** ** | **—**       |         | 30.0            |         |
|                                       |       |             |         |            |         |
| Partners’ equity                      |       |             |         |            |         |
| Common units                               | ** ** | **293.0**        |         | 287.4           |         |
| General partner                            | ** ** | **6.4**          |         | 6.3             |         |
| Accumulated other comprehensive income     | ** ** | **0.9**          |         | 1.2             |         |
|                                       | ** ** | **300.3**        |         | 294.9           |         |
|                                       | ** ** | **321.1**        |         | 332.1           |         |

** **

** **

**Statementof Cash Flows**

** **
| **(unaudited)**                                           | ** ** | **Nine months ended September 30** | ** ** |
|-----------------------------------------------------------|------------|------------------------------------|------------|
| **(millions of dollars)**                                 | ** ** | **2005**                           | ** ** | **2004** | ** ** |
| * *                                                  | * *   | * *                           | * *   | * * | * * |
| **Cash Generated From Operations**                        |       |                               |       |   |   |
| Net income                                                | ** ** | **37.9**                           | ** ** | 39.9 |   |
| Add/(deduct):                                             |       |                               | ** ** |   |   |
| Equity income greater than  distributions received        | ** ** | **(2.0**                           | **)**      | — |   |
| Decrease in operating  working capital                    | ** ** | **0.1**                            | ** ** | 0.1 |   |
|                                                      | ** ** | **36.0**                           | ** ** | 40.0 |   |
| **Investing Activities**                                  |       |                               | ** ** |   |   |
| Return of capital from  Northern Border Pipeline          | ** ** | **11.1**                           | ** ** | 10.6 |   |
| Return of capital from  Tuscarora                         | ** ** | **0.8**                            | ** ** | 0.2 |   |
| Investment in Northern  Border Pipeline                   | ** ** | **—**                         | ** ** | (39.0 | ) |
| Investment in Tuscarora                                   | ** ** | **(0.3**                           | **)**      | (0.4 | ) |
|                                                      | ** ** | **11.6**                           | ** ** | (28.6 | ) |
| **Financing Activities**                                  |       |                               | ** ** |   |   |
| Distributions paid                                        | ** ** | **(32.2**                          | **)**      | (31.0 | ) |
| Long-term debt issued                                     | ** ** | **—**                         | ** ** | 20.0 |   |
| Long-term debt repaid                                     | ** ** | **(16.5**                          | **)**      | (6.0 | ) |
|                                                      | ** ** | **(48.7**                          | **)**      | (17.0 | ) |
|                                                      |       |                               | ** ** |   |   |
| **Decrease in cash**                                      | ** ** | **(1.1**                           | **)**      | (5.6 | ) |
| **Cash and short-term  investments, beginning of period** | ** ** | **2.5**                            | ** ** | 7.5 |   |
| **Cash and short-term  investments, end of period**       | ** ** | **1.4**                            | ** ** | 1.9 |   |
|                                                      |       |                               | ** ** |   |   |
| Interest payments made                                    | ** ** | **0.9**                            | ** ** | 0.3 |   |

 

See accompanying notes to the condensedfinancial statements.

 

** **

**4**

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** **

##### * *

**Statementof Changes in Partners’ Equity**

 
| **(unaudited)**                                  | ** ** | **Common Units** | ** ** | **General Partner** | ** ** | **Accumulated Other Comprehensive 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, 2004      |       | 17.5             |       | 287.4               |       | 6.3                                        |       | 1.2                       |       | 17.5 |   | 294.9 |   |
| Net income                                       |       | —           |       | 35.8                |       | 2.1                                        |       | —                    |       | — |   | 37.9 |   |
| Distributions paid                               |       | —           |       | (30.2               | )          | (2.0                                       | )          | —                    |       | — |   | (32.2 | ) |
| Other comprehensive income                       |       | —           |       | —              |       | —                                     |       | (0.3                      | )          | — |   | (0.3 | ) |
| **Partners’ equity at September  30, 2005** | ** ** | **17.5**         | ** ** | **293.0**           | ** ** | **6.4**                                    | ** ** | **0.9**                   | ** ** | **17.5** | ** ** | **300.3** | ** ** |

 

See accompanying notes to the condensedfinancial statements.

 

 

5

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**Notes to Condensed FinancialStatements**

**(unaudited)**

##### * *

##### ***Note 1    Basis ofPresentation***

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.  The Partnership was formed by TransCanadaPipeLines Limited, a subsidiary of TransCanada Corporation (collectivelyreferred herein as TransCanada), to acquire, own and participate in themanagement of United States-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 United Statesdollars.  Other comprehensive incomerecorded by TC PipeLines arises through its equity investments in NorthernBorder Pipeline Company (Northern Border Pipeline) and Tuscarora GasTransmission Company (Tuscarora) and relates to cash flow hedges transacted byNorthern Border Pipeline and Tuscarora. Since a determination of many assets, liabilities, revenues and expensesis dependent upon future events, the preparation of these financial statementsrequires the use of estimates and assumptions which have been made usingcareful judgment.  In the opinion ofmanagement, these financial statements have been properly prepared withinreasonable limits of materiality and include all adjustments (consisting ofnormal recurring accruals) necessary to present fairly the results ofoperations for the three and nine months ended September 30, 2005 and 2004, thefinancial position as at September 30, 2005 and December 31, 2004, cash flowsfor the nine months ended September 30, 2005 and 2004, and statement ofpartners’ equity at September 30, 2005.

                Theresults of operations for the three and nine months ended September 30, 2005and 2004 are not necessarily indicative of the results that may be expected fora full fiscal year.  The interimfinancial statements should be read in conjunction with the Partnership’sfinancial statements and notes included in TC PipeLines’ annual report on Form10-K for the year ended December 31, 2004.

 

##### ***Note 2    Investment inNorthern Border Pipeline***

The Partnership owns a 30% general partnerinterest in Northern Border Pipeline, a partnership which owns a 1,249-mileUnited States interstate pipeline system that transports natural gas from theUnited States - Canadian border near Port of Morgan, Montana to a terminus nearNorth Hayden, Indiana for its customers. Northern Border Pipeline’s pipeline system connects with multiplepipelines providing shipper access to the various natural gas markets served bythose pipelines.  The remaining 70%partnership interest in Northern Border Pipeline is held by Northern BorderPartners, L.P. (Northern Border Partners), a publicly traded limitedpartnership.  The 2% general partnershipinterest in Northern Border Partners is controlled by affiliates of ONEOK, Inc.(ONEOK), which hold a 1.65% general partner interest, and TransCanada, parentof TC PipeLines’ general partner, which holds the remaining 0.35% generalpartner interest.  The Northern BorderPipeline system is operated by Northern Plains Natural Gas Company (NorthernPlains), a wholly owned subsidiary of ONEOK. Northern Border Pipeline is regulated by the Federal Energy RegulatoryCommission (FERC).

The Partnership uses theequity method of accounting for its investment in Northern BorderPipeline.  TC PipeLines’ equity incomefor the three and nine months ended September 30, 2005 and 2004 includes 30% ofthe net income of Northern Border Pipeline for the same periods.  There were undistributed earnings of $2.0million as at September 30, 2005 and no undistributed earnings as at December31, 2004, from Northern Border Pipeline.

**Thefollowing table sets out summarized financial information representing 100% ofthe operations of Northern Border Pipeline for the three and nine months endedSeptember 30, 2005 and 2004 and as at September 30, 2005 and December 31,2004.  Certain reclassifications weremade to the 2004 financial statements to conform to the current year presentation.  TC PipeLines has held its general partnerinterest since May 28, 1999.**

** **

**6**

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** **

**NorthernBorder Pipeline Income Statement**

 
| ** **                | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|---------------------------|------------|------------------------|------------|-----------------------|------------|
| **(unaudited)**           | ** ** | **September 30**       | ** ** | **September 30**      | ** ** |
| **(millions of dollars)** | ** ** | **2005**               | ** ** | **2004**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Revenues                  | ** ** | **89.0**               |       | 81.6                  |       | **241.6** |   | 246.4 |   |
| Costs and expenses        | ** ** | **(18.7**              | **)**      | (19.2                 | )          | **(52.8** | **)** | (52.3 | ) |
| Depreciation              | ** ** | **(14.5**              | **)**      | (14.5                 | )          | **(43.2** | **)** | (43.6 | ) |
| Financial charges         | ** ** | **(10.7**              | **)**      | (10.1                 | )          | **(31.9** | **)** | (30.2 | ) |
| Other income              | ** ** | **1.1**                |       | (0.2                  | )          | **1.9** | ** ** | 0.3 |   |
| Net income                | ** ** | **46.2**               |       | 37.6                  | ** ** | **115.6** |   | 120.6 |   |

 

                Northern Border Pipelineamortized $0.4 million and $1.1 million in the three and nine months endedSeptember 30, 2005, respectively, related to terminated interest rate swapagreements as a reduction to financial charges from accumulated othercomprehensive income.

 

**NorthernBorder Pipeline Balance Sheet**
| ** **                                 | ** ** | **September 30** | ** **   | **December 31** | ** **   |
|--------------------------------------------|------------|------------------|--------------|-----------------|--------------|
| **(millions of dollars)**                  | ** ** | **2005**         | ** **   | **2004**        | ** **   |
| ** **                                 | ** ** | **(unaudited)**  | *** *** | *** ***    | *** *** |
| **Assets**                                 |       |             |         |            |         |
| Cash and cash equivalents                  | ** ** | **21.0**         |         | 20.3            |         |
| Other current assets                       | ** ** | **37.6**         |         | 39.0            |         |
| Plant, property and  equipment, net        | ** ** | **1,519.5**      |         | 1,545.5         |         |
| Other assets                               | ** ** | **20.9**         |         | 20.2            |         |
| ** **                                 | ** ** | **1,599.0**      |         | 1,625.0         |         |
| **Liabilities and Partners’  Equity** |       |             |         |            |         |
| Current liabilities                        | ** ** | **56.4**         |         | 49.5            |         |
| Reserves and deferred  credits             | ** ** | **4.5**          |         | 4.5             |         |
| Long-term debt                             | ** ** | **602.4**        |         | 603.9           |         |
| Partners’ equity                      |       |             |         |            |         |
| Partners’ capital                     | ** ** | **933.0**        |         | 963.3           |         |
| Accumulated other comprehensive income     | ** ** | **2.7**          |         | 3.8             |         |
|                                       | ** ** | **1,599.0**      |         | 1,625.0         |         |

##### * *

##### ***Note 3    Investment inTuscarora***

The Partnership owns a 49%general partner interest in Tuscarora, a general partnership which owns a240-mile United States interstate pipeline system that transports natural gasfrom Oregon, where it interconnects to TransCanada’s Gas Transmission NorthwestSystem (GTN), to northern Nevada.  Theremaining general partner interests in Tuscarora are held 50% by Sierra PacificResources and 1% by TransCanada.  TheTuscarora pipeline system is operated by Tuscarora Gas Operating Company, awholly owned subsidiary of Sierra Pacific Resources.  Sierra Pacific Power Company (Sierra PacificPower) a wholly-owned subsidiary of Sierra Pacific Resources is Tuscarora’slargest shipper, accounting for approximately 69% of total available capacitythrough 2017.  On September 1, 2000, thePartnership acquired its interest in Tuscarora from a subsidiary ofTransCanada.  As a result of theacquisition allocation, an annual amortization of $0.4 million has beenincluded in the Partnership’s equity income from Tuscarora.  The amortization period ends in 2025.  Tuscarora is regulated by the FERC.

The Partnership uses theequity method of accounting for its investment in Tuscarora.  TC PipeLines’ equity income for the three andnine months ended September 30, 2005 and 2004 includes 49% of the net income ofTuscarora for the same periods.  There wereno undistributed earnings from Tuscarora as at September 30, 2005 and December31, 2004.  The following table sets outsummarized financial information representing 100% of the 

 

7

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operations of Tuscarora for the three andnine months ended September 30, 2005 and 2004 and as at September 30, 2005 andDecember 31, 2004.  TC PipeLines has heldits general partner interest since September 1, 2000.

** **

**TuscaroraIncome Statement**

 
| ** **                | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|---------------------------|------------|------------------------|------------|-----------------------|------------|
| **(unaudited)**           | ** ** | **September 30**       | ** ** | **September 30**      | ** ** |
| **(millions of dollars)** | ** ** | **2005**               | ** ** | **2004**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Revenues                  | ** ** | **7.8**                |       | 8.1                   | ** ** | **24.1** |   | 24.4 |   |
| Costs and expenses        | ** ** | **(1.0**               | **)**      | (1.2                  | )          | **(3.2** | **)** | (3.6 | ) |
| Depreciation              | ** ** | **(1.5**               | **)**      | (1.5                  | )          | **(4.6** | **)** | (4.6 | ) |
| Financial charges         | ** ** | **(1.5**               | **)**      | (1.5                  | )          | **(4.4** | **)** | (4.6 | ) |
| Other income              | ** ** | **—**             | ** ** | —                |       | **0.1** | ** ** | — |   |
| Net income                | ** ** | **3.8**                |       | 3.9                   | ** ** | **12.0** |   | 11.6 |   |

** **

**Tuscarora Balance Sheet**
| ** **                                 | ** ** | **September 30** | ** ** | **December 31** | ** ** |
|--------------------------------------------|------------|------------------|------------|-----------------|------------|
| **(millions of dollars)**                  | ** ** | **2005**         | ** ** | **2004**        | ** ** |
| ** **                                 | ** ** | **(unaudited)**  | ** ** | ** **      | ** ** |
| **Assets**                                 |       |             |       |            |       |
| Cash and cash equivalents                  | ** ** | **6.5**          |       | 3.6             |       |
| Other current assets                       | ** ** | **2.8**          |       | 3.0             |       |
| Plant, property and  equipment, net        | ** ** | **133.1**        |       | 136.9           |       |
| Other assets                               | ** ** | **1.4**          |       | 1.4             |       |
| ** **                                 | ** ** | **143.8**        |       | 144.9           |       |
| **Liabilities and Partners’  Equity** |       |             |       |            |       |
| Current liabilities                        | ** ** | **8.4**          |       | 6.9             |       |
| Long-term debt                             | ** ** | **73.5**         |       | 75.9            |       |
| Partners’ equity                      |       |             |       |            |       |
| Partners’ capital                     | ** ** | **61.8**         |       | 62.0            |       |
| Accumulated other comprehensive income     | ** ** | **0.1**          |       | 0.1             |       |
|                                       | ** ** | **143.8**        |       | 144.9           |       |

 

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

On May 28, 2003, the Partnership renewed its $40.0million unsecured two-year revolving credit facility (TransCanada CreditFacility) with TransCanada PipeLine USA Ltd., an affiliate of the generalpartner.  The TransCanada Credit Facilitybore interest, at the option of the Partnership, at a one-, two-, three-, orsix-month London Interbank Offered Rate (LIBOR) plus 1.25%.  The purpose of the TransCanada CreditFacility was to provide borrowings to fund capital expenditures, to fundcapital contributions to Northern Border Pipeline, Tuscarora and any other entityin which the Partnership directly or indirectly acquires an interest, to fundworking capital and for other general business purposes, including temporaryfunding of cash distributions to unitholders and the general partner, ifnecessary.  At December 31, 2004, thePartnership had $6.5 million borrowings outstanding under the TransCanadaCredit Facility.  The interest rate onthe TransCanada Credit Facility at December 31, 2004 was 3.75%.  On February 22, 2005, the Partnership repaidin full its $6.5 million outstanding balance on the TransCanada CreditFacility.  On July 31, 2005, theTransCanada Credit Facility expired and was not renewed as there were noanticipated drawings required under the facility.

            OnMarch 8, 2004 the Partnership renewed its $30.0 million unsecured creditfacility (Revolving Credit Facility) with JPMorgan Chase Bank, NA, asadministrative agent.  Loans under theRevolving Credit Facility may bear interest at the option of the Partnership,at a one-, two-, three-, or six-month LIBOR plus 1.25% or at a floating 

 

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rate based on the higher of the federal fundseffective rate plus 0.5% and the prime rate. The Revolving Credit Facility matures on February 28, 2006, at whichtime the Partnership expects to renew the facility.  Amounts borrowed may be repaid in part or infull prior to that time without penalty. The Revolving Credit Facility may be used to fund capital expenditures,to fund capital contributions to Northern Border Pipeline, Tuscarora and anyother entity in which the Partnership directly or indirectly acquires aninterest, to fund working capital and for other general business purposes,including temporary funding of cash distributions to unitholders and thegeneral partner, if necessary.  TheRevolving Credit Facility requires that the Partnership’s total debt, as of thelast day of any fiscal quarter, be no more than the lesser of (i) 35% ofcapitalization as at the last day of such fiscal quarter, or (ii) 2.5 times theconsolidated adjusted EBITDA (net income plus interest expense, income taxesand depreciation and amortization) for the period consisting of such fiscalquarter and the three preceding fiscal quarters.  The Partnership repaid $6.0 million and $4.0million on May 23, 2005 and August 22, 2005, respectively, on its RevolvingCredit Facility.  The Partnership had$20.0 million and $30.0 million outstanding under the Revolving Credit Facilityat September 30, 2005 and December 31, 2004. The interest rate on the Revolving Credit Facility averaged 4.22% and2.82% for the nine months ended September 30, 2005 and 2004, respectively, andat September 30, 2005 and December 31, 2004, the interest rate was 5.07% and3.72%, respectively.

 

**Note 5    Net Income per Unit**

Net income per unit is computed by dividing netincome, after deduction of the general partner’s allocation, by the weightedaverage number of common and subordinated units outstanding.  The general partner’s allocation is equal toan amount based upon the general partner’s 2% interest, adjusted to reflect anamount equal to incentive distributions. Net income per unit was determined as follows:

 
| ** **                                         | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|----------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| **(unaudited)**                                    | ** ** | **September 30**       | ** ** | **September 30**      | ** ** |
| **(millions of dollars except per  unit amounts)** | ** ** | **2005**               | ** ** | **2004**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net income                                         | ** ** | **14.8**               |       | 12.6                  | ** ** | **37.9** |   | 39.9 |   |
| Net income allocated to  general partner           |       |                   |       |                  |       |   | ** ** |   |   |
| General partner interest                           | ** ** | **(0.3**               | **)**      | (0.2                  | )          | **(0.7** | **)** | (0.8 | ) |
| Incentive distribution income allocation           | ** ** | **(0.4**               | **)**      | (0.5                  | )          | **(1.4** | **)** | (1.1 | ) |
|                                               | ** ** | **(0.7**               | **)**      | (0.7                  | )          | **(2.1** | **)** | (1.9 | ) |
| Net income allocable to  units                     | ** ** | **14.1**               | ** ** | 11.9                  |       | **35.8** | ** ** | 38.0 |   |
| Weighted average units  outstanding *(millions)*   | ** ** | **17.5**               | ** ** | 17.5                  | ** ** | **17.5** | ** ** | 17.5 |   |
| Net income per unit                                | ** ** | **$**                  | **0.81**   |                  | $          | 0.68 | ** ** | **$** | **2.05** |   | $ | 2.17 |   |
|                                                    |            |                        |            |                       |            |  |  |  |  |  |  |  |  |

 

** **

**Note 6    Distributions**

On October 18, 2005, the Board of Directorsof the general partner declared the Partnership’s 2005 third quarter cashdistribution.  The third quarter cashdistribution is payable on November 14, 2005 to unitholders of record as ofOctober 31, 2005.  The total cash distributionof $10.7 million will be paid in the following manner: $10.0 million to commonunitholders (including $1.2 million to the general partner as holder of2,035,106 common units), $0.5 million to the general partner as holder of theincentive distribution rights, and $0.2 million to the general partner inrespect of its 2% general partner interest.

 

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**Note 7    Accounting Pronouncements**

In March 2005, the FASB issued Interpretation (FIN) No. 47, “Accountingfor Conditional Asset Retirement Obligations - an interpretation of FASBStatement (SFAS) No. 143.” The statement clarifies the term “conditionalasset retirement obligation,” as used in SFAS No. 143 and thecircumstances under which an entity would have sufficient information to reasonablyestimate the fair value of an asset retirement obligation. The effective dateof this interpretation is no later than the end of the fiscal year ending afterDecember 15, 2005.  The effect ofadopting FIN 47 is not expected to be material to TC PipeLines’ results ofoperations or financial position.

 

In June 2005, the FERC issued guidance describing how FERC-regulatedcompanies should account for costs associated with implementing the pipelineintegrity management requirements of the U.S. Department of Transportation’sOffice of Pipeline Safety.  Under theguidance, costs to 1) prepare a plan to implement the program, 2) identify highconsequence areas, 3) develop and maintain a record keeping system and 4)inspect, test and report on the condition of affected pipeline segments todetermine the need for repairs or replacements, are required to beexpensed.  Costs of modifying pipelinesto permit in-line inspections, certain costs associated with developing or enhancingcomputer software and costs associated with remedial and mitigation actions tocorrect an identified condition can be capitalized.  The guidance is effective January 1, 2006, tobe applied prospectively.  The effect ofadopting this order is not expected to be material to TC PipeLines’ results ofoperations or financial position.

 

**Note 8        Subsequent Events**

Northern Border Pipeline declared adistribution of approximately $57.0 million on November 1, 2005.  The Partnership received its 30% share ($17.1million) on November 1, 2005.

 

Tuscarora declared a distribution ofapproximately $4.1 million on October 12, 2005. The Partnership received its 49% share ($2.0 million) on October 31,2005.

 

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**ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANICALCONDITION AND RESULTS OF OPERATIONS**

 

**TC PipeLines, LP**

 

**Cautionary Statement RegardingForward-Looking Information**

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

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

•                                          majority control and operation ofNorthern Border Pipeline by affiliates of ONEOK and any further developments inEnron’s filing of bankruptcy protection;

•                                          regulatory decisions, particularly thoseof the FERC;

•                                          orders by the FERC which aresignificantly different than Northern Border Pipeline’s assumptions related tothe November 2005 rate case;

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

•                                          the ability of Northern Border Pipelineto recover costs in its rates;

•                                          the failure of a shipper on either one ofthe pipelines in which the Partnership has an interest to perform itscontractual obligations;

•                                          the ability of affiliates of SierraPacific Resources to continue to meet their contractual obligations to Tuscarora;

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

•                                          the amount of storage capacity in WesternCanada and overall strong demand for storage injection;  and

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

and other risks discussed in the Partnership’s filings with theSecurities and Exchange Commission (SEC), including the Partnership’s annualreport on Form 10-K for the year ended December 31, 2004.  By its nature, such forward-lookinginformation is subject to various risks and uncertainties, which could cause TCPipeLines’ actual results and experience to differ materially from theanticipated results or other expectations expressed in this quarterly report.

 

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

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

 

The followingdiscussions of the financial condition and results of operations of thePartnership, Northern Border Pipeline and Tuscarora should be read inconjunction with the financial statements and notes thereto of the Partnershipincluded elsewhere in this report (see Item 1. Financial Statements).  For moredetailed information regarding the basis of presentation for the followingfinancial information, see the notes to the condensed financial statements ofthe Partnership.  

 

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***Overview***

TC PipeLines, LP was formedin 1998 as a Delaware limited partnership to acquire, own and participate inthe management of United States-based pipeline assets.  TC PipeLines, LP and its subsidiary limitedpartnerships, TC PipeLines Intermediate Limited Partnership and TC TuscaroraIntermediate Limited Partnership, are collectively referred to herein as “TCPipeLines” or “the Partnership.”  TCPipeLines GP, Inc., an indirect wholly owned subsidiary of TransCanadaPipeLines Limited, which is a wholly owned subsidiary of TransCanada, is thegeneral partner of the Partnership.  ThePartnership owns a 30% general partner interest in Northern Border Pipeline anda 49% general partner interest in Tuscarora.

 

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

NorthernBorder Pipeline owns a 1,249-mile United States interstate pipeline system thattransports natural gas from the United States — Canadian border near Port ofMorgan, Montana to a terminus near North Hayden, Indiana for itscustomers.  Northern Border Pipeline’spipeline system connects with multiple pipelines providing shippers access tothe various natural gas markets served by those pipelines.  The Partnership acquired its 30% interest inNorthern Border Pipeline from affiliates of its general partner.  The Partnership has one member and 30% of thevoting power of the Northern Border Pipeline management committee.

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

** **

#### ***Investment in Tuscarora GasTransmission Company***

Tuscarora owns a 240-mile United States interstate pipelinesystem that originates at an interconnection point with facilities of GTN, awholly-owned subsidiary of TransCanada, near Malin, Oregon and runs southeastthrough northeastern California and northwestern Nevada.  The Partnership owns a 49% general partnerinterest in Tuscarora.

                Theremaining general partner interest in Tuscarora is held 50% by Tuscarora GasPipeline Co., a wholly-owned subsidiary of Sierra Pacific Resources and 1% byTCPL Tuscarora Ltd., an indirect wholly owned subsidiary of TransCanada.

                Tuscarora increased itscontracted capacity from 127 million cubic feet per day (mmcfd) toapproximately 180 mmcfd in 2002 by completing an expansion of its pipelinesystem.  The expansion consisted of twocompressor stations and an 11-mile pipeline extension from a point near theprevious terminus of the Tuscarora pipeline system near Reno, Nevada toWadsworth, Nevada.

Tuscaroracompleted construction of the Barrick Lateral, a 0.5 mile lateral that providestransportation service to a new electric generation customer located nearTracy, Nevada.  The construction of thelateral was completed on time and commissioned for service to BarrickGoldstrike on June 25, 2005.

 

***Critical Accounting Policy***

TCPipeLines accounts for its interests in both Northern Border Pipeline andTuscarora using the equity method of accounting as detailed in notes 2 and 3 tothe condensed financial statements.  Theequity method of accounting is appropriate where the investor does not controlan investee, but rather is able to exercise significant influence over theoperating and financial policies of an investee.  TC PipeLines is able to exercise significantinfluence over its investments in Northern Border Pipeline and Tuscarora asevidenced by its representation on their respective management committees.

The30% general partner interest in Northern Border Pipeline and 49% generalpartner interest in Tuscarora are currently the Partnership’s only materialsources of income.  The Partnership’sresults of operations are influenced by and reflect the same factors thatinfluence the financial results of Northern Border Pipeline and Tuscarora,respectively.

 

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***Third Quarter 2005 Compared with Third Quarter 2004***

Net income increased $2.2 million, or 17%, to$14.8 million in the third quarter of 2005, compared to $12.6 million for thesame period in 2004.  The increase wasprimarily due to higher equity income from Northern Border Pipeline.

 

Equity income from the Partnership’sinvestment in Northern Border Pipeline increased $2.6 million, or 23%, to $13.9million in the third quarter of 2005, compared to $11.3 million for the sameperiod in 2004.  The increase in equityincome from Northern Border Pipeline was primarily due to higher revenues inthe third quarter of 2005 compared to the same period in 2004.  The higher revenues were primarily due to therecognition of the sale of Northern Border Pipeline’s bankruptcy claims heldagainst Enron Corp. (Enron) and Enron North America Corp. (Enron North America)of $9.4 million, partially offset by decreased firm demand revenue as a resultof discounted capacity of $2.0 million. Equity income from the Partnership’s investment in Tuscarora decreased$0.1 million, or 6%, to $1.7 million in the third quarter of 2005, compared to$1.8 million for the same period in 2004. Tuscarora’s transportation revenues were slightly lower in the thirdquarter of 2005.

 

The Partnership recordedgeneral and administrative expenses of $0.5 million and $0.3 million in thethird quarter of 2005 and 2004, respectively. The increase is primarily due to higher salaries and benefits as well astiming of expenses incurred.

 

The Partnership recordedfinancial charges and other of $0.3 million and $0.2 million in the third quarterof 2005 and 2004, respectively.  The $0.1million increase was due to higher average interest rates.

 

***Nine Months Ended September 30, 2005 Compared with Nine Months EndedSeptember 30, 2004***

Net income decreased $2.0 million, or 5%, to$37.9 million in the first nine months of 2005, compared to $39.9 million forthe same period in 2004.  The decreasewas primarily due to lower equity income from Northern Border Pipeline.

 

Equity income from thePartnership’s investment in Northern Border Pipeline decreased $1.5 million, or4%, to $34.7 million in the first nine months of 2005, compared to $36.2million for the same period in 2004.  Thedecrease in equity income from Northern Border Pipeline was primarily due to decreasedrevenue associated with uncontracted and discounted capacity and an additionalday of transportation revenue due to leap year for the same period in 2004,partially offset by increased short-term and other transportation servicerevenue and additional revenue for the sale of the Enron and Enron NorthAmerica claims in the nine months ended September 30, 2005.

 

Equity income from thePartnership’s investment in Tuscarora increased $0.1 million, or 2%, to $5.5million in the nine months ended September 30, 2005, compared to $5.4 million forthe same period in 2004.  The increase inequity income from Tuscarora was due to lower operating expenses and financialcharges.  Tuscarora’s operating expensesdecreased primarily due to the renegotiation of lower rates for maintenancecontracts in 2005, while the decrease in financial charges was due to a loweraverage outstanding debt balance in 2005.

 

The Partnership recordedgeneral and administrative expenses of $1.5 million and $1.3 million in thenine months ended September 30, 2005 and 2004, respectively.  The increase was primarily due to highersalaries and benefits as well as timing of expenses incurred.

 

Financial charges and otherwere $0.8 million and $0.4 million in the nine months ended September 30, 2005and 2004, respectively.  The increase wasdue to both higher average interest rates and a higher average debt balance.

 

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**Liquidityand Capital Resources of TC PipeLines, LP**

 

***Debt and Credit Facilities***

TC PipeLines’ debt andcredit facilities outstanding at September 30, 2005 are as follows:

 
| ** **                | ** ** | **Payments Due by Period** | ** ** |
|---------------------------|------------|----------------------------|------------|
| **(millions of dollars)** | ** ** | **Total**                  | ** ** | **Less than  1 year** | ** ** | **Long-term  portion** | ** ** |
|                      |       |                       |       |   |   |   |   |
| Revolving Credit Facility |       | 20.0                       |       | 20.0 |   | — |   |
| Total                     |       | $                          | 20.0       |   | $ | 20.0 |   | $ | — |   |
|                           |            |                            |            |  |  |  |  |  |  |  |

 

 

***Cash Distribution Policyof TC PipeLines, LP***

The Partnership has made distributions ofAvailable Cash, as defined in the Partnership Agreement, in the followingmanner:

 

• First, 98% to the common units, pro rata, and 2% to the general partner,until there is distributed for each outstanding unit an amount equal to theminimum quarterly distribution for that quarter; and

• Thereafter, in a manner whereby the general partner has rights (referredto as incentive distribution rights) to receive increasing percentages of excessquarterly cash distributions over specified cash distribution thresholds.

 

After the distributions described above aremet, additional Available Cash from Operating Surplus (as defined in thePartnership Agreement) for that quarter will be distributed among theunitholders and the general partner in the following manner:

 

• First, 85% to all units, pro rata, and 15% to the general partner, untileach unitholder has received a total of $0.5275 for that quarter;

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

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

 

The distribution to the general partnerdescribed above, other than in its capacity as a holder of 2,035,106 units thatare in excess of its aggregate 2% general partner interest, represents theincentive distribution rights.

 

***2005 Third Quarter CashDistribution***

On October 18, 2005, the Board of Directorsof the general partner declared the Partnership’s 2005 third quarter cashdistribution.  The third quarter cashdistribution is payable on November 14, 2005 to unitholders of record as ofOctober 31, 2005.  The total cash distributionof $10.7 million will be paid in the following manner: $10.0 million to commonunitholders (including $1.2 million to the general partner as holder of2,035,106 common units), $0.5 million to the general partner as holder of theincentive distribution rights, and $0.2 million to the general partner inrespect of its 2% general partner interest.

 

***Cash Flows from OperatingActivities***

Cash flows provided byoperating activities decreased $4.0 million, or 10%, to $36.0 million in thenine months ended September 30, 2005, compared to $40.0 million for the sameperiod in 2004.  The decrease wasprimarily due to lower equity income from Northern Border Pipeline in the ninemonths ended September 30, 2005, compared to the same period in 2004.  In the nine months ended September 30, 2005and 2004, the Partnership received cash distributions of $43.7 million and$46.8 million, respectively, from its equity investment in Northern BorderPipeline.  The decrease in cashdistributions from Northern Border Pipeline was mainly due to lower earnings inboth the first and second quarters of 2005 due to the negative revenue impactresulting from uncontracted capacity and expiring contracts which were replacedwith short-term contracts at discounted rates. The cash distributions 

 

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received include $11.1million and $10.6 million classified as return of capital in the nine monthsended September 30, 2005 and 2004, respectively.  In the nine months ended September 30, 2005and 2004, the Partnership also received cash distributions of $6.3 million and$5.6 million, respectively, from its equity investment in Tuscarora.  The increase in cash distributions fromTuscarora was mainly due to higher earnings in the first and second quarters of2005.  The cash distributions receivedinclude $0.8 million and $0.2 million classified as return of capital in thenine months ended September 30, 2005 and 2004, respectively.  Distributions received in the nine monthsended September 30, 2005 are based on the respective equity investments’financial results for the three quarters ended June 30, 2005.

 

***Cash Flows from InvestingActivities***

Cash received (used) ininvesting activities was $11.6 million and $(28.6) million in the nine monthsended September 30, 2005 and 2004, respectively.  The Partnership made a $39.0 millioninvestment in Northern Border Pipeline in the nine months ended September 30,2004.  Cash distributions received fromNorthern Border Pipeline which were classified as return of capital were $11.1million and $10.6 million in the nine months ended September 30, 2005 and 2004,respectively.  The Partnership made a$0.3 million and $0.4 million investment in Tuscarora in the nine months endedSeptember 30, 2005 and 2004, respectively. Cash distributions received from Tuscarora which were classified asreturn of capital were $0.8 million and $0.2 million in the nine months endedSeptember 30, 2005 and 2004, respectively.

 

***Cash Flows from FinancingActivities***

Cash flows used in financing activities were $48.7million in the nine months ended September 30, 2005, compared to $17.0 millionfor the same period in 2004.

            Inthe nine months ended September 30, 2005, the Partnership paid $32.2 million incash distributions in the following manner: $30.1 million to common unitholders (including $2.8 million to thegeneral partner as holder of 2,809,306 common units in the first quarter of2005 and as holder of 2,035,106 common units in the second and third quartersof 2005, respectively), $1.5 million to the general partner as holder of theincentive distribution rights, and $0.6 million to the general partner inrespect of its 2% general partner interest. This compares to $31.0 million that was paid in the nine months endedSeptember 30, 2004.

            Inthe nine months ended September 30, 2005, the Partnership repaid in full its$6.5 million outstanding balance on the TransCanada Credit Facility.  On July 31, 2005, the TransCanada CreditFacility expired and was not renewed as there were no anticipated drawingsrequired under the facility.  ThePartnership repaid $10.0 million and $6.0 million in the nine months endedSeptember 30, 2005 and 2004, respectively, on its Revolving CreditFacility.  During the nine months endedSeptember 30, 2004, the Partnership borrowed $20.0 million on its RevolvingCredit Facility to fund cash calls issued by Northern Border Pipeline.

 

***Capital Requirements***

To the extent TC PipeLines has any capitalrequirements with respect to its investments in Northern Border Pipeline andTuscarora or makes acquisitions during the remainder of 2005, TC PipeLinesexpects to fund these requirements with operating cash flows, debt and/orequity.

 

**Resultsof Operations of Northern Border Pipeline Company**

*In the followingdiscussion of the results of Northern Border Pipeline, all amounts represent100% of the operations of Northern Border Pipeline, in which the Partnershiphas held a 30% interest since May 28, 1999.*

 

The discussion and analysisof Northern Border Pipeline’s financial condition and operations are based onNorthern Border Pipeline’s financial statements, which were prepared inaccordance with U.S. GAAP.

 

***Overview***

For Northern BorderPipeline, there are several major business drivers as summarized in the “Management’sDiscussion and Analysis of Financial Condition and Results of Operations —Results of Operations of Northern Border Pipeline Company - Overview”, includedin TC PipeLines’ annual report on Form 10-K for the year ended December 31,2004.

 

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As of December 31, 2004, approximately 88% ofthe natural gas Northern Border Pipeline transported was produced in theWestern Canada Sedimentary Basin.  As aresult, the continuous supply of Canadian natural gas is crucial to NorthernBorder Pipeline’s long-term financial condition.  Of equal importance is the demand for naturalgas in the Midwestern United States markets that Northern Border Pipelineserves, including the Chicago market area.

Some of the significant factors that mayimpact Northern Border Pipeline’s customers’ desire to move natural gas on itsinterstate pipeline include:

•       the amount of Canadiannatural gas available for export, which is impacted by Canadian supply anddemand;

•      the ability to transportCanadian gas on other pipelines;

•      the amount of storagecapacity for Canadian gas and demand for storage injection;

•      availability of natural gasfrom other supply sources that could be transported to the Midwestern UnitedStates;

•      the demand for natural gasin other markets, which may affect the supply in the Midwestern United States,primarily as a result of temperature and/or hydro-electric generation levels;and

•      the natural gas market pricespread between Alberta, Canada and the Midwestern United States.

 

For more information about market conditionsthat may impact supply and demand for natural gas, please refer to TC PipeLines’annual report on Form 10-K for the year ended December 31, 2004, Item 1.  “Business of Northern Border Pipeline Company— Demand for Transportation Capacity”.

 

Northern Border Pipeline’s operating revenueis derived from transportation contracts under a tariff that is regulated bythe FERC.  The tariff specifies themaximum rate Northern Border Pipeline can charge its customers for natural gastransportation service on its pipeline, which is established in a FERCproceeding known as a rate case.  Duringa rate case, a determination is reached by the FERC, either through a hearingor a settlement, on a maximum rate that includes the recovery of its prudentcost-based investment and operating expenses and a reasonable return for itsinvestors.

 

Northern Border Pipeline’s firm servicetransportation customers pay a fee for capacity on its pipeline regardless ofhow much natural gas they actually transport as well as a fee based on thevolume of natural gas transported. Northern Border Pipeline’s interruptible service transportationcustomers pay a fee based only on the volumes of natural gas transported.

 

***Known Trends and Uncertainties***

*Canadian Supply**—***Northern Border Pipeline advises that itbelieves that Canadian natural gas supply will remain fairly stable and importlevels will be flat during the remainder of 2005.

 

*Natural Gas Storage Levels**—***Natural gas storage is necessary to balancesupply and demand, especially as demand shifts from steady load industrialusers to temperature-sensitive residential, commercial and electric generationusers as a result of increasing natural gas prices.  Industrial users may utilize more economicalenergy sources when the price of natural gas surpasses the price ofalternatives.

 

During the second quarter of 2005, increased storageinjection activity of Canadian natural gas negatively impacted demand forNorthern Border Pipeline’s transportation capacity.  As storage levels approached full capacityduring the third quarter of 2005, demand for Northern Border Pipeline’stransportation capacity increased. Additional Canadian storage projects expected to be in service in 2006and the anticipated natural gas price differential during the upcoming Apriland May shoulder months compared with the 2006-2007 winter heating season areexpected to impact Northern Border Pipeline’s revenues again in 2006.  The impact of shippers utilizing Canadianstorage may reduce demand for Northern Border Pipeline’s capacity during thespring and early summer months and increase demand during the winter months.

 

*Seasonality**—***Winter seasonis considered to be during the months of November to March, and summer seasonis considered to be during the remaining months.  Peak summer season for electric generationincludes July, August and September.  

 

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Weather conditions throughout the UnitedStates can significantly impact regional natural gas supply and demand.  The Western United States market is sensitiveto precipitation levels which impact hydro-electric generation.  During the summer, high temperatures combinedwith low hydro-electric generation levels may increase demand for Canadiannatural gas.  In the Midwestern UnitedStates, the current pipeline infrastructure is designed to meet its winterheating demand load.  When demanddeclines as a result of moderate temperatures, excess pipeline capacity maystimulate greater competition from other supply sources.  To the extent that Northern Border Pipeline’stransportation capacity is contracted under firm service transportationagreements, a significant portion of its revenues, which is generated fromdemand charges, will not be impacted by seasonal throughput variations.  However, when transportation agreementsexpire, seasonal demand may impact Northern Border Pipeline’s ability torecontract its pipeline’s firm service transportation capacity.  Accordingly, Northern Border Pipeline advisesthat it believes that throughput on its interstate natural gas pipeline mayexperience seasonal fluctuations and some discounting may be required at timesto maximize revenue.

 

*Competition**—***New supply fromthe Rockies via Cheyenne Plains Pipeline as well as natural gas from the SanJuan and Permian Basins have been redirected from Western United States marketsinto the Mid-continent region and has created greater supply competition in theMidwestern United States market.  CheyennePlains is expected to complete an expansion project that will increase itsdesign capacity by 170 million dekatherms per day (mmdth/d) to 730 mmdth/d byearly 2006.

 

*ContractingRisk **—***NorthernBorder Pipeline’s primary exposure to market risk occurs when existing transportationcontracts expire and are subject to renegotiation.* *For the third quarter of 2005, allof Northern Border Pipeline’s summer design transportation capacity on the Portof Morgan, Montana to Ventura, Iowa portion of the pipeline was sold.  For October 2005, 63 mmcfd of summer designtransportation capacity was not sold.  Asof October 31, 2005, 88 mmcfd of summer design capacity remained available forcontracting for November and December 2005.

 

Northern Border Pipeline anticipates that2006 demand for its capacity will be similar to 2005 demand based on itsexpectations of Canadian natural gas supply and demand for natural gas in themarkets that it serves.  Northern BorderPipeline advises that it believes that discounting transportation rates on ashort-term basis may be necessary to maximize revenue and anticipates that thelevel of discounting in the future will vary from 2005 depending upon currentmarket conditions.

 

*Growth Projects**—***Northern Border Pipeline is focused onmodifying its existing systems to meet market demand.  An organic growth project currently underwayis Northern Border Pipeline’s Chicago III Expansion Project which will add 130mmcfd of transportation capacity from Harper, Iowa to the Chicago marketarea.  In September 2005, Northern BorderPipeline accepted the FERC’s certificate of public convenience and necessityfor the project.  This expansion is fullysubscribed by four shippers under long-term firm service transportationagreements with terms ranging from five and one-half to ten years.  Construction is estimated to costapproximately $21.0 million and the targeted in-service date is April 2006.

 

Please refer to TC PipeLines’ annual reporton form 10-K for the period ended December 31, 2004 for more information aboutthe Chicago III Expansion Project.

 

***Recent Developments***

*Contracting***—** For the third quarter of 2005, all of Northern BorderPipeline’s summer design transportation capacity on the Port of Morgan, Montanato Ventura, Iowa portion of the pipeline was sold.  For October 2005, 63 mmcfd of summer designtransportation capacity was not sold.  Asof October 31, 2005, 88 mmcfd of summer design capacity remained available forcontracting for November and December 2005.

 

*Bankruptcy Claims -*In June 2005,Northern Border Pipeline executed term sheets with a third party for the saleof its bankruptcy claims for transportation contracts and associated guaranteesheld against Enron and Enron North America. Proceeds from the sale of the claims were $11.1 million.  In the third quarter of 2005, Northern BorderPipeline recognized additional revenue of $9.4 million as a result of the sale.

 

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*Chicago III Expansion Project* - In September2005, Northern Border Pipeline accepted the FERC’s certificate of publicconvenience and necessity for the Chicago III Expansion Project.  This project will add 130 mmcfd oftransportation capacity from Harper, Iowa to Chicago, Illinois and is fullysubscribed by four shippers under long-term firm service transportationagreements with terms ranging from five and one-half to ten years.  Construction is estimated to costapproximately $21.0 million and the targeted in-service date is April 2006.

 

*Rate Case* - On November1, 2005, as required by the provisions of the settlement of Northern BorderPipeline’s last rate case, it filed a rate case with the FERC.  The rate case filing proposes an increase toNorthern Border Pipeline’s rates; a change to its rate design approach with asupply zone and market area utilizing a fixed rate per dekatherm and adekatherm-mile rate, respectively; a compressor usage surcharge primarily torecover costs related to powering electric compressors; and the implementationof a short-term, firm-service rate structure on a prospective basis.  Northern Border Pipeline has proposed anincrease in overall revenue of 7.8%.  Thefiling also incorporates an overall cost of capital of 10.56% based on a rateof return on equity of 14.20%, an increase in the depreciation rate fortransmission plant from 2.25% to 2.84%, the institution of a negative salvagerate of 0.59% and a decrease in the billing determinants.  Also included in the filing is thecontinuation of the inclusion of income taxes in the calculation of NorthernBorder Pipeline’s rates.

 

While Northern Border Pipeline cannot predictthe FERC and intervening parties’ positions on the proposed changes, itanticipates opposition.  Northern BorderPipeline also anticipates that the FERC will issue an order by early December2005 that will identify the issues raised in the proceeding and accept theproposed rates but suspend their effectiveness until May 1, 2006, at which timethe new rates would be collected subject to refund until final resolution ofthe rate case.  Northern Border Pipelineadvises that it expects the FERC will set issues for hearing and unlessNorthern Border Pipeline is able to reach a settlement with the FERC staff andits customers, final resolution of this matter may not occur until 2007.

 

***Critical AccountingPolicies and Estimates***

The preparation of Northern Border Pipeline’sfinancial statements in accordance with U.S. GAAP requires its management tomake assumptions and use estimates that affect the reported amount of theassets, liabilities, revenue and expenses as well as the disclosure ofcontingent assets and liabilities during the reporting period.  Actual results could differ from theseestimates if the underlying assumptions are incorrect.  Any effects on Northern Border Pipeline’sfinancial position or results of operations resulting from revisions to theseestimates are recorded in the period during which the facts that gave rise tothe revision become known.  Key estimatesused by management include:

•      the economic useful life ofNorthern Border Pipeline’s assets used to determine depreciation andamortization;

•      the fair value used todetermine possible asset impairment charges;

•      the fair value used torecord derivative assets and liabilities;

•      the fair value of assetsacquired; and

•      the amount of expenseaccruals.

 

There have been no significant changes inNorthern Border Pipeline’s critical accounting policies since December 31,2004.  For more information about thesepolicies, please refer to TC PipeLines’ annual report on Form 10-K for theperiod ended December 31, 2004, Note 2 - Notes to Northern Border Pipeline’sConsolidated Financial Statements — Summary of Significant Accounting Policies.

 

Northern Border Pipeline’s accountingpolicies conform to SFAS No. 71, “Accounting for the Effects of Certain Typesof Regulation.”  Accordingly, certainassets that result from the ratemaking process are reflected on the balancesheet as regulatory assets.  NorthernBorder Pipeline considers factors such as regulatory changes and the impact ofcompetition to determine the probability of future recovery of theseassets.  If Northern Border Pipelinedetermines future recovery is no longer probable, it would be required towrite-off the regulatory assets at that time. As of September 30, 2005, Northern Border Pipeline reflected regulatoryassets of $13.0 million that it expects to recover from its customers overvarying time periods up to 44 years.  

 

18

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Northern Border Pipeline’s long-lived assetsare recorded at original cost.  NorthernBorder Pipeline estimates the economic useful lives of its assets based onhistorical experience and makes adjustments when changes in planned use,technological advances, or other factors show that a different life is moreappropriate.  The depreciation rate forNorthern Border Pipeline’s regulated interstate natural gas pipeline isdetermined by the FERC’s ratemaking process. Revisions to the estimated economic useful lives of Northern BorderPipeline’s assets would impact its depreciation and amortization expense infuture periods.

 

Northern Border Pipeline utilizes financialinstruments to reduce its market risk exposure to interest rate fluctuationsand achieve a more predictable cash flow. Northern Border Pipeline records its derivatives at fair value inaccordance with SFAS No. 133, “Accounting for Derivative Instruments andHedging Activities.” The fair value of a derivative instrument is determined bythe present value of its future cash flows based on market prices from thirdparty sources.  The accounting treatmentfor changes in the derivative’s fair value depends on whether it is designatedand qualifies as part of a hedge relationship. If specific hedge criteria are met, the derivative’s gains and lossesmay offset the hedged item’s related results in the income statement.  As of September 30, 2005, Northern BorderPipeline had no derivative financial instruments outstanding.

 

Northern Border Pipeline recognizes revenueaccording to each transportation contract for transportation service that isprovided to its customers.  Customerswith firm service transportation agreements pay a reservation fee for capacityon Northern Border Pipeline’s pipeline system known as a demand chargeregardless if the shipper actually utilizes its reserved capacity.  Firm service transportation customers alsopay a fee based on the volume of natural gas transported.  Customers with interruptible servicetransportation agreements may utilize available capacity on Northern BorderPipeline’s pipeline systems; however, service is subject to interruption ifcapacity is required for customers with firm service transportationagreements.  Interruptible servicecustomers are assessed a fee based only on the volume of natural gastransported.

 

***Results of Operations***

The following tables set outsummarized financial information for Northern Border Pipeline for the three andnine months ended September 30, 2005 and 2004 and as at September 30, 2005 andDecember 31, 2004.  Amounts discussedrepresent 100% of the operations of Northern Border Pipeline, in which thePartnership has held a 30% interest since May 28, 1999.  Certain reclassifications were made to the2004 financial statements to conform to the current year presentation.

 

**Northern Border Pipeline IncomeStatement**

 
| **(unaudited)**           | ** ** | **Three months ended**

**September 30** | ** ** | **Nine months ended**

**September 30** | ** ** |
|---------------------------|------------|------------------------------------------|------------|-----------------------------------------|------------|
| **(millions of dollars)** | ** ** | **2005**                                 | ** ** | **2004**                                | ** ** | **2005** | ** ** | **2004** | ** ** |
| Revenues                  | ** ** | **89.0**                                 |       | 81.6                                    | ** ** | **241.6** |   | 246.4 |   |
| Costs and expenses        | ** ** | **(18.7**                                | **)**      | (19.2                                   | )          | **(52.8** | **)** | (52.3 | ) |
| Depreciation              | ** ** | **(14.5**                                | **)**      | (14.5                                   | )          | **(43.2** | **)** | (43.6 | ) |
| Financial charges         | ** ** | **(10.7**                                | **)**      | (10.1                                   | )          | **(31.9** | **)** | (30.2 | ) |
| Other income              | ** ** | **1.1**                                  |       | (0.2                                    | )          | **1.9** |   | 0.3 |   |
| Net income                | ** ** | **46.2**                                 |       | 37.6                                    | ** ** | **115.6** |   | 120.6 |   |

 

 

19

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**Northern Border Pipeline BalanceSheet**

 
| **(millions of dollars)**                  | ** ** | **September 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|--------------------------------------------|------------|-------------------------|------------|------------------------|------------|
| ** **                                 | ** ** | **(unaudited)**         | ** ** | ** **             | ** ** |
| **Assets**                                 |       |                    |       |                   |       |
| Cash and cash equivalents                  | ** ** | **21.0**                |       | 20.3                   |       |
| Other current assets                       | ** ** | **37.6**                |       | 39.0                   |       |
| Plant, property and  equipment, net        | ** ** | **1,519.5**             |       | 1,545.5                |       |
| Other assets                               | ** ** | **20.9**                |       | 20.2                   |       |
| ** **                                 | ** ** | **1,599.0**             |       | 1,625.0                |       |
|                                       |       |                    |       |                   |       |
| **Liabilities and Partners’  Equity** |       |                    |       |                   |       |
| Current liabilities                        | ** ** | **56.4**                |       | 49.5                   |       |
| Reserves and deferred  credits             | ** ** | **4.5**                 |       | 4.5                    |       |
| Long-term debt                             | ** ** | **602.4**               |       | 603.9                  |       |
| Partners’ equity                      |       |                    |       |                   |       |
| Partners’ capital                     | ** ** | **933.0**               |       | 963.3                  |       |
| Accumulated other comprehensive income     | ** ** | **2.7**                 |       | 3.8                    |       |
|                                       | ** ** | **1,599.0**             |       | 1,625.0                |       |

 

 

***Third Quarter 2005Compared with Third Quarter 2004***

Net income increased $8.6million, or 23%, to $46.2 million in the third quarter of 2005, compared to$37.6 million for the same period in 2004.

 

Revenues increased $7.4 million, or 9%, to$89.0 million in the third quarter of 2005, compared to $81.6 million for thesame period in 2004.  The increase wasprimarily due to the recognition of the sale of Northern Border Pipeline’sbankruptcy claims for transportation contracts and associated guarantees heldagainst Enron and Enron North America of $9.4 million, partially offset bydecreased firm demand revenue of $2.0 million primarily as a result ofdiscounted capacity.

 

Costs and expenses decreased by $0.5 million,or 2.6%, to $18.7 million in the third quarter of 2005, compared to $19.2 forthe same period in 2004.  Operations andmaintenance expense decreased $0.5 million in the third quarter of 2005 comparedwith the same period in 2004 primarily due to decreased general andadministrative expenses.  Taxes otherthan income remained flat in the third quarter of 2005 compared with the sameperiod in 2004 due to increased expense for Minnesota compressor fuel tax of$0.4 million offset by decreased expense to adjust for valuations and actualtax bills received of $0.2 million in 2005 and increased expense to adjust fortax bills received of $0.3 million in 2004.

 

Financial charges increased $0.6 million inthe third quarter of 2005, or 6% to $10.7 million, compared to $10.1 millionfor the same period in 2004, as a result of higher average interest ratespartially offset by lower average debt outstanding.

 

Other income increased $1.3 million in thethird quarter of 2005,  to $1.1 million,compared to $(0.2) million for the same period in 2004, primarily due to incomerecorded for adjustments to allowance for doubtful accounts of $0.6 million in2005 and increased business development costs of $0.6 million incurred in 2004.

 

***Nine Months Ended September 30, 2005 Compared with Nine Months EndedSeptember 30, 2004***

Net income decreased $5.0 million, or 4%, to$115.6 million in the nine months ended September 30, 2005, compared to $120.6million for the same period in 2004.

 

Revenues decreased $4.8 million, or 2%, to$241.6 million in the nine months ended September 30, 2005, compared to $246.4million for the same period in 2004, primarily due to decreased revenueassociated with uncontracted and discounted transportation capacity of $13.6million, partially offset by revenue from the sale of bankruptcy claims of 

 

20

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$9.4 million in 2005.  An additional day of transportation revenuedue to leap year increased revenue by $0.9 million in 2004.

 

Costs and expenses inecreased $0.5 million inthe nine months ended September 30, 2005, compared to the same period in2004.  Operations and maintenance expensedecreased $0.5 million in the nine months ended September 30, 2005 compared tothe same period in 2004 due to the reduction of allowance for doubtful accountsrelated to bankruptcy claims of $0.6 million and decreased general andadministrative expenses of $0.4 million. In 2004, Northern Border Pipeline recorded an amortization expenserelated to the renewal of a right-of-way easement of $1.3 million offset byadjustments to true up corporate charges and benefit costs of $1.9million.  Taxes other than incomeincreased $1.0 million in the nine months ended September 30, 2005 compared tothe same period in 2004 due to increased expense for Minnesota compressor fueltax of $0.4 million and decreased expense to adjust for valuations and actualtax bills received to reflect actual tax amounts of $0.6 million and $1.2million in 2005 and 2004, respectively.

 

Financial charges increased $1.7 million, or6%, to $31.9 million in the nine months ended September 30, 2005, compared to$30.2 million for the same period in 2004 as a result of higher averageinterest rates partially offset by lower average debt outstanding.

 

Other income increased $1.6 million to $1.9million in the nine months ended September 30, 2005, compared to $0.3 millionfor the same period in 2004 primarily due to income recorded for adjustments toallowance for doubtful accounts of $0.4 million and income related to a wasteheat recovery project of $0.3 million in 2005 and increased businessdevelopment costs of $0.6 million incurred for the same period in 2004.

 

**Liquidityand Capital Resources of Northern Border Pipeline Company**

Northern Border Pipeline advisesthat it believes its liquidity is adequate to fund future recurring operatingactivities and investments.  NorthernBorder Pipeline relies on its operating cash flow and the credit facilitylisted in the following table to meet its short-term liquidity needs.  Northern Border Pipeline expects to meet itsother liquidity needs by issuing long-term debt.  The timing and Northern Border Pipeline’sability to issue debt will depend on various factors, including:

•       the prevailing marketconditions;

•       interest rates;

•       Northern Border Pipeline’sfinancial condition; and

•       Northern Border Pipeline’scredit rating.

 

***Debt and Credit Facilities***

Northern Border Pipeline’sdebt and credit facilities outstanding as of September 30, 2005 are as follows:

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

----

(a)  Northern Border Pipeline is required to pay afacility fee of 0.075% on the principal commitment amount of its creditagreement.

 

 

In May, 2005, Northern Border Pipelineentered into a $175 million five-year revolving credit agreement with certainfinancial institutions.  Northern BorderPipeline may select the lender’s base rate or the LIBOR plus a spread that isbased on its long-term unsecured debt ratings as the interest rate on theloan.  Northern Border Pipeline is 

 

21

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required to comply with certain financial,operational, and legal covenants, including the maintenance of EBITDA tointerest expense ratio of greater than 3 to 1 and debt to adjusted EBITDA(EBITDA adjusted for pro forma operating results of acquisitions made duringthe year) ratio of no more than 4.5 to 1. If Northern Border Pipeline consummates one or more acquisitions thatexceed $25 million in total purchase price, the allowable ratio of debt toadjusted EBITDA is increased to 5 to 1 for two calendar quarters following theacquisition.  If Northern Border Pipelinebreaches any of these covenants, amounts outstanding may become due and payableimmediately.  As of September 30, 2005,Northern Border Pipeline was in compliance with the covenants of its creditagreement.

 

***Cash Flows from OperatingActivities***

**Net cash provided by operatingactivities was $163.8 million in the nine months ended September 30, 2005,compared to $158.5 million for the same period in 2004.  The $5.3 million increased cash flow was dueto proceeds from the sale of Northern Border Pipeline’s bankruptcy claims heldagainst Enron and Enron North America of $11.1 million and payments receivedfor miscellaneous receivables of $1.8 million offset by lower operatingrevenues of $14.2 million and higher interest payments of $1.5 million in2005.  Impacting cash flow in 2004 werepayments to renew a right-of-way lease and other benefits of $5.5 million andpayments related to corporate charges of $3.0 million.**

** **

***CashFlows from Investing Activities***

**Net cash used in investing activitieswas $17.0 million in the nine months ended September 30, 2005, compared with$7.2 million for the same period in 2004. Both maintenance and growth capital expenditures increased $4.9 millionfor 2005 compared with 2004.  Growthcapital expenditures included $4.3 million related to the Chicago III ExpansionProject.  Total capital expenditures for2005 are estimated to be approximately $36.0 million, which includesapproximately $14.0 million for the Chicago III Expansion Project.  The remaining capital expenditures for 2005are primarily related to renewals and replacements of existing facilities.  Northern Border Pipeline currentlyanticipates funding its capital expenditure for the remainder of 2005 primarilywith borrowings under its credit agreement and using operating cash flow.**

** **

**Please refer to TC PipeLines’ annualreport on Form 10-K for the year ended December 31, 2005, for more informationabout the Chicago III Expansion Project.**

** **

***CashFlows from Financing Activities***

**Net cash used in financing activities was $146.2 million inthe nine months ended September 30, 2005, compared to $147.0 million for the sameperiod in 2004.  A cash distribution ofapproximately $57.0 million was declared and paid on November 1, 2005.**

** **

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

In June 2005, Northern Border Pipelineexecuted term sheets with a third party for the sale of its bankruptcy claimsfor transportation contracts and associated guarantees held against Enron andEnron North America.  Proceeds from thesale of the claims were $11.1 million. In 2004, Northern Border Pipeline adjusted its allowance for doubtfulaccounts to reflect an estimated recovery of $1.1 million for the claims.  In the second quarter of 2005, NorthernBorder Pipeline made an adjustment to its allowance for doubtful accounts of $0.6million to reflect the agreements for the sale. In the third quarter of 2005, Northern Border Pipeline recognizedrevenue of $9.4 million as a result of the sale.

** **

**Pleaserefer to TC PipeLines’ annual report on Form 10-K for the year ended December31, 2004 and TC PipeLines’ quarterly report on Form 10-Q for the first andsecond quarters ended March 31, 2005 and June 30, 2005, respectively, for thefull discussion of Impacts of Enron’s Chapter 11 Filing on Northern BorderPipeline’s business.**

** **

**22**

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** **

**Resultsof Operations of Tuscarora Gas Transmission Company**

*In the followingdiscussion of the results of Tuscarora, all amounts represent 100% of theoperations of Tuscarora, in which the Partnership has held a 49% interest sinceSeptember 1, 2000.*

 

***Overview***

Tuscarora is a Nevada general partnership formed in1993.  Its general partners are TCTuscarora Intermediate Limited Partnership, a direct subsidiary of TCPipeLines, which holds a 49% general partner interest, Tuscarora Gas PipelineCo., a wholly owned subsidiary of Sierra Pacific Resources, which holds a 50%general partner interest and TCPL Tuscarora Ltd., an indirect wholly ownedsubsidiary of TransCanada, which holds the remaining 1% general partnerinterest in Tuscarora.

 

The management of Tuscarora is overseen by a managementcommittee that determines the policies of, has authority over the affairs of,and approves the actions of Tuscarora. The management committee participates in the management of theconstruction, maintenance and operation of the Tuscarora pipeline system.Tuscarora owns a 240-mile, 20-inch diameter, United States interstate pipeline system that originates at aninterconnection point with facilities of GTN,a wholly-owned subsidiary of TransCanada, near Malin, Oregon and runs southeastthrough northeastern California and northwestern Nevada.  The Tuscarora pipelinesystem terminates near Wadsworth, Nevada. Deliveries are also made directly to the local gas distribution systemof Sierra Pacific Power, a subsidiary of Sierra Pacific Resources.  Along its route, deliveries are made inOregon, northern California and northwestern Nevada.

 

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

 

Tuscaroracompleted construction of the Barrick Lateral, a 0.5 mile lateral that providestransportation service to a new electric generation customer located nearTracy, Nevada.  The construction of thelateral was completed on time and commissioned for service to BarrickGoldstrike on June 25, 2005.

 

Tuscarorahas firm transportation contracts for over 95% of its contracted capacity,including contracts held by Sierra Pacific Power for 69% of the total availablecapacity, the majority of which expires on October 31, 2017.  As of September 30, 2005, the averagecontract life on the Tuscarora pipeline system was approximately 12.2 years.

 

***Critical Accounting Policies***

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

 

***Results of Operations***

The following tables set outsummarized financial information for Tuscarora for the three and nine monthsended September 30, 2005 and 2004 and as at September 30, 2005 and December 31,2004.  Amounts discussed represent 100%of the operations of Tuscarora, in which the Partnership has held a 49%interest since September 1, 2000.

 

23

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**Tuscarora Income Statement**

 
| **(unaudited)**           | ** ** | **Three months ended  September 30** | ** ** | **Nine months ended  September 30** | ** ** |
|---------------------------|------------|--------------------------------------|------------|-------------------------------------|------------|
| **(millions of dollars)** | ** ** | **2005**                             | ** ** | **2004**                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| Revenues                  | ** ** | **7.8**                              |       | 8.1                                 | ** ** | **24.1** |   | 24.4 |   |
| Costs and expenses        | ** ** | **(1.0**                             | **)**      | (1.2                                | )          | **(3.2** | **)** | (3.6 | ) |
| Depreciation              | ** ** | **(1.5**                             | **)**      | (1.5                                | )          | **(4.6** | **)** | (4.6 | ) |
| Financial charges         | ** ** | **(1.5**                             | **)**      | (1.5                                | )          | **(4.4** | **)** | (4.6 | ) |
| Other income              | ** ** | **—**                           | ** ** | —                              | ** ** | **0.1** |   | — |   |
| Net income                | ** ** | **3.8**                              |       | 3.9                                 | ** ** | **12.0** |   | 11.6 |   |

 

 

**Tuscarora Balance Sheet**

 
| **(millions of dollars)**                  | ** ** | **September 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|--------------------------------------------|------------|-------------------------|------------|------------------------|------------|
| ** **                                 | ** ** | **(unaudited)**         | ** ** | ** **             | ** ** |
| **Assets**                                 |       |                    |       |                   |       |
| Cash and cash equivalents                  | ** ** | **6.5**                 |       | 3.6                    |       |
| Other current assets                       | ** ** | **2.8**                 |       | 3.0                    |       |
| Plant, property and  equipment, net        | ** ** | **133.1**               |       | 136.9                  |       |
| Other assets                               | ** ** | **1.4**                 |       | 1.4                    |       |
| ** **                                 | ** ** | **143.8**               |       | 144.9                  |       |
|                                       |       |                    |       |                   |       |
| **Liabilities and Partners’  Equity** |       |                    |       |                   |       |
| Current liabilities                        | ** ** | **8.4**                 |       | 6.9                    |       |
| Long-term debt                             | ** ** | **73.5**                |       | 75.9                   |       |
| Partners’ equity                      |       |                    |       |                   |       |
| Partners’ capital                     | ** ** | **61.8**                |       | 62.0                   |       |
| Accumulated other comprehensive income     | ** ** | **0.1**                 |       | 0.1                    |       |
|                                       | ** ** | **143.8**               |       | 144.9                  |       |

 

 

***Third Quarter 2005Compared with Third Quarter 2004***

Net income decreased $0.1 million, or 3%, to $3.8million in the third quarter of 2005, compared to $3.9 million for the sameperiod in 2004.  The decrease wasprimarily due to slightly lower revenues earned in the third quarter of 2005.

 

Revenues earned by Tuscarora decreased $0.3 million,or 4% in the third quarter of 2005, compared to $8.1 million for the sameperiod in 2004 due to slightly lower transportation revenues.

 

Costs and expenses decreased $0.2 million, or 17%, to$1.0 million in the third quarter of 2005, compared to $1.2 million for thesame period in 2004.  The decrease wasprimarily due to the renegotiation of lower rates for maintenance contracts in2005.  Depreciation remained flat at $1.5million in the third quarter of 2005, compared to the same period in 2004.

 

Financial charges remained flat at $1.5 million in thethird quarter of 2005, compared to the same period in 2004.

 

***Nine Months Ended September 30,2005 Compared with Nine Months Ended September 30, 2004***

Net income increased $0.4 million, or 3%, to $12.0 millionin the nine months ended September 30, 2005, compared to the $11.6 million forthe same period in 2004.  The increasewas primarily due to lower costs and expenses and a decrease in financialcharges.

 

24

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Revenues earned by Tuscarora decreased $0.3 million,or 1%, to $24.1 million in the nine months ended September 30, 2005, comparedto $24.4 million for the same period in 2004 due to slightly lowertransportation revenues.  Costs andexpenses decreased $0.4 million, or 11%, to $3.2 million in the first ninemonths of 2005, compared to $3.6 million for the same period in 2004.  The decrease was primarily due to therenegotiation of lower rates for maintenance contracts in 2005.

 

Financial charges decreased $0.2 million, or 4%, to$4.4 million in the nine months ended September 30, 2005, compared to $4.6million for the same period in 2004.  Thedecrease reflects lower average debt outstanding.

 

Other income of $0.1 million in the nine months endedSeptember 30, 2005 was due to higher interest income resulting from higherinterest rates and an increased cash balance.

 

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

### ** **

***Debt and Credit Facilities***

Tuscarora’s debt and credit facilities outstandingat September 30, 2005 are as follows:

 
| ** **                      | ** ** | **Payments Due by Period** | ** ** |
|---------------------------------|------------|----------------------------|------------|
| **(millions of dollars)**       | ** ** | **Total**                  | ** ** | **Less Than  1 Year** | ** ** | **1-3 Years** | ** ** | **4-5 Years** | ** ** | **After 5 Years** | ** ** |
|                            |       |                       |       |   |   |   |   |   |   |   |   |
| Series A Senior Notes due  2010 |       | 63.5                       |       | 3.7 |   | 6.9 |   | 6.2 |   | 46.7 |   |
| Series B Senior Notes due  2010 |       | 6.5                        |       | 0.4 |   | 0.9 |   | 1.1 |   | 4.1 |   |
| Series C Senior Notes due  2012 |       | 8.3                        |       | 0.7 |   | 1.7 |   | 1.6 |   | 4.3 |   |
| Operating Leases                |       | 0.3                        |       | 0.1 |   | 0.2 |   | — |   | — |   |
| Commitments (1)                 |       | 1.5                        |       | 0.7 |   | 0.8 |   | — |   | — |   |
| Total                           |       | $                          | 80.1       |   | $ | 5.6 |   | $ | 10.5 |   | $ | 8.9 |   | $ | 55.1 |   |
|                                 |            |                            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(1) Tuscarora’s commitments relate to a contract with a third party formaintenance services on certain components of its pipeline-relatedequipment.  The contract expires in November2007.

 

 

Short-term liquidity needs will be met byoperating cash flows.  Long-term capitalneeds may be met through the issuance of long-term indebtedness.

 

***Cash Flows from OperatingActivities***

Cash provided by operating activitiesdecreased $1.3 million to $18.3 million in the nine months ended September 30,2005, compared to $19.6 million for the same period in 2004.  The decrease was primarily due to a reductionin working capital.

 

***Cash Flows from InvestingActivities***

Cash used in investing activities was $0.9million and $1.2 million in the nine months ended September 30, 2005 and 2004,respectively.  Tuscarora used more fundsfor construction projects in 2004.

 

***Cash Flows from FinancingActivities***

Cash used in financing activities increased$1.7 million to $14.6 million in the nine months ended September 30, 2005,compared to $12.9 million for the same period in 2004 primarily due to higherdistributions paid to partners in 2005. Distributions paid to Tuscarora’s partners were $12.9 million and $11.4million in the nine months ended of 2005 and 2004, respectively.  Tuscarora repaid $2.4 million and $2.3million on its long-term debt in the nine months ended September 30, 2005 and2004, respectively.

 

25

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**Sierra Pacific Resources**

**SierraPacific Power, a wholly owned subsidiary of Sierra Pacific Resources, isTuscarora’s largest shipper with approximately 69% of the total availablecapacity through 2017.**

**          In 2003, the Bankruptcy Court grantedEnron Power Marketing Inc.’s motion for a summary judgment with respect toclaims against Nevada Power Company and Sierra Pacific Power (together, the “Utilities”)of approximately $235 million and $102 million, respectively, of liquidateddamages, for power supply contracts terminated by Enron Power Marketing in May2002.  The Utilities filed a Notice ofAppeal from the Bankruptcy Court judgment with the U.S. District Court.**

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

**          On August 8, 2005, President Bushsigned the Domenici Barton Energy Policy Act into law (the “Energy Bill”).  The Energy Bill contains language thatrelates to the Utilities’ disputes with Enron over termination payments Enronclaims are owed to them arising from forward power purchase contractsterminated by Enron in 2002.  Theamendment grants FERC exclusive jurisdiction over the determination of whetherany such payments are unjust, unreasonable or contrary to the publicinterest.  The Utilities have not yetdetermined what impact the law will have on the status of the ongoing legalproceedings.**

**          On August 19, 2005, the BankruptcyCourt entered an Order approving a Stipulation by which the Utilities and Enronagreed to a standstill of the Bankruptcy Court proceeding until the earlier of(1) FERC lifting its July 20, 2005 stay under FERC Gaming and Partnership ShowCause Proceeding or (2) FERC approving the settlement agreement between theCalifornia parties and Enron discussed under FERC Gaming and Partnership ShowCause Proceeding.**

** **

Sierra Pacific Power to-date remains current on its shipping contractswith Tuscarora.

 

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**ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK**

 

**TC PipeLines, LP**

 

**TCPipeLines may**be exposed to marketrisk through changes in interest rates. The Partnership does not have any material foreign exchange risks.  TC PipeLines’ interest rate exposure resultsfrom its Revolving Credit Facility, which is subject to variability in LIBORinterest rates.  At September 30, 2005,TC PipeLines had $20.0 million outstanding on its Revolving CreditFacility.  In the nine months endedSeptember 30, 2005, there were no material changes to TC PipeLines’ interestrate exposure.

 

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

 

Northern Border Pipeline’s interest rateexposure is a result of variable rate borrowings.  To reduce its sensitivity to interest ratefluctuations, Northern Border Pipeline may maintain a portion of itsconsolidated debt portfolio in fixed-rate debt. Northern Border Pipeline may also use interest rate swap agreements tomanage interest expense by converting a portion of fixed-rate debt tovariable-rate debt.  As of September 30,2005, Northern Border Pipeline had neither variable-rate debt nor interest rateswaps outstanding.

 

Northern Border Pipeline records in long-termdebt amounts received or paid related to terminated interest rate swapagreements for fair value hedges and amortizes these amounts to interestexpense over the remaining life of the interest rate swap agreement.  During the three and nine months endedSeptember 30, 2005, Northern Border Pipeline amortized approximately $0.5million and $1.6 million, respectively, as a reduction to interestexpense.  Northern Border Pipelineexpects to amortize approximately $0.5 million in the fourth quarter of 2005.

 

 

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**PARTII. OTHER INFORMATION**

**ITEM 4.  CONTROLS AND PROCEDURES**

 

**TC PipeLines, LP**

 

**Evaluation of disclosure controls and procedures.**

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

 

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

 

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**ITEM 6. EXHIBITS**

 

**TC PipeLines, LP**

 

**Exhibits**

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

 

 

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### **SIGNATURES**

 

 

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

 

 
|                   | **TC PipeLines, LP**             |
|------------------------|----------------------------------|
|                   | (a Delaware Limited Partnership) |
|                   |                             |   |
|                   | By:                              | TC PipeLines GP, Inc., its general partner |
|                   |                             |   |
|                   | By:                              | /s/ Russell K. Girling |
| Date: November 7, 2005 |                             | Russell K. Girling |
|                   |                             | Chief Financial Officer  (duly authorized officer) |
|                   |                             |   |
|                   | By:                              | /s/ Amy Leong |
| Date: November 7, 2005 |                             | Amy Leong |
|                   |                             | Controller (duly  authorized officer) |

 

 

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