U.S. Securities and Exchange CommissionWashington, D.C. 20549

Form 40-F

|o  | REGISTRATION STATEMENT PURSUANT TO SECTION 12 OF THE SECURITIES EXCHANGE ACT of 1934    
|-- | ----------------------------------------------------------------------------------------
|OR
|ý  | ANNUAL REPORT PURSUANT TO SECTION 13(a) OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For
the fiscal year endedDecember 31, 2007Commission File Number 1-31690

TRANSCANADA CORPORATION(Exact Name of Registrant as specified in its charter)

Canada(Jurisdiction of incorporation or organization)

4922, 4923, 4924, 5172(Primary Standard Industrial Classification Code Number (if applicable))

Not Applicable(I.R.S. Employer Identification Number (if applicable))

TransCanada Tower, 450 - 1 Street S.W.
Calgary, Alberta, Canada, T2P 5H1
(403) 920-2000(Address and telephone number of Registrant's principal executive offices)

CT Corporation, Suite 2610, 520 Pike Street
Seattle, Washington, 98101; (206) 622-4511; (800) 456-4511(Name, address (including zip code) and telephone number (including area code)
of agent for service in the United States)

Securities registered pursuant to section 12(b) of the Act:

|Title of each class                                            |  | Name of each exchange on which registered
|-------------------------------------------------------------- |  | -----------------------------------------
|Common Shares (including Rights under
Shareholder Rights Plan) |  | New York Stock Exchange                  

Securities
registered pursuant to Section 12(g) of the Act:NoneSecurities for which there is a reporting obligation pursuant to Section 15(d) of the Act:None

|For annual reports, indicate by check mark the information filed with this Form:
|--------------------------------------------------------------------------------
|ý    Annual Information Form                                                    

Indicate
the number of outstanding shares of each of the issuer's classes of capital or common stock as of the close of the period covered by the annual report.

At December 31, 2007, 539,765,547 common shares
were issued and outstanding

Indicate by check mark whether the Registrant by filing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to
Rule 12g3-2(b) under the Securities Exchange Act of 1934 (the "Exchange Act"). If "Yes" is marked, indicate the file number assigned to the Registrant in connection with such
Rule.    Yes o            No ý

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding
12 months (or such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.
    Yes ý            No o



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The documents (or portions thereof) forming part of this Form 40-F are incorporated by reference into the following registration statements under the Securities Act of 1933, as
amended:

|Form |  | Registration No.
|---- |  | ----------------
|S-8  |  | 333-5916        
|S-8  |  | 333-8470        
|S-8  |  | 333-9130        
|F-3  |  | 33-13564        
|F-3  |  | 333-6132        
|F-10 |  | 333-140150      

CONSOLIDATED AUDITED ANNUAL FINANCIAL STATEMENTS AND  MANAGEMENT'S DISCUSSION & ANALYSIS

A.    Audited Annual Financial Statements

For consolidated audited financial statements, including the report of the independent chartered accountants see pages 75 through 129 of the TransCanada Corporation
("TransCanada") 2007 Annual Report to Shareholders included herein. See the related supplementary note entitled "Reconciliation to United States GAAP" for a reconciliation of the differences between
Canadian and United States generally accepted accounting principles, including the auditors' report, attached as document 13.4.

B.    Management's Discussion & Analysis

For management's discussion and analysis, see pages 6 through 74 of the TransCanada 2007 Annual Report to Shareholders included herein under the heading "Management's
Discussion & Analysis".

For
the purposes of this Report, only pages 6 through 74 and 75 through 129 of the TransCanada 2007 Annual Report to Shareholders shall be deemed incorporated herein by reference and filed, and
the balance of such 2007 Annual Report, except as otherwise specifically incorporated by reference in the TransCanada Annual Information Form, shall be deemed not filed with the Securities and
Exchange Commission as part of this Report under the Exchange Act.

C.    Management's Report on Internal Control Over Financial Reporting

For information on management's internal control over financial reporting, see:



The
effectiveness of internal control over financial reporting as of December 31, 2007 has been audited by TransCanada's independent auditors, KPMG LLP, a registered public accounting
firm, as stated in their audit report. KPMG LLP has issued a report on the effectiveness of internal control over financial reporting as of December 31, 2007 filed as document 13.6.

UNDERTAKING

The Registrant undertakes to make available, in person or by telephone, representatives to respond to inquiries made by the staff of the U.S. Securities and Exchange Commission
(the "Commission"), and to furnish promptly, when requested to do so by the Commission staff, information relating to: the securities registered pursuant to Form 40-F; the
securities in relation to which the obligation to file an Annual Report on Form 40-F arises; or transactions in said securities.

DISCLOSURE CONTROLS AND PROCEDURES

For information on disclosure controls and procedures, see "Controls and Procedures" in Management's Discussion and Analysis on page 69 of the TransCanada 2007 Annual
Report to Shareholders.

2

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AUDIT COMMITTEE FINANCIAL EXPERT

The Registrant's board of directors has determined that it has at least one audit committee financial expert serving on its audit committee. Mr. Kevin E. Benson has been
designated an audit committee financial expert and is independent, as that term is defined by the New York Stock Exchange's listing standards applicable to the Registrant. The Commission has indicated
that the designation of Mr. Benson as an audit committee financial expert does not make Mr. Benson an "expert" for any purpose, impose any duties, obligations or liability on
Mr. Benson that are greater than those imposed on members of the audit committee and board of directors who do not carry this designation or affect the duties, obligations or liability of any
other member of the audit committee.

CODE OF ETHICS

The Registrant has adopted codes of business ethics for its employees, its President and Chief Executive Officer, Chief Financial Officer and Controller and its directors. The
Registrant's codes are available on its website at www.transcanada.com. There has been no waiver of the codes granted during the 2007 fiscal year.

PRINCIPAL ACCOUNTANT FEES AND SERVICES

The aggregate fees for professional services rendered by KPMG LLP for the TransCanada group of companies for the 2007 and 2006 fiscal years are shown in the table below:

|Fees in millions of Canadian dollars |  |   | 2007 | (1) |   | 2006 | (1)
|------------------------------------ |  | - | ---- | --- | - | ---- | ---
|                                     |  |   |      |     |  
|Audit Fees                           |  | $ | 6.27 |     | $ | 6.52 |    
|                                     |  |   |      |     |  
|Audit-Related Fees                   |  |   | 0.07 |     |   | 0.07 |    
|                                     |  |   |      |     |  
|Tax Fees                             |  |   | 0.06 |     |   | 0.22 |    
|                                     |  |   |      |     |  
|All Other Fees                       |  |   | 0.00 |     |   | 0.07 |    
|                                     |  |   |      |     |  
|Total                                |  | $ | 6.40 |     | $ | 6.88 |    
|                                     |  |   |      |     |  

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The nature of each category of fees is described below.

Audit Fees

Aggregate fees for audit services rendered for the audit of the annual consolidated financial statements or services provided in connection with statutory and regulatory
filings or engagements, the review of interim consolidated financial statements and information contained in various prospectuses and other offering documents.

Audit-Related Fees

Aggregate fees for assurance and related services that are reasonably related to performance of the audit or review of the consolidated financial statements and are not
reported as Audit Fees. The nature of services comprising these fees is related to the audit of the financial statements of certain pension plans.

Tax Fees

Aggregate fees for primarily tax compliance and tax advice. The nature of these services consisted of: tax compliance including the review of income tax returns; and tax items
and tax services related to domestic and international taxation including income tax, capital tax and Goods and Services Tax.

3

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All Other Fees

Aggregate fees for products and services other than those reported elsewhere in this table. The nature of these services consisted of advice related to compliance with the
United StatesSarbanes-Oxley Act of 2002.

Pre-Approval Policies and Procedures

TransCanada's Audit Committee has adopted a pre-approval policy with respect to permitted non-audit services. Under the policy, the Audit Committee has
granted pre-approval for specified non-audit services. For engagements of $25,000 CDN or less which are not within the annual pre-approved limit, approval by the
Audit Committee is not required, and for engagements between $25,000 CDN and $100,000 CDN, approval of the Audit Committee Chair is required, and the Audit Committee is to be informed of
the engagement at the next scheduled Audit Committee meeting. For all engagements of $100,000 CDN or more, pre-approval of the Audit Committee is required. In all cases, regardless
of dollar amount involved, where there is a potential for conflict of interest involving the external auditor on an engagement, the Audit Committee Chair must pre-approve the assignment.

To
date, TransCanada has not approved any non-audit services on the basis of the de-minimis exemptions. All non-audit services have been pre-approved by
the Audit Committee in accordance with the pre-approval policy described above.

OFF-BALANCE SHEET ARRANGEMENTS

The Registrant has no off-balance sheet arrangements, as defined in this Form, other than the guarantees described in Note 23 of the Notes to the
Consolidated Financial Statements which are incorporated herein by reference.

TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS

For information on Tabular Disclosure of Contractual Obligations, see "Management's Discussion and Analysis  Contractual Obligations",
which is incorporated herein by reference on pages 51 and 52 of the TransCanada 2007 Annual Report to Shareholders.

IDENTIFICATION OF THE AUDIT COMMITTEE

The Registrant has a separately-designated standing Audit Committee. The members of the Audit Committee are:

|Chair:
Members: |  | K.E. Benson
D.H. Burney
P. Gauthier
P.L. Joskow
J.A. MacNaughton
|--------------- |  | ----------------------------------------------------------------

FORWARD-LOOKING INFORMATION

This document, the documents incorporated by reference, and other reports and filings made with the securities regulatory authorities may contain certain information that is
forward-looking and is subject to important risks and uncertainties. The words "anticipate", "expect", "believe", "may", "should", "estimate", "project", "outlook", "forecast" or other similar words
are used to identify such forward looking information. All forward-looking statements reflect TransCanada's beliefs and assumptions based on information available at the time the statements were made.
Actual results or events may differ from those predicted in these forward-looking statements. Factors that could cause actual results or events to differ materially from current expectations include,
among other things, the ability of TransCanada to successfully implement its strategic initiatives and whether such strategic initiatives will yield the expected benefits, the operating performance of
the Company's natural gas pipeline and energy assets, the availability and price of energy commodities, regulatory processes and decisions, changes in environmental and other laws and regulations,
competitive factors in the natural gas

4

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pipeline
and energy industry sectors, construction and completion of capital projects, labour, equipment and material costs, access to capital markets, interest and currency exchange rates,
technological developments and the current economic conditions in North America. By its nature, forward-looking information is subject to various risks and uncertainties, which could cause
TransCanada's actual results and experience to differ materially from the anticipated results or other expectations expressed. The Company's material risks and assumptions are discussed further in
TransCanada's Management's Discussion and Analysis filed as document 13.2 hereto including under the headings "Pipelines  Opportunities and Developments",
"Pipelines  Business Risks", "Energy  Opportunities and Developments",
"Energy  Business Risks" and "Risk Management and Financial Instruments". Additional information on these and other factors is available in the reports filed by
TransCanada with Canadian securities regulators and with the U.S. Securities and Exchange Commission ("SEC"). Readers are cautioned not to place
undue reliance on this forward-looking information, which is given as of the date it is expressed in this document or otherwise, and to not use future-oriented information or financial outlooks for
anything other than their intended purpose. TransCanada undertakes no obligation to update publicly or revise any forward-looking information, whether as a result of new information, future events or
otherwise, except as required by law.

5

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SIGNATURES

Pursuant
to the requirements of theExchange Act, the Registrant certifies that it meets all of the requirements for filing on
Form 40-F and has duly caused this Annual Report to be signed on its behalf by the undersigned, thereto duly authorized, in the City of Calgary, Province of Alberta, Canada.

| |  | TRANSCANADA CORPORATION
| |  | -----------------------
| |  | Per:                   
| |  |                        

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DOCUMENTS FILED AS PART OF THIS REPORT

|13.1 |  | TransCanada Corporation Annual Information Form for the year ended December 31, 2007.                                                                                           
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|13.2 |  | Management's Discussion and Analysis (included on pages 6 through 74 of the TransCanada 2007 Annual Report to Shareholders).                                                    
|13.3 |  | 2007 Consolidated Audited Financial Statements (included on pages 75 through 129 of the TransCanada 2007 Annual Report to Shareholders), including the auditors' report thereon.
|13.4 |  | Related supplementary note entitled "Reconciliation to United States GAAP" and the auditors' report thereon.                                                                    
|13.5 |  | Management's Report on Internal Control Over Financial Reporting.                                                                                                               
|13.6 |  | Report of the Independent Registered Accounting Firm on the effectiveness of TransCanada's Internal Control Over Financial Reporting, as at December 31, 2007.                  
|99.1 |  | Comments by Auditors for United States Readers on Canada-United States Reporting Differences.                                                                                   

EXHIBITS

|23.1 |  | Consent of KPMG LLP Chartered Accountants.                                                         
|---- |  | ---------------------------------------------------------------------------------------------------
|31.1 |  | Certification of Chief Executive Officer pursuant to Section 302 of theSarbanes-Oxley Act of 2002. 
|31.2 |  | Certification of Chief Financial Officer pursuant to Section 302 of theSarbanes-Oxley Act of 2002. 
|32.1 |  | Certification of Chief Executive Officer regarding Periodic Report containing Financial Statements.
|32.2 |  | Certification of Chief Financial Officer regarding Periodic Report containing Financial Statements.

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TRANSCANADA CORPORATION   ANNUAL
INFORMATION FORM   February 25, 2008


TRANSCANADA CORPORATION
  i
  TABLE OF CONTENTS  PageTABLE OF
  CONTENTS
  iPRESENTATION
  OF INFORMATION
  iiFORWARD-LOOKING
  INFORMATION
  iiTRANSCANADA
  CORPORATION
  1Corporate
  Structure
  1Intercorporate
  Relationships
  1GENERAL
  DEVELOPMENT OF THE BUSINESS
  2Developments
  in the Pipelines Business
  2Developments
  in the Energy Business
  4BUSINESS OF
  TRANSCANADA
  6Pipelines
  Business
  6Regulation
  of the Pipeline Business
  8Energy
  Business
  9HEALTH,
  SAFETY AND ENVIRONMENT RISK MANAGEMENT
  10LEGAL
  PROCEEDINGS AND REGULATORY ACTIONS
  11MATERIAL
  CONTRACTS
  11TRANSFER
  AGENT AND REGISTRAR
  11INTEREST OF
  EXPERTS
  11RISK FACTORS
  12DIVIDENDS
  12DESCRIPTION
  OF CAPITAL STRUCTURE
  12CREDIT
  RATINGS
  13MARKET FOR
  SECURITIES
  14DIRECTORS AND
  OFFICERS
  14CORPORATE
  GOVERNANCE
  17Audit
  Committee
  17Other
  Board Committees
  19Conflicts
  of Interest
  19ADDITIONAL
  INFORMATION
  19GLOSSARY
  20SCHEDULE A
  Metric Conversion Table
  21SCHEDULE B
  Charter of the Audit Committee
  22


TRANSCANADA CORPORATION
  ii  PRESENTATION OF
INFORMATION  Unless
otherwise noted, the information contained in this Annual Information Form (AIF) is given at or for the year ended December 31,
2007 (Year End). Amounts are
expressed in Canadian dollars unless otherwise indicated. Financial information
is presented in accordance with Canadian generally accepted accounting
principles.  Unless the
context indicates otherwise, a reference in this AIF to TransCanada
or the Company includes TransCanada
Corporation and the subsidiaries of TransCanada Corporation through which its
various business operations are conducted. In particular, TransCanada
includes references to TransCanada PipeLines Limited (TCPL). Where TransCanada is referred to
with respect to actions that occurred prior to its 2003 plan of arrangement
with TCPL, which is described below under the heading TransCanada Corporation
 Corporate Structure, these actions were taken by TCPL or its subsidiaries.
The term subsidiary, when referred to in this
AIF, with reference to TransCanada means direct and indirect wholly owned
subsidiaries of, and entities controlled by, TransCanada or TCPL,
as applicable.  Certain
portions of TransCanadas Managements Discussion and Analysis dated February 25,
2008 (MD&A) are
incorporated by reference into this AIF as stated below. The MD&A can be
found on SEDAR at www.sedar.com under TransCanadas profile.  Information
relating to metric conversion can be found at Schedule A
to this AIF.  FORWARD-LOOKING INFORMATION  This AIF,
the documents incorporated by reference into this AIF, and other reports and
filings made with the securities regulatory authorities may contain certain
information that is forward-looking and is subject to important risks and
uncertainties. The words anticipate, expect, believe, may, should, estimate,
project, outlook, forecast or other similar words are used to identify
such forward looking information. All forward-looking statements reflect
TransCanadas beliefs and assumptions based on information available at the
time the statements were made. Actual results or events may differ from those
predicted in these forward-looking statements. Factors that could cause actual
results or events to differ materially from current expectations include, among
other things, the ability of TransCanada to successfully implement its
strategic initiatives and whether such strategic initiatives will yield the
expected benefits, the operating performance of the Companys natural gas
pipeline and energy assets, the availability and price of energy commodities,
regulatory processes and decisions, changes in environmental and other laws and
regulations, competitive factors in the natural gas pipeline and energy
industry sectors, construction and completion of capital projects, labour,
equipment and material costs, access to capital markets, interest and currency
exchange rates, technological developments and the current economic conditions
in North America. By its nature, forward-looking information is subject to
various risks and uncertainties, including those material risks discussed in
this AIF under Risk Factors, which could cause TransCanadas actual results
and experience to differ materially from the anticipated results or
expectations expressed. Additional information on these and other factors is
available in the reports filed by TransCanada with Canadian securities
regulators and with the U.S. Securities and Exchange Commission (SEC). Readers are cautioned to not place undue reliance on
this forward-looking information, which is given as of the date it is expressed
in this AIF or otherwise, and to not use future-oriented information or
financial outlooks for anything other than their intended purpose. TransCanada
undertakes no obligation to update publicly or revise any forward-looking
information, whether as a result of new information, future events or
otherwise, except as required by law.


TRANSCANADA CORPORATION
  1
  TRANSCANADA
CORPORATION  Corporate
Structure  TransCanadas
head office and registered office are located at 450 - First Street
S.W., Calgary, Alberta, T2P 5H1. TransCanada was incorporated pursuant to
the provisions of the CanadaBusiness Corporation Act on February 25,
2003 in connection with a plan of arrangement which established TransCanada as
the parent company of TCPL. The arrangement was approved by TCPL common
shareholders on April 25, 2003 and, following court approval and the
filing of Articles of Arrangement, the arrangement became effective May 15,
2003. Pursuant to the arrangement, the common shareholders of TCPL exchanged
each of their TCPL common shares for one common share of TransCanada. The debt
securities and preferred shares of TCPL remained obligations and securities of
TCPL. TCPL continues to hold the assets it held prior to the arrangement and
continues to carry on business as the principal operating subsidiary of the
TransCanada group of entities. TransCanada does not hold any material assets
directly other than the common shares of TCPL and receivables from certain of
TransCanadas subsidiaries.  At Year
End, TransCanadas principal operating subsidiary, TCPL, had approximately
3,500 employees, substantially all of whom were employed in Canada and the U.S.  Intercorporate Relationships  TransCanadas
subsidiaries whose assets exceed ten per cent of TransCanadas consolidated
assets or whose sales and operating revenues exceeded ten per cent of
TransCanadas consolidated sales and operating revenues at year end are noted
below. Also noted is the jurisdiction under which each subsidiary was
incorporated. TransCanada owns, directly or indirectly, 100 per cent
of the voting shares of each of these subsidiaries.


TRANSCANADA CORPORATION
  2  GENERAL
DEVELOPMENT OF THE BUSINESS  The
general development of TransCanadas business during the last three financial
years, and the significant acquisitions, dispositions, events or conditions
which have had an influence on that development, are described below.  Effective June 1,
2006, TransCanada revised the composition and names of its reportable business
segments to Pipelines and Energy. Pipelines are principally
comprised of the Companys pipelines in Canada, the U.S. and Mexico and its
regulated natural gas storage operations in the U.S. Energy includes the
Companys power operations, the non-regulated natural gas storage business, and
liquefied natural gas (LNG)
projects.  Developments in the Pipelines Business  TransCanadas
strategy in pipelines is focused on both growing its North American natural gas
transmission network and maximizing the long-term value of its existing
pipeline assets. Summarized below are significant developments that have
occurred in TransCanadas pipelines business over the last three years.  Recent Pipeline Developments  ·January 4
2008. The State of Alaska announced that TransCanada had submitted a complete Alaska Gasline Inducement Act application for a license to
construct the Alaska Pipeline Project and would be advancing to the public
comment stage.  ·January 2008.
Gas Transmission Northwest Corporation (GTNC) filed a
Stipulation and Agreement with the U.S. Federal Regulatory Commission (FERC) on October 31, 2007 comprised of an uncontested
settlement of all aspects of its 2006 General Rate Case.  On January 7, 2008, the FERC issued an
order approving the settlement. The settlement rates are effective retroactive
to January 1, 2007.  ·January 11,
2008. Keystone U.S. received, from the U.S. Department of State, the Final
Environmental Impact Statement (FEIS)
regarding the construction of the Keystone U.S. pipeline and its Cushing
extension. The FEIS stated the pipeline would result in limited adverse environmental
impacts. The FEIS is a requirement to proceed with the Presidential Permit
process, which governs the construction and operation of facilities at the U.S.
 Canada border crossing. The Presidential Permit is expected to be issued in March 2008.
Construction and material supply contracts totaling approximately $3.0 billion
have been awarded for pipe, tanks, pumps and related materials, and engineering
and construction management services.  ·February 2008. In 2005, certain subsidiaries
of Calpine Corporation (Calpine) filed
for bankruptcy protection in both Canada and the U.S. The Portland Natural Gas Transmission System (Portland)
and GTNC reached agreement with Calpine for allowed unsecured claims in the
Calpine bankruptcy of US$125 million and US$192.5 million, respectively.
Creditors were to receive shares in the re-organized Calpine and these shares
will be subject to market price fluctuations as the new Calpine shares begin to
trade. In February 2008, Portland and GTNC received partial distributions of
6.1 million shares and 9.4 million shares, respectively. Claims for Nova Gas
Transmission Limited and Foothills Pipe Lines (South B.C.) Ltd. for $31.6
million and $44.4 million, respectively, were received in cash in January 2008
and will be passed on to shippers on these systems.  2007  Pipeline Developments  ·February 9, 2007. TransCanada received
approval from the National Energy Board (the NEB)
to transfer a section of the Canadian Mainline
(as defined below) natural gas transmission facilities to the Keystone oil
pipeline project to transport crude oil from Alberta to refining centres in the
U.S. Midwest and to construct and operate new oil pipeline facilities in
Canada. TransCanada announced in January 2007 the start of a binding open
season for an expansion and extension of the proposed Keystone oil pipeline.
The purpose of the open season was to obtain binding commitments to support the
expansion of the proposed Keystone pipeline from approximately
435,000 barrels per day to 590,000 barrels per day and the
construction of a 468 kilometre (km) extension
of the U.S. portion of the pipeline.  ·February 22,
2007. TransCanada closed its acquisitions of American Natural Resources Company
and ANR Storage Company (collectively, ANR) and acquired
an additional 3.6 per cent interest in Great Lakes Gas Transmission
Partnership (Great Lakes) from El Paso
Corporation for a total of US$3.4 billion, subject to certain post-closing
adjustments, including approximately US$491 million of assumed long-term
debt. Additionally, TransCanada


TRANSCANADA CORPORATION
  3
  increased its
ownership in TC PipeLines, LP to 32.1 per cent in conjunction with the TC
PipeLines, LP acquisition of a 46.4 per cent interest in the Great Lakes.
TransCanada subsequently became the operator of the Northern Border Pipeline
Company (NBPL) and now operates
all three TC PipeLines, LP investments.  ·November 2007. Keystone Canada filed an
application with the NEB to add new pumping facilities to accommodate the
increase in scope and scale of the project. 
An NEB oral hearing is scheduled to commence in April 2008.  ·November 20,
2007. A non-routine application was filed with the Alberta Energy and Utilities
Board (EUB) for the North Central Corridor
pipeline expansion of the Alberta System (as defined below). The estimated cost
of this project is $983 million with construction expected to begin late 2008,
subject to regulatory approval. The project is expected to be completed in two
stages with the first stage completed in April 2009 and the second in April 2010.  ·December 2007.
ConocoPhillips contributed $207 million to acquire a 50 per cent ownership
interest in the Keystone oil pipeline project. 
Affiliates of TransCanada will be responsible for constructing and
operating Keystone, which is expected to have a capital cost of approximately
US$5.2 billion.  ·TransCanada
continued funding of the Mackenzie Valley Aboriginal Pipeline Limited
Partnership for its participation in the Mackenzie Gas Pipeline Project.  Regulatory Matters  ·February 2007.
TransCanada received approval from the NEB to integrate the B.C. System into
the Foothills System (as defined below) in southern B.C. which was
effective April 1, 2007.  ·May 2007.
TransCanadas five-year settlement with interested stakeholders for the years
2007 to 2011 on its Canadian Mainline was approved by the NEB. The settlement
reflects, among other things, a deemed common equity ratio of 40 per cent.  Further information about these
developments can be found in the MD&A under the heading TransCanadas
Strategy and Pipelines - Opportunities and Developments.  2006  PipelineDevelopments  ·April 2006.
TC PipeLines, LP, an affiliate of TransCanada, acquired an additional
20 per cent general partnership interest in NBPL for approximately
US$307 million which brought its total general partnership interest in
NBPL owned by TC Pipelines, LP to 50 per cent. TC PipeLines, LP
also indirectly assumed approximately US$122 million of the debt of NBPL.
TransCanada is the parent company of TC PipeLines GP, Inc., the
general partner of TC PipeLines, LP.  ·April 2006.
TransCanada sold its 17.5 per cent general partner interest in
Northern Border Partners, L.P. for proceeds of $35 million, net of current
taxes.  ·December 2006.
The 130 km Tamazunchale natural gas pipeline in east-central Mexico went
into commercial service.  ·December 2006.
TC PipeLines, LP acquired 49 per cent in Tuscarora Gas
Transmission Company (Tuscarora).
TransCanada became the operator of Tuscarora.  Regulatory Matters  ·February 2006.
TransCanada filed an application with the FERC for a certificate for a two-phase expansion of its existing
natural gas pipeline in southern California, the North Baja system (North Baja) and the construction of a new
lateral pipeline in Californias Imperial Valley.  ·April 2006.
The NEB approved a negotiated settlement of the 2006 Canadian Mainline tolls
which included a deemed common equity ratio of 36 per cent from 33
per cent and incentives for managing cost through fixing certain components of
the revenue requirement.  ·June 2006.
TransCanada filed an application with the NEB seeking approval to transfer a
portion of TransCanadas Canadian Mainline natural gas transmission facilities
to the Keystone oil pipeline project which was approved by the NEB in February 2007.
Additionally, in December 2006, TransCanada filed an application with the
NEB for approval to construct and operate the Canadian portion of the Keystone
oil pipeline.


TRANSCANADA CORPORATION
  4  2005  Pipeline Developments  ·February 2005.
TransCanada announced the Keystone oil pipeline project. In November 2005,
TransCanada announced a memorandum of understanding with ConocoPhillips which
committed ConocoPhillips to ship crude oil on this pipeline and gave them the
right to acquire a 50 per cent ownership interest in the oil pipeline project.  ·June 2005.
TransCanada acquired an additional interest in the Iroquois Gas Transmission
System L.P. (Iroquois System)
for US$13.6 million. The acquisition increased TransCanadas ownership
interest from 40.96 per cent to 44.48 per cent.  ·June 2005.
TransCanada commenced construction of the Tamazunchale natural gas pipeline.  Regulatory Matters  ·March 2005.
TransCanada reached a settlement with shippers and other interested parties
regarding the annual revenue requirements of its Alberta System for the years
2005, 2006 and 2007. The settlement was approved by the regulator.  ·May 2005.
TransCanada received the NEBs decision on the Canadian Mainline 2004 Tolls and
Tariff Application (Phase II), approving an increase in the deemed common
equity component of the Canadian Mainlines capital structure from
33 per cent to 36 per cent effective January 1, 2004.  Developments in the Energy Business  TransCanada
has built a substantial energy business over the past decade and has achieved a
significant presence in power generation in selected regions of Canada and U.S.
More recently, TransCanada has also developed a significant non-regulated
natural gas storage business in Alberta. Summarized below are significant
developments that have occurred in TransCanadas energy business over the last
three years.  Recent
Energy Developments  ·January 11,
2008. The FERC issued its FEIS for the Broadwater LNG project (Broadwater), a proposed offshore LNG facility in Long
Island Sound, New York. The FEIS confirmed project need, supported the location
of the project with acknowledgement of its target market and delivery goals,
and found safety and security risks to be limited and acceptable.  The FEIS concluded that with adherence to
federal and state permit requirements and regulations, Broadwaterss proposed
mitigation measures and the FERCs recommendations, the project will not result
in a significant impact on the environment.  ·January 2008.
A milestone in the Bruce Power A L.P. (Bruce A) Units
1 and 2 refurbishment and restart project was completed when the sixteenth and
final new steam generator was installed. With the completion of this stage of
the project, the authorized funding for Units 1 and 2 was increased from $2.75
billion to approximately $3.0 billion. Bruce Power is currently preparing a
comprehensive estimate of the cost to complete the Unit 1 and 2 restart. This
process is expected to result in a further increase in the total project cost.
Project cost increases are subject to the capital cost-risk and reward-sharing
mechanism under the agreement with the Ontario Power Authority. Bruce A Units 1
and 2 are expected to produce an additional 1,500 megawatts (MW) when completed in 2010.  ·February 2008. The potential anchor LNG
supplier for the Cacouna LNG project (Cacouna)
terminal announced it would no longer be pursuing the development of its LNG
supply as originally planned. As a result of this announcement, TransCanada and
Petro-Canada are currently reviewing their strategy for the project.  2007  Energy Developments  ·June 2007.
Following public hearings in 2006, the Québec government granted a provincial
decree approving the Cacouna terminal. Cacouna also received federal approvals
pursuant to the Canadian Environmental
Assessment Act.  ·September 2007.
Cacouna announced that it was delaying the planned in-service date for the
regasification terminal from 2010 to 2012. This delay resulted from a need to assess
impacts of permit conditions, to review the facility design in light of
escalating costs and to align the schedule with potential LNG supply
facilities.


TRANSCANADA CORPORATION
  5
  ·August 2007. TransCanada announced the
expansion of the Unit 4 refurbishment on the revised Bruce A restart project
that includes installing new fuel channels in Unit 4.  ·November 2007.
The second phase of the Cartier Wind Energy
Project, the 101 MW Anse-à-Valleau wind farm, was placed into service.  In addition, the Cartier Wind Energy Project
began construction of a third project, the 110 MW Carleton wind farm.  ·November 2007. TransCanada entered into
an agreement with Hydro-Québec to temporarily suspend all electricity
generation from the Bécancour power plant during 2008. The agreement contains
an option for Hydro-Québec to extend the suspension to 2009. TransCanada will
receive payments under the agreement similar to those that would have been
received under the normal course of operation.  Further
information about each of these energy developments can be found in the
MD&A under the heading TransCanadas Strategy and Energy - Opportunities
and Developments.  2006  Energy Developments  ·TransCanada
continued construction of the Cartier Wind Energy Project, of which
62 per cent is owned by TransCanada. The first of six proposed wind
farm projects, Baie-des-Sables, went into commercial service in late 2006.  ·September 2006. Portlands Energy Centre L.P., 50
per cent owned by TransCanada, signed a 20-year Accelerated Clean Energy Supply
contract with the Ontario Power Authority for Portlands Energy Centre.  ·September 2006.
Construction of the 550 MW Bécancour cogeneration plant near Trois
Rivières, Québec, was completed and placed into service providing power to
Hydro-Québec Distribution.  ·November 2006.
TransCanada was awarded a 20-year Clean Energy Supply contract by the Ontario
Power Authority to build, own and operate a 683 MW natural gas-fired power
plant near the Town of Halton Hills, Ontario.  ·December 2006.
The Edson gas storage facility was placed in service.  Regulatory Matters  ·January 2006.
TransCanada, on behalf of Broadwater, filed an application with the FERC for
approval of the LNG regasification project to be located in Long Island Sound,
New York. Coincident with the FERC process, Broadwater applied to the New
York Department of State for a determination that the project is consistent
with New Yorks coastal zone policies.  ·December 2006.
A public hearing on Cacouna was held in May and June of 2006 and in December 2006
the Minister of the Environment for Québec and the federal Minister of the
Environment, jointly released the report of the Joint Commission on Cacouna.  2005  Energy Developments  ·February 2005.
TransCanada advanced the Cartier Wind Energy Project with the signing of
long-term electricity supply contracts.  ·April 2005.
TransCanada acquired hydroelectric power generation assets from USGen
New England, Inc. for approximately US$503 million.  ·September 2005.
TransCanada sold all of its interests in TransCanada Power, L.P. to EPCOR
Utilities Inc. for net proceeds of $523 million.  ·October 2005.
Bruce A entered into agreements
with the Ontario Power Authority to restart units 1 and 2, extend the operating
life of unit 3 and replace the generators on unit 4 at Bruce A.  ·December 2005.
TransCanada sold its approximate 11 per cent interest in P.T. Paiton
Energy Company to subsidiaries of The Tokyo Electric Power Company, resulting
in gross proceeds of US$103 million.


TRANSCANADA CORPORATION
  6  ·December 2005.
TransCanada acquired the remaining rights and obligations of the 756 MW
Sheerness Power Purchase Arrangement (PPA)
from the Alberta Balancing Pool for $585 million.  ·TransCanada
commenced construction of a natural gas storage facility located near Edson,
Alberta.  ·Ocean
State Power successfully restructured its long-term natural gas fuel supply
contracts with its suppliers.  BUSINESS OF TRANSCANADA  TransCanada
is a leading North American energy infrastructure company focused on pipelines
and energy. At Year End, Pipelines accounted for approximately
53 per cent of revenues and 73 per cent of TransCanadas
total assets and the Energy business accounted for approximately
47 per cent of revenues and 23 per cent of TransCanadas
total assets. The following is a description of each of TransCanadas two main
areas of operation.  The
following table shows TransCanadas revenues from operations by segment,
classified geographically, for the years ended December 31, 2007
and 2006.  Revenues From Operations(millions of dollars)
  
  
  2007
  
  
  2006PipelinesCanada - Domestic
  
  
  $2,227
  
  
  $2,390Canada - Export(1)
  
  
  1,003
  
  
  971United States
  
  
  1,482
  
  
  6294,712
  
  
  3,990Energy(2)Canada  Domestic
  
  
  2,792
  
  
  2,566Canada - Export(1)
  
  
  3
  
  
  1United States
  
  
  1,321
  
  
  9634,116
  
  
  3,530Total Revenues(3)
  
  
  $8,828
  
  
  $7,520  (1)Exports include pipeline revenues
attributable to deliveries to U.S. pipelines and power deliveries to
U.S. markets.  (2)Revenues include sales of natural
gas.  (3)Revenues are attributed to
countries based on country of origin of product or service.  Pipelines Business  TransCanada
is a leader in the responsible development and reliable operation of North
American energy infrastructure including natural gas pipelines, regulated gas
storage facilities and projects related to oil pipelines. TransCanadas network
of wholly owned pipelines extends more than 59,000 km (36,500 miles), tapping
into virtually all major gas supply basins in North America.  TransCanada
has substantial Canadian and U.S. natural gas pipeline and related
holdings, and one oil pipeline project, including those listed below.  Canada  ·TransCanadas
100 per cent owned, 14,957 km natural gas transmission system in Canada that
extends from the Alberta/Saskatchewan border east to the Québec/Vermont border
and connects with other natural gas pipelines in Canada and the U.S. (Canadian Mainline).  ·TransCanadas 100 per cent owned natural gas
transmission system in Alberta gathers natural gas for usewithin the province and delivers it to provincial
boundary points for connection with the Canadian Mainline and the Foothills
System as well as the natural gas pipelines of other companies. The 23,570 km
system is one of thelargest carriers of natural gas in North America (Alberta System).


TRANSCANADA CORPORATION
  7
  ·TransCanadas 100 per cent owned, 1,241 km natural
gas transmission system in Western Canada carriesnatural gas for export
from central Alberta to the U.S. border to serve markets in the U.S. Midwest,
Pacific Northwest, California and Nevada. Effective April 1, 2007, the
B.C. System was integrated into the Foothills System (Foothills
System).  ·TransCanada
Pipeline Ventures LP, which is 100 per cent
owned by TransCanada, owns a 121 km pipeline and related facilitiesthat
supply natural gas to the oilsands region of northern Alberta as well as a 27
km pipeline that supplies natural gas to a petrochemical complex at Joffre,
Alberta.  ·Keystone
is a 3,456 km oil pipeline project under construction that is expected to
transport crude oil from Hardisty, Alberta to U.S. Midwest markets at Wood
River and Patoka in Illinois, and to Cushing, Oklahoma. Keystone is 50 per cent
owned by TransCanada.  ·TransCanada Québec & Maritimes Pipeline
Inc. (TQM) is 50 per cent owned by
TransCanada. TQM is a 572 km pipeline system that connects with the Canadian
Mainline and transports natural gas from Montréal to Québec City in Québec, and
connects with the Portland system. TQM is operated by TransCanada.  United States  ·TransCanadas
ANR System (ANR System) is a 100 per cent owned, 17,000 km natural gas
transmission system which transports natural gas from producing fields located
primarily in Texas and Oklahoma on its southwest leg. Its southeast leg
transports natural gas from producing fields located primarily in the Gulf of
Mexico and Louisiana. The system extends to markets located mainly in
Wisconsin, Michigan, Illinois, Ohio and Indiana. ANRs natural gas pipeline
also connects with other natural gas pipelines to give access to diverse
sources of North American supply, including Western Canada and the Rocky
Mountain supply region, and a variety of markets in the midwestern and
northeastern U.S. ANR also owns and operates underground regulated natural gas
storage facilities in Michigan with a total capacity of approximately 235
billion cubic feet (Bcf).  ·The
GTN System (GTN System) is TransCanadas 100
per cent owned natural gas transmission system which extends 2,174 km and links
the Foothills System with Pacific Gas and Electric Companys California Gas
Transmission System, with Williams Companies, Inc.s Northwest Pipeline in
Washington and Oregon, and with Tuscarora.  ·North
Baja is TransCanadas 100 per cent owned natural gas transmission system which
extends 129 km from Ehrenberg in southwestern Arizona to a point near Ogilby,
California on the California/Mexico border and connects with the Gasoducto
Bajanorte natural gas pipeline system in Mexico.  ·The
Great Lakes Gas Transmission System (Great Lakes System) is a owned 53.6 per cent by TransCanada
and 46.4 per cent by TC Pipelines, LP. The 3,404 km Great Lakes natural gas
transmission system connects with the Canadian Mainline at Emerson, Manitoba
and serves markets in CentralCanada
and the Midwestern U.S. TransCanada operates Great Lakes and effectively owns
68.5 per cent of the system through its 53.6 per cent ownership interest and
its indirect ownership through its 32.1 per cent interest in TC Pipelines, LP.  ·The
Iroquois System connects with the Canadian
Mainline near Waddington, New York and delivers natural gas to customers in the
northeastern U.S. TransCanada has a 44.5 per cent ownership interest in this
666 kmpipeline system.  ·The
Portland system is a 474 km pipeline that connects with TQM near East Hereford,
Québec and delivers natural gas to customers in the northeastern U.S.
TransCanada has a 61.7 per cent ownership interest in the Portland system and
operates this pipeline.  ·The
Northern Border Pipeline System (NBPL System) is 50 per cent owned by TC PipeLines, LP and
is a 2,250 km natural gas transmission system, which serves the U.S. Midwest
from aconnection with the Foothills System near Monchy, Saskatchewan.
TransCanada operates and effectively owns 16.1 per cent of NBPL through its
32.1 per cent interest in TC PipeLines, LP.  ·The
Tuscarora System is 100 per cent owned by TC
PipeLines, LP and is a 491 km pipeline system transporting natural gas from the
GTN System at Malin, Oregon to Wadsworth, Nevada with delivery points in
northeastern California and northwestern
Nevada. TransCanada operates Tuscarora andits 32.1 per cent ownership
interest in TC PipeLines, LP gives TransCanada a 32.1 per cent ownership
interest in the system.  ·TransCanada holds a 32.1 per cent interest in TC
PipeLines, LP, a publicly held limited partnership of which a subsidiary
of TransCanada acts as the general partner. The remaining interest of TC
PipeLines, LP is widely held by the public. TC PipeLines, LP owns a
50 per cent interest in NBPL, the remaining 46.4 per cent
in the Great Lakes System and 100 per cent of Tuscarora.


TRANSCANADA CORPORATION
  8  International  TransCanada also has the
following natural gas pipeline and related holdings in Mexico and
South America:  ·TransGas is a 344 km natural gas pipeline system
which runs from Mariquita in the central region ofColombia to Cali in the southwest of Colombia.
TransCanada holds a 46.5 per cent ownership interest inthis pipeline.  ·Gas Pacifico is a 540
km natural gas pipeline extending from Loma de la Lata, Argentina to
Concepción,Chile.
INNERGY is an industrial natural gas marketing company based in Concepción that
markets natural gas transported on Gas
Pacifico.TransCanada holds a 30 per cent ownership interest both in Gas
Pacifico and INNERGY.  ·Tamazunchale is a 100 per cent owned, 130 km
natural gas pipeline in east-central Mexico which extends from the facilities
of Pemex Gas near Naranjos, Veracruz to an electricity generatingstation
near Tamazunchale, San Luis Potosi.This
pipeline went into service on December 1, 2006.  Further information
about TransCanadas pipeline holdings, developments and opportunities and
significant regulatory developments which relate to pipelines can be found in
the MD&A under the headings Pipelines - Opportunities and Developments
and Pipelines - Financial Analysis.  Regulation of the Pipeline Business  Canada  CANADIAN
MAINLINE, TQM AND FOOTHILLS SYSTEM Under the terms of the National Energy Board Act (Canada), the
Canadian Mainline, TQM and the Foothills Systems are regulated by the NEB. The
NEB sets tolls which provide TransCanada the opportunity to recover projected
costs of transporting natural gas, including the return on the Canadian
Mainline, TQM and Foothills Systems average investment base. In addition, new
facilities are approved by the NEB before construction begins and the NEB
regulates the operation of the Canadian Mainline, TQM and Foothills Systems.
Net earnings of the Canadian Mainline, TQM and Foothills Systems may be
affected by changes in investment base, the allowed return on equity, the level
of deemed common equity and any incentive earnings.  ALBERTA
SYSTEM The Alberta System was
regulated in 2007 by the EUB primarily under the provisions of the Gas Utilities Act (GUA) and the Pipeline Act. Under the GUA, the Alberta System rates, tolls
and other charges, and terms and conditions of services were subject to
approval by the EUB. Under the provisions of the Pipeline Act, the EUB oversaw various matters including the
economic, orderly and efficient development of pipeline facilities, the
operation and abandonment of the facilities and certain related pollution and
environmental conservation issues. In addition to requirements under the Pipeline Act, the construction and
operation of natural gas pipelines in Alberta are subject to certain provisions
of other provincial legislation such as the Environmental
Protection and Enhancement Act.  Effective January 1, 2008, the EUB was reorganized
into the Energy Resources Conservation Board and the Alberta Utilities Commission
(AUC). The AUC will regulate all the
physical and economic aspects of the Alberta System which were previously
regulated by the EUB.  United States  TransCanadas
wholly owned and partially owned U.S. pipelines, including the ANR System,
the GTN System, the Great Lakes System, the Iroquois System, the Portland
system, the NBPL System, North Baja and the Tuscarora System, are natural gas
companies operating under the provisions of theNatural Gas Act of 1938and
the Natural Gas Policy Act of 1978,
and are subject to the jurisdiction of the FERC. The Natural Gas Act of 1938 grants the FERC authority over the
construction and operation of pipelines and related facilities. The FERC also
has authority to regulate rates for natural gas transportation and interstate
commerce.


TRANSCANADA
  CORPORATION
  9  Energy Business  The
Energy segment of TransCanadas business includes the acquisition, development,
construction, ownership and operation of electrical power generation plants,
the purchase and marketing of electricity, the provision of electricity account
services to energy and industrial customers, and the development, construction,
ownership and operation of non-regulated natural gas storage in Alberta, and
LNG facilities in Canada and the U.S.  The electrical power
generation plants and power supply that TransCanada has an interest in,
including those under development, in the aggregate, represent approximately
7,700 MW of power generation capacity. Power plants and power supply in
Canada account for approximately 85 per cent of this total, and power
plants in the U.S. account for the balance, being approximately
15 per cent.  TransCanada owns and
operates the following facilities:  ·Natural
gas-fired cogeneration plants in Alberta at Carseland (80 MW), Redwater
(40 MW), Bear Creek (80 MW) and MacKay River (165 MW).  ·Grandview,
a90 MW natural gas-fired cogeneration power
plant located in Saint John,New Brunswick. Under a 20-year operating
lease for tolls, Irving Oil Limited receives 100 per cent of the plants heat
and electricity output.  ·Cancarb,
a27 MW facility at Medicine Hat, Alberta
fuelled by waste heat from TransCanadasadjacent thermal carbon black
facility.  ·OSP,
a 560 MW natural gas-fired, combined-cycle facility in Rhode Island.  ·TC
Hydro, TransCanadas hydroelectric
facilities located in New Hamphire, Vermont and Massachusetts on the
Connecticut and Deerfield Rivers consist of 13 stations and associated dams and
reservoirs with atotal generating capacity of 583 MW.  ·Bécancour,
a 550 MW natural gas-fired cogeneration power plant located near
Trois-Rivières, Québec.The entire power
output is suppliedto Hydro-Québec
under a 20-year power purchase contract. Steam is also sold to an industrial
customer for use in commercial processes.  ·Edson,
an underground natural gas storage facility connected to the Alberta System
near Edson, Alberta. The facilitys central processing system is capable of
maximum injection and withdrawal rates of 725 million cubic feet per day (mmcf/d) of natural gas. Edson has a working natural gas
storage capacity of approximately 50 Bcf.  ·A
long-term natural gas storage lease with a third party located in Alberta.  TransCanada has the following
long-term power purchase arrangements in place:  ·The largest coal-fired electric generating facility
in Western Canada, Sundance is located in south-central Alberta. TransCanada
has the rights to 100 per cent of the generating capacity of the 560 MW
Sundance A facility under a PPA, which expires in 2017. TransCanada also has
the rights to 50 per cent of the generating capacity of the 706 MW Sundance B
facility under a PPA, which expires in 2020 (Sundance).  ·The Sheernessfacility, which consists of two 390 MW coal-fired thermal powergenerating units, is located in southeastern
Alberta.TransCanada has the rights
to 756 MW of generating capacity from the SheernessPPA, which expires in 2020 (Sheerness).  TransCanada has
interests in the following:  ·A 60 per cent ownership in CrossAlta, which
is an underground natural gas storage facility connected to the Alberta System
and is located near Crossfield, Alberta. CrossAlta has a working natural gas
capacity of 54 Bcf with a maximum deliverability capability of 480 mmcf/d.  ·A
62 per cent interest in Baie-des-Sables (110
MW) and Anse á Valleau (101 MW) wind farms.  ·Consisting of two generating
stations, Bruce A with approximately 3,000 MW of generating capacity and Bruce
Power L.P. (Bruce B) with approximately
3,200 MW of generating capacity.  Bruce
Power is located in Ontario.  TransCanada
owns 48.7 per cent of Bruce A., which has four power generating units, two of
which have been idled for refurbishing and are expected to restart in
2010.  TransCanada owns 31.6 per cent of
Bruce B, which also has four power generating units.


TRANSCANADA CORPORATION
  10  TransCanada owns the
following facilities which are under construction or development:  ·The third phase of the 740 MW Cartier Wind Energy
Project, the Carleton wind farms, which began construction in late 2007 as well
as the remaining three projects which are under planning and development.  ·The Portlands Energy Centre, a 550 MW high efficiency,
combined-cycle natural gas generation power plant located near downtown Toronto,
Ontario is 50 percent owned by TransCanada and is under construction. The plant
is expected to be operational in simple-cycle mode, delivering 340 MW of
electricity beginning June in 2008. It is anticipated to be fully
commissioned in its combined-cycle mode, delivering 550 MW of power in the
second quarter of 2009.  ·A 683 MW natural gas-fired power plant near the
town of Halton Hills, Ontario is under construction and is expected to be
placed in service in the third quarter of 2010.  ·A
joint venture with Shell,Broadwater is a proposed offshore LNG project
located in the New York waters of Long Island Sound, capable of receiving,
storing and regasifying imported LNG with an average send-out capacity of
approximately one Bcf per day of natural gas. TransCanada holds a 50 per cent
interest in Broadwater.  ·A
joint venture with Petro-Canada, Cacouna
is a proposed LNG project in Québec at Gros Cacouna harbour on the St. Lawrence
River in Québec, Cacouna would
be capable of receiving, storing and regasifying imported LNG with an average
send-out capacity of approximately 500 mmcf/d of natural gas. TransCanada has a
50 per cent interest in Cacouna.  ·The
proposed Kibby wind power project is located in Kibby and Skinner Townships in
northwestern Franklin County, Maine. Subject to receipt of U.S. federal and
state approvals, construction of the new facilities could begin in 2008 with an
expected in-service date of 2009/2010.  Further information
about TransCanadas energy holdings and significant developments and
opportunities relating to energy can be found in the MD&A under the
headings Energy - Financial Analysis and Energy - Opportunities and Developments.  HEALTH, SAFETY AND ENVIRONMENT RISK MANAGEMENT  TransCanada is committed
to providing a safe and healthy environment for its employees, contractors and
the public, and to protecting the environment. Health, safety and environment (HS&E) is a priority in all of
TransCanadas operations and the Company is committed to ensuring it is in
conformance with its internal policies and regulated requirements, and is an
industry leader. The HS&E Committee of TransCanadas Board of Directors
monitors conformance with TransCanadas HS&E corporate policy through
regular reporting.  TransCanadas
HS&E management system is modeled to the elements of the International
Organization of Standardizations (ISO) standard
for environmental management systems, ISO 14001, and focuses resources on the
areas of significant risk to the organizations HS&E business activities,
Management is regularly advised of all important HS&E operational issues
and initiatives by way of formal reporting processes. TransCanadas HS&E management
system and performance are assessed by an independent outside firm every three
years or more often if requested by the HS&E Committee. The most recent
assessment was conducted in November 2006. These assessments involve
senior management and employee interviews, review of policies, procedures,
objectives, performance measurement and reporting.  Safety  In 2007, employee and contractor health and
safety performance continued to improve relative to previous years and
benchmarked within the top level of industry peers. The Companys assets were
highly reliable in 2007 and there were no incidents that were material to the
Companys operations.  Under the approved regulatory models in
Canada, pipeline integrity expenditures on NEB and AUC regulated pipelines are
treated on a flow-through basis and, as a result, have no impact on
TransCanadas earnings. The Company expects to spend approximately $120 million
in 2008 for pipeline integrity on its wholly owned pipelines, which is slightly
higher than the amount spent in 2007, reflecting the acquisition of ANR and
slightly increased spending in Canada. Spending associated with public safety
on the Energy assets is focused primarily on hydro dams and associated
equipment, and is consistent with previous years.  Environment  TransCanadas operations are subject to
various environmental laws and regulations that establish compliance and
remediation obligations. There are no outstanding orders, material claims or
lawsuits against the Company in relation to the release or discharge of any
material into the environment or in connection with environmental protection.
The Company believes that it has established appropriate reserves, where
required, for environmental liabilities.  Environmental risks from TransCanadas
facilities typically include air emissions such as nitrogen oxides (NOx),
particulate matter and greenhouse gases, potential land impacts, including land
reclamation following contruction, releases, chemical and hydrocarbon storage,
and waste management control to minimize hazardous wastes, and water impacts
such as water discharge. TransCanada utilizes a risk-based environmental
assessment approach. All businesses are assessed annually and specific
facilities, installations and activities are reviewed on a one- to three-year
cycle, depending on the Companys assessment of risk. Business and/or facility
inspections are completed on a monthly, quarterly or annual basis, depending on
the entity and the assessment of risk. There were no materially significant
environmental matters arising from these assessments conducted during 2007.  Climate change policy continues to evolve at
regional, national and international levels. Under the Specified Gas Emitters
Regulation, as of July 1, 2007, industrial facilities in Alberta are
required to reduce their greenhouse gas emissions intensities by 12 per cent.
TransCanadas Alberta-based facilities are subject to this regulation which also
extends to the Sundance and Sheerness facilities with which the Company has PPAs.
Plans


TRANSCANADA
  CORPORATION
  11  have been developed to manage the costs of
compliance incurred by these assets. The regulation is not expected to have a
material impact on the Companys results. Compliance costs related to the
Alberta System are expected to be recovered through tolls paid by customers.
Recovery of compliance costs related to the Companys power generation facilities
in Alberta is dependent ultimately on market prices for electricity. The Company
recorded in 2007 a charge of $14 million for the period from July 1, 2007 to
December 31, 2007 related to the new Alberta environmental regulation.  A hydrocarbon royalty tax took effect in
Québec on October 1, 2007 and is expected to affect mainly the Bécancour power
generation facility. A regulatory proceeding is under way to determine the
method of collecting the tax. The Company recorded a charge of $2 million for
the period October 1, 2007 to December 31, 2007 for Québec royalties.  British Columbia recently announced a carbon
tax, with an effective date of July 2008, which is expected to be applied to
fuel usage at the Companys pipeline compressor facilities in that province.
The specifies of the applicaton of the tax are still being assessed. Compliance
costs related to this tax are anticipated to be recovered through tolls paid by
customers.  The Government of Canada released in April
2007 the Regulatory Framework for Air Emissions (Framework).
The Framework outlines short-, medium- and long-term objectives for managing
both greenhouse gas emissions and air pollutants in Canada. The Company expects
a number of its facilities will be affected by pending Federal climate change
regulations that will be put in place to meet the Frameworks objectives. It is
unknown at this time whether the impacts from the pending regulations will be
material as the final form of compliance options is still evolving.  Climate change legislation is evolving at
both the federal and state levels in the U.S. 
The Company expects a number of its facilities could be affected by
these legislative initiatives, but timing and specific policy objectives remain
uncertain.  The Company continues to be involved in
discussions with governments in jurisdictions where TransCanda has operations
and where climate change policy is under development. TransCanada is also continuing
its programs to manage greenhouse gas emissions from its facilities, and to
evaluate new processes and technologies that result in improved efficiencies
and lower greenhouse gas emission rates.  LEGAL PROCEEDINGS AND REGULATORY ACTIONS  The Canadian Alliance of
Pipeline Landowners Association (CAPLA) and two
individual landowners commenced an action in 2003 under Ontarios Class Proceedings Act, 1992, against
TransCanada and Enbridge Inc. for damages of $500 million alleged to
arise from the creation of a control zone within 30 metres of a pipeline
pursuant to Section 112 of the National
Energy Board Act. On November 20, 2006, TransCanada and
Enbridge Inc. were granted a dismissal of the case but CAPLA has appealed
that decision. The appeal was heard on December 18, 2007 and the Ontario
Court of Appeal reserved their decision. TransCanada continues to believe the
claim is without merit and will vigorously defend the action. TransCanada has
made no provision for any potential liability. Liabilities, if any, would be
dealt with through the NEB.  TransCanada and its
subsidiaries are subject to various other legal proceedings and actions arising
in the normal course of business. While the final outcome of such legal
proceedings and actions cannot be predicted with certainty, it is the opinion
of TransCanadas management that the resolution of such proceedings and actions
will not have a material impact on TransCanadas consolidated financial
position or results of operations.  MATERIAL CONTRACTS  The ANR Purchase and
Sale Agreement as described in this AIF under General Development of the
Business - Developments in the Pipelines Business is available on SEDAR
at www.sedar.com under TransCanadas profile.  TRANSFER AGENT AND REGISTRAR  TransCanadas
transfer agent and registrar is Computershare Trust Company of Canada with
transfer facilities in the Canadian cities of Vancouver, Calgary, Winnipeg,
Toronto, Montréal and Halifax.  INTEREST OF EXPERTS  Our
auditors, KPMG LLP, have confirmed that they are independent within the
meaning of the Rules of Professional Conduct of the Institute of Chartered
Accountants of Alberta.


TRANSCANADA CORPORATION
  12  RISK FACTORS  A
discussion of the Companys risk factors can be found in the MD&A for the
year ended December 31, 2007, which is incorporated by reference herein,
under the headings Pipelines - Opportunities and Developments, Pipelines -
Business Risks, Energy - Opportunities and Developments, Energy - Business
Risks and Risk Management and Financial Instruments.  DIVIDENDS  The Board has not
adopted a formal dividend policy. The Board reviews the financial performance
of TransCanada quarterly and makes a determination of the appropriate level of
dividends to be declared in the following quarter. Currently, TransCanadas
payment of dividends on its common shares is funded from dividends TransCanada
receives as the sole common shareholder of TCPL. Provisions of various trust
indentures and credit arrangements to which TCPL is a party restrict TCPLs
ability to declare and pay dividends to TransCanada under certain circumstances
and, if such restrictions apply, they may, in turn, have an impact on
TransCanadas ability to declare and pay dividends on its common shares. In the
opinion of TransCanadas management, such provisions do not currently restrict
or alter TransCanadas ability to declare or pay dividends.  The dividends
declared per common share of TransCanada during the past three completed
financial years are set forth in the following table:  2007
  
  
  2006
  
  
  2005Dividends declared on common shares
  
  
  $1.36
  
  
  $1.28
  
  
  $1.22  DESCRIPTION OF CAPITAL STRUCTURE  Share Capital  TransCanadas authorized
share capital consists of an unlimited number of common shares, of which
539,765,547 were issued and outstanding at Year End, and an unlimited
number of first preferred shares and second preferred shares, issuable in
series, of which none are outstanding. The following is a description of the
material characteristics of each of these classes of shares.  Common Shares The common shares
entitle the holders thereof to one vote per share at all meetings of shareholders,
except meetings at which only holders of another specified class of shares are
entitled to vote, and, subject to the rights, privileges, restrictions and
conditions attaching to the first preferred shares and the second preferred
shares, whether as a class or a series, and to any other class or series of
shares of TransCanada which rank prior to the common shares, entitle the
holders thereof to receive (i) dividends if, as and when declared by the
Board out of the assets of TransCanada properly applicable to the payment of
the dividends in such amount and payable at such times and at such place or
places as the Board may from time to time determine and (ii) the remaining
property of TransCanada upon a dissolution.  First Preferred Shares Subject to certain
limitations, the Board may, from time to time, issue first preferred shares in
one or more series and determine for any such series, its designation, number
of shares and respective rights, privileges, restrictions and conditions. The
first preferred shares as a class, have, among others, provisions to the
following effect.  The first preferred
shares of each series rank on a parity with the first preferred shares of every
other series, and are entitled to preference over the common shares, the second
preferred shares and any other shares ranking junior to the first preferred
shares with respect to the payment of dividends, the repayment of capital and
the distribution of assets of TransCanada in the event of a liquidation,
dissolution or winding up of TransCanada.  Except as provided by
the Canada Business Corporations Act
or as referred to below, the holders of the first preferred shares will not
have any voting rights nor will they be entitled to receive notice of or to
attend shareholders meetings. The holders of any particular series of first
preferred shares will, if the directors so determine prior to the issuance of
such series, be entitled to such voting rights as may be determined by the
directors if TransCanada fails to pay dividends on that series of preferred
shares for any period as may be so determined by the directors.  The provisions attaching
to the first preferred shares as a class may be modified, amended or varied
only with the approval of the holders of the first preferred shares as a class.
Any such approval to be given by the holders of the first preferred shares may
be


TRANSCANADA
  CORPORATION
  13  given by the affirmative
vote of the holders of not less than 66 2/3 per cent of the first
preferred shares represented and voted at a meeting or adjourned meeting of
such holders.  Second Preferred
Shares The
rights, privileges, restrictions and conditions attaching to the second
preferred shares are substantially identical to those attaching to the first
preferred shares, except that the second preferred shares are junior to the
first preferred shares with respect to the payment of dividends, repayment of
capital and the distribution of assets of TransCanada in the event of a
liquidation, dissolution or winding up of TransCanada.  CREDIT RATINGS  Although
TransCanada has not issued debt to the public, it has been assigned an issuer
rating by Moodys Investors Service of A3 with a stable outlook.
TransCanada does not presently intend to issue debt securities to the public in
its own name and future financing requirements are expected to continue to be
funded primarily through its subsidiary, TCPL. The following table sets out the
credit ratings assigned to those outstanding classes of securities of TCPL
which have been rated:  Overall
  
  
  DBRS
  
  
  Moodys
  
  
  S&PSenior Unsecured DebtDebentures
  
  
  A
  
  
  A2
  
  
  A-Medium-term
  Notes
  
  
  A
  
  
  A2
  
  
  A-Junior Subordinated Notes(1)
  
  
  BBB (high)
  
  
  A3
  
  
  BBBPreferred Shares
  
  
  Pfd-2 (low)
  
  
  Baa1
  
  
  BBBCommercial Paper
  
  
  R-1 (low)
  
  
  P-1
  
  
  -Trend/Rating Outlook
  
  
  Stable(1)
  
  
  Stable
  
  
  Negative  (1)Issued May 3, 2007.  Credit ratings are
intended to provide investors with an independent measure of credit quality of an
issue of securities. Credit ratings are not recommendations to purchase, hold
or sell securities and do not address the market price or suitability of a
specific security for a particular investor. There is no assurance that any
rating will remain in effect for any given period of time or that any rating
will not be revised or withdrawn entirely by a rating agency in the future if,
in its judgment, circumstances so warrant. A description of the rating agencies
credit ratings listed in the table above is set out below.  DBRS  DBRS has different
rating scales for Short and Long-Term Debt and preferred shares. High or low
grades are used to indicate the relative standing within a rating category. The
absence of either a high or low designation indicates the rating is in the middle
of the category. The R-1 (low) rating assigned to TCPLs Short-Term Debt is the
third highest of ten rating categories and indicates satisfactory credit
quality. The overall strength and outlook for key liquidity, debt and
profitability ratios is not normally as favourable as with higher rating
categories, but these considerations are still respectable. Any qualifying
negative factors that exist are considered manageable, and the entity is
normally of sufficient size to have some influence in its industry. The A
rating assigned to TCPLs Senior Unsecured Debt is the third highest of ten
categories for Long-Term Debt. Long-Term Debt rated A is of satisfactory credit
quality. Protection of interest and principal is still substantial, but the
degree of strength is less than that of AA rated securities. While a
respectable rating, entities in the A category are considered to be more
susceptible to adverse economic conditions and have greater cyclical tendencies
than higher rated entities.  The BBB
(high) rating assigned to Junior Subordinated Notes is the fourth highest of
the ten categories for Long-Term Debt. 
Long-Term Debt rated BBB is of adequate credit quality.  Protection of interest and principal is
considered acceptable but there may be other adverse conditions present which
reduce the strength of the entity and its rated securities. The Pfd-2 (low)
rating assigned to TCPLs preferred shares is the second highest of six rating
categories for preferred shares. Preferred shares rated Pfd-2 are of
satisfactory credit quality. Protection of dividends and principal is still
substantial; however, earnings, the balance sheet and coverage ratios are not
as strong as Pfd-1 rated companies.  Moodys Investor Services (Moodys)  Moodys
has different rating scales for short and long-term obligations. Numerical
modifiers 1, 2 and 3 are applied to each rating classification, with
1 being the highest and 3 being the lowest. The P-1 rating
assigned to TCPLs Short-Term Debt is the highest of four rating categories and
indicates a superior ability to repay short-term debt obligations. The
A2 rating assigned to TCPLs senior secured and Senior Unsecured Debt and
the A3 rating assigned to its junior subordinated debt is the third
highest of nine


TRANSCANADA CORPORATION
  14  rating
categories for long-term obligations. Obligations rated A are considered
upper-medium grade and are subject to low credit risk. The Baa1 rating
assigned to TCPLs preferred shares is the fourth highest of nine rating
categories for long-term obligations. Obligations rated Baa are subject to
moderate credit risk, are considered medium-grade, and as such, may possess
certain speculative characteristics.  Standard & Poors (S&P)  S&P has different
rating scales for short and long-term obligations. Ratings may be modified by
the addition of a plus (+) or minus (-) sign to show the relative standing
within a particular rating category. The A- rating assigned to TCPLs senior
unsecured debt is the third highest of ten rating categories for long-term
obligations. An A rating indicates the obligors capacity to meet its financial
commitment is strong; however, the obligation is somewhat susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations in higher rated categories. The BBB ratings assigned to TCPLs Junior
Subordinated Notes and preferred shares are the fourth highest of ten rating
categories for long-term obligations. An obligation rated BBB exhibits adequate
protection parameters. However, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity of the obligor to
meet its financial commitment on the obligation.  MARKET FOR SECURITIES  TransCanadas common
shares are listed on the Toronto Stock Exchange (TSX) and the New York Stock Exchange (NYSE). The following table sets forth the
reported monthly high and low trading prices and monthly trading volumes of the
common shares of TransCanada on the TSX for the period indicated:  Common Shares (TRP) Month
  
  
  High 
  ($)
  
  
  Low 
  ($)
  
  
  Volume
  TradedDecember 2007
  
  
  40.73
  
  
  38.95
  
  
  17,822,199November 2007
  
  
  40.69
  
  
  38.10
  
  
  28,532,491October 2007
  
  
  40.24
  
  
  36.47
  
  
  30,876,596September 2007
  
  
  37.19
  
  
  35.80
  
  
  28,163,823August 2007
  
  
  38.62
  
  
  35.43
  
  
  29,811,560July 2007
  
  
  39.83
  
  
  36.17
  
  
  33,442,298June 2007
  
  
  39.36
  
  
  35.77
  
  
  30,897,359May 2007
  
  
  40.29
  
  
  38.77
  
  
  25,520,203April 2007
  
  
  40.26
  
  
  37.75
  
  
  22,302,817March 2007
  
  
  39.80
  
  
  36.75
  
  
  30,461,884February 2007
  
  
  39.28
  
  
  37.17
  
  
  28,769,671January 2007
  
  
  41.35
  
  
  38.28
  
  
  29,422,031  In addition, TransCanadas
subsidiary, TCPL, hasCumulative Redeemable First Preferred Shares, Series U
and Series Y listed on the TSX.  DIRECTORS AND OFFICERS  As of February 25,
2008, the directors and officers of TransCanada as a group beneficially owned,
directly or indirectly, or exercised control or direction over an aggregate of
312,588 common shares of TransCanada. This constitutes less than one
per cent of TransCanadas common shares and less than one per cent of
the voting securities of any of its subsidiaries or affiliates. In additions,
officers held exercisable options to acquire an aggregate of 2,296,740
additional common shares. TransCanada collects this information from its
directors and officers but otherwise has no direct knowledge of individual
holdings of its securities.  Directors  Set forth below are the
names of the thirteen directors who served on the Board at Year End, together
with their jurisdictions of residence, all positions and offices held by them
with TransCanada and its significant affiliates, their principal occupations or
employment during the past five years and the year from which each director has
continually served as a director of TransCanada and, prior to the arrangement,
with TCPL. Positions and offices held with TransCanada are also held by such
person at TCPL.


TRANSCANADA
  CORPORATION
  15  Name andPlace of Residence
  
  Principal Occupation During the
  Five Preceding Years
  
  Director
  SinceKevin E. Benson(1)Wheaton, Illinois  United States
  
  President and Chief Executive Officer, Laidlaw
  International, Inc. (transportation services) from June 2003 to
  October 2007, and Laidlaw, Inc. from September 2002 to
  June 2003.
  
  2005Derek H. Burney, O.C.Ottawa, Ontario
  Canada
  
  Senior strategic advisor at Ogilvy
  Renault LLP (law firm) and Chairman, CanWest Global Communications
  Corp. (communications). Lead director at Shell Canada Limited (oil and gas)
  from April 2001 to May 2007. President and Chief Executive Officer,
  CAE Inc. (technology) from October 1999 to August 2004.
  
  2005Wendy K. DobsonUxbridge, Ontario  Canada
  
  Professor, Rotman School of Management and
  Director, Institute for International Business, University of Toronto. Vice
  Chair, Canadian Public Accountability Board. Director, Toronto-Dominion Bank.
  
  1992E. Linn DraperLampasas, Texas  United States
  
  Director, Alliance Data Systems Corporation
  (data processing and services), Alpha Natural Resources, Inc. (mining),
  NorthWestern Corporation (conducting business as NorthWestern Energy) (oil
  and gas) and Lead Director of Temple-Inland Inc. (materials). Chairman,
  President and Chief Executive Officer of Columbus, Ohio-based American
  Electric Power Co., Inc. from April 1993 to April 2004.
  
  2005The Hon. Paule Gauthier,
  P.C., O.C., O.Q., Q.C.Québec, Québec  Canada
  
  Senior Partner, Stein Monast LLP (law firm).
  Director, Cossette Communication Group Inc., Institut Québecois des
  Hautes Études Internationales, Laval University, Metro Inc., RBC Dexia
  Investor Services Trust, Rothmans Inc. and Royal Bank of Canada.
  
  2002Kerry L. HawkinsWinnipeg, Manitoba  Canada
  
  Director, NOVA Chemicals Corporation. President,
  Cargill Limited (agricultural) from September 1982 to
  December 2005.
  
  1996S. Barry JacksonCalgary, Alberta  Canada
  
  Chair of the Board, TransCanada since
  April 2005. Director, Cordero Energy Inc. (oil and gas) and
  Nexen Inc. (oil and gas) Chair of Resolute Energy Inc.
  (oil and gas) from January 2002 to April 2005 and Chair of
  Deer Creek Energy Limited (oil and gas) from April 2001 to
  September 2005.
  
  2002Paul L. JoskowNew York, New York  United States
  
  Economist and President of the Alfred P. Sloan
  Foundation. On leave from his position as Professor of Economics and
  Management, Massachusetts Institute of Technology (MIT) where he has been
  on the faculty since 1972. Director of the MIT Center for Energy and
  Environmental Policy Research from 1999 to 2007. Director of Exelon
  Corporation (energy) since July 2007. Trustee of Putnam Mutual Funds.
  President of the Yale University Council until July 1, 2006 and was on
  the Board of Directors of the Whitehead Institute of Biological Research
  until February 2005.
  
  2004Harold N. KvisleCalgary, Alberta  Canada
  
  President and Chief Executive Officer of
  TransCanada since May 2003 and TCPL since May 2001. Director, Bank
  of Montreal.
  
  2001John A. MacNaughton, C.M.Toronto, Ontario  Canada
  
  Chairman of the Business Development Bank of
  Canada and of the Canadian Trading and Quotation System Inc. (stock
  exchange). Director, Nortel Networks Corporation and Nortel Networks Limited
  (the principal operating subsidiary of Nortel Networks Corporation)
  (technology). Founding President and Chief Executive Officer of the Canadian
  Pension Plan Investment Board from 1999 to 2005.
  
  2006David P. OBrien(2)Calgary, Alberta  Canada
  
  Chair, EnCana Corporation (oil and gas)
  since April 2002 and Chair, Royal Bank of Canada since
  February 2004. Director, Molson Coors Brewing Company, and C.D. Howe
  Institute. Chancellor, Concordia University and a member of the Science,
  Technology and Innovation Council of Canada.
  
  2001


TRANSCANADA CORPORATION
  16  Name andPlace of Residence
  
  Principal Occupation During the
  Five Preceding Years
  
  Director
  SinceW. Thomas StephensGreenwood Village, Colorado  United States
  
  Chairman and Chief Executive Officer of Boise
  Cascade, LLC (paper, forest products and timberland assets) since
  November 2005. Trustee of Putnam Mutual Funds.
  
  2007(3)D. Michael G. StewartCalgary, Alberta  Canada
  
  Principal of the privately held Ballinacurra
  Group of Investment Companies since March 2002. Director, Canadian
  Energy Services Inc. and Pengrowth Corporation. Director of Esprit
  Exploration Ltd. (oil and gas) from May 2002 to
  September 2004; a director of Canada Southern Petroleum Ltd. from
  June 2003 to August 2004; a trustee of Esprit Energy Trust
  (oil and gas) from August 2004 to October 2006; and a director
  of Creststreet Power & Income General Partner Limited, the General
  Partner of Creststreet Power & Income Fund L.P. (wind power)
  from December 2003 to February 2006.
  
  2006  (1)Mr. Benson
was President and Chief Executive Officer of Canadian Airlines
International Ltd. from July 1996 to February 2000. Canadian
Airlines International Ltd. filed for protection under the Companies Creditors Arrangement Act
(Canada) and applicable bankruptcy protection statutes in the U.S. on March 24, 2000.  (2)Mr. OBrien
was a director of Air Canada in April 2003 when Air Canada filed for
protection under the Companies Creditors
Arrangement Act (Canada) and applicable bankruptcy protection
statutes in the U.S.  (3)Mr. Stephens
previously served on the Board from 2000 to 2005.  Each director holds
office until the next annual meeting or until his or her successor is earlier
elected or appointed.  Officers  All of the executive
officers and corporate officers of TransCanada reside in Calgary, Alberta,
Canada. References to positions and offices with TransCanada prior to May 15,
2003 are references to the positions and offices held with TCPL. Current
positions and offices held with TransCanada are also held by such person at
TCPL. As of the date hereof, the officers of TransCanada, their present
positions within TransCanada and their principal occupations during the five
preceding years are as follows:  Executive
Officers  Name
  
  Present Position Held
  
  Principal Occupation Duringthe Five Preceding YearsHarold N. Kvisle
  
  President and Chief Executive Officer
  
  President and Chief Executive OfficerRussell K. Girling
  
  President, Pipelines
  
  Executive
  Vice-President, Corporate Development and Chief Financial Officer,
  March 2003 to June 2006. Prior to March 2003, Executive
  Vice-President and Chief Financial Officer.Gregory A. Lohnes
  
  Executive Vice-President and Chief Financial
  Officer
  
  Prior
  to June 2006, President and Chief Executive Officer of Great Lakes Gas
  Transmission Company.Dennis J. McConaghy
  
  Executive Vice-President,Pipeline Strategy and Development
  
  Prior
  to June 2006, Executive Vice-President, Gas Development.Sean McMaster
  
  Executive Vice-President, Corporate and General
  Counsel and Chief Compliance Officer
  
  Prior to October 2006, General Counsel and
  Chief Compliance Officer. Prior thereto, General Counsel since
  June 2006. Vice-President, Transactions, Power Division, TCPL from
  April 2003 to June 2006. President TransCanada Power
  Services Ltd., general partner of TransCanada Power, L.P. from
  June 2003 to August 2005. Prior to June 2003, Vice-President,
  TransCanada Power Services Ltd.


TRANSCANADA CORPORATION
  17
  Name
  
  Present Position Held
  
  Principal Occupation During
  the Five Preceding YearsAlexander J. Pourbaix
  
  President, Energy
  
  Executive Vice-President, Power, March 2003 to June 2006.
  Prior to March 2003, Executive Vice-President, Power Development.Sarah E. Raiss
  
  Executive Vice-President,
  Corporate Services
  
  Executive Vice-President, Corporate ServicesDonald M. Wishart
  
  Executive Vice-President,
  Operations and Engineering
  
  Prior to March 2003, Senior Vice-President, Field Operations.  Corporate
Officers  Name
  
  Present Position Held
  
  Principal Occupation During  the Five Preceding YearsRonald L. Cook
  
  Vice-President, Taxation
  
  Vice-President, Taxation.Donald J. DeGrandis
  
  Corporate Secretary
  
  Prior to June 2006, Associate General Counsel, Corporate.Garry E. Lamb
  
  Vice-President, Risk
  Management
  
  Vice-President, Risk ManagementDonald R. Marchand
  
  Vice-President, Finance and
  Treasurer
  
  Vice-President, Finance and TreasurerG. Glenn Menuz
  
  Vice President and Controller
  
  Prior to June 2006, Assistant Controller.  CORPORATE
GOVERNANCE  The Board
and the members of TransCanadas management are committed to the highest
standards of corporate governance. TransCanadas corporate governance practices
comply with the governance rules of the Canadian Securities Administrators
(CSA), those of the NYSE
applicable to foreign issuers and of the U.S. Securities and Exchange
Commission (SEC), and those
mandated by the U.S. Sarbanes-Oxley Act of
2002 (SOX). As a
non-U.S. company, TransCanada is not required to comply with most of the
NYSE corporate governance listing standards; however, except as summarized on
its website at www.transcanada.com, the governance practices followed are
in compliance with the NYSE standards for U.S. companies in all
significant respects. TransCanada is in compliance with the CSAs Multilateral
Instrument 52-110 pertaining to audit committees. TransCanada is also
in compliance with the CSAs National Policy 58-201, Corporate Governance
Guidelines, and National Instrument 58-101, Disclosure of Corporate
Governance Practices. Further information about TransCanadas corporate
governance can be found on TransCanadas website at www.transcanada.com under
the heading Corporate Governance.  Audit Committee  TransCanada
has an Audit Committee which is responsible for assisting the Board in
overseeing the integrity of TransCanadas financial statements and compliance
with legal and regulatory requirements and in ensuring the independence and
performance of TransCanadas internal and external auditors. The members of the
Audit Committee at Year End were Kevin E. Benson (Chair), Derek H. Burney,
Paule Gauthier, Paul L. Joskow and John A. MacNaughton.  The Board
believes that the composition of the Audit Committee reflects a high level of
financial literacy and expertise. Each member of the Audit Committee has been
determined by the Board to be independent and financially literate within
the meaning of the definitions under Canadian and U.S. securities laws and
the NYSE rules. In addition, the Board has determined that Mr. Benson is
an Audit Committee Financial Expert as that term is defined under
U.S. securities laws. The Board has made these determinations based on the
education and breadth and depth of experience of each member of the Audit
Committee. The following is a description of the education and experience,
apart from their respective roles as directors of TransCanada, of each member
of the Audit Committee that is relevant to the performance of his or her
responsibilities as a member of the Audit Committee:  Mr. Benson
earned a Bachelor of Accounting from the University of Witwatersrand (South
Africa) and was a member of the South African Society of Chartered Accountants.
Mr. Benson was the President and Chief Executive Officer of Laidlaw
International, Inc. until October, 2007. In prior years, he has held
several executive positions including one as President and Chief Executive
Officer of Canadian Airlines International Ltd. and has served on other
public company boards.


TRANSCANADA CORPORATION
  18  Mr. Burney
earned a Bachelor of Arts (Honours) and Master of Arts from Queens University.
He is currently a senior strategic advisor at Ogilvy Renault LLP. Mr. Burney
previously served as President and Chief Executive Officer of CAE Inc. and
as Chairman and Chief Executive Officer of Bell Canada International Inc. Mr. Burney
was the lead director at Shell Canada Limited until May 2007 and is the
Chairman of CanWest Global Communications Corp. He has served on one other
organizations audit committee.  Mme.
Gauthier earned a Bachelor of Arts from the Collège Jésus-Marie de Sillery, a
Bachelor of Laws from Laval University and a Master of Laws in Business Law
(Intellectual Property) from Laval-University. She has served on the boards of
several public companies and other organizations and on the audit committees of
certain of those boards.  Mr. Joskow
earned a Bachelor of Arts with Distinction in Economics from Cornell
University, a Masters of Philosophy in Economics from Yale University, and
Ph.D. in Economics from Yale University. He is currently the President of the
Alfred P. Sloan Foundation and on leave from his position as a Professor of
Economics and Management, MIT. He has served on the boards of several public
companies and other organizations and on the audit committees of certain of
those boards.  Mr. MacNaughton
earned a Bachelor of Arts in Economics from the University of Western Ontario. Mr. MacNaughton
is currently the Chairman of the Business Development Bank of Canada and of
Canadian Trading and Quotation System Inc. In prior years, he has held
several executive positions including founding President and Chief Executive
Officer of the Canadian Pension Plan Investment Board and President of Nesbitt
Burns Inc. He is currently the Chair of an audit committee of one other
public company.  The
Charter of the Audit Committee can be found in Schedule B of this AIF
and on TransCanadas website under the Corporate Governance - Board Committees
page, at www.transcanada.com.  Pre-Approval Policies and Procedures TransCanadas
Audit Committee has adopted a pre-approval policy with respect to permitted
non-audit services. Under the policy, the Audit Committee has granted
pre-approval for specified non-audit services. For engagements of $25,000 or
less which are not within the annual pre-approved limit, approval by the Audit
Committee is not required, and for engagements between $25,000 and $100,000,
approval of the Audit Committee Chair is required, and the Audit Committee is
to be informed of the engagement at the next scheduled Audit Committee meeting.
For all engagements of $100,000 or more, pre-approval of the Audit Committee is
required. In all cases, regardless of the dollar amount involved, where there
is a potential for conflict of interest involving the external auditor to arise
on an engagement, the Audit Committee Chair must pre-approve the assignment.  To date,
TransCanada has not approved any non-audit services on the basis of the
de-minimis exemptions. All non-audit services have been pre-approved by the
Audit Committee in accordance with the pre-approval policy described above.  External Auditor Service Fees  The
aggregate fees for external auditor services rendered by, KPMG LLP, the
External Auditor for the TransCanada group of companies for the 2007 and 2006
fiscal years, are shown in the table below:  Fee Category
  
  2007
  
  2006
  
  Description of Fee Category(millions
  of dollars)Audit Fees(1)
  
  $6.27
  
  $6.52
  
  Aggregate fees for audit services rendered for the audit of the
  annual consolidated financial statements or services provided in connection
  with statutory and regulatory filings or engagements, the review of interim
  consolidated financial statements and information contained in various
  prospectuses and other offering documents.Audit Related Fees
  
  0.07
  
  0.07
  
  Aggregate fees for assurance and related services that are reasonably
  related to performance of the audit or review of the consolidated financial
  statements and are not reported as Audit Fees. The nature of services
  comprising these fees related to the audit of the financial statements of
  certain pension plans.Tax Fees
  
  0.06
  
  0.22
  
  Aggregate fees rendered for primarily tax compliance and tax advice.
  The nature of these services consisted of: tax compliance including the
  review of income tax returns; and tax items and tax services related to
  domestic and international taxation including income tax, capital tax and
  Goods and Services Tax.


TRANSCANADA CORPORATION
  19
  Fee Category
  
  2007
  
  2006
  
  Description of Fee Category(millions
  of dollars)All Other Fees
  
  0.00
  
  0.07
  
  Aggregate fees for products and services other than those reported
  elsewhere in this table. The nature of these services consisted of advice related
  to compliance with SOX.Total
  
  $6.40
  
  $6.88  (1)
  The disclosure of
  audit fees paid has been revised to be based on aggregate fees billed during
  the fiscal year as opposed to aggregate fees for professional services
  rendered during the fiscal year. For comparison purposes, both the 2007 and
  the 2006 amounts have been disclosed based on the aggregate fees billed
  during the year.  Other Board
Committees  In
addition to the Audit Committee, TransCanada has three other Board committees:
the Governance Committee, the Health, Safety and Environment Committee and the
Human Resources Committee. Mr. Jackson, the Chair of the Board, is a non-voting
member of the Human Resources Committee and the Governance Committee. The
voting members of each of these committees, as of Year End, are identified
below:  Governance
  Committee
  
  Health,
  Safety & Environment Committee
  
  Human
  Resources CommitteeChair:
  
  W.K. Dobson
  
  Chair:
  
  E.L. Draper
  
  Chair:
  
  K.L. HawkinsMembers:
  
  D.H. Burney
  
  Members:
  
  P. Gauthier
  
  Members:
  
  W.K. DobsonP.L. Joskow
  
  
  
  K.L. Hawkins
  
  
  
  E.L. DraperJ.A. MacNaughton
  
  
  
  W.T. Stephens
  
  
  
  D.P. OBrienD.P. OBrien
  
  
  
  D.M.G. Stewart
  
  
  
  W.T. Stephens  The
charters of the Governance Committee, the Health, Safety & Environment
Committee and the Human Resources Committee can be found on TransCanadas
website under the Corporate Governance - Board Committees page located at
www.transcanada.com.  Further
information about the Board committees and corporate governance can also be
found on TransCanadas website.  Conflicts of
Interest  Directors
and officers of TransCanada and its subsidiaries are required to disclose the
existence of existing or potential conflicts in accordance with TransCanada
policies governing directors and officers and in accordance with the Canada Business Corporations Act. Although
some of the directors sit on boards or may be otherwise associated with companies
that ship natural gas on TransCanadas pipeline systems, TransCanada, as a
common carrier in Canada, cannot, under its tariff, deny transportation service
to a credit-worthy shipper. Further, due to the specialized nature of the
industry, TransCanada believes that it is important for its Board to be
composed of qualified and knowledgeable directors, so some of them must come
from oil and gas producers and shippers; the Governance Committee closely
monitors relationships among directors to ensure that business associations do
not affect the Boards performance. In a circumstance where a director declares
an interest in any material contract or material transaction being considered
at a meeting, the director generally absents himself or herself from the meeting
during the consideration of the matter, and does not vote on the matter.  ADDITIONAL
INFORMATION  1.Additional
information in relation to TransCanada may be found under TransCanadas profile
on SEDAR at www.sedar.com.  2.Additional information including directors and officers remuneration
and indebtedness, principal holders of TransCanadas securities and securities
authorized for issuance under equity compensation plans (all where
applicable), is contained in TransCanadas Proxy Circular for its most recent
annual meeting of shareholders that involved the election of directors and can
be obtained upon request from the Corporate Secretary of TransCanada.  3.Additional financial information is provided in TransCanadas audited
consolidated financial statements and MD&A for its most recently completed
financial year.


TRANSCANADA CORPORATION
  20  GLOSSARY  AIF
  
  Annual Information Form of
  TransCanada Corporation dated February 25, 2008
  
  GUA
  
  Gas Utilities Act(Alberta)Alberta System
  
  A natural gas transmission
  system throughout the province of Alberta
  
  HS&E
  
  Health, Safety and EnvironmentANR
  
  American Natural Resources
  Company and ANR Storage Company
  
  Iroquois System
  
  A natural gas pipeline system in
  New York and ConnecticutANR Purchase and Sale Agreement
  
  An agreement between TransCanada
  and El Paso Corporation, dated December 22, 2006, whereby TransCanada
  agreed to acquire ANR from El Paso Corporation
  
  LNG
  
  Liquefied Natural GasANR System
  
  A natural gas transmission
  system which extends approximately 17,000 km from producing fields in
  Louisiana, Oklahoma, Texas and the Gulf of Mexico to markets in Wisconsin,
  Michigan, Illinois, Ohio and Indiana
  
  MD&A
  
  TransCanadas Managements Discussion
  and Analysis dated February 25, 2008AUC
  
  Alberta Utilities Commission
  
  mmcf/d
  
  Million cubic feet per dayBcf
  
  Billion cubic feet
  
  MW
  
  MegawattsBécancour
  
  A power plant near
  Trois-Rivières, Québec
  
  NBPL
  
  Northern Border Pipeline CompanyBoard
  
  TransCanadas Board of Directors
  
  NBPL System
  
  A natural gas transmission
  system located in the upper midwestern portion of the U.S.Broadwater
  
  A proposed offshore LNG facility
  in Long Island Sound, New York
  
  NEB
  
  National Energy BoardBruce A
  
  Bruce Power A L.P.
  
  North Baja
  
  A natural gas pipeline in
  southern CaliforniaBruce B
  
  Bruce Power L.P.
  
  NYSE
  
  New York Stock ExchangeCacouna
  
  The Cacouna Energy LNG facility
  in Cacouna, Québec
  
  Portland
  
  A natural gas pipeline that runs
  through Maine and New Hampshire into MassachusettsCanadian Mainline
  
  A natural gas pipeline system
  running from the Alberta border east to delivery points in eastern Canada and
  along the U.S. border
  
  PPA
  
  Power Purchase ArrangementCAPLA
  
  Canadian Alliance of Pipeline
  Landowners Association
  
  Proxy Circular
  
  TransCanadas Management Proxy
  Circular dated February 25, 2008Cartier Wind Energy Project
  
  Six wind energy projects
  contracted by Hydro-Québec Distribution representing a total of 740 MW
  in the Gaspé region of Québec
  
  Sheerness
  
  A power plant consisting of two
  390 MW coal-fired thermal powered generating unitsCSA
  
  Canadian Securities
  Administrators
  
  Shell
  
  Shell US Gas & Power LLCEUB
  
  Alberta Energy and Utilities
  Board
  
  SOX
  
  U.S. Sarbanes-Oxley
  Act of 2002External Auditors
  
  KPMG LLP
  
  Sundance
  
  Two coal fired electrical
  generating facilities which produce 560 MW and 706 MW, respectively.FEIS
  
  Final Environment Impact
  Statement
  
  TCPL
  
  TransCanada PipeLines LimitedFERC
  
  Federal Energy Regulatory
  Commission (USA)
  
  TOM
  
  Trans Québec & Maritimes
  Pipeline Inc.Framework
  
  The Regulatory Framework for Air
  Emissions
  
  TransCanada or the Company
  
  TransCanada CorporationFoothills System
  
  A natural gas pipeline system in
  southeastern B.C., southern Alberta and southwestern Saskatchewan
  
  TSX
  
  Toronto Stock ExchangeGTNC
  
  Gas Transmission Northwest
  Corporation
  
  Tuscarora
  
  Tuscarora Gas Transmission
  CompanyGTN System
  
  A natural gas transmission
  system running from northwestern Idaho, through Washington and Oregon to the
  California border
  
  Tuscarora System
  
  A natural gas pipeline that runs
  from Oregon through northeast California to Reno NevadaGreat Lakes
  
  Great Lakes Gas Transmission
  Limited Partnership
  
  U.S.
  
  United StatesGreat Lakes System
  
  A natural gas pipeline system in
  the north central U.S., roughly parallel to the Canada-U.S. Border
  
  Year End
  
  December 31, 2007


TRANSCANADA CORPORATION
  21
  SCHEDULE A  METRIC
CONVERSION TABLE  The
conversion factors set out below are approximate factors. To convert from
Metric to Imperial multiply by the factor indicated. To convert from Imperial
to Metric divide by the factor indicated.  Metric
  
  
  Imperial
  
  
  FactorKilometres (km)
  
  
  Miles
  
  
  0.62Millimetres
  
  
  Inches
  
  
  0.04Gigajoules
  
  
  Million British thermal units
  
  
  0.95Cubic metres*
  
  
  Cubic feet
  
  
  35.3Kilopascals
  
  
  Pounds per square inch
  
  
  0.15Degrees Celsius
  
  
  Degrees Fahrenheit
  
  
  to convert to Fahrenheit multiply by 1.8,  then add 32 degrees; to convert to Celsius
  subtract 32 degrees, then divide by
  1.8  *       The
conversion is based on natural gas at a base pressure of
101.325 kilopascals and at a base temperature of 15 degrees Celsius.


TRANSCANADA CORPORATION
  22  SCHEDULE B  CHARTER OF THE
AUDIT COMMITTEE  1.Purpose  The Audit
Committee shall assist the Board of Directors (the Board) in overseeing
and monitoring, among other things, the:  ·Companys
financial accounting and reporting process;  ·integrity
of the financial statements;  ·Companys
internal control over financial reporting;  ·external
financial audit process;  ·compliance
by the Company with legal and regulatory requirements; and  ·independence
and performance of the Companys internal and external auditors.  To fulfill its purpose, the Audit Committee has
been delegated certain authorities by the Board of Directors that it may
exercise on behalf of the Board.  2.Roles and Responsibilities  I.Appointment of the Companys External Auditors  Subject to confirmation by the external auditors of their compliance
with Canadian and U.S. regulatory registration requirements, the Audit
Committee shall recommend to the Board the appointment of the external
auditors, such appointment to be confirmed by the Companys shareholders at
each annual meeting. The Audit Committee shall also recommend to the Board the
compensation to be paid to the external auditors for audit services and shall
pre-approve the retention of the external auditors for any permitted non-audit
service and the fees for such service. The Audit Committee shall also be
directly responsible for the oversight of the work of the external auditor
(including resolution of disagreements between management and the external
auditor regarding financial reporting) for the purpose of preparing or issuing
an audit report or related work. The external auditor shall report directly to
the Audit Committee.  The Audit Committee shall also receive periodic reports from the
external auditors regarding the auditors independence, discuss such reports
with the auditors, consider whether the provision of non-audit services is
compatible with maintaining the auditors independence and the Audit Committee
shall take appropriate action to satisfy itself of the independence of the
external auditors.  II.Oversight in Respect of Financial Disclosure  The Audit
Committee, to the extent it deems it necessary or appropriate, shall:  (a)review, discuss with management and the external
auditors and recommend to the Board for approval, the Companys audited annual
financial statements, annual information form including management discussion
and analysis, all financial statements in prospectuses and other offering
memoranda, financial statements required by regulatory authorities, all
prospectuses and all documents which may be incorporated by reference into a
prospectus, including without limitation, the annual proxy circular, but
excluding any pricing supplements issued under a medium term note prospectus
supplement of the Company;  (b)review, discuss with management and the external
auditors and recommend to the Board for approval the release to the public of
the Companys interim reports, including the financial statements, management
discussion and analysis and press releases on quarterly financial results;


TRANSCANADA CORPORATION
  23
  (c)review and discuss with management and external
auditors the use of pro forma or adjusted non-GAAP information and the
applicable reconciliation;  (d)review and discuss with management and external
auditors financial information and earnings guidance provided to analysts and
rating agencies; provided, however, that such discussion may be done generally
(consisting of discussing the types of information to be disclosed and the
types of presentations to be made). The Audit Committee need not discuss in
advance each instance in which the Company may provide earnings guidance or
presentations to rating agencies;  (e)review with management and the external auditors
major issues regarding accounting and auditing principles and practices,
including any significant changes in the Companys selection or application of
accounting principles, as well as major issues as to the adequacy of the
Companys internal controls and any special audit steps adopted in light of
material control deficiencies that could significantly affect the Companys
financial statements;  (f)review and discuss quarterly reports from the
external auditors on:  (i)all critical accounting policies and practices to
be used;  (ii)all alternative treatments of financial information within generally
accepted accounting principles that have been discussed with management,
ramifications of the use of such alternative disclosures and treatments, and
the treatment preferred by the external auditor;  (iii)other material written communications between the external auditor and
management, such as any management letter or schedule of unadjusted
differences;  (g)review with management and the external auditors the effect of
regulatory and accounting initiatives as well as off-balance sheet structures
on the Companys financial statements;  (h)review with management, the external auditors and, if necessary, legal
counsel, any litigation, claim or contingency, including tax assessments, that
could have a material effect upon the financial position of the Company, and
the manner in which these matters have been disclosed in the financial
statements;  (i)review disclosures made to the Audit Committee by
the Companys CEO and CFO during their certification process for the periodic
reports filed with securities regulators about any significant deficiencies in
the design or operation of internal controls or material weaknesses therein and
any fraud involving management or other employees who have a significant role
in the Companys internal controls;  (j)discuss with management the Companys material
financial risk exposures and the steps management has taken to monitor and
control such exposures, including the Companys risk assessment and risk
management policies.  III.Oversight in Respect of Legal and Regulatory
Matters  (a)review with the Companys General Counsel legal matters that may have a
material impact on the financial statements, the Companys compliance policies
and any material reports or inquiries received from regulators or governmental
agencies.  IV.Oversight in Respect of Internal Audit  (a)review the audit plans of the internal auditors of the Company including
the degree of coordination between such plan and that of the external auditors
and the extent to which the planned audit scope can be relied upon to detect
weaknesses in internal control, fraud or other illegal acts;  (b)review the significant findings prepared by the internal auditing
department and recommendations issued by the Company or by any external party
relating to internal audit issues, together with managements response thereto;  (c)review
compliance with the Companys policies and avoidance of conflicts
of interest;


TRANSCANADA CORPORATION
  24  (d)review the adequacy of the resources of the internal auditor to ensure
the objectivity and independence of the internal audit function, including
reports from the internal audit department on its audit process with associates
and affiliates;  (e)ensure the internal auditor has access to the Chair of the Audit
Committee and of the Board and to the Chief Executive Officer and meet
separately with the internal auditor to review with him any problems or
difficulties he may have encountered and specifically:  (i)any difficulties which were encountered in the
course of the audit work, including restrictions on the scope of activities or
access to required information, and any disagreements with management;  (ii)any changes required in the planned scope of the internal audit; and  (iii)the internal audit department responsibilities, budget and staffing;  and to
report to the Board on such meetings;  (f)bi-annually
review officers expenses and aircraft usage reports.  V.Insight in Respect of the External Auditors  (a)review the annual post-audit or management letter from the external
auditors and managements response and follow-up in respect of any identified
weakness, inquire regularly of management and the external auditors of any
significant issues between them and how they have been resolved, and intervene
in the resolution if required;  (b)review the quarterly unaudited financial
statements with the external auditors and receive and review the review
engagement reports of external auditors on unaudited financial statements of
the Company;  (c)receive and review annually the external auditors
formal written statement of independence delineating all relationships between
itself and the Company;  (d)meet separately with the external auditors to
review with them any problems or difficulties the external auditors may have
encountered and specifically:  (i)any difficulties which were encountered in the
course of the audit work, including any restrictions on the scope of activities
or access to required information, and any disagreements with
management; and  (ii)any changes required in the planned scope of the audit;  and to
report to the Board on such meetings;  (e)review with the external auditors the adequacy and
appropriateness of the accounting policies used in preparation of the financial
statements;  (f)meet
with the external auditors prior to the audit to review the planning and
staffing of the audit;  (g)receive and review annually the external auditors
written report on their own internal quality control procedures; any material
issues raised by the most recent internal quality control review, or peer
review, of the external auditors, or by any inquiry or investigation by
governmental or professional authorities, within the preceding five years, and
any steps taken to deal with such issues;  (h)review
and evaluate the external auditors, including the lead partner of the external
auditor team;  (i)ensure the rotation of the lead
(or coordinating) audit partner having primary responsibility for the
audit and the audit partner responsible for reviewing the audit as required
by law.


TRANSCANADA CORPORATION
  25
  VI.Oversight in Respect of Audit and Non-Audit
Services  (a)pre-approve all audit services (which may entail
providing comfort letters in connection with securities underwritings) and all
permitted non-audit services, other than non-audit services where:  (i)the aggregate amount of all such non-audit
services provided to the Company constitutes not more than 5% of the total fees
paid by the Company and its subsidiaries to the external auditor during the
fiscal year in which the non-audit services are provided;  (ii)such services were not recognized by the Company at the time of the
engagement to be non-audit services;  and  (iii)such services are promptly brought to the attention
of the Audit Committee and approved prior to the completion of the audit by the
Audit Committee or by one or more members of the Audit Committee to whom
authority to grant such approvals has been delegated by the Audit Committee;  (b)approval by the Audit Committee of a non-audit service to be performed
by the external auditor shall be disclosed as required under securities laws
and regulations;  (c)the Audit Committee may delegate to one or more
designated members of the Audit Committee the authority to grant pre-approvals
required by this subsection. The decisions of any member to whom authority is
delegated to pre-approve an activity shall be presented to the Audit Committee
at its first scheduled meeting following such pre-approval;  (d)if the Audit Committee approves an audit service
within the scope of the engagement of the external auditor, such audit service
shall be deemed to have been pre-approved for purposes of this subsection.  VII.Oversight in Respect of Certain Policies  (a)review and recommend to the Board for approval
policy changes and program initiatives deemed advisable by management or the
Audit Committee with respect to the Companys codes of business conduct
and ethics;  (b)obtain reports from management, the Companys
senior internal auditing executive and the external auditors and report to the
Board on the status and adequacy of the Companys efforts to ensure its
businesses are conducted and its facilities are operated in an ethical, legally
compliant and socially responsible manner, in accordance with the Companys
codes of business conduct and ethics;  (c)establish a non-traceable, confidential and
anonymous system by which callers may ask for advice or report any ethical or
financial concern, ensure that procedures for the receipt, retention and
treatment of complaints in respect of accounting, internal controls and
auditing matters are in place, and receive reports on such matters
as necessary;  (d)annually review and assess the adequacy of the Companys public disclosure
policy;  (e)review and approve the Companys hiring policies
for employees or former employees of the external auditors (recognizing the
Sarbanes-Oxley Act of 2002 does not permit the CEO, controller, CFO or chief
accounting officer to have participated in the Companys audit as an employee
of the external auditors during the preceding one-year period) and monitor the
Companys adherence to the policy.  VIII.Oversight in Respect of Financial Aspects of the
Companys Pension Plans, specifically:  (a)provide advice to the Human Resources Committee on
any proposed changes in the Companys pension plans in respect of any
significant effect such changes may have on pension financial matters;  (b)review and consider financial and investment
reports and the funded status relating to the Companys pension plans and
recommend to the Board on pension contributions;  (c)receive, review and report to the Board on the actuarial valuation and
funding requirements for the Companys pension plans;


TRANSCANADA CORPORATION
  26  (d)review and approve annually the Statement of Investment Policies and
Procedures (SIP&P);  (e)approve the appointment or termination of auditors and investment
managers.  IX.Oversight in Respect of Internal Administration  (a)review annually the reports of the Companys
representatives on certain audit committees of subsidiaries and affiliates of
the Company and any significant issues and auditor recommendations concerning
such subsidiaries and affiliates;  (b)review the succession plans in respect of the Chief Financial Officer,
the Vice President, Risk Management and the Director, Internal Audit;  (c)review and approve guidelines for the Companys hiring of employees or
former employees of the external auditors who were engaged on the Companys
account.  X.Oversight Function  While the Audit Committee has the
responsibilities and powers set forth in this Charter, it is not the duty of
the Audit Committee to plan or conduct audits or to determine that the Companys
financial statements and disclosures are complete and accurate or are in
accordance with generally accepted accounting principles and applicable rules and
regulations. These are the responsibilities of management and the external
auditors. The Audit Committee, its Chair and any of its members who have
accounting or related financial management experience or expertise, are members
of the Board, appointed to the Audit Committee to provide broad oversight of
the financial disclosure, financial risk and control related activities of the
Company, and are specifically not accountable nor responsible for the day to
day operation of such activities. Although designation of a member or members
as an audit committee financial expert is based on that individuals
education and experience, which that individual will bring to bear in carrying
out his or her duties on the Audit Committee, designation as an audit
committee financial expert does not impose on such person any duties, obligations
or liability that are greater than the duties, obligations and liability
imposed on such person as a member of the Audit Committee and Board in the
absence of such designation. Rather, the role of any audit committee financial
expert, like the role of all Audit Committee members, is to oversee the process
and not to certify or guarantee the internal or external audit of the Companys
financial information or public disclosure.  3.Composition of Audit Committee  The Audit Committee shall consist of three or
more Directors, a majority of whom are resident Canadians (as defined in
the Canada Business Corporations Act), and all of whom are unrelated and/or
independent for the purposes of applicable Canadian and U.S. securities law and
applicable rules of any stock exchange on which the Companys shares are
listed. Each member of the Audit Committee shall be financially literate and at
least one member shall have accounting or related financial management
expertise (as those terms are defined from time to time under the
requirements or guidelines for audit committee service under securities laws
and the applicable rules of any stock exchange on which the Companys
securities are listed for trading or, if it is not so defined as that term is
interpreted by the Board in its business judgment).  4.Appointment of Audit Committee Members  The members of the Audit Committee shall be
appointed by the Board from time to time, on the recommendation of the
Governance Committee and shall hold office until the next annual meeting of
shareholders or until their successors are earlier appointed or until they
cease to be Directors of the Company.


TRANSCANADA CORPORATION
  27
  5.Vacancies  Where a vacancy occurs at any time in the
membership of the Audit Committee, it may be filled by the Board on the
recommendation of the Governance Committee.  6.Audit Committee Chair  The Board shall appoint a Chair of the Audit Committee who shall:  (a)review and approve the agenda for each meeting of
the Audit Committee and as appropriate, consult with members
of management;  (b)preside over meetings of the Audit Committee;  (c)report to the Board on the activities of the Audit
Committee relative to its recommendations, resolutions, actions and
concerns; and  (d)meet as necessary with the internal and external
auditors.  7.Absence of Audit Committee Chair  If the Chair of the Audit Committee is not
present at any meeting of the Audit Committee, one of the other members of the
Audit Committee present at the meeting shall be chosen by the Audit Committee
to preside at the meeting.  8.Secretary of Audit Committee  The Corporate Secretary shall act as Secretary to the Audit Committee.  9.Meetings  The Chair, or any two members of the Audit
Committee, or the internal auditor, or the external auditors, may call a
meeting of the Audit Committee. The Audit Committee shall meet at least
quarterly. The Audit Committee shall meet periodically with management, the
internal auditors and the external auditors in separate executive sessions.  10.Quorum  A majority of the members of the Audit Committee, present in person or
by telephone or other telecommunication device that permit all persons
participating in the meeting to speak to each other, shall constitute
a quorum.  11.Notice of Meetings  Notice of the time and place of every meeting
shall be given in writing or facsimile communication to each member of the
Audit Committee at least 24 hours prior to the time fixed for such
meeting; provided, however, that a member may in any manner waive a notice of a
meeting. Attendance of a member at a meeting is a waiver of notice of the
meeting, except where a member attends a meeting for the express purpose of
objecting to the transaction of any business on the grounds that the meeting is
not lawfully called.  12.Attendance of Company Officers and Employees at
Meeting  At the invitation of the Chair of the Audit Committee, one or more
officers or employees of the Company may attend any meeting of the Audit Committee.


TRANSCANADA CORPORATION
  28  13.Procedure, Records and Reporting  The Audit Committee shall fix its own
procedure at meetings, keep records of its proceedings and report to the Board
when the Audit Committee may deem appropriate but not later than the next
meeting of the Board.  14.Review of Charter and Evaluation of Audit
Committee  The Audit Committee shall review its Charter
annually or otherwise, as it deems appropriate, and if necessary propose
changes to the Governance Committee and the Board. The Audit Committee shall
annually review the Audit Committees own performance.  15.Outside Experts and Advisors  The Audit Committee is authorized, when
deemed necessary or desirable, to retain independent counsel, outside experts
and other advisors, at the Companys expense, to advise the Audit Committee or
its members independently on any matter.  16.Reliance  Absent actual knowledge to the contrary
(which shall be promptly reported to the Board), each member of the Audit
Committee shall be entitled to rely on (i) the integrity of those persons
or organizations within and outside the Company from which it receives
information, (ii) the accuracy of the financial and other information
provided to the Audit Committee by such persons or organizations and (iii) representations
made by Management and the external auditors, as to any information technology,
internal audit and other non-audit services provided by the external auditors
to the Company and its subsidiaries.


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|Financial
Highlights |  | 
|-------------------- |  | 

| | Year ended December 31
(millions of dollars)     |  | 2007   |  | 2006   |   | 2005   |   | 2004   |  | 2003  
| | ------------------------------------------------ |  | ------ |  | ------ | - | ------ | - | ------ |  | ------
| |                                                 
| | Income                                           |  |        |  |        |   |        |   |        |  |       
| | Net income                                       |  |        |  |        |   |        |   |        |  |       
| | Continuing operations                            |  | 1,223  |  | 1,051  |   | 1,209  |   | 980    |  | 801   
| | Discontinued operations                          |  |       |  | 28     |   |       |   | 52     |  | 50    
| |                                                 
| |                                                  |  | 1,223  |  | 1,079  |   | 1,209  |   | 1,032  |  | 851   
| |                                                 
| | Cash Flow                                        |  |        |  |        |   |        |   |        |  |       
| | Funds generated from operations                  |  | 2,621  |  | 2,378  |   | 1,951  |   | 1,703  |  | 1,822 
| | Decrease/(increase) in operating working capital |  | 215    |  | (303   | ) | (49    | ) | 29     |  | 93    
| |                                                 
| | Net cash provided by operations                  |  | 2,836  |  | 2,075  |   | 1,902  |   | 1,732  |  | 1,915 
| |                                                 
| | Capital expenditures and acquisitions            |  | 5,874  |  | 2,042  |   | 2,071  |   | 2,046  |  | 965   
| | Balance Sheet                                    |  |        |  |        |   |        |   |        |  |       
| | Total assets                                     |  | 30,330 |  | 25,909 |   | 24,113 |   | 22,422 |  | 20,887
| | Long-term debt                                   |  | 12,377 |  | 10,887 |   | 9,640  |   | 9,749  |  | 9,516 
| | Junior subordinated notes                        |  | 975    |  |       |   |       |   |       |  |      
| | Common shareholders' equity                      |  | 9,785  |  | 7,701  |   | 7,206  |   | 6,565  |  | 6,091 
| | Common Share Statistics
Year ended December 31   |  | 2007   |  | 2006   |   | 2005   |   | 2004   |  | 2003  
| |                                                 
| | Net income per share  Basic                     |  |        |  |        |   |        |   |        |  |       
| | Continuing operations                            |  | $2.31  |  | $2.15  |   | $2.49  |   | $2.02  |  | $1.66 
| | Discontinued operations                          |  |       |  | 0.06   |   |       |   | 0.11   |  | 0.10  
| |                                                 
| |                                                  |  | $2.31  |  | $2.21  |   | $2.49  |   | $2.13  |  | $1.76 
| |                                                 
| | Net income per share  Diluted                   |  |        |  |        |   |        |   |        |  |       
| | Continuing operations                            |  | $2.30  |  | $2.14  |   | $2.47  |   | $2.01  |  | $1.66 
| | Discontinued operations                          |  |       |  | 0.06   |   |       |   | 0.11   |  | 0.10  
| |                                                 
| |                                                  |  | $2.30  |  | $2.20  |   | $2.47  |   | $2.12  |  | $1.76 
| |                                                 
| | Dividends declared per share                     |  | $1.36  |  | $1.28  |   | $1.22  |   | $1.16  |  | $1.08 
| | Common shares outstanding (millions)             |  |        |  |        |   |        |   |        |  |       
| | Average for the year                             |  | 529.9  |  | 488.0  |   | 486.2  |   | 484.1  |  | 481.5 
| | End of year                                      |  | 539.8  |  | 489.0  |   | 487.2  |   | 484.9  |  | 483.2 

---

GRAPHIC

TRANSCANADA
CORPORATION1

---





|Chairman's
Message |  | Good governance is a cornerstone of a company's financial success. But it's more than rules and compliance, it is active Board involvement in the strategic direction and decisions of
the company.
|------------------ |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|PHOTO |  | 2007 was another successful year for TransCanada. We remained focused on our goal of being the leading energy infrastructure company in North America.
This past year saw continued growth and value creation for our shareholders, strong financial performance and key developments on many major projects in our businesses. As a result, and for the eighth year in a row, your Board of Directors has
increased the dividend on common shares. Further, we approved a 2% discount on common shares issued under our dividend reinvestment and share purchase plan (DRP) which allows common and preferred shareholders to purchase additional common shares by
reinvesting their cash dividend.
Corporate governance remains a top priority for TransCanada and the Board of Directors plays an integral role in setting the tone for leadership, and ultimately oversees the strategic direction and decisions made. The diversity of views represented
on our board and the independent mindedness of the directors are key attributes that we have worked hard to create. Our strategy of long-term economic growth is rooted in this sound governance as well as risk-based economic modeling. Together, they
enhance our competitiveness, benefit our shareholders and other stakeholders, and encourage the sustainable development of the natural resources upon which our society depends for its quality of life.
When companies succeed financially, they are able to make significant contributions to the societies in which they operate. TransCanada was named to the Dow Jones Sustainability World and North American Indexes and one of only three Canadian
companies named to the Global 100 Most Sustainable Companies in the World. This recognition acknowledges TransCanada's commitment to sound governance and responsible management of environmental and social risks. TransCanada also received the
2007 Governance Gavel Award for Excellence in Compensation Disclosure from the Canadian Coalition for Good Governance.
These elements are at the heart of TransCanada's values and success.
I know I speak for all Board members when I thank management and employees for their efforts in 2007. Their hard work and dedication to TransCanada's goals and objectives were critical to the company's prosperity this year.
|      |  | On behalf of the Board of Directors, SIG S. Barry Jackson                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

2CHAIRMAN'S
MESSAGE

---





|Letter
to Shareholders |  | TransCanada is well-positioned for continued success. Our strong financial performance and the significant project milestones we achieved in our Pipelines and Energy businesses in 2007 have set the stage
for continued growth and value creation in 2008 and beyond.
|---------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|PHOTO |  | Our strength is a result of solid contributions from our existing assets and growing cash flow and earnings from newly acquired and developed assets such as the ANR pipeline system and the Edson gas storage facility
in Alberta.
2007 began on a successful note with the closure and integration of the ANR and Great Lakes acquisition. We also continued to achieve major milestones in many of our key projects including several regulatory approvals related to the Keystone Oil
Pipeline project and the successful installation of the sixteenth and final new steam generator as part of the Bruce Power Unit 1 and 2 restart and refurbishment project.
Our strategic focus remains clear. Our vision is to become the leading energy infrastructure company in North America. In pursuing our goal, we will strive to deliver strong financial performance and maximize our financial flexibility, to execute on
our current portfolio of large, attractive projects and initiatives and to continue to work to create and cultivate a high-quality portfolio of future growth opportunities.
|      |  | Delivering strong financial performance and maximizing financial flexibility                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|      |  | In 2007, TransCanada's net income and net income from continuing operations (net earnings) was $1.223 billion ($2.31 per share) compared to net income of $1.079 billion ($2.21 per share), and net earnings of
$1.051 billion ($2.15 per share) in 2006. Net earnings increased seven per cent on a per share basis in 2007.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|      |  | Comparable earnings(1) increased to $1.107 billion or $2.09 per share in 2007, compared to $925 million or $1.90 per share for 2006. Comparable earnings grew by 10 per cent on a per share basis
in 2007.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|      |  | Funds generated from operations(1) increased to $2.621 billion in 2007, an increase of $243 million or 10 per cent above 2006. This strong underlying cash flow enabled us to make significant capital investments in our
Pipelines and Energy businesses. We invested approximately $5.9 billion in growth initiatives in 2007.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|      |  | Our continued strong financial performance once again enabled our Board of Directors to increase the quarterly dividend on the company's common shares in January 2008 by six per cent to $0.36 per share, or $1.44 per share on an
annualized basis. This is the eighth year in a row the Board has increased the dividend.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|      |  | (1)  Non-GAAP measure that does not have any standardized meaning prescribed by generally accepted accounting principles. For more information on non-GAAP
measures see page 14 in the Management's Discussion and Analysis of the 2007 Annual Report.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

LETTER TO
SHAREHOLDERS3

---



| |  | TransCanada's balance sheet remains strong and provides the financial flexibility to execute our portfolio of opportunities. In 2007, we raised $1.725 billion in common equity through a public offering to help fund the ANR acquisition. It was
the largest fully-funded subscription receipts transaction in Canadian history. In addition, we initiated a 2% discount on common shares issued under our dividend reinvestment and share purchase plan which allows common and preferred
shareholders to purchase additional common shares by reinvesting their cash dividend without incurring brokerage or administrative fees. TransCanada raised over $150 million in common equity through this plan and experienced a
30% participation rate in 2007. We also sold U.S. $1 billion of 30-year senior notes and issued U.S. $1 billion of junior subordinated notes, both at very competitive market rates reflective of our strong financial
position and 'A' credit ratings.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | TransCanada's financial performance in 2007 continued to build on our strong track record of delivering strong and sustainable financial returns to our shareholders. In the last eight years, TransCanada has invested approximately $18 billion in
value-creating pipeline and energy growth opportunities. Comparable earnings per share increased at a compound average annual growth rate of 8.6 per cent from $1.08 per share in 1999 to $2.09 per share in 2007. Funds generated from
operations, during the same period, grew at a compound average annual growth rate of 12.2 per cent from $1 billion to $2.6 billion. This strong financial performance has created significant returns and longer-term value for our
shareholders. The compound average annual total shareholder return over the past eight years is approximately 21 per cent.                                                                                                                            
| |  | Execute on large and attractive projects and initiatives                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  | TransCanada is committed to maximizing and sustaining the long-term value of existing assets. In addition to our $30 billion of assets, we have a superior growth portfolio that will see us invest approximately $10 billion in a number of
energy infrastructure projects throughout North America. The majority of these projects are under construction and will be completed over the next three years.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |  | In our Pipelines business we have committed approximately $5.3 billion of capital to projects that include the Alberta System's North Central Corridor and the Keystone Oil Pipeline project. The Keystone Oil Pipeline project is an important
initiative that will allow customers to move up to 590,000 barrels per day of growing Canadian oil sands production to U.S. markets and provide TransCanada with a platform to pursue other opportunities in the crude oil transmission
business.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  | In Energy, we continued to advance a number of growth opportunities which will see us invest more than $4.6 billion in a variety of projects. One of these projects is the Bruce A restart and refurbishment project, one of the largest
infrastructure projects underway in North America today. When completed, Bruce Power will be capable of producing 6,200 MW of power. Other key projects include the Halton Hills Generating Station, the Portlands Energy Centre and
Cartier Wind.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |  | As we look forward, we are excited about the significant opportunities available to TransCanada in the years ahead. Our approach is to select only the very best opportunities and move those initiatives forward.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

4LETTER TO
SHAREHOLDERS

---



| |  | Continue to create and cultivate a high-quality portfolio of future growth opportunities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | At no other time in TransCanada's history have we had such a large and attractive portfolio of projects and investment opportunities as we have today in both our Pipelines and Energy businesses. Over the long term, we will continue to cultivate a
portfolio that gives the company the ability to reinvest its substantial discretionary cash flow into opportunities in natural gas and crude oil pipelines, power generation facilities, natural gas storage and LNG terminals. As we look ahead, we
see TransCanada capitalizing on North America's increased demand for cleaner and more efficient energy. We build and operate the energy infrastructure that North America needs.
| |  | TransCanada's success is a reflection of our exceptional team of motivated employees who bring skill, experience, energy and knowledge to the work that they do. Our employees truly are our competitive advantage and remain a key part of future
accomplishments.                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  | As we meet the energy needs of North America, we will continue to deliver strong and sustainable financial returns to our shareholders. We will continue to maximize our financial strength and execution capability to enable us to capture large-scale,
value-creating opportunities and create value for our customers and shareholders through the selection and superb execution of the very best of these opportunities. We created significant shareholder value in 2007 and we look forward to ever greater
accomplishments in 2008 and beyond.                                                                                                                                     
| |  | SIG                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  | Hal KvislePresident and Chief Executive Officer                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

LETTER TO
SHAREHOLDERS5

---





TABLE OF CONTENTS

|                               
|-------------------------------
|TRANSCANADA OVERVIEW           
|TRANSCANADA'S STRATEGY         
|                               
|CONSOLIDATED FINANCIAL REVIEW  
|                               
|                               
|                               
|                               
|FORWARD-LOOKING INFORMATION    
|NON-GAAP MEASURES              
|OUTLOOK                        
|SEGMENT RESULTS-AT-A-GLANCE    
|                               
|PIPELINES                      
|                               
|                               
|                               
|                               
|                               
|                               
|                               
|                               
|ENERGY                         
|                               
|                               
|                               
|                               
|                               
|                               
|                               
|                               
|CORPORATE                      
|                               
|                               
|                               
|                               
|DISCONTINUED OPERATIONS        
|                               
|LIQUIDITY AND CAPITAL RESOURCES
|                               
|                               
|                               
|CONTRACTUAL OBLIGATIONS        
|                               
|                               
|                               
|                               
|                               

6MANAGEMENT'S
DISCUSSION AND ANALYSIS

---



|                                                                 
|-----------------------------------------------------------------
|RISK MANAGEMENT AND FINANCIAL INSTRUMENTS                        
|                                                                 
|                                                                 
|                                                                 
|CONTROLS AND PROCEDURES                                          
|SIGNIFICANT ACCOUNTING POLICIES AND CRITICAL ACCOUNTING ESTIMATES
|ACCOUNTING CHANGES                                               
|SELECTED QUARTERLY CONSOLIDATED FINANCIAL DATA                   
|FOURTH-QUARTER 2007 HIGHLIGHTS                                   
|SHARE INFORMATION                                                
|OTHER INFORMATION                                                
|GLOSSARY OF TERMS                                                

MANAGEMENT'S DISCUSSION AND
ANALYSIS7

---





The Management's Discussion and Analysis (MD&A) dated February 25, 2008 should be read in conjunction with the audited Consolidated Financial
Statements of TransCanada Corporation (TransCanada or the Company) and the notes thereto for the year ended December 31, 2007. This MD&A covers TransCanada's financial position and operations
as at and for the year ended December 31, 2007. Amounts are stated in Canadian dollars unless otherwise indicated. Abbreviations and acronyms used in this MD&A are identified in the Glossary of
Terms in the Company's 2007 Annual Report.

TRANSCANADA OVERVIEW

With more than 50 years experience, TransCanada is a leader in the responsible development and reliable operation of North American energy infrastructure, including
natural gas pipelines, power generation, natural gas storage facilities and projects related to oil pipelines and liquefied natural gas (LNG) facilities. TransCanada's network of wholly owned natural
gas pipelines extends more than 59,000 kilometres (km), tapping into virtually all major gas supply basins in North America. TransCanada is one of the continent's largest providers of natural
gas storage and related services with approximately 355 billion cubic feet (Bcf) of natural gas storage capacity. A growing independent power producer, TransCanada owns, or has interests
in, approximately 7,700 megawatts (MW) of power generation in Canada and the United States (U.S.).

In
addition to having total assets in excess of $30 billion, TransCanada plans to invest approximately $10 billion in a number of energy infrastructure
projects in North America, with the expectation that a majority of these projects will be completed by 2010. Over the longer-term, TransCanada has a significant portfolio of large-scale infrastructure
opportunities that will continue to be pursued and developed.

North
America's demand for natural gas, oil and electricity is expected to continue to grow. By 2020, it is expected that demand for natural gas will grow by
15 billion cubic feet per day (Bcf/d), demand for crude oil will increase by 3 million barrels per day (Bbl/d) and demand for power will grow by 155 gigawatts.

Demand
for natural gas in North America is expected to increase due primarily to a growing demand for electricity. The long lead times required to complete new coal and
nuclear projects could slow the development and completion of new coal or nuclear generation facilities over the next five to ten years. As a result, North America is expected to continue to rely on
natural gas-fired generation to satisfy a large portion of its growing electricity needs. North America has entered a period when it will no longer be able to rely solely on traditional sources of
natural gas supply to meet its growing needs. This outlook for traditional sources of natural gas means that northern gas and offshore LNG could be required to fill the shortfall between supply and
demand for natural gas. TransCanada is well positioned to capture related opportunities in natural gas transmission, LNG infrastructure and power generation.

TransCanada
is also expanding into the crude oil transmission business with the development of a 590,000 Bbl/d crude oil pipeline from Hardisty, Alberta to refineries
in U.S. midwest markets. TransCanada has partnered with ConocoPhillips, a global, integrated oil and gas producer and refiner to construct the Keystone oil pipeline to transport crude oil from Alberta
to refineries in Illinois and Oklahoma. The partnership provides TransCanada with a platform for developing future crude oil pipeline opportunities. Significant oilsands development in Alberta is
providing opportunities for new crude oil transmission infrastructure.

TransCanada
has the financial strength and flexibility to build new infrastructure to support increased energy demand, to respond to shifting energy supply-demand dynamics
and to replace aging North American infrastructure.

Pipelines Assets

TransCanada's natural gas pipeline assets link gas supplies from basins in Western Canada, the U.S. mid-continent and Gulf of Mexico to premium North American markets.
These assets are well-positioned to connect emerging natural gas supplies, including northern gas and offshore LNG imports, to growing markets. With increasing production from the oilsands in Alberta
and growing demand for secure, reliable sources of energy, TransCanada has identified opportunities to develop oil pipeline capacity.

TransCanada's
Alberta System gathered 68 per cent of the natural gas produced in Western Canada or 16 per cent of total North American production in 2007.
TransCanada exports natural gas from the Western Canada Sedimentary Basin (WCSB) to Eastern Canada and the U.S. West, Midwest and Northeast through three wholly owned pipeline systems: the
Canadian Mainline, the GTN System and Foothills Pipe Lines Ltd. (Foothills).

8MANAGEMENT'S
DISCUSSION AND ANALYSIS

---



American
Natural Resources Company and ANR Storage Company (collectively, ANR) were acquired in February 2007. ANR Pipeline Company (ANR Pipeline), a
subsidiary of American Natural Resources Company, transports natural gas from producing fields located primarily in Oklahoma, Texas, Louisiana and the Gulf of Mexico to markets located primarily in
Wisconsin, Michigan, Illinois, Ohio and Indiana. ANR Pipeline also connects with numerous other natural gas pipelines, providing customers with access to diverse sources of North American supply,
including
Western Canada and the Rocky Mountain region, and access to a variety of end-user markets in the midwestern and northeastern U.S.

As
a result of the ANR acquisition, TransCanada owns and operates approximately 235 Bcf of regulated natural gas storage capacity in Michigan, making it one of North
America's largest gas storage operators.

TransCanada
also exports natural gas from the WCSB to Eastern Canada and to the U.S. West, Midwest and Northeast through six partially owned natural gas pipeline
systems: Great Lakes Transmission Limited Partnership (Great Lakes), Iroquois Gas Transmission System, L.P. (Iroquois), Portland Natural Gas Transmission System (Portland), Trans
Québec & Maritimes System (TQM), Northern Border Pipeline Company (Northern Border) and Tuscarora Gas Transmission Company (Tuscarora). Certain of these pipeline systems are held
through the Company's 32.1 per cent interest in TC PipeLines, LP (PipeLines LP).

The
Company also transports natural gas through the wholly owned TransCanada Pipeline Ventures Limited Partnership (Ventures LP) pipeline in Alberta, North Baja
pipeline in the U.S. and Tamazunchale pipeline in Mexico, as well as the partially owned TransGas de Occidente S.A. (TransGas) pipeline in Columbia and Gasoducto del Pacifico S.A.
(Gas Pacifico) pipeline in Argentina.

In
addition, the Company has a 50 per cent ownership interest in each of TransCanada Keystone Pipeline Limited Partnership (Keystone Canada) and TransCanada
Keystone Pipeline LP (Keystone U.S.), (collectively Keystone). Currently beginning its construction phase, Keystone will transport crude oil from Hardisty, Alberta, to U.S. Midwest markets at
Wood River and Patoka in Illinois, and to Cushing, Oklahoma.

Energy Assets

TransCanada has built a substantial energy business over the past decade and has achieved a significant presence in power generation in selected regions of Canada and the U.S.
TransCanada owns, or has rights or interests in, approximately 7,700 MW of power generation in Canada and the U.S. These assets are primarily low-cost, base-load generation and/or are assets
backed by secure, long-term power sales agreements. More recently, TransCanada has also developed a significant non-regulated natural gas storage business in Alberta.

|GRAPHIC |  | The Company's power assets are concentrated in two main regions: Western Power in Alberta and Eastern Power in the Eastern Canada and New England markets. TransCanada's portfolio of power supply is shown in the accompanying chart.
All of TransCanada's non-regulated natural gas storage assets are located in Alberta. TransCanada owns or has rights to 120 Bcf or approximately one-third of the natural gas storage capacity in the province.
Opportunities and developments in the Company's Pipelines and Energy businesses are discussed further in the "Pipelines" and "Energy" sections of this MD&A.
|------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

TRANSCANADA'S STRATEGY

TransCanada's vision is to be the leading energy infrastructure company in North America, with a strong focus on pipelines and power generation opportunities located in regions
where the Company enjoys significant competitive advantages. Since 2000, TransCanada's key strategies have evolved with the Company's progression and the changing business environment. Today,
TransCanada's corporate strategy consists of the following six components:



MANAGEMENT'S DISCUSSION AND
ANALYSIS9

---





Maximize the long-term value of the Company's natural gas transmission business

TransCanada continues to place a priority on maximizing the long-term value of its natural gas transmission business. There is a strong focus on connecting supply
with markets through expansions, extensions, acquisitions and strategic relationships. The Company also aims to offer competitive rates and services to meet stakeholder needs and enhance the value of
its natural gas pipeline assets.

Grow the North American pipeline and related infrastructure business

TransCanada is pursuing the development of greenfield and brownfield pipeline projects to grow its North American pipeline and related infrastructure business. These include
frontier natural gas pipeline projects such as the Mackenzie Gas Pipeline (MGP) and the Alaska Pipeline as well as crude oil pipeline projects to meet the growing demand for transportation of Alberta
oilsands production.

Other
possible avenues of growth include:



The
Company is also pursuing the development of natural gas pipeline infrastructure and associated LNG regasification terminals in Mexico and aims to grow pipeline earnings
from PipeLines LP through acquisitions and organic growth.

Maximize the long-term value of existing power generation and power marketing and related businesses

TransCanada aims to maximize the long-term value of existing power generation and power marketing and related businesses, such as unregulated natural gas storage.
The Company's approach involves engaging in marketing activities  guided by strategic criteria and defined risk
boundaries  that optimize the value of owned assets, as well as exercising disciplined asset management and being actively involved in regulatory and market
developments.

Grow North American power and energy businesses

The Company is focusing primarily on the core western and eastern regions to grow its North American power and energy businesses. Consideration will be given to new markets
with attractive fundamentals where TransCanada can take advantage of its competencies to enhance its competitive strengths. There is a continued focus on low-cost, base-load power assets or assets
backed by firm long-term contracts with reputable counterparties. The Company is also pursuing the development of LNG regasification terminals and associated natural gas pipeline
infrastructure terminals to feed TransCanada's gas transmission grids in Eastern Canada and the U.S. Northeast, Pacific Northwest, and Gulf of Mexico. Greenfield development and acquisition of
power generation, transmission and natural gas storage will be considered if they meet the Company's rigorous strategic and value creation criteria.

Drive for operational excellence

TransCanada maintains a commitment to provide safe, low-cost, reliable and responsible service to customers under its operational excellence business model. The Company will
continue to focus efforts in this critical area on efficiencies, operational reliability, the environment and safety.

Maximize TransCanada's competitive strength and enduring value

In addition to the strategies discussed above, a number of other initiatives are being pursued in order to maximize TransCanada's competitive strength and enduring value.
These include:



10MANAGEMENT'S
DISCUSSION AND ANALYSIS

---







CONSOLIDATED FINANCIAL REVIEW

---

SELECTED THREE-YEAR CONSOLIDATED FINANCIAL DATA(1) (millions of dollars, except per share amounts)

|                                                 |                         | 2007   |       | 2006   |       | 2005   |      
|------------------------------------------------ | ----------------------- | ------ | ----- | ------ | ----- | ------ | -----
|                                                 |                        
|Income Statement                                 |                         |        |       |        |       |        |      
|Revenues                                         |                         | 8,828  |       | 7,520  |       | 6,124  |      
|Net income                                       |                         |        |       |        |       |        |      
|                                                 | Continuing operations   |        | 1,223 |        | 1,051 |        | 1,209
|                                                 | Discontinued operations |        |      |        | 28    |        |     
|                                                 |                        
|                                                 |                         | 1,223  |       | 1,079  |       | 1,209  |      
|                                                 |                        
|Comparable earnings(2)                           |                         | 1,107  |       | 925    |       | 839    |      
|Per Common Share Data                            |                         |        |       |        |       |        |      
|Net income  basic                               |                         |        |       |        |       |        |      
|                                                 | Continuing operations   |        | $2.31 |        | $2.15 |        | $2.49
|                                                 | Discontinued operations |        |      |        | 0.06  |        |     
|                                                 |                        
|                                                 |                         | $2.31  |       | $2.21  |       | $2.49  |      
|                                                 |                        
|Net income  diluted                             |                         |        |       |        |       |        |      
|                                                 | Continuing operations   |        | $2.30 |        | $2.14 |        | $2.47
|                                                 | Discontinued operations |        |      |        | 0.06  |        |     
|                                                 |                        
|                                                 |                         | $2.30  |       | $2.20  |       | $2.47  |      
|                                                 |                        
|Comparable earnings per share(2)                 |                         | $2.09  |       | $1.90  |       | $1.72  |      
|Dividends declared                               |                         | $1.36  |       | $1.28  |       | $1.22  |      
|Summarized Cash Flow                             |                         |        |       |        |       |        |      
|Funds generated from operations(2)               |                         | 2,621  |       | 2,378  |       | 1,951  |      
|Decrease/(increase) in operating working capital |                         | 215    |       | (303   | )     | (49    | )    
|                                                 |                        
|Net cash provided by operations                  |                         | 2,836  |       | 2,075  |       | 1,902  |      
|                                                 |                        
|Balance Sheet                                    |                         |        |       |        |       |        |      
|Total assets                                     |                         | 30,330 |       | 25,909 |       | 24,113 |      
|Total long-term liabilities                      |                         | 16,511 |       | 14,464 |       | 13,012 |      
|                                                 |                        

MANAGEMENT'S DISCUSSION AND
ANALYSIS11

---



HIGHLIGHTS

---

Net Income

Comparable Earnings

Cash from Operations

Investing Activities

Financing Activities

Balance Sheet

12MANAGEMENT'S
DISCUSSION AND ANALYSIS

---



Dividend

Refer
to "Results of Operations" below and to the "Liquidity and Capital Resources" section of this MD&A for further discussion of these highlights.

RESULTS OF OPERATIONS

Net income was $1,223 million or $2.31 per share in 2007 compared to $1,079 million or $2.21 per share in 2006 and $1,209 million or $2.49 per share in
2005. Results in 2006 included net income from discontinued operations of $28 million or $0.06 per share, reflecting bankruptcy settlements with Mirant Corporation and certain of its
subsidiaries (Mirant) related to their transactions with TransCanada's Gas Marketing business. TransCanada divested its Gas Marketing business in 2001.

Net
earnings were $1,223 million or $2.31 per share in 2007 compared to $1,051 million or $2.15 per share in 2006 and $1,209 million or $2.49 per share
in 2005. Net earnings in 2007 included $102 million of favourable income tax adjustments and an after-tax gain of $14 million on the sale of land. Net earnings in 2006
included $95 million of favourable income tax adjustments, an $18-million after-tax bankruptcy settlement with Mirant and an after-tax gain of
$13 million from the sale of TransCanada's general partner interest in Northern Border Partners, L.P. Net earnings of $1,209 million in 2005 included after-tax gains
of $193 million on the sale of the Company's interest in TransCanada Power, L.P. (Power LP), $115 million on the sale of the Company's interest in P.T. Paiton Energy
Company (Paiton Energy), $49 million on the sale of PipeLines LP units, and $13 million arising from a Canadian Mainline tolls settlement adjustment related to
2004 earnings.

Excluding
the above-noted items, comparable earnings for the years 2007, 2006 and 2005 were $1,107 million ($2.09 per share), $925 million ($1.90 per share)
and $839 million ($1.72 per share), respectively. Comparable earnings in 2007 increased $182 million or $0.19 per share compared to 2006 due primarily to additional earnings from the
acquisition of ANR in February 2007 and the first full year of earnings from the Bécancour cogeneration plant and the Edson gas storage facility as well as positive impacts from
rate case settlements for the GTN
System and the Canadian Mainline. These increases were partially offset by a lower contribution by Bruce Power A L.P. (Bruce A) and Bruce Power L.P. (Bruce
B) (collectively, Bruce Power) in 2007.

Comparable
earnings increased $86 million or $0.18 per share in 2006 compared to 2005. The increase was due primarily to significantly higher operating income from
Western Power, Eastern Power and the Company's investment in Bruce Power. The higher operating income was partially offset by decreased Pipelines results as net earnings from the Canadian Mainline and
the Alberta System declined due to lower approved rates of return on common equity (ROE) and lower average investment bases in 2006. In addition, the Company's Other Pipelines businesses and the GTN
System and North Baja (collectively, GTN) experienced lower earnings in 2006.

Results
from each business segment are discussed further in the "Pipelines", "Energy" and "Corporate" sections of this MD&A.

FORWARD-LOOKING INFORMATION

This MD&A may contain certain information that is forward-looking and is subject to important risks and uncertainties. The words "anticipate", "expect", "believe", "may",
"should", "estimate", "project", "outlook", "forecast" or other similar words are used to identify such forward looking information. All forward-looking statements reflect TransCanada's beliefs and
assumptions based on information available at the time the statements were made. Actual results or events may differ from those predicted in these forward-looking statements. Factors that could cause
actual results or events to differ materially from current expectations include, among other things, the ability of TransCanada to successfully implement its strategic initiatives and whether such
strategic initiatives will yield the expected benefits, the operating performance of the Company's pipeline and energy assets, the availability and price of energy

MANAGEMENT'S DISCUSSION AND
ANALYSIS13

---



commodities,
regulatory processes and decisions, changes in environmental and other laws and regulations, competitive factors in the pipeline and energy industry sectors, construction and completion
of capital projects, labour, equipment and material costs, access to capital markets, interest and currency exchange rates, technological developments and the current economic conditions in North
America. By its nature, forward-looking information is subject to various risks and uncertainties, which could cause TransCanada's actual results and experience to differ materially from the
anticipated results or expectations expressed. Additional information on these and other factors is available in the reports filed by TransCanada with Canadian securities regulators and with the
U.S. Securities and Exchange Commission (SEC). Readers are cautioned to not place undue reliance on this forward-looking information, which is given as of the date it is expressed in this MD&A
or otherwise, and to not use future-oriented information or financial outlooks for anything other than their intended purpose. TransCanada undertakes no obligation to update publicly or revise any
forward-looking information, whether as a result of new information, future events or otherwise, except as required by law.

NON-GAAP MEASURES

TransCanada uses the measures "comparable earnings", "comparable earnings per share", "funds generated from operations" and "operating income" in this MD&A. These measures do
not have any standardized meaning prescribed by GAAP. They are, therefore, considered to be non-GAAP measures and are unlikely to be comparable to similar measures presented by other
entities. Management of TransCanada uses non-GAAP measures to increase its ability to compare financial results between reporting periods and to enhance its understanding of operating performance,
liquidity and ability to generate funds to finance operations. Non-GAAP measures are also provided to readers as additional information on TransCanada's operating performance, liquidity and ability to
generate funds to finance operations.

Comparable
earnings comprise net earnings adjusted for specific items that are significant but not typical of the Company's operations. Specific items are subjective,
however, management uses its best judgement and informed decision-making when identifying items to be excluded in calculating comparable earnings. Specific items may include but are not limited to
certain income tax refunds and adjustments, gains or losses on sales of assets, legal settlements, and bankruptcy settlements with former customers. The table in the "Segment Results-at-a-Glance"
section of this MD&A presents a reconciliation of comparable earnings to net income. Comparable earnings per share is calculated by dividing comparable earnings by the weighted average number of
shares outstanding for the period.

Funds
Generated from Operations comprises net cash provided by operations before changes in operating working capital. A reconciliation of funds generated from operations to
net cash provided by operations is presented in the "Liquidity and Capital Resources" section of this MD&A.

Operating
Income is reported in the Company's Energy business segment and comprises revenues less operating expenses as shown on the consolidated income statement. A
reconciliation of operating income to net earnings is presented in the Energy section of this MD&A.

OUTLOOK

The Company's net earnings and cash flow, combined with a strong balance sheet, are expected to continue to provide the financial flexibility TransCanada will need in 2008 and
beyond to complete its current capital expenditure program and continue to pursue opportunities and create additional long-term value for its shareholders.

TransCanada
views diligence and discipline as important elements of its strategy for long-term growth in its Pipelines and Energy businesses. In 2008, the Company will
continue to implement its strategy and grow its Pipelines and Energy businesses as discussed in the "TransCanada's Strategy" section of this MD&A.

The
Company's results in 2008 may be affected positively or negatively by a number of factors and developments as discussed throughout this MD&A, including in the
"Forward-Looking Information" section. Refer to the "Pipelines  Outlook", "Energy  Outlook" and
"Corporate  Outlook" sections of this MD&A for further discussion regarding outlook.

14MANAGEMENT'S
DISCUSSION AND ANALYSIS

---





---

SEGMENT RESULTS-AT-A-GLANCE
Reconciliation of Comparable Earnings to Net Income

|Year ended December 31 (millions of dollars except per share amounts) |                          | 2007                                                    |       | 2006  |       | 2005  |      
|--------------------------------------------------------------------- | ------------------------ | ------------------------------------------------------- | ----- | ----- | ----- | ----- | -----
|                                                                      |                         
|Pipelines                                                             |                          |                                                         |       |       |       |       |      
|                                                                      | Comparable earnings      |                                                         | 686   |       | 529   |       | 617  
|                                                                      | Specific items:          |                                                         |       |       |       |       |      
|                                                                      |                          | Bankruptcy settlement with Mirant                       |       |      |       | 18    |      
|                                                                      |                          | Gain on sale of Northern Border Partners, L.P. interest |       |      |       | 13    |      
|                                                                      |                          | Gain on sale of PipeLines LP units                      |       |      |       |      |      
|                                                                      |                          | Canadian Mainline NEB decision related to 2004          |       |      |       |      |      
|                                                                      |                         
|                                                                      | Net earnings             |                                                         | 686   |       | 560   |       | 679  
|                                                                      |                         
|Energy                                                                |                          |                                                         |       |       |       |       |      
|                                                                      | Comparable earnings      |                                                         | 466   |       | 429   |       | 258  
|                                                                      | Specific items:          |                                                         |       |       |       |       |      
|                                                                      |                          | Income tax reassessments and adjustments                |       | 34    |       | 23    |      
|                                                                      |                          | Gain on sale of land                                    |       | 14    |       |      |      
|                                                                      |                          | Gain on sale of Power LP units                          |       |      |       |      |      
|                                                                      |                          | Gain on sale of Paiton Energy                           |       |      |       |      |      
|                                                                      |                         
|                                                                      | Net earnings             |                                                         | 514   |       | 452   |       | 566  
|                                                                      |                         
|Corporate                                                             |                          |                                                         |       |       |       |       |      
|                                                                      | Comparable expenses      |                                                         | (45   | )     | (33   | )     | (36  
|                                                                      | Specific item:           |                                                         |       |       |       |       |      
|                                                                      |                          | Income tax reassessments and adjustments                |       | 68    |       | 72    |      
|                                                                      |                         
|                                                                      | Net earnings             |                                                         | 23    |       | 39    |       | (36  
|                                                                      |                         
|Net Income                                                            |                          |                                                         |       |       |       |       |      
|                                                                      | Continuing operations(1) |                                                         | 1,223 |       | 1,051 |       | 1,209
|                                                                      | Discontinued operations  |                                                         |      |       | 28    |       |     
|                                                                      |                         
|Net Income                                                            |                          | 1,223                                                   |       | 1,079 |       | 1,209 |      
|                                                                      |                         
|Comparable Earnings(1)                                                |                          | 1,107                                                   |       | 925   |       | 839   |      
|                                                                      |                         
|Net Income per Share                                                  |                          |                                                         |       |       |       |       |      
|                                                                      | Continuing operations(2) |                                                         | $2.31 |       | $2.15 |       | $2.49
|                                                                      | Discontinued operations  |                                                         |      |       | 0.06  |       |     
|                                                                      |                         
|                                                                      | Basic                    |                                                         | $2.31 |       | $2.21 |       | $2.49
|                                                                      |                         
|Comparable Earnings per Share(2)                                      |                          | $2.09                                                   |       | $1.90 |       | $1.72 |      
|                                                                      |                         

|                                                        | (1)Comparable Earnings           |       | 1,107 |       | 925   |       | 839  
|------------------------------------------------------- | -------------------------------- | ----- | ----- | ----- | ----- | ----- | -----
|Specific items (net of tax, where applicable):          |                                  |       |       |       |       |      
|Income tax reassessments and adjustments                |                                  | 102   |       | 95    |       |     
|Gain on sale of land                                    |                                  | 14    |       |      |       |     
|Bankruptcy settlement with Mirant                       |                                  |      |       | 18    |       |     
|Gain on sale of Northern Border Partners, L.P. interest |                                  |      |       | 13    |       |     
|Gain on sale of Power LP units                          |                                  |      |       |      |       | 193  
|Gain on sale of Paiton Energy                           |                                  |      |       |      |       | 115  
|Gain on sale of PipeLines LP units                      |                                  |      |       |      |       | 49   
|Canadian Mainline NEB decision related to 2004          |                                  |       |       |       |       | 13   
|                                                       
|Net Income from Continuing Operations                   |                                  | 1,223 |       | 1,051 |       | 1,209
|                                                       
|                                                        | (2)Comparable Earnings Per Share |       | $2.09 |       | $1.90 |       | $1.72
|Specific items  per share:                             |                                  |       |       |       |       |      
|Income tax reassessments and adjustments                |                                  | 0.19  |       | 0.18  |       |     
|Gain on sale of land                                    |                                  | 0.03  |       |      |       |     
|Bankruptcy settlement with Mirant                       |                                  |      |       | 0.04  |       |     
|Gain on sale of Northern Border Partners, L.P. interest |                                  |      |       | 0.03  |       |     
|Gain on sale of Power LP units                          |                                  |      |       |      |       | 0.40 
|Gain on sale of Paiton Energy                           |                                  |      |       |      |       | 0.24 
|Gain on sale of PipeLines LP units                      |                                  |      |       |      |       | 0.10 
|Canadian Mainline NEB decision related to 2004          |                                  |       |       |       |       | 0.03 
|                                                       
|Net Income per Share from Continuing Operations         |                                  | $2.31 |       | $2.15 |       | $2.49
|                                                       

MANAGEMENT'S DISCUSSION AND
ANALYSIS15

---





GRAPHIC

CANADIAN MAINLINEOwned 100 per cent by TransCanada, the Canadian Mainline is a 14,957-km natural gas transmission system in Canada
that extends from the Alberta/Saskatchewan border east to the Québec/Vermont border and connects with other natural gas pipelines in Canada and the U.S.

ALBERTA SYSTEMOwned 100 per cent by TransCanada, the Alberta System is a 23,570-km natural gas transmission system in Alberta. One
of the largest transmission systems in North America, it gathers natural gas for use within the province and delivers it to provincial boundary points for connection with the Company's Canadian
Mainline and Foothills natural gas pipelines as well as the natural gas pipelines of other companies.

ANROwned 100 per cent by TransCanada, the 17,000-km ANR transmission system transports natural gas from producing fields located
primarily in Texas and Oklahoma on its southwest leg and in the Gulf of Mexico and Louisiana on its southeast leg. The system extends to markets located mainly in Wisconsin, Michigan, Illinois, Ohio
and Indiana. ANR's natural gas pipeline also connects with other natural gas pipelines to give access to diverse sources of North American supply including Western Canada and the Rocky Mountain supply
basin, and a variety of markets in the midwestern and northeastern U.S. ANR also owns and operates regulated underground natural gas storage facilities in Michigan with a total capacity of
approximately 235 Bcf.

16MANAGEMENT'S
DISCUSSION AND ANALYSIS

---



GTN SYSTEMOwned 100 per cent by TransCanada, the GTN System is a 2,174-km natural gas transmission system that links Foothills with
Pacific Gas and Electric Company's California Gas Transmission System, with Williams Companies, Inc.'s Northwest Pipeline in Washington and Oregon, and with Tuscarora.

FOOTHILLSOwned 100 per cent by TransCanada, the 1,241-km Foothills transmission system in Western Canada carries natural gas for
export from central Alberta to the U.S. border to serve markets in the U.S. Midwest, Pacific Northwest, California and Nevada. TransCanada's BC System was integrated into Foothills
effective April 1, 2007.

NORTH BAJAOwned 100 per cent by TransCanada, the North Baja natural gas transmission system extends 129 km from Ehrenberg in
southwestern Arizona to a point near Ogilby, California on the California/Mexico border and connects with the Gasoducto Bajanorte natural gas pipeline system in Mexico.

GREAT LAKESOwned 53.6 per cent by TransCanada and 46.4 per cent by PipeLines LP, the 3,404-km Great Lakes natural gas
transmission system connects with the Canadian Mainline at Emerson, Manitoba, and serves markets in Central Canada and the midwestern U.S. TransCanada operates Great Lakes and effectively owns
68.5 per cent of the system through its 53.6 per cent direct ownership interest and its indirect ownership through its 32.1 per cent interest in
PipeLines LP.

NORTHERN BORDEROwned 50 per cent by PipeLines LP, the 2,250-km Northern Border natural gas transmission system serves the
U.S. Midwest from a connection with Foothills near Monchy, Saskatchewan. TransCanada operates Northern Border and effectively owns 16.1 per cent of the system through its
32.1 per cent interest in PipeLines LP.

TUSCARORAOwned 100 per cent by PipeLines LP, Tuscarora is a 491-km pipeline system transporting natural gas from the
GTN System at Malin, Oregon, to Wadsworth, Nevada, with delivery points in northeastern California and northwestern Nevada. TransCanada operates Tuscarora and its 32.1 per cent interest
in PipeLines LP gives TransCanada a 32.1 per cent ownership interest in the system.

IROQUOISOwned 44.5 per cent by TransCanada, the 666-km Iroquois pipeline system connects with the Canadian Mainline near
Waddington, New York, and delivers natural gas to customers in the northeastern U.S.

TRANSGASOwned 46.5 per cent by TransCanada, TransGas is a 344-km natural gas pipeline system extending from Mariquita in the
central region of Colombia to Cali in southwestern Colombia.

PORTLANDOwned 61.7 per cent by TransCanada, Portland is a 474-km pipeline that connects with TQM near East Hereford,
Québec and delivers natural gas to customers in the northeastern U.S. Portland is operated by TransCanada.

VENTURES LPOwned 100 per cent by TransCanada, Ventures LP has a 121-km pipeline and related facilities that supply
natural gas to the oilsands region of northern Alberta as well as a 27-km pipeline that supplies natural gas to a petrochemical complex at Joffre, Alberta.

TAMAZUNCHALEOwned 100 per cent by TransCanada, the 130-km Tamazunchale natural gas pipeline in east central Mexico extends from the
facilities of Pemex Gas near Naranjos, Veracruz, to an electricity generating station near Tamazunchale, San Luis Potosi. Tamazunchale went into service on December 1, 2006.

TQMOwned 50 per cent by TransCanada, TQM is a 572-km pipeline system that connects with the Canadian Mainline and transports
natural gas from Montréal to Québec City in Québec, and connects with the Portland system. TQM is operated by TransCanada.

GAS PACIFICO/INNERGYOwned 30 per cent by TransCanada, Gas Pacifico is a 540-km natural gas pipeline extending from Loma de la Lata,
Argentina to Concepción, Chile. TransCanada also has a 30 per cent ownership interest in INNERGY, an industrial natural gas marketing company based in
Concepción that markets natural gas transported on Gas Pacifico.

KEYSTONEOwned 50 per cent by TransCanada, Keystone is a 3,456-km oil pipeline project under construction that is expected to
transport crude oil from Hardisty, Alberta to U.S. midwest markets at Wood River and Patoka in Illinois, and to Cushing, Oklahoma.

MANAGEMENT'S DISCUSSION AND
ANALYSIS17

---





PIPELINES  HIGHLIGHTS

Net Earnings

Expanding Asset Base

Canadian Mainline

Alberta System

GTN System

Foothills

Other Pipelines

18MANAGEMENT'S
DISCUSSION AND ANALYSIS

---



---

PIPELINES RESULTS-AT-A-GLANCEYear ended December 31(millions of dollars)

|                                                        |                                                  | 2007 |     | 2006 |     | 2005 |    
|------------------------------------------------------- | ------------------------------------------------ | ---- | --- | ---- | --- | ---- | ---
|                                                        |                                                 
|Wholly Owned Pipelines                                  |                                                  |      |     |      |     |      |    
|                                                        | Canadian Mainline                                |      | 273 |      | 239 |      | 270
|                                                        | Alberta System                                   |      | 138 |      | 136 |      | 150
|                                                        | ANR(1)                                           |      | 104 |      |     |      |    
|                                                        | GTN                                              |      | 58  |      | 46  |      | 71 
|                                                        | Foothills(2)                                     |      | 26  |      | 27  |      | 27 
|                                                        |                                                 
|                                                        |                                                  | 599  |     | 448  |     | 518  |    
|                                                        |                                                 
|Other Pipelines                                         |                                                  |      |     |      |     |      |    
|                                                        | Great Lakes(3)                                   |      | 47  |      | 44  |      | 46 
|                                                        | PipeLines LP(4)                                  |      | 18  |      | 4   |      | 9  
|                                                        | Iroquois                                         |      | 15  |      | 15  |      | 17 
|                                                        | TransGas                                         |      | 15  |      | 11  |      | 11 
|                                                        | Portland                                         |      | 11  |      | 13  |      | 11 
|                                                        | Ventures LP                                      |      | 11  |      | 12  |      | 12 
|                                                        | Tamazunchale(5)                                  |      | 10  |      | 2   |      |    
|                                                        | TQM                                              |      | 6   |      | 7   |      | 7  
|                                                        | Gas Pacifico/INNERGY(6)                          |      | 3   |      | 8   |      | 6  
|                                                        | Northern Development                             |      | (7  | )    | (5  | )    | (4 
|                                                        | General, administrative, support costs and other |      | (42 | )    | (30 | )    | (16
|                                                        |                                                 
|                                                        |                                                  | 87   |     | 81   |     | 99   |    
|                                                        |                                                 
|Comparable earnings(7)                                  |                                                  | 686  |     | 529  |     | 617  |    
|Bankruptcy settlement with Mirant                       |                                                  |     |     | 18   |     |     |    
|Gain on sale of Northern Border Partners, L.P. interest |                                                  |     |     | 13   |     |     |    
|Gain on sale of PipeLines LP units                      |                                                  |     |     |     |     | 49   |    
|Canadian Mainline NEB decision related to 2004          |                                                  |     |     |     |     | 13   |    
|                                                        |                                                 
|Net earnings                                            |                                                  | 686  |     | 560  |     | 679  |    
|                                                        |                                                 

Net earnings from the Pipelines business were $686 million in 2007 compared to $560 million in 2006 and
$679 million in 2005. Net earnings in 2006 included the $18-million bankruptcy settlement with Mirant and the $13-million gain on sale of TransCanada's general partner
interest in Northern Border Partners, L.P. Net earnings in 2005 included the $49-million gain on sale of PipeLines LP units. Net earnings in 2005 also included a
$13-million positive

MANAGEMENT'S DISCUSSION AND
ANALYSIS19

---



adjustment
related to 2004 as a result of the NEB's decision in 2005 to increase the deemed common equity ratio to 36 per cent from 33 per cent under the Canadian
Mainline's 2004 Tolls and Tariff Application (Phase II).

Comparable
earnings from the Pipelines business were $686 million in 2007, an increase of $157 million compared to $529 million in 2006. The increase
was due primarily to the acquisitions of ANR and additional interest in Great Lakes, higher earnings as a result of the Canadian Mainline and GTN System rate settlements and an increased ownership in
PipeLines LP.

Comparable
earnings decreased $88 million to $529 million in 2006 compared to $617 million in 2005. The decline was due primarily to lower net earnings
from the Canadian Mainline, the Alberta System, GTN and Other Pipelines.

PIPELINES  FINANCIAL ANALYSIS

Canadian Mainline

The Canadian Mainline is regulated by the NEB. The NEB sets tolls that provide TransCanada with the opportunity to recover its projected costs of transporting natural gas,
including a return on the Canadian Mainline's average investment base. The NEB also approves new facilities before their construction begins. Net earnings of the Canadian Mainline are affected by
changes in the investment base, the ROE, the level of deemed common equity and potential incentive earnings.

In
February 2007, TransCanada reached a five-year tolls settlement effective January 1, 2007 to December 31, 2011 on the Canadian Mainline.
In May 2007, the NEB approved TransCanada's application of the settlement as filed, including TransCanada's request that interim tolls be made final for 2007.

As
part of the settlement, it was agreed that the cost of capital reflect an ROE on a deemed common equity ratio of 40 per cent, an increase from
36 per cent, as determined under the NEB's ROE formula. The remaining capital structure will consist of short- and long-term debt, following the agreed upon
redemption of the US$460 million 8.25 per cent Preferred Securities that were included in the Canadian Mainline's capital structure.

The
settlement also established certain elements of the Canadian Mainline's fixed OM&A costs for each year of the settlement. The variance between actual and agreed upon
OM&A costs will accrue to TransCanada from 2007 to 2009, and will be shared equally between TransCanada and its customers in 2010 and 2011. The settlement also allows for performance-based incentive
arrangements that will provide mutual benefits to both TransCanada and its customers.

Net
earnings of $273 million in 2007 were $34 million higher than 2006 net earnings of $239 million. The increase primarily reflected the positive
impact of the increase in deemed common equity ratio in the Canadian Mainline tolls settlement, performance-based incentive arrangements and OM&A cost savings, partially offset by a lower allowed ROE
of 8.46 per cent in 2007 (8.88 per cent in 2006), as determined under the NEB's formula, and a lower average investment base.

Canadian
Mainline generated comparable earnings of $239 million in 2006, a decrease of $31 million from 2005. The decrease was due primarily to a combination
of a lower allowed ROE and a lower average investment base in 2006

|
|

GRAPHIC

20MANAGEMENT'S
DISCUSSION AND ANALYSIS

---



compared
to 2005. Comparable earnings in 2005 excluded the $13-million positive adjustment from the NEB decision related to 2004. TransCanada reached a tolls
settlement with its Canadian Mainline customers and other interested parties that included an NEB-allowed ROE of 8.88 per cent for 2006, which was determined under the NEB's
return adjustment formula on a deemed common equity ratio of 36 per cent. The NEB-allowed ROE for 2005 was 9.46 per cent.

Alberta System

The EUB was reorganized into the Energy Resources Conservation Board and the Alberta Utilities Commission (AUC) effective January 1, 2008. The AUC regulates construction
and operation of facilities and the terms and conditions of services, including rates, for the Alberta System, primarily under the provisions of theGas Utilities
Actand thePipeline Act.

The
Alberta System has been operating for the past three years under the 2005-2007 Revenue Requirement Settlement. The settlement addresses all elements of the
Alberta System including OM&A costs, ROE, depreciation and income and municipal taxes. The settlement fixed OM&A costs at $207 million for 2007, $201 million for 2006, and
$193 million for 2005. In each year, any variance between actual
OM&A and other fixed costs and those agreed to in the settlement accrued to TransCanada. The majority of other cost elements of the 2005, 2006 and 2007 revenue requirements are treated on a
flow-through basis.

Alberta
System net earnings of $138 million in 2007 were $2 million higher than in 2006. The increase was due primarily to OM&A cost savings, partially offset
by a lower allowed ROE and a lower investment base in 2007. The allowed ROE prescribed by the EUB was 8.51 per cent in 2007 compared with 8.93 per cent in 2006 on deemed
common equity of 35 per cent.

Net
earnings of $136 million in 2006 were $14 million lower than in 2005. The decrease was due primarily to a lower investment base and a lower allowed ROE in
2006. The allowed ROE prescribed by the EUB was 9.50 per cent in 2005 on deemed common equity of 35 per cent.

GRAPHIC

ANR

TransCanada completed the acquisition of ANR on February 22, 2007 and included its net earnings from this date. The operations of ANR are regulated primarily by
the FERC. ANR provides natural gas transportation, storage and various capacity-related services to a variety of customers in both the U.S. and Canada. The transmission system has a
peak-day capacity of 6.8 Bcf/d. ANR also owns and operates numerous underground natural gas storage facilities in Michigan. ANR's FERC-regulated natural gas
storage and transportation services operate under current FERC-approved tariff rates. These tariffs include maximum and minimum rate levels for services and permit ANR to discount or
negotiate rates on a non-discriminatory basis. ANR Pipeline's rates were established pursuant to a settlement approved by a FERC order issued in February 1998 and the settlement
rates became effective November 1, 1997. ANR Storage Company's rates were established pursuant to a settlement approved by the FERC in April 1990 and these settlement rates became
effective June 1, 1990. None of ANR's FERC-regulated operations are required to file for new rates at any time in the future, nor are any of the operations prohibited from filing a
rate case. ANR's revenues are derived primarily from its interstate natural gas transmission and storage, gathering and related services. Due to the seasonal nature of the

MANAGEMENT'S DISCUSSION AND
ANALYSIS21

---



business,
ANR's volumes, revenues and net earnings are generally expected to be higher in the winter months. ANR's net earnings were $104 million from the date of its acquisition by
TransCanada on February 22, 2007, to December 31, 2007 and were in line with the Company's expectations.

GTN

The FERC regulates GTN. Both of GTN's systems, the GTN System and North Baja, are subject to FERC-approved tariffs that establish maximum and minimum rates for
various services. The systems are permitted to discount or negotiate these rates on a non-discriminatory basis. On October 31, 2007, the GTN System filed a Stipulation and
Agreement with the FERC that comprises an uncontested settlement of all aspects of its 2006 General Rate Case. The settlement rates went into effect on an interim basis on November 1, 2007, in
accordance with the FERC's Order dated November 16, 2007. The FERC approved the settlement on January 7, 2008, with settlement rates effective January 1, 2007. GTN's financial
results in 2007 reflect the terms of the settlement. The net earnings of GTN are affected by variations in contracted volume levels, volumes delivered and prices charged under the various service
types that are provided, as well as by variations in the costs of providing services.

GTN's
comparable earnings increased $12 million in 2007, compared to 2006 due primarily to the positive impact of the rate case settlement, partially offset by lower
long-term firm contracted volumes and a weaker U.S. dollar in 2007. In addition, comparable earnings in 2007 were negatively affected by a higher provision taken in 2007 for
non-payment of contract revenues from a subsidiary of Calpine Corporation (Calpine) that filed for bankruptcy protection.

Net
earnings were $46 million in 2006, a $25-million decrease from 2005. This decrease was due primarily to lower transportation revenues, higher
operating costs, the impact of the weaker U.S. dollar and the provision for non-payment of contract revenues from the Calpine subsidiary.

Other Pipelines

TransCanada's direct and indirect investments in various natural gas pipelines and its project development activities relating to natural gas and oil transmission opportunities
throughout North America are included in Other Pipelines.

TransCanada's
comparable earnings from Other Pipelines were $87 million in 2007 compared to $81 million in 2006. The increase was due primarily to higher
earnings in PipeLines LP, which were affected positively by TransCanada's increased ownership interests in PipeLines LP and Great Lakes, and Tamazunchale, which completed its first full
year of operations in 2007. These increases were partially offset by higher project development and support costs associated with growing the Pipelines business, the effects of the weaker
U.S. dollar in 2007, and proceeds of a bankruptcy settlement received by Portland in 2006.

Comparable
earnings from Other Pipelines were $81 million in 2006, $18 million lower than in 2005. The decrease was due primarily to higher project development
and support costs associated with growing the Pipelines business, reduced ownership in PipeLines LP, the effects of the weaker U.S. dollar, and proceeds of bankruptcy settlements
received by Iroquois in 2005. These decreases were partially offset by higher net earnings from Portland due to the proceeds it received in 2006 from the bankruptcy settlement.

PIPELINES  OPPORTUNITIES AND DEVELOPMENTS

Keystone

Keystone is expected to extend 3,456 km and is designed to deliver 590,000 Bbl/d of crude oil from Hardisty, Alberta, to U.S. Midwest markets at Wood River and
Patoka in Illinois, and to Cushing, Oklahoma. The Company has currently secured long-term contracts for a total of 495,000 Bbl/d with an average duration of 18 years.
Deliveries to Patoka are expected to begin in late 2009.

TransCanada
and Keystone Canada received regulatory approval from the NEB in 2007 to transfer a portion of TransCanada's Canadian Mainline natural gas transmission
facilities to Keystone Canada, and to construct and operate new oil pipeline facilities in Canada. Keystone Canada filed an application with the NEB in November 2007 to add new

22MANAGEMENT'S
DISCUSSION AND ANALYSIS

---



pumping
facilities to accommodate the increase in scope and scale of the project. An NEB oral hearing is scheduled to commence in April 2008.

Keystone U.S.
received, from the U.S. Department of State in January 2008, the Final Environmental Impact Statement (FEIS) regarding construction of the
Keystone U.S. pipeline and its Cushing extension. The FEIS stated the pipeline would result in limited adverse environmental impacts. The FEIS is a requirement to proceed with the Presidential Permit
process, which governs the construction and operation of facilities at the U.S.-Canada border crossing. The Presidential Permit is expected to be issued in
March 2008.

ConocoPhillips
contributed $207 million to acquire a 50 per cent ownership interest in Keystone in December 2007. Affiliates of TransCanada will be responsible for
constructing and operating Keystone, which is expected to have a capital cost of approximately US$5.2 billion.

Canadian Mainline

In July 2007, the NEB approved TransCanada's request to add a new LNG receipt point at Gros Cacouna, Québec, as well as its request to calculate tolls for
service from this point on a rolled-in basis. The approvals will be effective on the date the facilities required to connect the Gros Cacouna receipt point are placed in service.

On
November 29, 2007, the NEB announced that, pursuant to its formula, the 2008 allowed ROE for NEB-regulated pipelines, including the Canadian Mainline,
will be 8.71 per cent, up from 8.46 per cent in 2007.

Alberta System

TransCanada received approval from the EUB in July 2007 to initiate negotiations on the Alberta System revenue requirement with the intent of reaching a settlement for a term
of up to three years commencing January 1, 2008. Settlement negotiations with stakeholders are progressing. TransCanada has a requirement to file a 2008 General Rate application or a
settlement in first-quarter 2008.

On
November 30, 2007 the EUB finalized the Alberta System's 2008 allowed ROE at 8.75 per cent, compared to 8.51 per cent in 2007.

TransCanada
received approval from the EUB in 2007 to construct four new natural gas transmission facilities to serve the firm intra-Alberta delivery contract requirements
of oilsands developers in the Fort McMurray, Alberta area. The capital cost of the four pipeline facilities, which total 150 km, together with a 15-MW compression facility are
expected to be $367 million.

TransCanada
submitted an application to the EUB in November 2007 for a permit to construct the North Central Corridor expansion, which comprises a 300-km natural
gas pipeline and associated facilities on the northern section of the Alberta System. The expansion, if approved, will connect the northwest portion of the Alberta System with the northeast portion of
the system. The estimated capital cost of this expansion is $983 million. The project is expected to be completed in two stages, the first one beginning in late 2008 with an
in-service date of April 1, 2009 and the second one with an in-service date of April 1, 2010.

ANR

As of December 31, 2007, ANR substantially completed a project that increased its saleable natural gas storage capacity by 13 Bcf, of which 10 Bcf was
previously used for system operations. Construction has commenced on a second storage enhancement project, which is expected to increase ANR's natural gas storage capacity by 14 Bcf in 2008.

ANR
is considering an additional storage expansion project, which, along with the utilization of other natural gas pipeline assets across TransCanada's system, is intended
to allow customers to access additional storage and markets. ANR is also pursuing potential additions of supply on both its southwest and southeast legs. Supply on the southwest leg was increased in
early 2008 as a result of an interconnect with the Rockies Express natural gas pipeline, which commenced service in January 2008. There is potential for new supply on the southeast leg from LNG
additions, shale gas from the mid-continent, and a potential additional interconnect with the Rockies Express pipeline.

MANAGEMENT'S DISCUSSION AND
ANALYSIS23

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GTN

In August 2007, Gas Transmission Northwest Corporation (GTNC), a wholly owned subsidiary of TransCanada, and Northwest Natural Gas Company (NW Natural) formed an
equally owned joint venture, Palomar Gas Transmission LLC (Palomar), to develop a 354-km (220 mile) natural gas pipeline to serve the Oregon, Pacific Northwest and Western
U.S markets. The proposed Palomar pipeline would connect TransCanada's existing GTN System in central Oregon with NW Natural's distribution system near Molalla, Oregon, and could be extended to a
proposed pipeline near the town of Wauna, Oregon. The Palomar pipeline is in the preliminary stages of the FERC permitting process.

North Baja

North Baja received a FERC expansion certificate in October 2007 authorizing modifications that would allow it to import natural gas from the Costa Azul LNG terminal in
northwestern Mexico, which is nearing completion. The imported gas would serve markets in California and the U.S. Southwest. The FERC certificate authorizes phased expansion of North Baja. The
first phase of the expansion includes system modifications to allow for bi-directional natural gas flow and the addition of a lateral natural gas pipeline to interconnect with a Southern
California Gas Co. pipeline near Blythe, California. The first phase will also give North Baja the ability to import approximately 600 million cubic feet per day (mmcf/d) of
natural gas from Mexico.

Foothills

TransCanada's BC System was integrated into Foothills in 2007. In first quarter 2007, the NEB approved the transfer of assets and finalized the revised tolls for 2007.
Foothills will continue to be regulated on a complaint basis only.

Tamazunchale

The Company's Tamazunchale natural gas pipeline in Mexico is designed to transport initial volumes of 170 mmcf/d. The pipeline's capacity is expected to be expanded to
approximately 430 mmcf/d, to meet the needs of two additional proposed power plants near Tamazunchale. The timing of the expansion will be driven by the Comisión Federal de
Electricidad's requirements for the power plants.

Mackenzie Gas Pipeline Project

The MGP is a proposed 1,200-km natural gas pipeline to be constructed from a point near Inuvik, Northwest Territories to the northern border of Alberta, where it is
expected to connect to the Alberta System.

TransCanada's
involvement with the MGP arises from a 2003 agreement between the Mackenzie Valley Aboriginal Pipeline Group (APG) and the MGP, whereby TransCanada agreed to
finance the APG's one-third share of the pre-development costs associated with the project. Cumulative advances made by TransCanada in this respect totalled $137 million
at December 31, 2007 and are included in Other Assets. These amounts constitute a loan to the APG, which becomes repayable only after the pipeline commences commercial operations. The total
amount of the loan is expected to form part of the rate base of the pipeline and subsequently be repaid from the APG's share of future natural gas pipeline revenues or from alternate financing. If the
project does not proceed, TransCanada has no recourse against the APG for recovery of advances made. Accordingly, TransCanada's ability to recover its investment is dependant upon a successful outcome
of the project.

Under
the terms of certain MGP agreements, TransCanada holds an option to acquire up to a five per cent equity ownership in the natural gas pipeline at the time of
the decision to construct. In addition, TransCanada gains certain rights of first refusal to acquire 50 per cent of any divestitures by existing partners and an entitlement to obtain a
one-third interest in all expansion opportunities once the APG reaches a one-third ownership share, with the other natural gas pipeline owners and the APG sharing
the balance.

TransCanada
and the other co-venture companies involved in the MGP continue to pursue approval of the proposed project, focusing on the regulatory process and
discussions with the Canadian government on fiscal framework. Project timing is uncertain and is conditional upon resolution of regulatory and fiscal matters.

24MANAGEMENT'S
DISCUSSION AND ANALYSIS

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Alaska Pipeline Project

TransCanada continued its discussions with Alaska North Slope producers and the State of Alaska in 2007 to advance the proposed Alaska Pipeline Project. TransCanada submitted
an application in November 2007 for a license to construct the Alaska Pipeline Project under theAlaska Gasline Inducement Act(AGIA). The State of
Alaska announced on January 4, 2008, that TransCanada had submitted a complete AGIA application and would be advancing to the Public Comment stage. No other applicant met all the AGIA
requirements. If approved by the Alaska Administration and the Alaska Legislature, TransCanada could be granted the AGIA license by mid-2008. Upon receipt of the AGIA license, TransCanada
will proceed with an open season to secure shipping commitments from shippers.

Foothills
holds the priority right to build, own and operate the first natural gas pipeline through Canada for the transportation of Alaskan gas. This right was granted
under theNorthern Pipeline Act of Canada(NPA) following a lengthy competition hearing before the NEB in the late 1970s, which produced a decision in
favour of Foothills. The NPA creates a single-window regulatory regime that is uniquely available to Foothills. It has been used by Foothills to construct facilities in Alberta, British
Columbia (B.C.) and Saskatchewan that constitute a pre-build for the Alaska Pipeline Project, and to expand these facilities five times, the latest of
which was in 1998. Continued development of the Alaska Pipeline Project under the NPA is expected to ensure the earliest in-service date for the project.

PIPELINES  BUSINESS RISKS

Supply, Markets and Competition

TransCanada faces competition at both the supply and market ends of its systems. This competition comes from other natural gas pipelines accessing the increasingly mature WCSB
and markets served by TransCanada's pipelines. In addition, the continued expiration of long-term firm transportation (FT) contracts has resulted in significant reductions in
long-term firm contracted capacity and shifts to short-term firm contracts on the Canadian Mainline, the Alberta System, Foothills and the GTN System.

TransCanada's
primary source of natural gas supply is the WCSB. As of December 2006, the WCSB had remaining discovered natural gas reserves of approximately
57 trillion cubic feet and a reserves-to-production ratio of approximately nine years at current levels of production. Historically, sufficient additional
reserves have been discovered on an ongoing basis to maintain the reserves-to-production ratio at close to nine years. However, gas supply is expected to decline due to a
continued reduction in levels of drilling activity in the WCSB. The reduced drilling activity is a result of lower prices, higher supply costs, which include higher royalties, and the stronger
Canadian dollar. TransCanada anticipates there will be excess natural gas pipeline capacity out of the WCSB in the foreseeable future as a result of capacity expansion on its wholly owned and
partially owned natural gas pipelines over the past decade, competition from other pipelines, and significant growth in natural gas demand in Alberta driven by oilsands and electricity generation
requirements.

TransCanada's
Alberta System is the major natural gas gathering and transportation system for the WCSB, connecting most of the natural gas processing plants in Alberta to
domestic and export markets. Despite reduced overall drilling levels, activity remains robust in certain areas of the WCSB, which has resulted in the need for new transmission infrastructure. The
primary areas of high activity have been deeper conventional drilling in western Alberta and in the foothills region of B.C., and coalbed methane development in central Alberta. The Alberta System has
faced, and will continue to face, increasing competition from other natural gas pipelines. An emerging competitive issue for the Alberta System is the existence and access to natural gas liquids (NGL)
contained in the natural gas transported by the pipeline system. In 2007, the EUB began a proceeding in relation to NGL extraction matters. The outcome of this proceeding may affect the way in which
regulated natural gas pipelines compete within Alberta.

Historically,
TransCanada's eastern natural gas pipeline system has been supplied by long-haul flows from the WCSB and by short-haul volumes received from
storage fields and interconnecting pipelines in southwestern Ontario. Over the last few years, the Canadian Mainline has experienced reductions in long-haul flows, which have been
partially offset by

MANAGEMENT'S DISCUSSION AND
ANALYSIS25

---



increases
in short-haul volumes. This reflects the combined impact of new U.S. Midwest-to-Ontario pipeline capacity and lower supply available for export
from the WCSB region.

Demand
for natural gas in TransCanada's key eastern markets, which are served by the Canadian Mainline, is expected to continue to increase, particularly to meet the
expected growth in natural gas-fired power generation. Although there are opportunities to increase market share in Canadian and U.S. export markets, TransCanada faces significant
competition in these regions. Consumers in the northeastern U.S. generally have access to an array of natural gas pipeline and supply options. Eastern markets that historically received
Canadian supplies only from TransCanada are now capable of receiving supplies from new natural gas pipelines that can source U.S. and Western and Atlantic Canadian supplies.

ANR's
primary natural gas supply is sourced from the Gulf of Mexico and mid-continent U.S. regions, which are served by competing natural gas pipelines.
ANR also has competition from other natural gas pipelines in its primary markets in the U.S. Midwest. The Gulf of Mexico region is extremely competitive given its extensive natural gas pipeline
network. ANR is one of many interstate and intrastate pipelines in the region competing for new and existing production as well as for new supplies from LNG, from shale production in the
mid-continent, and from the Rockies Express natural gas pipeline originating in the Rocky Mountain region. Several new natural gas pipelines are proposed or under construction to connect
new supplies to the numerous pipelines in the Gulf of Mexico region. ANR competes with other natural gas pipelines in the region to attract supply to its pipeline for alternative markets and storage.
The most recent changes in ANR's market region are the FERC-approved expansions of two competing pipelines, which will provide approximately 500 mmcf/d of incremental capacity into the
Wisconsin market and approximately 200 mmcf/d of incremental capacity into the market extending from Chicago, Illinois, to Dawn, Ontario. The expanded transportation capacity competes directly
with alternatives provided by ANR and Great Lakes, while incremental storage connections provide competitive alternatives to ANR's storage in Michigan.

The
GTN System must compete with other pipelines to access natural gas supplies and markets. Transportation service capacity on the GTN System provides customers in the U.S.
Pacific Northwest, California and Nevada with access to supplies of natural gas primarily from the WCSB. These three markets may also access supplies from other basins. In the Pacific Northwest
market, natural gas transported on the GTN System competes with the Rocky Mountain natural gas supply and with additional western Canadian supply transported by other natural gas pipelines.
Historically, natural gas supplies from the WCSB have been competitively priced in relation to supplies from the other regions serving these markets. The GTN System experienced significant contract
non-renewals in 2005 and 2006 as natural gas transported from the WCSB on the GTN System competed for the California and Nevada markets against supplies from the Rocky Mountain and
southwestern U.S. supply basins. Recently, Pacific Gas and Electric Company, the GTN System's largest customer, filed an application with the California Public Utilities Commission (CPUC)
requesting approval to commit to capacity on a proposed project out of the Rocky Mountain basin to the California border. This project has not yet been filed with the FERC and TransCanada is
protesting the application filed with the CPUC.

Regulatory Financial Risk

Regulatory decisions continue to have a significant impact on the financial returns from existing investments in TransCanada's Canadian wholly owned pipelines and are expected
to have a similarly significant impact on financial returns from future investments. TransCanada remains concerned that financial returns approved by regulators could potentially fail to be
competitive with returns from assets with similar risk profiles. In recent years, TransCanada applied to the NEB and the EUB for an ROE of 11 per cent on 40 per cent deemed
common equity for both the Canadian Mainline and the Alberta System, respectively. The NEB has reaffirmed its ROE formula and the EUB has established a generic ROE, which largely aligns with the NEB
formula. Through rate applications and negotiated settlements, TransCanada has been able to improve the common equity components of its Canadian Mainline and Alberta System capital structures to the
current 40 per cent and 35 per cent respectively.

TQM
filed an application with the NEB in December 2007 requesting a fair return on capital, consisting of an ROE of 11 per cent on 40 per cent
deemed common equity. The outcome of this proceeding may influence the regulators' view of fair financial returns on equity associated with TransCanada's other Canadian wholly owned pipelines.

26MANAGEMENT'S
DISCUSSION AND ANALYSIS

---



Throughput Risk

As transportation contracts expire, TransCanada's U.S. natural gas pipelines are expected to be more exposed to the risk of reduced throughput and their revenues more
likely to experience increased variability. Throughput risk is created by supply and market competition, gas basin pricing, economic activity, weather variability, natural gas pipeline competition and
pricing of alternative fuels.

Execution and Capital Cost Risk

The construction of Keystone is subject to execution and capital cost risks, which is subject to a capital cost risk- and reward-sharing mechanism with its customers.

Refer
to the "Risk Management and Financial Instruments" section of this MD&A for information on managing risks in the Pipelines business.

PIPELINES  OUTLOOK

Demand for natural gas and crude oil is expected to continue to grow across North America in 2008. TransCanada's Pipelines business will continue to focus on the delivery of
natural gas to growing markets, connecting new supply, progressing development of new infrastructure to connect natural gas from the north and unconventional supplies such as coalbed methane and LNG,
and development of the Keystone oil pipeline.

TransCanada
expects producers will continue to explore and develop new fields in Western Canada, particularly in northeastern B.C. and the west central foothills
regions of Alberta. There is also expected to be significant activity aimed at unconventional resources such as coalbed methane, which will be further incented starting in 2009 due to the new royalty
structure in Alberta benefiting lower productivity wells.

Most
of TransCanada's current expansion plans in Canadian natural gas transmission are focused on the Alberta System. New facilities are expected to be needed to
expand the integrated Alberta System to reflect changes in the distribution of supply and market within Alberta, connect new discrete supply sources, as well as new delivery points, primarily in the
Alberta oilsands region and the central Alberta industrial heartland.

In
the U.S., TransCanada expects unconventional production will continue to be developed from the coalbed methane and tight gas sands of the Rocky Mountain region, as well
as from shale plays in east Texas, southwestern Oklahoma and Arkansas. In addition, incremental supplies are anticipated from LNG imports into the U.S. Significant infrastructure is being built
in the U.S. to accommodate these supply sources. The resulting growth in supply from LNG and the unconventional supply sources is likely to offer additional commercial opportunities for
TransCanada. In particular, the southwest leg of ANR is expected to continue to remain fully subscribed for the foreseeable future, and new transport routes are being developed to move additional
Rocky Mountain production to midwestern and eastern U.S. markets, including interconnections with ANR. The southeast leg of ANR has the capacity to transport additional volumes of LNG and
mid-continent shale production as these supplies develop.

Producers
continue to develop new oil supply in the WCSB. In 2008, there are several new oilsands projects that will begin production, along with growth at existing
projects. Oilsands production is expected to grow from 1.2 million Bbl/d in 2007 to 3.0 million Bbl/d in 2015, while total WCSB oil supply is projected to grow from 2.5 million
Bbl/d to 3.9 million Bbl/d over the same period. The primary market for this new oilsands production is the U.S., extending from the U.S. Midwest to the Gulf of Mexico region, which contains a
number of very large refineries, well equipped to handle Canadian heavy crude oil blends. WCSB crude oil is expected to replace declining U.S. imports of heavy crude oil from other countries.

This
increase in WCSB crude oil exports requires new pipeline capacity, including Keystone, and further expansions to the Gulf of Mexico. TransCanada will continue to pursue
additional opportunities to move crude oil from the Alberta oilsands to U.S. markets.

MANAGEMENT'S DISCUSSION AND
ANALYSIS27

---



TransCanada
will continue to focus on operational excellence and on collaborative efforts with all stakeholders to achieve negotiated settlements and service options that
will increase the value of the Company's business to customers and shareholders.

Earnings

The Company expects continued growth on its Alberta System. The Company anticipates a modest level of investment in its other existing Canadian natural gas pipelines, resulting
in an expected continued net decline in the average investment base due to annual depreciation. A net decline in the average investment base has the effect of reducing
year-over-year earnings from these assets. However, this impact will be partially mitigated in 2008 by a slight increase in the formula-based regulated ROEs. Additionally, a
settlement resulting from the current negotiations on the Alberta System may provide the opportunity for additional earnings contribution in 2008. Under the current regulatory model, earnings from
Canadian pipelines are not affected by short-term fluctuations in the commodity price of natural gas, changes in throughput volumes or changes in contract levels.

Reduced
FT contract volumes due to customer defaults, reduced supply available for export from the WCSB and expiry of long-term contracts could have a negative
impact on short-term earnings from TransCanada's U.S. natural gas pipelines, unless the available capacity can be recontracted. The ability to recontract available capacity is
influenced by prevailing market conditions and competitive factors including competing natural gas pipelines and supply from other natural gas sources in markets served by TransCanada's
U.S. pipelines. Earnings from Pipelines' foreign operations are impacted by changes in foreign currency exchange rates. Pipelines' earnings in 2008 are expected to be positively impacted by a
full year of operations from ANR and the additional interests in Great Lakes.

Certain
subsidiaries of Calpine filed for bankruptcy protection in both Canada and the U.S. in 2005. Portland and GTNC have reached agreements with Calpine for allowed
unsecured claims of US$125 million and US$192.5 million, respectively, in the Calpine bankruptcy. Creditors will receive shares in the re-organized Calpine and these shares
will be subject to market price fluctuations as the new Calpine shares begin to trade. In February 2008, Portland and GTNC received initial distributions of 6.1 million shares and
9.4 million shares, respectively, which are expected to result in a significant increase in TransCanada's net earnings in first-quarter 2008.

Claims
by NOVA Gas Transmission Limited and Foothills Pipe Lines (South B.C.) Ltd. for $31.6 million and $44.4 million,
respectively, were received in cash in January 2008 and will be passed on to shippers on these systems.

Capital Expenditures

Excluding the cost of acquiring ANR and additional interests in Great Lakes, total capital spending for the wholly owned pipelines in 2007 was $487 million. Capital spending
for the wholly owned pipelines in 2008 is expected to be approximately $1.0 billion. In addition, capital spending for TransCanada's 50 per cent share of constructing the Keystone
pipeline is expected to be approximately $800 million.

28MANAGEMENT'S
DISCUSSION AND ANALYSIS

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---

NATURAL GAS THROUGHPUT VOLUMES(Bcf)

|                     |  | 2007  |  | 2006  |  | 2005 
|-------------------- |  | ----- |  | ----- |  | -----
|                    
|Canadian Mainline(1) |  | 3,183 |  | 2,955 |  | 2,997
|Alberta System(2)    |  | 4,015 |  | 4,051 |  | 3,999
|ANR(3)               |  | 1,210 |  |       |  |      
|GTN System           |  | 827   |  | 790   |  | 777  
|Foothills(4)         |  | 1,441 |  | 1,403 |  | 1,372
|North Baja           |  | 90    |  | 95    |  | 84   
|Great Lakes          |  | 829   |  | 816   |  | 850  
|Northern Border      |  | 800   |  | 799   |  | 808  
|Iroquois             |  | 394   |  | 384   |  | 394  
|TQM                  |  | 207   |  | 158   |  | 166  
|Ventures LP          |  | 178   |  | 179   |  | 138  
|Gas Pacifico         |  | 71    |  | 52    |  | 34   
|Portland             |  | 58    |  | 52    |  | 62   
|Tamazunchale(5)      |  | 29    |  |      |  |      
|Tuscarora            |  | 28    |  | 28    |  | 25   
|TransGas             |  | 24    |  | 22    |  | 19   

MANAGEMENT'S DISCUSSION AND
ANALYSIS29

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GRAPHIC

BEAR CREEKAn 80-MW natural gas-fired cogeneration plant, Bear Creek is located near Grande Prairie, Alberta.

MACKAY RIVERA 165-MW natural gas-fired cogeneration plant, MacKay River is located near Fort McMurray, Alberta.

REDWATERA 40-MW natural gas-fired cogeneration plant, Redwater is located near Redwater, Alberta.

SUNDANCE A&BThe largest coal-fired electric power generating facility in Western Canada, Sundance is located in south-central
Alberta. TransCanada has the rights to 100 per cent of the generating capacity of the 560-MW Sundance A facility under a power purchase arrangement (PPA), which expires in
2017. TransCanada also has the rights to 50 per cent of the generating capacity of the 706-MW Sundance B facility under a PPA, which expires in 2020.

SHEERNESSConsisting of two 390-MW coal-fired thermal power generating units, the Sheerness plant is located in
southeastern Alberta. TransCanada has the rights to 756 MW of generating capacity from the Sheerness PPA, which expires in 2020.

30MANAGEMENT'S
DISCUSSION AND ANALYSIS

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CARSELANDAn 80-MW natural gas-fired cogeneration plant, Carseland is located near Carseland, Alberta.

CANCARBA 27-MW facility fuelled by waste heat from TransCanada's adjacent thermal carbon black facility, Cancarb is
located in Medicine Hat, Alberta.

BRUCE POWERConsisting of two generating stations, Bruce A with approximately 3,000 MW of generating capacity and
Bruce B with approximately 3,200 MW of generating capacity, Bruce Power is located in Ontario. TransCanada owns 48.7 per cent of Bruce A, which has four power
generating units, two of which have been idled for refurbishing and are expected to restart in 2010. TransCanada owns 31.6 per cent of Bruce B, which also has four power
generating units.

HALTON HILLSA 683-MW natural gas-fired power plant, Halton Hills is under construction near the town of Halton
Hills, Ontario, and is expected to be in service in third-quarter 2010.

PORTLANDS ENERGYA 550-MW high-efficiency, combined-cycle natural gas generation power plant, Portlands Energy is
under construction near downtown Toronto, Ontario. The plant is 50 per cent owned by TransCanada and is expected to be operational in simple-cycle mode, delivering 340 MW of electricity to the
City of Toronto, beginning in June 2008. It is expected to be fully commissioned in its combined-cycle mode, delivering 550 MW of power, in second-quarter 2009.

BÉCANCOURA 550-MW natural gas-fired cogeneration power plant, Bécancour is located
near Trois-Rivières, Québec. The entire power output is supplied to Hydro-Québec under a 20-year power purchase contract. Steam is also sold to
an industrial customer for use in commercial processes.

CARTIER WINDThe 740-MW Cartier wind farm project consists of six wind power projects located in Québec. Cartier
Wind is 62 per cent owned by TransCanada. Baie-des-Sables, with a generation capacity of 110 MW, and Anse-á-Valleau, with a generation
capacity of 101 MW, were placed into service in November 2006 and November 2007, respectively. Construction of a third project, the 110-MW Carleton wind farm, began in
late 2007. Planning and construction of the remaining three projects will continue, subject to future approvals.

GRANDVIEWA 90-MW natural gas-fired cogeneration power plant, Grandview is located in Saint John,
New Brunswick. Irving Oil Limited receives 100 per cent of the plant's heat and electricity output under a 20-year tolling agreement.

KIBBY WINDA 132-MW wind power project, the proposed Kibby Wind includes 44 turbines located in Kibby and Skinner
Townships in northwestern Franklin County, Maine. Subject to U.S. federal and state approvals, construction could begin in early 2008 and the new facilities could go into service in
20092010.

TC HYDROWith a total generating capacity of 583 MW, TC Hydro comprises 13 hydroelectric facilities, including
stations and associated dams and reservoirs, on the Connecticut and Deerfield rivers in New Hampshire, Vermont and Massachusetts.

OSPA 560-MW natural gas-fired, combined-cycle facility, OSP is located in Rhode Island.

EDSONAn underground natural gas storage facility, Edson is connected to the Alberta System near Edson, Alberta. The facility's central
processing system is capable of maximum injection and withdrawal rates of 725 mmcf/d of natural gas. Edson has a working natural gas storage capacity of approximately 50 Bcf.

CROSSALTAAn underground natural gas storage facility, CrossAlta is connected to the Alberta System and is located near Crossfield,
Alberta. TransCanada owns 60 per cent of CrossAlta, which has a working natural gas capacity of 54 Bcf with a maximum deliverability capability of 480 mmcf/d.

CACOUNAA proposed LNG project at Gros Cacouna Harbour on the St. Lawrence River in Québec, Cacouna would be capable
of receiving, storing and regasifying imported LNG with an average send-out capacity of approximately 500 mmcf/d of natural gas. TransCanada has a 50 per cent ownership interest
in Cacouna.

BROADWATERA proposed offshore LNG project located in the New York waters of Long Island Sound, Broadwater would be capable of
receiving, storing and regasifying imported LNG with an average send-out capacity of approximately 1 Bcf/d of natural gas. TransCanada has a 50 per cent ownership interest
in Broadwater.

MANAGEMENT'S DISCUSSION AND
ANALYSIS31

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ENERGY  HIGHLIGHTS

Net Earnings

Expanding Asset Base

Plant Availability

---

ENERGY RESULTS-AT-A-GLANCEYear ended December 31(millions of dollars)

|                                                 |  | 2007 |   | 2006 |   | 2005 |  
|------------------------------------------------ |  | ---- | - | ---- | - | ---- | -
|                                                 | 
|Western Power                                    |  | 308  |   | 297  |   | 123  |  
|Eastern Power                                    |  | 255  |   | 187  |   | 137  |  
|Bruce Power                                      |  | 167  |   | 235  |   | 195  |  
|Natural Gas Storage                              |  | 146  |   | 93   |   | 32   |  
|Power LP Investment                              |  |     |   |     |   | 29   |  
|General, administrative, support costs and other |  | (158 | ) | (144 | ) | (129 | )
|                                                 | 
|Operating income                                 |  | 718  |   | 668  |   | 387  |  
|Financial charges                                |  | (22  | ) | (23  | ) | (11  | )
|Interest income and other                        |  | 10   |   | 5    |   | 5    |  
|Income taxes                                     |  | (240 | ) | (221 | ) | (123 | )
|                                                 | 
|Comparable earnings(1)                           |  | 466  |   | 429  |   | 258  |  
|Income tax adjustments                           |  | 34   |   | 23   |   |     |  
|Gain on sale of land                             |  | 14   |   |     |   |     |  
|Gain on sale of Paiton Energy                    |  |     |   |     |   | 193  |  
|Gain on sale of Power LP units                   |  |     |   |     |   | 115  |  
|                                                 | 
|Net earnings                                     |  | 514  |   | 452  |   | 566  |  
|                                                 | 

32MANAGEMENT'S
DISCUSSION AND ANALYSIS

---



|GRAPHIC                                                                                                                                                                                                                                                                                                                               |  | Energy's net earnings in 2007 were $514 million compared to $452 million in 2006. Comparable earnings were $466 million in 2007, an increase of $37 million from 2006. Comparable earnings exclude the $14-million gain on sale of
land and the $34-million favourable income tax adjustments in 2007 as well as the $23-million favourable impact in 2006 from future income taxes as a result of reductions in Canadian federal and provincial corporate income tax rates. The increase was
due primarily to higher operating income in Eastern Power, Natural Gas Storage and Western Power, partially offset by a reduced contribution from Bruce Power.
Energy's net earnings in 2006 were $452 million compared to $566 million in 2005. The decrease was due primarily to the inclusion in 2005 net
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|earnings of gains related to the disposal of TransCanada's investments in Paiton Energy and Power LP. In 2005, TransCanada sold its interest of approximately 11 per cent in Paiton Energy
resulting in an after-tax gain of $115 million and sold its ownership interest in Power LP resulting in an after-tax gain of $193 million.

Energy's comparable earnings, which exclude the $23-million favourable impact on future income taxes in 2006 and the
Power LP and Paiton Energy gains in 2005, were $429 million in 2006, an increase of $171 million from $258 million in 2005. The increase was due primarily to higher
contributions from each of Energy's existing businesses, including a full year of earnings from TC Hydro, partially offset by the loss of operating income associated with the sale of the
Power LP interest in 2005.

---

POWER PLANTS  NOMINAL GENERATING CAPACITY AND FUEL TYPE

|                                  |                     | MW    |     | Fuel Type
|--------------------------------- | ------------------- | ----- | --- | ---------
|                                 
|Western Power                     |                     |       |     |          
|                                  | Sheerness(1)        |       | 756 |          
|                                  | Sundance A(2)       |       | 560 |          
|                                  | Sundance B(2)       |       | 353 |          
|                                  | MacKay River        |       | 165 |          
|                                  | Carseland           |       | 80  |          
|                                  | Bear Creek          |       | 80  |          
|                                  | Redwater            |       | 40  |          
|                                  | Cancarb             |       | 27  |          
|                                 
|                                  |                     | 2,061 |     |          
|                                 
|Eastern Power                     |                     |       |     |          
|                                  | Halton Hills(3)     |       | 683 |          
|                                  | TC Hydro(4)         |       | 583 |          
|                                  | OSP                 |       | 560 |          
|                                  | Bécancour(5)        |       | 550 |          
|                                  | Cartier Wind(6)     |       | 458 |          
|                                  | Portlands Energy(7) |       | 275 |          
|                                  | Grandview(8)        |       | 90  |          
|                                 
|                                  |                     | 3,199 |     |          
|                                 
|Bruce Power(9)                    |                     | 2,474 |     | Nuclear  
|                                 
|Total nominal generating capacity |                     | 7,734 |     |          
|                                 

MANAGEMENT'S DISCUSSION AND
ANALYSIS33

---



ENERGY  FINANCIAL ANALYSIS

Western Power

As at December 31, 2007, Western Power owns or has the rights to approximately 2,100 MW of power supply in Alberta from its three long-term PPAs and
five natural gas-fired cogeneration facilities. The power supply portfolio of Western Power comprises approximately 1,700 MW of low-cost, base-load
coal-fired generation supply through the three long-term PPAs and approximately 400 MW of natural gas-fired cogeneration assets. This supply portfolio is
among the lowest-cost, most competitive generation in the Alberta market area. On December 31, 2005, $585 million was paid to the Alberta Balancing Pool for the remaining
rights of the Sheerness PPA, which has a remaining term of approximately 13 years. The Sundance A and B PPAs have remaining terms of 10 years and 13 years, respectively.

Western
Power relies on its two integrated functions, marketing and plant operations, to generate earnings. The marketing function, based in Calgary, Alberta, purchases and
resells electricity sourced from the PPAs, markets uncommitted volumes from the cogeneration facilities, and purchases and resells power and gas to maximize the value of the cogeneration facilities.
The marketing function is integral to optimizing Energy's return from its portfolio of power supply and to managing risks associated with uncontracted volumes. A portion of its power is sold into the
spot market for operational reasons and the amount of supply volumes eventually sold into the spot market is dependent upon the ability to transact in forward sales markets at acceptable contract
terms. This approach to portfolio management helps to minimize costs in situations where TransCanada would otherwise have to purchase electricity in the open market to fulfil its contractual sales
obligations. To reduce its exposure to spot market prices on uncontracted volumes, Western Power had, as at December 31, 2007, fixed-price power sales contracts to sell approximately
9,200 gigawatt hours (GWh) in 2008 and 6,800 GWh in 2009.

Plant
operations consist of five natural gas-fired cogeneration power plants located in Alberta with an approximate combined output capacity of 400 MW
ranging from 27 MW to 165 MW per facility. A portion of the expected output is sold under long-term contracts and the remaining output is subject to fluctuations in the price
of power and gas. Market heat rate is an economic measure for natural gas-fired power plants and is determined by dividing the average price of power per megawatt hour (MWh) by the average
price of natural gas per gigajoule (GJ) for a given period. To the extent power is not sold under long-term contracts and plant fuel gas has not been purchased under long-term
contracts, the profitability of a natural gas-fired generating facility rises in proportion to increases in the market heat rate, and, conversely, declines in proportion to decreases in
the market heat rate. Market heat rates in Alberta decreased in 2007 by approximately 16 per cent as a result of a decrease in average power prices, while spot market natural gas prices
remained relatively unchanged. Market heat rates averaged approximately 11.4 GJ/MWh in 2007 compared to approximately 13.5 GJ/MWh in 2006.

34MANAGEMENT'S
DISCUSSION AND ANALYSIS

---



All
plants in Western Power operated with an average plant availability of approximately 90 per cent in 2007 compared to 88 per cent
in 2006.

---

Western Power Results-at-a-GlanceYear ended December 31(millions of dollars)

|                                | 2007     |       | 2006  |       | 2005 |     
|------------------------------- | -------- | ----- | ----- | ----- | ---- | ----
|                                |         
|Revenues                        |          |       |       |       |      |     
|                                | Power    | 1,045 |       | 1,185 |      | 715 
|                                | Other(1) | 89    |       | 169   |      | 158 
|                                |         
|                                | 1,134    |       | 1,354 |       | 873  |     
|                                |         
|Commodity purchases resold      |          |       |       |       |      |     
|                                | Power    | (608  | )     | (767  | )    | (476
|                                | Other(2) | (65   | )     | (135  | )    | (104
|                                |         
|                                | (673     | )     | (902  | )     | (580 | )   
|                                |         
|Plant operating costs and other | (135     | )     | (135  | )     | (149 | )   
|Depreciation                    | (18      | )     | (20   | )     | (21  | )   
|                                |         
|Operating income                | 308      |       | 297   |       | 123  |     
|                                |         

---

Western Power Sales VolumesYear ended December 31(GWh)

|                    |            | 2007                              |        | 2006   |        | 2005  
|------------------- | ---------- | --------------------------------- | ------ | ------ | ------ | ------
|                   
|Supply              |            |                                   |        |        |        |       
|                    | Generation |                                   | 2,154  |        | 2,259  |       
|                    | Purchased  |                                   |        |        |        |       
|                    |            | Sundance A & B and Sheerness PPAs |        | 12,199 |        | 12,712
|                    |            | Other purchases                   |        | 1,433  |        | 1,905 
|                   
|                    |            | 15,786                            |        | 16,876 |        | 11,906
|                   
|Contracted vs. Spot |            |                                   |        |        |        |       
|                    | Contracted |                                   | 11,998 |        | 12,750 |       
|                    | Spot       |                                   | 3,788  |        | 4,126  |       
|                   
|                    |            | 15,786                            |        | 16,876 |        | 11,906
|                   

Operating income was $308 million in 2007, an increase of $11 million from $297 million in 2006. The increase
was due primarily to lower PPA costs, partially offset by slightly lower overall realized power prices. Revenues decreased in 2007 compared to 2006 due mainly to the lower overall power sales prices
realized in 2007 as well as lower volumes purchased and generated. Commodity purchases resold decreased in 2007 compared to 2006 due primarily to lower PPA costs, a decrease in volumes purchased and
the expiry of certain retail contracts. Purchased power volumes in 2007 decreased compared to 2006 mainly as a result of an increase in outage hours at the Sundance A facility and the expiry

MANAGEMENT'S DISCUSSION AND
ANALYSIS35

---



of
certain retail contracts. Approximately 24 per cent of power sales volumes were sold in to the spot market in 2007, which was consistent with 2006.

Operating
income was $297 million in 2006, an increase of $174 million from $123 million in 2005. The increase was due primarily to incremental earnings
from the acquisition of the Sheerness PPA on December 31, 2005, and increased margins from a combination of higher overall realized power prices and higher market heat rates on uncontracted
volumes of power sold. Revenues and commodity purchases resold increased in 2006 compared to 2005 due mainly to the acquisition of the Sheerness PPA as well as higher realized power prices. Plant
operating costs and other, which includes fuel gas consumed in power generation, decreased due to lower natural gas prices. Purchased power volumes in 2006 increased compared to 2005 due primarily to
the acquisition of the Sheerness PPA. Approximately 24 per cent of power sales volumes were sold into the spot market in 2006 compared to 13 per cent in 2005.

Eastern Power

Eastern Power owns approximately 3,200 MW of power generation capacity, including facilities under construction or in the development phase. Eastern Power's current
operating power generation assets are TC Hydro, Ocean State Power (OSP), Bécancour and Grandview, and the Baie-des-Sables and
Anse-á-Valleau wind farms. The TC Hydro assets include 13 hydroelectric stations housing 39 hydroelectric generating units in New Hampshire,
Vermont and Massachusetts.

Eastern
Power conducts its business primarily in the deregulated New England power market and in Eastern Canada. In the New England market, TransCanada has
established a successful marketing operation through its wholly owned subsidiary, TransCanada Power Marketing Ltd. (TCPM), located in Westborough, Massachusetts. To reduce exposure to spot
market prices on uncontracted volumes, Eastern Power had, as at December 31, 2007, fixed price sales contracts to sell forward approximately 8,200 GWh in 2008 and 9,900 GWh in
2009. Fixed price sales contracts in 2008 exclude approximately 4,200 GWh of generation from the Bécancour power plant as a result of the request from Hydro-Québec
to suspend electricity generation, beginning January 1, 2008.

TCPM
focuses on selling power under short- and long-term contracts to wholesale, commercial and industrial customers while managing a portfolio of power supplies
sourced from both its own generation and wholesale power purchases. In 2007, TCPM continued to expand its marketing presence and customer base.

In
June 2006, the FERC approved a settlement agreement to implement a newly-designed Forward Capacity Market (FCM) for power generation in the New England
power markets. The FCM design is intended to promote investment in new and existing power resources needed to meet growing consumer demand and maintain a reliable power system. The settlement
agreement provides for a multi-year transition period beginning in December 2006 and ending in May 2010, whereby fixed payments ranging from US$3.05 to US$4.10 per kilowatt-
month, will be made to owners of existing installed capacity. Eastern Power's OSP plant and TC Hydro generation facilities are eligible to receive payments during the transition period. Under the new
FCM design, Independent System Operator New England will project the needs of the power system three years in advance, following which it will hold an annual auction to purchase power resources
to satisfy a region's future needs. Suppliers will receive payments pursuant to the FCM auction mechanism commencing June 1, 2010.

36MANAGEMENT'S
DISCUSSION AND ANALYSIS

---



---

Eastern Power Results-at-a-Glance(1)
Year ended December 31(millions of dollars)

|                                |          | 2007  |       | 2006  |      | 2005 |     
|------------------------------- | -------- | ----- | ----- | ----- | ---- | ---- | ----
|                                |         
|Revenues                        |          |       |       |       |      |      |     
|                                | Power    |       | 1,481 |       | 789  |      | 505 
|                                | Other(2) |       | 239   |       | 292  |      | 412 
|                                |         
|                                |          | 1,720 |       | 1,081 |      | 917  |     
|                                |         
|Commodity purchases resold      |          |       |       |       |      |      |     
|                                | Power    |       | (755  | )     | (379 | )    | (215
|                                | Other(2) |       | (208  | )     | (257 | )    | (373
|                                |         
|                                |          | (963  | )     | (636  | )    | (588 | )   
|                                |         
|Plant operating costs and other |          | (454  | )     | (226  | )    | (167 | )   
|Depreciation                    |          | (48   | )     | (32   | )    | (25  | )   
|                                |         
|Operating income                |          | 255   |       | 187   |      | 137  |     
|                                |         

---

Eastern Power Sales Volumes(1)
Year ended December 31(GWh)

|                    |            | 2007   |        | 2006  |       | 2005 
|------------------- | ---------- | ------ | ------ | ----- | ----- | -----
|                   
|Supply              |            |        |        |       |       |      
|                    | Generation |        | 8,095  |       | 4,700 |      
|                    | Purchased  |        | 6,986  |       | 3,091 |      
|                   
|                    |            | 15,081 |        | 7,791 |       | 5,506
|                   
|Contracted vs. Spot |            |        |        |       |       |      
|                    | Contracted |        | 14,505 |       | 7,374 |      
|                    | Spot       |        | 576    |       | 417   |      
|                   
|                    |            | 15,081 |        | 7,791 |       | 5,506
|                   

Operating income was $255 million in 2007, $68 million higher than the $187 million earned in 2006. The increase
was due primarily to incremental income from the first full year of operation of the Bécancour facility and the Baie-des-Sables wind farm, and from the
start-up of the Anse-à-Valleau wind farm in November 2007. Also contributing to the increase were payments received under the
start-up of the FCM in New England and higher sales volumes to commercial and industrial customers in 2007. Partially offsetting these increases was the impact of reduced water
flows from the TC Hydro generation assets in 2007, compared to the above-average water flows experienced in 2006 following higher precipitation in the surrounding area.

Eastern
Power's revenues from power were $1,481 million in 2007, an increase of $692 million from $789 million in 2006. The substantial growth was
driven primarily by the first full year of revenue from the Bécancour facility and the

MANAGEMENT'S DISCUSSION AND
ANALYSIS37

---



Baie-des-Sables
wind farm, which went into service in September and November 2006, respectively, as well as by increased sales volumes to commercial and industrial
customers, and higher realized prices. Other revenue and other commodity purchases resold decreased year-over-year as a result of a reduction in the quantity of natural gas
purchased and resold under OSP's natural gas supply contracts. Power commodity purchases resold and purchased power volumes were higher in 2007 due to the impact of increased purchases to supply
higher sales volumes to wholesale, commercial and industrial customers. The increase in purchased power volumes was partially offset by additional power generation from the OSP plant, which
reduced the requirement to purchase power to fulfill contractual sales obligations. Plant operating costs and other, which includes fuel gas consumed in generation, were higher in 2007 due primarily
to the full year of operations of the Bécancour facility and increased power generation from the OSP plant.

Operating
income was $187 million in 2006, an increase of $50 million from $137 million earned in 2005. The increase was due mainly to incremental
income from the full year of ownership of the TC Hydro assets, the start-up of the Bécancour facility, a $10-million after-tax one-time
restructuring payment in first-quarter 2005 from OSP to its natural gas fuel suppliers, and higher overall margins on power sales volumes in 2006.

Bruce Power

In 2005, Bruce Power and the Ontario Power Authority (OPA) completed a long-term agreement whereby Bruce A committed to refurbish and restart the currently
idle Units 1 and 2, extend the operating life of Unit 3 by replacing its steam generators and fuel channels when required, and replace the steam generators on Unit 4. An
amendment to this agreement in 2007 is described further in the "Energy  Opportunities and Developments" section of this MD&A. As a result of an agreement
between Bruce Power and the OPA, and Cameco Corporation's (Cameco) decision not to participate in the refurbishment and restart program, the Bruce A partnership was formed by TransCanada and
BPC Generation Infrastructure Trust (BPC), with each owning a 48.7 per cent interest in Bruce A at December 31, 2007
(2006  48.7 per cent; 2005  47.9 per cent). TransCanada and BPC each incurred a net cash
outlay of approximately $100 million in 2005 to acquire Cameco's interest. The remaining 2.6 per cent interest in Bruce A is owned by BPC, a trust established by the
Ontario Municipal Employees Retirement System, the Power Worker's Union and The Society of Energy Professionals. The Bruce A partnership subleases Bruce A Units 1 to 4 from
Bruce B. TransCanada continues to own 31.6 per cent of Bruce B, which consists of Units 5 to 8.

Upon
reorganization, both Bruce A and Bruce B became jointly controlled entities and TransCanada proportionately consolidated these investments on a prospective basis from
October 31, 2005. The following Bruce Power financial results reflect the operations of six of the eight Bruce Power units in all periods.

38MANAGEMENT'S
DISCUSSION AND ANALYSIS

---



---

Bruce Power Results-at-a-GlanceYear ended December 31(millions of dollars)

|                                                   | 2007                                             |                                              | 2006   |        | 2005   |       
|-------------------------------------------------- | ------------------------------------------------ | -------------------------------------------- | ------ | ------ | ------ | ------
|                                                   |                                                 
|Bruce Power (100 per cent basis)                   |                                                  |                                              |        |        |        |       
|                                                   | Revenues                                         |                                              |        |        |        |       
|                                                   |                                                  | Power                                        | 1,920  |        | 1,861  |       
|                                                   |                                                  | Other(1)                                     | 113    |        | 71     |       
|                                                   |                                                 
|                                                   | 2,033                                            |                                              | 1,932  |        | 1,942  |       
|                                                   |                                                 
|                                                   | Operating expenses                               |                                              |        |        |        |       
|                                                   |                                                  | Operations and maintenance(2)                | (1,051 | )      | (912   | )     
|                                                   |                                                  | Fuel                                         | (104   | )      | (96    | )     
|                                                   |                                                  | Supplemental rent(2)                         | (170   | )      | (170   | )     
|                                                   |                                                  | Depreciation and amortization                | (151   | )      | (134   | )     
|                                                   |                                                 
|                                                   | (1,476                                           | )                                            | (1,312 | )      | (1,310 | )     
|                                                   |                                                 
|                                                   | Revenues, net of operating expenses              | 557                                          |        | 620    |        | 632   
|                                                   |                                                  | Financial charges under equity accounting(3) |       |        |       |       
|                                                   |                                                 
|                                                   | 557                                              |                                              | 620    |        | 574    |       
|                                                   |                                                 
|TransCanada's proportionate share  Bruce A        | 24                                               |                                              | 91     |        | 22     |       
|TransCanada's proportionate share  Bruce B        | 161                                              |                                              | 137    |        | 166    |       
|                                                   |                                                 
|TransCanada's proportionate share                  | 185                                              |                                              | 228    |        | 188    |       
|Adjustments                                        | (18                                              | )                                            | 7      |        | 7      |       
|                                                   |                                                 
|TransCanada's operating income from Bruce Power(3) | 167                                              |                                              | 235    |        | 195    |       
|                                                   |                                                 
|Bruce Power  Other Information                    |                                                  |                                              |        |        |        |       
|Plant availability                                 |                                                  |                                              |        |        |        |       
|                                                   | Bruce A                                          | 78%                                          |        | 81%    |        | 94%   
|                                                   | Bruce B                                          | 89%                                          |        | 91%    |        | 79%   
|                                                   | Combined Bruce Power                             | 86%                                          |        | 88%    |        | 80%   
|Planned outage days                                |                                                  |                                              |        |        |        |       
|                                                   | Bruce A                                          | 121                                          |        | 81     |        | 106   
|                                                   | Bruce B                                          | 93                                           |        | 65     |        | 153   
|Unplanned outage days                              |                                                  |                                              |        |        |        |       
|                                                   | Bruce A                                          | 17                                           |        | 37     |        | 30    
|                                                   | Bruce B                                          | 32                                           |        | 31     |        | 104   
|Sales volumes (GWh)                                |                                                  |                                              |        |        |        |       
|                                                   | Bruce A  100 per cent                           | 10,180                                       |        | 10,650 |        | 2,100 
|                                                   | Bruce A  TransCanada's proportionate share      | 4,959                                        |        | 5,158  |        | 999   
|                                                   | Bruce B  100 per cent                           | 25,290                                       |        | 25,820 |        | 30,800
|                                                   | Bruce B  TransCanada's proportionate share      | 7,992                                        |        | 8,159  |        | 9,733 
|                                                   | Combined Bruce Power  100 per cent              | 35,470                                       |        | 36,470 |        | 32,900
|                                                   | TransCanada's proportionate share                | 12,951                                       |        | 13,317 |        | 10,732
|Results per MWh                                    |                                                  |                                              |        |        |        |       
|                                                   | Bruce A power revenues                           | $59                                          |        | $58    |        | $57   
|                                                   | Bruce B power revenues                           | $52                                          |        | $48    |        | $58   
|                                                   | Combined Bruce Power revenues                    | $55                                          |        | $51    |        | $58   
|                                                   | Combined Bruce Power fuel                        | $3                                           |        | $3     |        | $2    
|                                                   | Combined Bruce Power total operating expenses(4) | $41                                          |        | $35    |        | $40   
|Percentage of output sold to spot market           | 45%                                              |                                              | 35%    |        | 49%    |       

MANAGEMENT'S DISCUSSION AND
ANALYSIS39

---



TransCanada's operating income from its investment in Bruce Power was $167 million in 2007 compared to $235 million in
2006. TransCanada's proportionate share of operating income in Bruce B increased $24 million to $161 million in 2007 compared with 2006 due primarily to higher realized power
prices, partially offset by higher operating costs associated with an increase in planned outage days in 2007. TransCanada's proportionate share of operating income in Bruce A decreased
$67 million to $24 million in 2007 compared with 2006 due primarily to lower output and higher operating costs associated with an increase in planned outage days in 2007. Higher
post-employment benefit costs and lower positive purchase price amortizations related to the expiry of power sales agreements also contributed to the decrease in TransCanada's operating
income from its combined investment in Bruce power in 2007 compared to 2006.

Combined
Bruce Power prices (excluding other revenues) were $55 per MWh in 2007 compared to $51 per MWh in 2006, reflecting higher prices on both contracted volumes and
uncontracted volumes sold into the spot market. Bruce Power's combined operating expenses (net of fuel cost recoveries) increased to $41 per MWh in 2007 from $35 per MWh in 2006 due primarily
to higher operating costs and decreased output in 2007.

The
Bruce units ran at a combined average availability of 86 per cent in 2007, compared to an 88 per cent average availability in 2006. The lower
availability in 2007 was the result of more planned maintenance outage days, partially offset by fewer unplanned outage days in 2007.

TransCanada's
operating income from its combined investment in Bruce Power was $235 million in 2006 compared to $195 million in 2005. The increase of
$40 million was due primarily to an increased ownership interest in the Bruce A facilities and higher sales volumes resulting from increased plant availability, partially offset by lower
overall realized prices.

Adjustments
to TransCanada's combined interest in Bruce Power's income before income taxes were lower in 2007 than in 2006 and 2005 due primarily to lower positive purchase
price amortizations related to the expiry of power sales agreements.

Income
from Bruce B is directly affected by fluctuations in wholesale spot market prices for electricity. Income from both Bruce A and Bruce B is
affected by overall plant availability, which in turn is affected by planned and unplanned maintenance. As a result of a contract with the OPA, all of the output from Bruce A is sold at a fixed
price per MWh, adjusted for inflation annually on April 1, and before recovery of fuel costs from the OPA. Per the 2007 amendment of the contract with the OPA, discussed in the
"Energy  Opportunities and Developments" section, effective April 1, 2008, the fixed price for output from Bruce A will also increase by $2.11 per
MWh, subject to inflation adjustments from October 31, 2005.

|                                  |  | per MWh
|--------------------------------- |  | -------
|                                 
|April 1, 2007  March 31, 2008    |  | $59.69 
|April 1, 2006  March 31, 2007    |  | $58.63 
|October 31, 2005  March 31, 2006 |  | $57.37 

Payments received pursuant to the fixed-price contract are capped at $575 million for the period ending on the
commercial in-service date of the later of the restarted Unit 1 and Unit 2. Post-refurbishment prices will also be adjusted for capital cost variances associated with the
refurbishment and restart projects.

40MANAGEMENT'S
DISCUSSION AND ANALYSIS

---





As part of this contract, sales from the Bruce B Units 5 to 8 are subject to a floor price adjusted annually for inflation on April 1.

|                                  |  | per MWh
|--------------------------------- |  | -------
|                                 
|April 1, 2007  March 31, 2008    |  | $46.82 
|April 1, 2006  March 31, 2007    |  | $45.99 
|October 31, 2005  March 31, 2006 |  | $45.00 

Payments received pursuant to the Bruce B floor price mechanism may be subject to a recapture payment dependent on annual spot
prices over the term of the contract. Bruce B net earnings to date do not include any amounts received pursuant to this floor mechanism. To further reduce its exposure to spot market prices,
Bruce B entered into fixed price sales contracts as at December 31, 2007, to sell forward approximately 10,200 GWh in 2008 and 4,900 GWh in 2009.

The
overall plant availability percentage in 2008 is expected to be in the low 90s for the four Bruce B units and the low 80s for the two operating Bruce A
units. A planned maintenance outage of Bruce B Unit 7 began at the end of January 2008 and the unit is expected to be back in service in March 2008. A planned maintenance
outage of Bruce B Unit 5 is scheduled to begin in early May 2008 and the unit is expected to return to service in late second-quarter 2008. A one-month
maintenance outage of Bruce A Unit 4 is scheduled to start in late March 2008 and a two-month outage of Bruce A Unit 3 is expected to commence
mid-September 2008.

The
Bruce partners have agreed that all excess cash from both Bruce A and Bruce B will be distributed on a monthly basis and that separate cash calls will be
made for major capital projects, including the Bruce A refurbishment and restart project.

Power LP Divestiture

TransCanada sold all of its interest in Power LP to EPCOR Utilities Inc. in August 2005 for net proceeds of $523 million, resulting in an
after-tax gain of $193 million. TransCanada's investment in Power LP generated operating income of $29 million in 2005.

Plant Availability

|GRAPHIC |  | Weighted average power plant availability for all plants, excluding Bruce Power, was 93 per cent in 2007 and 2006, compared to 87 per cent in 2005. Plant availability represents the percentage of time in a year that the plant is
available to generate power whether actually running or not, reduced by planned and unplanned outages. Western Power's plant availability was affected negatively in 2006 and 2005 by an unplanned outage at Bear Creek, which returned to service in
August 2006. A planned outage was taken in 2005 at the MacKay River facility, further decreasing Western Power's plant availability in 2005. Eastern Power achieved plant availability of 96 per cent in 2007, which was consistent with
2006. Availability was lower in 2005 as a result of OSP experiencing two significant outages.
|------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

Weighted Average Plant Availability(1)
Year ended December 31

|                                             |  | 2007 |  | 2006 |  | 2005
|-------------------------------------------- |  | ---- |  | ---- |  | ----
|                                            
|Western Power(2)                             |  | 90%  |  | 88%  |  | 85% 
|Eastern Power(3)                             |  | 96%  |  | 95%  |  | 83% 
|Bruce Power                                  |  | 86%  |  | 88%  |  | 80% 
|Power LP investment(4)                       |  |     |  |     |  | 94% 
|All plants, excluding Bruce Power investment |  | 93%  |  | 93%  |  | 87% 
|All plants                                   |  | 91%  |  | 91%  |  | 84% 

MANAGEMENT'S DISCUSSION AND
ANALYSIS41

---



Natural Gas Storage

TransCanada became one of the largest natural gas storage providers in Western Canada when the Edson storage facility was placed in service on December 31, 2006, with a
final commissioning date of April 1, 2007. TransCanada owns or has rights to 120 Bcf of natural gas storage capacity in Alberta, including a 60 per cent ownership interest
in CrossAlta Gas Storage & Services Ltd. (CrossAlta), an independently operated storage facility. TransCanada also has contracts for long-term, Alberta-based storage capacity
from a third party, which expire in 2030 and include mutual early termination rights in 2015.

---

Natural Gas Storage Capacity

|                    |  | Working Gas
Storage Capacity
(Bcf) |  | Maximum Injection/
Withdrawal Capacity
(mmcf/d) | 
|------------------- |  | ---------------------------------- |  | ----------------------------------------------- | 
|                   
|Edson               |  | 50                                 |  | 725                                             | 
|CrossAlta(1)        |  | 32                                 |  | 288                                             | 
|Third-party storage |  | 38                                 |  | 630                                             | 
|                   
|                    |  | 120                                |  | 1,643                                           | 
|                   

TransCanada believes the market fundamentals for natural gas storage remain strong. The Company's additional gas storage capacity is
expected to help balance seasonal and short-term supply and demand, and bring flexibility to the supply of natural gas to Alberta and the rest of North America. The increasing seasonal
imbalance in North American natural gas supply and demand has increased natural gas price volatility and the demand for storage services. Alberta-based storage will continue to serve market needs and
could play an important role should northern gas be connected to North American markets. Energy's natural gas storage business operates independently from TransCanada's regulated natural gas
transmission business and ANR's regulated storage business, which is included in TransCanada's Pipelines segment.

TransCanada
manages its non-regulated natural gas storage assets' exposure to seasonal natural gas price spreads by hedging storage capacity with a portfolio of
third-party storage capacity leases and proprietary natural gas purchases and sales.

In
Alberta, TransCanada offers a broad range of injection and withdrawal storage alternatives specific to customer needs in multi-year contracts. Market
volatility frequently creates arbitrage opportunities and TransCanada's storage operations offer solutions to capture value from these short-term price movements. Products consist of
short-term deliver-redeliver contracts, parking, peak-day supply and other related services. Earnings from third-party storage capacity leases are recognized over
the term of the lease. At December 31, 2007, TransCanada had contracted approximately 74 per cent of the total 120 Bcf of working gas storage capacity in 2008 and
50 per cent of storage capacity in 2009.

TransCanada
adopted an accounting policy to record proprietary natural gas inventory held in storage at its fair value using the one-month forward price for
natural gas, effective April 1, 2007. Changes in the fair value of inventory are recorded in Net Income.

Proprietary
natural gas storage transactions are comprised of a forward purchase of natural gas to be injected into storage and a simultaneous forward sale of natural gas
for withdrawal at a later period, typically during the winter withdrawal season. By matching purchase and sales volumes on a back-to-back basis, TransCanada locks in a margin,

42MANAGEMENT'S
DISCUSSION AND ANALYSIS

---



thereby
effectively eliminating its exposure to the price movements of natural gas. These forward natural gas contracts provide highly effective economic hedges but do not meet the specific criteria
for hedge accounting and, therefore, are recorded at their fair values based on the forward market prices for the contracted month of delivery. Changes in the fair value of these contracts are
recorded in Net Income. In 2007, operating income included a $10-million net unrealized gain for the changes in fair value of the proprietary natural gas inventory and forward purchase and
sales contracts.

Natural
Gas Storage operating income was $146 million in 2007, an increase of $53 million compared to 2006. The increase was due primarily to income earned
from the first full year of operations of the Edson facility.

Natural
Gas Storage operating income was $93 million in 2006, an increase of $61 million compared to 2005. The increase was due primarily to higher
contributions from CrossAlta as a result of increased utilization and higher natural gas storage spreads as well as income from contracted third-party natural gas storage capacity. The Edson facility
did not contribute to earnings in 2006 as it went into service on December 31, 2006.

ENERGY  OPPORTUNITIES AND DEVELOPMENTS

Portlands EnergyConstruction continued in 2007 on the Portlands Energy Centre L.P. (Portlands Energy)
project. The capital cost is expected to be approximately $730 million and the facility is expected to be operational in single-cycle mode beginning June 2008. Upon final completion of
the combined-cycle mode planned for second-quarter 2009, the plant is expected to provide power under a 20-year Accelerated Clean Energy Supply contract with the OPA.

Halton HillsSite preparation and construction began in 2007 on the Halton Hills Generating Station (Halton
Hills). The project includes the construction and operation of a natural
gas-fired power plant near the town of Halton Hills, Ontario. TransCanada expects to invest approximately $670 million in the project, which is anticipated to be in service in
third-quarter 2010. Power from the facility will be sold to the OPA under a 20-year Clean Energy Supply contract.

Cartier WindThe Anse-à-Valleau wind farm went into commercial operation
in November 2007, providing up to 101 MW of power to the Hydro Québec grid, and construction began in 2007 on the Carleton wind farm with a generation capacity of 110 MW.
Carleton is expected to enter commercial service in fourth-quarter 2008. Anse-à-Valleau and Carleton are the second and third phases, respectively,
of the six-phase, multi-year Cartier Wind project, located in the Gaspé region of Québec. The first phase, Baie-des-Sables, went into
service in November 2006, generating up to 110 MW of power. The remaining phases of Cartier Wind are expected to be constructed through 2012, subject to the necessary approvals. Capacity is
expected to total 740 MW when all six phases are complete.

Kibby WindIn January 2008, Maine's Land Use Regulation Commission voted to recommend the approval of the
zoning changes and preliminary development plan submitted by TransCanada to build, own and operate a wind farm in Maine. Subject to U.S. federal and state approvals, construction of the new
facilities could begin in 2008, with the project being commissioned in 2009-2010.

BécancourTransCanada entered into an agreement with Hydro-Québec in November 2007
to temporarily suspend all electricity generation from the Bécancour power plant during 2008. The agreement, which was requested by Hydro-Québec as a result of its excess
electricity supply, was approved by Québec's Régie de l'énergie in December 2007. The agreement also provides Hydro-Québec the option
to extend the suspension to 2009. TransCanada will receive payments under the agreement similar to those that would have been received under the normal course of operation.

Bruce PowerBruce Power and the OPA amended their Bruce A refurbishment agreement in 2007 to allow for
the installation of 480 new fuel channels in Unit 4. Under the original plan, Bruce Power intended to install new steam generators in all four Bruce A units and replace the fuel
channels in Units 1, 2 and 3. By replacing the fuel channels in Unit 4, Bruce Power will extend the expected operational life of the unit to 2036 from 2017. Under the amended agreement,
the OPA may elect prior to April 1, 2008 to proceed with a three-unit refurbishment and restart program.

The
amended refurbishment capital program was originally expected to cost $5.25 billion with $2.75 billion being attributed to refurbishing and restarting
Units 1 and 2 and $2.5 billion being attributed to refurbishing Units 3 and 4. In January 2008, a milestone in the Bruce A Units 1 and 2
refurbishment and restart project was completed when the

MANAGEMENT'S DISCUSSION AND
ANALYSIS43

---



sixteenth
and final new steam generator was installed. With the completion of this stage of the project, the authorized funding for Units 1 and 2 was increased to approximately
$3.0 billion from $2.75 billion. Bruce Power is currently preparing a comprehensive estimate of the cost to complete the Unit 1 and 2 restart. This process is expected to
result in a further increase in the total project cost. Project cost increases are subject to the capital cost risk- and reward-sharing mechanism under the agreement with the OPA.
Bruce A Units 1 and 2 are expected to produce an additional 1,500 MW of power when completed in 2010.

As
at December 31, 2007, Bruce A had incurred $1.9 billion in costs with respect to the refurbishment and restart of Units 1 and 2 and
approximately $0.2 billion for the refurbishment of Units 3 and 4.

LNG Projects

TransCanada continues to pursue proposals to build, own and operate LNG facilities, including the Broadwater LNG project (Broadwater) and the Cacouna LNG project
(Cacouna).

BroadwaterBroadwater, a joint venture with Shell US Gas & Power LLC in which TransCanada holds a
50 per cent interest, is a proposed LNG facility in New York State waters in Long Island Sound. The Broadwater terminal would be capable of receiving, storing, and regasifying
imported LNG with an average send-out capacity of approximately 1 Bcf/d of natural gas. Coincident with the FERC process, Broadwater applied to the New York Department of
State for a determination that the project is consistent with New York's coastal zone policies. The state's decision is expected in second-quarter 2008. In January 2008, the
FERC issued the FEIS, which confirmed project need, supported the location of the project with acknowledgement of its target market and delivery goals, and found safety and security risks to be
limited and acceptable. The FEIS also concluded that with adherence to federal and state permit requirements and regulations, Broadwater's proposed mitigation measures and the FERC's recommendations,
the project will not result in a significant impact on the environment. At December 31, 2007, the Company had capitalized $40 million related to Broadwater.

CacounaCacouna, a joint venture with Petro-Canada in which TransCanada holds a 50 per cent
interest, is a proposed LNG project at the Gros Cacouna Harbour on the St. Lawrence River in Québec. The proposed terminal would be capable of receiving, storing, and regasifying
imported LNG with an average throughput capacity of approximately 500 mmcf/d of natural gas. Following public hearings in 2006, the Québec government granted a provincial decree
in June 2007 approving the Cacouna terminal. Also in June 2007, the project received federal approvals pursuant to theCanadian Environmental Assessment
Act. A delay to 2012 from 2010 in the planned in-service date for the regasification terminal was announced in September 2007. This delay resulted from a need to
assess the impacts of permit conditions, to review the facility design in light of escalating costs and to align the schedule with potential LNG supply facilities. In February 2008, the
potential anchor LNG supplier for the Cacouna
terminal announced it would no longer be pursuing the development of its LNG supply as originally planned. As a result of this announcement, TransCanada and Petro-Canada are currently reviewing their
strategy for the project.

ENERGY  BUSINESS RISKS

Fluctuating Power and Natural Gas Market Prices

TransCanada operates in competitive power and natural gas markets in North America. Volatility in power and natural gas prices is caused by market forces such as fluctuating
supply and demand, which are greatly affected by weather events. Energy's earnings from the sale of uncontracted volumes are subject to price volatility. Although Energy commits a significant portion
of its supply to medium- to long-term sales contracts, it retains an amount of unsold supply in order to provide flexibility in managing the Company's portfolio of wholly
owned assets.

Uncontracted Volumes

Energy has certain uncontracted power sales volumes in Western Power and Eastern Power and through its investment in Bruce Power. Sale of uncontracted power volumes into the
spot market is subject to market price volatility, which directly impacts earnings. Bruce B has a significant amount of uncontracted volumes sold into the wholesale power spot market while
100 per cent of the Bruce A output is sold into the Ontario wholesale power spot market under fixed contract price terms with the OPA. The natural gas storage business is subject
to fluctuating natural gas seasonal spreads generally

44MANAGEMENT'S
DISCUSSION AND ANALYSIS

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determined
by the differential in natural gas prices in the traditional summer injection and winter withdrawal seasons. As a result, the Company hedges capacity with a portfolio of contractual
commitments containing varying terms.

Plant Availability

Maintaining plant availability is essential to the continued success of the Energy business. Plant operating risk is mitigated through a commitment to TransCanada's operational
excellence strategy, which is to provide low-cost, reliable operating performance at each of the Company's facilities. Unexpected plant outages and the duration of outages could result in
lower plant output and sales revenue, reduced margins and increased maintenance costs. At certain times, unplanned outages may require power or natural gas purchases at market prices to ensure
TransCanada meets its contractual obligations.

Weather

Extreme temperature and weather events in North America and the Gulf of Mexico often create price volatility and demand for power and natural gas. These same events may also
restrict the availability of power and natural gas. Seasonal changes in temperature can also affect the efficiency and output capability of natural gas-fired power plants. Variability in
wind speeds may impact the earnings of the Cartier Wind assets in Québec.

Hydrology

TransCanada's power operations are subject to hydrology risk arising from the ownership of hydroelectric power generation facilities in the northeastern U.S. Weather
changes, weather events, local river management and potential dam failures at these plants or upstream facilities pose potential risks to the Company.

Execution and Capital Cost

Energy's new construction programs in Ontario and Québec, including its investment in Bruce Power, are subject to execution and capital cost risks. At Bruce
Power, Bruce A's four unit refurbishment and restart project is also subject to a capital cost risk- and reward-sharing mechanism with the OPA.

Asset Commissioning

Although all of TransCanada's newly constructed assets go through rigorous acceptance testing prior to being placed in service, there is a risk that these assets may have lower
than expected availability or performance, especially in their first year of operations.

Power Regulatory

TransCanada operates in both regulated and deregulated power markets. As electricity markets evolve across North America, there is the potential for regulatory bodies to
implement new rules that could negatively impact TransCanada as a generator and marketer of electricity. These may be in the form of market rule changes, price caps, emission controls, unfair cost
allocations to generators or attempts to control the wholesale market by encouraging new plant construction. TransCanada continues to monitor regulatory issues and regulatory reform and participate in
and lead discussions around these topics.

Refer
to the "Risk Management and Financial Instruments" section of this MD&A for information on managing risks in the Energy business.

ENERGY  OUTLOOK

Although TransCanada has sold forward significant output from its Alberta PPAs and power plants and capacity from its natural gas storage facilities, operating income in 2008
can be affected by changes in the spot market price of power, market heat rates, hydrology, natural gas storage spreads and unplanned outages. Operating income from Energy's foreign operations is
impacted by changes in foreign currency exchange rates. TransCanada's operating income from its investment in Bruce B can be significantly affected by the impact on uncontracted output of
changes in spot market prices for power. Bruce Power's operating income is expected to be impacted by higher projected generation volumes and lower outage costs resulting from a decrease in planned
outages in 2008 compared to 2007.

MANAGEMENT'S DISCUSSION AND
ANALYSIS45

---





Other factors such as plant availability, regulatory changes, weather, currency movements, and overall stability of the energy industry can also impact 2008 operating
income. Refer to the "Energy  Business Risks" section of this MD&A for a complete discussion of these factors.

Capital Expenditures

Total capital expenditures for Energy in 2007 were $1.1 billlion. Energy's overall capital spending in 2008 is expected to be approximately $1.1 billion and includes
cash calls for the Bruce A refurbishment and restart project as well as continued construction at Halton Hills, Portlands Energy and Cartier Wind.

CORPORATE

---

CORPORATE RESULTS-AT-A-GLANCEYear ended December 31(millions of dollars)

|                                                         |                                          | 2007 |     | 2006 |     | 2005 |  
|-------------------------------------------------------- | ---------------------------------------- | ---- | --- | ---- | --- | ---- | -
|                                                         |                                         
|Indirect financial charges and non-controlling interests |                                          | 248  |     | 136  |     | 130  |  
|Interest income and other                                |                                          | (83  | )   | (31  | )   | (29  | )
|Income taxes                                             |                                          | (120 | )   | (72  | )   | (65  | )
|                                                         |                                         
|Comparable expenses(1)                                   |                                          | 45   |     | 33   |     | 36   |  
|                                                         | Income tax reassessments and adjustments |      | (68 | )    | (72 | )    | 
|                                                         |                                         
|Net (earnings)/expenses, after income taxes              |                                          | (23  | )   | (39  | )   | 36   |  
|                                                         |                                         

Corporate reflects net expenses not allocated to specific business segments, including:

CORPORATE  FINANCIAL RESULTS

Net earnings in Corporate were $23 million in 2007 compared to net earnings of $39 million in 2006 and net expenses of $36 million in 2005.

Corporate's
net earnings included favourable income tax reassessments and adjustments of $68 million and $72 million in 2007 and 2006, respectively. Excluding
these income tax adjustments, Corporate had
comparable expenses of $45 million in 2007, an increase of $12 million from comparable expenses of $33 million in 2006. Gains on derivatives used to manage the Company's exposure
to foreign exchange rate fluctuations and the impact of positive tax rate differentials were more than offset by higher financial charges resulting primarily from financing the acquisitions of ANR and
additional interest in Great Lakes.

46MANAGEMENT'S
DISCUSSION AND ANALYSIS

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The
increase in Corporate's net earnings in 2006 compared with 2005 was due mainly to the $72 million of favourable income tax legislative changes, reassessments and
adjustments and the positive impact of the weaker U.S. dollar.

CORPORATE  OUTLOOK

Corporate's net expenses in 2007 included certain favourable income tax reassessments and adjustments that are not expected to recur in 2008. Financing costs associated with
debt issued in 2007 and new debt expected to be issued in 2008 to partially finance the Company's capital programs are expected to increase net expenses in Corporate in 2008, which will be partially
offset by capitalized interest for projects under construction. Corporate's results could also be affected by debt levels, interest rates, foreign exchange and income tax refunds and adjustments. The
performance of the Canadian dollar relative to the U.S. dollar will influence Corporate's results, although this impact is mitigated by offsetting U.S.-dollar exposures in certain
of TransCanada's other businesses and by the Company's hedging activities.

DISCONTINUED OPERATIONS

TransCanada did not have income from discontinued operations in 2007 and 2005. Income from discontinued operations was $28 million in 2006, reflecting bankruptcy
settlements with Mirant related to TransCanada's Gas Marketing business, which the Company divested in 2001.

LIQUIDITY AND CAPITAL RESOURCES

---

SUMMARIZED CASH FLOWYear ended December 31(millions of dollars)

|                                                 |  | 2007  |  | 2006  |   | 2005  |  
|------------------------------------------------ |  | ----- |  | ----- | - | ----- | -
|                                                 | 
|Funds generated from operations                  |  | 2,621 |  | 2,378 |   | 1,951 |  
|Decrease/(increase) in operating working capital |  | 215   |  | (303  | ) | (49   | )
|                                                 | 
|Net cash provided by operations                  |  | 2,836 |  | 2,075 |   | 1,902 |  
|                                                 | 

HIGHLIGHTS

Investing Activities

Dividend

MANAGEMENT'S DISCUSSION AND
ANALYSIS47

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Funds Generated from Operations

|GRAPHIC |  | Funds Generated from Operations were $2.6 billion in 2007 compared to $2.4 billion and $2.0 billion, in 2006 and 2005, respectively. The increase in 2007 compared to 2006 was mainly a result of higher earnings. The Pipelines business
was the primary source of the increase in Funds Generated from Operations in each of the three years. Growth in Energy's operations also caused an increase in Funds Generated from Operations in 2007 compared to the two prior years.
At December 31, 2007, TransCanada's ability to generate adequate amounts of cash in the short term and the long term when needed and to maintain financial capacity and flexibility to provide for planned growth was consistent with
recent years.
|------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Investing Activities

Capital expenditures totalled $1,651 million in 2007 compared to $1,572 million in 2006 and $754 million in 2005. Expenditures in 2007 were related
primarily to construction of new power plants in Canada, the development of new pipelines, including Keystone, and maintenance and capacity projects in the Pipelines business in Canada and the
U.S. Expenditures in 2006 and 2005 were related primarily to construction of new power plants and natural gas storage facilities in Canada and maintenance and capacity projects in the Pipelines
business.

|GRAPHIC |  | TransCanada acquired, from El Paso Corporation, 100 per cent of ANR and an additional 3.6 per cent interest in Great Lakes for US$3.4 billion in 2007, subject to certain post-closing adjustments, including approximately
US$491 million of assumed long-term debt. The additional interest in Great Lakes increased TransCanada's ownership to 53.6 per cent. PipeLines LP acquired, from El Paso Corporation, the remaining 46.4 per cent of
Great Lakes for US$942 million, subject to certain post-closing adjustments, including US$209 million of assumed long-term debt.
In December 2007, PipeLines LP purchased, from Sierra Pacific Resources, a one per cent ownership interest in Tuscarora for approximately $2 million. In a separate transaction, PipeLines LP also purchased TransCanada's
one per cent ownership interest in Tuscarora for approximately $2 million. As a result of these transactions, PipeLines LP owns 100 per cent of Tuscarora. At December 31, 2007, TransCanada held a
32.1 per cent interest in PipeLines LP.
|------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In fourth-quarter 2007, the Company's Energy segment sold land in Ontario that had been previously held for development,
generating net proceeds of $38 million.

In
2006, PipeLines LP acquired an additional 49 per cent interest in Tuscarora for US$100 million, subject to closing adjustments, in addition to
indirectly assuming US$37 million of debt. PipeLines LP also acquired an additional 20 per cent general partnership interest in Northern Border for US$307 million,
in addition to indirectly assuming US$122 million of debt. TransCanada sold its 17.5 per cent general partner interest in Northern Border Partners, L.P. for proceeds of
$35 million, net of current tax.

In
2005, TransCanada obtained the remaining rights to full generating capacity under the Sheerness PPA for $585 million, invested $100 million in Bruce A as
part of the Bruce Power reorganization, purchased the TC Hydro assets from USGen New England, Inc. for US$503 million and acquired an additional 3.52 per cent
ownership interest in Iroquois for US$14 million. TransCanada sold its ownership interest in Power LP for proceeds of $444 million, net of current tax, and also sold its ownership
interest of approximately 11 per cent in Paiton Energy for proceeds of $125 million, net of current tax, and PipeLines LP units for proceeds of $102 million, net of
current tax.

Financing Activities

In 2007, TransCanada issued Long-Term Debt of $2.6 billion and Junior Subordinated Notes of US$1.0 billion, and its proportionate share of
Long-Term Debt issued by joint ventures was $142 million. The Company also reduced its Long-Term Debt by $1.1 billion, its Notes Payable by $46 million and
its proportionate share of the Long-Term Debt of

48MANAGEMENT'S
DISCUSSION AND ANALYSIS

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Joint
Ventures by $157 million. In February 2007, the Company established a US$2.2-billion, committed, unsecured, one-year bridge loan facility and utilized
$1.5 billion and US$700 million to partially finance its acquisition of ANR and its increased ownership in Great Lakes. At December 31, 2007, US$370 million remained
outstanding on this facility.

At
December 31, 2007, total unsecured revolving and demand credit facilities of $2.9 billion were available to support the Company's commercial paper program
and for general corporate purposes. These credit facilities include the following:



2007 Long-Term Debt Financing Activities

In March 2007, the Company filed debt shelf prospectuses in Canada and the U.S. qualifying for issuance $1.5 billion of Medium-Term Notes and
US$1.5 billion of debt securities, respectively. At December 31, 2007, the
Company had issued no Medium-Term Notes under the Canadian prospectus and, in September 2007, replaced the March 2007 U.S. debt shelf prospectus with a new
US$2.5-billion U.S. debt shelf prospectus. In October 2007, TransCanada issued US$1.0 billion of Senior Unsecured Notes under the US$2.5-billion
U.S. debt shelf prospectus. These notes mature on October 15, 2037 and bear interest at a rate of 6.20 per cent. US$1.5 billion remains available under the
U.S. debt shelf at December 31, 2007.

In
July 2007, TransCanada exercised its rights to redeem the US$460-million 8.25 per cent Preferred Securities due 2047. The Preferred
Securities were redeemed for cash, at par, as part of the settlement on the Canadian Mainline. The foreign exchange gain realized on redemption of the securities will flow through to Canadian Mainline
shippers over the five-year period of the settlement.

In
April 2007, TransCanada PipeLines Limited (TCPL) issued US$1.0 billion of Junior Subordinated Notes, maturing in 2067 and bearing interest of 6.35 per cent per year until
May 15, 2017, when interest will convert to a floating rate, reset quarterly to the three-month London Interbank Offered Rate (LIBOR) plus 221 basis points. The Company has the option to defer
payment of interest for periods of up to ten years without giving rise to a default and without permitting acceleration of payment under the terms of the Junior Subordinated Notes. The Company would
be prohibited from paying dividends during any deferral period. The Junior Subordinated Notes are subordinated in right of payment to existing and future senior indebtedness and are effectively
subordinated to all indebtedness and obligations of TCPL. The Junior Subordinated Notes are callable at the Company's option at any time on or after May 15, 2017 at 100 per cent of the
principal amount of the Junior Subordinated Notes plus accrued and unpaid interest to the date of redemption. The Junior Subordinated Notes are callable earlier at the Company's option, in whole or in
part, at an amount equal to the greater of 100 per cent of the principal amount of the Junior Subordinated Notes plus accrued and unpaid interest to the date of redemption and an amount determined by
formula in accordance with the terms of the Junior Subordinated Notes. The Junior Subordinated Notes were issued under the U.S. shelf prospectus filed in March 2007.

In
April 2007, Northern Border increased its five-year bank facility to US$250 million from US$175 million. A portion of the bank facility
was drawn to refinance US$150 million of Senior Notes that matured on May 1, 2007, with the balance available to fund Northern Border's ongoing operations.

MANAGEMENT'S DISCUSSION AND
ANALYSIS49

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In
March 2007, ANR Pipeline voluntarily withdrew the New York Stock Exchange listing of its 9.625 per cent Debentures due 2021,
7.375 per cent Debentures due 2024, and 7.0 per cent Debentures due 2025. With the delisting, which became effective April 12, 2007, ANR Pipeline deregistered these
securities with the SEC.

In
February 2007, the Company established a US$1.0 billion committed, unsecured credit facility, consisting of a US$700-million
five-year term loan and a US$300-million five-year, extendible revolving facility. The Company utilized US$1.0 billion from this facility and an additional
US$100 million from an existing demand line to partially finance the ANR acquisition
and increased ownership in Great Lakes, as well as its additional investment in PipeLines LP. At December 31, 2007, US$860 million remained outstanding on the committed facility
and the demand line had been fully repaid.

In
February 2007, PipeLines LP increased the size of its syndicated revolving credit and term loan facility in connection with its Great Lakes acquisition. The
amount available under the facility increased to US$950 million from US$410 million and consisted of a US$700-million senior term loan and a US$250-million senior
revolving credit facility, with US$194 million of the available senior term loan amount being terminated upon closing of the Great Lakes acquisition. At December 31, 2007,
US$507 million remained outstanding on the facility.

In
January 2008, the Company retired $105 million of 6.0 per cent Medium-Term Notes. In October 2007, the Company retired $150 million of
6.15 per cent Medium-Term Notes. In February 2007, the Company retired $275 million of 6.05 per cent Medium-Term Notes.

2006 Long-Term Debt Financing Activities

In 2006, TransCanada reduced its Long-Term Debt by $729 million, its Notes Payable by $495 million and its proportionate share of the
Long-Term Debt of Joint Ventures by a net amount of $14 million. In January 2006, the Company issued $300 million of 4.3 per cent five-year
Medium-Term Notes due 2011. In March 2006, the Company issued US$500 million of 5.85 per cent 30-year Senior Unsecured Notes due 2036. In
October 2006, TransCanada issued $400 million of 4.65 per cent ten-year Medium-Term Notes due 2016.

In
April 2006, PipeLines LP borrowed US$307 million under its unsecured credit facility to finance the cash portion of its acquisition of an additional
20 per cent interest in Northern Border. In December 2006, the credit facility was repaid in full and replaced with a US$410-million syndicated revolving credit and
term loan agreement, of which US$397 million was drawn as at December 31, 2006, a portion of which was utilized to finance the acquisition of additional interests in Tuscarora. In
February 2007, PipeLines LP increased the size of this facility, as discussed above.

2005 Long-Term Debt Financing Activities

In 2005, TransCanada reduced its Long-Term Debt by $1,113 million and increased its Notes Payable by $416 million. Financing activities included a net
reduction in the Company's proportionate share of Long-Term Debt of Joint Ventures of $42 million. In June 2005, GTNC redeemed all of its outstanding
US$150-million 7.8 per cent Senior Unsecured Debentures and US$250-million 7.1 per cent Senior Unsecured Notes. Following an application by GTNC, it
no longer has any securities registered under U.S. securities laws. In June 2005, GTNC also completed a US$400-million multi-tranche private placement of senior debt with a
weighted average interest rate of 5.28 per cent and weighted average life of approximately
18 years. In 2005, TransCanada also issued $300 million of 5.1 per cent Medium-Term Notes due 2017 under the Company's Canadian shelf prospectus.

2007 Equity Financing Activities

In January 2007, TransCanada filed a short form shelf prospectus with securities regulators in Canada and the U.S. to allow for the offering of up to
$3.0 billion of common shares, preferred shares and/or subscription receipts in Canada and the U.S. until February 2009. In February and March 2007, the Company issued
45,390,500 common shares under the short form shelf prospectus, at a price of $38.00 each, resulting in gross proceeds of approximately $1.7 billion, which were used towards financing
the ANR acquisition and increased ownership in Great Lakes.

In
2007, TransCanada's Board of Directors authorized the issuance of common shares from treasury at a discount of two per cent to participants in the Company's DRP.
Under this plan, eligible shareholders may reinvest their dividends

50MANAGEMENT'S
DISCUSSION AND ANALYSIS

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and
make optional cash payments to obtain additional TransCanada common shares. Commencing with the dividend payable in April 2007, the DRP shares were provided to the participants at a two
per cent discount to the average market price in the five days before dividend payment. Dividends of $157 million were paid in 2007 through the issuance of 4.1 million common
shares issued from treasury in accordance with the DRP.

In
February 2007, PipeLines LP completed a private placement offering of 17,356,086 common units at a price of US$34.57 per unit, of which
50 per cent were acquired by TransCanada for US$300 million. TransCanada also invested an additional US$12 million to maintain its general partnership ownership interest in
PipeLines LP. As a result of these additional investments, TransCanada's ownership in PipeLines LP increased to 32.1 per cent on February 22, 2007. The total private
placement together with TransCanada's additional general partnership investment resulted in gross proceeds to PipeLines LP of US$612 million, which were used to partially finance its
acquisition of a 46.4 per cent ownership interest in Great Lakes.

Dividends

Cash dividends on common shares amounting to $546 million were paid in 2007 compared to cash dividends amounting to $617 million in 2006 and $586 million
in 2005. The reduction in 2007 compared to 2006 reflected the Company's issuance of $157 million of common shares under the DRP, in lieu of cash dividends.

In
January 2008, TransCanada's Board of Directors approved an increase in the quarterly common share dividend payment to $0.36 per share from $0.34 per share for the
quarter ending March 31, 2008. This
was the eighth consecutive year of dividend increase beginning with the dividend of $0.20 per share declared in fourth-quarter 2000 and represents an 80 per cent increase in
the dividend over this period.

Issuer Ratings

TransCanada's issuer rating assigned by Moody's Investors Service (Moody's) is A3 with a stable outlook. TCPL's senior unsecured debt is rated A
with a stable outlook by DBRS, A2 with a stable outlook by Moody's, and A- with a stable outlook by Standard and Poor's.

CONTRACTUAL OBLIGATIONS

Obligations and Commitments

At December 31, 2007, the Company had total long-term debt of $12.9 billion and $1.0 billion of Junior Subordinated Notes, compared to
long-term debt of $11.5 billion at December 31, 2006. TransCanada's share of the total debt of joint ventures, including capital lease obligations, was $903 million at
December 31, 2007, compared to $1.3 billion at December 31, 2006. Total notes payable, including TransCanada's proportionate share of the notes payable of joint ventures, were
$421 million at December 31, 2007, compared to $467 million at December 31, 2006. The security provided by each joint venture, except for the capital lease obligation at
Bruce Power, is limited to the rights and assets of the joint venture and does not extend to the rights and assets of TransCanada, but does extend to the Company's investment. TransCanada has provided
certain pro-rata guarantees related to the capital lease obligations of Bruce Power and to the performance obligations of Bruce Power and certain other partially owned entities.

MANAGEMENT'S DISCUSSION AND
ANALYSIS51

---



---

CONTRACTUAL OBLIGATIONSYear ended December 31(millions of dollars)

|                                                           |  |        |  | Payments Due by Period
|---------------------------------------------------------- |  | ------ |  | ----------------------
|                                                           |  |        |  |                       
|                                                           |  | Total  |  | Less than
one year    
|                                                          
|Long-term debt(1)                                          |  | 14,568 |  | 577                   
|Capital lease obligations                                  |  | 243    |  | 9                     
|Operating leases(2)                                        |  | 1,081  |  | 49                    
|Purchase obligations                                       |  | 11,694 |  | 3,414                 
|Other long-term liabilities reflected on the balance sheet |  | 372    |  | 10                    
|                                                          
|Total contractual obligations                              |  | 27,958 |  | 4,059                 
|                                                          

TransCanada's commitments under the Alberta PPAs are considered to be operating leases and a portion of these PPAs have been
subleased to third parties under similar terms and conditions. Future payments under these PPAs have been excluded from the above table as these payments are dependent upon plant availability, among
other things. The amount of power purchased under the PPAs in 2007 was $440 million (2006  $499 million;
2005  $230 million).

At
December 31, 2007, scheduled principal repayments and interest payments related to long-term debt and the Company's proportionate share of the
long-term debt of joint ventures were as follow:

---

PRINCIPAL REPAYMENTSYear ended December 31(millions of dollars)

|                                 |  |        |  | Payments Due by Period
|-------------------------------- |  | ------ |  | ----------------------
|                                 |  |        |  |                       
|                                 |  | Total  |  | Less than
one year    
|                                
|Long-term debt                   |  | 12,933 |  | 556                   
|Junior subordinated notes        |  | 975    |  |                      
|Long-term debt of joint ventures |  | 660    |  | 21                    
|                                
|Total principal repayments       |  | 14,568 |  | 577                   
|                                

52MANAGEMENT'S
DISCUSSION AND ANALYSIS

---



---

INTEREST PAYMENTSYear ended December 31(millions of dollars)

|                                                      |  |        |  | Payments Due by Period
|----------------------------------------------------- |  | ------ |  | ----------------------
|                                                      |  |        |  |                       
|                                                      |  | Total  |  | Less than
one year    
|                                                     
|Interest payments on long-term debt                   |  | 10,978 |  | 832                   
|Interest payments on junior subordinated notes        |  | 588    |  | 63                    
|Interest payments on long-term debt of joint ventures |  | 332    |  | 55                    
|                                                     
|Total interest payments                               |  | 11,898 |  | 950                   
|                                                     

At December 31, 2007, the Company's approximate future purchase obligations were as follow:

---

PURCHASE OBLIGATIONS(1)
Year ended December 31(millions of dollars)

|                                 |  |        |  | Payments Due by Period
|-------------------------------- |  | ------ |  | ----------------------
|                                 |  |        |  |                       
|                                 |  | Total  |  | Less than
one year    
|                                
|Pipelines                        |  |        |  |                       
|Transportation by others(2)      |  | 719    |  | 197                   
|Capital expenditures(3)(4)       |  | 1,677  |  | 1,107                 
|Other                            |  | 153    |  | 55                    
|Energy                           |  |        |  |                       
|Commodity purchases(5)           |  | 7,381  |  | 1,134                 
|Capital expenditures(3)(6)       |  | 1,293  |  | 723                   
|Other(7)                         |  | 377    |  | 175                   
|Corporate                        |  |        |  |                       
|Information technology and other |  | 94     |  | 23                    
|                                
|Total purchase obligations       |  | 11,694 |  | 3,414                 
|                                

MANAGEMENT'S DISCUSSION AND
ANALYSIS53

---



TransCanada expects to make funding contributions to the Company's pension plans and other benefit plans in the amount of
approximately $60 million and $14 million, respectively, in 2008. The expected increase in total pension and post-retirement benefits funding in 2008, from $61 million
in 2007, is attributed primarily to a decline in the actual return on plan assets compared to investment performance expectations for 2007 and plan experience being different than expected.
TransCanada's proportionate share of funding contributions expected to be made by joint ventures to their respective pension plans and other benefit plans in 2008 is approximately $31 million
and $3 million, respectively.

TransCanada
and its affiliates have long-term natural gas transportation and natural gas purchase arrangements as well as other purchase obligations, all of
which are transacted at market prices and in the normal course of business.

Bruce Power

Bruce A has signed commitments to third-party suppliers related to refurbishing and restarting Units 1 and 2 and refurbishing Units 3
and 4 to extend their operating life. TransCanada's share of these signed commitments, which extend over the four-year period ending December 31, 2011, are as follow:

Year ended December 31(millions of
dollars)

|2008 |  | 360
|---- |  | ---
|2009 |  | 151
|2010 |  | 69 
|2011 |  | 14 
|    
|     |  | 594
|    

Aboriginal Pipeline Group

On June 18, 2003, the Mackenzie Delta gas producers, the APG and TransCanada reached an agreement governing TransCanada's role in the MGP project to build a natural gas
pipeline from Inuvik, Northwest Territories, to the northern border of Alberta, where it would connect with the Company's Alberta System. Under the agreement, TransCanada agreed to finance the APG for
its one-third share of project pre-development costs. These costs are currently forecasted to be between $150 million and $200 million, depending on the pace of
project development. As at December 31, 2007, the Company had advanced $137 million of this total.

TransCanada
and the other co-venture companies involved in the MGP continue to pursue approval of the proposed project, focusing on the regulatory process and
discussions with the Canadian government on the fiscal framework. Project timing is uncertain and is conditional upon resolution of regulatory and fiscal matters. TransCanada's ability to recover its
investment depends on the successful outcome of the project.

Contingencies

The Canadian Alliance of Pipeline Landowners' Associations (CAPLA) and two individual landowners commenced an action in 2003 against TransCanada and Enbridge Inc. under
Ontario'sClass Proceedings Act, 1992for damages of $500 million. The damages are alleged to have arisen from the creation of a control zone
within 30 metres of a pipeline pursuant to Section 112 of theNational Energy Board Act. In November 2006, TransCanada and
Enbridge Inc. were
granted a dismissal of the case but CAPLA appealed the decision. The Ontario Court of Appeal heard the appeal on December 18, 2007, and reserved its decision. The Company continues to believe
the claim is without merit and will vigorously defend the action. The Company has made no provision for any potential liability. A liability, if any, would be dealt with through the regulatory
process.

54MANAGEMENT'S
DISCUSSION AND ANALYSIS

---





TransCanada and its subsidiaries are subject to various legal proceedings and actions arising in the normal course of business. While the final outcome of such legal
proceedings and actions cannot be predicted with certainty, it is the opinion of management that the resolution of such proceedings and actions will not have a material impact on the Company's
consolidated financial position or results of operations.

Guarantees

TransCanada, Cameco and BPC have each severally guaranteed one-third of certain contingent financial obligations of Bruce B related to power sales agreements,
operator licenses, a lease agreement and contractor services. The guarantees have terms ranging from one year ending in 2008 to perpetuity.

TransCanada
and BPC have each severally guaranteed one-half of certain contingent financial obligations related to an agreement with the OPA to refurbish and
restart Bruce A power generation units. The guarantees were part of the reorganization of Bruce Power in 2005 and have terms ending in 2019 to 2036. TransCanada's share of the potential
exposure under these Bruce Power guarantees was estimated at December 31, 2007, to range from $711 million to a maximum of $750 million. The fair value of these guarantees is
estimated to be $12 million.

The
Company and its partners in certain jointly owned entities have severally and joint and severally guaranteed the performance of these entities related primarily to
construction projects, redelivery of natural gas, PPA payments and the payment of liabilities. TransCanada's share of the potential exposure under these guarantees was estimated at December 31,
2007 to range from $699 million to a maximum of $1,210 million. For certain of these entities, any payments made by TransCanada under these guarantees in excess of its ownership interest
are to be reimbursed by its partners. Deferred Amounts includes $7 million for the fair value of these joint and several guarantees.

TransCanada
has guaranteed a subsidiary's equity undertaking that supports the payment, under certain conditions, of principal and interest on US$75 million of the
public debt obligations of TransGas. The Company has a 46.5 per cent interest in TransGas. Under the terms of a shareholder agreement, TransCanada and
another major multinational company may be required to severally fund more than their proportionate share of debt obligations of TransGas in the event that the minority shareholders fail to
contribute. Any payments made by TransCanada under this agreement convert into share capital of TransGas. The Company's potential exposure is contingent on the impact any change of law would have on
the ability of TransGas to service the debt. There has been no change in applicable law since the issuance of debt in 1995 and, thus, no exposure for TransCanada. The debt matures in 2010. The Company
has made no provision related to this guarantee.

RISK MANAGEMENT AND FINANCIAL INSTRUMENTS

FINANCIAL RISKS

Risk Management Overview

TransCanada has exposure to market, counterparty credit and liquidity risk. The risk management function assists in managing these risks. TransCanada's primary risk management
objective is to protect earnings and cash flow, and ultimately shareholder value.

Risk
management strategies, policies and limits are designed to ensure TransCanada's risks and related exposures are in line with the Company's business objectives and risk
tolerance. Risks are managed within limits established by the Company's Board of Directors, implemented by senior management and monitored by risk management personnel. TransCanada's Audit Committee
oversees how management monitors compliance with risk management policies and procedures, and management's review of the adequacy of the risk management framework. Internal audit personnel assist the
Audit Committee in its oversight role by performing regular and ad-hoc reviews of risk management controls and procedures, the results of which are reported to the Audit Committee.

Market Risk

The Company constructs and invests in large infrastructure projects, purchases and sells commodities, issues short- and long-term debt including amounts in
foreign currencies, and invests in foreign operations. These activities expose the Company to market risk from changes in commodity prices, foreign exchange rates and interest rates, which affect the
Company's earnings and the value of the financial instruments it holds.

MANAGEMENT'S DISCUSSION AND
ANALYSIS55

---



The
Company uses derivatives as part of its overall risk management policy to manage exposures to market risk that result from these activities.

Contracts
used to manage market risk generally consist of the following:

Commodity Price Risk

The Company is exposed to commodity price movements as part of its normal business operations, particularly in relation to the prices of power and natural gas. A number of
strategies are used to mitigate these exposures, including the following:

The
Company assesses its commodity contracts and derivative instruments used to manage energy commodity risk to determine the appropriate accounting treatment. Contracts,
with the exception of leases, have been assessed to determine whether they meet the definition of a derivative. Certain commodity purchase and sale contracts are derivatives but are not within the
scope of CICA Handbook Section 3855 "Financial Instruments  Recognition and Measurement", as they were entered into and continue to be held for the
purpose of receipt or delivery in accordance with the Company's normal purchases and normal sales exemption. Certain other contracts are not within the scope of Section 3855 as they are
considered to meet other exemptions.

TransCanada
manages its exposure to seasonal natural gas price spreads in its natural gas storage business by hedging storage capacity with a portfolio of third-party
storage capacity leases and proprietary natural gas purchases and sales. By matching purchase and sale volumes, TransCanada locks in a margin on a back-to-back basis and
thereby effectively eliminates its exposure to natural gas market price fluctuations.

Natural Gas Inventory Price Risk

Effective April 1, 2007, TransCanada began valuing its proprietary natural gas inventory held in storage at fair value, as measured by the one-month forward
price for natural gas. At December 31, 2007, $190 million of proprietary natural gas inventory was included in Inventories. The amount recorded in 2007 in Revenues for the net change in
the fair value of proprietary natural gas held in inventory was insignificant. A gain of $10 million was recorded in 2007 in Revenues for the net change in fair value of the forward proprietary
natural gas purchase and sales contracts.

56MANAGEMENT'S
DISCUSSION AND ANALYSIS

---



Foreign Exchange and Interest Rate Risk

Foreign exchange and interest rate risk is created by fluctuations in the fair values or cash flows of financial instruments due to changes in foreign exchange rates and/or
changes in the market interest rates.

A
portion of TransCanada's earnings from its Pipelines and Energy operations outside of Canada is generated primarily in U.S. dollars and is subject to currency
fluctuations. The performance of the Canadian dollar relative to the U.S. dollar could positively or negatively affect TransCanada's earnings. This foreign exchange impact is offset by
exposures in certain of TransCanada's businesses and by the Company's hedging activities. Due to its growing operations in the U.S., including the acquisitions of ANR and additional interests in
Great Lakes and PipeLines LP, TransCanada expects to have a greater exposure to U.S. dollar fluctuations than in prior years.

The
Company uses foreign currency and interest rate derivatives to manage the foreign exchange and interest rate risks related to its U.S. dollar-denominated debt and
other transactions, as well as to manage the interest rate exposures of the Canadian Mainline, Alberta System and Foothills. Certain of the realized gains and losses on these derivatives are shared
with shippers on predetermined terms. These gains and losses are deferred as regulatory assets and liabilities until they are recovered from or paid to the shippers in accordance with the terms of the
shipping agreements.

The
Company has fixed-rate long-term debt, which subjects it to interest rate price risk, and has floating interest rate debt, which subjects it to interest rate
cash flow risk. The Company uses a combination of forwards, interest rate swaps and options to manage its exposure to these risks.

Net Investment in Self-Sustaining Foreign Operations

The Company hedges its net investment in self-sustaining foreign operations on an after-tax basis with U.S. dollar-denominated debt, forward
contracts, cross-currency interest rate swaps and options. The Company had designated U.S. dollar-denominated debt with a carrying value of $4.7 billion (US$4.7 billion) and a
fair value of $4.8 billion (US$4.8 billion) as a net investment hedge at December 31, 2007. The forwards, swaps and options are recorded at their fair value and are included in
Other Assets.

The
fair values and notional or principal amount for the derivatives designated as a net investment hedge were as follow:

|                                                   |                         | 2007          |    | 2006                         |          |              
|-------------------------------------------------- | ----------------------- | ------------- | -- | ---------------------------- | -------- | -------------
|                                                   |                         |              
|Asset/(Liability)December 31 (millions of dollars) |                         | Fair Value(1) |    | Notional or
Principal
Amount |          | Fair Value(1)
|                                                  
|U.S. dollar cross-currency swaps                   |                         |               |    |                              |          |              
|                                                   | (maturing 2009 to 2014) |               | 77 |                              | U.S. 350 |              
|U.S. dollar options                                |                         |               |    |                              |          |              
|                                                   | (maturing 2008)         |               | 3  |                              | U.S. 600 |              
|U.S. dollar forward foreign exchange contracts     |                         |               |    |                              |          |              
|                                                   | (maturing 2008)         |               | (4 | )                            | U.S. 150 |              
|                                                  
|                                                   |                         | 76            |    | U.S. 1,100                   |          | 45           
|                                                  

VaR Analysis

TransCanada uses a Value-at-Risk methodology (VaR) to estimate the potential impact resulting from its exposure to market risk. VaR estimates the
potential change in pre-tax earnings over a given holding period for a specified confidence level. The VaR number calculated and used by TransCanada reflects the 95 per cent
probability that the daily change resulting from normal market fluctuations in its liquid positions will not exceed the reported VaR. VaR methodology is a statistically-defined, probability-based
approach that takes into consideration market volatilities as well

MANAGEMENT'S DISCUSSION AND
ANALYSIS57

---



as
risk diversification by recognizing offsetting positions and correlations between products and markets. Risks are measured across all products and markets, and risk measures can be aggregated to
arrive at a single VaR number.

There
is currently no uniform industry methodology for estimating VaR. The use of VaR has limitations because it is based on historical correlations and volatilities in
commodity prices, interest rates and foreign exchange rates, and assumes that future price movements will follow a statistical distribution. Although losses are not expected to exceed the
statistically estimated VaR on 95 per cent of occasions, losses on the other five per cent of occasions could be substantially greater than the estimated VaR.

TransCanada's
estimation of VaR includes wholly owned subsidiaries, and incorporates relevant risks associated with each market or business unit. The calculation does not
include the Pipelines segment as the rate-regulated nature of the pipeline business reduces the impact of market risks and limits TransCanada's ability to manage these risks. The Company's
Board of Directors has established a VaR limit, which is monitored on an ongoing basis as part of the Company's risk management policy. TransCanada's consolidated VaR was less than $10 million
at December 31, 2007.

Counterparty Credit Risk

Counterparty credit risk represents the financial loss that the Company would experience if a counterparty to a financial instrument, in which the Company has an amount owing
from the counterparty, failed to meet its obligations in accordance with the terms and conditions of its contracts with the Company.

Counterparty
credit risk is mitigated through established credit management techniques, including conducting financial and other assessments to establish and monitor a
counterparty's creditworthiness, setting exposure limits, monitoring exposures against these limits, utilizing master netting arrangements and obtaining financial assurances where warranted. In
general, financial assurances include guarantees, letters of credit and cash. The Company monitors and manages its concentration of counterparty credit risk on an ongoing basis.

TransCanada's
maximum counterparty credit exposure at the balance sheet date consists primarily of the carrying amount of non-derivative financial assets as well
as the fair value of derivative financial assets.

The
Company has contracts for the sale of non-financial items. Many of these contracts do not meet the definition of a financial instrument since the underlying
volumes are physically delivered during the Company's normal course of business. Exposure to counterparty credit risk on these non-financial contracts results from the potential of a
counterparty defaulting on invoiced amounts owing to TransCanada. These invoiced amounts are included in the Accounts Receivable and Other Assets amounts disclosed in the Non-Derivative
Financial Instruments Summary table presented later in this section. Some of these non-financial contracts do meet the definition of a derivative and are recorded at fair value.

The
carrying amounts and fair values of financial assets and non-financial derivatives are disclosed in the Non-Derivative Financial Instruments
Summary and the Derivative Financial Instruments Summary tables presented later in this section.

The
Company does not have any significant concentrations of counterparty credit risk and the majority of the counterparty credit exposure is with counterparties who are
investment grade.

The
Company has reached agreements for allowed unsecured claims with certain subsidiaries of Calpine, former shippers on TransCanada's pipeline systems that have filed for
bankruptcy protection, as discussed in the "Pipelines  Outlook" section of this MD&A.

Liquidity Risk

Liquidity risk is the risk that TransCanada will not be able to meet its financial obligations as they fall due. The Company's approach to managing liquidity risk is to ensure
that it always has sufficient cash and credit facilities to meet its obligations when due, under both normal and stressed conditions, without incurring unacceptable losses or damage to the Company's
reputation.

Management
typically forecasts cash flows for a period of 12 months to identify financing requirements. These requirements are then addressed through a combination of
committed and demand credit facilities, and through access to capital markets.

58MANAGEMENT'S
DISCUSSION AND ANALYSIS

---



Fair Values

The fair value of Cash and Cash Equivalents and Notes Payable approximates their carrying amounts due to the short time period to maturity. The fair value of foreign exchange
and interest rate derivatives has been calculated using year-end market rates. The fair value of power, natural gas and heat rate derivatives has been calculated using estimated forward
prices for the relevant period.

Fair
values of financial instruments are determined by reference to quoted bid or asking price, as appropriate, in active markets at period-end dates. In the
absence of an active market, the Company determines fair value by using valuation techniques that refer to observable market data or estimated market prices. These include comparisons with similar
instruments that have observable market prices, option pricing models and other valuation techniques commonly used by market participants. Fair values determined using valuation models require the use
of assumptions about the amount and timing of estimated future cash flows and discount rates. In making these assumptions, the Company looks primarily to readily observable external market input
factors such as interest rate yield curves, currency rates, and price and rate volatilities as applicable.

The
fair value of the Company's Long-Term Debt was estimated based on quoted market prices for the same or similar debt instruments and, when such information
was not available, by
discounting future payments of interest and principal at estimated interest rates that were made available to the Company at December 31, 2007.

Non-Derivative Financial Instruments Summary

The carrying and fair values of non-derivative financial instruments were as follow:

|December 31, 2007(millions of dollars)           |  | Carrying Amount |  | Fair Value |  | 
|------------------------------------------------ |  | --------------- |  | ---------- |  | 
|                                                
|Financial Assets(1)                              |  |                 |  |            |  | 
|Cash and cash equivalents                        |  | 504             |  | 504        |  | 
|Accounts receivable and other assets(2)(3)       |  | 1,231           |  | 1,231      |  | 
|Available-for-sale assets(2)                     |  | 17              |  | 17         |  | 
|                                                
|                                                 |  | 1,752           |  | 1,752      |  | 
|                                                
|Financial Liabilities(1)(3)                      |  |                 |  |            |  | 
|Notes payable                                    |  | 421             |  | 421        |  | 
|Accounts payable and deferred amounts(4)         |  | 1,454           |  | 1,454      |  | 
|Long-term debt and junior subordinated notes     |  | 13,908          |  | 15,340     |  | 
|Long-term debt of joint ventures                 |  | 903             |  | 937        |  | 
|Other long-term liabilities of joint ventures(4) |  | 60              |  | 60         |  | 
|                                                
|                                                 |  | 16,746          |  | 18,212     |  | 
|                                                

MANAGEMENT'S DISCUSSION AND
ANALYSIS59

---



Derivative Financial Instruments Summary

Information for the Company's derivative financial instruments is as follows.

|                                                                   |                            | 2007        |       |            
|------------------------------------------------------------------ | -------------------------- | ----------- | ----- | -----------
|                                                                   |                            |            
|December 31
(all amounts in millions unless otherwise indicated)   |                            | Power       |       | Natural Gas
|                                                                  
|Derivative Financial Instruments Held for Trading                  |                            |             |       |            
|Fair Values(1)                                                     |                            |             |       |            
|                                                                   | Assets                     |             | $55   |            
|                                                                   | Liabilities                |             | $(44  | )          
|Notional Values                                                    |                            |             |       |            
|                                                                   | Volumes(2)                 |             |       |            
|                                                                   |                            | Purchases   |       | 3,774      
|                                                                   |                            | Sales       |       | 4,469      
|                                                                   | Canadian dollars           |             |      |            
|                                                                   | U.S. dollars               |             |      |            
|                                                                   | Japanese yen (in billions) |             |      |            
|                                                                   | Cross-currency             |             |      |            
|Unrealized gains/(losses) in the period(3)                         |                            | $16         |       | $(10       
|Realized (losses)/gains in the period(3)                           |                            | $(8         | )     | $47        
|Maturity dates                                                     |                            | 2008 - 2016 |       | 2008 - 2010
|Derivative Financial Instruments in Hedging Relationships(4)(5)(6) |                            |             |       |            
|Fair Values(1)                                                     |                            |             |       |            
|                                                                   | Assets                     |             | $135  |            
|                                                                   | Liabilities                |             | $(104 | )          
|Notional Values                                                    |                            |             |       |            
|                                                                   | Volumes(2)                 |             |       |            
|                                                                   |                            | Purchases   |       | 7,362      
|                                                                   |                            | Sales       |       | 16,367     
|                                                                   | Canadian dollars           |             |      |            
|                                                                   | U.S. dollars               |             |      |            
|                                                                   | Cross-currency             |             |      |            
|Realized (losses)/gains in the period(3)                           |                            | $(29        | )     | $18        
|Maturity dates                                                     |                            | 2008 - 2013 |       | 2008 - 2010

60MANAGEMENT'S
DISCUSSION AND ANALYSIS

---





Balance Sheet Presentation of Derivative Financial Instruments

The fair values of the derivative financial instruments in the Company's Balance Sheet were as follow:

|December 31 (millions of dollars) |                      | 2007 |      |  
|--------------------------------- | -------------------- | ---- | ---- | -
|                                 
|Current                           |                      |      |      |  
|                                  | Other Current Assets |      | 160  |  
|                                  | Accounts Payable     |      | (144 | )
|Long-term                         |                      |      |      |  
|                                  | Other Assets         |      | 204  |  
|                                  | Deferred Amounts     |      | (205 | )

OTHER RISKS

Development Projects and Acquisitions

TransCanada continues to focus on growing its Pipelines and Energy operations through greenfield projects and acquisitions. TransCanada capitalizes costs incurred on certain of
its greenfield development projects during the period prior to construction when the project meets specific criteria and is expected to proceed through to completion. The related capital costs of a
project that does not proceed through to completion would be expensed at the time it is discontinued. There is a risk with respect to TransCanada's acquisition of existing assets and operations that
certain commercial opportunities and operational synergies may not materialize as expected.

Health, Safety and Environment Risk Management

TransCanada is committed to providing a safe and healthy environment for its employees, contractors and the public, and to protecting the environment. Health, safety and
environment (HS&E) is a priority in all of TransCanada's operations and the Company is committed to ensuring it is in conformance with its internal policies and regulated requirements, and is an
industry leader. The HS&E Committee of TransCanada's Board of Directors monitors conformance with TransCanada's HS&E corporate policy through regular reporting. TransCanada's HS&E management system is
modeled to the elements of the International Organization of Standardization (ISO) standard for environmental management systems, ISO 14001, and focuses resources on the areas of significant
risk to the organization's HS&E business activities. Management is regularly advised of all important HS&E operational issues and initiatives by way of formal reporting processes. TransCanada's HS&E
management system and performance are assessed by an independent outside firm every three years or more often if requested by the HS&E Committee. The most recent assessment was conducted in November
2006. These assessments involve senior management and employee interviews, review of policies, procedures, objectives, performance measurement and reporting.

Health and Safety

In 2007, employee and contractor health and safety performance continued to improve relative to previous years and benchmarked within the top level of industry peers. The
Company's assets were highly reliable in 2007 and there were no incidents that were material to the Company's operations.

Under
the approved regulatory models in Canada, pipeline integrity expenditures on NEB-and AUC-regulated pipelines are treated on a flow-through basis and, as a
result, have no impact on TransCanada's earnings. The Company expects to spend approximately $120 million in 2008 for pipeline integrity on its wholly owned pipelines, which is slightly higher
than the amount spent in 2007, reflecting the acquisition of ANR and slightly increased spending in Canada. Spending associated with public safety on the Energy assets is focused primarily on hydro
dams and associated equipment, and is consistent with previous years.

MANAGEMENT'S DISCUSSION AND
ANALYSIS61

---



Environment

TransCanada's operations are subject to various environmental laws and regulations that establish compliance and remediation obligations. There are no outstanding orders,
material claims or lawsuits against the Company in relation to the release or discharge of any material into the environment or in connection with environmental protection. The Company believes that
it has established appropriate reserves, where required, for environmental liabilities.

Environmental
risks from TransCanada's facilities typically include air emissions such as nitrogen oxides (NOx), particulate matter and greenhouse gases, potential land
impacts, including land reclamation following construction, releases, chemical and hydrocarbon storage, and waste management control to minimize hazardous wastes, and water impacts such as water
discharge. TransCanada utilizes a risk-based environmental assessment approach. All businesses are assessed annually and specific facilities, installations and activities are reviewed on a one- to
three-year cycle, depending on the Company's assessment of risk. Business and/or facility inspections are completed on a monthly, quarterly or annual basis, depending on the entity and the assessment
of risk. There were no materially significant environmental matters arising from these assessments conducted during 2007.

Climate
change policy continues to evolve at regional, national and international levels. Under the Specified Gas Emitters Regulation, as of July 1, 2007, industrial
facilities in Alberta are required to reduce their greenhouse gas emissions intensities by 12 per cent. TransCanada's Alberta-based facilities are subject to this regulation, which also
extends to the Sundance and Sheerness facilities with which the Company has PPAs. Plans have been developed to manage the costs of compliance incurred by these assets. The regulation is not expected
to have a material impact on the Company's results. Compliance costs related to the Alberta System are expected to be recovered
through tolls paid by customers. Recovery of compliance costs related to the Company's power generation facilities in Alberta is dependent ultimately on market prices for electricity. The Company
recorded a charge of $14 million for the period from July 1, 2007 to December 31, 2007 related to the new Alberta environmental regulation.

A
hydrocarbon royalty tax took effect in Québec on October 1, 2007 and is expected to affect mainly the Bécancour power generation
facility. A regulatory proceeding is under way to determine the method of collecting the tax. The Company recorded a charge of $2 million for the period October 1, 2007 to
December 31, 2007 for Québec royalties.

British
Columbia recently announced a carbon tax, with an effective date of July 2008, which is expected to be applied to fuel usage at the Company's pipeline compressor
facilities in that province. The specifics of the application of the tax are still being assessed. Compliance costs related to this tax are anticipated to be recovered through tolls paid
by customers.

The
Government of Canada released in April 2007 the Regulatory Framework for Air Emissions (Framework). The Framework outlines short-, medium- and long-term
objectives for managing both greenhouse gas emissions and air pollutants in Canada. The Company expects a number of its facilities will be affected by pending Federal climate change regulations that
will be put in place to meet the Framework's objectives. It is unknown at this time whether the impacts from the pending regulations will be material as the final form of compliance options is
still evolving.

Climate
change legislation is evolving at both the federal and state levels in the U.S. The Company expects a number of its facilities could be affected by these legislative
initiatives, but timing and specific policy objectives remain uncertain.

The
Company continues to be involved in discussions with governments in jurisdictions where TransCanada has operations and where climate change policy is under development.
TransCanada is also continuing its programs to manage greenhouse gas emissions from its facilities and to evaluate new processes and technologies that result in improved efficiencies and lower
greenhouse gas emission rates. The Company also incorporates compliance costs associated with environmental regulations as part of its normal assessment of existing operations and new growth
opportunities.

62MANAGEMENT'S
DISCUSSION AND ANALYSIS

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CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed in reports filed with or submitted to, securities
regulatory authorities is recorded, processed, summarized and reported within the time periods specified under Canadian and U.S. securities laws. The information is accumulated and communicated
to management, including the President and Chief Executive Officer and the Chief Financial Officer, to allow timely decisions regarding required disclosure.

As
at December 31, 2007, an evaluation was carried out under the supervision of and with the participation of management, including the President and Chief Executive
Officer and Chief Financial Officer, of the effectiveness of TransCanada's disclosure controls and procedures as defined under the rules adopted by the Canadian securities regulatory authorities and
by the SEC. Based on this evaluation, the President and Chief Executive Officer and the Chief Financial Officer concluded that the design and operation of TransCanada's disclosure controls and
procedures were effective as at December 31, 2007.

Management's Annual Report on Internal Control over Financial Reporting

Internal control over financial reporting is a process designed by or under the supervision of senior management, and effected by the Board of Directors, management and other
personnel to provide reasonable assurance regarding the reliability of financial reporting and preparation of consolidated financial statements for external purposes in accordance with Canadian GAAP,
including a reconciliation to U.S. GAAP.

Management
is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting, no matter how well
designed, has inherent limitations and can only provide reasonable assurance with respect to the preparation and fair presentation of published financial statements. Under the supervision and with the
participation of the President and Chief Executive Officer and the Chief Financial Officer, management conducted an evaluation of the effectiveness of its internal control over financial reporting
based on the framework in Internal Control  Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. In 2007, the
Company acquired ANR and began consolidating the operations of ANR into the Company. Management excluded this business from its evaluation of the effectiveness of the Company's internal control over
financial reporting as at December 31, 2007. The net income attributable to this business represented approximately nine per cent of the Company's consolidated net income in 2007, and
its aggregate total assets represented approximately 12 per cent of the Company's consolidated total assets as at December 31, 2007.

Based
on this evaluation, management concluded that internal control over financial reporting is effective as at December 31, 2007, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes.

In
2007, there was no change in TransCanada's internal control over financial reporting that materially affected or is reasonably likely to materially affect TransCanada's
internal control over financial reporting.

CEO and CFO Certifications

TransCanada's President and Chief Executive Officer has provided the New York Stock Exchange with the annual CEO certification for 2007 regarding TransCanada's
compliance with the New York Stock Exchange's corporate governance listing standards applicable to foreign issuers. In addition, TransCanada's President and Chief Executive Officer and Chief
Financial Officer have filed with the SEC and the Canadian securities regulators certifications regarding the quality of TransCanada's public disclosures relating to its fiscal 2007 reports filed with
the SEC and the Canadian securities regulators.

MANAGEMENT'S DISCUSSION AND
ANALYSIS63

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SIGNIFICANT ACCOUNTING POLICIES AND CRITICAL ACCOUNTING ESTIMATES

To prepare financial statements that conform with Canadian GAAP, TransCanada is required to make estimates and assumptions that affect both the amount and timing of recording
assets, liabilities, revenues and expenses. The Company uses the most current information available and exercises careful judgment in making these estimates and assumptions.

Regulated Accounting

The Company accounts for the impacts of rate regulation in accordance with GAAP. Three criteria must be met to use these accounting principles: the rates for regulated services
or activities must be subject to approval by a regulator; the regulated rates must be designed to recover the cost of providing the services or products; and it must be reasonable to assume that rates
set at levels to recover the cost can be charged to and will be collected from customers in view of the demand for services or products and the level of direct and indirect competition. The Company's
management believes that all three of these criteria have been met with respect to each of the regulated natural gas pipelines accounted for using regulated accounting principles. The most significant
impact from the use of these accounting
principles is that, in order to appropriately reflect the economic impact of the regulators' decisions regarding the Company's revenues and tolls, and to thereby achieve a proper matching of revenues
and expenses, the timing of recognition of certain expenses and revenues in the regulated businesses may differ from that otherwise expected under GAAP.

Financial Instruments

Effective January 1, 2007, the Company adopted the new Canadian Institute of Chartered Accountants (CICA) Handbook accounting requirements for Section 3855
"Financial Instruments  Recognition and Measurement" and Section 3865 "Hedges". The CICA Handbook requirements for Section 3862 "Financial
Instruments  Disclosure" and Section 3863 "Financial Instruments  Presentation" are effective January 1,
2008, however the Company chose to adopt these standards effective December 31, 2007.

These
standards are described further in the "Risk Management and Financial Instruments" and "Accounting Changes" sections of this MD&A.

Depreciation and Amortization Expense

TransCanada's plant, property and equipment are depreciated on a straight-line basis over their estimated useful lives. Pipeline and compression equipment are
depreciated at annual rates ranging from two per cent to six per cent. Metering and other plant equipment are depreciated at various rates. Major power generation and natural gas
storage plant, equipment and structures in the Energy business are depreciated on a straight-line basis over estimated service lives at average annual rates ranging from
two per cent to ten per cent. Nuclear power generation assets under capital lease are amortized on a straight-line basis over the shorter of their useful life
and the remaining terms of their lease. Other equipment is depreciated at various rates. Corporate plant, property and equipment are depreciated on a straight-line basis over estimated
useful lives at average annual rates ranging from three to 20 per cent.

Depreciation
expense in 2007 was $1,179 million (2006  $1,059 million) and primarily affects the Pipelines and Energy
segments of the Company. In Pipelines, depreciation rates are approved by regulators where applicable and depreciation expense is recoverable based on the cost of providing the services or products.
If regulators permit recovery through rates, a change in the estimate of the useful lives of plant, property and equipment in the Pipelines segment would have no material impact on TransCanada's net
income but would directly affect funds generated from operations.

ACCOUNTING CHANGES

Changes in Accounting Policies for 2007

Effective January 1, 2007, the Company adopted the CICA Handbook accounting requirements for Sections 1506 "Accounting Changes", 1530 "Comprehensive Income", 3251
"Equity", 3855 "Financial Instruments  Recognition and

64MANAGEMENT'S
DISCUSSION AND ANALYSIS

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Measurement",
and 3865 "Hedges". In addition, the Company chose to adopt the accounting requirements for Sections 3862 "Financial
Instruments  Disclosure", 3863 "Financial Instruments  Presentation" and 1535 "Capital Disclosures" at December 31,
2007, as well as the accounting requirements for Section 3031 "Inventories" at April 1, 2007. Adjustments to the consolidated financial statements for 2007 have been made in accordance
with the transitional provisions for these new standards.

Comprehensive Income and Equity

The Company's financial statements include statements of Consolidated Comprehensive Income and Consolidated Accumulated Other Comprehensive Income. In addition, as required in
CICA Handbook Section 3251, the Company now presents separately, in the Consolidated Shareholders' Equity statement, the changes for each of its components of Shareholders' Equity, including
Accumulated Other Comprehensive Income.

Financial Instruments

All financial instruments must initially be included on the balance sheet at their fair value. Subsequent measurement of the financial instruments is based on their
classification. Financial assets are classified into the following categories: held for trading, available for sale, held-to-maturity investments and loans and receivables. Financial liabilities are
classified as held for trading or other financial liabilities.

Held-for-trading
financial assets and liabilities consist of swaps, options, forwards and futures, and are entered into with the intention of
generating a profit. A financial asset or liability that does not meet this criterion may also be designated as held for trading. Power and natural gas held-for-trading
instruments are initially recorded at their fair value and changes to fair value are included in Revenues. Changes in the fair value of interest rate and foreign exchange
held-for-trading instruments are recorded in Financial Charges and in Interest Income and Other, respectively. The Company had not designated any financial assets or
liabilities as held for trading at December 31, 2007.

The
available-for-sale classification includes non-derivative financial assets that are designated as available for sale or are not
included in the other three classifications. TransCanada's available-for-sale financial instruments include fixed-income securities held for self-insurance. These
instruments are initially accounted for at their fair value and changes to fair value are recorded through Other Comprehensive Income. Income from the settlement of
available-for-sale financial assets will be included in Interest Income and Other.

Held-to-maturity
financial assets are accounted for at their amortized cost using the effective interest method. The Company did not have any
held-to-maturity financial assets at December 31, 2007.

Trade
receivables, loans and other receivables with fixed or determinable payments that are not quoted in an active market are classified as "loans and receivables" and are
measured net of any impairment. Loans and receivables include primarily trade accounts receivable and non-interest-bearing third-party loans receivable. Interest and other income earned
from these financial assets are recorded in Interest Income and Other.

Other
financial liabilities consist of liabilities not classified as held for trading. Interest expense is included in Financial Charges and in Financial Charges of Joint
Ventures. Items in this financial instrument category are recognized at amortized cost using the effective interest method.

All
derivatives are recorded on the balance sheet at fair value, with the exception of those that were entered into and continue to be held for the purpose of receipt or
delivery in accordance with the Company's expected purchase, sale or usage requirements (normal purchase and normal sale exemption). Changes in the fair value of derivatives that are not designated in
a hedging relationship are recorded in Net Income. Derivatives used in hedging relationships are discussed further under the heading Hedges in this section.

Derivatives
embedded in other financial instruments or contracts (the host instrument) are recorded as separate derivatives and are measured at fair value if the
economic characteristics of the embedded derivative are not closely

MANAGEMENT'S DISCUSSION AND
ANALYSIS65

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related
to the host instrument, the terms of the embedded derivative are the same as those of a stand-alone derivative and the total contract is not held for trading or accounted for at fair value.
Changes in the fair value of embedded derivates that are recorded separately are included in Revenues. The Company used January 1, 2003 as the transition date for embedded derivatives.

Transaction
costs are incremental costs that are directly attributable to the acquisition, issue or disposal of a financial instrument. Effective January 1, 2007, the
Company began offsetting long-term debt transaction costs against the associated debt and began amortizing these costs using the effective interest method. Previously, these costs were
amortized on a straight-line basis over the life of the debt. There was no material impact on the Company's financial statements as a result of this change in policy. In 2007, the impact
on Net Income for the amortization of transaction costs using the effective interest method was nominal.

The
Company records the fair values of material joint and several guarantees. These fair values cannot be readily obtained from an open market and therefore, the fair value
of these guarantees is estimated by discounting the cash flows that would be incurred by the Company if letters of credit were used in place of the guarantees. Guarantees are recorded as an increase
to an investment account, Property, Plant and Equipment or a charge to Net Income, and a corresponding liability in Deferred Amounts.

Hedges

Section 3865 specifies the criteria that must be satisfied in order to apply hedge accounting and the accounting for each of the permitted hedging strategies, including:
fair value hedges, cash flow hedges and hedges of foreign currency exposures of net investments in self-sustaining foreign operations. Hedge accounting is discontinued prospectively when
the derivative no longer qualifies as an effective hedge or is terminated or sold, or upon the sale or early termination of the hedged item.

Documentation
must be prepared at the inception of the hedging arrangement in order to qualify for hedge accounting treatment. In addition, the Company must perform an
assessment of effectiveness at inception of the contract and at each reporting date.

In
a fair value hedging relationship, the carrying value of the hedged item is adjusted for changes in fair value attributable to the hedged risk. The changes in fair value
are recognized in Net Income. Changes in the fair value of the hedged item, to the extent that the hedging relationship is effective, are offset by changes in the fair value of the hedging item, which
is also recorded in Net Income. Changes in the fair value of foreign exchange and interest rate hedges are recorded in Interest Income and Other and Financial Charges, respectively. When hedge
accounting is discontinued, the carrying value of the hedged item is no longer adjusted and the cumulative fair value adjustments to the carrying value of the hedged item are amortized to Net Income
over the remaining term of the original hedging relationship.

In
a cash flow hedging relationship, the effective portion of the change in the fair value of the hedging derivative is recognized in Other Comprehensive Income, while any
ineffective portion is recognized in Net Income in the same financial category as the underlying transaction. When hedge accounting is discontinued, the amounts recognized previously in Accumulated
Other Comprehensive Income are reclassified to Net Income during the periods when the variability in cash flows of the hedged item affects Net Income. Gains and losses on derivatives are reclassified
immediately to Net Income when the hedged item is sold or terminated early, or when a hedged anticipated transaction is no longer expected to occur.

The
Company also enters into cash flow hedges and fair value hedges for activities subject to rate regulation. The gains and losses arising from the changes in fair value of
these hedges can be recovered through the tolls charged by the Company. As a result, these gains and losses are deferred as rate-regulated assets or liabilities on behalf of the
ratepayers. When the hedges are settled, the realized gains or losses are collected from or refunded to the ratepayers in subsequent years.

66MANAGEMENT'S
DISCUSSION AND ANALYSIS

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In
hedging the foreign currency exposure of a net investment in a self-sustaining foreign operation, the effective portion of foreign exchange gains and losses
on the hedging instruments is recognized in Other Comprehensive Income and the ineffective portion is recognized in Net Income. The amounts recognized previously in Accumulated Other Comprehensive
Income are recognized in Net Income in the event the Company settles or otherwise reduces its investment.

Net Effect of Accounting Policy Changes

The net effect of the preceding accounting policy changes on the Company's financial statements at January 1, 2007 was as follows:

|Increases/(decreases)(millions of dollars) |  |      |   | 
|------------------------------------------ |  | ---- | - | 
|                                          
|Other current assets                       |  | (127 | ) | 
|Other assets                               |  | (203 | ) | 
|Accounts payable                           |  | (29  | ) | 
|Deferred amounts                           |  | (75  | ) | 
|Future income taxes                        |  | (42  | ) | 
|Long-term debt                             |  | (85  | ) | 
|Long-term debt of joint ventures           |  | (7   | ) | 
|Accumulated other comprehensive income     |  | (96  | ) | 
|Retained earnings                          |  | 4    |   | 

The primary changes in 2007 to the Company's accounting policies for financial instruments related to the requirements to record
certain non-financial contracts at their fair value and to offset transaction costs against long-term debt.

Section 3862 Financial Instruments  Disclosures and Section 3863 Financial
Instruments  Presentation

CICA Handbook Sections 3862 "Financial Instruments  Disclosure" and 3863 "Financial
Instruments  Presentation", which replaced Section 3861 "Financial Instruments  Disclosure and Presentation", are
effective January 1, 2008. However, the Company chose to adopt these standards effective December 31, 2007. The Company's December 31, 2007 financial statements provided the
additional disclosure necessary to comply with these standards.

Section 1535 Capital Disclosures

CICA Handbook Section 1535 "Capital Disclosures" is effective for fiscal years beginning on or after October 1, 2007, however, TransCanada chose to adopt this standard
effective December 31, 2007. The Company has provided qualitative disclosure regarding objectives, policies and processes for managing capital as well as quantitative data of capital as of
December 31, 2007 in the "Risk Management and Financial Instruments" section of this MD&A.

Proprietary Natural Gas Inventories and Revenue Recognition

CICA Handbook Section 3031 "Inventories" is effective January 1, 2008. However, the Company chose to adopt this standard effective April 1, 2007, and began
valuing its proprietary natural gas inventory held in storage at fair value, as measured by the one-month forward price for natural gas. To record inventory at fair value, TransCanada has
designated its natural gas storage business as a broker/trader business that purchases and sells natural gas on a back-to-back basis. TransCanada did not have any proprietary
natural gas inventory prior to
April 1, 2007. The Company records its proprietary natural gas storage results in Revenues net of Commodity Purchases Resold. All changes in the fair value of the proprietary natural gas
inventories are reflected in Inventories and Revenues.

MANAGEMENT'S DISCUSSION AND
ANALYSIS67

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Future Accounting Changes

Rate-Regulated Operations

Effective January 1, 2009, the temporary exemption from CICA Handbook Section 1100, "Generally Accepted Accounting Principles", which permits the recognition and
measurement of assets and liabilities arising from rate regulation, will be withdrawn. In addition, Section 3465 "Income Taxes" was amended to require the recognition of future income tax
liabilities and assets. As a result of the changes, TransCanada will be required to recognize future income tax liabilities and assets instead of using the taxes payable method, and will record an
offsetting adjustment to regulatory assets and liabilities. If the liability method of accounting had been used at December 31, 2007, additional future income tax liabilities in the amount of
$1,138 million would have been recorded and would have been recoverable from future revenue. These changes will be applied prospectively beginning January 1, 2009.

International Financial Reporting Standards

The CICA's Accounting Standards Board (AcSB) announced that Canadian publicly accountable enterprises will adopt International Financial Reporting Standards (IFRS) as issued by
the International Accounting Standards Board (IASB), effective January 1, 2011. IFRS will require increased financial statement disclosure. Although IFRS uses a conceptual framework similar to
Canadian GAAP, differences in accounting policies will need to be addressed. TransCanada is currently assessing the impact of this AcSB announcement on its financial statements.

Intangible Assets

The CICA Handbook implemented revisions to standards dealing with Intangible Assets effective for fiscal years beginning on or after October 1, 2008. The revisions are
intended to align the definition of an Intangible Asset in Canadian GAAP with that in IFRS and U.S. GAAP. Section 1000 "Financial Statement Concepts" was revised to remove material that
permitted the recognition of assets that might not otherwise meet the definition of an asset and to add
guidance from the IASB's "Framework for the Preparation and Presentation of Financial Statements" that will help distinguish assets from expenses. Section 3064 "Goodwill and Intangible Assets",
which replaced Section 3062 "Goodwill and Other Intangible Assets", gives guidance on the recognition of intangible assets as well as the recognition and measurement of internally developed
intangible assets. Section 3450 "Research and Development Costs" will be withdrawn from the Handbook. The Company does not expect these changes to have a material effect on its financial
statements.

68MANAGEMENT'S
DISCUSSION AND ANALYSIS

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---

SELECTED QUARTERLY CONSOLIDATED FINANCIAL DATA(1)

|                                               |                         | 2007  
|---------------------------------------------- | ----------------------- | ------
|                                               |                         |       
|(millions of dollars except per share amounts) |                         | Fourth
|                                              
|Revenues                                       |                         | 2,189 
|Net Income                                     |                         |       
|                                               | Continuing operations   |       
|                                               | Discontinued operations |       
|                                              
|                                               |                         | 377   
|                                              
|Share Statistics                               |                         |       
|Net income per share  Basic                   |                         |       
|                                               | Continuing operations   |       
|                                               | Discontinued operations |       
|                                              
|                                               |                         | $0.70 
|                                              
|Net income per share  Diluted                 |                         |       
|                                               | Continuing operations   |       
|                                               | Discontinued operations |       
|                                              
|                                               |                         | $0.70 
|                                              
|Dividend declared per common share             |                         | $0.34 
|                                              

|
|

|                                               |                         | 2006  
|---------------------------------------------- | ----------------------- | ------
|                                               |                         |       
|(millions of dollars except per share amounts) |                         | Fourth
|                                              
|Revenues                                       |                         | 2,091 
|Net Income                                     |                         |       
|                                               | Continuing operations   |       
|                                               | Discontinued operations |       
|                                              
|                                               |                         | 269   
|                                              
|Share Statistics                               |                         |       
|Net income per share  Basic                   |                         |       
|                                               | Continuing operations   |       
|                                               | Discontinued operations |       
|                                              
|                                               |                         | $0.55 
|                                              
|Net income per share  Diluted                 |                         |       
|                                               | Continuing operations   |       
|                                               | Discontinued operations |       
|                                              
|                                               |                         | $0.54 
|                                              
|Dividend declared per common share             |                         | $0.32 
|                                              

MANAGEMENT'S DISCUSSION AND
ANALYSIS69

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Factors Impacting Quarterly Financial Information

In Pipelines, which consists primarily of the Company's investments in regulated pipelines and regulated natural gas storage facilities, annual revenues and net earnings
fluctuate over the long term based on regulators' decisions and negotiated settlements with shippers. Generally, quarter-over-quarter revenues and net earnings during any
particular fiscal year remain relatively stable with fluctuations resulting from adjustments being recorded due to regulatory decisions and negotiated settlements with shippers, seasonal fluctuations
in
short-term throughput volumes on U.S. pipelines, acquisitions and divestitures, and developments outside of the normal course of operations.

In
Energy, which consists primarily of the Company's investments in electrical power generation plants and non-regulated natural gas storage facilities,
quarter-over-quarter revenues and net earnings are affected by seasonal weather conditions, customer demand, market prices, planned and unplanned plant outages, acquisitions
and divestitures, and developments outside of the normal course of operations.

Significant
developments that affected quarterly net earnings in 2007 and 2006 were as follow:

70MANAGEMENT'S
DISCUSSION AND ANALYSIS

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FOURTH-QUARTER 2007 HIGHLIGHTS

---

CONSOLIDATED RESULTS OF OPERATIONS
Reconciliation of Comparable Earnings to Net Income

|(millions of dollars except per share amounts) |                                                | 2007                                     |       | 2006  |      
|---------------------------------------------- | ---------------------------------------------- | ---------------------------------------- | ----- | ----- | -----
|                                               |                                               
|Pipelines Net Earnings                         |                                                | 202                                      |       | 126   |      
|                                               |                                               
|Energy Net Earnings                            |                                                |                                          |       |       |      
|                                               | Comparable earnings(1)                         |                                          | 114   |       | 132  
|                                               | Specific items:                                |                                          |       |       |      
|                                               |                                                | Income tax reassessments and adjustments |       | 30    |      
|                                               |                                                | Gain on sale of land                     |       | 14    |      
|                                               |                                               
|                                               | Net earnings                                   |                                          | 158   |       | 132  
|                                               |                                               
|Corporate Net Earnings                         |                                                |                                          |       |       |      
|                                               | Comparable earnings(1)                         |                                          | (9    | )     | (1   
|                                               | Specific item:                                 |                                          |       |       |      
|                                               |                                                | Income tax reassessments and adjustments |       | 26    |      
|                                               |                                               
|                                               | Net earnings                                   |                                          | 17    |       | 11   
|                                               |                                               
|Net Income                                     |                                                | 377                                      |       | 269   |      
|                                               |                                               
|Net Income per Share                           |                                                |                                          |       |       |      
|                                               | Basic                                          |                                          | $0.70 |       | $0.55
|                                               |                                               
|                                               | Diluted                                        |                                          | $0.70 |       | $0.54
|                                               |                                               
|Comparable Earnings(1)                         |                                                | 307                                      |       | 257   |      
|                                               | Specific items (net of tax, where applicable): |                                          |       |       |      
|                                               |                                                | Income tax reassessments and adjustments |       | 56    |      
|                                               |                                                | Gain on sale of land                     |       | 14    |      
|                                               |                                               
|                                               | Net Income                                     |                                          | 377   |       | 269  
|                                               |                                               
|Comparable Earnings per Share(1)               |                                                | $0.57                                    |       | $0.53 |      
|                                               | Specific items  per share:                    |                                          |       |       |      
|                                               |                                                | Income tax reassessments and adjustments |       | 0.10  |      
|                                               |                                                | Gain on sale of land                     |       | 0.03  |      
|                                               |                                               
|                                               | Net Income per Share                           |                                          | $0.70 |       | $0.55
|                                               |                                               

TransCanada's net income and net earnings in fourth-quarter 2007 were $377 million or $0.70 per share compared to
$269 million or $0.55 per share in fourth-quarter 2006, an increase of $108 million or $0.15 per share. The increase reflected the impact of favourable income tax adjustments
of $56 million in fourth-quarter 2007 as a result of changes in Canadian federal income tax legislation compared to income tax refunds and related interest of $12 million in
fourth-quarter 2006. The increase was also due to additional earnings from the acquisition of ANR in February 2007 and the start-up of the Edson facility in
December 2006, the positive impact of the rate case settlements on both the GTN System and the Canadian Mainline, a $14-million after-tax ($16 million
pre-tax) gain on the sale of land and lower

MANAGEMENT'S DISCUSSION AND
ANALYSIS71

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operating
costs on the Alberta System. Lower realized power prices in Alberta and a lower contribution from Bruce Power partially offset these increases to net earnings in fourth-quarter
2007 compared to fourth-quarter 2006. The per-share net income increase of $0.15 in fourth-quarter 2007 was achieved despite an increased number of shares
outstanding following the Company's share issuances in 2007.

Comparable
earnings in fourth-quarter 2007 were $307 million or $0.57 per share, compared to $257 million or $0.53 per share in the same period in
2006. Comparable earnings excluded the $56-million and $12-million positive income tax adjustments in fourth-quarter 2007 and fourth-quarter 2006,
respectively, as well as the $14-million gain on sale of land in fourth-quarter 2007.

In
Pipelines, net earnings were $202 million in fourth-quarter 2007, an increase of $76 million from $126 million in the same period in
2006. Additional income from the acquisition of ANR, the positive impact of the rate case settlements on both the Canadian Mainline and the GTN System, and lower operating costs on the Alberta System
contributed to higher earnings.

Canadian
Mainline's net earnings in fourth-quarter 2007 were $72 million, an increase of $12 million from the corresponding period in 2006. The
increase reflected the impact of the five-year rate case settlement on the Canadian Mainline, effective January 1, 2007 to December 31, 2011. Canadian Mainline's net earnings
increased due to certain performance-based incentive arrangements and OM&A cost savings in addition to the positive impact of the increase in deemed common equity ratio in the settlement. Partially
offsetting these increases were the negative impacts of a lower allowed ROE of 8.46 per cent in 2007 (2006  8.88 per cent) and a
lower average investment base.

Alberta
System's net earnings in fourth-quarter 2007 were $41 million, an increase of $7 million from the same quarter of 2006. The increase was
due mainly to OM&A cost savings, partially offset by a lower investment base as well as a lower allowed ROE in 2007. Earnings in 2007 reflected an ROE of 8.51 per cent compared to
8.93 per cent in 2006, both on deemed common equity of 35 per cent.

GTN's
comparable earnings in fourth-quarter 2007 were $32 million, an increase of $25 million from the same period in 2006 due primarily to the
positive impact of the rate case settlement. GTN recorded the full-year impact of the rate case settlement in fourth-quarter 2007 upon receipt of FERC approval in
January 2008. The positive impact of the rate case settlement on net earnings was partially offset by the impacts of lower long-term firm contracted volumes and a weaker
U.S. dollar in 2007 as well as a higher provision taken in 2007 for non-payment of contract revenues from a subsidiary of Calpine that filed for bankruptcy protection.

In
Energy, fourth-quarter 2007 net earnings were $158 million, an increase of $26 million from $132 million in the same period in 2006. Net
earnings in fourth-quarter 2007 included $30 million of positive income tax reassessments and adjustments, a $14-million after-tax ($16 million
pre-tax) gain on sale of land, higher prices and volumes at Bruce B, and revenue from the Edson facility, which commenced operation in December 2006. These gains were partially
offset by lower overall realized power prices in Western Power as well as lower volumes and increased outage days and related costs at Bruce A.

Western
Power's operating income in fourth-quarter 2007 was $58 million, a decrease of $51 million from fourth-quarter 2006. This
decrease was due primarily to lower overall realized power prices and lower market heat rates on higher uncontracted volumes of power sold, partially offset by lower PPA costs. Average spot market
power prices in Alberta decreased 47 per cent, or $55 per MWh, in fourth-quarter 2007 compared to fourth-quarter 2006. The power price decrease was also the main
contributor to a decrease of approximately 43 per cent in market heat rates, partially offset by an 11 per cent, or $0.73 per GJ, decrease in average spot
market natural gas prices in Alberta in fourth-quarter 2007 compared to the same quarter in 2006.

Eastern
Power's operating income in fourth-quarter 2007 was $66 million, an increase of $11 million from the same period in 2006. The increase was
due primarily to payments received under the newly-designed FCM in New England and increased earnings from higher sales volumes to commercial and industrial customers. These positive impacts
were

72MANAGEMENT'S
DISCUSSION AND ANALYSIS

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partially
offset by decreased power generation from the TC Hydro facilities compared with fourth-quarter 2006 when water flows were above normal.

Operating
income from Bruce Power in fourth-quarter 2007 was $43 million, a decrease of $16 million from fourth-quarter 2006. The decrease was due to lower
power generation volumes and higher operating costs related to the significant increase in planned outage days at Bruce A as well as higher post-employment benefit costs and lower
positive purchase price amortizations related to the expiry of power sales agreements. These negative impacts were partially offset by higher realized prices, higher power generation volumes and lower
operating costs as a result of fewer planned outage days at Bruce B.

Natural
Gas Storage operating income in fourth-quarter 2007 was $57 million, an increase of $27 million from fourth-quarter 2006 due
primarily to income earned from the Edson facility, which commenced operation in December 2006. Operating income in fourth-quarter 2007 included a $15-million net unrealized
gain from the changes in fair value of proprietary natural gas inventory, forward purchase contracts and forward sale contracts.

Corporate
net earnings in fourth-quarter 2007 were $17 million compared to $11 million in the same period in 2006. The increase was due primarily
to $26 million of favourable income tax adjustments arising from legislated Canadian corporate income tax changes in fourth-quarter 2007, compared to $12 million in income
tax refunds and related interest in the same period in 2006. Gains on derivatives used to manage the Company's exposure to foreign exchange rate fluctuations and the impact of positive tax rate
differentials also contributed to higher net earnings. However, these gains were more than offset by higher financial charges, resulting primarily from financing the acquisitions of ANR and additional
interest in Great Lakes. Corporate's comparable expenses were $9 million in fourth-quarter 2007 compared with $1 million in the same period in 2006, excluding the favourable
income tax adjustments in the two periods.

SHARE INFORMATION

At February 25, 2008, TransCanada had 541.4 million issued and outstanding common shares. In addition, there were 9.2 million outstanding options to
purchase common shares, of which 6.2 million were exercisable as at February 25, 2008.

OTHER INFORMATION

Additional information relating to TransCanada, including the Company's Annual Information Form and other continuous disclosure documents, is available on SEDAR at
www.sedar.com under TransCanada Corporation.

Other
selected consolidated financial information for the years 2000 to 2007 is found under the heading "Eight-Year Financial Highlights" in the Supplementary
Information section of the Company's Annual Report.

MANAGEMENT'S DISCUSSION AND
ANALYSIS73

---





GLOSSARY OF TERMS

|AGIA                       |  | Alaska Gasline Inducement Act                                           
|-------------------------- |  | ------------------------------------------------------------------------
|ANR                        |  | American Natural Resources Company and ANR Storage Company, collectively
|ANR Pipeline               |  | ANR Pipeline Company                                                    
|APG                        |  | Aboriginal Pipeline Group                                               
|AUC                        |  | Alberta Utilities Commission                                            
|B.C.                       |  | British Columbia                                                        
|Bbl/d                      |  | Barrels per day                                                         
|Bcf                        |  | Billion cubic feet                                                      
|Bcf/d                      |  | Billion cubic feet per day                                              
|BPC                        |  | BPC Generation Infrastructure Trust                                     
|Broadwater                 |  | Broadwater LNG project                                                  
|Bruce A                    |  | Bruce Power A L.P.                                                      
|Bruce B                    |  | Bruce Power L.P.                                                        
|Bruce Power                |  | Bruce A and Bruce B, collectively                                       
|Cacouna                    |  | Cacouna LNG project                                                     
|Calpine                    |  | Calpine Corporation                                                     
|Cameco                     |  | Cameco Corporation                                                      
|CAPLA                      |  | Canadian Alliance of Pipeline Landowners' Associations                  
|CPUC                       |  | California Public Utilities Commision                                   
|CrossAlta                  |  | CrossAlta Gas Storage & Services Ltd.                                   
|DRP                        |  | Dividend Reinvestment and Share Purchase Plan                           
|EPCOR                      |  | EPCOR Utilities Inc.                                                    
|EUB                        |  | Alberta Energy and Utilities Board                                      
|FCM                        |  | Forward Capacity Market                                                 
|FEIS                       |  | Final Environmental Impact Statement                                    
|FERC                       |  | Federal Energy Regulatory Commission                                    
|Foothills                  |  | Foothills Pipe Lines Ltd.                                               
|FT                         |  | Firm transportation                                                     
|GAAP                       |  | Generally accepted accounting principles                                
|Gas Pacifico               |  | Gasoducto del Pacifico S.A.                                             
|GJ                         |  | Gigajoule                                                               
|GRA                        |  | General Rate Application                                                
|Great Lakes                |  | Great Lakes Gas Transmission Limited Partnership                        
|GTN                        |  | GTN System and North Baja, collectively                                 
|GTNC                       |  | Gas Transmission Northwest Corporation                                  
|GWh                        |  | Gigawatt hours                                                          
|Halton Hills               |  | Halton Hills Generating Station                                         
|INNERGY                    |  | INNERGY Holdings S.A.                                                   
|Iroquois                   |  | Iroquois Gas Transmission System, L.P.                                  
|Keystone                   |  | Keystone Canada and Keystone U.S., collectively                         
|Keystone Canada            |  | TransCanada Keystone Pipeline Limited Partnership                       
|Keystone U.S.              |  | TransCanada Keystone Pipeline LP                                        
|km                         |  | Kilometres                                                              
|LIBOR                      |  | London Interbank Offered Rate                                           
|LNG                        |  | Liquefied natural gas                                                   
|MD&A                       |  | Management's Discussion and Analysis                                    
|MGP                        |  | Mackenzie Gas Pipeline                                                  
|Mirant                     |  | Mirant Corporation and certain of its subsidiaries                      
|mmcf/d                     |  | Million cubic feet per day                                              
|Moody's                    |  | Moody's Investors Service                                               
|MW                         |  | Megawatt                                                                
|MWh                        |  | Megawatt hours                                                          
|NEB                        |  | National Energy Board                                                   
|Net earnings               |  | Net income from continuing operations                                   
|NGL                        |  | Natural gas liquid                                                      
|NGTL                       |  | NOVA Gas Transmission Ltd.                                              
|Northern Border            |  | Northern Border Pipeline Company                                        
|NPA                        |  | Northern Pipeline Act of Canada                                         
|NW Natural                 |  | Northwest Natural Gas Company                                           
|OM&A                       |  | Operating, maintenance and administration                               
|OPA                        |  | Ontario Power Authority                                                 
|OSP                        |  | Ocean State Power                                                       
|Paiton Energy              |  | P.T. Paiton Energy Company                                              
|Palomar                    |  | Palomar Gas Transmission LLC                                            
|PG&E                       |  | Pacific Gas & Electric Company                                          
|PipeLines LP               |  | TC PipeLines, LP                                                        
|Portland                   |  | Portland Natural Gas Transmission System                                
|Portlands Energy           |  | Portlands Energy Centre L.P.                                            
|Power LP                   |  | TransCanada Power, L.P.                                                 
|PPA                        |  | Power purchase arrangement                                              
|ROE                        |  | Rate of return on common equity                                         
|SEC                        |  | U.S. Securities and Exchange Commission                                 
|TCPL                       |  | TransCanada PipeLines Limited                                           
|TCPM                       |  | TransCanada Power Marketing Ltd.                                        
|TQM                        |  | Trans Québec & Maritimes System                                         
|TransCanada or the Company |  | TransCanada Corporation                                                 
|TransGas                   |  | TransGas de Occidente S.A.                                              
|Tuscarora                  |  | Tuscarora Gas Transmission Company                                      
|U.S.                       |  | United States                                                           
|Ventures LP                |  | TransCanada Pipeline Ventures Limited Partnership                       
|WCSB                       |  | Western Canada Sedimentary Basin                                        

74MANAGEMENT'S
DISCUSSION AND ANALYSIS

---





|Report of
Management |  | The consolidated financial statements included in this Annual Report are the responsibility of TransCanada Corporation's management and have been approved by the Board of Directors of the Company. These consolidated
financial statements have been prepared by management in accordance with generally accepted accounting principles (GAAP) in Canada and include amounts that are based on estimates and judgments. Financial information contained elsewhere in this Annual
Report is consistent with the consolidated financial statements.
Management's Discussion and Analysis in this Annual Report has been prepared by management based on the Company's financial results prepared in accordance with Canadian GAAP. It compares the Company's financial performance in 2007 to
that in 2006 and should be read in conjunction with the consolidated financial statements and accompanying notes. In addition, it highlights significant changes between 2006 and 2005.Management has designed and maintains a system of internal accounting controls, including a program of internal audits. Management believes that these controls provide reasonable assurance that financial records are reliable and
form a proper basis for preparation of financial statements. The internal accounting control process includes management's communication to employees of policies that govern ethical business conduct.
Under the supervision and with the participation of the President and Chief Executive Officer and the Chief Financial Officer, management conducted an evaluation of the effectiveness of its internal control over financial reporting based
on the framework in Internal Control  Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. TransCanada acquired American Natural Resources Company and ANR Storage Company (collectively,
ANR) in 2007 and began consolidating the operations of ANR into the Company. Management has excluded this business from its evaluation of the effectiveness of the Company's internal control over financial reporting as of December 31, 2007. The
net income attributable to this business represented approximately nine per cent of the Company's consolidated net income for the year ended December 31, 2007, and their aggregate total assets represented approximately 12 per cent
of the Company's consolidated total assets as at December 31, 2007.Based on their evaluation, management concluded that internal control over financial reporting is effective as of December 31, 2007 to provide reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external reporting purposes.
The Board of Directors has appointed an Audit Committee consisting of unrelated, non-management directors. The Audit Committee meets at least six times a year with management and meets independently with each of the internal and external
auditors and as a group to review any significant accounting, internal control and auditing matters in accordance with the terms of the charter of the Audit Committee as set out in the Annual Information Form. The Audit Committee reviews the Annual
Report, including the consolidated financial statements, before the consolidated financial statements are submitted to the Board of Directors for approval. The internal and external auditors have free access to the Audit Committee without obtaining
prior management approval.The Audit Committee approves the terms of engagement of the independent external auditors and reviews the annual audit plan, the Auditors' Report and results of the audit. It also recommends to the Board of Directors the firm of external
auditors to be appointed by the shareholders.
The shareholders have appointed KPMG LLP as independent external auditors to express an opinion as to whether the consolidated financial statements present fairly, in all material respects, the Company's consolidated financial
position, results of operations and cash flows in accordance with Canadian GAAP. The report of KPMG LLP outlines the scope of its examination and its opinion on the consolidated financial statements.
|-------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|
|

|
|

| |  | SIG                                   |  | SIG                                                 
| |  | ------------------------------------- |  | ----------------------------------------------------
| |  | Harold N. Kvisle                      |  | Gregory A. Lohnes                                   
| |  | President and
Chief Executive Officer |  | Executive Vice-President and
Chief Financial Officer
| |  | February 25, 2008                     |  |                                                     

TRANSCANADA
CORPORATION75

---





|Auditors'
Report |  | To the Shareholders of TransCanada CorporationWe have audited the consolidated balance sheets of TransCanada Corporation as at December 31, 2007 and 2006, and the consolidated statements of income, comprehensive income, accumulated other comprehensive income, shareholders'
equity and cash flows for each of the years in the three-year period ended December 31, 2007. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted auditing standards. With respect to the consolidated financial statements for the years ended December 31, 2007 and 2006, we also 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 the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 2007 and 2006 and the results of its operations and its cash flows for each
of the years in the three-year period ended December 31, 2007 in accordance with Canadian generally accepted accounting principles.
|---------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|
|

|
|

| |  | GRAPHIC                              
| |  | -------------------------------------
| |  | Chartered Accountants
Calgary, Canada
| |  | February 25, 2008                    

76CONSOLIDATED
FINANCIAL STATEMENTS

---





TRANSCANADA CORPORATIONCONSOLIDATED INCOME

|Year ended December 31
(millions of dollars except per share amounts)               |                         | 2007  |       | 2006  |       | 2005  |       | 
|----------------------------------------------------------------------------------- | ----------------------- | ----- | ----- | ----- | ----- | ----- | ----- | 
|                                                                                   
|Revenues                                                                            |                         | 8,828 |       | 7,520 |       | 6,124 |       | 
|Operating Expenses                                                                  |                         |       |       |       |       |       |       | 
|Plant operating costs and other                                                     |                         | 3,030 |       | 2,411 |       | 1,825 |       | 
|Commodity purchases resold                                                          |                         | 1,959 |       | 1,707 |       | 1,232 |       | 
|Depreciation                                                                        |                         | 1,179 |       | 1,059 |       | 1,017 |       | 
|                                                                                   
|                                                                                    |                         | 6,168 |       | 5,177 |       | 4,074 |       | 
|                                                                                   
|                                                                                    |                         | 2,660 |       | 2,343 |       | 2,050 |       | 
|                                                                                   
|Other Expenses/(Income)                                                             |                         |       |       |       |       |       |       | 
|Financial charges (Note 9)                                                          |                         | 943   |       | 825   |       | 836   |       | 
|Financial charges of joint ventures (Note 10)                                       |                         | 75    |       | 92    |       | 66    |       | 
|Income from equity investments (Note 7)                                             |                         | (17   | )     | (33   | )     | (247  | )     | 
|Interest income and other                                                           |                         | (135  | )     | (123  | )     | (63   | )     | 
|Gains on sales of assets (Note 8)                                                   |                         | (16   | )     | (23   | )     | (445  | )     | 
|                                                                                   
|                                                                                    |                         | 850   |       | 738   |       | 147   |       | 
|                                                                                   
|Income from Continuing Operations before Income Taxes and Non-Controlling Interests |                         | 1,810 |       | 1,605 |       | 1,903 |       | 
|                                                                                   
|Income Taxes(Note 18)                                                               |                         |       |       |       |       |       |       | 
|                                                                                    | Current                 |       | 432   |       | 301   |       | 550   | 
|                                                                                    | Future                  |       | 58    |       | 175   |       | 60    | 
|                                                                                   
|                                                                                    |                         | 490   |       | 476   |       | 610   |       | 
|Non-Controlling Interests(Note 15)                                                  |                         | 97    |       | 78    |       | 84    |       | 
|                                                                                   
|Net Income from Continuing Operations                                               |                         | 1,223 |       | 1,051 |       | 1,209 |       | 
|Net Income from Discontinued Operations(Note 24)                                    |                         |      |       | 28    |       |      |       | 
|                                                                                   
|Net Income                                                                          |                         | 1,223 |       | 1,079 |       | 1,209 |       | 
|                                                                                   
|Net Income per Share(Note 16)                                                       |                         |       |       |       |       |       |       | 
|Basic                                                                               |                         |       |       |       |       |       |       | 
|                                                                                    | Continuing operations   |       | $2.31 |       | $2.15 |       | $2.49 | 
|                                                                                    | Discontinued operations |       |      |       | 0.06  |       |      | 
|                                                                                   
|                                                                                    |                         | $2.31 |       | $2.21 |       | $2.49 |       | 
|                                                                                   
|Diluted                                                                             |                         |       |       |       |       |       |       | 
|                                                                                    | Continuing operations   |       | $2.30 |       | $2.14 |       | $2.47 | 
|                                                                                    | Discontinued operations |       |      |       | 0.06  |       |      | 
|                                                                                   
|                                                                                    |                         | $2.30 |       | $2.20 |       | $2.47 |       | 
|                                                                                   

The accompanying notes to the consolidated financial statements are an integral part of these statements.

CONSOLIDATED FINANCIAL
STATEMENTS77

---



TRANSCANADA CORPORATIONCONSOLIDATED CASH FLOWS

|Year ended December 31
(millions of dollars)                                 |  | 2007   |   | 2006   |   | 2005   |   | 
|---------------------------------------------------------------------------- |  | ------ | - | ------ | - | ------ | - | 
|                                                                            
|Cash Generated from Operations                                               |  |        |   |        |   |        |   | 
|Net income                                                                   |  | 1,223  |   | 1,079  |   | 1,209  |   | 
|Depreciation                                                                 |  | 1,179  |   | 1,059  |   | 1,017  |   | 
|Income from equity investments in excess of distributions received (Note 7)  |  | (1     | ) | (9     | ) | (71    | ) | 
|Future income taxes (Note 18)                                                |  | 58     |   | 175    |   | 60     |   | 
|Non-controlling interests (Note 15)                                          |  | 97     |   | 78     |   | 84     |   | 
|Employee future benefits funding lower than/(in excess of) expense (Note 21) |  | 43     |   | (31    | ) | (9     | ) | 
|Gains on sales of assets, net of current income taxes (Note 8)               |  | (14    | ) | (11    | ) | (318   | ) | 
|Other                                                                        |  | 36     |   | 38     |   | (21    | ) | 
|                                                                            
|                                                                             |  | 2,621  |   | 2,378  |   | 1,951  |   | 
|Decrease/(increase) in operating working capital (Note 22)                   |  | 215    |   | (303   | ) | (49    | ) | 
|                                                                            
|Net cash provided by operations                                              |  | 2,836  |   | 2,075  |   | 1,902  |   | 
|                                                                            
|Investing Activities                                                         |  |        |   |        |   |        |   | 
|Capital expenditures                                                         |  | (1,651 | ) | (1,572 | ) | (754   | ) | 
|Acquisitions, net of cash acquired (Note 8)                                  |  | (4,223 | ) | (470   | ) | (1,317 | ) | 
|Disposition of assets, net of current income taxes (Note 8)                  |  | 35     |   | 23     |   | 671    |   | 
|Deferred amounts and other                                                   |  | (368   | ) | (97    | ) | 64     |   | 
|                                                                            
|Net cash used in investing activities                                        |  | (6,207 | ) | (2,116 | ) | (1,336 | ) | 
|                                                                            
|Financing Activities                                                         |  |        |   |        |   |        |   | 
|Dividends on common shares (Note 16)                                         |  | (546   | ) | (617   | ) | (586   | ) | 
|Distributions paid to non-controlling interests                              |  | (88    | ) | (72    | ) | (74    | ) | 
|Notes payable (repaid)/issued, net                                           |  | (46    | ) | (495   | ) | 416    |   | 
|Long-term debt issued                                                        |  | 2,631  |   | 2,107  |   | 799    |   | 
|Reduction of long-term debt                                                  |  | (1,088 | ) | (729   | ) | (1,113 | ) | 
|Long-term debt of joint ventures issued                                      |  | 142    |   | 56     |   | 38     |   | 
|Reduction of long-term debt of joint ventures                                |  | (157   | ) | (70    | ) | (80    | ) | 
|Junior subordinated notes issued                                             |  | 1,107  |   |       |   |       |   | 
|Preferred securities redeemed                                                |  | (488   | ) |       |   |       |   | 
|Common shares issued, net of issue costs (Note 16)                           |  | 1,711  |   | 39     |   | 44     |   | 
|Partnership units of subsidiary issued (Note 8)                              |  | 348    |   |       |   |       |   | 
|                                                                            
|Net cash provided by/(used in) financing activities                          |  | 3,526  |   | 219    |   | (556   | ) | 
|                                                                            
|Effect of Foreign Exchange Rate Changes on Cash and Cash Equivalents         |  | (50    | ) | 9      |   | 11     |   | 
|                                                                            
|Increase in Cash and Cash Equivalents                                        |  | 105    |   | 187    |   | 21     |   | 
|Cash and Cash Equivalents                                                    |  |        |   |        |   |        |   | 
|Beginning of year                                                            |  | 399    |   | 212    |   | 191    |   | 
|                                                                            
|Cash and Cash Equivalents                                                    |  |        |   |        |   |        |   | 
|End of year                                                                  |  | 504    |   | 399    |   | 212    |   | 
|                                                                            

The accompanying notes to the consolidated financial statements are an integral part of these statements.

78CONSOLIDATED
FINANCIAL STATEMENTS

---





TRANSCANADA CORPORATIONCONSOLIDATED BALANCE SHEET

|December 31
(millions of dollars)                             |  | 2007   |   | 2006   |   | 
|------------------------------------------------------------- |  | ------ | - | ------ | - | 
|                                                             
|ASSETS                                                        |  |        |   |        |   | 
|Current Assets                                                |  |        |   |        |   | 
|Cash and cash equivalents                                     |  | 504    |   | 399    |   | 
|Accounts receivable                                           |  | 1,116  |   | 1,004  |   | 
|Inventories                                                   |  | 497    |   | 392    |   | 
|Other                                                         |  | 188    |   | 297    |   | 
|                                                             
|                                                              |  | 2,305  |   | 2,092  |   | 
|Long-Term Investments(Note 7)                                 |  | 63     |   | 71     |   | 
|Plant, Property and Equipment(Note 4)                         |  | 23,452 |   | 21,487 |   | 
|Goodwill                                                      |  | 2,633  |   | 281    |   | 
|Other Assets(Note 5)                                          |  | 1,877  |   | 1,978  |   | 
|                                                             
|                                                              |  | 30,330 |   | 25,909 |   | 
|                                                             
|LIABILITIES AND SHAREHOLDERS' EQUITY                          |  |        |   |        |   | 
|Current Liabilities                                           |  |        |   |        |   | 
|Notes payable (Note 19)                                       |  | 421    |   | 467    |   | 
|Accounts payable                                              |  | 1,767  |   | 1,500  |   | 
|Accrued interest                                              |  | 261    |   | 264    |   | 
|Current portion of long-term debt (Note 9)                    |  | 556    |   | 616    |   | 
|Current portion of long-term debt of joint ventures (Note 10) |  | 30     |   | 142    |   | 
|                                                             
|                                                              |  | 3,035  |   | 2,989  |   | 
|Deferred Amounts(Note 12)                                     |  | 1,107  |   | 1,029  |   | 
|Future Income Taxes(Note 18)                                  |  | 1,179  |   | 876    |   | 
|Long-Term Debt(Note 9)                                        |  | 12,377 |   | 10,887 |   | 
|Long-Term Debt of Joint Ventures(Note 10)                     |  | 873    |   | 1,136  |   | 
|Junior Subordinated Notes(Note 11)                            |  | 975    |   |        |   | 
|Preferred Securities(Note 14)                                 |  |       |   | 536    |   | 
|                                                             
|                                                              |  | 19,546 |   | 17,453 |   | 
|                                                             
|Non-Controlling Interests(Note 15)                            |  | 999    |   | 755    |   | 
|Shareholders' Equity                                          |  |        |   |        |   | 
|Common shares (Note 16)                                       |  | 6,662  |   | 4,794  |   | 
|                                                             
|Contributed surplus                                           |  | 276    |   | 273    |   | 
|                                                             
|Retained earnings                                             |  | 3,220  |   | 2,724  |   | 
|Accumulated other comprehensive income                        |  | (373   | ) | (90    | ) | 
|                                                             
|                                                              |  | 2,847  |   | 2,634  |   | 
|                                                             
|                                                              |  | 9,785  |   | 7,701  |   | 
|                                                             
|Commitments, Contingencies and Guarantees(Note 23)            |  |        |   |        |   | 
|Subsequent Events(Note 25)                                    |  |        |   |        |   | 
|                                                              |  | 30,330 |   | 25,909 |   | 
|                                                             

The accompanying notes to the consolidated financial statements are an integral part of these statements.

On
behalf of the Board:

|SIG                      |  | SIG                    
|------------------------ |  | -----------------------
|Harold N. KvisleDirector |  | Kevin E. BensonDirector

CONSOLIDATED FINANCIAL
STATEMENTS79

---



TRANSCANADA CORPORATIONCONSOLIDATED COMPREHENSIVE INCOME

|Year ended December 31
(millions of dollars)                                                                                               |  | 2007  |   | 2006  |   | 2005  |   | 
|------------------------------------------------------------------------------------------------------------------------------------------ |  | ----- | - | ----- | - | ----- | - | 
|                                                                                                                                          
|Net Income                                                                                                                                 |  | 1,223 |   | 1,079 |   | 1,209 |   | 
|                                                                                                                                          
|Other Comprehensive Income/(Loss), net of income taxes                                                                                     |  |       |   |       |   |       |   | 
|Change in foreign currency translation gains and losses on investments in foreign operations(1)                                            |  | (350  | ) | 6     |   | (34   | ) | 
|Change in gains and losses on hedges of investments in foreign operations(2)                                                               |  | 79    |   | (6    | ) | 15    |   | 
|Change in gains and losses on derivative instruments designated as cash flow hedges(3)                                                     |  | 42    |   |      |   |      |   | 
|Reclassification to net income of gains and losses on derivative instruments designated as cash flow hedges pertaining to prior periods(4) |  | 42    |   |      |   |      |   | 
|                                                                                                                                          
|Other comprehensive income/(loss)                                                                                                          |  | (187  | ) |      |   | (19   | ) | 
|                                                                                                                                          
|Comprehensive Income                                                                                                                       |  | 1,036 |   | 1,079 |   | 1,190 |   | 
|                                                                                                                                          

The
accompanying notes to the consolidated financial statements are an integral part of these statements.

80CONSOLIDATED
FINANCIAL STATEMENTS

---





TRANSCANADA CORPORATIONCONSOLIDATED ACCUMULATED OTHER COMPREHENSIVE INCOME

|(millions of dollars)                                                                                                                         |  | Currency
Translation
Adjustment |   | Cash Flow
Hedges |   | Total |   | 
|--------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------- | - | ---------------- | - | ----- | - | 
|                                                                                                                                             
|Balance at December 31, 2004                                                                                                                  |  | (71                             | ) |                 |   | (71   | ) | 
|Change in foreign currency translation gains and losses on investments in foreign operations(1)                                               |  | (34                             | ) |                 |   | (34   | ) | 
|Change in gains and losses on hedges of investments in foreign operations(2)                                                                  |  | 15                              |   |                 |   | 15    |   | 
|                                                                                                                                             
|Balance at December 31, 2005                                                                                                                  |  | (90                             | ) |                 |   | (90   | ) | 
|Change in foreign currency translation gains and losses on investments in foreign operations(1)                                               |  | 6                               |   |                 |   | 6     |   | 
|Change in gains and losses on hedges of investments in foreign operations(2)                                                                  |  | (6                              | ) |                 |   | (6    | ) | 
|                                                                                                                                             
|Balance at December 31, 2006                                                                                                                  |  | (90                             | ) |                 |   | (90   | ) | 
|Transition adjustment resulting from adopting new financial instruments standards(3)                                                          |  |                                |   | (96              | ) | (96   | ) | 
|Change in foreign currency translation gains and losses on investments in foreign operations(1)                                               |  | (350                            | ) |                 |   | (350  | ) | 
|Change in gains and losses on hedges of investments in foreign operations(2)                                                                  |  | 79                              |   |                 |   | 79    |   | 
|Change in gains and losses on derivative instruments designated as cash flow hedges(4)                                                        |  |                                |   | 42               |   | 42    |   | 
|Reclassification to net income of gains and losses on derivative instruments designated as cash flow hedges pertaining to prior periods(5)(6) |  |                                |   | 42               |   | 42    |   | 
|                                                                                                                                             
|Balance at December 31, 2007                                                                                                                  |  | (361                            | ) | (12              | ) | (373  | ) | 
|                                                                                                                                             

The
accompanying notes to the consolidated financial statements are an integral part of these statements.

CONSOLIDATED FINANCIAL
STATEMENTS81

---



TRANSCANADA CORPORATIONCONSOLIDATED SHAREHOLDERS' EQUITY

|Year ended December 31
(millions of dollars)                                                          |  | 2007  |   | 2006  |   | 2005  |   | 
|----------------------------------------------------------------------------------------------------- |  | ----- | - | ----- | - | ----- | - | 
|                                                                                                     
|Common Shares                                                                                         |  |       |   |       |   |       |   | 
|Balance at beginning of year                                                                          |  | 4,794 |   | 4,755 |   | 4,711 |   | 
|Proceeds from shares issued under public offering (Note 16)                                           |  | 1,683 |   |      |   |      |   | 
|Shares issued under dividend reinvestment plan (Note 16)                                              |  | 157   |   |      |   |      |   | 
|Proceeds from shares issued on exercise of stock options (Note 16)                                    |  | 28    |   | 39    |   | 44    |   | 
|                                                                                                     
|Balance at end of year                                                                                |  | 6,662 |   | 4,794 |   | 4,755 |   | 
|                                                                                                     
|Contributed Surplus                                                                                   |  |       |   |       |   |       |   | 
|Balance at beginning of year                                                                          |  | 273   |   | 272   |   | 270   |   | 
|Issuance of stock options (Note 16)                                                                   |  | 3     |   | 1     |   | 2     |   | 
|                                                                                                     
|Balance at end of year                                                                                |  | 276   |   | 273   |   | 272   |   | 
|                                                                                                     
|Retained Earnings                                                                                     |  |       |   |       |   |       |   | 
|Balance at beginning of year                                                                          |  | 2,724 |   | 2,269 |   | 1,655 |   | 
|Transition adjustment resulting from adopting new financial instruments accounting standards (Note 2) |  | 4     |   |       |   |       |   | 
|Net income                                                                                            |  | 1,223 |   | 1,079 |   | 1,209 |   | 
|Common share dividends                                                                                |  | (731  | ) | (624  | ) | (595  | ) | 
|                                                                                                     
|Balance at end of year                                                                                |  | 3,220 |   | 2,724 |   | 2,269 |   | 
|                                                                                                     
|Accumulated Other Comprehensive Income, Net of Income Taxes                                           |  |       |   |       |   |       |   | 
|Balance at beginning of year                                                                          |  | (90   | ) | (90   | ) | (71   | ) | 
|Transition adjustment resulting from adopting new financial instruments accounting standards (Note 2) |  | (96   | ) |       |   |       |   | 
|Other comprehensive income/(loss)                                                                     |  | (187  | ) |      |   | (19   | ) | 
|                                                                                                     
|Balance at end of year                                                                                |  | (373  | ) | (90   | ) | (90   | ) | 
|                                                                                                     
|Total Shareholders' Equity                                                                            |  | 9,785 |   | 7,701 |   | 7,206 |   | 
|                                                                                                     

The accompanying notes to the consolidated financial statements are an integral part of these statements.

82CONSOLIDATED
FINANCIAL STATEMENTS

---





TRANSCANADA CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS

TransCanada Corporation (the Company or TransCanada) is a leading North American energy company. TransCanada operates in two
business segments, Pipelines and Energy, each of which offers different products and services.

Pipelines

The Pipelines segment owns and operates the following:

Pipelines
also holds the Company's investments in other pipelines and pipeline projects including the following:

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS83

---



Energy

The Energy segment builds, owns and operates electrical power generation plants, and sells electricity. Energy also holds investments in other electrical power generation
plants, non-regulated natural gas storage facilities and interests in liquefied natural gas (LNG) regasification projects in North America. This business operates in Canada and the
U.S. as follows:

Through
its Energy segment, TransCanada owns and operates:

TransCanada
owns but does not operate:

TransCanada
also has long-term power purchase arrangements (PPA) in place for:

TransCanada
has interests in projects under construction as follow:

NOTE 1    ACCOUNTING POLICIES

The consolidated financial statements of the Company have been prepared by Management in accordance with Canadian GAAP. Amounts are stated in Canadian dollars unless otherwise
indicated. Certain comparative figures have been reclassified to conform with the current year's presentation.

In
preparing these financial statements, TransCanada is required to make estimates and assumptions that affect both the amount and timing of recording assets, liabilities,
revenues and expenses since the determination of these items may be dependent on future events. The Company uses the most current information available and exercises careful judgment in making these
estimates. In the
opinion of management, these consolidated financial statements have been properly prepared within reasonable limits of materiality and within the framework of the significant accounting policies
summarized below.

Basis of Presentation

The consolidated financial statements include the accounts of TransCanada and its subsidiaries as well as its proportionate share of the accounts of its joint ventures.
TransCanada uses the equity method of accounting for investments over which the Company is able to exercise significant influence. The Company consolidates its 32.1 per cent ownership
interest in PipeLines LP and its 61.7 per cent interest in Portland Natural Gas Transmission System (Portland), with the other partners' interests included in Non-Controlling
Interests.

Regulation

The Canadian Mainline, Foothills Pipe Lines Ltd. (Foothills), including the BC System effective April 1, 2007, and Trans Québec Maritimes
System (TQM) are subject to the authority of the National Energy Board (NEB). Effective January 1, 2008, the Alberta System is regulated by the Alberta Utilities Commission (AUC), a new
regulatory body created as a result of the reorganization of the Alberta Energy and Utilities

84NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

---



Board
(EUB). The Alberta System was regulated by the EUB prior to this date. The GTN System and North Baja (collectively, GTN), ANR and the other natural gas pipelines in the U.S. are
subject to the authority of the Federal Energy Regulatory Commission (FERC). These natural gas transmission operations are regulated with respect to the determination of revenues, tolls, construction
and operations. The timing of recognition of certain revenues and expenses in these regulated businesses may differ from that otherwise expected under GAAP to appropriately reflect the economic impact
of the regulators' decisions regarding the Company's revenues and tolls, and to thereby achieve a proper matching of revenues and expenses. The impact of rate regulation on TransCanada is provided in
Note 13 of these financial statements.

Revenue Recognition

Pipelines

In the Pipelines segment, revenues from Canadian operations subject to rate regulation are recognized in accordance with decisions made by the NEB and AUC. Revenues from
U.S. operations subject to rate regulation are recorded in accordance with FERC rules and regulations. Revenues from non-regulated operations are recorded when products have been
delivered or services have been performed.

Energy

i)      Power

The majority of revenues from the Power business are derived from the sale of electricity from energy marketing activities and from the sale of unutilized natural gas fuel,
which are recorded in the month of delivery. Revenues also include the impact of energy derivative contracts, the accounting for which is described in Note 2.

ii)     Natural Gas Storage

The majority of the revenues earned from natural gas storage are derived from providing storage services and are recognized in accordance with the terms of the gas storage
contracts. Revenues earned on the sale of proprietary natural gas are recorded in the month of delivery. Forward contracts for the purchase or sale of natural gas, as well as proprietary natural gas
inventory, are recorded at fair value with changes in fair value recorded in Net Income.

Dilution Gains

Dilution gains resulting from the sale of units by partnerships in which TransCanada has an ownership interest are recognized immediately in net income.

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.

Inventories

Inventories consisting of uranium and materials and supplies including spare parts, are carried at the lower of average cost or net realizable value. As a result of adopting the
new Canadian Institute of Chartered Accountants (CICA) Handbook accounting requirements for Section 3031 "Inventories", effective April 1, 2007, TransCanada began valuing its proprietary
natural gas inventory held in storage at its fair value, as measured by the one-month forward price for natural gas.

Plant, Property and Equipment

Pipelines

Plant, property and equipment of the Pipelines segment are carried at cost. Depreciation is calculated on a straight-line basis. Pipeline and compression equipment
are depreciated at annual rates ranging from two to six per cent and metering and other plant equipment are depreciated at various rates. An allowance for funds used during construction is
capitalized based on the rate of return on rate base approved by regulators and included in the cost of gas transmission plant. Interest is capitalized during construction on non-regulated
pipelines.

Energy

Major power generation and natural gas storage plant, equipment and structures in the Energy segment are recorded at cost and depreciated on a straight-line basis
over estimated service lives at average annual rates ranging from two to ten per cent. Nuclear power generation assets under capital lease are initially recorded at the present value of minimum
lease payments at the inception of the lease and amortized on a straight-line basis over the shorter of their useful life or remaining lease term. Other equipment is depreciated at various
rates. The cost of

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS85

---



major
overhauls of equipment is capitalized and depreciated over the estimated service lives. Interest is capitalized on plants under construction.

Corporate

Corporate plant, property and equipment are recorded at cost and depreciated on a straight-line basis over estimated useful lives at average annual rates ranging
from three to 20 per cent.

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. Goodwill is not amortized and is tested for impairment annually, or more frequently if events or changes in circumstances indicate that the
asset might be impaired. Currently, all goodwill relates to U.S. Pipelines acquisitions.

Power Purchase Arrangements

A PPA is a long-term contract for the purchase or sale of power on a predetermined basis. The initial payments for a PPA are deferred and amortized on a
straight-line basis over the term of the contract, which ranges from nine to 12 years. PPAs, under which TransCanada sells power, are accounted for as operating leases. A portion of
these PPAs have been subleased to third parties under similar terms and conditions.

Stock Options

TransCanada's Stock Option Plan permits options to be awarded to certain employees, including officers, to purchase the Company's common shares. The contractual life of options
granted after 2002 and options granted prior to 2003 is seven years and ten years, respectively. Options may be exercised at a price determined at the time the option is awarded and vest
33.3 per cent on each of the three following award date anniversaries. The Company records compensation expense over the three-year vesting period. This charge is reflected
in the Pipelines and Energy segments. Upon exercise of stock options, amounts originally recorded against Contributed Surplus are reclassified to Common Shares.

Income Taxes

The taxes payable method of accounting for income taxes is used for tollmaking purposes in Canadian regulated natural gas transmission operations, as prescribed by regulators.
It is not necessary to provide for future income taxes under the taxes payable method. As permitted by Canadian GAAP, this method is also used for accounting purposes, since there is reasonable
expectation that future taxes payable will be included in future costs of service and recorded in revenues at that time. The liability method of accounting for income taxes is used for the remainder
of the Company's operations. Under the liability method, future tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax bases. Future income tax assets and liabilities are measured using enacted or substantively enacted tax rates anticipated
to apply to taxable income in the years in which temporary differences are anticipated to be recovered or settled. Changes to these balances are recognized in income in the period in which
they occur.

Canadian
income taxes are not provided on the unremitted earnings of foreign investments that the Company does not intend to repatriate in the foreseeable future.

Foreign Currency Translation

The Company's foreign operations are self-sustaining and are translated into Canadian dollars using the current rate method. Under this method, assets and
liabilities are translated at period-end exchange rates and items included in the consolidated statements of income, shareholders' equity, comprehensive income, accumulated other
comprehensive income and cash flows are translated at the exchange rates in effect at the time of the transaction. Translation adjustments are reflected in Other Comprehensive Income.

Exchange
gains or losses on the principal amounts of foreign currency debt related to the Alberta System, Foothills and Canadian Mainline are deferred until they are
refunded or recovered in tolls.

Derivative Financial Instruments and Hedging Activities

The Company uses derivative and other financial instruments to manage its exposure to changes in foreign currency exchange rates, interest rates and energy commodity prices. The
Company also uses a combination of derivatives and U.S. dollar-denominated debt to manage the foreign currency exposure of its foreign operations. The methods the Company uses to
account for its derivative and other financial instruments are described in Notes 2 and 17.

86NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

---



The
recognition of gains and losses on the derivatives for the Canadian Mainline, Alberta System and Foothills exposures is determined through the regulatory process. The
gains and losses on derivatives accounted for as part of rate-regulated accounting are deferred in regulatory assets or regulatory liabilities.

Asset Retirement Obligations

The Company recognizes the fair value of a liability for an asset retirement obligation in the period in which it is incurred, when a legal obligation exists and if a reasonable
estimate of fair value can be made. The fair value is added to the carrying amount of the associated asset and the liability is accreted at the end of each period through charges to operating
expenses.

It
is not possible to determine the scope and timing of asset retirements related to regulated natural gas transmission pipelines and, therefore, not possible to make a
reasonable estimate of the fair value of the associated liability. As a result, the Company has not recorded an amount for asset retirement obligations related to these assets, with the exception of
abandoned facilities. Management believes it is reasonable to assume that all retirement costs associated with its regulated pipelines will be recovered through tolls in future periods.

Similarly,
it is not possible to determine the scope and timing of asset retirements related to hydroelectric power plants and, therefore, not possible to make a reasonable
estimate of the fair value of the associated liability. As a result, the Company has not recorded an amount for asset retirement obligations related to hydroelectric power plant assets. With respect
to the nuclear assets leased by Bruce Power, the Company has not recorded an amount for asset retirement obligations, as the lessor is responsible for decommissioning liabilities under the lease
agreement.

Employee Benefit and Other Plans

The Company sponsors defined benefit pension plans (DB Plans), defined contributions plans (DC Plans) and other post-employment plans. Contributions
made by the Company to the DC Plans are expensed as incurred. The cost of the DB Plans and other post-employment benefits earned by employees is actuarially determined using the projected
benefit method pro-rated based on service and management's best estimate of expected plan investment performance, salary escalation, retirement ages of employees and expected health
care costs.

The
DB Plans' assets are measured at fair value. The expected return on the DB Plans' assets is determined using market-related values based on a
five-year moving average value for all plan assets. Past service costs are amortized over the expected average remaining service life of the employees. Adjustments arising from plan
amendments are amortized on a straight-line basis over the average remaining service period of employees active at the date of amendment. The excess of net actuarial gains or losses over
10 per cent of the greater of the benefit obligation and the fair value of the DB Plans' assets is amortized over the average remaining service period of the active employees.
When the restructuring of a benefit plan gives rise to both a curtailment and a settlement, the curtailment is accounted for prior to the settlement.

The
Company has broad-based, medium-term employee incentive plans, which grant units to each eligible employee and are payable in cash. The expense related to
these incentive plans is accounted for on an accrual basis. Under these plans, units vest when certain conditions are met, including the employees' continued employment during a specified period and
achievement of specified corporate performance targets.

Certain
of the Company's joint ventures sponsor DB Plans. The Company records its proportionate share of expenses, funding contributions and accrued benefit assets
and liabilities related to these plans.

NOTE 2    ACCOUNTING CHANGES

Changes in Accounting Policies for 2007

Effective January 1, 2007, the Company adopted the accounting requirements for CICA Handbook Sections 1506 "Accounting Changes", 1530 "Comprehensive Income", 3251
"Equity", 3855 "Financial Instruments  Recognition and Measurement", and 3865 "Hedges". In addition, the Company chose to adopt the accounting requirements for
Sections 3862 "Financial Instruments  Disclosure", 3863 "Financial Instruments  Presentation", and 1535 "Capital
Disclosures" effective December 31, 2007, as well as the accounting requirements for Section 3031 "Inventories" effective April 1, 2007. Adjustments to the consolidated financial
statements for 2007 have been made in accordance with the transitional provisions for these new standards.

Comprehensive Income and Equity

The Company's financial statements include statements of Consolidated Comprehensive Income and Consolidated Accumulated Other Comprehensive Income. In addition, as required in
CICA Handbook Section 3251, the Company now presents separately, in the Consolidated Shareholders' Equity statement, the changes for each of its components of Shareholders' Equity,
including Accumulated Other Comprehensive Income.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS87

---



Financial Instruments

All financial instruments must initially be included on the balance sheet at their fair value. Subsequent measurement of the financial instruments is based on their
classification. Financial assets are classified into the following categories: held for trading, available for sale, held-to-maturity investments and loans and receivables. Financial liabilities are
classified as held for trading or other financial liabilities.

Held-for-trading
financial assets and liabilities consist of swaps, options, forwards and futures, and are entered into with the intention of
generating a profit. A financial asset or liability that does not meet this criterion may also be designated as held for trading. Power and natural gas held-for-trading
instruments are initially recorded at their fair value and changes to fair value are included in Revenues. Changes in the fair value of interest rate and foreign exchange
held-for-trading instruments are recorded in Financial Charges and in Interest Income and Other, respectively. The Company had not designated any financial assets or
liabilities as held for trading at December 31, 2007.

The
available-for-sale classification includes non-derivative financial assets that are designated as available for sale or are not
included in the other three classifications. TransCanada's available-for-sale financial instruments include fixed-income securities held for
self-insurance. These instruments are initially accounted for at their fair value and changes to fair value are recorded through Other Comprehensive Income. Income from the settlement of
available-for-sale financial assets will be included in Interest Income and Other.

Held-to-maturity
financial assets are accounted for at their amortized cost using the effective interest method. The Company did not have any
held-to-maturity financial assets at December 31, 2007.

Trade
receivables, loans and other receivables with fixed or determinable payments that are not quoted in an active market are classified as "loans and receivables" and are
measured net of any impairment. Loans and receivables include primarily trade accounts receivable and non-interest-bearing third-party loans receivable. Interest and other
income earned from these financial assets are recorded in Interest Income and Other.

Other
financial liabilities consist of liabilities not classified as held for trading. Interest expense is included in Financial Charges and in Financial Charges of Joint
Ventures. Items in this financial instrument category are recognized at amortized cost using the effective interest method.

All
derivatives are recorded on the balance sheet at fair value, with the exception of those that were entered into and continue to be held for the purpose of receipt or
delivery in accordance with the Company's expected purchase, sale or usage requirements (normal purchase and normal sale exemption). Changes in the fair value of derivatives that are not designated in
a hedging relationship are recorded in Net Income. Derivatives used in hedging relationships are discussed further under the heading Hedges in this Note.

Derivatives
embedded in other financial instruments or contracts (the host instrument) are recorded as separate derivatives and are measured at fair value if the
economic characteristics of the embedded derivative are not closely related to the host instrument, the terms of the embedded derivative are the same as those of a stand-alone derivative and the total
contract is not held for trading or accounted for at fair value. Changes in the fair value of embedded derivates that are recorded separately are included in Revenues. The Company used
January 1, 2003 as the transition date for embedded derivatives.

Transaction
costs are incremental costs that are directly attributable to the acquisition, issue or disposal of a financial instrument. Effective January 1, 2007, the
Company began offsetting long-term debt transaction costs against the associated debt and began amortizing these costs using the effective interest method. Previously, these costs were
amortized on a straight-line basis over the life of the debt. There was no material impact on the Company's financial statements as a result of this change in policy. In 2007, the impact
on Net Income for the amortization of transaction costs using the effective interest method was nominal.

The
Company records the fair values of material joint and several guarantees. These fair values cannot be readily obtained from an open market and therefore, the fair value
of these guarantees is estimated by discounting the cash flows that would be incurred by the Company if letters of credit were used in place of the guarantees. Guarantees are recorded as an increase
to an investment account, Property, Plant and Equipment or a charge to Net Income, and a corresponding liability in Deferred Amounts.

Hedges

CICA Handbook Section 3865 specifies the criteria that must be satisfied in order to apply hedge accounting and the accounting for each of the permitted hedging
strategies, including: fair value hedges, cash flow hedges and hedges of foreign currency exposures of net investments in self-sustaining foreign operations. Hedge accounting is
discontinued prospectively when the derivative no longer qualifies as an effective hedge or is terminated or sold, or upon the sale or early termination of the hedged item.

Documentation
must be prepared at the inception of the hedging arrangement in order to qualify for hedge accounting treatment. In addition, the Company must perform an
assessment of effectiveness at inception of the contract and at each reporting date.

In
a fair value hedging relationship, the carrying value of the hedged item is adjusted for changes in fair value attributable to the hedged risk. The changes in fair value
are recognized in Net Income. Changes in the fair value of the hedged item, to the extent that the hedging relationship is effective, are offset by changes in the fair value of the hedging item, which
is also recorded in Net Income. Changes in the fair value of foreign exchange and interest rate hedges are recorded in Interest Income and Other and Financial Charges, respectively. When hedge

88NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

---



accounting
is discontinued, the carrying value of the hedged item is no longer adjusted and the cumulative fair value adjustments to the carrying value of the hedged item are amortized to Net Income
over the remaining term of the original hedging relationship.

In
a cash flow hedging relationship, the effective portion of the change in the fair value of the hedging derivative is recognized in Other Comprehensive Income, while any
ineffective portion is recognized in Net Income in the same financial category as the underlying transaction. When hedge accounting is discontinued, the amounts recognized previously in Accumulated
Other Comprehensive Income are reclassified to Net Income during the periods when the variability in cash flows of the hedged item affects Net Income. Gains and losses on derivatives are reclassified
immediately to Net Income when the hedged item is sold or terminated early, or when a hedged anticipated transaction is no longer expected to occur.

The
Company also enters into cash flow hedges and fair value hedges for activities subject to rate regulation. The gains and losses arising from the changes in fair value of
these hedges can be recovered through the tolls charged by the Company. As a result, these gains and losses are deferred as rate-regulated assets or liabilities on behalf of the
ratepayers. When the hedges are settled, the realized gains or losses are collected from or refunded to the ratepayers in subsequent years.

In
hedging the foreign currency exposure of a net investment in a self-sustaining foreign operation, the effective portion of foreign exchange gains and losses
on the hedging instruments is recognized in Other Comprehensive Income and the ineffective portion is recognized in Net Income. The amounts recognized previously in Accumulated Other Comprehensive
Income are recognized in Net Income in the event the Company settles or otherwise reduces its investment.

Net Effect of Accounting Policy Changes

The net effect of the preceding accounting policy changes on the Company's financial statements at January 1, 2007, was as follows:

|Increases/(decreases) (millions of dollars) |  |      |   | 
|------------------------------------------- |  | ---- | - | 
|                                           
|Other current assets                        |  | (127 | ) | 
|Other assets                                |  | (203 | ) | 
|Accounts payable                            |  | (29  | ) | 
|Deferred amounts                            |  | (75  | ) | 
|Future income taxes                         |  | (42  | ) | 
|Long-term debt                              |  | (85  | ) | 
|Long-term debt of joint ventures            |  | (7   | ) | 
|Accumulated other comprehensive income      |  | (96  | ) | 
|Retained earnings                           |  | 4    |   | 

The
primary changes in 2007 to the Company's accounting policies for financial instruments related to the requirements to record certain non-financial contracts
at their fair value and to offset transaction costs against long-term debt.

Section 3862 Financial Instruments  Disclosures and Section 3863 Financial
Instruments  Presentation

CICA Handbook Sections 3862 "Financial Instruments  Disclosure" and 3863 "Financial
Instruments  Presentation", which replaced Section 3861 "Financial Instruments  Disclosure and Presentation", are
effective January 1, 2008. However, the Company chose to adopt these standards effective December 31, 2007. The additional disclosure necessary to comply with these standards is provided
in these consolidated financial statements. Certain information related to comparative years is not prescribed by these standards and accordingly has not been presented.

Section 1535 Capital Disclosures

CICA Handbook Section 1535 "Capital Disclosures" is effective for fiscal years beginning on or after October 1, 2007, however, TransCanada chose to adopt this standard
effective December 31, 2007. Note 17 in these consolidated financial statements provides qualitative disclosure regarding objectives, policies and processes for managing capital as well
as quantitative data on capital as of December 31, 2007.

Proprietary Natural Gas Inventories and Revenue Recognition

CICA Handbook Section 3031 "Inventories" is effective January 1, 2008. However, the Company chose to adopt this standard effective April 1, 2007, and began
valuing its proprietary natural gas inventory held in storage at fair value, as measured by the one-month forward price for natural gas. To record inventory at fair value, TransCanada has
designated its natural gas storage business as a broker/trader business that purchases and sells natural gas on a back-to-back basis. TransCanada did not have any proprietary
natural gas inventory prior to April 1, 2007.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS89

---



The
Company records its proprietary natural gas storage results in Revenues net of Commodity Purchases Resold. All changes in the fair value of the proprietary natural gas inventories are reflected in
Inventories and Revenues.

Future Accounting Changes

Rate-Regulated Operations

Effective January 1, 2009, the temporary exemption from CICA Handbook Section 1100, "Generally Accepted Accounting Principles", which permits the recognition and
measurement of assets and liabilities arising from rate regulation, will be withdrawn. In addition, Section 3465 "Income Taxes" was amended to require the recognition of future income tax
liabilities and assets. As a result of the changes, TransCanada will be required to recognize future income tax liabilities and assets instead of using the taxes payable method, and will record an
offsetting adjustment to regulatory assets and liabilities. If the liability method of accounting had been used at December 31, 2007, additional future income tax liabilities in the amount of
$1,138 million would have been recorded and would have been recoverable from future revenue. These changes will be applied prospectively beginning January 1, 2009.

International Financial Reporting Standards

The CICA's Accounting Standards Board (AcSB) announced that Canadian publicly accountable enterprises will adopt International Financial Reporting Standards (IFRS), as issued by
the International Accounting Standards Board (IASB), effective January 1, 2011. IFRS will require increased financial statement disclosure. Although IFRS uses a conceptual framework similar to
Canadian GAAP, differences in accounting policies will need to be addressed. TransCanada is currently assessing the impact of this AcSB announcement on its financial statements.

Intangible Assets

The CICA Handbook implemented revisions to standards dealing with Intangible Assets effective for fiscal years beginning on or after October 1, 2008. The revisions are
intended to align the definition of an Intangible Asset in Canadian GAAP with that in IFRS and U.S. GAAP. Section 1000 "Financial Statement Concepts" was revised to remove material that
permitted the recognition of assets that might not otherwise meet the definition of an asset and to add guidance from the IASB's "Framework for the Preparation and Presentation of Financial
Statements" that will help distinguish assets from expenses. Section 3064 "Goodwill and Intangible Assets", which replaced Section 3062 "Goodwill and Other Intangible Assets", gives
guidance on the recognition of intangible assets as well as the recognition and measurement of internally developed intangible assets. Section 3450 "Research and Development Costs" will be
withdrawn from the Handbook. The Company does not expect these changes to have a material effect on its financial statements.

90NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

---





NOTE 3    SEGMENTED INFORMATION

NET INCOME/(LOSS)(1)

|Year ended December 31, 2007 (millions of dollars) |  | Pipelines |   | Energy |   | Corporate |   |  | Total  |   | 
|-------------------------------------------------- |  | --------- | - | ------ | - | --------- | - |  | ------ | - | 
|                                                  
|Revenues                                           |  | 4,712     |   | 4,116  |   |          |   |  | 8,828  |   | 
|Plant operating costs and other                    |  | (1,670    | ) | (1,353 | ) | (7        | ) |  | (3,030 | ) | 
|Commodity purchases resold                         |  | (72       | ) | (1,887 | ) |          |   |  | (1,959 | ) | 
|Depreciation                                       |  | (1,021    | ) | (158   | ) |          |   |  | (1,179 | ) | 
|                                                  
|                                                   |  | 1,949     |   | 718    |   | (7        | ) |  | 2,660  |   | 
|Financial charges and non-controlling interests    |  | (793      | ) | 1      |   | (248      | ) |  | (1,040 | ) | 
|Financial charges of joint ventures                |  | (52       | ) | (23    | ) |          |   |  | (75    | ) | 
|Income from equity investments                     |  | 17        |   |       |   |          |   |  | 17     |   | 
|Interest income and other                          |  | 35        |   | 10     |   | 90        |   |  | 135    |   | 
|Gain on sale of assets                             |  |          |   | 16     |   |          |   |  | 16     |   | 
|Income taxes                                       |  | (470      | ) | (208   | ) | 188       |   |  | (490   | ) | 
|                                                  
|Net Income                                         |  | 686       |   | 514    |   | 23        |   |  | 1,223  |   | 
|                                                  

|
|

|Year ended December 31, 2006 (millions of dollars) |  |        |   |        |   |      |   |  |        |   | 
|-------------------------------------------------- |  | ------ | - | ------ | - | ---- | - |  | ------ | - | 
|                                                  
|Revenues                                           |  | 3,990  |   | 3,530  |   |     |   |  | 7,520  |   | 
|Plant operating costs and other                    |  | (1,380 | ) | (1,024 | ) | (7   | ) |  | (2,411 | ) | 
|Commodity purchases resold                         |  |       |   | (1,707 | ) |     |   |  | (1,707 | ) | 
|Depreciation                                       |  | (927   | ) | (131   | ) | (1   | ) |  | (1,059 | ) | 
|                                                  
|                                                   |  | 1,683  |   | 668    |   | (8   | ) |  | 2,343  |   | 
|Financial charges and non-controlling interests    |  | (767   | ) |       |   | (136 | ) |  | (903   | ) | 
|Financial charges of joint ventures                |  | (69    | ) | (23    | ) |     |   |  | (92    | ) | 
|Income from equity investments                     |  | 33     |   |       |   |     |   |  | 33     |   | 
|Interest income and other                          |  | 67     |   | 5      |   | 51   |   |  | 123    |   | 
|Gain on sale of assets                             |  | 23     |   |       |   |     |   |  | 23     |   | 
|Income taxes                                       |  | (410   | ) | (198   | ) | 132  |   |  | (476   | ) | 
|                                                  
|Net income from continuing operations              |  | 560    |   | 452    |   | 39   |   |  | 1,051  |   | 
|                                                   |  |        |  
|Net income from discontinued operations            |  |        |   |        |   |      |   |  | 28     |   | 
|                                                   |  |        |   |        |   |      |   |  |       
|Net Income                                         |  |        |   |        |   |      |   |  | 1,079  |   | 
|                                                   |  |        |   |        |   |      |   |  |       

|
|

|Year ended December 31, 2005 (millions of dollars) |  |        |   |        |   |      |   |  |        |   | 
|-------------------------------------------------- |  | ------ | - | ------ | - | ---- | - |  | ------ | - | 
|                                                  
|Revenues                                           |  | 3,993  |   | 2,131  |   |     |   |  | 6,124  |   | 
|Plant operating costs and other                    |  | (1,226 | ) | (595   | ) | (4   | ) |  | (1,825 | ) | 
|Commodity purchases resold                         |  |       |   | (1,232 | ) |     |   |  | (1,232 | ) | 
|Depreciation                                       |  | (932   | ) | (85    | ) |     |   |  | (1,017 | ) | 
|                                                  
|                                                   |  | 1,835  |   | 219    |   | (4   | ) |  | 2,050  |   | 
|Financial charges and non-controlling interests    |  | (788   | ) | (2     | ) | (130 | ) |  | (920   | ) | 
|Financial charges of joint ventures                |  | (57    | ) | (9     | ) |     |   |  | (66    | ) | 
|Income from equity investments                     |  | 79     |   | 168    |   |     |   |  | 247    |   | 
|Interest income and other                          |  | 25     |   | 5      |   | 33   |   |  | 63     |   | 
|Gains on sales of assets                           |  | 82     |   | 363    |   |     |   |  | 445    |   | 
|Income taxes                                       |  | (497   | ) | (178   | ) | 65   |   |  | (610   | ) | 
|                                                  
|Net Income                                         |  | 679    |   | 566    |   | (36  | ) |  | 1,209  |   | 
|                                                  

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS91

---



TOTAL ASSETS

|December 31 (millions of dollars) |  | 2007   |  | 2006   |  |  |  | 
|--------------------------------- |  | ------ |  | ------ |  |  |  | 
|                                  |  |       
|Pipelines                         |  | 22,024 |  | 18,320 |  |  |  | 
|Energy                            |  | 7,037  |  | 6,500  |  |  |  | 
|Corporate                         |  | 1,269  |  | 1,089  |  |  |  | 
|                                  |  |       
|                                  |  | 30,330 |  | 25,909 |  |  |  | 
|                                  |  |       

GEOGRAPHIC INFORMATION

|Year ended December 31 (millions of dollars) |  | 2007  |  | 2006  |  | 2005  |  | 
|-------------------------------------------- |  | ----- |  | ----- |  | ----- |  | 
|                                            
|Revenues(1)                                  |  |       |  |       |  |       |  | 
|Canada  domestic                            |  | 5,019 |  | 4,956 |  | 3,499 |  | 
|Canada  export                              |  | 1,006 |  | 972   |  | 1,160 |  | 
|United States and other                      |  | 2,803 |  | 1,592 |  | 1,465 |  | 
|                                            
|                                             |  | 8,828 |  | 7,520 |  | 6,124 |  | 
|                                            

|December 31 (millions of dollars) |  | 2007   |  | 2006   |  |  |  | 
|--------------------------------- |  | ------ |  | ------ |  |  |  | 
|                                  |  |       
|Plant, Property and Equipment     |  |        |  |        |  |  |  | 
|Canada                            |  | 16,741 |  | 16,204 |  |  |  | 
|United States                     |  | 6,564  |  | 5,109  |  |  |  | 
|Mexico                            |  | 147    |  | 174    |  |  |  | 
|                                  |  |       
|                                  |  | 23,452 |  | 21,487 |  |  |  | 
|                                  |  |       

CAPITAL EXPENDITURES

|Year ended December 31 (millions of dollars) |  | 2007  |  | 2006  |  | 2005 |  | 
|-------------------------------------------- |  | ----- |  | ----- |  | ---- |  | 
|                                            
|Pipelines                                    |  | 564   |  | 560   |  | 244  |  | 
|Energy                                       |  | 1,079 |  | 976   |  | 506  |  | 
|Corporate                                    |  | 8     |  | 36    |  | 4    |  | 
|                                            
|                                             |  | 1,651 |  | 1,572 |  | 754  |  | 
|                                            

92NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

---



NOTE 4    PLANT, PROPERTY AND EQUIPMENT

|                                  |                     | 2007   | 2006 
|--------------------------------- | ------------------- | ------ | -----
|                                  |                     |       
|December 31 (millions of dollars) |                     | Cost   |      
|                                 
|Pipelines                         |                     |        |      
|Canadian Mainline                 |                     |        |      
|                                  | Pipeline            |        | 8,889
|                                  | Compression         |        | 3,371
|                                  | Metering and other  |        | 345  
|                                 
|                                  |                     | 12,605 |      
|                                  | Under construction  |        | 28   
|                                 
|                                  |                     | 12,633 |      
|                                 
|Alberta System                    |                     |        |      
|                                  | Pipeline            |        | 5,258
|                                  | Compression         |        | 1,522
|                                  | Metering and other  |        | 831  
|                                 
|                                  |                     | 7,611  |      
|                                  | Under construction  |        | 120  
|                                 
|                                  |                     | 7,731  |      
|                                 
|ANR(1)                            |                     |        |      
|                                  | Pipeline            |        | 772  
|                                  | Compression         |        | 424  
|                                  | Metering and other  |        | 483  
|                                  |                     |        |      
|                                  |                     | 1,679  |      
|                                  | Under construction  |        | 69   
|                                  |                     |        |      
|                                  |                     | 1,748  |      
|                                  |                     |        |      
|GTN                               |                     |        |      
|                                  | Pipeline            |        | 1,181
|                                  | Compression         |        | 436  
|                                  | Metering and other  |        | 81   
|                                 
|                                  |                     | 1,698  |      
|                                  | Under construction  |        | 31   
|                                 
|                                  |                     | 1,729  |      
|                                 
|Great Lakes(2)                    |                     |        |      
|                                  | Pipeline            |        | 977  
|                                  | Compression         |        | 359  
|                                  | Metering and other  |        | 165  
|                                 
|                                  |                     | 1,501  |      
|                                  | Under construction  |        | 8    
|                                 
|                                  |                     | 1,509  |      
|                                 
|Foothills                         |                     |        |      
|                                  | Pipeline            |        | 903  
|                                  | Compression         |        | 632  
|                                  | Metering and other  |        | 112  
|                                 
|                                  |                     | 1,647  |      
|                                 
|Joint Ventures and Other          |                     |        |      
|                                  | Northern Border(3)  |        | 1,232
|                                  | Other               |        | 1,863
|                                 
|                                  |                     | 3,095  |      
|                                 
|                                  |                     | 30,092 |      
|                                 
|Energy(4)                         |                     |        |      
|                                  | Nuclear(5)          |        | 1,479
|                                  | Natural gas         |        | 1,570
|                                  | Hydro               |        | 503  
|                                  | Natural gas storage |        | 358  
|                                  | Wind                |        | 288  
|                                  | Other               |        | 137  
|                                 
|                                  |                     | 4,335  |      
|                                  | Under construction  |        | 1,606
|                                 
|                                  |                     | 5,941  |      
|                                 
|Corporate                         |                     | 60     |      
|                                 
|                                  |                     | 36,093 |      
|                                 

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS93

---



NOTE 5    OTHER ASSETS

|December 31 (millions of dollars)     |  | 2007  |  | 2006  |  |  |  | 
|------------------------------------- |  | ----- |  | ----- |  |  |  | 
|                                      |  |      
|PPAs(1)                               |  | 709   |  | 767   |  |  |  | 
|Regulatory assets                     |  | 336   |  | 178   |  |  |  | 
|Pension and other benefit plans       |  | 234   |  | 268   |  |  |  | 
|Fair value of derivative contracts    |  | 204   |  | 144   |  |  |  | 
|Loans and advances(2)                 |  | 141   |  | 121   |  |  |  | 
|Deferred project development costs(3) |  | 40    |  | 70    |  |  |  | 
|Hedging deferrals(4)                  |  |      |  | 152   |  |  |  | 
|Debt issue costs(5)                   |  |      |  | 77    |  |  |  | 
|Other                                 |  | 213   |  | 201   |  |  |  | 
|                                      |  |      
|                                      |  | 1,877 |  | 1,978 |  |  |  | 
|                                      |  |      

2007

2006December 31
(millions of dollars)

Cost

Accumulated
Amortization

Net
Book Value

Cost

Accumulated
Amortization

Net
Book ValuePPAs

915

206

709

915

148

767




94NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

---



NOTE 6    JOINT VENTURE INVESTMENTS

|                       |  |                       |      | TransCanada's Proportionate Share                 |  |                       
|---------------------- |  | --------------------- | ---- | ------------------------------------------------- |  | ----------------------
|                       |  |                       |      |                                                  
|                       |  |                       |      | Income Before Income Taxes
Year ended December 31 |  | Net Assets
December 31
|                       |  |                       |      |                                                  
|(millions of dollars)  |  | Ownership
Interest(1) |      | 2007                                              |  | 2006                  
|                      
|Pipelines              |  |                       |      |                                                   |  |                       
|Northern Border        |  |                       | (3)  | 63                                                |  | 47                    
|Iroquois               |  | 44.5%                 | (4)  | 25                                                |  | 25                    
|Great Lakes            |  |                       | (5)  | 13                                                |  | 69                    
|TQM                    |  | 50.0%                 |      | 11                                                |  | 11                    
|Keystone               |  | 50.0%                 | (6)  |                                                  |  |                      
|Other                  |  | Various               |      | 13                                                |  | 6                     
|Energy                 |  |                       |      |                                                   |  |                       
|Bruce A                |  | 48.7%                 | (7)  | 8                                                 |  | 75                    
|Bruce B                |  | 31.6%                 | (7)  | 140                                               |  | 140                   
|CrossAlta(2)           |  | 60.0%                 |      | 59                                                |  | 64                    
|Cartier Wind           |  | 62.0%                 | (8)  | 10                                                |  | 2                     
|TC Turbines            |  | 50.0%                 |      | 5                                                 |  | 5                     
|Portlands Energy       |  | 50.0%                 |      |                                                  |  |                      
|ASTC Power Partnership |  | 50.0%                 | (9)  |                                                  |  |                      
|Power LP               |  |                       | (10) |                                                  |  |                      
|                      
|                       |  |                       |      | 347                                               |  | 444                   
|                      

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS95

---



Summarized Financial Information of Joint Ventures

|Year ended December 31 (millions of dollars)                    |  | 2007  |   | 2006  |   | 2005 |   | 
|--------------------------------------------------------------- |  | ----- | - | ----- | - | ---- | - | 
|                                                               
|Income                                                          |  |       |   |       |   |      |   | 
|Revenues                                                        |  | 1,224 |   | 1,379 |   | 687  |   | 
|Plant operating costs and other                                 |  | (659  | ) | (689  | ) | (328 | ) | 
|Depreciation                                                    |  | (150  | ) | (162  | ) | (93  | ) | 
|Financial charges and other                                     |  | (68   | ) | (84   | ) | (56  | ) | 
|                                                               
|Proportionate share of joint venture income before income taxes |  | 347   |   | 444   |   | 210  |   | 
|                                                               

|
|

|Year ended December 31 (millions of dollars)                                              |  | 2007 |   | 2006 |   | 2005 |   | 
|----------------------------------------------------------------------------------------- |  | ---- | - | ---- | - | ---- | - | 
|                                                                                         
|Cash Flows                                                                                |  |      |   |      |   |      |   | 
|Operating activities                                                                      |  | 420  |   | 645  |   | 346  |   | 
|Investing activities                                                                      |  | (761 | ) | (641 | ) | (133 | ) | 
|Financing activities(1)                                                                   |  | 409  |   | (31  | ) | (152 | ) | 
|Effect of foreign exchange rate changes on cash and cash equivalents                      |  | (8   | ) | 9    |   | (1   | ) | 
|                                                                                         
|Proportionate share of increase/(decrease) in cash and cash equivalents of joint ventures |  | 60   |   | (18  | ) | 60   |   | 
|                                                                                         

|December 31 (millions of dollars)                   |  | 2007  |   | 2006   |   |  |  | 
|--------------------------------------------------- |  | ----- | - | ------ | - |  |  | 
|                                                    |  |      
|Balance Sheet                                       |  |       |   |        |   |  |  | 
|Cash and cash equivalents                           |  | 170   |   | 127    |   |  |  | 
|Other current assets                                |  | 314   |   | 304    |   |  |  | 
|Plant, property and equipment                       |  | 4,283 |   | 4,110  |   |  |  | 
|Other assets                                        |  | 44    |   | 78     |   |  |  | 
|Current liabilities                                 |  | (250  | ) | (443   | ) |  |  | 
|Long-term debt                                      |  | (873  | ) | (1,136 | ) |  |  | 
|Future income taxes                                 |  | (2    | ) | (20    | ) |  |  | 
|                                                    |  |      
|Proportionate share of net assets of joint ventures |  | 3,686 |   | 3,020  |   |  |  | 
|                                                    |  |      

96NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

---



NOTE 7    LONG-TERM INVESTMENTS

|                      |  |                    |     | TransCanada's Share                                          |  |                                                      
|--------------------- |  | ------------------ | --- | ------------------------------------------------------------ |  | -----------------------------------------------------
|                      |  |                    |     |                                                             
|                      |  |                    |     | Distributions
from Equity Investments
Year ended December 31 |  | Income from
Equity Investments
Year ended December 31
|                      |  |                    |     |                                                             
|(millions of dollars) |  | Ownership
Interest |     | 2007                                                         |  | 2006                                                 
|                     
|Pipelines             |  |                    |     |                                                              |  |                                                      
|TransGas              |  | 46.5%              |     | 8                                                            |  | 7                                                    
|Northern Border       |  |                    | (1) |                                                             |  | 13                                                   
|Other                 |  | Various            |     | 8                                                            |  | 4                                                    
|Energy                |  |                    |     |                                                              |  |                                                      
|Bruce B               |  | 31.6%              | (2) |                                                             |  |                                                     
|                     
|                      |  |                    |     | 16                                                           |  | 24                                                   
|                     

NOTE 8    ACQUISITIONS AND DISPOSITIONS

Acquisitions

Pipelines

ANR and Great Lakes

On February 22, 2007, TransCanada acquired from El Paso Corporation 100 per cent of ANR and an additional 3.6 per cent interest in
Great Lakes Gas Transmission Limited Partnership (Great Lakes) for a total of US$3.4 billion, subject to certain post-closing adjustments, including US$491 million of assumed
long-term debt. The acquisitions were accounted for using the purchase method of accounting. TransCanada began consolidating ANR and Great Lakes in the Pipelines segment after the
acquisition date. The preliminary allocation of the purchase price at December 31, 2007, was as follows.

Purchase Price Allocation

|(millions of US dollars)      |  | ANR   |   | Great Lakes |   | Total |   | 
|----------------------------- |  | ----- | - | ----------- | - | ----- | - | 
|                             
|Current assets                |  | 250   |   | 4           |   | 254   |   | 
|Plant, property and equipment |  | 1,617 |   | 35          |   | 1,652 |   | 
|Other non-current assets      |  | 83    |   |            |   | 83    |   | 
|Goodwill                      |  | 1,914 |   | 32          |   | 1,946 |   | 
|Current liabilities           |  | (179  | ) | (3          | ) | (182  | ) | 
|Long-term debt                |  | (475  | ) | (16         | ) | (491  | ) | 
|Other non-current liabilities |  | (326  | ) | (19         | ) | (345  | ) | 
|                             
|                              |  | 2,884 |   | 33          |   | 2,917 |   | 
|                             

TC PipeLines, LP Acquisition of Interest in Great Lakes

On February 22, 2007, PipeLines LP acquired from El Paso Corporation a 46.4 per cent interest in Great Lakes for US$942 million,
subject to certain post-closing adjustments, including US$209 million of assumed long-term debt. The acquisition was accounted for using the purchase method of
accounting. TransCanada began consolidating Great Lakes in the Pipelines segment after the acquisition date. The preliminary allocation of the purchase price at December 31, 2007, was
as follows.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS97

---



Purchase Price Allocation

|(millions of US dollars)      |  |      |   |  |  |  |  | 
|----------------------------- |  | ---- | - |  |  |  |  | 
|                              |  |      |   | 
|Current assets                |  | 42   |   |  |  |  |  | 
|Plant, property and equipment |  | 465  |   |  |  |  |  | 
|Other non-current assets      |  | 1    |   |  |  |  |  | 
|Goodwill                      |  | 457  |   |  |  |  |  | 
|Current liabilities           |  | (23  | ) |  |  |  |  | 
|Long-term debt                |  | (209 | ) |  |  |  |  | 
|                              |  |      |   | 
|                              |  | 733  |   |  |  |  |  | 
|                              |  |      |   | 

The
preliminary allocation of the purchase price for these transactions was made using the fair value of the net assets at the date of acquisition. Tolls charged by ANR and
Great Lakes are subject to rate regulation based on historical costs. As a result, the regulated net assets, other than ANR's gas held for sale, were determined to have a fair value equal to their
rate-regulated values.

Factors
that contributed to goodwill included the opportunity to expand in the U.S. market and to gain a stronger competitive position in the North American gas
transmission business. Goodwill related to TransCanada's ANR and Great Lakes transactions is not amortizable for tax purposes. Goodwill related to PipeLines LP's Great Lakes transaction is
amortizable for tax purposes.

TC PipeLines, LP Private Placement Offering

PipeLines LP completed a private placement offering of 17,356,086 common units at a price of US$34.57 per unit in February 2007. TransCanada acquired
50 per cent of the units for US$300 million. TransCanada also invested an additional US$12 million to maintain its general partnership interest in PipeLines LP. As a
result of these additional investments, TransCanada's ownership in PipeLines LP increased to 32.1 per cent on February 22, 2007. The total private placement, together with
TransCanada's additional investment, resulted in gross proceeds to PipeLines LP of US$612 million, which were used to partially finance its acquisition of a
46.4-per-cent ownership interest in Great Lakes.

Tuscarora

PipeLines LP exercised its option to purchase Sierra Pacific Resources' remaining one per cent interest in Tuscarora Gas Transmission Company (Tuscarora)
for US$2 million in December 2007. In addition, PipeLines LP purchased TransCanada's one per cent interest in Tuscarora for US$2 million.

In
December 2006, PipeLines LP acquired an additional 49 per cent controlling general partner interest in Tuscarora for US$100 million in
addition to indirectly assuming US$37 million of debt. The purchase price was allocated US$79 million to Goodwill, US$37 million to long-term debt, and the balance
primarily to Plant, Property and Equipment. Factors that contributed to goodwill included opportunities for expansion and a stronger competitive position. The goodwill recognized on this transaction
is amortizable for tax purposes. PipeLines LP began consolidating its investment in Tuscarora in December 2006. TransCanada became the operator of Tuscarora in
December 2006 as a result of this transaction.

PipeLines LP
now owns 100 per cent of Tuscarora. At December 31, 2007, TransCanada's 32.1 per cent ownership interest in
PipeLines LP (December 31, 2006  13.4 per cent) gave it an effective ownership in Tuscarora of 32.1 per cent, net of
non-controlling interests (December 31, 2006  14.3 per cent).

Northern Border

In April 2006, PipeLines LP acquired an additional 20 per cent general partnership interest in Northern Border Pipeline Company (Northern Border) for
US$307 million, in addition to indirectly assuming US$122 million of debt. The purchase price was allocated US$114 million to Goodwill, US$122 million to
long-term debt and the balance primarily to Plant, Property and Equipment. Factors that contributed to goodwill included opportunities for expansion and a stronger competitive position.
The goodwill recognized on this transaction is amortizable for tax purposes.

PipeLines LP
now owns 50 per cent of Northern Border. At December 31, 2007, TransCanada's 32.1 per cent ownership interest in
PipeLines LP (2006  13.4 per cent) gave it an effective ownership in Northern Border of 16.1 per cent, net of
non-controlling interests (2006  6.7 per cent). TransCanada proportionately consolidated its interest in Northern Border since the date
of acquisition. TransCanada became the operator of Northern Border in April 2007 as a result of this transaction.

98NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

---



Energy

Sheerness PPA

TransCanada obtained the 756 MW Sheerness PPA from the Alberta Balancing Pool for $585 million effective December 31, 2005. The PPA terminates
in 2020.

Bruce Power

In October 2005, TransCanada acquired an interest in Bruce A, a newly created partnership, as part of an agreement to restart Bruce A Units 1 and 2,
which are currently idle. Under the Bruce A Sublease agreement, the new partnership subleased Units 1 to 4 from Bruce B and purchased certain other related assets. TransCanada
incurred a net cash outlay of $100 million related to this transaction. As part of the reorganization, Bruce A and Bruce B became jointly controlled entities and TransCanada
commenced proportionately consolidating its investment in both on a prospective basis effective October 31, 2005. At December 31, 2007 and 2006, the Company held a
48.7 per cent interest in Bruce A and a 31.6 per cent interest in Bruce B.

TC Hydro

TransCanada acquired TC Hydro, the hydroelectric generation assets of USGen New England, Inc. for approximately US$503 million in April 2005.
Substantially all of the purchase price was allocated to Plant, Property and Equipment.

Dispositions

Pre-tax gains on sales of assets were as follow:

|Year ended December 31 (millions of dollars)          |  | 2007 |  | 2006 |  | 2005 |  |  |  | 
|----------------------------------------------------- |  | ---- |  | ---- |  | ---- |  |  |  | 
|                                                      |  |     
|Gain on sale of land                                  |  | 16   |  |     |  |     |  |  |  | 
|Gain on sale of Northern Border Partners, LP interest |  |     |  | 23   |  |     |  |  |  | 
|Gains related to Power LP                             |  |     |  |     |  | 245  |  |  |  | 
|Gain on sale of Paiton Energy                         |  |     |  |     |  | 118  |  |  |  | 
|Gain on sale of PipeLines LP units                    |  |     |  |     |  | 82   |  |  |  | 
|                                                      |  |     
|                                                      |  | 16   |  | 23   |  | 445  |  |  |  | 
|                                                      |  |     

Ontario Land Sale

In November 2007, TransCanada's Energy segment sold land in Ontario that had been previously held for development, generating net proceeds of $37 million and
recognizing an after-tax gain of $14 million on the sale.

Northern Border Partners, LP Interest

In April 2006, TransCanada sold its 17.5 per cent general partner interest in Northern Border Partners, LP, generating net proceeds of
$33 million (US$30 million) and recognizing an after-tax gain of $13 million. The net gain was recorded in the Pipelines segment and the Company recorded a
$10-million income tax charge on the transaction, including $12 million of current income tax expense.

Power LP

In August 2005, TransCanada sold its ownership interest in TransCanada Power, L.P. (Power LP) to EPCOR Utilities Inc. (EPCOR), generating net
proceeds of $523 million and realizing an after-tax gain of $193 million. The net gain was recorded in the Energy segment and the Company recorded a $52-million
income tax charge on the transaction, including $79 million of current income tax expense. The sale resulted in disposal of Power LP assets and liabilities with a book value of
$452 million and $174 million, respectively. EPCOR's acquisition included 14.5 million limited partnership units of Power LP, representing 30.6 per cent of
the outstanding units, 100 per cent ownership of the general partner of Power LP, and the management and operations agreements governing the ongoing operation of Power LP's
assets.

Paiton Energy

In November 2005, TransCanada sold its ownership interest of approximately 11 per cent in PT Paiton Energy Company (Paiton Energy) to subsidiaries of
The Tokyo Electric Power Company for gross proceeds of $122 million (US$103 million) and recognized an after-tax gain of $115 million. The net gain was recorded in the
Energy segment and the Company recorded a $3-million income tax charge, including $3 million of current income tax recovery.

TC PipeLines, LP

In March and April 2005, TransCanada sold a total of 3,574,200 common units of PipeLines LP for net proceeds of $153 million and recorded an
after-tax gain of $49 million. The net gain was recorded in the Pipelines segment and the Company recorded a $33-million income tax charge on the transaction, including
$51 million of current income tax expense.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS99

---





NOTE 9    LONG-TERM DEBT

|                                                                          |                                                    |                |              | 2007                    |       | 2006 |                     |      
|------------------------------------------------------------------------- | -------------------------------------------------- | -------------- | ------------ | ----------------------- | ----- | ---- | ------------------- | -----
|                                                                          |                                                    |                |              |                        
|Outstanding loan amounts (millions of
dollars unless otherwise indicated) |                                                    | Maturity Dates |              | Outstanding December 31 |       |      | Interest Rate(1)(2) |      
|                                                                         
|TRANSCANADA PIPELINES LIMITED                                             |                                                    |                |              |                         |       |      |                     |      
|First Mortgage Pipe Line Bonds                                            |                                                    |                |              |                         |       |      |                     |      
|                                                                          | Pounds sterling (2006  £25 million)               |                |              |                         |      |      |                     |      
|Debentures                                                                |                                                    |                |              |                         |       |      |                     |      
|                                                                          | Canadian dollars                                   |                | 2008 to 2020 |                         | 1,351 |      |                     | 10.9%
|                                                                          | U.S. dollars (2007 and 2006  US$600)(4)           |                | 2012 to 2021 |                         | 594   |      |                     | 9.5% 
|Medium-Term Notes                                                         |                                                    |                |              |                         |       |      |                     |      
|                                                                          | Canadian dollars(5)                                |                | 2008 to 2031 |                         | 3,413 |      |                     | 6.1% 
|Senior Unsecured Notes                                                    |                                                    |                |              |                         |       |      |                     |      
|                                                                          | U.S. dollars (2007  US$3,223; 2006  US$2,223)(6) |                | 2009 to 2037 |                         | 3,161 |      |                     | 6.0% 
|                                                                          |                                                    |                |              |                         |       |      |                     |      
|                                                                          |                                                    |                |              | 8,519                   |       |      |                     |      
|                                                                          |                                                    |                |              |                         |       |      |                     |      
|NOVA GAS TRANSMISSION LTD.                                                |                                                    |                |              |                         |       |      |                     |      
|Debentures and Notes                                                      |                                                    |                |              |                         |       |      |                     |      
|                                                                          | Canadian dollars                                   |                | 2008 to 2024 |                         | 501   |      |                     | 11.6%
|                                                                          | U.S. dollars (2007 and 2006  US$375)              |                | 2012 to 2023 |                         | 368   |      |                     | 8.2% 
|Medium-Term Notes                                                         |                                                    |                |              |                         |       |      |                     |      
|                                                                          | Canadian dollars                                   |                | 2008 to 2030 |                         | 607   |      |                     | 7.2% 
|                                                                          | U.S. dollars (2007 and 2006  US$33)               |                | 2026         |                         | 32    |      |                     | 7.5% 
|                                                                          |                                                    |                |              |                         |       |      |                     |      
|                                                                          |                                                    |                |              | 1,508                   |       |      |                     |      
|                                                                          |                                                    |                |              |                         |       |      |                     |      
|TRANSCANADA PIPELINE USA LTD.                                             |                                                    |                |              |                         |       |      |                     |      
|Bank Loan                                                                 |                                                    |                |              |                         |       |      |                     |      
|                                                                          | U.S. dollars (2007  US$860)                       |                | 2012         |                         | 850   |      |                     | 5.7% 
|                                                                          |                                                    |                |              |                         |       |      |                     |      
|ANR PIPELINE COMPANY                                                      |                                                    |                |              |                         |       |      |                     |      
|Senior Unsecured Notes                                                    |                                                    |                |              |                         |       |      |                     |      
|                                                                          | U.S. dollars (2007 US$444)                        |                | 2010 to 2025 |                         | 435   |      |                     | 9.1% 
|                                                                          |                                                    |                |              |                         |       |      |                     |      
|GAS TRANSMISSION NORTHWEST CORPORATION                                    |                                                    |                |              |                         |       |      |                     |      
|Senior Unsecured Notes                                                    |                                                    |                |              |                         |       |      |                     |      
|                                                                          | U.S. Dollars (2007 and 2006  US$400)              |                | 2010 to 2035 |                         | 399   |      |                     | 5.4% 
|                                                                          |                                                    |                |              |                         |       |      |                     |      
|TC PIPELINES, LP                                                          |                                                    |                |              |                         |       |      |                     |      
|Unsecured Loan                                                            |                                                    |                |              |                         |       |      |                     |      
|                                                                          | U.S. dollars (2007  US$507; 2006   US$397)       |                | 2011         |                         | 499   |      |                     | 6.2% 
|                                                                          |                                                    |                |              |                         |       |      |                     |      
|GREAT LAKES GAS TRANSMISSION LIMITED PARTNERSHIP(7)                       |                                                    |                |              |                         |       |      |                     |      
|Senior Unsecured Notes                                                    |                                                    |                |              |                         |       |      |                     |      
|                                                                          | U.S. dollars (2007 US$440)                        |                | 2011 to 2030 |                         | 434   |      |                     | 7.8% 
|                                                                          |                                                    |                |              |                         |       |      |                     |      
|TUSCARORA GAS TRANSMISSION COMPANY                                        |                                                    |                |              |                         |       |      |                     |      
|Senior Unsecured Notes                                                    |                                                    |                |              |                         |       |      |                     |      
|                                                                          | U.S. dollars (2007  US$69; 2006   US$74)         |                | 2010 to 2012 |                         | 67    |      |                     | 7.4% 
|                                                                          |                                                    |                |              |                         |       |      |                     |      
|PORTLAND NATURAL GAS TRANSMISSION SYSTEM                                  |                                                    |                |              |                         |       |      |                     |      
|Senior Secured Notes                                                      |                                                    |                |              |                         |       |      |                     |      
|                                                                          | U.S. dollars (2007  US$211; 2006   US$226)       |                | 2018         |                         | 205   |      |                     | 6.1% 
|                                                                          |                                                    |                |              |                         |       |      |                     |      
|OTHER                                                                     |                                                    |                |              |                         |       |      |                     |      
|Senior Notes                                                              |                                                    |                |              |                         |       |      |                     |      
|                                                                          | U.S. dollars (2007  US$17; 2006  US$24)          |                | 2011         |                         | 17    |      |                     | 7.3% 
|                                                                          |                                                    |                |              |                         |       |      |                     |      
|                                                                          |                                                    |                |              | 12,933                  |       |      |                     |      
|Less: Current Portion of Long-Term Debt                                   |                                                    |                |              | 556                     |       |      |                     |      
|                                                                          |                                                    |                |              |                         |       |      |                     |      
|                                                                          |                                                    |                |              | 12,377                  |       |      |                     |      
|                                                                          |                                                    |                |              |                         |       |      |                     |      

100NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

---



Principal Repayments

Principal repayments on the long-term debt of the Company are approximately as follow: 2008  $556 million;
2009  $1,002 million; 2010  $617 million; 2011  $805 million;
and 2012  $1,246 million.

Debt Shelf Programs

In March 2007, the Company filed debt shelf prospectuses in Canada and the U.S. qualifying for issuance $1.5 billion of Medium-Term Notes and
US$1.5 billion of debt securities, respectively. At December 31, 2007, the Company had issued no Medium-Term Notes under the Canadian prospectus. In September 2007,
the Company replaced the March 2007 U.S. debt shelf prospectus with a US$2.5-billion U.S. debt shelf prospectus. US$1.5 billion remains available under the U.S.
debt shelf at December 31, 2007.

TransCanada PipeLines Limited

In October 2007, TransCanada PipeLines Limited (TCPL) issued US$1.0 billion of Senior Unsecured Notes under the U.S. debt shelf prospectus filed in
September 2007. These notes mature on October 15, 2037 and bear interest at a rate of 6.20 per cent. The effective interest rate at issuance was
6.30 per cent.

NOVA Gas Transmission Ltd.

Debentures issued by NOVA Gas Transmission Ltd. (NGTL) amount to $225 million and have retraction provisions that entitle the holders to require redemption of up
to eight per cent of the then outstanding principal plus accrued and unpaid interest on specified repayment dates. No redemptions were made at December 31, 2007.

On
January 31, 2008, NGTL retired $105 million of 6.0 per cent Medium-Term Notes.

TransCanada PipeLine USA Ltd.

In
February 2007, TransCanada PipeLine USA Ltd. established a US$1.0 billion committed, unsecured credit facility, consisting of a US$700-million
five-year term loan and a US$300-million five-year, extendible revolving facility. A floating interest rate based on the three-month London Interbank Offered Rate
(LIBOR) plus 22.5 basis points is charged on the balance outstanding and a facility fee of 7.5 basis points is charged on the entire facility. US$1.0 billion from this facility
and an additional US$100 million from an existing demand line were used to partially finance the acquisitions of ANR and additional interest in Great Lakes and the Company's additional
investment in PipeLines LP. There was an outstanding balance of US$860 million on the credit facility and nil on the demand line at December 31, 2007.

ANR Pipeline Company  Voluntary Withdrawal of Listing

In March 2007, ANR Pipeline Company (ANR Pipeline) voluntarily withdrew, from the New York Stock Exchange, the listing of its 9.625 per cent
Debentures due 2021, 7.375 per cent Debentures due 2024, and 7.0 per cent Debentures due 2025. With the delisting, which became effective April 12, 2007, ANR
Pipeline deregistered these securities with the U.S. Securities and Exchange Commission.

TC PipeLines, LP

In February 2007, PipeLines LP increased the size of its syndicated revolving credit and term loan facility in connection with its acquisition of a
46.4 per cent interest in Great Lakes. The amount available under the facility increased to US$950 million from US$410 million and consisted of a US$700-million
senior term loan and a US$250-million senior revolving credit facility, with US$194 million of the senior term loan amount terminated upon closing of the Great Lakes acquisition. An
additional US$18 million of the senior term loan was terminated due to a principal payment made in November 2007. A floating interest rate based on the three-month LIBOR plus
55 basis points is charged on the senior term

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS101

---



loan
and a floating interest rate based on the one-month LIBOR plus 35 basis points is charged on the senior revolving credit facility. A facility fee of 10 basis points is
charged on the US$250-million senior revolving credit facility.

Sensitivity

A one per cent change in interest rates would have the following effects assuming all other variables were to remain constant:

|(millions of dollars)                                     |  | Increase |   | Decrease |   | 
|--------------------------------------------------------- |  | -------- | - | -------- | - | 
|                                                         
|Effect on fair value of fixed interest rate debt          |  | (1,023   | ) | 1,185    |   | 
|Effect on interest expense of variable interest rate debt |  | 7        |   | (7       | ) | 

Financial Charges

|Year ended December 31 (millions of dollars) |  | 2007 |   | 2006 |   | 2005 |   | 
|-------------------------------------------- |  | ---- | - | ---- | - | ---- | - | 
|                                            
|Interest on long-term debt                   |  | 948  |   | 846  |   | 849  |   | 
|Interest on junior subordinated notes        |  | 43   |   |      |   |      |   | 
|Interest on short-term debt                  |  | 48   |   | 23   |   | 23   |   | 
|Capitalized interest                         |  | (68  | ) | (60  | ) | (24  | ) | 
|Amortization and other financial charges(1)  |  | (28  | ) | 16   |   | (12  | ) | 
|                                            
|                                             |  | 943  |   | 825  |   | 836  |   | 
|                                            

The
Company made interest payments of $966 million in 2007 (2006  $771 million;
2005  $838 million).

NOTE 10    LONG-TERM DEBT OF JOINT VENTURES

|                                                          |                                |                |              | 2007                       |     | 2006 |                     |     
|--------------------------------------------------------- | ------------------------------ | -------------- | ------------ | -------------------------- | --- | ---- | ------------------- | ----
|                                                          |                                |                |              |                           
|Outstanding loan amounts
(millions of dollars)            |                                | Maturity Dates |              | Outstanding
December 31(1) |     |      | Interest
Rate(2)(3) |     
|                                                         
|NORTHERN BORDER PIPELINE COMPANY                          |                                |                |              |                            |     |      |                     |     
|Senior Unsecured Notes                                    |                                |                |              |                            |     |      |                     |     
|                                                          | (2007  US$232; 2006  US$316) |                | 2009 to 2021 |                            | 229 |      |                     | 7.7%
|Bank Facility                                             |                                |                |              |                            |     |      |                     |     
|                                                          | (2007  US$83)                 |                | 2012         |                            | 82  |      |                     | 5.3%
|IROQUOIS GAS TRANSMISSION SYSTEM, L.P.                    |                                |                |              |                            |     |      |                     |     
|Senior Unsecured Notes                                    |                                |                |              |                            |     |      |                     |     
|                                                          | (2007 and 2006  US$165)       |                | 2010 to 2027 |                            | 162 |      |                     | 7.4%
|Bank Loan                                                 |                                |                |              |                            |     |      |                     |     
|                                                          | (2007  US$7; 2006  US$15)    |                | 2008         |                            | 7   |      |                     | 7.4%
|GREAT LAKES GAS TRANSMISSION LIMITED PARTNERSHIP(5)       |                                |                |              |                            |     |      |                     |     
|Senior Unsecured Notes                                    |                                |                |              |                            |     |      |                     |     
|                                                          | (2006  US$225)                |                |              |                            |    |      |                     |     
|BRUCE POWER L.P. AND BRUCE POWER A L.P.                   |                                |                |              |                            |     |      |                     |     
|Capital Lease Obligations                                 |                                | 2018           |              | 243                        |     |      | 7.5%                |     
|TRANS QUÉBEC & MARITIMES PIPELINE INC.                    |                                |                |              |                            |     |      |                     |     
|Bonds                                                     |                                | 2009 to 2010   |              | 137                        |     |      | 6.0%                |     
|Term Loan                                                 |                                | 2011           |              | 28                         |     |      | 4.6%                |     
|Other                                                     |                                | 2008 to 2013   |              | 15                         |     |      | 4.5%                |     
|                                                          |                                |                |              |                            |     |      |                     |     
|                                                          |                                |                |              | 903                        |     |      |                     |     
|Less: Current Portion of Long-Term Debt of Joint Ventures |                                |                |              | 30                         |     |      |                     |     
|                                                          |                                |                |              |                            |     |      |                     |     
|                                                          |                                |                |              | 873                        |     |      |                     |     
|                                                          |                                |                |              |                            |     |      |                     |     

102NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

---



The
long-term debt of joint ventures is non-recourse to TransCanada, except that TransCanada has provided certain pro-rata guarantees
related to the capital lease obligations of Bruce Power. The security provided with respect to the debt by each joint venture is limited to the rights and assets of that joint venture and does not
extend to the rights and assets of TransCanada, except to the extent of TransCanada's investment. Other joint venture debt includes a demand loan secured by a first interest in all personal property,
a floating charge over all real property and a demand collateral leasehold mortgage in the amount of $20 million creating a first fixed and specific charge over the joint venture's leasehold
interest in all land and premises. TQM's Bonds are secured by a first interest in all TQM real and immoveable property and rights, a floating charge on all residual property and assets, and a specific
interest on Bonds of TQM Finance Inc. and on rights under all licenses and permits relating to the TQM pipeline system and natural gas transportation agreements.

Subject
to meeting certain requirements, the Bruce Power capital lease agreements provide for renewals commencing January 1, 2019. The first renewal is for a period
of one year and each of 12 renewals thereafter is for a period of two years.

The
Company's proportionate share of principal repayments resulting from maturities and sinking fund obligations of the non-recourse joint venture debt is
approximately as follows: 2008  $21 million; 2009  $161 million;
2010  $185 million; 2011  $36 million; and 2012  $95 million.

The
Company's proportionate share of principal payments resulting from the capital lease obligations of Bruce Power is approximately as follows:
2008  $9 million; 2009  $11 million; 2010  $13 million;
2011  $15 million; and 2012  $18 million.

In
April 2007, Northern Border established a US$250-million five-year bank facility. A portion of the bank facility was drawn to refinance
US$150 million of the Senior Unsecured Notes that matured on May 1, 2007, with the balance available to fund Northern Border's ongoing operations.

Sensitivity

A one per cent change in interest rates would have the following effects assuming all other variables were to remain constant:

|(millions of dollars)                                     |  | Increase |   | Decrease |   | 
|--------------------------------------------------------- |  | -------- | - | -------- | - | 
|                                                         
|Effect on fair value of fixed interest rate debt          |  | (13      | ) | 15       |   | 
|Effect on interest expense of variable interest rate debt |  | 1        |   | (1       | ) | 

Financial Charges of Joint Ventures

|Year ended December 31 (millions of dollars)    |  | 2007 |  | 2006 |  | 2005 |  | 
|----------------------------------------------- |  | ---- |  | ---- |  | ---- |  | 
|                                               
|Interest on long-term debt                      |  | 50   |  | 67   |  | 60   |  | 
|Interest on capital lease obligations           |  | 18   |  | 19   |  | 3    |  | 
|Short-term interest and other financial charges |  | 4    |  | 3    |  | 1    |  | 
|Deferrals and amortization                      |  | 3    |  | 3    |  | 2    |  | 
|                                               
|                                                |  | 75   |  | 92   |  | 66   |  | 
|                                               

The
Company's proportionate share of the interest payments of joint ventures was $45 million in 2007 (2006  $73 million;
2005  $62 million).

The
Company's proportionate share of interest payments from the capital lease obligations of Bruce Power was $26 million in 2007
(2006  $20 million; 2005  $3 million).

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS103

---



NOTE 11    JUNIOR SUBORDINATED NOTES

|                                              |                                |                |      | 2007                    |     | 
|--------------------------------------------- | ------------------------------ | -------------- | ---- | ----------------------- | --- | 
|                                              |                                |                |      |                        
|Outstanding loan amount
(millions of dollars) |                                | Maturity Dates |      | Outstanding
December 31 |     | 
|                                             
|TRANSCANADA PIPELINES LIMITED                 |                                |                |      |                         |     | 
|                                              | U.S. dollars (2007  US$1,000) |                | 2017 |                         | 975 | 
|                                              |                                |                |      |                         |     | 

In
April 2007, TCPL issued US$1.0 billion of Junior Subordinated Notes, maturing in 2067 and bearing interest of 6.35 per cent per year until
May 15, 2017, when interest will convert to a floating rate, reset quarterly to the three-month LIBOR plus 221 basis points. The Company has the option to defer payment of interest for
periods of up to ten years without giving rise to a default and without permitting acceleration of payment under the terms of the Junior Subordinated Notes. The Company would be prohibited from paying
dividends during any deferral period. The Junior Subordinated Notes are subordinated in right of payment to existing and future senior indebtedness and are effectively subordinated to all indebtedness
and obligations of TCPL. The Junior Subordinated Notes are callable at the Company's option at any time on or after May 15, 2017 at 100 per cent of the principal amount of the
Junior Subordinated Notes plus accrued and unpaid interest to the date of redemption. The Junior Subordinated Notes are callable earlier upon the occurrence of certain events and at the Company's
option, in whole or in part, at an amount equal to the greater of 100 per cent of the principal amount of the Junior Subordinated Notes plus accrued and unpaid interest to the date of
redemption and an amount determined by formula in accordance with the terms of the Junior Subordinated Notes. The Junior Subordinated Notes were issued under the U.S. shelf prospectus filed in
March 2007.

Sensitivity

A one per cent change in interest rates would have the following effects assuming all other variables were to remain constant:

|(millions of dollars)                             |  | Increase |   | Decrease |  | 
|------------------------------------------------- |  | -------- | - | -------- |  | 
|                                                 
|Effect on fair value of Junior Subordinated Notes |  | (61      | ) | 66       |  | 

NOTE 12    DEFERRED AMOUNTS

|December 31 (millions of dollars)  |  | 2007  |  | 2006  |  |  |  | 
|---------------------------------- |  | ----- |  | ----- |  |  |  | 
|                                   |  |      
|Regulatory liabilities             |  | 525   |  | 386   |  |  |  | 
|Fair value of derivative contracts |  | 205   |  | 254   |  |  |  | 
|Employee benefit plans             |  | 196   |  | 195   |  |  |  | 
|Asset retirement obligations       |  | 88    |  | 45    |  |  |  | 
|Hedging deferrals(1)               |  |      |  | 84    |  |  |  | 
|Other                              |  | 93    |  | 65    |  |  |  | 
|                                   |  |      
|                                   |  | 1,107 |  | 1,029 |  |  |  | 
|                                   |  |      

NOTE 13    REGULATED BUSINESSES

Regulatory assets and liabilities represent future revenues that are expected to be recovered from or refunded to customers in future periods. They stem from the
rate-setting process associated with certain costs and revenues, incurred in the current period or in prior periods and the under- or over-collection of revenues in the current or
prior periods.

Canadian Regulated Operations

Canadian natural gas transmission services are supplied under gas transportation tariffs that provide for cost recovery including return of and return on capital as approved by
the applicable regulatory authorities.

104NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

---



Rates
charged by TransCanada's wholly owned and partially owned Canadian regulated pipelines are set typically through a process that involves filing an application with the
regulators for a change in rates. Regulated rates are underpinned by the total annual revenue requirement, which comprises a specified annual return on capital, including debt and equity, and all
necessary operating expenses, taxes and depreciation.

TransCanada's
Canadian regulated pipelines have generally been subject to a cost-of-service model wherein forecasted costs, including a return on
capital, equal the revenues for the upcoming year. To the extent that actual costs are more or less than the forecasted costs, the regulators generally allow the difference to be deferred to a future
period and recovered or refunded in revenues at that time. Costs for which the regulator does not allow the difference between actual and forecast to be deferred are included in the determination of
net income in the year they are incurred.

The
Canadian Mainline, Foothills and TQM pipelines are regulated by the NEB under theNational Energy Board Act. At
December 31, 2007, the Alberta System was regulated by the EUB primarily under the provisions of theGas Utilities Act (Alberta)and the Pipeline Act (Alberta). The EUB was reorganized into the AUC and the Energy Resource Conservation Board effective January 1, 2008. The AUC
regulates the Alberta System's construction and operation of facilities, and the terms and conditions of services, including rates. The NEB regulates the construction and operation of facilities, and
the terms and conditions of services, including rates, for the Company's other Canadian regulated transmission systems.

Canadian Mainline

In February 2007, TransCanada reached a five-year tolls settlement with interested stakeholders for 2007 to 2011 on the Canadian Mainline. In May 2007,
the NEB approved the application as filed, including TransCanada's request that interim tolls for 2007 be made final. The terms of the settlement are effective January 1, 2007, to
December 31, 2011.

As
part of the settlement, TransCanada and its stakeholders agreed that the cost of capital will reflect a rate of return on common equity (ROE) as determined by the NEB's
ROE formula, on a deemed common equity ratio of 40 per cent, an increase from 36 per cent. The allowed ROE in 2007 for Canadian Mainline was 8.46 per cent.
The remaining capital structure consists of short- and long-term debt following the agreed-upon redemption of the US$460-million Preferred Securities.

The
settlement also established the Canadian Mainline's fixed operating, maintenance and administration (OM&A) costs for each year of the five years. Any variance
between actual OM&A costs and those agreed to in the settlement will accrue to TransCanada from 2007 to 2009. Variances in OM&A costs will be shared equally between TransCanada and its customers in
2010 and 2011. All other cost elements of the revenue requirement will be treated on a flow-through basis. The settlement also allows for performance-based incentive arrangements that will provide
mutual benefits to both TransCanada and its customers.

Alberta System

The Alberta System operated under the 2005-2007 Revenue Requirement Settlement. This settlement, approved by the EUB in June 2005, encompassed all elements of
the Alberta System's revenue requirement for 2005, 2006 and 2007 and established methodologies for calculating the revenue requirement for all three years, based on the recovery of all cost components
and the use of deferral accounts.

OM&A
and certain other costs, including foreign exchange on interest payments, uninsured losses and amortization of severance costs, were fixed for each of the three years
and any difference between actual and forecast fixed costs will be included in the determination of net income in the year they are incurred. Costs other than those that are fixed are forecast at the
beginning of each year and included in calculating the revenue requirement. Any variance between forecasted and actual costs is included in a deferral account and adjusted in the following year's
revenue requirement. The settlement also set the ROE using the formula for determining the annual generic ROE established in the EUB's General Cost of Capital Decision 2004-052 on a
deemed common equity of 35 per cent for all three years. The allowed ROE in 2007 was 8.51 per cent.

Other Canadian Pipelines

In February 2007, the NEB approved TransCanada's application to integrate the BC System and Foothills and charge tolls based on the integrated structure. The two systems
were integrated effective April 1, 2007, resulting in a transfer of BC System regulatory assets and liabilities to Foothills. The ROE for Foothills, which is based on the
NEB-allowed ROE formula established in the RH-2-94 Multi-Pipeline Cost of Capital proceeding, was 8.46 per cent in 2007 on a deemed equity
component of 36 per cent.

The
NEB approves pipeline tolls on an annual cost of service basis for Foothills and TQM, similar to the basis it uses to approve tolls on the Canadian Mainline. The NEB
allows each pipeline to charge a schedule of tolls based on the estimated cost of service. This schedule of tolls is used for the current year until a new toll filing is made for the following year.
Differences between the estimated cost of service and the actual cost of service are calculated and reflected in the subsequent year's tolls.

TQM
filed an application with the NEB in November 2007 for approval of a three-year partial negotiated settlement for the years 2007 to 2009. The partial
settlement represents agreement on all cost of service matters for the three-year period, with the exception of cost of capital and associated income taxes. In December 2007, TQM filed a cost
of capital application with the NEB for the years 2007 and 2008. The application requests approval of an 11 per cent return on deemed common equity of 40 per cent. TQM
currently is subject to an NEB ROE

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS105

---



formula
on deemed common equity of 30 per cent. TQM tolls remain in effect on an interim basis pending a decision on the application. Any adjustments to the interim tolls will be
recorded in accordance with the decision.

U.S. Regulated Operations

TransCanada's wholly owned and partially owned U.S. pipelines are 'natural gas companies' operating under the provisions of theNatural Gas Act of
1938,theNatural Gas Policy Act of 1978and the Energy Project Act of 2005, and are
subject to the jurisdiction of the FERC. TheNatural Gas Act of 1938grants the FERC authority over the construction and operation of pipelines and
related facilities. The FERC also has authority to regulate rates for natural gas transportation in interstate commerce.

ANR

ANR's operations are regulated primarily by the FERC. ANR's natural gas storage and transportation services that are regulated by the FERC also operate under approved tariff
rates. ANR Pipeline's rates were established pursuant to a settlement approved by a FERC order issued in February 1998 and became effective in November 1997. These tariffs include
maximum and minimum rate levels for services and permit ANR to discount or negotiate rates on a non-discriminatory basis. ANR Storage Company's rates were established pursuant to a
settlement approved by the FERC in April 1990 and became effective in June 1990. None of ANR's FERC-regulated operations are required to file for new rates at any time in the
future, nor are any of the operations prohibited from filing a case for new rates.

GTN

GTN is regulated by the FERC. Both of GTN's systems, the GTN System and North Baja, operate in accordance with FERC-approved tariffs that establish maximum and minimum
rates for various services. The pipelines are permitted to discount or negotiate these rates on a non-discriminatory basis. The GTN System filed a general rate case in June 2006
under theNatural Gas Act of 1938. The GTN System filed a Stipulation and Agreement with the FERC on November 1, 2007, that comprised an
uncontested settlement of all aspects of its 2006 rate case. The FERC approved the settlement on January 7, 2008, and GTN's financial results in 2007 reflect the terms of the settlement. In
2008, the GTN System will refund to customers amounts collected above the settlement rates for the period from January 1, 2007 through October 31, 2007. Under the settlement, a
five-year moratorium period was set in which the GTN System and the settling parties are prohibited from taking certain actions under theNatural Gas Act of
1938, including any filings. The GTN System is also required to file a rate case within seven years. Rates for capacity on North Baja were established in 2002 in
the FERC's initial order certificating construction and operations of North Baja.

Great Lakes

Great Lakes' rates and tariffs are regulated by the FERC. In 2000, Great Lakes negotiated an overall rate settlement with its customers that established the current rates. The
settlement expired October 31, 2005, with no requirement to file for new rates at any time in the future, nor is Great Lakes prohibited from filing such a rate case.

Portland

In 2003, Portland received final approval from the FERC of its general rate case under theNatural Gas Act of 1938. Portland is
required to file a general rate case under Section 4 of theNatural Gas Act of 1938, with a proposed effective date of
April 1, 2008.

Northern Border

Northern Border and its customers reached a settlement in September 2006 that was approved by the FERC in November 2006. The settlement established maximum
long-term mileage-based rates and charges for transportation on Northern Border's system. Beginning January 1, 2007, overall rates were reduced by approximately five per cent
from the rates in effect prior to the filing. The settlement provided for seasonal rates, which vary on a monthly basis, for short-term transportation services. It also included a
three-year moratorium on filing rate cases and on participants filing challenges to rates, and required that Northern Border file a general rate case within six years. Northern
Border was required to provide services under negotiated and discounted rates on a non-discriminatory basis.

106NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

---





Regulatory Assets and Liabilities

|Year ended December 31 (millions of dollars)    |                                                                                                                      | 2007 |     | 2006 |     |  |  | Remaining Recovery/ Settlement
Period |        | 
|----------------------------------------------- | -------------------------------------------------------------------------------------------------------------------- | ---- | --- | ---- | --- |  |  | ------------------------------------- | ------ | 
|                                               
|
|Regulatory Assets                               |                                                                                                                      |      |     |      |     |  |  |                                       |        | 
|                                                | Operating and debt-service regulatory assets(1)                                                                      |      | 85  |      |     |  |  |                                       | 1      | 
|                                                | Unrealized losses on derivatives  Canadian Mainline(2)                                                              |      | 63  |      | 44  |  |  |                                       | 1 - 3  | 
|                                                | Unrealized losses on derivatives  Foothills(2)                                                                      |      | 33  |      | 33  |  |  |                                       | 6      | 
|                                                | Unrealized losses on derivatives  Alberta System(2)                                                                 |      | 10  |      | 7   |  |  |                                       | 1 - 5  | 
|                                                | Foreign exchange on long-term debt principal  Alberta System(3)                                                     |      | 34  |      | 33  |  |  |                                       | 22     | 
|                                                | Deferred income tax on carrying costs capitalized during construction of
utility plant  ANR(4)                      |      | 20  |      |     |  |  |                                       | n/a    | 
|                                                | Unamortized issue costs on Preferred Securities  Canadian Mainline(5)                                               |      | 19  |      |     |  |  |                                       | 19     | 
|                                                | Phase II preliminary expenditures  Foothills(6)                                                                     |      | 18  |      | 20  |  |  |                                       | 8      | 
|                                                | Transitional other benefit obligations(7)                                                                            |      | 16  |      | 18  |  |  |                                       | 9      | 
|                                                | Unamortized post-retirement benefits  ANR(8)                                                                        |      | 13  |      |     |  |  |                                       | 4 - 6  | 
|                                                | Other                                                                                                                |      | 25  |      | 23  |  |  |                                       | n/a    | 
|                                                |                                                                                                                      |      |     |     
|Total Regulatory Assets (Other Assets)          |                                                                                                                      | 336  |     | 178  |     |  |  |                                       |        | 
|                                                |                                                                                                                      |      |     |     
|Regulatory Liabilities                          |                                                                                                                      |      |     |      |     |  |  |                                       |        | 
|                                                | Operating and debt-service regulatory liabilities(1)                                                                 |      | 3   |      | 70  |  |  |                                       | 1      | 
|                                                | Foreign exchange on long-term debt  Alberta System(9)                                                               |      | 168 |      | 60  |  |  |                                       | 5 - 22 | 
|                                                | Foreign exchange on long-term debt  Canadian Mainline(9)                                                            |      | 61  |      | 195 |  |  |                                       | 1 - 3  | 
|                                                | Foreign exchange on long-term debt  Foothills(9)                                                                    |      | 37  |      | 19  |  |  |                                       | 6      | 
|                                                | Foreign exchange gain on redemption of Preferred Securities, net of income tax of $15 million  Canadian Mainline(5) |      | 150 |      |     |  |  |                                       | 4      | 
|                                                | Post-retirement benefits other than pension  ANR(10)                                                                |      | 38  |      |     |  |  |                                       | n/a    | 
|                                                | Fuel tracker  ANR(11)                                                                                               |      | 29  |      |     |  |  |                                       | n/a    | 
|                                                | Negative salvage  ANR(12)                                                                                           |      | 17  |      |     |  |  |                                       | n/a    | 
|                                                | Post-retirement benefits other than pension  GTN System(13)                                                         |      |    |      | 19  |  |  |                                       | 4      | 
|                                                | Other                                                                                                                |      | 22  |      | 23  |  |  |                                       | n/a    | 
|                                                |                                                                                                                      |      |     |     
|Total Regulatory Liabilities (Deferred Amounts) |                                                                                                                      | 525  |     | 386  |     |  |  |                                       |        | 
|                                                |                                                                                                                      |      |     |     

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS107

---





As
prescribed by regulators, the taxes payable method of accounting for income taxes is used for toll-making purposes on Canadian regulated natural gas transmission
operations. As permitted by GAAP, this method is also used for accounting purposes, since there is a reasonable expectation that future income taxes payable will be included in future costs of service
and recorded in revenues at that time. Consequently, future income tax liabilities have not been recognized, as it is expected that when these amounts become payable, they will be recovered through
future rates. In the absence of rate-regulated accounting, GAAP would have required the recognition of future income tax liabilities. If the liability method of accounting had been used,
additional future income tax liabilities of $1,138 million would have been recorded at December 31, 2007 (2006  $1,355 million) and would
have been recoverable from future revenues. In 2007, reductions in enacted Canadian federal and provincial corporate future income tax rates resulted in a decrease of $123 million to this
unrecorded future income tax liability. The liability method of accounting is used for both accounting and toll-making purposes for the U.S. natural gas transmission operations.

108NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

---



Under
this method, future income tax assets and liabilities are recognized based on the differences between financial statement carrying amounts and the tax basis of the assets and liabilities. This
method is also used for toll-making purposes for the U.S. natural gas transmission operations. As a result, current year's revenues include a tax provision that is calculated based
on the liability method of accounting and there is no recognition of a related regulatory asset or liability.

NOTE 14    PREFERRED SECURITIES

In July 2007, TransCanada exercised its right to redeem the US$460-million 8.25 per cent preferred securities due 2047. The preferred securities
were redeemed for cash at par as part of the tolls settlement on the Canadian Mainline. The foreign exchange gain realized on redemption of the securities will flow through to the Canadian Mainline
shippers over a five-year period, pursuant to the settlement.

NOTE 15    NON-CONTROLLING INTERESTS

The Company's non-controlling interests included in the consolidated balance sheet were as follows.

|December 31 (millions of dollars)        |  | 2007 |  | 2006 |  |  |  | 
|---------------------------------------- |  | ---- |  | ---- |  |  |  | 
|                                         |  |     
|Non-controlling interest in PipeLines LP |  | 539  |  | 287  |  |  |  | 
|Preferred shares of subsidiary           |  | 389  |  | 389  |  |  |  | 
|Other                                    |  | 71   |  | 79   |  |  |  | 
|                                         |  |     
|                                         |  | 999  |  | 755  |  |  |  | 
|                                         |  |     

The
Company's non-controlling interests included in the consolidated income statement are as follows.

|Year ended December 31 (millions of dollars) |  | 2007 |  | 2006 |  | 2005 |  | 
|-------------------------------------------- |  | ---- |  | ---- |  | ---- |  | 
|                                            
|Non-controlling interest in PipeLines LP     |  | 65   |  | 43   |  | 52   |  | 
|Preferred share dividends of subsidiary      |  | 22   |  | 22   |  | 22   |  | 
|Other                                        |  | 10   |  | 13   |  | 10   |  | 
|                                            
|                                             |  | 97   |  | 78   |  | 84   |  | 
|                                            

The
non-controlling interest in PipeLines LP as at December 31, 2007, represented the 67.9 per cent interest not owned by TransCanada
(2006  86.6 per cent). Other non-controlling interests as at December 31, 2007, included the
38.3-per-cent (2006  38.3 per cent) non-controlling interest in Portland held by an unrelated partner.

TransCanada
received revenues of $2 million from PipeLines LP in 2007 (2006  $1 million;
2005  $1 million) and $7 million from Portland in 2007 (2006  $6 million;
2005  $6 million) for services it provided.

Preferred Shares of Subsidiary

|December 31                                     | Number of
Shares |  | Dividend Rate
Per Share |  | Redemption
Price Per Share |  | 2007                  |  | 2006                  |  | 
|----------------------------------------------- | ---------------- |  | ----------------------- |  | -------------------------- |  | --------------------- |  | --------------------- |  | 
|                                               
|                                                | (thousands)      |  |                         |  |                            |  | (millions of dollars) |  | (millions of dollars) |  | 
|Cumulative First Preferred Shares of Subsidiary |                  |  |                         |  |                            |  |                       |  |                       |  | 
|Series U                                        | 4,000            |  | $2.80                   |  | $50.00                     |  | 195                   |  | 195                   |  | 
|Series Y                                        | 4,000            |  | $2.80                   |  | $50.00                     |  | 194                   |  | 194                   |  | 
|                                                |                  |  |                         |  |                            |  |                      
|                                                |                  |  |                         |  |                            |  | 389                   |  | 389                   |  | 
|                                                |                  |  |                         |  |                            |  |                      

The
authorized number of preferred shares of TCPL issuable in series is unlimited. All of the cumulative first preferred shares of TCPL are without par value.

The
issuer may redeem at $50 per share the Series U shares on or after October 15, 2013, and the Series Y shares on or after March 5,
2014.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS109

---



NOTE 16    COMMON SHARES

|                                 |                                               | Number of Shares |        | Amount                |       | 
|-------------------------------- | --------------------------------------------- | ---------------- | ------ | --------------------- | ----- | 
|                                
|                                 |                                               | (thousands)      |        | (millions of dollars) |       | 
|Outstanding at January 1, 2005   |                                               | 484,914          |        | 4,711                 |       | 
|                                 | Exercise of options                           |                  | 2,322  |                       | 44    | 
|                                
|Outstanding at December 31, 2005 |                                               | 487,236          |        | 4,755                 |       | 
|                                 | Exercise of options                           |                  | 1,739  |                       | 39    | 
|                                
|Outstanding at December 31, 2006 |                                               | 488,975          |        | 4,794                 |       | 
|                                 | Issuance of common shares(1)                  |                  | 45,390 |                       | 1,683 | 
|                                 | Dividend reinvestment and share purchase plan |                  | 4,147  |                       | 157   | 
|                                 | Exercise of options                           |                  | 1,253  |                       | 28    | 
|                                
|Outstanding at December 31, 2007 |                                               | 539,765          |        | 6,662                 |       | 
|                                

Common Shares Issued and Outstanding

The Company is authorized to issue an unlimited number of common shares without par value.

In
January 2007, TransCanada filed a short form shelf prospectus with securities regulators in Canada and the U.S. to allow for the offering of up to
$3.0 billion of common shares, preferred shares and/or subscription receipts in Canada and the U.S. until February 2009. In 2007, the Company issued 45.4 million common
shares at a price of $38.00 each, generating gross proceeds of approximately $1.725 billion. The proceeds were used towards financing the acquisitions of ANR and an increased ownership interest
in Great Lakes.

Net Income per Share

Basic and diluted earnings per share are calculated based on the weighted average number of common shares outstanding during the year of 529.9 million and
532.5 million (2006  488.0 million and 490.6 million; 2005  486.2 million and
489.1 million), respectively. The increase in the weighted average number of shares for the diluted earnings per share calculation is due to the options exercisable under TransCanada's Stock
Option Plan.

Stock Options

|                                 |  | Number of
Options |   |  |  | Weighted
Average
Exercise Prices |  | Options
Exercisable |  | 
|-------------------------------- |  | ----------------- | - |  |  | -------------------------------- |  | ------------------- |  | 
|                                
|                                 |  | (thousands)       |   |  |  |                                  |  | (thousands)         |  | 
|Outstanding at January 1, 2005   |  | 9,965             |   |  |  | $20.90                           |  | 7,239               |  | 
|Granted                          |  | 1,075             |   |  |  | $30.21                           |  |                     |  | 
|Exercised                        |  | (2,322)           |   |  |  | $18.57                           |  |                     |  | 
|Cancelled or expired             |  | (4)               |   |  |  | $25.34                           |  |                     |  | 
|                                 |  |                   |   |  |  |                                  |  |                    
|Outstanding at December 31, 2005 |  | 8,714             |   |  |  | $22.67                           |  | 6,300               |  | 
|Granted                          |  | 1,841             |   |  |  | $34.48                           |  |                     |  | 
|Exercised                        |  | (1,739)           |   |  |  | $21.44                           |  |                     |  | 
|Cancelled or expired             |  | (17)              |   |  |  | $30.98                           |  |                     |  | 
|                                 |  |                   |   |  |  |                                  |  |                    
|Outstanding at December 31, 2006 |  | 8,799             |   |  |  | $25.37                           |  | 5,888               |  | 
|Granted                          |  | 1,083             |   |  |  | $38.10                           |  |                     |  | 
|Exercised                        |  | (1,253            | ) |  |  | $22.77                           |  |                     |  | 
|Cancelled or expired             |  | (20               | ) |  |  | $35.08                           |  |                     |  | 
|                                 |  |                   |   |  |  |                                  |  |                    
|Outstanding at December 31, 2007 |  | 8,609             |   |  |  | $27.32                           |  | 6,118               |  | 
|                                 |  |                   |   |  |  |                                  |  |                    

110NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

---



Stock
options outstanding at December 31, 2007, were as follow:

|                         |  | Options Outstanding |  | Options Exercisable
|------------------------ |  | ------------------- |  | -------------------
|                         |  |                    
|Range of Exercise Prices |  | Number of
Options   |  |                    
|                        
|                         |  | (thousands)         |  |                    
|$10.03 to $20.27         |  | 1,013               |  |                    
|$20.58 to $21.86         |  | 1,524               |  |                    
|$22.33 to $24.49         |  | 1,134               |  |                    
|$24.61 to $26.85         |  | 1,103               |  |                    
|$30.09 to $33.08         |  | 1,585               |  |                    
|$35.23 to $36.67         |  | 1,180               |  |                    
|$38.10 to $38.14         |  | 1,070               |  |                    
|                         |  |                     |  |                    
|                         |  | 8,609               |  |                    
|                         |  |                     |  |                    

An
additional five million common shares were reserved for future issuance under TransCanada's Stock Option Plan at December 31, 2007. In 2007, TransCanada issued
976,217 and 107,199 options to purchase common shares at a price of $38.10 and $38.14, respectively, under the Company's Stock Option Plan and the weighted average fair value of each option was
determined to be $4.22. The Company used the Black-Scholes model for determining the fair value of options granted applying the following weighted average assumptions for 2007: four years of expected
life (2006 and 2005  four years); 4.1 per cent interest rate (2006  4.1 per cent;
2005  4.0 per cent); 15 per cent volatility (2006  14 per cent;
2005  15 per cent); and 3.6 per cent dividend yield (2006  3.7 per cent;
2005  3.3 per cent). The amount expensed for stock options, with a corresponding increase in contributed surplus, was $4 million in 2007
(2006  $3 million; 2005  $3 million).

Shareholder Rights Plan

The Company's Shareholder Rights Plan is designed to encourage the fair treatment of shareholders in connection with any takeover offer for the Company. Under certain
circumstances, each common share is entitled to one right that entitles certain holders to purchase two common shares of the Company for the price of one.

Dividend Reinvestment and Share Purchase Plan

In 2007, TransCanada's Board of Directors authorized the issuance of common shares from treasury at a discount of two per cent to participants in the Company's Dividend
Reinvestment and Share Purchase Plan (DRP). Eligible shareholders may reinvest their dividends and make optional cash payments to obtain additional TransCanada common shares under the DRP. Commencing
with the dividend payable in April 2007, the DRP shares are provided to the participants at a two per cent discount to the average market price in the five days before dividend payment.
Previously, TransCanada purchased shares on the open market and provided them to DRP participants at cost. The Company reserves the right to alter the discount or return to purchasing shares on the
open market at any time. In accordance with the DRP, dividends of $157 million were paid in 2007 by the issuance from treasury of 4.1 million common shares.

NOTE 17    RISK MANAGEMENT AND FINANCIAL INSTRUMENTS

Risk Management Overview

TransCanada has exposure to market, counterparty credit and liquidity risk. The risk management function assists in managing these risks. TransCanada's primary risk management
objective is to protect earnings and cash flow, and ultimately shareholder value.

Risk
management strategies, policies and limits are designed to ensure TransCanada's risks and related exposures are in line with the Company's business objectives and risk
tolerance. Risks are managed within limits ultimately established by the Company's Board of Directors, implemented by senior management and monitored by risk management personnel. TransCanada's Audit
Committee oversees how management monitors compliance with risk management policies and procedures, and management's review of the adequacy of the risk management framework. Internal audit personnel
assist the Audit Committee in its oversight role by performing regular and ad-hoc reviews of risk management controls and procedures, the results of which are reported to the Audit
Committee.

Market Risk

The Company constructs and invests in large infrastructure projects, purchases and sells commodities, issues short- and long-term debt including amounts in foreign
currencies, and invests in foreign operations. These activities expose the Company to market risk from changes in commodity prices, foreign exchange rates and interest rates, which affect the
Company's earnings and the value of the financial instruments it holds.

The
Company uses derivatives as part of its overall risk management policy to manage exposures to market risk that result from these activities.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS111

---



Contracts
used to manage market risk generally consist of the following:

Commodity Price Risk

The Company is exposed to commodity price movements as part of its normal business operations, particularly in relation to the prices of power and natural gas. A number of
strategies are used to mitigate these exposures, including the following:



The
Company assesses its commodity contracts and derivative instruments used to manage energy commodity risk to determine the appropriate accounting treatment. Contracts,
with the exception of leases, have been assessed to determine whether they meet the definition of a derivative. Certain commodity purchase and sale contracts are derivatives but are not within the
scope of CICA Handbook Section 3855 "Financial Instruments  Recognition and Measurement", as they were entered into and continue to be held for the
purpose of receipt or delivery in accordance with the Company's normal purchases and normal sales exemption. Certain other contracts are not within the scope of Section 3855 as they are
considered to meet other exemptions.

TransCanada
manages its exposure to seasonal natural gas price spreads in its natural gas storage business by hedging storage capacity with a portfolio of
third-party storage capacity leases and proprietary natural gas purchases and sales. By matching purchase and sale volumes, TransCanada locks in a margin on a
back-to-back basis and thereby effectively eliminates its exposure to natural gas market price fluctuations.

Natural Gas Inventory Price Risk

Effective April 1, 2007, TransCanada began valuing its proprietary natural gas inventory held in storage at fair value, as measured by the one-month forward
price for natural gas. At December 31, 2007, $190 million of proprietary natural gas inventory was included in Inventories. The amount recorded in 2007 in Revenues for the net change in
the fair value of proprietary natural gas held in inventory was insignificant. A gain of $10 million was recorded in 2007 in Revenues for the net change in fair value of the forward proprietary
natural gas purchase and sales contracts.

Foreign Exchange and Interest Rate Risk

Foreign exchange and interest rate risk is created by fluctuations in the fair values or cash flows of financial instruments due to changes in foreign exchange rates and/or
changes in the market interest rates.

A
portion of TransCanada's earnings from its Pipelines and Energy operations outside of Canada is generated primarily in U.S. dollars and is subject to currency
fluctuations. The performance of the Canadian dollar relative to the U.S. dollar could positively or negatively affect TransCanada's earnings. This foreign exchange impact is offset by
exposures in certain of TransCanada's businesses and by the Company's hedging activities. Due to its growing operations in the U.S., including the acquisitions of ANR and increased ownership in
Great Lakes and PipeLines LP, TransCanada expects to have a greater exposure to U.S. dollar fluctuations than in prior years.

The
Company uses foreign currency and interest rate derivatives to manage the foreign exchange and interest rate risks related to its
U.S. dollar-denominated debt and other transactions, as well as to manage the interest rate exposures of the Canadian Mainline, Alberta System and Foothills. Certain of the realized
gains and losses on these derivatives are shared with shippers on predetermined terms. These gains and losses are deferred as regulatory assets and liabilities until they are recovered from or paid to
the shippers in accordance with the terms of the shipping agreements.

The
Company has fixed-rate long-term debt, which subjects it to interest rate price risk, and has floating interest rate debt, which subjects it to interest rate
cash flow risk. The Company uses a combination of forwards, interest rate swaps and options to manage its exposure to these risks.

112NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

---



Net Investment in Self-Sustaining Foreign Operations

The Company hedges its net investment in self-sustaining foreign operations on an after-tax basis with U.S. dollar-denominated debt, forward
contracts, cross-currency interest rate swaps and options. The Company had designated U.S. dollar-denominated debt with a carrying value of $4.7 billion (US$4.7 billion) and a
fair value of $4.8 billion (US$4.8 billion) as a net investment hedge at December 31, 2007. The forwards, swaps and options are recorded at their fair value and are included in
Other Assets.

The
fair values and notional or principal amount for the derivatives designated as a net investment hedge were as follow:

|                                                   |                         | 2007       |    | 2006                         |          |           
|-------------------------------------------------- | ----------------------- | ---------- | -- | ---------------------------- | -------- | ----------
|                                                   |                         |           
|Asset/(Liability)December 31 (millions of dollars) |                         | Fair Value |    | Notional or
Principal
Amount |          | Fair Value
|                                                  
|U.S. dollar cross-currency swaps                   |                         |            |    |                              |          |           
|                                                   | (maturing 2009 to 2014) |            | 77 |                              | U.S. 350 |           
|U.S. dollar options                                |                         |            |    |                              |          |           
|                                                   | (maturing 2008)         |            | 3  |                              | U.S. 600 |           
|U.S. dollar forward foreign exchange contracts     |                         |            |    |                              |          |           
|                                                   | (maturing 2008)         |            | (4 | )                            | U.S. 150 |           
|                                                  
|                                                   |                         | 76         |    | U.S. 1,100                   |          | 45        
|                                                  

VaR Analysis

TransCanada uses a Value-at-Risk methodology (VaR) to estimate the potential impact resulting from its exposure to market risk. VaR estimates the
potential change in pre-tax earnings over a given holding period for a specified confidence level. The VaR number calculated and used by TransCanada reflects the 95 per cent
probability that the daily change resulting from normal market fluctuations in its liquid positions will not exceed the reported VaR. VaR methodology is a statistically-defined, probability-based
approach that takes into consideration market volatilities as well as risk diversification by recognizing offsetting positions and correlations between products and markets. Risks are measured across
all products and markets, and risk measures can be aggregated to arrive at a single VaR number.

There
is currently no uniform industry methodology for estimating VaR. The use of VaR has limitations because it is based on historical correlations and volatilities in
commodity prices, interest rates and foreign exchange rates, and assumes that future price movements will follow a statistical distribution. Although losses are not expected to exceed the
statistically estimated VaR on 95 per cent of occasions, losses on the other five per cent of occasions could be substantially greater than the estimated VaR.

TransCanada's
estimation of VaR includes wholly owned subsidiaries, and incorporates relevant risks associated with each market or business unit. The calculation does not
include the Pipelines segment as the rate-regulated nature of the pipeline business reduces the impact of market risks and limits TransCanada's ability to manage these risks. The Company's
Board of Directors has established a VaR limit, which is monitored on an ongoing basis as part of the Company's risk management policy. TransCanada's consolidated VaR was less than $10 million
at December 31, 2007.

Counterparty Credit Risk

Counterparty credit risk represents the financial loss that the Company would experience if a counterparty to a financial instrument, in which the Company has an amount owing
from the counterparty, failed to meet its obligations in accordance with the terms and conditions of its contracts with the Company.

Counterparty
credit risk is mitigated through established credit management techniques, including conducting financial and other assessments to establish and monitor a
counterparty's creditworthiness, setting exposure limits, monitoring exposures against these limits, utilizing master netting arrangements and obtaining financial assurances where warranted. In
general, financial assurances include guarantees, letters of credit and cash. The Company monitors and manages its concentration of counterparty credit risk on an ongoing basis.

TransCanada's
maximum counterparty credit exposure at the balance sheet date consists primarily of the carrying amount of non-derivative financial assets as well
as the fair value of derivative financial assets.

The
Company has contracts for the sale of non-financial items. Many of these contracts do not meet the definition of a financial instrument since the underlying
volumes are physically delivered during the Company's normal course of business. Exposure to counterparty credit risk on these non-financial contracts results from the potential of a
counterparty defaulting on invoiced amounts owing to TransCanada. These invoiced amounts are included in the Accounts Receivable and Other Assets amounts disclosed in the Non-Derivative
Financial Instruments Summary table presented later in this Note. Some of these non-financial contracts do meet the definition of a derivative and are recorded at fair value.

The
carrying amounts and fair values of financial assets and non-financial derivatives are disclosed in the Non-Derivative Financial Instruments
Summary and the Derivative Financial Instruments Summary tables presented later in this Note.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS113

---





The Company does not have any significant concentrations of counterparty credit risk and the majority of the counterparty credit
exposure is with counterparties who are investment grade.

The
Company has reached agreements for allowed unsecured claims with certain subsidiaries of Calpine Corporation (Calpine), former shippers on TransCanada's pipeline systems
that have filed for bankruptcy protection, as discussed in Note 25.

Liquidity Risk

Liquidity risk is the risk that TransCanada will not be able to meet its financial obligations as they fall due. The Company's approach to managing liquidity risk is to ensure
that it always has sufficient cash and credit facilities to meet its obligations when due, under both normal and stressed conditions, without incurring unacceptable losses or damage to the Company's
reputation.

Management
typically forecasts cash flows for a period of 12 months to identify financing requirements. These requirements are then addressed through a combination of
committed and demand credit facilities and access to capital markets, as discussed in the Capital Management section in this Note.

The
following tables detail the remaining contractual maturities for TransCanada's non-derivative financial liabilities, including both the principal and
interest cash flows at December 31, 2007:

Contractual Repayments of Financial Liabilities

|                                             |  |        |  | Payments Due by Period
|-------------------------------------------- |  | ------ |  | ----------------------
|                                             |  |        |  |                       
|December 31, 2007 (millions of dollars)      |  | Total  |  | 2008                  
|                                            
|Notes payable                                |  | 421    |  | 421                   
|Long-term debt and junior subordinated notes |  | 13,908 |  | 556                   
|Long-term debt of joint ventures             |  | 903    |  | 30                    
|                                            
|Total contractual repayments                 |  | 15,232 |  | 1,007                 
|                                            

Interest Payments on Financial Liabilities

|                                                                  |  |        |  | Payments Due by Period
|----------------------------------------------------------------- |  | ------ |  | ----------------------
|                                                                  |  |        |  |                       
|December 31, 2007 (millions of dollars)                           |  | Total  |  | 2008                  
|                                                                 
|Interest payments on long-term debt and junior subordinated notes |  | 11,566 |  | 895                   
|Interest payments on long-term debt of joint ventures             |  | 332    |  | 55                    
|                                                                 
|Total interest payments                                           |  | 11,898 |  | 950                   
|                                                                 

114NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

---



Capital Management

The primary objective of capital management is to ensure TransCanada's strong credit rating is maintained to support its businesses and maximize shareholder value. This overall
objective and policy for managing capital remained unchanged in 2007 from the prior year.

TransCanada
manages its capital structure in a manner consistent with the risk characteristics of the underlying assets. The Company's management considers its capital
structure to consist of net debt, Non-Controlling Interests and Shareholders' Equity. Net debt is comprised of Notes Payable, Long-Term Debt, Junior Subordinated Notes and
Preferred Securities less Cash and Cash Equivalents. Net debt only includes obligations that the Company controls and manages. Consequently, it does not include Cash and Cash Equivalents, Notes
Payable and Long-Term Debt of TransCanada's joint ventures.

The
capital structure at December 31, 2007 was as follows:

|(millions of dollars)     |  |        |   | 
|------------------------- |  | ------ | - | 
|                         
|Notes payable             |  | 407    |   | 
|Long-term debt            |  | 12,933 |   | 
|Junior subordinated notes |  | 975    |   | 
|Cash and cash equivalents |  | (333   | ) | 
|                         
|Net debt                  |  | 13,982 |   | 
|                         
|Non-controlling interests |  | 999    |   | 
|Shareholders' equity      |  | 9,785  |   | 
|                         
|Total equity              |  | 10,784 |   | 
|                         
|Total capital             |  | 24,766 |   | 
|                         

Fair Values

The fair value of Cash and Cash Equivalents and Notes Payable approximates their carrying amounts due to the short time period to maturity. The fair value of foreign exchange
and interest rate derivatives has been calculated using year-end market rates. The fair value of power, natural gas and heat rate derivatives has been calculated using estimated forward
prices for the relevant period.

Fair
values of financial instruments are determined by reference to quoted bid or asking price, as appropriate, in active markets at period-end dates. In the
absence of an active market, the Company determines fair value by using valuation techniques that refer to observable market data or estimated market prices. These include comparisons with similar
instruments that have observable market prices, option pricing models and other valuation techniques commonly used by market participants. Fair values determined using valuation models require the use
of assumptions about the amount and timing of estimated future cash flows and discount rates. In making these assumptions, the Company looks primarily to readily observable external market input
factors such as interest rate yield curves, currency rates, and price and rate volatilities as applicable.

The
fair value of the Company's Long-Term Debt was estimated based on quoted market prices for the same or similar debt instruments and, when such information
was not available, by discounting future payments of interest and principal at estimated interest rates that were made available to the Company at December 31, 2007. The fair value of Preferred
Securities was determined using market prices for the same or similar issues.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS115

---



Fair Value of Long-Term Debt and Other Long-Term Securities

The carrying and fair values of long-term debt and other long-term securities were as follow:

|                                                 |  | 2007            |  | 2006       |  |                
|------------------------------------------------ |  | --------------- |  | ---------- |  | ---------------
|                                                 |  |                
|December 31 (millions of dollars)                |  | Carrying
Amount |  | Fair
Value |  | Carrying
Amount
|                                                
|Long-Term Debt                                   |  |                 |  |            |  |                
|TransCanada PipeLines Limited(1)                 |  | 8,519           |  | 9,400      |  | 8,549          
|NOVA Gas Transmission Ltd.                       |  | 1,508           |  | 1,877      |  | 1,648          
|TransCanada PipeLine USA Ltd.                    |  | 850             |  | 850        |  |               
|ANR Pipeline Company                             |  | 435             |  | 573        |  |                
|Gas Transmission Northwest Corporation           |  | 399             |  | 383        |  | 466            
|TC PipeLines, LP                                 |  | 499             |  | 499        |  | 463            
|Great Lakes Gas Transmission Limited Partnership |  | 434             |  | 519        |  |               
|Tuscarora Gas Transmission Company               |  | 67              |  | 81         |  | 86             
|Portland Natural Gas Transmission System         |  | 205             |  | 214        |  | 263            
|Other                                            |  | 17              |  | 24         |  | 28             
|                                                
|                                                 |  | 12,933          |  | 14,420     |  | 11,503         
|Junior Subordinated Notes                        |  | 975             |  | 914        |  |               
|                                                
|                                                 |  | 13,908          |  | 15,334     |  | 11,503         
|                                                
|Long-Term Debt of Joint Ventures                 |  |                 |  |            |  |                
|Northern Border Pipeline Company                 |  | 311             |  | 329        |  | 368            
|Iroquois Gas Transmission System, L.P.           |  | 169             |  | 180        |  | 209            
|Great Lakes Gas Transmission Limited Partnership |  |                |  |           |  | 262            
|Bruce Power L.P. and Bruce Power A L.P.          |  | 243             |  | 243        |  | 250            
|Trans Québec & Maritimes Pipeline Inc.           |  | 165             |  | 169        |  | 171            
|Other                                            |  | 15              |  | 16         |  | 18             
|                                                
|                                                 |  | 903             |  | 937        |  | 1,278          
|                                                
|                                                 |  | 14,811          |  | 16,271     |  | 12,781         
|                                                
|Preferred Securities                             |  |                |  |           |  | 536            
|                                                

Non-Derivative Financial Instruments Summary

The carrying and fair values of non-derivative financial instruments were as follow:

|December 31, 2007 (millions of dollars)          |  | Carrying Amount |  | Fair Value |  | 
|------------------------------------------------ |  | --------------- |  | ---------- |  | 
|                                                
|Financial Assets(1)                              |  |                 |  |            |  | 
|Cash and cash equivalents                        |  | 504             |  | 504        |  | 
|Accounts receivable and other assets(2)(3)       |  | 1,231           |  | 1,231      |  | 
|Available-for-sale assets(2)                     |  | 17              |  | 17         |  | 
|                                                
|                                                 |  | 1,752           |  | 1,752      |  | 
|                                                
|Financial Liabilities(1)(3)                      |  |                 |  |            |  | 
|Notes payable                                    |  | 421             |  | 421        |  | 
|Accounts payable and deferred amounts(4)         |  | 1,454           |  | 1,454      |  | 
|Long-term debt and junior subordinated notes     |  | 13,908          |  | 15,334     |  | 
|Long-term debt of joint ventures                 |  | 903             |  | 937        |  | 
|Other long-term liabilities of joint ventures(4) |  | 60              |  | 60         |  | 
|                                                
|                                                 |  | 16,746          |  | 18,206     |  | 
|                                                

116NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

---



Derivative Financial Instruments Summary

Information for the Company's derivative financial instruments is as follows:

|                                                                 |                            | 2007        |       |            
|---------------------------------------------------------------- | -------------------------- | ----------- | ----- | -----------
|                                                                 |                            |            
|December 31
(all amounts in millions unless otherwise indicated) |                            | Power       |       | Natural Gas
|                                                                
|Derivative Financial Instruments Held for Trading                |                            |             |       |            
|Fair Values(1)                                                   |                            |             |       |            
|                                                                 | Assets                     |             | $55   |            
|                                                                 | Liabilities                |             | $(44  | )          
|Notional Values                                                  |                            |             |       |            
|                                                                 | Volumes(2)                 |             |       |            
|                                                                 |                            | Purchases   |       | 3,774      
|                                                                 |                            | Sales       |       | 4,469      
|                                                                 | Canadian dollars           |             |      |            
|                                                                 | U.S. dollars               |             |      |            
|                                                                 | Japanese yen (in billions) |             |      |            
|                                                                 | Cross-currency             |             |      |            
|Unrealized gains/(losses) in the period(3)                       |                            | $16         |       | $(10       
|Realized (losses)/gains in the period(3)                         |                            | $(8         | )     | $47        
|Maturity dates                                                   |                            | 2008 - 2016 |       | 2008 - 2010
|Derivative Financial Instruments in Hedging Relationships(4)(5)  |                            |             |       |            
|Fair Values(1)                                                   |                            |             |       |            
|                                                                 | Assets                     |             | $135  |            
|                                                                 | Liabilities                |             | $(104 | )          
|Notional Values                                                  |                            |             |       |            
|                                                                 | Volumes(2)                 |             |       |            
|                                                                 |                            | Purchases   |       | 7,362      
|                                                                 |                            | Sales       |       | 16,367     
|                                                                 | Canadian dollars           |             |      |            
|                                                                 | U.S. dollars               |             |      |            
|                                                                 | Cross-currency             |             |      |            
|Realized (losses)/gains in the period(3)                         |                            | $(29        | )     | $18        
|Maturity dates                                                   |                            | 2008 - 2013 |       | 2008 - 2010

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS117

---



Balance Sheet Presentation of Derivative Financial Instruments

The fair values of the derivative financial instruments in the Company's Balance Sheet were as follow:

|December 31 (millions of dollars) |                      | 2007 |      |  
|--------------------------------- | -------------------- | ---- | ---- | -
|                                 
|Current                           |                      |      |      |  
|                                  | Other current assets |      | 160  |  
|                                  | Accounts payable     |      | (144 | )
|Long-term                         |                      |      |      |  
|                                  | Other assets         |      | 204  |  
|                                  | Deferred amounts     |      | (205 | )

Derivative Financial Instruments of Joint Ventures

Included in the Balance Sheet Presentation of Derivatives Financial Instruments table above are amounts related to power derivatives used by certain of the Company's joint
ventures to manage commodity price risk. The Company's proportionate share of the fair value of these power sales derivatives was $75 million at December 31, 2007. These contracts mature
from 2008 to 2013. The Company's proportionate share of the notional sales volumes of power associated with this exposure was 7,300 gigawatt hours (GWh) at December 31, 2007. The
Company's proportionate share of the notional purchased volumes of power associated with this exposure was 50 GWh at December 31, 2007.

NOTE 18    INCOME TAXES

Provision for Income Taxes

|Year ended December 31 (millions of dollars) |  | 2007 |  | 2006 |  | 2005 |   | 
|-------------------------------------------- |  | ---- |  | ---- |  | ---- | - | 
|                                            
|Current                                      |  |      |  |      |  |      |   | 
|Canada                                       |  | 367  |  | 264  |  | 499  |   | 
|Foreign                                      |  | 65   |  | 37   |  | 51   |   | 
|                                            
|                                             |  | 432  |  | 301  |  | 550  |   | 
|                                            
|Future                                       |  |      |  |      |  |      |   | 
|Canada                                       |  | 12   |  | 104  |  | (46  | ) | 
|Foreign                                      |  | 46   |  | 71   |  | 106  |   | 
|                                            
|                                             |  | 58   |  | 175  |  | 60   |   | 
|                                            
|                                             |  | 490  |  | 476  |  | 610  |   | 
|                                            

Geographic Components of Income

|Year ended December 31 (millions of dollars)                                        |  | 2007  |  | 2006  |  | 2005  |  | 
|----------------------------------------------------------------------------------- |  | ----- |  | ----- |  | ----- |  | 
|                                                                                   
|Canada                                                                              |  | 1,228 |  | 1,161 |  | 1,316 |  | 
|Foreign                                                                             |  | 582   |  | 444   |  | 587   |  | 
|                                                                                   
|Income from continuing operations before income taxes and non-controlling interests |  | 1,810 |  | 1,605 |  | 1,903 |  | 
|                                                                                   

118NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

---



Reconciliation of Income Tax Expense

|Year ended December 31 (millions of dollars)                                        |  | 2007  |   | 2006  |   | 2005  |   | 
|----------------------------------------------------------------------------------- |  | ----- | - | ----- | - | ----- | - | 
|                                                                                   
|Income from continuing operations before income taxes and non-controlling interests |  | 1,810 |   | 1,605 |   | 1,903 |   | 
|Federal and provincial statutory tax rate                                           |  | 32.1  | % | 32.5  | % | 33.6  | % | 
|Expected income tax expense                                                         |  | 581   |   | 522   |   | 639   |   | 
|Income tax differential related to regulated operations                             |  | 69    |   | 72    |   | 71    |   | 
|(Lower)/higher effective foreign tax rates                                          |  | (39   | ) |      |   | 2     |   | 
|Tax rate and legislated changes                                                     |  | (72   | ) | (33   | ) |      |   | 
|Income from equity investments and non-controlling interests                        |  | (34   | ) | (27   | ) | (29   | ) | 
|Non-taxable portion of gains on sale of assets                                      |  | (3    | ) |      |   | (68   | ) | 
|Large corporations tax                                                              |  |      |   |      |   | 15    |   | 
|Other(1)                                                                            |  | (12   | ) | (58   | ) | (20   | ) | 
|                                                                                   
|Actual income tax expense                                                           |  | 490   |   | 476   |   | 610   |   | 
|                                                                                   

Future Income Tax Assets and Liabilities

|December 31 (millions of dollars)                                   |  | 2007  |  | 2006  |  | 
|------------------------------------------------------------------- |  | ----- |  | ----- |  | 
|                                                                   
|Deferred amounts                                                    |  | 43    |  | 65    |  | 
|Other post-employment benefits                                      |  | 57    |  | 45    |  | 
|Unrealized losses on derivatives                                    |  | 22    |  |      |  | 
|Other                                                               |  | 77    |  | 53    |  | 
|                                                                   
|                                                                    |  | 199   |  | 163   |  | 
|Less: valuation allowance                                           |  | 13    |  | 14    |  | 
|                                                                   
|Future income tax assets, net of valuation allowance                |  | 186   |  | 149   |  | 
|                                                                   
|Difference in accounting and tax bases of plant, equipment and PPAs |  | 1,073 |  | 768   |  | 
|Investments in subsidiaries and partnerships                        |  | 61    |  | 113   |  | 
|Pension benefits                                                    |  | 50    |  | 59    |  | 
|Unrealized foreign exchange gains on long-term debt                 |  | 110   |  | 39    |  | 
|Unrealized gains on derivatives                                     |  | 27    |  |      |  | 
|Other                                                               |  | 44    |  | 46    |  | 
|                                                                   
|Future income tax liabilities                                       |  | 1,365 |  | 1,025 |  | 
|                                                                   
|Net future income tax liabilities                                   |  | 1,179 |  | 876   |  | 
|                                                                   

Unremitted Earnings of Foreign Investments

Income taxes have not been provided on the unremitted earnings of foreign investments that the Company does not intend to repatriate in the foreseeable future. Future income tax
liabilities would have increased by approximately $72 million at December 31, 2007 (2006  $72 million) if there had been a provision for
these taxes.

Income Tax Payments

Income tax payments of $442 million were made during the year ended December 31, 2007 (2006  $494 million;
2005  $531 million).

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS119

---



NOTE 19    NOTES PAYABLE

|                                         |  | 2007                    |  | 2006 |  |                                                        
|---------------------------------------- |  | ----------------------- |  | ---- |  | -------------------------------------------------------
|                                         |  |                        
|                                         |  | Outstanding
December 31 |  |      |  | Weighted
Average
Interest Rate
Per Annum at
December 31
|                                        
|                                         |  | (millions of dollars)   |  |      |  |                                                        
|Canadian dollars                         |  | 55                      |  |      |  | 5.0%                                                   
|U.S. dollars (2007  US$370; 2006  nil) |  | 366                     |  |      |  | 5.5%                                                   
|                                         |  |                         |  |      |  |                                                        
|                                         |  | 421                     |  |      |  |                                                        
|                                         |  |                         |  |      |  |                                                        

Notes
Payable consists of commercial paper outstanding and drawings on bridge and line-of-credit facilities. Total unsecured revolving and demand credit facilities of
$2.9 billion were available at December 31, 2007 to support the Company's commercial paper program and for general corporate purposes. These credit facilities include
the following:



In
February 2007, the Company established a US$2.2-billion unsecured, committed one-year bridge facility and drew down $1.5 billion and
US$700 million for the sole purpose of partially financing the acquisitions of ANR and an increased ownership in Great Lakes. The facility had a floating interest rate based on the
one-month LIBOR plus 25 basis points. The outstanding balance at December 31, 2007 was US$370 million, which was repaid on January 7, 2008. The undrawn balance
of this facility has been cancelled and is no longer available to the Company.

120NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

---





NOTE 20    ASSET RETIREMENT OBLIGATIONS

The estimated undiscounted cash flows required to settle the asset retirement obligations with respect to the regulated and non-regulated operations in the Pipelines
segment were $65 million at December 31, 2007 (2006  $39 million), calculated using an inflation rate ranging from two to three
per cent per annum. The estimated fair value of these liabilities was $25 million at December 31, 2007 (2006  $9 million) after
discounting the estimated cash flows at rates ranging from 5.4 per cent to 8.0 per cent. At December 31, 2007, the expected timing of payment for settlement of the
obligations ranged from one to 27 years.

The
estimated undiscounted cash flows required to settle the asset retirement obligations with respect to the Energy segment were $216 million at December 31,
2007 (2006  $162 million), calculated using an inflation rate ranging from two to three per cent per annum. The estimated fair value of this
liability was $63 million at December 31, 2007 (2006  $36 million) after discounting the estimated cash flows at rates ranging from
5.4 per cent to 6.6 per cent. At December 31, 2007, the expected timing of payment for settlement of the obligations ranges from 11 to 32 years.

Reconciliation of Asset Retirement Obligations(1)

|(millions of dollars)                                 |  | Pipelines |   | Energy |   | Total |   | 
|----------------------------------------------------- |  | --------- | - | ------ | - | ----- | - | 
|                                                     
|Balance at January 1, 2005                            |  | 5         |   | 31     |   | 36    |   | 
|New obligations and revisions in estimated cash flows |  | (1        | ) | 1      |   |      |   | 
|Sale of Power LP                                      |  |          |   | (5     | ) | (5    | ) | 
|Accretion expense                                     |  |          |   | 2      |   | 2     |   | 
|                                                     
|Balance at December 31, 2005                          |  | 4         |   | 29     |   | 33    |   | 
|New obligations and revisions in estimated cash flows |  | 4         |   | 6      |   | 10    |   | 
|Accretion expense                                     |  | 1         |   | 1      |   | 2     |   | 
|                                                     
|Balance at December 31, 2006                          |  | 9         |   | 36     |   | 45    |   | 
|New obligations and revisions in estimated cash flows |  | 14        |   | 25     |   | 39    |   | 
|Accretion expense                                     |  | 2         |   | 2      |   | 4     |   | 
|                                                     
|Balance at December 31, 2007                          |  | 25        |   | 63     |   | 88    |   | 
|                                                     

(1)
Asset Retirement Obligations are included in Deferred Amounts.

NOTE 21    EMPLOYEE FUTURE BENEFITS

The Company sponsors DB Plans that cover substantially all employees. Benefits provided under the DB Plans are based on years of service and highest average earnings over three
consecutive years of employment, and increase annually by a portion of the increase in the Consumer Price Index (CPI). Past service costs are amortized over the expected average remaining service life
of employees, which is approximately 11 years.

The
Company also provides its employees with DC Plans and post-employment benefits other than pensions, including termination benefits and defined life insurance
and medical benefits beyond those provided by government-sponsored plans. Past service costs are amortized over the expected average remaining life expectancy of former employees, which was
approximately 14 years at December 31, 2007. Contributions to DC Plans are expensed as incurred.

The
Company expensed $8 million in 2007 (2006  $2 million;
2005  $2 million) related to retirement savings plans for its U.S. employees.

Total
cash payments for employee future benefits, consisting of cash contributed by the Company to the DB Plans and other benefit plans, was $61 million in 2007
(2006  $104 million; 2005  $74 million).

The
Company measures its accrued benefit obligations and the fair value of plan assets for accounting purposes as at December 31 of each year. The most recent
actuarial valuation of the pension plans for funding purposes was as at January 1, 2008, and the next required valuation will be as at January 1, 2009.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS121

---



|                                                                     |                                               | Pension Benefit Plans |       | Other Benefit Plans |       |     
|-------------------------------------------------------------------- | --------------------------------------------- | --------------------- | ----- | ------------------- | ----- | ----
|                                                                     |                                               |                      
|(millions of dollars)                                                |                                               | 2007                  |       | 2006                |       | 2007
|                                                                    
|Change in Benefit Obligation                                         |                                               |                       |       |                     |       |     
|                                                                     | Benefit obligation  beginning of year        |                       | 1,378 |                     | 1,282 |     
|                                                                     | Current service cost                          |                       | 45    |                     | 39    |     
|                                                                     | Interest cost                                 |                       | 73    |                     | 65    |     
|                                                                     | Employee contributions                        |                       | 4     |                     | 3     |     
|                                                                     | Benefits paid                                 |                       | (65   | )                   | (64   | )   
|                                                                     | Actuarial (gain)/loss                         |                       | (22   | )                   | 53    |     
|                                                                     | Foreign exchange rate changes                 |                       | (16   | )                   |      |     
|                                                                     | Plan amendment                                |                       |      |                     |      |     
|                                                                     | Acquisition                                   |                       | 65    |                     |      |     
|                                                                    
|                                                                     | Benefit obligation  end of year              |                       | 1,462 |                     | 1,378 |     
|                                                                    
|Change in Plan Assets                                                |                                               |                       |       |                     |       |     
|                                                                     | Plan assets at fair value  beginning of year |                       | 1,264 |                     | 1,096 |     
|                                                                     | Actual return on plan assets                  |                       | 33    |                     | 134   |     
|                                                                     | Employer contributions                        |                       | 46    |                     | 95    |     
|                                                                     | Employee contributions                        |                       | 4     |                     | 3     |     
|                                                                     | Benefits paid                                 |                       | (65   | )                   | (64   | )   
|                                                                     | Foreign exchange rate changes                 |                       | (17   | )                   |      |     
|                                                                     | Acquisition                                   |                       | 93    |                     |      |     
|                                                                    
|                                                                     | Plan assets at fair value  end of year       |                       | 1,358 |                     | 1,264 |     
|                                                                    
|Funded status  plan deficit                                         |                                               | (104                  | )     | (114                | )     | (125
|Unamortized net actuarial loss                                       |                                               | 299                   |       | 291                 |       | 44  
|Unamortized past service costs                                       |                                               | 28                    |       | 32                  |       | 7   
|                                                                    
|Accrued benefit asset/(liability), net of valuation allowance of nil |                                               | 223                   |       | 209                 |       | (74 
|                                                                    

The
accrued benefit asset/(liability) in the Company's balance sheet was as follows:

|                      |  | Pension Benefit Plans |  | Other Benefit Plans |   |     
|--------------------- |  | --------------------- |  | ------------------- | - | ----
|                      |  |                      
|(millions of dollars) |  | 2007                  |  | 2006                |   | 2007
|                     
|Other Assets          |  | 223                   |  | 230                 |   | 5   
|Deferred Amounts      |  |                      |  | (21                 | ) | (79 
|                     
|Total                 |  | 223                   |  | 209                 |   | (74 
|                     

Included
in the above benefit obligation and fair value of plan assets at December 31 were the following amounts for plans that are not fully funded:

|                             |  | Pension Benefit Plans |   | Other Benefit Plans |   |     
|---------------------------- |  | --------------------- | - | ------------------- | - | ----
|                             |  |                      
|(millions of dollars)        |  | 2007                  |   | 2006                |   | 2007
|                            
|Benefit obligation           |  | (1,324                | ) | (1,359              | ) | (155
|Plan assets at fair value    |  | 1,198                 |   | 1,243               |   | 30  
|                            
|Funded status  plan deficit |  | (126                  | ) | (116                | ) | (125
|                            

The
Company's expected contributions in 2008 are approximately $60 million for the pension benefit plans and approximately $14 million for the other
benefit plans.

122NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

---



The
following are estimated future benefit payments, which reflect expected future service.

|(millions of dollars) |  | Pension
Benefits |  | Other
Benefits |  | 
|--------------------- |  | ---------------- |  | -------------- |  | 
|                     
|2008                  |  | 65               |  | 7              |  | 
|2009                  |  | 68               |  | 7              |  | 
|2010                  |  | 71               |  | 8              |  | 
|2011                  |  | 74               |  | 9              |  | 
|2012                  |  | 78               |  | 9              |  | 
|2013 to 2017          |  | 447              |  | 54             |  | 

The
significant weighted average actuarial assumptions adopted in measuring the Company's benefit obligations at December 31 were as follow:

|                              |  | Pension Benefit Plans |  | Other Benefit Plans |  |      
|----------------------------- |  | --------------------- |  | ------------------- |  | -----
|                              |  |                      
|                              |  | 2007                  |  | 2006                |  | 2007 
|                             
|Discount rate                 |  | 5.30%                 |  | 5.00%               |  | 5.50%
|Rate of compensation increase |  | 3.50%                 |  | 3.50%               |  |      

The
significant weighted average actuarial assumptions adopted in measuring the Company's net benefit plan cost for years ended December 31 were as follow:

|                                                 |  | Pension Benefit Plans |  | Other Benefit Plans |  |      
|------------------------------------------------ |  | --------------------- |  | ------------------- |  | -----
|                                                 |  |                      
|                                                 |  | 2007                  |  | 2006                |  | 2005 
|                                                
|Discount rate                                    |  | 5.05%                 |  | 5.00%               |  | 5.75%
|Expected long-term rate of return on plan assets |  | 6.90%                 |  | 6.90%               |  | 6.90%
|Rate of compensation increase                    |  | 3.50%                 |  | 3.50%               |  | 3.50%

The
overall expected long-term rate of return on plan assets is based on historical and projected rates of return for the portfolio in aggregate and for each
asset class in the portfolio. Assumed projected rates of return are selected after analyzing historical experience and estimating future levels and volatility of returns. Asset class benchmark
returns, asset mix and anticipated benefit payments from plan assets are also considered in the determination of the overall expected rate of return. The discount rate is based on market interest
rates of high quality bonds that match the timing and benefits expected to be paid under each plan.

A
nine per cent annual rate of increase in the per-capita cost of covered health care benefits was assumed for 2008 measurement purposes. The rate was
assumed to decrease gradually to five per cent in 2016 and remain at this level thereafter. A one percentage point change in assumed health care cost trend rates would have the following
effects:

|(millions of dollars)                                   |  | Increase |  | Decrease |   | 
|------------------------------------------------------- |  | -------- |  | -------- | - | 
|                                                       
|Effect on total of service and interest cost components |  | 1        |  | (1       | ) | 
|Effect on post-employment benefit obligation            |  | 14       |  | (12      | ) | 

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS123

---



The
Company's net benefit cost is as follows.

|                                                                                                                   |  | Pension Benefit Plans |   | Other Benefit Plans |   |     
|------------------------------------------------------------------------------------------------------------------ |  | --------------------- | - | ------------------- | - | ----
|                                                                                                                   |  |                      
|Year ended December 31 (millions of dollars)                                                                       |  | 2007                  |   | 2006                |   | 2005
|                                                                                                                  
|Current service cost                                                                                               |  | 45                    |   | 39                  |   | 32  
|Interest cost                                                                                                      |  | 73                    |   | 65                  |   | 63  
|Actual return on plan assets                                                                                       |  | (33                   | ) | (134                | ) | (119
|Actuarial (gain)/loss                                                                                              |  | (22                   | ) | 53                  |   | 149 
|Plan amendment                                                                                                     |  |                      |   |                    |   |    
|                                                                                                                  
|Elements of net benefit cost prior to adjustments to recognize the long-term nature of net benefit cost            |  | 63                    |   | 23                  |   | 125 
|                                                                                                                  
|Difference between expected and actual return on plan assets                                                       |  | (51                   | ) | 63                  |   | 54  
|Difference between actuarial (gain)/loss recognized and actual actuarial (gain)/loss on accrued benefit obligation |  | 47                    |   | (27                 | ) | (131
|Difference between amortization of past service costs and actual plan amendments                                   |  | 4                     |   | 4                   |   | 3   
|Amortization of transitional obligation related to regulated business                                              |  |                      |   |                    |   |    
|                                                                                                                  
|Net benefit cost recognized                                                                                        |  | 63                    |   | 63                  |   | 51  
|                                                                                                                  

The
Company pension plans' weighted average asset allocations and weighted average target allocations by asset category were as follow:

|December 31       |  | Percentage of Plan Assets |  | Target Allocation |  | 
|----------------- |  | ------------------------- |  | ----------------- |  | 
|                  |  |                          
|Asset Category    |  | 2007                      |  | 2006              |  | 
|                 
|Debt securities   |  | 42%                       |  | 40%               |  | 
|Equity securities |  | 58%                       |  | 60%               |  | 
|                  |  |                           |  |                   |  | 
|                  |  | 100%                      |  | 100%              |  | 
|                  |  |                           |  |                   |  | 

Debt
securities included the Company's debt of $4 million (0.3 per cent of total plan assets) and $4 million (0.3 per cent of total
plan assets) at December 31, 2007 and 2006, respectively. Equity securities included the Company's common shares of $6 million (0.4 per cent of total plan assets) and
$6 million (0.5 per cent of total plan assets) at December 31, 2007 and 2006, respectively.

The
assets of the pension plans are managed on a going concern basis subject to legislative restrictions. The plans' investment policies are to maximize returns within an
acceptable risk tolerance. Pension assets are invested in a diversified manner with consideration given to the demographics of the plans' participants.

Employee Future Benefits of Joint Ventures

Certain of the Company's joint ventures sponsor DB Plans as well as post-employment benefits other than pensions, including defined life insurance and medical
benefits beyond those provided by government-sponsored plans. The obligations of these plans are non-recourse to TransCanada. The following amounts in this note, including those in the
tables, represent TransCanada's proportionate share with respect to these plans.

Total
cash payments for employee future benefits, consisting of cash contributed by the Company's joint ventures to DB Plans and other benefit plans was $34 million
in 2007 (2006  $25 million; 2005  $4 million).

The
Company's joint ventures measure the benefit obligations and the fair value of plan assets for accounting purposes as at December 31 of each year. The most recent
actuarial valuations of the pension plans for funding purposes were as at January 1, 2008, and the next required valuations will be as at January 1, 2009.

124NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

---





|                                                                     |                                               | Pension Benefit Plans |     | Other Benefit Plans |     |     
|-------------------------------------------------------------------- | --------------------------------------------- | --------------------- | --- | ------------------- | --- | ----
|                                                                     |                                               |                      
|(millions of dollars)                                                |                                               | 2007                  |     | 2006                |     | 2007
|                                                                    
|Change in Benefit Obligation                                         |                                               |                       |     |                     |     |     
|                                                                     | Benefit obligation  beginning of year        |                       | 807 |                     | 679 |     
|                                                                     | Current service cost                          |                       | 28  |                     | 24  |     
|                                                                     | Interest cost                                 |                       | 40  |                     | 37  |     
|                                                                     | Employee contributions                        |                       | 5   |                     | 5   |     
|                                                                     | Benefits paid                                 |                       | (23 | )                   | (15 | )   
|                                                                     | Actuarial (gain)/loss                         |                       | (34 | )                   | 77  |     
|                                                                     | Foreign exchange rate changes                 |                       | (3  | )                   |    |     
|                                                                     | Acquisition                                   |                       | (31 | )                   |    |     
|                                                                     | Plan amendment                                |                       |    |                     |    |     
|                                                                    
|                                                                     | Benefit obligation  end of year              |                       | 789 |                     | 807 |     
|                                                                    
|Change in Plan Assets                                                |                                               |                       |     |                     |     |     
|                                                                     | Plan assets at fair value  beginning of year |                       | 666 |                     | 585 |     
|                                                                     | Actual return on plan assets                  |                       | (1  | )                   | 68  |     
|                                                                     | Employer contributions                        |                       | 32  |                     | 23  |     
|                                                                     | Employee contributions                        |                       | 5   |                     | 5   |     
|                                                                     | Benefits paid                                 |                       | (23 | )                   | (15 | )   
|                                                                     | Foreign exchange rate changes                 |                       | (5  | )                   |    |     
|                                                                     | Acquisition                                   |                       | (48 | )                   |    |     
|                                                                    
|                                                                     | Plan assets at fair value  end of year       |                       | 626 |                     | 666 |     
|                                                                    
|Funded status  plan deficit                                         |                                               | (163                  | )   | (141                | )   | (165
|Unamortized net actuarial loss                                       |                                               | 169                   |     | 174                 |     | 45  
|Unamortized past service costs                                       |                                               |                      |     |                    |     | 3   
|                                                                    
|Accrued benefit asset/(liability), net of valuation allowance of nil |                                               | 6                     |     | 33                  |     | (117
|                                                                    

The
accrued benefit asset/(liability), net of valuation allowance of nil in the Company's balance sheet was as follows:

|                      |  | Pension Benefit Plans |  | Other Benefit Plans |  |     
|--------------------- |  | --------------------- |  | ------------------- |  | ----
|                      |  |                      
|(millions of dollars) |  | 2007                  |  | 2006                |  | 2007
|                     
|Other assets          |  | 6                     |  | 33                  |  |    
|Deferred amounts      |  |                      |  |                    |  | (117
|                     
|Total                 |  | 6                     |  | 33                  |  | (117
|                     

The
following amounts were included at December 31 in the above benefit obligation and fair value of plan assets for plans that are not fully funded:

|                             |  | Pension Benefit Plans |   | Other Benefit Plans |   |     
|---------------------------- |  | --------------------- | - | ------------------- | - | ----
|                             |  |                      
|(millions of dollars)        |  | 2007                  |   | 2006                |   | 2007
|                            
|Benefit obligation           |  | (786                  | ) | (773                | ) | (165
|Plan assets at fair value    |  | 623                   |   | 609                 |   |    
|                            
|Funded status  plan deficit |  | (163                  | ) | (164                | ) | (165
|                            

The
expected contributions of the Company's joint ventures in 2008 are approximately $31 million for the pension benefit plans and approximately $3 million for
the other benefit plans.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS125

---



The
following are estimated future benefit payments, which reflect expected future service.

|(millions of dollars) |  | Pension
Benefits |  | Other
Benefits |  | 
|--------------------- |  | ---------------- |  | -------------- |  | 
|                     
|2008                  |  | 26               |  | 3              |  | 
|2009                  |  | 30               |  | 4              |  | 
|2010                  |  | 33               |  | 5              |  | 
|2011                  |  | 37               |  | 5              |  | 
|2012                  |  | 41               |  | 6              |  | 
|2013 to 2017          |  | 263              |  | 39             |  | 

The
significant weighted average actuarial assumptions adopted in measuring the benefit obligations of the Company's joint ventures at December 31 were
as follow:

|                              |  | Pension Benefit Plans |  | Other Benefit Plans |  |      
|----------------------------- |  | --------------------- |  | ------------------- |  | -----
|                              |  |                      
|                              |  | 2007                  |  | 2006                |  | 2007 
|                             
|Discount rate                 |  | 5.25%                 |  | 5.05%               |  | 5.15%
|Rate of compensation increase |  | 3.50%                 |  | 3.50%               |  |      

The
significant weighted average actuarial assumptions adopted in measuring the net benefit plan costs of the Company's joint ventures for years ended December 31
were as follow:

|                                                 |  | Pension Benefit Plans |  | Other Benefit Plans |  |      
|------------------------------------------------ |  | --------------------- |  | ------------------- |  | -----
|                                                 |  |                      
|                                                 |  | 2007                  |  | 2006                |  | 2005 
|                                                
|Discount rate                                    |  | 5.00%                 |  | 5.25%               |  | 6.20%
|Expected long-term rate of return on plan assets |  | 7.00%                 |  | 7.30%               |  | 7.40%
|Rate of compensation increase                    |  | 3.50%                 |  | 3.50%               |  | 3.50%

A
one percentage point change in assumed health care cost trend rates would have the following effects:

|(millions of dollars)                                   |  | Increase |  | Decrease |   | 
|------------------------------------------------------- |  | -------- |  | -------- | - | 
|                                                       
|Effect on total of service and interest cost components |  | 2        |  | (1       | ) | 
|Effect on post-employment benefit obligation            |  | 23       |  | (20      | ) | 

The
Company's proportionate share of net benefit cost of joint ventures is as follows.

|                                                                                                                   |  | Pension Benefit Plans |   | Other Benefit Plans |   |     
|------------------------------------------------------------------------------------------------------------------ |  | --------------------- | - | ------------------- | - | ----
|                                                                                                                   |  |                      
|Year ended December 31 (millions of dollars)                                                                       |  | 2007                  |   | 2006                |   | 2005
|                                                                                                                  
|Current service cost                                                                                               |  | 28                    |   | 24                  |   | 4   
|Interest cost                                                                                                      |  | 40                    |   | 37                  |   | 7   
|Actual return on plan assets                                                                                       |  | 1                     |   | (68                 | ) | (18 
|Actuarial (gain)/loss                                                                                              |  | (34                   | ) | 77                  |   | 17  
|Plan amendment                                                                                                     |  |                      |   |                    |   |    
|                                                                                                                  
|Elements of net benefit cost prior to adjustments to recognize the long-term nature of net benefit cost            |  | 35                    |   | 70                  |   | 10  
|                                                                                                                  
|Difference between expected and actual return on plan assets                                                       |  | (44                   | ) | 26                  |   | 9   
|Difference between actuarial (gain)/loss recognized and actual actuarial (gain)/loss on accrued benefit obligation |  | 44                    |   | (70                 | ) | (16 
|Difference between amortization of past service costs and actual plan amendments                                   |  |                      |   |                    |   |    
|                                                                                                                  
|Net benefit cost recognized related to joint ventures                                                              |  | 35                    |   | 26                  |   | 3   
|                                                                                                                  

126NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

---



The
weighted average asset allocations and weighted average target allocation by asset category in the pension plans of the Company's joint ventures were as follow:

|December 31       |  | Percentage of Plan Assets |  | Target Allocation |  | 
|----------------- |  | ------------------------- |  | ----------------- |  | 
|                  |  |                          
|Asset Category    |  | 2007                      |  | 2006              |  | 
|                 
|Debt securities   |  | 43%                       |  | 29%               |  | 
|Equity securities |  | 57%                       |  | 71%               |  | 
|                  |  |                           |  |                   |  | 
|                  |  | 100%                      |  | 100%              |  | 
|                  |  |                           |  |                   |  | 

Debt
securities included the Company's debt of $1 million (0.2 per cent of total plan assets) and $1 million (0.2 per cent of total
plan assets) at December 31, 2007 and 2006, respectively. Equity securities included the Company's common shares of $3 million (0.5 per cent of total plan assets) and
$6 million (1.0 per cent of total plan assets) at December 31, 2007 and 2006, respectively.

The
assets of the pension plans are managed on a going concern basis subject to legislative restrictions. The plans' investment policies are to maximize returns within an
acceptable risk tolerance. Pension assets are invested in a diversified manner with consideration given to the demographics of the plans' participants.

NOTE 22    CHANGES IN OPERATING WORKING CAPITAL

|Year ended December 31 (millions of dollars) |  | 2007 |   | 2006 |   | 2005 |   | 
|-------------------------------------------- |  | ---- | - | ---- | - | ---- | - | 
|                                            
|Decrease/(increase) in accounts receivable   |  | 51   |   | (188 | ) | (100 | ) | 
|Increase in inventories                      |  | (6   | ) | (108 | ) | (50  | ) | 
|Decrease/(increase) in other current assets  |  | 118  |   | (6   | ) | (1   | ) | 
|Increase/(decrease) in accounts payable      |  | 61   |   | (42  | ) | 97   |   | 
|(Decrease)/increase in accrued interest      |  | (9   | ) | 41   |   | 5    |   | 
|                                            
|                                             |  | 215  |   | (303 | ) | (49  | ) | 
|                                            

NOTE 23    COMMITMENTS, CONTINGENCIES AND GUARANTEES

Commitments

Operating leases

Future annual payments, net of sub-lease receipts, under the Company's operating leases for various premises, services, equipment and a natural gas storage facility
are approximately as follows.

|Year ended December 31 (millions of dollars) |  | Minimum
Lease Payments |  | Amounts Recoverable
under Sub-Leases |   | Net
Payments |  | 
|-------------------------------------------- |  | ---------------------- |  | ------------------------------------ | - | ------------ |  | 
|                                            
|2008                                         |  | 62                     |  | (13                                  | ) | 49           |  | 
|2009                                         |  | 58                     |  | (12                                  | ) | 46           |  | 
|2010                                         |  | 57                     |  | (12                                  | ) | 45           |  | 
|2011                                         |  | 61                     |  | (10                                  | ) | 51           |  | 
|2012                                         |  | 61                     |  | (6                                   | ) | 55           |  | 
|2013 and thereafter                          |  | 848                    |  | (13                                  | ) | 835          |  | 
|                                            
|Total                                        |  | 1,147                  |  | (66                                  | ) | 1,081        |  | 
|                                            

The
operating lease agreements for premises, services and equipment expire at various dates through 2021, with an option to renew certain lease agreements for one to ten
years. The operating lease agreement for the natural gas storage facility expires in 2030. The lessee has the right to terminate the agreement on anniversary dates five years apart commencing in 2010,
and the lessor has the right to terminate the agreement on the same schedule commencing in 2015. Net rental expense on operating leases in 2007 was $34 million
(2006  $25 million; 2005  $17 million).

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS127

---



TransCanada's
commitments under the Alberta PPAs are considered to be operating leases and a portion of these PPAs have been subleased to third parties under similar terms
and conditions. Future payments under these PPAs have been excluded from the above table, as these payments are dependent upon plant availability, among other things. The amount of power purchased
under the PPAs in 2007 was $440 million (2006  $499 million; 2005  $230 million). The generating
capacities and expiry dates of the PPAs are as follow:

|           |  | Megawatts |  | Expiry Date       |  | 
|---------- |  | --------- |  | ----------------- |  | 
|          
|Sheerness  |  | 756       |  | December 31, 2020 |  | 
|Sundance A |  | 560       |  | December 31, 2017 |  | 
|Sundance B |  | 353       |  | December 31, 2020 |  | 

TransCanada
and its affiliates have long-term natural gas transportation and natural gas purchase arrangements as well as other purchase obligations, all of
which are transacted at market prices and in the normal course of business.

Bruce Power

Bruce A has signed commitments to third-party suppliers related to refurbishing and restarting Units 1 and 2 and refurbishing Units 3
and 4 to extend their operating life. TransCanada's share of these signed commitments, which extend over the four-year period ending December 31, 2011, are as follow:

|Year ended December 31 (millions of dollars) |  |     |  | 
|-------------------------------------------- |  | --- |  | 
|                                            
|2008                                         |  | 360 |  | 
|2009                                         |  | 151 |  | 
|2010                                         |  | 69  |  | 
|2011                                         |  | 14  |  | 
|                                            
|                                             |  | 594 |  | 
|                                            

Aboriginal Pipeline Group

On June 18, 2003, the Mackenzie Delta gas producers, the APG and TransCanada reached an agreement governing TransCanada's role in the Mackenzie Gas Pipeline (MGP) project
to build a natural gas pipeline from Inuvik, Northwest Territories, to the northern border of Alberta, where it would connect with the Company's Alberta System. Under the agreement, TransCanada agreed
to finance the APG for its one-third share of project pre-development costs. These costs are currently forecasted to be between $150 million and $200 million,
depending on the pace of project development. As at December 31, 2007, the Company had advanced $137 million of this total.

TransCanada
and the other co-venture companies involved in the MGP continue to pursue approval of the proposed project, focusing on the regulatory process and
discussions with the Canadian government on the fiscal framework. Project timing is uncertain and is conditional upon resolution of regulatory and fiscal matters. TransCanada's ability to recover its
investment depends on the successful outcome of the project.

Other Commitments

TransCanada is committed to capital expenditures of approximately $1.6 billion related to its share of the construction costs of the Keystone oil pipeline and other
pipeline projects.

The
Company is committed to capital expenditures of approximately $608 million related to its share of the construction costs of the Halton Hills, Portlands Energy
and remaining Cartier Wind projects.

Contingencies

The Canadian Alliance of Pipeline Landowners' Associations (CAPLA) and two individual landowners commenced an action in 2003 against TransCanada and Enbridge Inc. under
Ontario'sClass Proceedings Act, 1992for damages of $500 million. The damages are alleged to have arisen from the creation of a control zone
within 30 metres of a pipeline pursuant to Section 112 of theNational Energy Board Act. In November 2006, TransCanada and
Enbridge Inc. were granted a dismissal of the case but CAPLA appealed the decision. The Ontario Court of Appeal heard the appeal on December 18, 2007, and reserved its decision. The
Company continues to believe the claim is without merit and will vigorously defend the action. The Company has made no provision for any potential liability. A liability, if any, would be dealt with
through the regulatory process.

TransCanada
and its subsidiaries are subject to various legal proceedings and actions arising in the normal course of business. While the final outcome of such legal
proceedings and actions cannot be predicted with certainty, it is the opinion of management that the resolution of such proceedings and actions will not have a material impact on the Company's
consolidated financial position or results of operations.

128NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

---



Guarantees

TransCanada, Cameco Corporation and BPC Generation Infrastructure Trust (BPC) have each severally guaranteed one-third of certain contingent financial obligations of
Bruce B related to power sales agreements, operator licenses, a lease agreement and contractor services. The guarantees have terms ranging from one year ending in 2008 to perpetuity.

TransCanada
and BPC have each severally guaranteed one-half of certain contingent financial obligations related to an agreement with the Ontario Power Authority
to refurbish and restart Bruce A power generation units. The guarantees were part of the reorganization of Bruce Power in 2005 and have terms ending in 2019 to 2036. TransCanada's share of the
potential exposure under these Bruce Power guarantees was estimated at December 31, 2007 to range from $711 million to a maximum of $750 million. The fair value of these
guarantees is estimated to be $12 million.

The
Company and its partners in certain jointly owned entities have severally and joint and severally guaranteed the performance of these entities related primarily to
construction projects, redelivery of natural gas, PPA payments and the payment of liabilities. TransCanada's share of the potential exposure under these guarantees was estimated at December 31,
2007 to range from $699 million to a maximum of $1,210 million. For certain of these entities, any payments made by TransCanada under these guarantees in excess of its ownership interest
are to be reimbursed by its partners. Deferred Amounts includes $7 million for the fair value of these joint and several guarantees.

TransCanada
has guaranteed a subsidiary's equity undertaking that supports the payment, under certain conditions, of principal and interest on US$75 million of the
public debt obligations of TransGas de Occidente S.A. (TransGas). The Company has a 46.5 per cent interest in TransGas. Under the terms of a shareholder agreement, TransCanada and
another major multinational company, may be required to severally fund more than their proportionate share of debt obligations of TransGas in the event that the minority shareholders fail to
contribute. Any payments made by TransCanada under this agreement convert into share capital of TransGas. The
Company's potential exposure is contingent on the impact any change of law would have on the ability of TransGas to service the debt. There has been no change in applicable law since the issuance of
debt in 1995 and, thus, no exposure for TransCanada. The debt matures in 2010. The Company has made no provision related to this guarantee.

NOTE 24    DISCONTINUED OPERATIONS

TransCanada had no income from discontinued operations in 2007 (2006  $28 million;
2005  nil). The income from discontinued operations in 2006 reflected settlements received from bankruptcy claims related to TransCanada's Gas Marketing
business, which was divested in 2001.

NOTE 25    SUBSEQUENT EVENTS

Certain subsidiaries of Calpine filed for bankruptcy protection in both Canada and the U.S. in 2005. Portland and Gas Transmission Northwest Corporation (GTNC) have
reached agreements with Calpine for allowed unsecured claims of US$125 million and US$192.5 million, respectively, in the Calpine bankruptcy. Creditors will receive shares in the
re-organized Calpine and these shares will be subject to market price fluctuations as the new Calpine shares begin to trade. In February 2008, Portland and GTNC received initial
distributions of 6.1 million shares and 9.4 million shares, respectively, which are expected to result in a significant increase in TransCanada's net earnings in
first-quarter 2008.

Claims
by NGTL and Foothills Pipe Lines (South B.C.) Ltd. for $31.6 million and $44.4 million, respectively, were received in cash in
January 2008 and will be passed on to shippers on these systems.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS129

---



SUPPLEMENTARY INFORMATION

SELECTED QUARTERLY AND ANNUAL CONSOLIDATED FINANCIAL DATA

The following sets forth selected quarterly and annual financial data for 2007, 2006 and 2005:

|Toronto Stock Exchange(Stock trading symbol TRP)  |  | First |  | Second |  | Third |  | Fourth |  | Annual | 
|------------------------------------------------- |  | ----- |  | ------ |  | ----- |  | ------ |  | ------ | 
|                                                 
|2007 (dollars)                                    |  |       |  |        |  |       |  |        |  |        | 
|High                                              |  | 41.35 |  | 40.29  |  | 39.83 |  | 40.73  |  | 41.35  | 
|Low                                               |  | 36.75 |  | 35.77  |  | 35.43 |  | 36.47  |  | 35.43  | 
|Close                                             |  | 38.35 |  | 36.64  |  | 36.47 |  | 40.54  |  | 40.54  | 
|Volume (millions of shares)                       |  | 88.7  |  | 78.7   |  | 91.4  |  | 77.2   |  | 336.0  | 
|                                                 
|2006 (dollars)                                    |  |       |  |        |  |       |  |        |  |        | 
|High                                              |  | 37.15 |  | 34.93  |  | 36.49 |  | 40.90  |  | 40.90  | 
|Low                                               |  | 33.60 |  | 30.77  |  | 31.70 |  | 33.87  |  | 30.77  | 
|Close                                             |  | 33.67 |  | 31.85  |  | 35.15 |  | 40.61  |  | 40.61  | 
|Volume (millions of shares)                       |  | 71.9  |  | 74.1   |  | 61.6  |  | 61.0   |  | 268.6  | 
|                                                 
|2005 (dollars)                                    |  |       |  |        |  |       |  |        |  |        | 
|High                                              |  | 30.84 |  | 33.03  |  | 37.29 |  | 37.90  |  | 37.90  | 
|Low                                               |  | 28.94 |  | 29.23  |  | 31.49 |  | 34.06  |  | 28.94  | 
|Close                                             |  | 29.82 |  | 32.24  |  | 35.50 |  | 36.65  |  | 36.65  | 
|Volume (millions of shares)                       |  | 64.1  |  | 54.1   |  | 61.4  |  | 58.4   |  | 238.0  | 
|                                                 
|New York Stock Exchange(Stock trading symbol TRP) |  |       |  |        |  |       |  |        |  |        | 
|                                                 
|2007 (U.S. dollars)                               |  |       |  |        |  |       |  |        |  |        | 
|High                                              |  | 35.30 |  | 37.21  |  | 38.06 |  | 43.94  |  | 43.94  | 
|Low                                               |  | 31.33 |  | 32.91  |  | 32.92 |  | 36.68  |  | 31.33  | 
|Close                                             |  | 33.28 |  | 34.41  |  | 36.61 |  | 40.93  |  | 40.93  | 
|Volume (millions of shares)                       |  | 8.2   |  | 5.7    |  | 9.0   |  | 7.9    |  | 30.8   | 
|                                                 
|2006 (U.S. dollars)                               |  |       |  |        |  |       |  |        |  |        | 
|High                                              |  | 32.14 |  | 31.36  |  | 32.85 |  | 35.40  |  | 35.40  | 
|Low                                               |  | 28.66 |  | 27.40  |  | 28.23 |  | 29.82  |  | 27.40  | 
|Close                                             |  | 28.93 |  | 28.68  |  | 31.44 |  | 34.95  |  | 34.95  | 
|Volume (millions of shares)                       |  | 5.8   |  | 9.0    |  | 5.6   |  | 7.3    |  | 27.7   | 
|                                                 
|2005 (U.S. dollars)                               |  |       |  |        |  |       |  |        |  |        | 
|High                                              |  | 25.49 |  | 26.85  |  | 31.61 |  | 32.41  |  | 32.41  | 
|Low                                               |  | 23.66 |  | 23.36  |  | 25.84 |  | 28.81  |  | 23.36  | 
|Close                                             |  | 24.70 |  | 26.46  |  | 30.55 |  | 31.48  |  | 31.48  | 
|Volume (millions of shares)                       |  | 4.9   |  | 3.9    |  | 14.7  |  | 8.1    |  | 31.6   | 
|                                                 

130SUPPLEMENTARY
INFORMATION

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EIGHT-YEAR FINANCIAL HIGHLIGHTS

|(millions of dollars except where indicated)     |                         | 2007      |        | 2006   |        | 2005   |        | 2004   |        | 2003   |        | 2002   |        | 2001   |        | 2000   |        |       
|------------------------------------------------ | ----------------------- | --------- | ------ | ------ | ------ | ------ | ------ | ------ | ------ | ------ | ------ | ------ | ------ | ------ | ------ | ------ | ------ | ------
|                                                
|Income Statement                                 |                         |           |        |        |        |        |        |        |        |        |        |        |        |        |        |        |        |       
|Revenues                                         |                         | 8,828     |        | 7,520  |        | 6,124  |        | 5,497  |        | 5,636  |        | 5,225  |        | 5,285  |        | 4,384  |        |       
|Net income from continuing operations            |                         | 1,223     |        | 1,051  |        | 1,209  |        | 980    |        | 801    |        | 747    |        | 686    |        | 628    |        |       
|Net income/(loss) by segment                     |                         |           |        |        |        |        |        |        |        |        |        |        |        |        |        |        |        |       
|                                                 |                         | Pipelines |        | 686    |        | 560    |        | 679    |        | 584    |        | 625    |        | 639    |        | 572    |        | 613   
|                                                 |                         | Energy    |        | 514    |        | 452    |        | 566    |        | 398    |        | 217    |        | 160    |        | 181    |        | 95    
|                                                 |                         | Corporate |        | 23     |        | 39     |        | (36    | )      | (2     | )      | (41    | )      | (52    | )      | (67    | )      | (80   
|                                                 | Continuing operations   |           | 1,223  |        | 1,051  |        | 1,209  |        | 980    |        | 801    |        | 747    |        | 686    |        | 628    |       
|                                                 | Discontinued operations |           |       |        | 28     |        |       |        | 52     |        | 50     |        |       |        | (67    | )      | 61     |       
|Net income                                       |                         | 1,223     |        | 1,079  |        | 1,209  |        | 1,032  |        | 851    |        | 747    |        | 619    |        | 689    |        |       
|Cash Flow Statement                              |                         |           |        |        |        |        |        |        |        |        |        |        |        |        |        |        |        |       
|Funds generated from operations                  |                         | 2,621     |        | 2,378  |        | 1,951  |        | 1,703  |        | 1,822  |        | 1,843  |        | 1,625  |        | 1,484  |        |       
|Decrease/(increase) in operating working capital |                         | 215       |        | (303   | )      | (49    | )      | 29     |        | 93     |        | 92     |        | (487   | )      | 437    |        |       
|                                                
|Net cash provided by operations                  |                         | 2,836     |        | 2,075  |        | 1,902  |        | 1,732  |        | 1,915  |        | 1,935  |        | 1,138  |        | 1,921  |        |       
|Capital expenditures and acquisitions            |                         | (5,874    | )      | (2,042 | )      | (2,071 | )      | (2,046 | )      | (965   | )      | (851   | )      | (1,082 | )      | (1,144 | )      |       
|Disposition of assets                            |                         | 35        |        | 23     |        | 671    |        | 410    |        |       |        |       |        | 1,170  |        | 2,233  |        |       
|Cash dividends paid on common shares             |                         | (546      | )      | (617   | )      | (586   | )      | (552   | )      | (510   | )      | (466   | )      | (418   | )      | (423   | )      |       
|Balance Sheet                                    |                         |           |        |        |        |        |        |        |        |        |        |        |        |        |        |        |        |       
|Assets                                           |                         |           |        |        |        |        |        |        |        |        |        |        |        |        |        |        |        |       
|Plant, property and equipment                    |                         |           |        |        |        |        |        |        |        |        |        |        |        |        |        |        |        |       
|                                                 |                         | Pipelines |        | 18,280 |        | 17,141 |        | 16,528 |        | 17,306 |        | 16,064 |        | 16,158 |        | 16,562 |        | 16,937
|                                                 |                         | Energy    |        | 5,127  |        | 4,302  |        | 3,483  |        | 1,421  |        | 1,368  |        | 1,340  |        | 1,116  |        | 776   
|                                                 |                         | Corporate |        | 45     |        | 44     |        | 27     |        | 37     |        | 50     |        | 64     |        | 66     |        | 111   
|Total assets                                     |                         |           |        |        |        |        |        |        |        |        |        |        |        |        |        |        |        |       
|                                                 | Continuing operations   |           | 30,330 |        | 25,909 |        | 24,113 |        | 22,415 |        | 20,876 |        | 20,416 |        | 20,255 |        | 20,238 |       
|                                                 | Discontinued operations |           |       |        |       |        |       |        | 7      |        | 11     |        | 139    |        | 276    |        | 5,007  |       
|                                                
|Total assets                                     |                         | 30,330    |        | 25,909 |        | 24,113 |        | 22,422 |        | 20,887 |        | 20,555 |        | 20,531 |        | 25,245 |        |       
|Capitalization                                   |                         |           |        |        |        |        |        |        |        |        |        |        |        |        |        |        |        |       
|Long-term debt                                   |                         | 12,377    |        | 10,887 |        | 9,640  |        | 9,749  |        | 9,516  |        | 8,899  |        | 9,444  |        | 10,008 |        |       
|Junior subordinated notes                        |                         | 975       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       
|Preferred securities                             |                         |          |        | 536    |        | 536    |        | 554    |        | 598    |        | 944    |        | 950    |        | 1,208  |        |       
|Non-controlling interests                        |                         | 999       |        | 755    |        | 783    |        | 700    |        | 713    |        | 677    |        | 675    |        | 646    |        |       
|Common shareholders' equity                      |                         | 9,785     |        | 7,701  |        | 7,206  |        | 6,565  |        | 6,091  |        | 5,747  |        | 5,426  |        | 5,211  |        |       

SUPPLEMENTARY
INFORMATION131

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|Per Common Share Data (dollars)                  |                               |                             |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |      
|------------------------------------------------ | ----------------------------- | --------------------------- | ----- | ------ | ----- | ------ | ----- | ------ | ----- | ------ | ----- | ------ | ----- | ------ | ----- | ------ | ----- | -----
|Net income  Basic                               |                               |                             |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |      
|                                                 | Continuing operations         |                             | $2.31 |        | $2.15 |        | $2.49 |        | $2.02 |        | $1.66 |        | $1.56 |        | $1.44 |        | $1.32 |      
|                                                 | Discontinued operations       |                             |      |        | 0.06  |        |      |        | 0.11  |        | 0.10  |        |      |        | (0.14 | )      | 0.13  |      
|                                                
|                                                 |                               | $2.31                       |       | $2.21  |       | $2.49  |       | $2.13  |       | $1.76  |       | $1.56  |       | $1.30  |       | $1.45  |       |      
|                                                
|Net income  Diluted                             |                               |                             |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |      
|                                                 | Continuing operations         |                             | $2.30 |        | $2.14 |        | $2.47 |        | $2.01 |        | $1.66 |        | $1.55 |        | $1.44 |        | $1.32 |      
|                                                 | Discontinued operations       |                             |      |        | 0.06  |        |      |        | 0.11  |        | 0.10  |        |      |        | (0.14 | )      | 0.13  |      
|                                                
|                                                 |                               | $2.30                       |       | $2.20  |       | $2.47  |       | $2.12  |       | $1.76  |       | $1.55  |       | $1.30  |       | $1.45  |       |      
|                                                
|Dividends declared                               |                               | $1.36                       |       | $1.28  |       | $1.22  |       | $1.16  |       | $1.08  |       | $1.00  |       | $0.90  |       | $0.80  |       |      
|Book Value(1)(6)                                 |                               | $18.13                      |       | $15.75 |       | $14.79 |       | $13.54 |       | $12.61 |       | $11.99 |       | $11.38 |       | $10.97 |       |      
|Market Price                                     |                               |                             |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |      
|                                                 | Toronto Stock Exchange ($Cdn) |                             |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |      
|                                                 |                               | High                        |       | 41.35  |       | 40.90  |       | 37.90  |       | 30.35  |       | 28.49  |       | 23.91  |       | 21.13  |       | 17.25
|                                                 |                               | Low                         |       | 35.43  |       | 30.77  |       | 28.94  |       | 25.37  |       | 20.77  |       | 19.05  |       | 14.85  |       | 9.80 
|                                                 |                               | Close                       |       | 40.54  |       | 40.61  |       | 36.65  |       | 29.80  |       | 27.88  |       | 22.92  |       | 19.87  |       | 17.20
|                                                 |                               | Volume (millions of shares) |       | 336.0  |       | 268.6  |       | 238.0  |       | 280.1  |       | 277.9  |       | 280.6  |       | 288.2  |       | 400.7
|                                                 | New York Stock Exchange ($US) |                             |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |      
|                                                 |                               | High                        |       | 43.94  |       | 35.40  |       | 32.41  |       | 24.91  |       | 21.88  |       | 15.56  |       | 13.41  |       | 11.50
|                                                 |                               | Low                         |       | 31.33  |       | 27.40  |       | 23.36  |       | 18.75  |       | 14.16  |       | 11.89  |       | 9.88   |       | 6.75 
|                                                 |                               | Close                       |       | 40.93  |       | 34.95  |       | 31.48  |       | 24.87  |       | 21.51  |       | 14.51  |       | 12.51  |       | 11.50
|                                                 |                               | Volume (millions of shares) |       | 30.8   |       | 27.7   |       | 31.6   |       | 33.0   |       | 21.2   |       | 16.3   |       | 16.8   |       | 21.2 
|Shares outstanding (millions)                    |                               |                             |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |      
|                                                 | Average for the year          |                             | 529.9 |        | 488.0 |        | 486.2 |        | 484.1 |        | 481.5 |        | 478.3 |        | 475.8 |        | 474.6 |      
|                                                 | End of year                   |                             | 539.8 |        | 489.0 |        | 487.2 |        | 484.9 |        | 483.2 |        | 479.5 |        | 476.6 |        | 474.9 |      
|Registered common shareholders(1)                |                               | 34,204                      |       | 35,522 |       | 30,533 |       | 31,837 |       | 33,133 |       | 34,902 |       | 36,350 |       | 30,758 |       |      
|Financial Ratios                                 |                               |                             |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |      
|Return on average common shareholders' equity(2) |                               | 14.0%                       |       | 14.5%  |       | 17.6%  |       | 16.3%  |       | 14.4%  |       | 13.4%  |       | 11.6%  |       | 13.6%  |       |      
|Dividend yield(3)                                |                               | 3.4%                        |       | 3.2%   |       | 3.3%   |       | 3.9%   |       | 3.9%   |       | 4.4%   |       | 4.5%   |       | 4.7%   |       |      
|Price/earnings multiple(4)(5)                    |                               | 17.5                        |       | 18.4   |       | 14.7   |       | 14.0   |       | 15.8   |       | 14.7   |       | 15.3   |       | 11.9   |       |      
|Price/book multiple(4)(6)                        |                               | 2.2                         |       | 2.6    |       | 2.5    |       | 2.2    |       | 2.2    |       | 1.9    |       | 1.7    |       | 1.6    |       |      
|Debt to debt plus shareholders' equity(7)        |                               | 59%                         |       | 61%    |       | 59%    |       | 63%    |       | 64%    |       | 64%    |       | 67%    |       | 69%    |       |      
|Total shareholder return(8)                      |                               | 3%                          |       | 15%    |       | 28%    |       | 11%    |       | 27%    |       | 21%    |       | 21%    |       | 48%    |       |      
|Earnings to fixed charges(9)                     |                               | 2.6                         |       | 2.5    |       | 2.9    |       | 2.5    |       | 2.3    |       | 2.3    |       | 2.1    |       | 1.9    |       |      

132SUPPLEMENTARY
INFORMATION

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INVESTOR INFORMATION

STOCK EXCHANGES, SECURITIES AND SYMBOLS

TransCanada Corporation

Common shares are listed on the Toronto and New York stock exchanges under the symbol: TRP

TransCanada PipeLines Limited (TCPL)*

Preferred shares are listed on the Toronto Stock Exchange under the following symbols:

Cumulative
redeemable first preferred Series U: TCA.PR.X and Series Y: TCA.PR.Y

* TCPL
is a wholly owned subsidiary of TransCanada Corporation.

Annual MeetingThe annual meeting of shareholders is scheduled for April 25, 2008 at 10:00 a.m. (Mountain Daylight Time) at
the Roundup Centre, Calgary, Alberta.

Dividend Payment DatesScheduled common share dividend payment dates in 2008 are January 31, April 30, July 31 and
October 31.

Dividend Reinvestment and Share Purchase PlanTransCanada's dividend reinvestment and share purchase plan (Plan) allows common shareholders
of TransCanada and preferred shareholders of TCPL to purchase additional common shares by reinvesting their cash dividends without incurring brokerage or administrative fees. Participants in the Plan
may also buy additional common shares, up to $10,000 (US$7,000) per quarter. Please contact our Plan agent, Computershare Trust Company of Canada, for more information on the Plan or visit us at
www.transcanada.com.

TRANSFER AGENTS, REGISTRARS AND TRUSTEE

TransCanada Corporation Common SharesComputershare Trust Company of Canada (Montréal, Toronto, Calgary and Vancouver) and
Computershare Trust Company, N.A. (Golden)

TCPL Preferred SharesComputershare Trust Company of Canada (Montréal, Toronto, Calgary and Vancouver)

TCPL Debentures

Canadian
Series: CIBC Mellon Trust Company (Halifax, Montréal, Toronto, Calgary and Vancouver)

|11.10% series N |  | 10.50% series O |  | 10.50% series P |  | 10.625% series Q |  |               
|--------------- |  | --------------- |  | --------------- |  | ---------------- |  | --------------
|11.85% series R |  | 11.90% series S |  | 11.80% series U |  | 9.80% series V   |  | 9.45% series W

U.S. Series: The Bank of New York (New York) 9.875% and 8.625%

TCPL Canadian Medium-Term NotesCIBC Mellon Trust Company (Halifax, Montréal, Toronto, Calgary
and Vancouver)

TCPL U.S. Medium-Term Notes and Senior NotesThe Bank of New York (New York)

TCPL U.S. Junior Subordinated NotesThe Bank of Nova Scotia Trust Company of New York

TRANSCANADA
CORPORATION133

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NOVA Gas Transmission Ltd. (NGTL) Debentures

Canadian
Series: CIBC Mellon Trust Company (Halifax, Montreal, Toronto, Calgary and Vancouver)

|11.95% series 13 |  | 11.70% series 15 |  | 11.20% series 18 |  | 12.625% series 19 |  | 
|---------------- |  | ---------------- |  | ---------------- |  | ----------------- |  | 
|12.20% series 20 |  | 12.20% series 21 |  | 9.90% series 23  |  |                   |  | 

U.S. Series: U.S. Bank Trust National Association (New York) 8.50% and 7.875%

NGTL Canadian Medium-Term NotesCIBC Mellon Trust Company (Halifax, Montreal, Toronto, Calgary and Vancouver)

NGTL U.S. Medium-Term NotesU.S. Bank Trust National Association (New York)

REGULATORY FILINGS

Annual Information FormTransCanada's 2007 Annual Information Form, as filed with Canadian securities commissions and as filed under
Form 40-F with the SEC, is available on our website at www.transcanada.com.

A
printed copy may be obtained from:

Corporate
Secretary, TransCanada Corporation, P.O. Box 1000, Station M, Calgary, Alberta, Canada T2P 4K5

134TRANSCANADA
CORPORATION

---



SHAREHOLDER ASSISTANCE

If you are a registered shareholder and have questions regarding your account, please contact our transfer agent in writing, by telephone, fax or e-mail at:

Computershare
Trust Company of Canada, 100 University Avenue, 9th Floor, North Tower, Toronto, Ontario, Canada M5J 2Y1

|Toll-free: 1 (800) 340-5024 |  | Fax: 1 (888) 453-0330 (North America)        
|--------------------------- |  | ---------------------------------------------
|Telephone: 1 (514) 982-7959 |  | Fax: 1 (416) 263-9394 (outside North America)

E-mail: transcanada@computershare.com

If
you hold your shares in a brokerage account (beneficial shareholder), questions should be directed to your broker on all administrative matters.

If
you would like to receive quarterly reports, please contact Computershare or visit our website at www.transcanada.com.

Electronic Proxy Voting and Delivery of DocumentsTransCanada is pleased to offer registered and beneficial shareholders the ability to
receive their documents (annual report, management information circular, notice of meeting and view-only proxy form) and vote online.

In
2008, registered shareholders who opt to receive their documents electronically will have a tree planted on their behalf through eTree. For more information and to sign
up online, registered shareholders can visit www.etree.ca/transcanada.

Shareholders
who do not have access to e-mail, or who still prefer to receive their proxy materials by mail also have the ability to choose whether to receive
TransCanada's annual report by regular mail. Each year, shareholders are required to renew their option and will receive a notification for doing so. The annual report is available on the TransCanada
website at www.transcanada.com/investor/financial.html at the same time that the report is mailed to shareholders.

Electronic
delivery and the ability to opt out of receiving the annual report by mail, provides increased convenience to shareholders, benefits to the environment and
reduced mailing and printing costs for the company.

TransCanada in the CommunityTransCanada's annual Corporate Social Responsibility Report is available at www.transcanada.com. If you would
like to receive a copy of this report by mail, please contact:

CommunicationsP.O. Box 1000, Station M, Calgary, Alberta T2P 4K5,
1 (403) 920-2000 or 1 (800) 661-3805.

Visit
our website at www.transcanada.com to access TransCanada's corporate and financial information, including quarterly reports, news releases, real-time
conference call webcasts and investor presentations.

Si
vous désirez vous procurer un exemplaire de ce rapport en français, veuillez consulter notre site web ou vous adresser par
écrit à TransCanada Corporation, bureau du secrétaire.

TRANSCANADA
CORPORATION135

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BOARD OF DIRECTORS

(as at December 31, 2007)

|S. Barry Jackson*
Chairman
TransCanada Corporation
Calgary, Alberta Harold N. KvislePresident and CEO
TransCanada Corporation
Calgary, Alberta Kevin E. Benson(1)
Corporate Director
Wheaton, Illinois Derek H. Burney, O.C.(1)(2)
Senior Strategic Advisor
Ogilvy Renault LLP
Ottawa, Ontario Wendy K. Dobson(2)(4)
Professor, Rotman School
of Management and Director,
Institute for International Business
University of Toronto
Uxbridge, Ontario |  | E. Linn Draper(3)(4)
Former Chairman, President and CEO
American Electric Power Co., Inc. (AEP)
Lampasas, Texas The Hon. Paule Gauthier, P.C., O.C., O.Q., Q.C.(1)(3)
Senior Partner
Stein Monast L.L.P.
Québec, Québec Kerry L. Hawkins(3)(4)
Retired President
Cargill Limited
Winnipeg, Manitoba Paul L. Joskow(1)(2)
President
Alfred P. Sloan Foundation
New York, New York |  | John A. MacNaughton(1)(2)
Chairman
Business Development Bank of Canada
Toronto, Ontario David P. O'Brien(2)(4)
Chairman
EnCana Corporation
Royal Bank of Canada
Calgary, Alberta W. Thomas Stephens(3)(4)
Chairman and Chief Executive Officer
Boise Cascade, LLC
Boise, Idaho D. Michael G. Stewart(3)
Principal
Ballinacurra Group
Calgary, Alberta
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

CORPORATE GOVERNANCE

Please refer to TransCanada's Notice of 2008 Annual Meeting of Common Shareholders and Management Proxy Circular for the company's statement of corporate governance.

TransCanada's
Corporate Governance Guidelines, Board charter, Committee charters, Chair and CEO terms of reference and codes of business conduct and ethics are available on
our website at www.transcanada.com. Also available on our website is a summary of the significant ways in which TransCanada's corporate governance practices differ from those required to be followed
by U.S. domestic companies under the New York Stock Exchange's listing standards.

Additional
information relating to the company is filed with securities regulators in Canada on SEDAR at www.sedar.com and in the United States on EDGAR at
www.sec.gov. The documents referred to in this Annual Report may be obtained free of charge by contacting TransCanada's Corporate Secretary at P.O. Box 1000, Station M, Calgary,
Alberta, Canada T2P 4K5, or by telephoning 1 (403) 920-2000.

Ethics Help-LineThe Audit Committee of the Board of Directors has established an anonymous and confidential
toll-free telephone number for employees, contractors and others to call with respect to accounting irregularities and ethical violations. The Ethics Help-Line number is
1 (888) 920-2042.

136TRANSCANADA
CORPORATION

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GRAPHIC

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GRAPHIC

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TRANSCANADA CORPORATION    RECONCILIATION TO UNITED STATES GAAP

December 31,
2007

---



AUDITOR'S REPORT ON RECONCILIATION TO UNITED STATES GAAP

To the Board of Directors of TransCanada Corporation

On February 25, 2008, we reported on the consolidated balance sheets of TransCanada Corporation as at December 31, 2007 and 2006, and the consolidated statements
of income, comprehensive income, accumulated other comprehensive income, shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 2007,
which are included in the Annual Report on Form 40-F. In connection with our audits of the aforementioned consolidated financial statements, we also have audited the related
supplemental note entitled "Reconciliation to United States GAAP" included in Form 40-F. This supplemental note is the responsibility of the Company's management. Our
responsibility is to express an opinion on this supplemental note based on our audits.

In
our opinion, such supplemental note, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set
forth therein.

/s/KPMG LLPChartered Accountants
Calgary, Canada

February 25,
2008

2

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TRANSCANADA CORPORATION  RECONCILIATION TO UNITED STATES GAAP

The 2007 audited consolidated financial statements of TransCanada Corporation (TransCanada or the Company) have been prepared in accordance with Canadian generally accepted
accounting principles (GAAP), which in some respects, differ from United States (U.S.) GAAP. The effects of these differences on the Company's consolidated financial statements for the year
ended December 31, 2007 are provided in the following U.S. GAAP condensed consolidated financial statements which should be read in conjunction with TransCanada's 2007 audited
consolidated financial statements prepared in accordance with Canadian GAAP. Amounts are stated in Canadian dollars unless otherwise indicated.

Condensed Statement of Consolidated Income and Comprehensive Income in Accordance with U.S. GAAP(1)

|Year ended December 31 (millions of dollars except per share amounts) |                                                                                           | 2007 |       | 2006 |   | 2005  |     
|--------------------------------------------------------------------- | ----------------------------------------------------------------------------------------- | ---- | ----- | ---- | - | ----- | ----
|Revenues                                                              |                                                                                           |      | 7,563 |      |   | 5,997 |     
|                                                                      |                                                                                           |      |       |      |   |       |     
|Plant operating costs and other                                       |                                                                                           |      | 2,405 |      |   | 1,922 |     
|Commodity purchases resold                                            |                                                                                           |      | 1,897 |      |   | 1,369 |     
|Depreciation                                                          |                                                                                           |      | 1,030 |      |   | 897   |     
|                                                                      |                                                                                           |      |       |      |   |       |     
|                                                                      |                                                                                           |      | 5,332 |      |   | 4,188 |     
|                                                                      |                                                                                           |      |       |      |   |       |     
|                                                                      |                                                                                           |      | 2,231 |      |   | 1,809 |     
|                                                                      |                                                                                           |      |       |      |   |       |     
|Other (income)/expenses                                               |                                                                                           |      |       |      |   |       |     
|                                                                      | Income from equity investments                                                            |      |       | (365 | ) |       | (478
|                                                                      | Other expenses(2)                                                                         |      |       | 898  |   |       | 764 
|                                                                      | Income taxes                                                                              |      |       | 498  |   |       | 473 
|                                                                      |                                                                                           |      |       |      |   |       |     
|                                                                      |                                                                                           |      | 1,031 |      |   | 759   |     
|                                                                      |                                                                                           |      |       |      |   |       |     
|Income from continuing operations  U.S. GAAP                         |                                                                                           |      | 1,200 |      |   | 1,050 |     
|Net income from discontinued operations  U.S. GAAP                   |                                                                                           |      |      |      |   | 28    |     
|                                                                      |                                                                                           |      |       |      |   |       |     
|Net Income in Accordance with U.S. GAAP                               |                                                                                           |      | 1,200 |      |   | 1,078 |     
|Adjustments affecting comprehensive income under U.S. GAAP            |                                                                                           |      |       |      |   |       |     
|                                                                      | Foreign currency translation adjustment, net of tax                                       |      |       | (271 | ) |       | (1  
|                                                                      | Changes in minimum pension liability, net of tax(3)                                       |      |       |     |   |       | 63  
|                                                                      | Change in funded status of postretirement plan liability, net of tax(3)                   |      |       | (40  | ) |       |    
|                                                                      | Change in equity investment funded status of postretirement plan liability, net of tax(3) |      |       | 21   |   |       |    
|                                                                      | Unrealized gain/(loss) on derivatives, net of tax                                         |      |       | 70   |   |       | (24 
|                                                                      |                                                                                           |      |       |      |   |       |     
|Comprehensive Income in Accordance with U.S. GAAP(4)                  |                                                                                           |      | 980   |      |   | 1,116 |     
|                                                                      |                                                                                           |      |       |      |   |       |     
|Net Income Per Share in Accordance with U.S. GAAP                     |                                                                                           |      |       |      |   |       |     
|                                                                      | Continuing operations                                                                     |      | $     | 2.26 |   | $     | 2.15
|                                                                      | Discontinued operations                                                                   |      |       |     |   |       | 0.06
|                                                                      |                                                                                           |      |       |      |   |       |     
|                                                                      | Basic                                                                                     |      | $     | 2.26 |   | $     | 2.21
|                                                                      |                                                                                           |      |       |      |   |       |     
|                                                                      | Diluted(5)                                                                                |      | $     | 2.25 |   | $     | 2.20
|                                                                      |                                                                                           |      |       |      |   |       |     
|Net Income Per Share in Accordance with Canadian GAAP                 |                                                                                           |      |       |      |   |       |     
|                                                                      | Basic                                                                                     |      | $     | 2.31 |   | $     | 2.21
|                                                                      |                                                                                           |      |       |      |   |       |     
|                                                                      | Diluted                                                                                   |      | $     | 2.30 |   | $     | 2.20
|                                                                      |                                                                                           |      |       |      |   |       |     
|Dividends per common share                                            |                                                                                           | $    | 1.36  |      | $ | 1.28  |     
|                                                                      |                                                                                           |      |       |      |   |       |     
|Common Shares Outstanding(millions)                                   |                                                                                           |      |       |      |   |       |     
|                                                                      | Average for the period  Basic                                                            |      |       | 530  |   |       | 488 
|                                                                      |                                                                                           |      |       |      |   |       |     
|                                                                      | Average for the period  Diluted                                                          |      |       | 532  |   |       | 491 
|                                                                      |                                                                                           |      |       |      |   |       |     

3

---



Reconciliation of Income from Continuing Operations

|Year ended December 31 (millions of dollars)                           |                                                                                     | 2007  |     | 2006  |    | 2005  |    
|---------------------------------------------------------------------- | ----------------------------------------------------------------------------------- | ----- | --- | ----- | -- | ----- | ---
|Net Income from Continuing Operations in Accordance with Canadian GAAP |                                                                                     | 1,223 |     | 1,051 |    | 1,209 |    
|U.S. GAAP adjustments                                                  |                                                                                     |       |     |       |    |       |    
|                                                                       | Unrealized gain on natural gas inventory held in storage(6)                         |       | (25 | )     |   |       |   
|                                                                       | Tax impact on unrealized gain on natural gas inventory held in storage              |       | 8   |       |   |       |   
|                                                                       | Unrealized gain/(loss) on energy contracts(7)                                       |       | 13  |       | (6 | )     | (14
|                                                                       | Tax impact of unrealized gain/(loss) on energy contracts                            |       | (5  | )     | 3  |       | 5  
|                                                                       | Equity investment gain(8)(9)                                                        |       |    |       | 1  |       | 5  
|                                                                       | Tax impact of equity investment gain                                                |       |    |       |   |       | (1 
|                                                                       | Unrealized (loss)/gain on foreign exchange and interest rate derivatives(10)        |       | (3  | )     | 1  |       | 1  
|                                                                       | Tax impact of (loss)/gain on foreign exchange and interest rate derivatives         |       | 1   |       |   |       | (1 
|                                                                       | Tax recovery due to a change in tax legislation substantively enacted in Canada(11) |       | (12 | )     |   |       |   
|                                                                       |                                                                                     |       |     |       |    |       |    
|Income from Continuing Operations in Accordance with U.S. GAAP         |                                                                                     | 1,200 |     | 1,050 |    | 1,204 |    
|                                                                       |                                                                                     |       |     |       |    |       |    

Condensed Statement of Consolidated Cash Flows in Accordance with U.S. GAAP(1)

|Year ended December 31 (millions of dollars)                               |  | 2007   |   | 2006   |   | 2005   |  
|-------------------------------------------------------------------------- |  | ------ | - | ------ | - | ------ | -
|Cash Generated from Operations(12)                                         |  |        |   |        |   |        |  
|Net cash provided by operating activities                                  |  | 2,777  |   | 1,885  |   | 1,628  |  
|Investing Activities                                                       |  |        |   |        |   |        |  
|Net cash used in investing activities                                      |  | (6,217 | ) | (1,920 | ) | (1,171 | )
|Financing Activities                                                       |  |        |   |        |   |        |  
|Net cash provided by/(used in) financing activities                        |  | 3,527  |   | 233    |   | (514   | )
|Effect of Foreign Exchange Rate Changes on Cash and Short-Term Investments |  | (42    | ) | 7      |   | 13     |  
|                                                                           |  |        |   |        |   |        |  
|Increase/(Decrease) in Cash and Short-Term Investments                     |  | 45     |   | 205    |   | (44    | )
|Cash and Short-Term Investments                                            |  |        |   |        |   |        |  
|Beginning of year                                                          |  | 288    |   | 83     |   | 127    |  
|                                                                           |  |        |   |        |   |        |  
|Cash and Short-Term Investments                                            |  |        |   |        |   |        |  
|End of year                                                                |  | 333    |   | 288    |   | 83     |  
|                                                                           |  |        |   |        |   |        |  

Condensed Balance Sheet in Accordance with U.S. GAAP(1)

|December 31 (millions of dollars)                |  | 2007   |  | 2006  
|------------------------------------------------ |  | ------ |  | ------
|Current assets(6)                                |  | 1,766  |  | 1,551 
|Long-term investments(3)(8)(9)                   |  | 3,568  |  | 2,922 
|Plant, property and equipment                    |  | 19,225 |  | 17,430
|Regulatory asset(3)(13)                          |  | 1,790  |  | 2,199 
|Goodwill                                         |  | 2,521  |  | 148   
|Other assets(3)(8)(15)                           |  | 1,658  |  | 1,572 
|                                                 |  |        |  |       
|                                                 |  | 30,528 |  | 25,822
|                                                 |  |        |  |       
|Current liabilities(3)(14)                       |  | 2,774  |  | 2,541 
|Deferred amounts(3)(9)                           |  | 1,158  |  | 987   
|Long-term debt and junior subordinated notes(15) |  | 13,423 |  | 10,913
|Deferred income taxes(3)(6)(13)                  |  | 2,693  |  | 2,734 
|Preferred securities                             |  |       |  | 536   
|Non-controlling interests                        |  | 999    |  | 755   
|Shareholders' equity(3)                          |  | 9,481  |  | 7,356 
|                                                 |  |        |  |       
|                                                 |  | 30,528 |  | 25,822
|                                                 |  |        |  |       

4

---



Statement of Accumulated Other Comprehensive Income in Accordance with U.S. GAAP(1)(16)

|(millions of dollars)                                                                                     |  | Under-funded
Postretirement
Plan Liability
(SFAS No. 158) |   | Cumulative
Translation
Account |   | Minimum Pension Liability
(SFAS No. 87) |   | Cash Flow Hedges
(SFAS No. 133) |   | Total |  
|--------------------------------------------------------------------------------------------------------- |  | --------------------------------------------------------- | - | ------------------------------ | - | --------------------------------------- | - | ------------------------------- | - | ----- | -
|Balance at January 1, 2005                                                                                |  |                                                          |   | (71                            | ) | (26                                     | ) | (4                              | ) | (101  | )
|Changes in minimum pension liability, net of tax recovery of $27(3)                                       |  |                                                          |   |                               |   | (51                                     | ) |                                |   | (51   | )
|Unrealized loss on derivatives, net of tax recovery of $28(7)                                             |  |                                                          |   |                               |   |                                        |   | (54                             | ) | (54   | )
|Foreign currency translation adjustment, net of tax expense of $21                                        |  |                                                          |   | (18                            | ) |                                        |   |                                |   | (18   | )
|
|Balance at December 31, 2005                                                                              |  |                                                          |   | (89                            | ) | (77                                     | ) | (58                             | ) | (224  | )
|Change in minimum pension liability, net of tax expense of $35(3)                                         |  |                                                          |   |                               |   | 63                                      |   |                                |   | 63    |  
|Reversal of minimum pension liability, due to adoption of SFAS 158(3)                                     |  | (14                                                       | ) |                               |   | 14                                      |   |                                |   |      |  
|Change in funded status of postretirement plan liability, net of tax recovery of $35(3)                   |  | (78                                                       | ) |                               |   |                                        |   |                                |   | (78   | )
|Change in equity investment funded status of postretirement plan liability, net of tax recovery of $70(3) |  | (154                                                      | ) |                               |   |                                        |   |                                |   | (154  | )
|Unrealized gain on derivatives, net of tax expense of $11(7)                                              |  |                                                          |   |                               |   |                                        |   | (24                             | ) | (24   | )
|Foreign currency translation adjustment, net of tax recovery of $1                                        |  |                                                          |   | (1                             | ) |                                        |   |                                |   | (1    | )
|
|Balance at December 31, 2006                                                                              |  | (246                                                      | ) | (90                            | ) |                                        |   | (82                             | ) | (418  | )
|Foreign currency translation adjustment, net of tax expense of $142                                       |  |                                                          |   | (271                           | ) |                                        |   |                                |   | (271  | )
|Change in funded status of postretirement plan liability, net of tax recovery of $8(3)                    |  | (40                                                       | ) |                               |   |                                        |   |                                |   | (40   | )
|Change in equity investment funded status of postretirement plan liability, net of tax expense of $11(3)  |  | 21                                                        |   |                               |   |                                        |   |                                |   | 21    |  
|Unrealized loss on derivatives, net of tax expense of $42(7)                                              |  |                                                          |   |                               |   |                                        |   | 70                              |   | 70    |  
|
|Balance at December 31, 2007                                                                              |  | (265                                                      | ) | (361                           | ) |                                        |   | (12                             | ) | (638  | )
|

5

---



SFAS No. 158
requires an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan as an asset or liability in its statement of financial
position and to recognize changes in that funded status, through other comprehensive income, in the year in which the changes occur. The amounts recognized in the Company's balance sheet as at
December 31, 2007 are as follows.

December 31 (millions of dollars)

2007

2006Non-current assets

20

10Current liabilities



(5
)Non-current liabilities

(251
)
(220
)(231
)
(215
)


December 31 (millions of dollars)

Pension
Benefits
2007

Other
Benefits
2007

Total
2007

Pension
Benefits
2006

Other
Benefits
2006

Total
2006Net loss

120

15

135

92

14

106Prior service cost (credit)

12

14

26

11

(4
)
7132

29

161

103

10

113


December 31 (millions of dollars)

Pension
Benefits
2007

Other
Benefits
2007

Total
2007Amortization of net loss from AOCI to net income

(9
)
(1
)
(10
)Amortization of prior service cost (credit) from AOCI to net income

(1
)


(1
)Funded status adjustment

38

21

5928

20

48


December 31 (millions of dollars)

2007

2006Accumulated benefit obligation

1,244

1,167Fair value of plan assets

1,358

1,264Funded status  surplus

114

97


December 31 (millions of dollars)

2007

2006Accumulated benefit obligation



67Fair value of plan assets



65Funded status  (deficit)



(2
)


The
accumulated benefit obligation for the Company's defined benefit pension plans was $1,244 million at December 31, 2007
(2006  $1,167 million). 
The rate used to discount pension and other post-retirement benefit plan obligations was based on a yield curve from Moody's corporate AA bond yields at December 31, 2007 developed
by the Company's third party actuary. This yield curve is used to develop

6

---





7

---



Income Taxes

The income tax effects of differences between the accounting value and the tax value of assets and liabilities are as follows.

|December 31 (millions of dollars)                                                          |  | 2007  |  | 2006 
|------------------------------------------------------------------------------------------ |  | ----- |  | -----
|Deferred Tax Liabilities                                                                   |  |       |  |      
|Difference in accounting and tax bases of plant, equipment and power purchase arrangements |  | 1,763 |  | 1,478
|Taxes on future revenue requirement                                                        |  | 433   |  | 606  
|Investments in subsidiaries and partnerships                                               |  | 443   |  | 683  
|Unrealized foreign exchange gains on long-term debt                                        |  | 110   |  | 39   
|Pension Benefit                                                                            |  | 11    |  | 25   
|Other Comprehensive Income                                                                 |  | 8     |  |     
|Other                                                                                      |  | 81    |  | 88   
|                                                                                           |  |       |  |      
|                                                                                           |  | 2,849 |  | 2,919
|                                                                                           |  |       |  |      
|Deferred Tax Assets                                                                        |  |       |  |      
|Deferred amounts                                                                           |  | 45    |  | 71   
|Other Post-employment benefits                                                             |  | 25    |  | 16   
|Other Comprehensive Income                                                                 |  | 22    |  |     
|Other                                                                                      |  | 77    |  | 112  
|                                                                                           |  |       |  |      
|                                                                                           |  | 169   |  | 199  
|                                                                                           |  |       |  |      
|Less: Valuation allowance                                                                  |  | 13    |  | 14   
|                                                                                           |  |       |  |      
|                                                                                           |  | 156   |  | 185  
|                                                                                           |  |       |  |      
|Net deferred tax liabilities                                                               |  | 2,693 |  | 2,734
|                                                                                           |  |       |  |      

TransCanada
adopted FASB Financial Interpretation 48, Accounting for Uncertainty in Income Taxes ("FIN 48"), January 1, 2007. The implementation of the provisions
under FIN 48 did not have a material impact on the U.S. GAAP financial statements of the Company and no adjustment to the beginning balance of retained earnings was required due to the
adoption of FIN 48.

Below
is the reconciliation of the annual changes in the total unrecognized tax benefit.

|December 31 (millions of dollars)              |  | 2007 |  
|---------------------------------------------- |  | ---- | -
|Unrecognized tax benefits, beginning of year   |  | 80   |  
|Gross increases  tax positions in prior years |  | 9    |  
|Gross decreases  tax positions in prior years |  | (11  | )
|Gross increases  current year positions       |  | 9    |  
|Settlements                                    |  | (6   | )
|Lapses of statute of limitations               |  | (11  | )
|
|Unrecognized tax benefits, end of year         |  | 70   |  
|

TransCanada
expects the enactment of certain Canadian Federal tax legislation in the next twelve months. This legislation will result in a favourable income tax adjustment of
approximately $12 million. Otherwise, subject to the results of audit examinations by taxing authorities and other legislative amendments, TransCanada does not anticipate further adjustments to
the unrecognized tax benefits during the next twelve months that would have a material impact on its financial statements.

TransCanada
and its subsidiaries are subject to either Canadian federal and provincial income tax, U.S. federal, state and local income tax or the relevant income tax in other international
jurisdictions. The Company has substantially concluded all Canadian federal and provincial income tax matters for the years through 2003.

8

---



Canadian
federal income tax returns for years 2004 and 2005 are currently under examination by the Canada Revenue Agency, which has not proposed any significant adjustments. Substantially all material
U.S. federal income tax matters have been concluded for years through 2003 and U.S. state and local income tax matters through 2001.

TransCanada's
continuing practice is to recognize interest and penalties related to income tax uncertainties in income tax expense. Included in net tax expense for the year ended December 31,
2007 was $1 million and nil for interest and penalties respectively. At December 31, 2007, the Company had $14 million and nil accrued for interest and penalties respectively
(December 31, 2006, $13 million and nil, respectively).

Other

In February 2006, FASB issued SFAS No. 155 "Accounting for Certain Hybrid Financial Instruments  an amendment of
SFAS No. 133 and 140", which is effective for fiscal years beginning after September 15, 2006. SFAS No. 155 permits fair value remeasurement of any hybrid
instrument that contains an embedded derivative that otherwise would require bifurcation. TransCanada's U.S. GAAP financial statements were not impacted by SFAS No. 155.

In
March 2006, FASB issued SFAS No. 156 "Accounting for Servicing of Financial Assets  an amendment of FASB Statement No. 140", which
is effective for fiscal years beginning after September 15, 2006. SFAS No. 156 requires recognition of a servicing asset or liability when an entity enters into arrangements to
service financial instruments in certain situations. Such servicing assets or servicing liabilities are required to be initially measured at fair value, if practicable. SFAS No. 156 also
allows an entity to subsequently measure its servicing assets or servicing liabilities using either an amortization method or a fair value method. TransCanada's U.S. GAAP financial statements were not
impacted by SFAS No. 156.

In
September 2006, FASB issued SFAS No. 157 "Fair Value Measurements", which is effective for fiscal years beginning after November 15, 2007. This statement defines fair
value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. TransCanada is in the process of assessing the impact of the application of
SFAS No. 157 on its U.S GAAP financial statements.

In
February 2007, FASB issued SFAS No. 159 "The Fair Value Option for Financial Assets and Financial Liabilities  Including an Amendment of
FASB Statement No. 115", which allows an entity to choose to measure many financial instruments and certain other items at fair value for fiscal years beginning on or after November 15,
2007. TransCanada does not expect a material affect on its financial results as a result of adopting this standard on January 1, 2008.

In
December 2007, FASB issued SFAS No. 160 "Noncontrolling Interests in Consolidated Financial Statements  an amendment of ARB No. 51" and SFAS
No. 141R "Business Combinations" both of which are effective for annual periods beginning after December 15, 2008. The first statement requires that third party ownership interests in
subsidiaries be presented separately in the equity section of the balance sheet. In addition, the income attributable to the noncontrolling interest will now be included in consolidated net income and
will be deducted separately at the bottom of the income statement. The second statement requires that most identifiable assets, liabilities (including obligations for contingent consideration),
noncontrolling interests and goodwill be recorded at "full fair value". Also, for step acquisitions, the acquirer will be required to re-measure its noncontrolling equity investment in the acquiree at
fair value as of the date control is obtained and recognize any gain or loss in income. The Company is expected to adopt these standards on January 1, 2009.

9

---



Summarized Financial Information of Long-Term Investments

The following summarized financial information of long-term investments includes those investments that are accounted for by the equity method under
U.S. GAAP (including those that are accounted for by the proportionate consolidation method under Canadian GAAP).

|Year ended December 31 (millions of dollars)                               |  | 2007  |   | 2006  |   | 2005  |  
|-------------------------------------------------------------------------- |  | ----- | - | ----- | - | ----- | -
|Income                                                                     |  |       |   |       |   |       |  
|Revenues                                                                   |  | 1,260 |   | 1,450 |   | 1,233 |  
|Plant operating costs and other                                            |  | (662  | ) | (697  | ) | (508  | )
|Depreciation                                                               |  | (157  | ) | (175  | ) | (173  | )
|Financial charges and other                                                |  | (76   | ) | (100  | ) | (94   | )
|                                                                           |  |       |   |       |   |       |  
|Proportionate share of income before income taxes of long-term investments |  | 365   |   | 478   |   | 458   |  
|                                                                           |  |       |   |       |   |       |  

|December 31 (millions of dollars)                          |  | 2007  |   | 2006   |  
|---------------------------------------------------------- |  | ----- | - | ------ | -
|Balance Sheet                                              |  |       |   |        |  
|Current assets                                             |  | 526   |   | 446    |  
|Plant, property and equipment                              |  | 4,317 |   | 4,177  |  
|Other assets                                               |  | 51    |   | 198    |  
|Current liabilities                                        |  | (260  | ) | (445   | )
|Deferred amounts                                           |  | (212  | ) | (235   | )
|Long-term debt of joint ventures                           |  | (909  | ) | (1,266 | )
|Deferred income taxes                                      |  | 55    |   | 47     |  
|                                                           |  |       |   |        |  
|Proportionate share of net assets of long-term investments |  | 3,568 |   | 2,922  |  
|                                                           |  |       |   |        |  

The
distributed earnings from long-term investments for the year ended December 31, 2007 were $376 million (2006  $494 million;
2005  $371 million). The undistributed earnings from long-term investments for the year ended December 31, 2007 were
$821 million (2006  $836 million; 2005  $820 million).

10

---



MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The management of TransCanada Corporation ("TransCanada") is responsible for establishing and maintaining adequate internal control over financial reporting, and have designed
such internal control over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with Canadian generally accepted accounting principles (GAAP), including a reconciliation to United States GAAP.

Management
has used the Internal Control  Integrated Framework to evaluate the effectiveness of internal control over financial reporting, which is a recognized
and suitable framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

Because
of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management
has evaluated the design and operation of TransCanada's internal control over financial reporting as of December 31, 2007. In 2007, the Company acquired American Natural Resources
Company and ANR Storage Company (collectively, "ANR") and began consolidating the operations of ANR into the Company. Management excluded this business from its evaluation of the effectiveness of the
Company's internal control over financial reporting as of December 31, 2007. The net income attributable to this business represented approximately nine per cent of the Company's consolidated
net income for the year ended December 31, 2007, and their aggregate total assets represented approximately 12 per cent of the Company's consolidated total assets as of
December 31, 2007.

Based
on this evaluation, management concluded that such internal control over financial reporting is effective as of December 31, 2007. There are no material weaknesses that have been
identified by management in this regard.

KPMG LLP,
the independent auditors appointed by the shareholders of TransCanada, who have audited the consolidated financial statements of TransCanada, have also audited the effectiveness of
TransCanada's internal control over financial reporting as of December 31, 2007 have also and have issued the report entitled "Report of Independent Registered Accounting Firm".

February 25,
2008

|                                                                                                                                                                                  |  |                                                                                               
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------
|/s/HAROLD N. KVISLEHarold N. Kvisle President and
Chief Executive Officer                                                                                                         |  | /s/GREGORY A. LOHNESGregory A. Lohnes Executive Vice-President and
and Chief Financial Officer
|TransCanada's internal control over financial reporting as of December 31, 2007 have also and have issued the report entitled "Report of Independent Registered Accounting Firm". |  |                                                                                               

---





REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To
the Board of Directors of TransCanada Corporation

We
have audited TransCanada Corporation's internal control over financial reporting as of December 31, 2007, based on the criteria established in Internal
Control  Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for
maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's
Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.

We
conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit
also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A
company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because
of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In
our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on the criteria established in Internal
Control  Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

We
also have conducted our audits on the consolidated financial statements in accordance with Canadian generally accepted auditing standards. With respect to the consolidated financial statements for
the years ended December 31, 2007 and 2006, we also have conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our report dated
February 25, 2008, expressed an unqualified opinion on those consolidated financial statements.

/s/
KPMG LLP

Chartered
Accountants

Calgary,
Canada

February 25,
2008

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COMMENTS BY AUDITORS FOR UNITED STATES READERS ON CANADA  UNITED STATES REPORTING DIFFERENCES

To
the Board of Directors of TransCanada Corporation

In
the United States, reporting standards for auditors require the addition of an explanatory paragraph (following the opinion paragraph) that refers to the audit report on the Company's internal
control over financial reporting. Our report to the shareholders dated February 25, 2008 is expressed in accordance with Canadian reporting standards, which do not require a reference to the
audit report on the Company's internal control over financial reporting in the financial statement auditors' report.

In
the United States, reporting standards for auditors require the addition of an explanatory paragraph (following the opinion paragraph) when there is a change in accounting principles that has a
material effect on the comparability of the Company's financial statements, such as the change described in note 2 to the consolidated financial statements as at December 31, 2007 and
for the year then ended. Our report to the shareholders dated February 25, 2008 is expressed in accordance with Canadian reporting standards, which do not require a reference to such a change
in accounting principles in the auditors' report when the change is properly accounted for and adequately disclosed in the financial statements.

/s/
KPMG LLP

Chartered
Accountants

Calgary,
Canada

February 25,
2008

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