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, 2007 and 2006. 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, 2007 and 2006 in conformity with accounting principles generally accepted in
the United States of America.
    /s/
KPMG LLP
   Chartered
Accountants
 Calgary,
Canada
 April
23, 2008





CONSOLIDATED
BALANCE SHEETS





TC
PipeLines GP, Inc.




December
      31(millions of
      dollars)
            
            2007
            
            
            2006AssetsCurrent
      assetsCash
      and short-term investments
            
            
            8.8
            
            
            
            4.9Accounts
      receivables and other
            
            
            4.2
            
            
            
            2.5Due
      from affiliate (Note 11)
            
            
            1.8
            
            
            
            6.014.8
            
            
            
            13.4Investment
      in Great Lakes (Note 3)
            
            
            721.1
            
            
            
            -Investment
      in Northern Border (Note 4)
            
            
            541.9
            
            
            
            561.2Plant,
      property and equipment (Note 6)
            
            
            134.1
            
            
            
            127.0Goodwill
      (Note 7)
            
            
            81.7
            
            
            
            79.2Other
      assets
            
            
            2.1
            
            
            
            3.31,495.7
            
            
            
            784.1Liabilities
      and Stockholder's EquityCurrent
      liabilitiesBank
      indebtedness
            
            
            1.4
            
            
            
            -Accounts
      payable
            
            
            4.8
            
            
            
            3.3Accrued
      interest
            
            
            3.0
            
            
            
            1.3Due
      to affiliates (Note 11)
            
            
            4.4
            
            
            
            3.1Current
      portion of long-term debt (Note 8)
            
            
            4.6
            
            
            
            4.718.2
            
            
            
            12.4Long-term
      debt (Note 8)
            
            
            568.8
            
            
            
            463.4Hedging
      deferrals
            
            
            9.9
            
            
            
            -Deferred
      income tax (Note 9)
            
            
            21.7
            
            
            
            18.6618.6
            
            
            
            494.4Non-controlling
      interests (Note 7)
            
            
            832.6
            
            
            
            266.3Stockholder's
      equity (Note 10)Common
      stock ($0.01 par value per share; 1,000 shares authorized; 100 shares
      issued)
            
            
            -
            
            
            
            -Additional
      paid-in capital
            
            
            22.2
            
            
            
            18.2Retained
      earnings
            
            
            23.7
            
            
            
            4.9Accumulated
      other comprehensive (loss)/income
            
            
            (1.4
            )
            
            
            0.344.5
            
            
            
            23.41,495.7
            
            
            
            784.1The
      accompanying notes are an integral part of these consolidated balance
      sheets.








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.





The GP
holds a two per cent general partner interest in the LP and also owns 2,035,106
common units, representing an effective 7.7 per cent limited partner interest in
the LP at December 31, 2007. 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 (Partnership Agreement),
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 are quoted for trading under the symbol “TCLP.” As at December
31, 2007 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 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 AccountingPolicies


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, 2007 and 2006. 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 accounted for its investment in
Tuscarora using the equity method until December 19, 2006. On this date, the
Company acquired an additional 49 per cent general partner interest in Tuscarora
and, as a result of acquiring a controlling interest in Tuscarora, began to
consolidate Tuscarora’s operations.





c)
            Cash
      and Short-Term Investments


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. At December 31, 2007, $0.7 million of the Company’s
cash is restricted (2006 - $0.6 million).







d)
            Plant,
      Property and Equipment


Plant,
property and equipment relates solely to Tuscarora and 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.





Long-lived
assets are assessed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Recoverability is assessed by comparing the carrying amount of an asset to
future net cash flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amounts of such assets exceed the fair value of the
assets.





e)
            Revenue
      Recognition


Transmission
revenues are recognized in the period in which the service is provided. When
rate cases are pending final Federal Energy Regulatory Commission (FERC)
approval, a portion of revenue collected is subject to possible refund. As of
December 31, 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 Statement of Financial Accounting Standards No. 109 “Accounting
for Income Taxes” (SFAS 109). Under SFAS 109, 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 instruments must be
designated as hedges and be effective to qualify for hedge accounting.
Derivatives are recorded at their fair value at each balance sheet date. 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.





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 deferred and 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, 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.





FIN 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 system 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. Accordingly, certain assets or liabilities
that result from the regulated ratemaking process are recorded that would not be
recorded under generally accepted accounting principles 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 of December 31,
2007 and 2006, the LP has 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 interest concurrent with the LP’s
acquisition of its interest. Effective February 22, 2007, a wholly-owned
subsidiary of TransCanada became the operator of Great Lakes. Great Lakes is
regulated by the FERC.





The LP
uses the equity method of accounting for its investment in Great Lakes. Great
Lakes had no undistributed earnings for the year ended December 31,
2007.





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




Summarized
      Consolidated Great Lakes Balance SheetDecember 31(millions of
      dollars)
              2007AssetsCash
      and short-term investments
              32.0Other
      current assets
              55.5Plant,
      property and equipment, net
              969.21,056.7Liabilities
      and Partners' EquityCurrent
      liabilities
              50.7Deferred
      credits
              0.4Long-term
      debt, including current maturities
              440.0Partners'
      capital
              565.61,056.7


Note
4    Investment in Northern Border


The LP
owns a 50 per cent general partner interest in Northern Border. The remaining 50
per cent partnership interest in Northern Border is held by ONEOK Partners, L.P.
(ONEOK), a publicly traded limited partnership. The Northern Border system was
operated by ONEOK Partners GP, LLC (ONEOK Partners GP), 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.





On April
6, 2006, the LP acquired an additional 20 per cent general partner interest in
Northern Border. The LP uses the equity method of accounting for its investment
in Northern Border. Equity income from Northern Border includes amortization of
a $10 million transaction fee paid to the operator of Northern Border as an
inducement to become operator at the time of the additional 20 per cent
acquisition in April 2006. Northern Border had no undistributed earnings for the
years ended December 31, 2007 and 2006.





The
following table contains summarized balance sheet information for Northern
Border as at December 31, 2007 and 2006:




Summarized
      Northern Border Balance SheetDecember 31(millions of
      dollars)
              2007
              
              2006AssetsCash
      and short-term investments
              22.9
              
              11.0Other
      current assets
              39.8
              
              35.5Plant,
      property and equipment, net
              1,428.3
              
              1,475.7Other
      assets
              23.9
              
              22.51,514.9
              
              1,544.7Liabilities
      and Partners' EquityCurrent
      liabilities
              53.4
              
              47.7Deferred
      credits and other
              8.1
              
              2.1Long-term
      debt, including current maturities and notes payable
              615.3
              
              619.8Partners'
      equityPartners'
      capital
              840.5
              
              874.1Accumulated
      other comprehensive (loss)/income
              (2.4)
              
              1.01,514.9
              
              1,544.7
  
  Note
5    Investment in Tuscarora


As of
December 31, 2007, the LP wholly-owns Tuscarora. On December 19, 2006, the LP
acquired an additional 49 per cent general partner interest in Tuscarora from
Tuscarora Gas Pipeline Co., a wholly-owned subsidiary of Sierra Pacific
Resources. Prior to this acquisition, the LP used the equity method of
accounting for its investment in Tuscarora. Subsequent to this acquisition, the
LP used the consolidation method of accounting for its investment in Tuscarora.
On December 31, 2007, the LP acquired the remaining two per cent general partner
interest in Tuscarora, with one per cent purchased from a wholly-owned
subsidiary of TransCanada and the other one per cent purchased from Tuscarora
Gas Pipeline Co. Tuscarora is operated by TCNB. Tuscarora is regulated by the
FERC.





Tuscarora
had no undistributed earnings for the years ended December 31, 2007 and
2006.





Note
6    Plant, Property and Equipment


2007
              
              2006Accumulated
              
              Net
      Book
              
              
              
              Accumulated
              
              Net
      BookDecember 31 (millions of
      dollars)
              Cost
              
              Depreciation
              
              Value
              
              Cost
              
              Depreciation
              
              ValueTuscaroraPipeline
              146.6
              
              53.1
              
              93.5
              
              146.1
              
              48.2
              
              97.9Compression
              25.0
              
              5.5
              
              19.5
              
              25.0
              
              4.5
              
              20.5Metering
      and other
              11.0
              
              3.1
              
              7.9
              
              10.0
              
              2.7
              
              7.3Under
      construction
              13.2
              
              -
              
              13.2
              
              1.3
              
              -
              
              1.3195.8
              
              61.7
              
              134.1
              
              182.4
              
              55.4
              
              127.0
  
  Note
7    Acquisitions


Great
Lakes


On
February 22, 2007, the LP acquired a 46.45 per cent general partner interest in
Great Lakes from El Paso Corporation. The total purchase price was $942.4
million, subject to certain closing adjustments, 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
which closed concurrently with the acquisition. 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 total
consideration with a draw on its senior credit facility, which was amended and
restated in connection with the acquisition.





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 LP’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 simultaneously 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.





Northern
Border


On April
6, 2006, the LP acquired an additional 20 per cent general partner interest in
Northern Border for $298.0 million plus a $10.0 million transaction fee payable
to TCNB, bringing the LP’s total interest to 50 per cent. Through the
acquisition, the LP indirectly assumed $121.7 million of debt. The LP funded the
transaction through a Bridge Loan Credit Facility (see note 8). In connection
with this transaction, TCNB became the operator of Northern Border in April
2007.





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
fair value of net assets of $115.0 million, being goodwill, was recorded as part
of the LP’s investment in Northern Border. The $10.0 million transaction fee
payable to the operator has been recorded as part of the LP’s investment in
Northern Border and is being amortized over the term of the related operating
agreement.





Northern
Border’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 Northern Border were determined to
have a fair value equal to the rate regulated historical costs. No intangibles
other than goodwill were identified in the acquisition.





Tuscarora


On
December 19, 2006, the LP acquired an additional 49 per cent general partnership
interest in Tuscarora for $99.8 million. Through the acquisition the LP
indirectly assumed $37.5 million of Tuscarora debt. The LP funded the
transaction through the Senior Credit Facility (see note 8). In connection with
this transaction, TCNB became the operator of Tuscarora.





The
acquisition was accounted for using the purchase method of accounting. The
purchase price was allocated as follows using an estimate of fair value of the
assets acquired and liabilities assumed at the date of acquisition:


Purchase
      Price Allocation (millions of dollars)
              
              Acquisition
      of additional 49% interestCurrent
      assets
              
              4.7Plant,
      property and equipment
              
              56.6Other
      non-current assets
              
              0.7Goodwill
              
              79.1Current
      liabilities
              
              (2.6)Long-term
      debt
              
              (37.5)Non-controlling
      interests
              
              (1.2)99.8
  On
December 31, 2007, the LP acquired the other two per cent general partner
interest in Tuscarora. One per cent was purchased from a wholly-owned subsidiary
of TransCanada, while the other one per cent 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
LP’s balance sheet of $2.6 million was recorded as goodwill.





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 acquisitions.





Note
8CreditFacilities
and Long-Term Debt


(millions
      of dollars)
              2007
              
              2006Senior
      Credit Facility
              507.0
              
              397.0Series
      A Senior Notes
              54.5
              
              57.9Series
      B Senior Notes
              5.5
              
              6.0Series
      C Senior Notes
              6.4
              
              7.2Revolving
      Credit Facility
              -
              
              -573.4
              
              468.1
  On
February 28, 2006, the LP renewed a $20.0 million unsecured credit facility
(Revolving Credit Facility). In 2006, the LP repaid the Revolving Credit
Facility in full and it was terminated. The interest rate on the Revolving
Credit Facility averaged 5.60 per cent for the year ended December 31,
2006.





On March
31, 2006, the LP entered into an unsecured credit agreement for a $310.0 million
credit facility (Bridge Loan Credit Facility) with a banking syndicate.
Borrowings under the Bridge Loan Credit Facility bore interest, at the option of
the LP, at the LIBOR or the base rate plus an applicable margin. On April 5,
2006, the LP borrowed $307.0 million under the Bridge Loan Credit Facility to
finance the purchase price and a $10.0 million transaction fee payable in
connection with the acquisition of an additional 20 per cent general partner
interest in Northern Border. The remaining $3.0 million commitment under the
Bridge Loan Credit Facility was terminated. On December 12, 2006, the Bridge
Loan Credit Facility was refinanced through a $297.0 million draw on a $410.0
million credit agreement (Senior Credit Facility) with a banking syndicate and
the use of $10.0 million cash on hand. The interest rate on the Bridge Loan
Credit Facility averaged 6.29 per cent for the year ended December 31,
2006.





On
December 12, 2006, the LP entered into a credit agreement for the Senior Credit
Facility. On December 19, 2006, the LP borrowed an additional $100.0 million
under the Senior Credit Facility to finance the purchase price of an additional
49 per cent general partner interest in Tuscarora.





On
February 13, 2007, the Senior Credit Facility was amended and restated in
connection with the Great Lakes acquisition. The amount available under the
Senior Credit Facility increased from $410.0 million to $950.0 million,
consisting of a $700.0 million senior term loan and a $250.0 million senior
revolving credit facility, with $194.0 million of the senior term
loan





available
being terminated upon closing of the Great Lakes acquisition. In accordance with
the Senior Credit Facility agreement, once repaid, a senior term loan cannot be
re-borrowed. On November 29, 2007, $18.0 million of the senior term loan was
repaid and hence terminated, leaving $488.0 million available and outstanding
under the senior term loan. At December 31, 2007, $19.0 million is outstanding
under the senior revolving credit facility, leaving $231.0 million available for
future borrowings.





The
Senior Credit Facility matures on December 12, 2011, at which time all amounts
outstanding will be due and payable. 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 LIBOR or the
prime rate plus, in either case, an applicable margin. There was $507.0 million
outstanding under the Senior Credit Facility at December 31, 2007 (2006 - $397.0
million). The interest rate on the Senior Credit Facility averaged 6.01 per cent
for the year ended December 31, 2007 (2006 – 6.16 per cent). After hedging
activity, the interest rate incurred on the Senior Credit Facility averaged 5.75
per cent for the year ended December 31, 2007. Prior to hedging activities, the
interest rate was 5.62 per cent at December 31, 2007 (2006 – 6.07 per cent). At
December 31, 2007, the LP was in compliance with its financial
covenants.





In 1995,
Tuscarora issued $91.7 million of 7.13 per cent senior secured notes, which
mature on December 21, 2010 (Series A). In 2000, Tuscarora issued $8.0 million
of 7.99 per cent senior secured notes, which mature on December 21, 2010 (Series
B). In 2002, Tuscarora issued $10.0 million of 6.89 per cent senior secured
notes, which mature on December 21, 2012 (Series C). The Series A, Series B and
Series C notes (collectively, the Notes) have a final payment at maturity of
$46.7 million, $4.1 million and $2.7 million, respectively. The Notes are
secured by Tuscarora’s transportation contracts, supporting agreements and
substantially all of Tuscarora’s property. The credit agreement for the Notes
contains 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:





2008
              
              4.62009
              
              4.42010
              
              53.52011
              
              507.82012
              
              3.1573.4


Note
9    Income Taxes


Deferred
income tax liabilities of $21.7 million for 2007 (2006 - $18.6 million) arise
from the Company’s investments having higher book basis than tax
basis.





Note
10Stockholder’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 December 11, 2007, the
Company declared a distribution of $7.5 million in the form of a dividend to a
wholly-owned subsidiary of TransCanada. On July 21, 2006 the Company declared a
distribution of $6.5 million in the form of a return of capital to the same
wholly-owned subsidiary of TransCanada.





Note
11  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 or other
compensation 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 was $1.9
million for the year ended December 31, 2007 (2006 - $1.2 million).









A
wholly-owned subsidiary of TransCanada became the operator of Great Lakes
through TransCanada’s acquisition of Great Lakes Gas Transmission Company on
February 22, 2007. On December 19, 2006, the LP acquired an additional
49 per cent general partner interest in Tuscarora. In connection with this
transaction, TCNB became the operator of Tuscarora. TransCanada and its
affiliates provide capital and operating services to the LP’s pipeline systems.
TransCanada and its affiliates incur costs on behalf of the LP’s pipeline
systems, including, but not limited to, employee benefit costs, property and
liability insurance costs, and transition costs. Total costs charged to the LP’s
pipeline systems in 2007 by TransCanada and its affiliates and amounts owed to
TransCanada and its affiliates at December 31, 2007 are summarized in the
following table:




(millions
      of dollars)
              Great
      Lakes
              
              Northern
      Border
              
              TuscaroraCosts
      charged by TransCanada and its affiliates
              25.6
              
              22.5
              
              1.8Impact
      on the LP's net income
              11.2
              
              11.0
              
              0.9Amount
      owed to TransCanada and its affiliates
              1.9
              
              3.0
              
              3.5


Great
Lakes earns transportation revenues from TransCanada and its affiliates under
fixed priced contracts with remaining terms ranging from one to ten years. Great
Lakes earned $113.9 million of transportation revenues under these contracts for
the period February 23, 2007 to December 31, 2007. This amount represents 48.2
per cent of total revenues earned by Great Lakes for the period February 23,
2007 to December 31, 2007. $52.9 million of transportation revenue is included
in the LP’s equity income from Great Lakes during the same period. At December
31, 2007, $10.0 million is included in Great Lakes’ receivables in regards to
the transportation contracts with TransCanada and its affiliates.





For the
year ended December 31, 2007, the LP recorded transmission revenues of $19.4
million in regards to various contracts with Sierra Pacific Power Company, a
wholly-owned subsidiary of Sierra Pacific Resources.





On April
6, 2006, the LP acquired an additional 20 per cent general partner interest in
Northern Border. At the time of this transaction, the LP paid a $10.0 million
transaction fee to TCNB related to the assumption of operatorship. This fee has
been recorded as part of the LP’s investment in Northern Border and is being
amortized over the term of the related operating agreement partially offsetting
equity income.





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. 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
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.





As at
December 31, 2007, $0.4 million was owed to TransCan Northern Ltd., a
wholly-owned subsidiary of TransCanada (2006 - $0.5 million). As at December 31,
2007, $3.1 million was owed to TransCanada PipeLines USA Ltd. (TCPL USA), a
wholly-owned subsidiary of TransCanada (2006 - $2.3 million).





As at
December 31, 2006, $6.0 million was owed to the Company by TCPL USA under a
credit facility agreement. The advance bore interest at the United States prime
rate. Amounts advanced were repaid in full in 2007.


Note 12  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.





The LP
contributed $3.1 million to Northern Border during 2006, representing its then
30 per cent share of a $10.3 million cash call issued by Northern Border. The
funds were used by Northern Border to fund an expansion project.







Note
13  Derivative Financial Instruments


The
carrying value of cash and short-term investments, accounts receivable and
other, accounts payable and accrued interest 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 LP’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 LP’s and its subsidiary’s long-term debt as of
December 31, 2007 and 2006 are as follows:




2007
              
              2006(millions
      of dollars)
              Carrying
      Value
              
              Fair
      Value
              
              Carrying
      Value
              
              Fair
      ValueSenior
      Credit Facility
              507.0
              
              507.0
              
              397.0
              
              397.0Series
      A Senior Notes
              54.5
              
              58.7
              
              57.9
              
              60.9Series
      B Senior Notes
              5.5
              
              6.0
              
              6.0
              
              6.4Series
      C Senior Notes
              6.4
              
              7.0
              
              7.2
              
              7.5573.4
              
              578.7
              
              468.1
              
              471.8





The LP’s
short-term and long-term debt results in exposure to changing interest rates.
The LP uses derivatives to assist in managing its exposure to interest rate
risk.





At
December 31, 2007, the fair value of the interest rate swaps and options
accounted for as hedges was negative $9.8 million (2006 - positive $1.6
million). The fair value of interest rate swaps and options have been calculated
using year-end market rates. The notional amount hedged was $475.0 million as at
December 31, 2007 (2006 - $200.0 million). $300.0 million of variable-rate debt
is hedged by an interest rate swap during the period from March 12, 2007 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 during the period from May 22, 2007 through May 22, 2009 to 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. The interest rate swaps and options are structured such that
the cash flows match those of the Senior Credit Facility.


Note 14  Accounting Pronouncements




In 2006,
the Financial Accounting Standards Board issued SFAS No. 157, Fair Value Measurements,andduring
2007,issued SFAS No. 141(R), Business Combinations -
revised, SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities – including an amendment of FASB Statement No.
115, and SFAS No. 160, Noncontrolling Interests in
Consolidated financial Statements.





SFAS No.
157 establishes a framework for measuring fair value and requires additional
disclosures about fair value measurements. The effect of adopting SFAS No. 157
is not expected to be material to the Company’s results of operations or
financial position.





SFAS No.
141(R) replaces SFAS No. 141, Business Combinations. 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 not have a material impact on
the results of the Company.





SFAS No.
159 permits entities to choose to measure selected financial assets and
financial liabilities at fair value. 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 effect of adopting SFAS No. 159 is not expected
to be material to the LP’s results of operations or financial
position.





SFAS No.
160 clarifies the classification of non-controlling interests in consolidated
statements of financial position and the accounting for and reporting of
transactions between the reporting entity and holders of such non-controlling
interests. The Company is currently reviewing the applicability of SFAS No. 160
to its financial position.





In June
2007 the Emerging Issues Task Force of the FASB issued EITF 07-4, “Application
of the Two-Class Method under FASB Statement No. 128, Earnings per Share,to Master
Limited Partnerships”. EITF 07-4 addresses how current period earnings of a
Master Limited Partnership (MLP) should be allocated to the GP, limited partners
and when applicable, incentive distribution rights when applying the two-class
method under Statement 128. A tentative conclusion was ratified by the FASB in
December 2007. The Company is currently reviewing the applicability of EIFT 07-4
to its financial position.