Exhibit
99.1





REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To the
Board of Directors of TC PipeLines GP, Inc., General Partner of TC PipeLines,
LP:





We have
audited the accompanying consolidated balance sheets of TC PipeLines GP, Inc. (a
Delaware corporation) as of December 31, 2008 and 2007. These consolidated
balance sheets are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated balance sheets
based on our audits.





We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform an audit to obtain reasonable assurance about whether the balance
sheets are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the balance sheets. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall balance sheet
presentation. We believe that our audits provide a reasonable basis for our
opinion.





In our
opinion, the consolidated balance sheets referred to above present fairly, in
all material respects, the financial position of the Company as of December 31,
2008 and 2007 in conformity with accounting principles generally accepted in the
United States of America.








/s/ KPMG
LLP





Calgary,
Canada


April 29,
2009












40


CONSOLIDATED
BALANCE SHEETS





TC
PipeLines GP, Inc.





December 31(millions of
      dollars)
              
              2008
              
              
              2007AssetsCurrent
      assetsCash
      and cash equivalents
              
              
              8.4
              
              
              
              8.8Accounts
      receivables and other
              
              
              3.4
              
              
              
              4.2Due
      from affiliates (Note
      10)
              
              
              2.0
              
              
              
              1.813.8
              
              
              
              14.8Investment
      in Great Lakes (Note
      3)
              
              
              704.5
              
              
              
              721.1Investment
      in Northern Border (Note
      4)
              
              
              514.8
              
              
              
              541.9Plant,
      property and equipment(Note 5)
              
              
              134.2
              
              
              
              134.1Goodwill
      (Note
      6)
              
              
              81.7
              
              
              
              81.7Other
      assets
              
              
              1.5
              
              
              
              2.11,450.5
              
              
              
              1,495.7Liabilities
      and Stockholder's EquityCurrent
      liabilitiesBank
      indebtedness
              
              
              -
              
              
              
              1.4Accounts
      payable
              
              
              2.2
              
              
              
              4.8Accrued
      interest
              
              
              2.1
              
              
              
              3.0Due
      to affiliates (Note
      10)
              
              
              -
              
              
              
              4.4Current
      portion of long-term debt (Note
7)
              
              
              4.4
              
              
              
              4.6Current
      portion of fair value of derivative contracts (Note
    12)
              
              
              11.8
              
              
              
              2.520.5
              
              
              
              20.7Long-term
      debt(Note
      7)
              
              
              532.4
              
              
              
              568.8Fair
      value of derivative contracts and other (Note
    12)
              
              
              20.0
              
              
              
              7.4Deferred
      income tax (Note
      8)
              
              
              24.4
              
              
              
              21.7597.3
              
              
              
              618.6Non-controlling
      interests (Note
      6)
              
              
              811.6
              
              
              
              832.6Stockholder's
      equity (Note
      9)Common
      stock ($0.01 par value per share; 1,000 shares authorized; 100 shares
      issued)
              
              
              -
              
              
              
              -Additional
      paid-in capital
              
              
              22.2
              
              
              
              22.2Retained
      earnings
              
              
              24.2
              
              
              
              23.7Accumulated
      other comprehensive loss
              
              
              (4.8
              )
              
              
              (1.4
              )41.6
              
              
              
              44.51,450.5
              
              
              
              1,495.7The
      accompanying notes are an integral part of these consolidated balance
      sheets.


41
 TC
PipeLines GP, Inc.


NOTES
TO CONSOLIDATED BALANCE SHEETS





NOTE
1                 ORGANIZATION


TC
PipeLines GP, Inc. (the GP), a Delaware corporation, was formed by TransCanada
PipeLines Limited in December 1998 to become the general partner of TC
PipeLines, LP (the LP), a Delaware limited partnership. The GP and the LP are
collectively referred to herein as “the Company”. On May 15, 2003, TransCanada
PipeLines Limited became a wholly-owned subsidiary of TransCanada Corporation
(collectively referred to herein as TransCanada). The GP is a wholly-owned
subsidiary of TransCanada.





At
December 31, 2008, the GP held a two per cent general partner interest in the LP
and also owned 2,035,106 common units, representing an effective 7.7 per cent
limited partner interest in the LP. By virtue of the GP’s performance of all
management and operating functions required by the LP pursuant to the Amended
and Restated Agreement of Limited Partnership of TC PipeLines, LP, the GP has
control of the operating and financial policies of the LP.





The LP is
a publicly traded partnership. Common units of the LP are listed on the NASDAQ
Global Market and trade under the symbol “TCLP.” As at December 31, 2008, the LP
owned a 46.45 per cent general partner interest in Great Lakes Gas Transmission
Limited Partnership (Great Lakes), a 50 per cent general partner interest in
Northern Border Pipeline Company (Northern Border) and wholly-owned Tuscarora
Gas Transmission Company (Tuscarora).





Great
Lakes owns a 2,115-mile interstate pipeline system that transports natural gas
from TransCanada at the Canadian border near Emerson, Manitoba across Minnesota,
Northern Wisconsin and Michigan, and redelivers gas to TransCanada at the
Canadian border at Sault Ste. Marie, Michigan and St. Clair, Michigan. Northern
Border owns a 1,249-mile interstate pipeline system that transports natural gas
from the Canadian border near Port of Morgan, Montana to a terminus near North
Hayden, Indiana. Tuscarora owns a 240-mile interstate pipeline system that
transports natural gas from Malin, Oregon, where it interconnects with
facilities of Gas Transmission Northwest Corporation, a wholly-owned subsidiary
of TransCanada, to Northwestern Nevada.





NOTE
2                 SIGNIFICANT
ACCOUNTING POLICIES


a)
            Basis
      of Presentation and Use of Estimates
              The
      accompanying consolidated balance sheets and related notes present the
      financial position of the Company as of December 31, 2008 and 2007. The
      preparation of consolidated balance sheets in conformity with generally
      accepted accounting principles in the United States of America requires
      management to make estimates and assumptions that affect the reported
      amounts of assets and liabilities and disclosure of contingent assets and
      liabilities at the date of the balance sheets. Although management
      believes these estimates are reasonable, actual results could differ from
      these estimates. Amounts are stated in United States dollars. Certain
      comparative figures have been reclassified to conform to the current
      year’s presentation.





b)
            Principles
      of Consolidation
              The
      consolidated balance sheets include the accounts of the GP and the LP. The
      GP controls the operations of the LP through its two per cent general
      partner interest. All significant intercompany transactions and accounts
      have been eliminated on consolidation. The Company uses the equity method
      of accounting for its investments in Great Lakes and Northern Border, over
      which it is able to exercise significant influence. The Company has owned
      a controlling interest in Tuscarora since December 19, 2006 and, as a
      result, consolidates Tuscarora’s
  operations.





c)
            Cash
      and Cash Equivalents
              The Company’s short-term investments with
      original maturities of three months or less are considered to be cash
      equivalents and are recorded at cost, which approximates market
      value.





d)
            Plant,
      Property and Equipment


Plant,
property and equipment of Tuscarora is stated at original cost. Costs of
restoring the land above and around the pipeline are capitalized to pipeline
facilities and depreciated over the remaining life of the related pipeline
facilities. Depreciation of pipeline facilities and compression equipment is
provided on a straight-line composite basis over the estimated useful life of
the pipeline of 30 years and of the compression equipment of 25 years. Metering
and other is depreciated on a straight-line basis over the estimated useful
lives of the equipment, which range from 3 to 30 years. Repair and maintenance
costs are expensed as incurred. Costs that are considered a betterment are
capitalized. An allowance for funds used during construction, using the rate of
return on rate base approved by the Federal Energy Regulatory Commission (FERC),
is capitalized and included in the cost of plant, property and equipment.
Amounts included in construction work in progress are not amortized until
transferred into service.





42
 TC
PipeLines GP, Inc.






The
Company assesses its long-lived assets for impairment based on Statement of
Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. A long-lived asset is tested for
impairment whenever events or changes in circumstances indicate that its
carrying amount may exceed the undiscounted cash flows expected to be generated
by the asset. If the carrying amount exceeds the undiscounted cash flows,
impairment is recognized to the extent the carrying amount exceeds its fair
value.





e)
            Revenue
      Recognition


Transmission
revenues relate solely to Tuscarora, and are recognized in the period in which
the service is provided. When a rate case is pending final FERC approval, a
portion of the revenue collected is subject to possible refund. As of December
31, 2008 and 2007, the Company has not recognized any transmission revenue that
is subject to refund.





f)
            Income
      Taxes


The
Company follows the liability method of accounting for income taxes in
accordance with SFAS No. 109, Accounting for Income Taxes.
Under this standard, deferred income taxes are recorded based upon differences
between the financial reporting and tax basis of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
underlying assets are received and liabilities settled.





g)
            Acquisitions
      and Goodwill
              The
      Company accounts for business acquisitions using the purchase method of
      accounting and accordingly the assets and liabilities of the acquired
      entities are recorded at their estimated fair values at the date of
      acquisition. The excess of the purchase price over the fair value of net
      assets acquired is attributed to goodwill. Goodwill is not amortized for
      accounting purposes; however, it is tested on an annual basis for
      impairment, or more frequently if any indicators of impairment are
      evident.





h)
            Derivative
      Financial Instruments and Hedging
Activities


The
Company utilizes derivative and other financial instruments to manage its
exposure to changes in interest rates. Derivatives and other hedging instruments
must be designated as hedges and be effective to qualify for hedge accounting.
For cash flow hedges, unrealized gains or losses relating to derivatives are
recognized as other comprehensive income. In the event that a derivative does
not meet the designation or effectiveness criteria, any unrealized gain or loss
on the instrument is recognized immediately in earnings.





Effective
January 1, 2008, the Company adopted the provisions of SFAS No. 157, Fair Value Measurements(SFAS
No. 157). Under this standard, these financial assets and liabilities that are
recorded at fair value on a recurring basis are categorized into one of three
categories based upon a fair value hierarchy. The Company has classified all of
its derivative financial instruments as level II where the fair value is
determined by using valuation techniques that refer to observable market data or
estimated market prices.





If a
derivative that previously qualified as a hedge is settled, de-designated or
ceases to be effective, the gain or loss at that date is recognized in the same
period and in the same financial statement category as the corresponding hedged
transactions. If a hedged anticipated transaction is no longer probable to
occur, related gains or losses are immediately recognized in earnings and
amounts previously recognized in other comprehensive income are reclassified to
earnings prospectively. Costs associated with the purchase of certain hedging
instruments are deferred and amortized against interest expense.





i)
            Asset
      Retirement Obligation


SFAS No.
143, Accounting for Asset
Retirement Obligations (SFAS No. 143), provides accounting
requirements for the recognition and measurement of liabilities associated with
the retirement of tangible long-lived assets. Under the standard, these
liabilities are recognized at fair value as incurred and capitalized as part of
the cost of the related tangible long-lived assets. Accretion of the liabilities
due to the passage of time is classified as an operating expense. Retirement
obligations associated with long-lived assets included within the scope of SFAS
No. 143 are those for which a legal obligation exists under enacted laws,
statutes, ordinances, or written or oral contracts, including obligations
arising under the doctrine of promissory estoppel.





43
 TC
PipeLines GP, Inc.






Financial
Accounting Standards Board Interpretation 47, Accounting for Conditional Asset
Retirement Obligations – an interpretation of SFAS No. 143,clarifies the
term “conditional asset retirement obligation,” as used in SFAS No. 143, and the
circumstances under which an entity would have sufficient information to
reasonably estimate the fair value of an asset retirement obligation. No amount
is recorded for asset retirement obligations relating to the assets as it is not
possible to make a reasonable estimate of the fair value of the liability due to
the inability to determine the scope and timing of the asset
retirements. Management believes it is reasonable to assume that all
retirement costs associated with the pipeline systems will be recovered through
rates in future periods.





j)
            Government
      Regulation


Tuscarora,
the LP’s wholly-owned pipeline system, is subject to regulation by the FERC. The
Company’s accounting policies conform to SFAS No. 71, Accounting for the Effects of
Certain Types of Regulation(SFAS No. 71). Accordingly, certain assets or
liabilities that result from the regulated ratemaking process may be recorded
that would not be recorded under GAAP for non-regulated entities. The Company
regularly evaluates the continued applicability of SFAS No. 71, considering such
factors as regulatory changes, the impact of competition, and the ability to
recover regulatory assets. As at December 31, 2008 and 2007, the Company had no
regulatory assets or liabilities.





NOTE
3                 INVESTMENT
IN GREAT LAKES


On
February 22, 2007, the LP acquired a 46.45 per cent general partner interest in
Great Lakes. TransCanada, which previously held a 50 per cent interest in Great
Lakes, acquired the other 3.55 per cent general partner interest concurrent with
the LP’s acquisition of its interest. On the same day, a wholly-owned subsidiary
of TransCanada acquired 100 per cent ownership of the operator of Great Lakes.
Great Lakes is regulated by the FERC.





The
Company uses the equity method of accounting for its investment in Great Lakes.
Great Lakes had no undistributed earnings for the year ended December 31, 2008
and the period February 23, 2007 to December 31, 2007.





The
following table contains summarized consolidated balance sheet information for
Great Lakes as at December 31, 2008 and 2007:






Summarized
      Consolidated Great Lakes Balance SheetDecember 31(millions of
      dollars)
              
              2008
              
              
              2007AssetsCash
      and cash equivalents
              
              
              1.6
              
              
              
              32.0Other
      current assets
              
              
              80.2
              
              
              
              55.5Plant,
      property and equipment, net
              
              
              923.4
              
              
              
              969.21,005.2
              
              
              
              1,056.7Liabilities
      and Partners' EquityCurrent
      liabilities
              
              
              43.0
              
              
              
              50.7Deferred
      credits and other
              
              
              2.3
              
              
              
              0.4Long-term
      debt, including current maturities
              
              
              430.0
              
              
              
              440.0Partners'
      capital
              
              
              529.9
              
              
              
              565.61,005.2
              
              
              
              1,056.7




NOTE
4                 INVESTMENT
IN NORTHERN BORDER


The LP
owns a 50 per cent general partner interest in Northern Border. The remaining 50
per cent general partner interest in Northern Border is held by ONEOK Partners,
L.P., a publicly traded limited partnership. The Northern Border system was
operated by ONEOK Partners GP, LLC, a wholly-owned subsidiary of ONEOK, Inc.
during the three months ended March 31, 2007. Effective April 1, 2007,
TransCanada Northern Border Inc. (TCNB), a wholly-owned subsidiary of
TransCanada, became the operator of Northern Border. Northern Border is
regulated by the FERC.





44
 TC
PipeLines GP, Inc.






The
Company uses the equity method of accounting for its investment in Northern
Border. Equity income from Northern Border includes amortization of a $10.0
million transaction fee paid to the operator of Northern Border as an inducement
to become operator at the time of an additional 20 per cent acquisition in April
2006. Northern Border had no undistributed earnings for the years ended December
31, 2008 and 2007.





On
February 2, 2009, Northern Border received a Notice of Violation from the United
States Environmental Protection Agency alleging that Northern Border was in
violation of certain regulations pursuant to the Clean Air Act regarding a
compressor station on its system. At this time, Northern Border is unable to
reasonably estimate the cost of any associated corrective action or the
possibility or amount of any penalty, but does not expect such amounts to be
material to its financial condition.





The
following table contains summarized balance sheet information for Northern
Border as at December 31, 2008 and 2007:







Summarized
      Northern Border Balance SheetDecember 31(millions of
      dollars)
              
              2008
              
              
              2007AssetsCash
      and cash equivalents
              
              
              21.6
              
              
              
              22.9Other
      current assets
              
              
              39.1
              
              
              
              39.8Plant,
      property and equipment, net
              
              
              1,390.8
              
              
              
              1,428.3Other
      assets
              
              
              24.5
              
              
              
              23.91,476.0
              
              
              
              1,514.9Liabilities
      and Partners' EquityCurrent
      liabilities
              
              
              48.7
              
              
              
              53.4Deferred
      credits and other
              
              
              11.2
              
              
              
              8.1Long-term
      debt, including current maturities
              
              
              630.4
              
              
              
              615.3Partners'
      equityPartners'
      capital
              
              
              791.4
              
              
              
              840.5Accumulated
      other comprehensive loss
              
              
              (5.7
              )
              
              
              (2.4
              )1,476.0
              
              
              
              1,514.9





NOTE
5                 PLANT,
PROPERTY AND EQUIPMENT




2008
              
              2007Accumulated
              
              Net
      Book
              
              
              
              Accumulated
              
              Net
      BookDecember 31 (millions of
      dollars)
              Cost
              
              Depreciation
              
              Value
              
              Cost
              
              Depreciation
              
              ValueTuscaroraPipeline
              146.6
              
              57.9
              
              88.7
              
              146.6
              
              53.1
              
              93.5Compression
              45.1
              
              7.0
              
              38.1
              
              25.0
              
              5.5
              
              19.5Metering
      and other
              11.0
              
              3.6
              
              7.4
              
              11.0
              
              3.1
              
              7.9Under
      construction
              -
              
              -
              
              -
              
              13.2
              
              -
              
              13.2202.7
              
              68.5
              
              134.2
              
              195.8
              
              61.7
              
              134.1





NOTE
6                 ACQUISITIONS


Great
Lakes


On
February 22, 2007, the LP acquired a 46.45 per cent general partner interest in
Great Lakes. The total purchase price was $942.4 million and included the
indirect assumption of $209.0 million of debt. The acquisition was partially
financed through a private placement of common units for gross proceeds of
$600.0 million. A dilution gain of $17.6 million was recognized as a result of
the common units owned by the GP having an increased value after the private
placement with a reduction to non-controlling interests on the balance sheet. In
addition, the GP maintained its two per cent general partner interest in the LP
by contributing $12.6 million to the LP in connection with the private
placement. The LP funded the balance of the acquisition with a draw on its
Senior Credit Facility (defined in Note 7).





45
 TC
PipeLines GP, Inc.




The
acquisition was accounted for using the purchase method of accounting. The
purchase price was allocated using an estimate of fair value of the net assets
at the date of acquisition. The difference between the purchase price and the
estimated fair value of net assets of $457.5 million, being goodwill, was
recorded as part of the Company’s investment in Great Lakes.





Great
Lakes’ business is subject to rate regulation based on historical costs which do
not change with market conditions or change of ownership. Accordingly, upon
acquisition, the assets and liabilities of Great Lakes were determined to have a
fair value equal to the rate regulated historical costs. No intangibles other
than goodwill were identified in the acquisition.





TransCanada,
which previously held a 50 per cent interest in Great Lakes, acquired the other
3.55 per cent general partner interest concurrent with the LP’s acquisition of
its interest. In connection with these transactions, a wholly-owned subsidiary
of TransCanada became the operator of Great Lakes.





Tuscarora


On
December 31, 2007, the LP acquired the remaining two per cent general partner
interest in Tuscarora, thereby making it a wholly-owned subsidiary. A one per
cent general partner interest was purchased from a wholly-owned subsidiary of
TransCanada, while the other one per cent general partner interest was purchased
from Tuscarora Gas Pipeline Co. for a total purchase price of $3.9 million. The
acquisitions were accounted for using the purchase method of accounting. The
difference between the combined purchase prices and the non-controlling interest
recorded on the Company’s balance sheet of $2.6 million was recorded as
goodwill.





The
entire goodwill balance of $81.7 million as at December 31, 2008 and 2007
relates to acquisitions of general partner interests in Tuscarora.





Tuscarora’s
business is subject to rate regulation based on historical costs which do not
change with market conditions or change of ownership. Accordingly, upon
acquisition, the assets and liabilities of Tuscarora were determined to have a
fair value equal to the rate regulated historical costs. No intangibles other
than goodwill were identified in the acquisition.





NOTE
7                      CREDIT
FACILITIES AND LONG-TERM DEBT


December 31 (millions of
      dollars)
              2008
              
              2007Senior
      Credit Facility
              475.0
              
              507.07.13%
      Series A Senior Notes due 2010
              51.3
              
              54.57.99%
      Series B Senior Notes due 2010
              5.0
              
              5.56.89%
      Series C Senior Notes due 2012
              5.5
              
              6.4536.8
              
              573.4




The LP
has a revolving credit and term loan agreement (Senior Credit Facility) with a
banking syndicate. In accordance with the Senior Credit Facility agreement, once
repaid, a senior term loan cannot be re-borrowed. In 2008, $13.0 million of the
senior term loan was repaid (2007 - $18.0 million), leaving $475.0 million
outstanding under the senior term loan at December 31, 2008. No amount was
outstanding under the revolving portion of the Senior Credit Facility at
December 31, 2008 (2007 - $19.0 million), leaving $250.0 million available for
future borrowings.





The
Senior Credit Facility matures on December 12, 2011, subject to two one-year
extensions at the option of the LP and with the approval of a majority of the
lenders thereunder. Amounts borrowed may be repaid in part, or in full, prior to
that time without penalty. Borrowings under the Senior Credit Facility will bear
interest based, at the LP’s election, on the London Interbank Offered Rate or
the prime rate plus, in either case, an applicable margin. There was $475.0
million outstanding under the Senior Credit Facility at December 31, 2008 (2007
- $507.0 million). The underlying interest rate on the Senior Credit Facility
averaged 3.75 per cent for the year ended December 31, 2008 (2007 – 6.01 per
cent). After hedging activity, the interest rate incurred on the Senior Credit
Facility averaged 5.15 per cent for the year ended December 31, 2008 (2007 –
5.55 per cent). Prior to hedging activities, the interest rate was 2.67 per cent
at December 31, 2008 (2007 – 5.62 per cent). At December 31, 2008, the LP was in
compliance with its financial covenants, in addition to the other covenants
which include restrictions on entering into mergers, consolidations and sales of
assets, granting liens, material amendments to the Partnership Agreement,
incurring additional debt and distributions to unitholders.





46
 TC
PipeLines GP, Inc.






Series A,
B and C Senior Notes are secured by Tuscarora’s transportation contracts,
supporting agreements and substantially all of Tuscarora’s property. The note
purchase agreements contain certain provisions that include, among other items,
limitations on additional indebtedness and distributions to
partners.





Annual
maturities of the Senior Credit Facility and the Notes are summarized as
follows:





(millions
      of dollars)2009
              4.42010
              53.52011
              475.82012
              3.1536.8





NOTE
8                 INCOME
TAXES


Deferred
income tax liabilities of $24.4 million for 2008 (2007 - $21.7 million) arise
from the Company’s investments having higher book basis than tax
basis.





NOTE
9                STOCKHOLDER’S
EQUITY


A
wholly-owned subsidiary of TransCanada holds 100 common shares representing 100
per cent of the issued common stock of the Company. On October 17, 2008, the
Company declared a distribution of $10.0 million in the form of a dividend to a
wholly-owned subsidiary of TransCanada (December 11, 2007 - $7.5
million).





NOTE
10             RELATED
PARTY TRANSACTIONS


The
Company does not have any employees. The management and operating functions are
provided by TransCanada. TransCanada does not receive a management fee in
connection with its management of the Company. The Company reimburses
TransCanada for all costs of services provided, including the costs of employee,
officer and director compensation and benefits, and all other expenses necessary
or appropriate to the conduct of the business of, and allocable to, the Company.
Such costs include (i) overhead costs (such as office space and equipment) and
(ii) out-of-pocket expenses related to the provision of such services. Total
costs charged to the Company by TransCanada were $2.1 million for the year ended
December 31, 2008 (2007 - $1.9 million).





The
operator of Great Lakes became a wholly-owned subsidiary of TransCanada through
TransCanada’s acquisition of Great Lakes Gas Transmission Company on February
22, 2007. TCNB became the operator of Northern Border effective April 1, 2007.
TCNB is also the operator of Tuscarora. TransCanada and its affiliates provide
capital and operating services to the Company’s pipeline systems. TransCanada
and its affiliates incur costs on behalf of the Company’s pipeline systems,
including, but not limited to, employee salary and benefit costs, property and
liability insurance costs, and transition costs.





Total
costs charged to the Company’s pipeline systems for the years ended December 31,
2008 and 2007 by TransCanada and its affiliates and amounts owed to TransCanada
and its affiliates at December 31, 2008 and 2007 are summarized in the following
tables:





47
 TC
PipeLines GP, Inc.






Year ended December
      31 (millions
      of dollars)
                
                2008
                
                
                2007
      (1)Costs
      charged by TransCanada and its affiliates:Great
      Lakes
                
                
                34.3
                
                
                
                25.6Northern
      Border (2)
                
                
                30.5
                
                
                
                22.5Tuscarora
                
                
                3.7
                
                
                
                1.8Impact
      on the Partnership's net income:Great
      Lakes
                
                
                14.2
                
                
                
                11.2Northern
      Border
                
                
                12.9
                
                
                
                11.0Tuscarora
                
                
                2.7
                
                
                
                0.9(1)
      The amounts disclosed for Great Lakes are for the period February 23 to
      December 31, 2007. The amounts disclosed for Northern Border are for the
      period April 1 to December 31, 2007.(2)Northern Border's costs charged by TransCanada and its affiliates
      include $2.0 million of charges related to Bison Pipeline LLC through the
      effective date of the sale.December 31 (millions of
      dollars)
                
                2008
                
                
                2007Amount
      owed to TransCanada and its affiliates:Great
      Lakes
                
                
                4.5
                
                
                
                1.9Northern
      Border
                
                
                2.8
                
                
                
                3.0Tuscarora
                
                
                0.8
                
                
                
                3.5
  Great
Lakes earns transportation revenues from TransCanada and its affiliates under
fixed priced contracts with remaining terms ranging from one to nine years.
Great Lakes earned $144.1 million of transportation revenues under these
contracts in 2008 ($113.9 million for the period February 23, 2007 to December
31, 2007). This amount represents 50.0 per cent of total revenues earned by
Great Lakes in 2008 (48.2 per cent for the period February 23, 2007 to December
31, 2007). $67.0 million of affiliated revenue is included in the Company’s
equity income from Great Lakes in 2008 ($52.9 million for the period February
23, 2007 to December 31, 2007). At December 31, 2008, $12.7 million was included
in Great Lakes’ receivables from affiliates, of which $12.5 million related to
the transportation contracts with TransCanada and its affiliates. At December
31, 2007, $11.6 million was included in Great Lakes’ receivables from
affiliates, of which $10.0 million related to the transportation contracts with
TransCanada and its affiliates.





In August
2008, Northern Border sold its wholly-owned subsidiary, Bison Pipeline LLC, to
TransCanada for $20.0 million. In connection with this transaction, Northern
Border recorded a gain on sale of $16.2 million, of which the LP’s share is $8.1
million.





Northern
Border’s Des Plaines Project consists of the construction, ownership and
operation of interconnect facilities near Joliet, Illinois. In June 2008, in
connection with the Des Plaines Project, Northern Border and ANR Pipeline
Company (ANR), a wholly-owned subsidiary of TransCanada, have entered into an
Interconnect Agreement, which provides that Northern Border will reimburse ANR
for the cost of the interconnect facilities to be owned by ANR. In June,
Northern Border paid ANR $0.5 million and it is estimated that additional costs
to complete the interconnect will be $0.1 million. Northern Border will be
responsible for the final costs to construct the interconnect and any difference
between the final actual costs and the estimated amounts paid will be remitted
by or refunded to Northern Border.





Effective
February 2008, the GP entered into a Cash Management Agreement with TransCanada
PipeLine USA Ltd. (TCPL USA), a wholly-owned subsidiary of TransCanada. In
relation to the Cash Management Agreement, $3.7 million was receivable from TCPL
USA as at December 31, 2008.





The GP is
a party to a Tax Allocation Agreement with TCPL USA and all of TCPL USA’s
wholly-owned subsidiaries, where the GP is required to pay its share of
allocated income taxes to TCPL USA. TCPL USA is required to file tax returns and
pay income taxes on a consolidated basis which includes the GP’s share. In
relation to the Tax Allocation Agreement, $1.7 million was due to TCPL USA as at
December 31, 2008 (2007 - $3.1 million).





48
 TC
PipeLines GP, Inc.






As at
December 31, 2007, $0.4 million was due to TransCan Northern Ltd., a
wholly-owned subsidiary of TransCanada.  As at December 31, 2008, no
amount was due to TransCan Northern Ltd.





On December 31, 2007, the LP acquired a one per cent general partner
interest in Tuscarora from a wholly-owned subsidiary of TransCanada for $2.0
million. The purchase price of this acquisition was derived from the formula
used to calculate the purchase price of a separate one per cent general partner
interest in Tuscarora which was purchased from Tuscarora Gas Pipeline Co. on the
same day.





On September 26, 2007, the LP reimbursed TransCanada $1.2 million for
a working capital adjustment related to the LP’s acquisition of its interest in
Great Lakes. On May 8, 2007, the LP reimbursed TransCanada $2.8 million for
third party costs related to the LP’s acquisition of its interest in Great
Lakes.





NOTE
11                      CAPITAL
REQUIREMENTS


On April 30, 2007,
the LP made a contribution of $7.5 million to Northern Border, representing the
LP’s 50 per cent share of a $15.0 million cash call issued by Northern Border.
The funds were used by Northern Border to repay
indebtedness.





NOTE
12                      DERIVATIVE
FINANCIAL INSTRUMENTS


The
carrying value of cash and cash equivalents, accounts receivable and other, due
from affiliates, bank indebtedness, accounts payable, accrued interest and due
to affiliates approximate their fair values because of the short maturity or
duration of these instruments, or because the instruments carry a variable rate
of interest or a rate that approximates current rates. The fair value of the
Company’s long-term debt is estimated by discounting the future cash flows of
each instrument at current borrowing rates.




The estimated fair values
of the Company’s long-term debt as of December 31, 2008 and 2007 are as
follows:





2008
              
              2007December 31 (millions of
      dollars)
              Carrying
      Value
              
              Fair
      Value
              
              Carrying
      Value
              
              Fair
      ValueSenior
      Credit Facility
              475.0
              
              475.0
              
              507.0
              
              507.0Series
      A Senior Notes
              51.3
              
              52.3
              
              54.5
              
              58.7Series
      B Senior Notes
              5.0
              
              5.2
              
              5.5
              
              6.0Series
      C Senior Notes
              5.5
              
              5.4
              
              6.4
              
              7.0536.8
              
              537.9
              
              573.4
              
              578.7
  The
Company’s short-term and long-term debt results in exposure to changing interest
rates. The Company uses derivatives to assist in managing its exposure to
interest rate risk.





The
interest rate swaps and options are structured such that the cash flows match
those of the Senior Credit Facility. The notional amount hedged was $475.0
million at December 31, 2008 (2007 - $400.0 million). $300.0 million of
variable-rate debt is hedged by an interest rate swap through December 12, 2011,
where the weighted average fixed interest rate paid is 4.89 per cent. $100.0
million of variable-rate debt is hedged by an interest rate option through May
22, 2009 at an interest rate range between a weighted average floor of 4.09 per
cent and a cap of 5.35 per cent. $75.0 million of variable-rate debt is hedged
by an interest rate swap during the period from February 29, 2008 through
February 28, 2011, where the fixed interest rate paid will be 3.86 per cent. In
addition to these fixed rates, the LP pays an applicable margin in accordance
with the Senior Credit Facility agreement.





49
 TC
PipeLines GP, Inc.






Effective
January 1, 2008, the Company adopted the provisions of SFAS No. 157. Under SFAS
No. 157, the financial assets and liabilities that are recorded at fair value on
a recurring basis are categorized into one of three categories based upon a fair
value hierarchy. The Company has classified all of its derivative financial
instruments as level II where the fair value is determined by using valuation
techniques that refer to observable market data or estimated market prices.At December
31, 2008, the fair value of the interest rate swaps and options accounted for as
hedges was negative $31.7 million (2007 - negative $9.8 million).





NOTE
13                      ACCOUNTING
PRONOUNCEMENTS


The
Financial Accounting Standards Board (FASB) issued Staff Position
No. 157-2, Effective Date
of FASB Statement No. 157 (Staff Position No. 157-2), in February
2008, which delayed the effective date of SFAS No. 157 for all non-financial
assets and liabilities that are measured at fair value on a non-recurring basis
until fiscal years beginning after November 15, 2008. These non-financial
items include assets and liabilities such as non-financial assets and
liabilities assumed in a business combination, reporting units measured at fair
value in a goodwill impairment test and asset retirement obligations initially
measured at fair value. The effect of adopting Staff Position No. 157-2 is not
expected to be material to the Company’s financial position.





The FASB
issued Staff Position No. 157-3, Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active, in October
2008, which clarifies the application of SFAS No. 157 in a market that is not
active. This Staff Position is effective upon issuance and the Company’s
financial position was not impacted by this standard.





The FASB
issued SFAS No. 159, The Fair
Value Option for Financial Assets and Financial Liabilities – Including an
Amendment of FASB Statement No. 115 (SFAS No. 159), in February 2007,
which permits entities to choose to measure selected financial assets and
financial liabilities at fair value for fiscal years beginning on or after
November 15, 2007. The fair value option established by SFAS No. 159 permits all
entities to choose to measure eligible items at fair value at specified election
dates. The Company has not elected the fair value option for any non-derivative
financial assets or liabilities.





The FASB
issued SFAS No. 162, The
Hierarchy of Generally Accepted Accounting Principles(SFAS No. 162), in
May 2008, which codifies the sources of accounting principles and the related
framework to be utilized in preparing financial statements in conformity with
GAAP. The requirements of this standard are not expected to have a material
impact on the Company’s financial position.





The FASB
issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities – an amendment of FASB Statement No.
133 (SFAS No. 161) in March 2008. SFAS No. 161 expands the disclosure
requirements for derivative instruments and hedging activities with respect to
how and why entities use derivative instruments, how they are accounted for
under SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities, and the related impact
on financial position, financial performance and cash flows. The requirements of
this standard will not have a material effect on the Company’s disclosure as a
result of adoption on January 1, 2009.





The FASB
issued SFAS No. 141(R), Business Combinations(SFAS
No. 141(R)), in December 2007, which replaces SFAS No. 141, Business Combinations(SFAS
No. 141). SFAS No. 141 (R) retains the fundamental requirements of SFAS No. 141
that the acquisition method of accounting be used for all business combinations
and for an acquirer to be identified for each business combination, with the
objective of improving the relevance and comparability of the information that a
reporting entity provides in its financial reports about a business combination
and its effects. The requirements of this standard will impact the accounting
for business combinations subsequent to January 1, 2009.






50