U.S. SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

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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 ended December 31, 2005 |  | Commission 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; 1-800-456-4511(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 classCommon Shares
(including Rights under
Shareholder Rights Plan) | Name of each exchange on which registeredNew York Stock Exchange
|--------------------------------------------------------------------------------- | ----------------------------------------------------------------

Securities
registered pursuant to Section 12(g) of the Act:        None
Securities 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 | ý    Audited annual financial statements
|---------------------------- | ----------------------------------------

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, 2005, 487,235,725 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


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

33-00958S-8

333-5916S-8

333-8470S-8

333-9130F-3

33-13564F-3

333-6132




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

A.    Audited Annual Financial Statements

For consolidated audited financial statements, including the report of independent chartered accountants with respect thereto, see pages 75 through 113 of
the TransCanada Corporation (TransCanada") 2005 Annual Report to Shareholders included herein. See document 13.4, entitled "U.S. GAAP reconciliation of the 2005 Consolidated Audited Financial
Statements", attached to this Form 40-F for a reconciliation of the important differences between Canadian and United States generally accepted accounting principles.

B.    Management's Discussion & Analysis

For management's discussion and analysis, see pages 8 through 73 of the TransCanada 2005 Annual Report to Shareholders included herein under the heading
"Management's Discussion & Analysis".

For
the purposes of this Report, only pages 8 through 73 and 75 through 113 of the TransCanada 2005 Annual Report to Shareholders as referred to above shall be deemed incorporated herein
by reference and filed, and the balance of such 2005 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.

UNDERTAKING

The Registrant undertakes to make available, in person or by telephone, representatives to respond to inquiries made by the Commission staff, 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

Pursuant to the Sarbanes-Oxley Act of 2002, as adopted by the U.S. Securities and Exchange Commission, the Registrant's management evaluates the
effectiveness of the design and operation of the company's disclosure controls and procedures (disclosure controls). This evaluation is done under the supervision of, and with the participation of,
the President and Chief Executive Officer and the Chief Financial Officer.

As
of the end of the period covered by this Annual Report, the Registrant's management evaluated the effectiveness of its disclosure controls. Based on that evaluation, the President and
Chief Executive Officer and the Chief Financial Officer have concluded that the Registrant's disclosure controls are effective in ensuring that material information relating to the Registrant is made
known to management on a timely basis, and is included in this Form 40-F.

No
change in the Registrant's internal control over financial reporting occurred during the period covered by this annual report that has materially affected, or is reasonably likely to
materially affect, the Registrant's internal control over financial reporting.

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. Harry G.
Schaefer has been determined to be such 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 SEC has indicated that the designation of Mr. Schaefer as an audit committee financial expert does not make Mr. Schaefer an "expert" for any purpose, impose any duties,
obligations or liability on Mr. Schaefer 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 and officers, its principal executive officer, principal 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 2005 fiscal year.

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PRINCIPAL ACCOUNTANT FEES AND SERVICES

The aggregate fees for professional services rendered by KPMGLLPfor the TransCanada group of companies
for the 2005 and 2004 fiscal years are shown in the table below:

|Fees in millions of Canadian dollars |  | 2005 |      | 2004
|------------------------------------ |  | ---- | ---- | ----
|Audit Fees                           |  | $    | 3.15 |     
|Audit-Related Fees                   |  |      | 0.11 |     
|Tax Fees                             |  |      | 0.12 |     
|All Other Fees                       |  |      | 0.14 |     
|Total                                |  | $    | 3.52 |     

The
nature of each category of fees is described below.

Audit Fees

Audit fees were incurred for professional services rendered by the auditors for the audit of the Registrant's and its subsidiaries' annual 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

Audit-related fees were incurred for the audit of the financial statements of the Registrant's various pension plans.

Tax Fees

Tax fees were incurred for tax compliance and tax advice. These services consisted of: tax compliance including the review of Canadian and US 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.

All Other Fees

Fees disclosed in the table above under the item "all other fees" were incurred for services other than the audit fees, audit-related fees and tax fees described
above. These services consisted of advice with regard to compliance with the Sarbanes-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 in both instances 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.

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OFF-BALANCE SHEET ARRANGEMENTS

The Registrant has no off-balance sheet arrangements, as defined in this Form, other than the guarantees described in Note 22 of the Notes to
the Consolidated Financial Statements and document 13.4, entitled "U.S. GAAP Reconciliation of the 2005 Consolidated Audited Financial Statements", attached to this
Form 40-F. The disclosure relating to guarantees in Note 22 to the Consolidated Financial Statements is incorporated herein by reference.

TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS(millions of Canadian dollars)

|Contractual Obligations                                                                                                    |  | Total  |  | Less than 1 year |  | 1-3 years |  | 3-5 years |  | More than 5 years
|-------------------------------------------------------------------------------------------------------------------------- |  | ------ |  | ---------------- |  | --------- |  | --------- |  | -----------------
|Long-Term Debt Obligations                                                                                                 |  | 10,757 |  | 427              |  | 1,191     |  | 1,509     |  | 7,630            
|Capital (Finance) Lease Obligations                                                                                        |  | 254    |  | 7                |  | 17        |  | 24        |  | 206              
|Interest Payments on Long-Term Debt                                                                                        |  | 11,640 |  | 876              |  | 1,653     |  | 1,435     |  | 7,676            
|Operating Lease Obligations                                                                                                |  | 834    |  | 34               |  | 82        |  | 85        |  | 633              
|Purchase Obligations(1)                                                                                                    |  | 11,421 |  | 2,197            |  | 2,905     |  | 1,359     |  | 4,960            
|Other Long-Term Liabilities Reflected on the Registrant's Balance Sheet under the GAAP of the primary financial statements |  |        |  |                  |  |           |  |           |  |                  
|                                                                                                                           |  |        |  |                  |  |           |  |           |  |                  
|Total                                                                                                                      |  | 34,906 |  | 3,541            |  | 5,848     |  | 4,412     |  | 21,105           
|                                                                                                                           |  |        |  |                  |  |           |  |           |  |                  

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For further information on purchase obligations see "Management's Discussion and Analysis  Contractual
Obligations  Purchase Obligations", which is incorporated herein by reference.

IDENTIFICATION OF THE AUDIT COMMITTEE

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

|Chair:   |  | H.G. Schaefer                                   
|-------- |  | ------------------------------------------------
|Members: |  | D.D. Baldwin
K.E. Benson
P. Gauthier
P.L. Joskow

FORWARD-LOOKING INFORMATION

This document, documents incorporated herein by reference, and other reports and filings made with the securities regulatory authorities include forward-looking
statements. All forward looking statements are based on TransCanada's current beliefs as well as assumptions based on information available at the time the assumption was made. Forward-looking
statements relate to, among other things, anticipated financial performance, business prospects, strategies, regulatory developments, new services, market forces, commitments and technological
developments. By its nature, such forward-looking information is subject to various risks and uncertainties, including those discussed herein in TransCanada's Annual Information Form filed as document
13.1 hereto and in TransCanada's Management's Discussion and Analysis filed as document 13.2 hereto, which could cause TransCanada's actual results and experience to differ materially
from the anticipated results or other expectations expressed. Readers are cautioned not to place undue reliance on this forward-looking information, which is given as of the date hereof or otherwise,
and TransCanada undertakes no obligation to update publicly or revise any forward-looking information, whether as a result of new information, future events or otherwise.

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SIGNATURES

Pursuant to the requirements of the Exchange 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
|------------------- |  | -----------------------
|Date: March 2, 2006 |  |                        
|                    |  | 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, 2005.                                                   
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------
|13.2 |  | Management's Discussion and Analysis (included on pages 8 through 73 of the TransCanada 2005 Annual Report to Shareholders).            
|13.3 |  | 2005 Consolidated Audited Financial Statements (included on pages 75 through 113 of the TransCanada 2005 Annual Report to Shareholders).
|13.4 |  | Reconciliation to United States GAAP.                                                                                                   
|99.1 |  | Comments by Auditors for U.S. Readers on Canada-U.S. Reporting Difference.                                                              

EXHIBITS

|23.1 |  | Consent of KPMG LLP Chartered Accountants.                                                         
|---- |  | ---------------------------------------------------------------------------------------------------
|31.1 |  | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|31.2 |  | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|32.1 |  | Certification of 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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LOGO

TRANSCANADA CORPORATION

ANNUAL INFORMATION FORM

February 27, 2006

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TABLE OF CONTENTS

|                                                                       |                                           | Page
|---------------------------------------------------------------------- | ----------------------------------------- | ----
|                                                                      
|TABLE OF CONTENTS                                                      |                                           | i   
|PRESENTATION OF INFORMATION                                            |                                           | ii  
|FORWARD-LOOKING INFORMATION                                            |                                           | ii  
|REFERENCE INFORMATION                                                  |                                           | ii  
|                                                                      
|TRANSCANADA CORPORATION                                                |                                           | 1   
|                                                                       | Corporate Structure                       |     
|                                                                       | Significant Subsidiaries                  |     
|                                                                      
|GENERAL DEVELOPMENT OF THE BUSINESS                                    |                                           | 2   
|                                                                       | Developments in Gas Transmission Business |     
|                                                                       | Developments in Power Business            |     
|                                                                       | Recent Developments                       |     
|                                                                      
|BUSINESS OF TRANSCANADA                                                |                                           | 6   
|                                                                       | Gas Transmission Business                 |     
|                                                                       | Regulation                                |     
|                                                                       | Power                                     |     
|                                                                       | Other Interests                           |     
|                                                                      
|HEALTH, SAFETY AND ENVIRONMENT                                         |                                           | 9   
|                                                                      
|LEGAL PROCEEDINGS                                                      |                                           | 10  
|TRANSFER AGENT AND REGISTRAR                                           |                                           | 10  
|INTEREST OF EXPERTS                                                    |                                           | 10  
|                                                                      
|RISK FACTORS                                                           |                                           | 11  
|                                                                       | Gas Transmission                          |     
|                                                                       | Power                                     |     
|                                                                       | Other                                     |     
|                                                                      
|DIVIDENDS                                                              |                                           | 11  
|DESCRIPTION OF CAPITAL STRUCTURE                                       |                                           | 12  
|CREDIT RATINGS                                                         |                                           | 13  
|MARKET FOR SECURITIES                                                  |                                           | 14  
|                                                                      
|DIRECTORS AND OFFICERS                                                 |                                           | 15  
|                                                                       | Directors                                 |     
|                                                                       | Officers                                  |     
|                                                                      
|CORPORATE GOVERNANCE                                                   |                                           | 18  
|                                                                       | Audit Committee                           |     
|                                                                       | Other Board Committees                    |     
|                                                                       | Conflicts of Interest                     |     
|                                                                      
|ADDITIONAL INFORMATION                                                 |                                           | 21  
|                                                                      
|GLOSSARY                                                               |                                           | 22  
|                                                                      
|SCHEDULE "A"                                                           |                                           | A-1 
|                                                                       | Exchange Rate of the Canadian Dollar      |     
|                                                                       | Metric Conversion Table                   |     
|                                                                      
|SCHEDULE "B"    Charter of the Audit Committee                         |                                           | B-1 
|                                                                      
|SCHEDULE "C"    Charter of the Governance Committee                    |                                           | C-1 
|                                                                      
|SCHEDULE "D"   Charter of the Health, Safety and Environment Committee |                                           | D-1 
|                                                                      
|SCHEDULE "E"    Charter of the Human Resources Committee               |                                           | E-1 
|                                                                      

TRANSCANADA
CORPORATIONi

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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, 2005 ("Year End"). Amounts are expressed in Canadian dollars unless otherwise indicated. Financial information is presented in
accordance with Canadian generally accepted accounting principles.

This
AIF provides material information about the business and operations of TransCanada Corporation ("TransCanada"). TransCanada's
Management's Discussion and Analysis dated February 27, 2006 ("MD&A") and TransCanada's Audited Consolidated Financial Statements are
incorporated by reference into this AIF and can be found in TransCanada's Annual Report to Shareholders for the year ended December 31, 2005 ("Annual
Report") which is available on TransCanada's profile on SEDAR at www.sedar.com.

Unless
the context indicates otherwise, a reference in this AIF to "TransCanada" includes the subsidiaries of TransCanada 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.

Trends
impacting TransCanada's gas transmission and power businesses are discussed in the MD&A under the headings "Gas Transmission" (under the subheadings "Opportunities and
Developments", "Regulatory Developments" and "Business Risks") and "Power" (under the subheadings "Opportunities and Developments" and "Business Risks").

FORWARD-LOOKING INFORMATION

This AIF, the documents incorporated by reference into this AIF, and other reports and filings made with the securities regulatory authorities include forward-looking
statements. All forward-looking statements are based on TransCanada's beliefs and assumptions based on information available at the time the assumption was made. Forward-looking statements relate to,
among other things, anticipated financial performance, business prospects, strategies, regulatory developments, new services, market forces, commitments and technological developments. Much of this
information also appears in the MD&A. By its nature, such forward-looking information is subject to various risks and uncertainties, including those material risks discussed in this AIF under "Risk
Factors" and in the MD&A under "Gas Transmission  Business Risks" and "Power  Business Risks", which could cause
TransCanada's actual results and experience to differ materially from the anticipated results or other expectations expressed. The material assumptions in making these forward-looking statements are
disclosed in the MD&A under the headings "Overview and Strategic Priorities", "Gas Transmission  Opportunities and Developments", "Gas
Transmission  Outlook", "Power  Opportunities and Developments" and
"Power  Outlook". 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
AIF or otherwise, and TransCanada undertakes no obligation to update publicly or revise any forward-looking information, whether as a result of new information, future events or otherwise.

REFERENCE INFORMATION

For the reference information noted below, please refer to Schedule "A".



iiTRANSCANADA
CORPORATION

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TRANSCANADA CORPORATION

Corporate Structure

TransCanada's head office and registered office are located at 450 - 1st Street S.W., Calgary, Alberta, T2P 5H1.

TransCanada
was incorporated pursuant to the provisions of theCanada Business Corporation Acton 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 assets directly other than the common shares
of TCPL.

TransCanada
is a Canadian public company. Significant dates and events are set forth below.

|Date              |  | Event                                                         
|----------------- |  | --------------------------------------------------------------
|                 
|February 25, 2003 |  | TransCanada incorporated underCanada Business Corporations Act
|                 
|May 15, 2003      |  | Certificate of Arrangement issued                             
|                 

The significant dates and events relating to TCPL are set out in TCPL's Annual Information Form for the year ended
December 31, 2005, dated February 27, 2006.

TransCanada
does not directly employ any employees or contractors. At Year End, TransCanada's principal operating subsidiary, TCPL, had approximately 2,350 employees,
substantially all of whom were employed in Canada and the United States.

TRANSCANADA CORPORATION1

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Significant Subsidiaries

TransCanada's significant subsidiaries(1) at Year End and the jurisdiction under which each subsidiary was incorporated are noted below. TransCanada owns,
directly or indirectly, 100 per cent of the voting shares of each of these subsidiaries.

GRAPHIC

GENERAL DEVELOPMENT OF THE BUSINESS

The general development of TransCanada's business during the last three financial years, and the significant acquisitions, events or conditions which have had an influence on
that development, are described below.

Developments in Gas Transmission Business

TransCanada's focus has been to sustain, grow and optimize its natural gas transmission business. Summarized below are significant developments that have occurred in
TransCanada's natural gas transmission business over the last three years.

2005

In 2005, some of the significant natural gas transmission developments that occurred involved the sale of common units of TC PipeLines, LP, regulatory matters
including the National Energy Board's ("NEB") decision on the Canadian Mainline 2004 Tolls and Tariff Application (Phase II) and a settlement
relating to the Alberta System, on-going construction of a natural gas storage facility located near Edson, Alberta, continued funding of the Mackenzie Valley

2TRANSCANADA
CORPORATION

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Aboriginal
Pipeline Limited Partnership (known as "Aboriginal Pipeline Group" or "APG") for its
participation in the Mackenzie Gas Pipeline Project, continued discussions relating to the proposed Alaska Highway Pipeline Project, launching of the Keystone crude oil pipeline project and the
announcement in January 2006 that firm, long-term contracts were secured for the project, continued work toward gaining regulatory approval for its two liquified natural gas
("LNG") projects: Cacouna in Québec and the Broadwater Energy project, offshore of New York State in Long Island Sound,
acquisition of an additional interest in the Iroquois Gas Transmission System L.P. ("Iroquois System") and the commencement of construction of
the Tamazunchale Pipeline in east-central Mexico. Further information about each of these developments can be found in the MD&A under the heading "TransCanada's
Strategy  Gas Transmission" and "Gas Transmission  Opportunities and Developments".

2004

In September 2004, TransCanada and Petro-Canada signed a memorandum of understanding for the development of the Cacouna Energy LNG facility in Cacouna,
Québec, approximately 15 kilometres northeast of Rivière-du-Loup. The proposed facility will be capable of receiving, storing and
regasifying imported LNG with an average annual send out capacity of approximately 500 million cubic feet per day of natural gas. TransCanada and Petro-Canada will share equally the
construction costs of the facility, which are estimated to be $660 million. TransCanada will operate the facility while Petro-Canada will contract for the facility's entire regasification
capacity and supply the LNG. The proposed facility requires regulatory and other approvals from federal, provincial and municipal governments and regulators and the regulatory approval process is
anticipated to take approximately two years to complete. In September 2005, the village of Cacouna, Québec voted 57.2 per cent in favour of an LNG terminal
to be built in the area. Québec's Ministry of Environment commenced its 45 day public consultation period on February 22, 2006 regarding its next phase for this project.
TransCanada continues to work towards gaining regulatory approval and provided the necessary approvals are obtained, the facility is anticipated to be in service towards the end of this decade.

In
November 2004, TransCanada acquired the Gas Transmission Northwest System and the North Baja System from National Energy & Gas Transmission, Inc.
("NEGT") for US$1.7 billion, including approximately US$0.5 billion of assumed debt, subject to typical closing adjustments. The
2,174 kilometre Gas Transmission Northwest System, formerly known as Pacific Gas Transmission, extends from a connection point on TransCanada's BC System and Foothills System near Kingsgate,
British Columbia on the B.C./Idaho border to a point near Malin, Oregon on the Oregon/California border. The natural gas transported on this system originates primarily in Canada and is supplied to
markets in the Pacific Northwest, California and Nevada. The 129 kilometre North Baja System extends from a point near Ehrenberg, Arizona
to a point near Ogilby, California on the California/Mexico border. The natural gas transported on the North Baja System comes primarily from supplies in the southwestern U.S. for markets in
northern Baja California, Mexico.

In
November 2004, TransCanada and Shell US Gas & Power LLC ("Shell") announced plans to jointly develop an
offshore LNG regasification terminal, Broadwater Energy, in the New York State waters of Long Island Sound. The proposed floating storage and regasification unit will be capable of receiving,
storing and regasifying imported LNG with an average send out capacity of approximately one billion cubic feet ("Bcf") per day of natural gas.
TransCanada and Shell will build and install a floating storage and regasification unit at a location approximately 15 kilometres off the Long Island coast and 18 kilometres off the
Connecticut coast. TransCanada will own 50 per cent of Broadwater Energy LLC, which will own and operate the facility, while Shell will contract for the facility's entire
regasification capacity and supply the LNG. The estimated cost of construction is approximately US$700 million to US$1 billion. The proposed Broadwater Energy LNG facility requires
regulatory approval from federal and state governments before construction can begin and the regulatory approval process is anticipated to take up to three years to complete. Provided the necessary
approvals are granted and commercial commitments obtained, the facility could be in service in late 2010 or early 2011. TransCanada, on behalf of the Broadwater Energy project, filed a formal
application with the U.S. Federal Energy Regulatory Commission ("FERC") in January 2006, for federal approval to construct and operate
Broadwater.

TRANSCANADA CORPORATION3

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2003

In August 2003, TransCanada acquired the remaining interests in Foothills Pipe Lines Ltd. ("Foothills") that it
did not previously own. The Foothills System, which is owned by Foothills, extends 1,040 kilometres and has two legs: one which originates south of Caroline, Alberta and runs along the
foothills of the Rocky Mountains through the Crowsnest Pass to Kingsgate, B.C. where it connects to the Gas Transmission Northwest System; and the other which originates south of Caroline, Alberta and
runs southeast across Alberta and Saskatchewan to the Canada-U.S. border near Monchy, Saskatchewan where it interconnects with Northern Border Pipeline Company
("Northern Border Pipeline"). The Foothills System carries over 30 per cent of all Canadian natural gas exports to the U.S.

TransCanada,
through Foothills, holds certificates for both the Alaskan and Canadian segments of the Alaska Highway Pipeline Project and also holds significant
right-of-way assets for the project in both Canada and Alaska.

In
June 2003, TransCanada, the Mackenzie Delta Producers Group ("Mackenzie Producers") and the APG reached a funding and
participation agreement. TransCanada agreed to finance the APG's share of project development costs in exchange for certain rights in the Mackenzie Gas Pipeline Project, including a right to an
ownership interest in the pipeline at the decision to construct, preferential rights of first refusal and preferential expansion rights and the right of connection of the Mackenzie Delta natural gas
flow into the Alberta System. For current information about the Mackenzie Gas Pipeline Project, please refer to the MD&A under the heading "Gas
Transmission  Opportunities and Development  Mackenzie Gas Pipeline Project".

Through
acquisitions that took place in September and December 2003, TransCanada increased its ownership interest in Portland Natural Gas Transmission System Partnership
("Portland") in the northeastern U.S. from 33.3 per cent to 61.7 per cent.

Developments in Power Business

In the past three years, TransCanada has grown its power business and, in particular, has increased its generation capacity from facilities it owns, operates and/or controls,
including those under construction or in development, from 4,667 megawatts ("MW") in 2003 to 6,736 MW at Year End. Summarized below are
significant developments that have occurred in TransCanada's power business over the last three years.

2005

The significant power developments that occurred in 2005 included the advancement of the 739.5 MW Cartier Wind Energy project ("Cartier
Wind Energy"), the sale of TransCanada's approximate 11 per cent interest in P.T. Paiton Energy Company ("Paiton
Energy") to subsidiaries of The Tokyo Electric Power Company resulting in gross proceeds of US$103 million ($122 million), the acquisition of the 756 MW
Sheerness Power Purchase Arrangement for $585 million, the restructuring of Bruce Power L.P. ("Bruce B") and the execution of
agreements by Bruce Power A L.P. ("Bruce A") with the Ontario Power Authority to restart and refurbish units at Bruce A, the
acquisition of power generation assets from USGen New England, Inc. ("USGen") for US$505 million, the sale of all of TransCanada's
interests in TransCanada Power, L.P. ("Power LP") to EPCOR Utilities Inc. for net proceeds of $523 million in August 2005
and OSP's successful restructuring of its long-term natural gas fuel supply contracts with its supplier.

Further
information about each of these power developments can be found in the MD&A under the heading "TransCanada's Strategy  Power". Further
information can be found in the MD&A about Bruce A and Bruce B under the heading "Power  Financial
Analysis  Bruce Power", about the sale of Paiton Energy under
"Power  Highlights  Net Earnings", "Power  Power
Results-at-a-Glance", "Discontinued Operations" and elsewhere, and about the Power LP under the heading
"Power  Financial Analysis  Power LP Investment".

2004

TransCanada received approval from the Québec government in April 2004, to develop the 550 MW natural gas-fired
Bécancour cogeneration plant which is located at an industrial park near Trois-Rivières, Québec ("Bécancour
Plant") and which will supply its entire power output to Hydro-Québec Distribution under a 20 year power purchase contract. The

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Bécancour
Plant will also supply steam to two other companies located within the same industrial park. Construction of the 550 MW Bécancour Plant began in the
third quarter of 2004. The cost of the Bécancour Plant is estimated to be $550 million, and the plant is expected to be in service in late 2006.

In
April 2004, TransCanada sold its ManChief and Curtis Palmer power plants to Power LP for approximately US$402.6 million, excluding closing adjustments. The
acquisition was partially financed by Power LP through a public offering of subscription receipts which were subsequently converted into limited partnership units. TransCanada did not take up
its full pro rata share of the units and as a result, its interest in Power LP was reduced from 35.6 per cent to 30.6 per cent.

Cartier
Wind Energy, of which 62 per cent is owned by TransCanada, was awarded six wind energy projects by Hydro-Québec Distribution in October 2004,
representing a total of 739.5 MW in the Gaspé region of Québec. The six projects are distributed throughout the
Gaspésie-Iles-de-la-Madeleine region and the Regional County Municipality of Matane and are expected to cost a total of more than
$1.1 billion to develop and construct. Construction of the first two of six wind farm projects will commence in early 2006 and the first of the two projects is
expected to be in service in late 2006. The entire output will be supplied to Hydro-Québec Distribution under a 20-year power purchase contract.

Construction
of the 165 MW MacKay River power plant located in Alberta was completed in 2003 and the plant was put into commercial service in 2004.

Construction
of the 90 MW Grandview natural gas-fired cogeneration power plant on the site of the Irving Oil refinery in Saint John, New Brunswick
("Grandview Plant") was completed by the end of 2004 and was commissioned in January 2005. Under a 20 year tolling arrangement, a
subsidiary of Irving Oil Limited will provide fuel to the Grandview Plant and has contracted for 100 per cent of the Grandview Plant's heat and electricity output.

2003

In February 2003, TransCanada, as part of a consortium, acquired a 31.6 per cent interest in Bruce B and a 33.3 per cent interest in
Bruce Power Inc., the general partner of Bruce B. Bruce B leases its generation facilities from Ontario Power Generation Inc.
("OPG"). The facilities consist of eight nuclear reactors, five of which were operational at the end of 2003, with a capacity of 3,950 MW. An
additional reactor with capacity of 750 MW commenced commercial operations in March 2004.

The
members of the purchasing consortium of Bruce B severally guaranteed, on a pro-rata basis, certain contingent financial obligations of Bruce B related to
operator licenses, the OPG lease agreement, power sales agreements and contractor services. Bruce B continues to be operated by experienced nuclear power plant operators. Spent fuel and
decommissioning liabilities remain with OPG under the terms of the lease.

Recent Developments

On February 9, 2006, TransCanada announced the filing by its subsidiary, North Baja Pipeline LLC, of an application with the FERC for a certificate for a
two-phase expansion of its existing natural gas pipeline in southern California and the construction of a new pipeline lateral in California's Imperial Valley.

TransCanada
announced on February 15, 2006, that it will sell its 17.5 per cent general partner interest in Northern Border Partners, L.P. to a subsidiary of
ONEOK, Inc. for a net payment of US$30 million subject to certain closing adjustments. In addition, TransCanada will become the operator of Northern Border Pipeline
("NBPL") in early 2007. The transaction is expected to close in the second quarter of 2006 and is part of a series of transactions that will also result
in TC PipeLines, LP, an affiliate of TransCanada, acquiring an additional 20 per cent interest in NBPL from Northern Border Partners, L.P., bringing its total
general partnership interest in NBPL to 50 per cent.

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BUSINESS OF TRANSCANADA

TransCanada is a leading North American energy infrastructure company focused on natural gas transmission and power generation. At Year End, the gas transmission business
accounted for approximately 68 per cent of revenues and 76 per cent of TransCanada's total assets and the power business accounted for approximately
32 per cent of revenues and 20 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, 2005 and 2004.

|Revenues From Operations(millions of dollars) |                               | 2005  |       | 2004 
|--------------------------------------------- | ----------------------------- | ----- | ----- | -----
|                                             
|Gas Transmission                              |                               |       |       |      
|                                              | Canada  Domestic Deliveries  |       | 2,451 |      
|                                              | Canada  Export Deliveries(1) |       | 1,159 |      
|                                              | United States                 |       | 553   |      
|                                             
|                                              |                               | 4,163 |       | 3,929
|                                             
|Power(2)                                      |                               |       |       |      
|                                              | Canada  Domestic Deliveries  |       | 1,048 |      
|                                              | Canada  Export Deliveries(1) |       | 1     |      
|                                              | United States                 |       | 912   |      
|                                             
|                                              |                               | 1,961 |       | 1,568
|                                             
|Total Revenues(3)                             |                               | 6,124 |       | 5,497
|                                             

Gas Transmission Business

TransCanada, through subsidiaries, has substantial Canadian and U.S. natural gas pipeline and related holdings, including:

Canada



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United States



TransCanada
holds a 13.4 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. At Year End, TC PipeLines, LP held a 30 per cent interest in NBPL and a
49 per cent interest in Tuscarora.

TransCanada
also has the following natural gas pipeline and related holdings in Central and South America which are held through subsidiaries:



Further
information about TransCanada's pipeline holdings, developments and opportunities relating to gas transmission and significant regulatory developments which relate to gas
transmission can be found in the MD&A under the headings "Gas Transmission", "Gas Transmission  Opportunities and Developments" and "Gas
Transmission  Regulatory Developments".

In
addition, information about the Mackenzie Gas Pipeline Project and the Alaska Highway Pipeline Project can be found in the MD&A under the headings "Gas
Transmission  Opportunities and Developments  Mackenzie Gas Pipeline Project" and "Gas
Transmission  Opportunities and Developments  Alaska Highway Pipeline Project", respectively and about
TransCanada's activities relating to LNG under the heading "Gas Transmission  Opportunities and Developments  LNG".

Regulation

Canadian Mainline

Under the terms of theNational Energy Board Act(Canada), the Canadian Mainline is regulated by the NEB. The NEB sets tolls
which provide TransCanada the opportunity to recover projected costs of transporting natural gas, including

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the
return on the Canadian Mainline's 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. Net earnings of the Canadian Mainline are affected by changes in investment base, the return on equity, the level of deemed common equity and the potential for incentive earnings.

Alberta System

The Alberta System is regulated by the Alberta Energy and Utilities Board ("EUB") primarily under the provisions of the Gas Utilities Act (Alberta)("GUA") and thePipeline Act
(Alberta). Under the GUA, its rates, tolls and other charges, and
terms and conditions of service are subject to approval by the EUB. Under the provisions of thePipeline Act, the EUB oversees various matters including
the economic, orderly and efficient development of the pipeline, the operation and abandonment of the pipeline and certain related pollution and environmental conservation issues. In addition to
requirements under thePipeline Act, the construction and operation of natural gas pipelines in Alberta are subject to certain provisions of
other provincial legislation such as theEnvironmental Protection and Enhancement Act(Alberta).

Power

The Power segment of TransCanada's business includes the acquisition, development, construction, ownership and operation of electrical power generation plants, the purchase and
marketing of electricity and the provision of electricity account services to energy and industrial customers.

The
electrical power generation plants and power supply that TransCanada owns, operates and/or controls, including those under development or in construction, in the aggregate, represent
approximately 6,700 MW of power generation capacity. Power plants and power supply in Canada account for approximately 83 per cent of this total, and power plants in the U.S.
account for the balance, being approximately 17 per cent.

TransCanada
owns and operates:



TransCanada
has long-term power purchase arrangements in place for:



TransCanada
owns, but does not operate:



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TransCanada
owns the following facilities which are under construction or development:



Further
information about TransCanada's power holdings and significant developments and opportunities relating to power can be found in the MD&A under the headings "Power",
"Power  Financial Analysis" and "Power  Opportunities and Developments". In particular, information about TransCanada's
Eastern and Western power operations and about TransCanada's divestiture of Power LP to EPCOR, can be found under the heading "Power" in the MD&A.

Other Interests

Cancarb Limited

TransCanada owns Cancarb Limited, a world scale thermal carbon black manufacturing facility located in Medicine Hat, Alberta.

TransCanada Turbines

TransCanada owns a 50 per cent interest in TransCanada Turbines Ltd., a repair and overhaul business for aero-derivative industrial gas
turbines. This business operates primarily out of facilities in Calgary, Alberta, with offices in Bakersfield, California; East Windsor, Connecticut; and Liverpool, England.

TransCanada Calibrations

TransCanada owns an 80 per cent interest in TransCanada Calibrations Ltd., a gas meter calibration business certified by Measurement Canada, located at Ile
des Chênes, Manitoba.

HEALTH, SAFETY AND ENVIRONMENT

TransCanada is committed to providing a safe and healthy environment for its employees and the public, and to the protection of the environment. Health, safety and environment
("HS&E") is a priority in all of TransCanada's operations. The HS&E Committee of TransCanada's Board of Directors
("Board") monitors compliance with the TransCanada HS&E corporate policy through regular reporting by TransCanada's department of Community,
Safety & Environment. TransCanada's senior executives are also committed to ensuring TransCanada is in compliance with its policies and is an industry leader. Senior executives are regularly
advised of all important operational issues and initiatives relating to HS&E by way of a formal reporting process. In addition, TransCanada's management system and performance in the HS&E area are
assessed by an independent outside firm every three years or more often if the HS&E Committee requests it. The most recent assessment was completed by PricewaterhouseCoopers in January 2004. These
assessments involve senior executive interviews, review of policies and objectives, performance measurement and reporting.

TransCanada
has an HS&E management system modeled after elements of the International Organization for Standardization's standard for environmental management systems which is known as
ISO 14001, to facilitate the focus of resources on the areas of greatest risk to the organization's business activities relating to HS&E. The system highlights opportunities for improvement,
enables TransCanada to work towards defined HS&E expectations and objectives, and provides a competitive business advantage. HS&E outside, independent assessments, management system assessments and
planned inspections are used to assess both the effectiveness of implementation of HS&E programs, processes and procedures, and TransCanada's compliance with regulatory requirements.

TransCanada
employs full-time staff dedicated to HS&E matters, and incorporates HS&E policies and principles into the planning, development, construction and operation of all
its projects. Environmental protection requirements have not had a material impact on the capital expenditures of TransCanada to date; however, there can be no assurance that such requirements will
not have a material impact on TransCanada's financial or operating results in future years. Such

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requirements
can be dependent on a variety of factors including the regulatory environment in which TransCanada operates.

Environment

Climate change is a strategic issue for TransCanada. In Canada, TransCanada's fossil fuelled power plants, pipeline assets and carbon black facilities are expected to be
covered under legislation for large final emitters. While the broad elements of the proposed regulations to reduce greenhouse gas emissions intensities from large industrial emitters have been
established, key policy elements remain outstanding including details of compliance options that entities may use to fulfill compliance obligations. At this time, it is difficult to determine the
level of impact to TransCanada's Canadian assets until these and other key policy elements have been defined.

In
2006, TransCanada will continue with its strategy for managing the climate change issue. This strategy includes activities such as:



In
addition to these activities, TransCanada also ensures that the potential business risks and opportunities posed by increasing environmental priorities are considered when making
decisions regarding TransCanada's businesses.

LEGAL PROCEEDINGS

The Canadian Alliance of Pipeline Landowners' Association and two individual landowners have commenced an action under Ontario'sClass 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 the
pipeline pursuant to section 112 of theNational Energy Board Act.TransCanada believes the claim is without merit and will vigorously defend the
action. TransCanada has made no provision for any potential liability. Any liability would be dealt with through the regulatory process.

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.

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

TransCanada's auditor is KPMGLLP("External Auditor") and as of
February 27, 2006, the partners of the External Auditor have advised that they do not beneficially own, directly or indirectly, any securities of TransCanada. TransCanada collects this
information from the External Auditor but otherwise has no direct knowledge of individual holdings of its securities.

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RISK FACTORS

A number of factors, including but not limited to those discussed in this section, could cause actual results or events to differ materially from current expectations.

Gas Transmission

TransCanada faces competition in its gas transmission business at both the supply and market ends of its systems. The competition is a result of other pipelines accessing an
increasingly mature western Canadian sedimentary basin and serving some of the same markets as TransCanada. In addition, the continued expiration of firm transportation contracts has resulted in
significant reductions in firm contracted capacity on both the Canadian Mainline and Alberta System. As well, regulatory decisions continue to have significant impact on the financial returns for and
future investments in TransCanada's Canadian wholly-owned pipelines.

Further
information about risks in TransCanada's natural gas transmission business can be found under the headings "Gas Transmission  Opportunities
and Developments" and "Gas Transmission  Business Risks" in the MD&A.

Power

TransCanada's power business can be affected by a variety of factors including competition from other market participants, fluctuating market demand, weather, reliance on the
supply of feed stocks such as natural gas, water, coal and uranium, fluctuating feed stock prices, fluctuating electricity prices, unexpected outages, third party power plant operator performance,
power transmission disruptions and regulatory changes and influences.

Further
information about competition risks in TransCanada's power business can be found under the headings "Power  Opportunities and Developments"
and "Power  Business Risks" in the MD&A.

In
addition, Bruce A and Bruce B, in which TransCanada holds material interests, are subject to risks related to the operation and maintenance of nuclear power generating
facilities, including risks relating to the use, handling, containment and storage of radioactive materials; limitation on the amounts and types of insurance that are commercially available to cover
any related liabilities that may arise from these operations; changes in and varying interpretations of the extensive federal regulations that apply to Bruce A's and Bruce B's nuclear
operations; modifications needed to meet increasing security requirements; and repairs, modifications, replacements and outages that may be necessitated as a result of testing and inspection programs
which, themselves, may need to be enhanced in coming years to improve operations or satisfy increasing regulatory or other requirements.

Other

Further information about TransCanada's risk management activities can be found under the heading "Risk Management" in the MD&A.

DIVIDENDS

TransCanada's Board of Directors 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
management, such provisions do not restrict or alter TransCanada's ability to declare or pay dividends.

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The
dividends declared per common share of TransCanada during the past three completed financial years are set forth in the following table:

|                                       |  | 2005  |  | 2004  |  | 2003 
|-------------------------------------- |  | ----- |  | ----- |  | -----
|                                      
|Dividends declared on common shares(1) |  | $1.22 |  | $1.16 |  | $1.08
|                                      

DESCRIPTION OF CAPITAL STRUCTURE

Share Capital

TransCanada's authorized share capital consists of an unlimited number of common shares, of which approximately 487,235,725 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 shall rank on a parity with the first preferred shares of every other series, and shall be 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 theCanada Business Corporations Actor 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 sanction of the holders of the first preferred shares as a class. Any
such sanction to be given by the holders of the first preferred shares may be given by the affirmative vote of the holders of not less than 662/3 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.

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CREDIT RATINGS

Although TransCanada has not issued debt, 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 in its own name and future financing requirements are expected to continue to be funded 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&P     
|------------------------ | -------------------- | ---------- | - | ------- | -- | --------
|                        
|Senior Secured Debt      |                      |            |   |         |    |         
|                         | First Mortgage Bonds |            | A |         | A2 |         
|                        
|Senior Unsecured Debt    |                      |            |   |         |    |         
|                         | Debentures           |            | A |         | A2 |         
|                         | Medium-term Notes    |            | A |         | A2 |         
|                        
|Subordinated Debt        |                      | A (low     | ) | A3      |    | BBB+    
|                        
|Junior Subordinated Debt |                      | Pfd-2      |   | A3      |    | BBB     
|                        
|Preferred Shares         |                      | Pfd-2 (low | ) | Baa1    |    | BBB     
|                        
|Commercial Paper         |                      | R-1 (low   | ) | P-1     |    |        
|                        
|Trend/Rating Outlook     |                      | Stable     |   | Stable  |    | Negative
|                        

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.

Dominion Bond Rating Service (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 ratings assigned to TCPL's senior secured and senior unsecured debt and the A (low) rating assigned to its subordinated debt are
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 entities. 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 Pfd-2 and Pfd-2 (low) ratings assigned to TCPL's junior subordinated debt and preferred shares are 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.

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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 ratings assigned to TCPL's senior secured and senior unsecured debt and the A3 ratings assigned to its subordinated debt and
junior subordinated debt are the third highest of nine 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 and A- ratings assigned to TCPL's senior secured and senior unsecured debt,
respectively, are 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+ rating assigned to TCPL's
subordinated debt and the BBB ratings assigned to its junior subordinated debt 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 closing 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 Traded
|--------------- |  | -------- |  | ------- |  | -------------
|               
|December, 2005  |  | 37.56    |  | 36.25   |  | 16,433,655   
|November, 2005  |  | 37.40    |  | 34.95   |  | 21,148,781   
|October, 2005   |  | 36.00    |  | 34.60   |  | 20,786,022   
|September, 2005 |  | 36.94    |  | 32.92   |  | 26,394,804   
|August, 2005    |  | 33.69    |  | 31.49   |  | 18,358,190   
|July, 2005      |  | 34.08    |  | 32.06   |  | 16,695,178   
|June, 2005      |  | 32.59    |  | 30.32   |  | 20,470,296   
|May, 2005       |  | 31.10    |  | 29.80   |  | 16,560,238   
|April, 2005     |  | 30.00    |  | 29.55   |  | 17,071,520   
|March, 2005     |  | 30.61    |  | 29.20   |  | 23,363,461   
|February, 2005  |  | 30.69    |  | 29.70   |  | 19,187,511   
|January, 2005   |  | 30.48    |  | 29.75   |  | 21,563,721   
|               

In addition, the following securities of TransCanada's subsidiary, TCPL, are listed on the markets specified:



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DIRECTORS AND OFFICERS

As of February 27, 2006, the directors and officers of TransCanada as a group beneficially owned, directly or indirectly, have exercisable options to own, or exercised
control or direction over, 2,334,652 common shares of TransCanada which 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. TransCanada collects this information from its directors and officers but otherwise has no direct knowledge of individual holdings of its
securities. Further information as to securities beneficially owned, or over which control or direction is exercised, is provided in TransCanada's Management Proxy Circular dated February 28,
2006 ("Proxy Circular") under the heading "Business to be Transacted at the Meeting  Election of Directors". See
also "Additional Information" in this AIF.

Directors

Set forth below are the names of the twelve directors who served on TransCanada's 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.

|Name and
Place of Residence                        |  | Principal Occupation During the Five Preceding Years                                                                                                                                                                                                                                                                                                                                                  |  | Director Since
|-------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------
|                                                  
|Douglas D. Baldwin
Calgary, Alberta
Canada         |  | Chairman, Talisman Energy Inc., (oil and gas) since May 2003. President and Chief Executive Officer, TCPL, from August 1999 to April 2001. Director, Citadel Group of Funds. Member, Board of
Governors, University of Calgary.                                                                                                                                                                       |  | 1999          
|                                                  
|Kevin E. Benson(1)
Wheaton, Illinois
United States |  | President and Chief Executive Officer, Laidlaw International, Inc. (transportation services) since June 2003, and Laidlaw, Inc. from September 2002 to June 2003. President and Chief Executive
Officer, The Insurance Corporation of British Columbia from December 2001 until September 2002. President, The Pattison Group from April 2000 to February 2001. Director, Laidlaw International, Inc. |  | 2005          
|                                                  
|Derek H. Burney, O.C.
Ottawa, Ontario
Canada       |  | Corporate Director. President and Chief Executive Officer, CAE Inc. (technology) from October 1999 to August 2004. Lead director at Quebecor World Inc. (communications and media) from April 2003 to
November 2005. Director, CanWest Global Communications Corp., Chair, New Brunswick Power Corporation and Lead Director, Shell Canada Limited.                                                   |  | 2005          
|                                                  
|Wendy K. Dobson
Uxbridge, Ontario
Canada           |  | Professor, Rotman School of Management and Director, Institute for International Business, University of Toronto (education). Director, Toronto-Dominion Bank. Vice Chair, Canadian Public Accountability Board.                                                                                                                                                                                      |  | 1992          
|                                                  
|E. Linn Draper, Jr.
Lampasas, Texas
United States  |  | Corporate Director. Chairman, President and Chief Executive Officer of Columbus, Ohio-based American Electric Power Co., Inc. from April 1993 to April 2004. Director, Alliance Data Systems Corporation, Alpha
Natural Resources, Inc. and Temple-Inland Inc. Chair of NorthWestern Corporation.                                                                                                     |  | 2005          
|                                                  
|                                                   |  |                                                                                                                                                                                                                                                                                                                                                                                                       |  |               

TRANSCANADA CORPORATION15

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|The Hon. Paule Gauthier,
P.C., O.C., O.Q., Q.C.
Québec, Québec
Canada |  | Senior Partner, Desjardins Ducharme L.L.P. (law firm). President, Institut Québecois des Hautes Études Internationales, Laval University. Director, Royal Bank of Canada, Rothmans Inc.,
Metro Inc. and RBC Dexia Investor Services Trust.                                                                                                                                                                                                                                                                                                                   |  | 2002
|--------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ----
|                                                                     
|Kerry L. Hawkins
Winnipeg, Manitoba
Canada                            |  | Corporate Director. President, Cargill Limited (agricultural) from September 1982 to December 2005. Director, NOVA Chemicals Corporation and Shell Canada Limited.                                                                                                                                                                                                                                                                                                                                                                                           |  | 1996
|                                                                     
|S. Barry Jackson
Calgary, Alberta
Canada                              |  | Corporate Director. Chairman, Resolute Energy Inc. (oil and gas) from January 2002 to April 2005 and Chairman, Deer Creek Energy Limited (oil and gas) from April 2001 to September 2005. Director,
Nexen Inc., Cordero Energy Inc. and privately held Larincina Energy Ltd.                                                                                                                                                                                                                                                                                 |  | 2002
|                                                                     
|Paul L. Joskow
Brookline, Massachusetts
United States                 |  | Professor, Department of Economics, Massachusetts Institute of Technology (MIT) (education). Director of the MIT Center for Energy and Environmental Policy Research. Director, National Grid PLC and trustee, Putnam
Mutual Funds.                                                                                                                                                                                                                                                                                                                          |  | 2004
|                                                                     
|Harold N. Kvisle
Calgary, Alberta
Canada                              |  | President and Chief Executive Officer, TransCanada since May 2003 and TCPL since May 2001. Executive Vice-President, Trading and Business Development, TCPL, from June 2000 to April 2001. Director,
 PrimeWest Energy Inc. and Bank of Montreal. Chair, Mount Royal College.                                                                                                                                                                                                                                                                                |  | 2001
|                                                                     
|David P. O'Brien(2)
Calgary, Alberta
Canada                           |  | Chairman and Chief Executive Officer, PanCanadian Energy Corporation (oil and gas) from October 2001 to April 2002. Chairman, President and Chief Executive Officer, Canadian Pacific Limited (transportation,
energy and hotels) from May 1996 to October 2001. Chair, EnCana Corporation (oil and gas) since April 2002 and Chair, Royal Bank of Canada (banking) since February 2004. Director, Fairmont Hotels & Resorts Inc.,
Inco Limited, Molson Coors Brewing Company, and the not for profit C.D. Howe Institute. Chancellor, Concordia University. |  | 2001
|                                                                     
|Harry G. Schaefer, F.C.A.
Calgary, Alberta
Canada                     |  | President, Schaefer & Associates (business advisory services). Vice-Chairman of the Board, TransCanada since May 2003 and TCPL since June 1998. Director, Agrium Inc. and Fording Canadian
Coal Trust.                                                                                                                                                                                                                                                                                                                                                       |  | 1987
|                                                                     

Each director holds office until the next annual meeting or until his or her successor is earlier elected or appointed. Mr. Jackson was
designated as the Chair of the Board on April 29, 2005, Mr. Draper was appointed to the Board on June 15, 2005 and Mr. Burney was appointed to the Board on
September 8, 2005. Mr. W. Thomas Stephens, a TransCanada director since April 1999, resigned from the Board on August 12, 2005.

16TRANSCANADA
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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 During
the Five Preceding Years                                                                          
|-------------------------------- |  | ------------------------------------------------------------------------------ |  | ------------------------------------------------------------------------------------------------------------------------------
|                                
|Harold N. Kvisle                 |  | President and Chief Executive Officer                                          |  | Prior to April 2001, Executive Vice-President, Trading and Business Development.                                              
|                                
|Albrecht W.A. Bellstedt, Q.C.(1) |  | Executive Vice-President, Law and General Counsel and Chief Compliance Officer |  | Prior to September 2005, Executive Vice-President, Law and General Counsel.                                                   
|                                
|Russell K. Girling               |  | Executive Vice-President, Corporate Development and Chief Financial Officer    |  | Prior to March 2003, Executive Vice-President and Chief Financial Officer.                                                    
|                                
|Dennis J. McConaghy              |  | Executive Vice-President, Gas Development                                      |  | Prior to May 2001, Senior Vice-President, Business Development.                                                               
|                                
|Alexander J. Pourbaix            |  | Executive Vice-President, Power                                                |  | Executive Vice-President, Power Development, May 2001 to March 2003. Prior to May 2001, Senior Vice-President, Power Ventures.
|                                
|Sarah E. Raiss                   |  | Executive Vice-President, Corporate Services                                   |  | Prior to January 2002, Executive Vice-President, Human Resources and Public Sector Relations.                                 
|                                
|Ronald J. Turner                 |  | Executive Vice-President, Gas Transmission                                     |  | Prior to March 2003, Executive Vice-President, Operations and Engineering.                                                    
|                                
|Donald M. Wishart                |  | Executive Vice-President, Operations and Engineering                           |  | Prior to March 2003, Senior Vice-President, Field Operations.                                                                 
|                                

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Corporate Officers

|Name               |  | Present Position Held                                  |  | Principal Occupation During
the Five Preceding Years             
|------------------ |  | ------------------------------------------------------ |  | -----------------------------------------------------------------
|                  
|Ronald L. Cook     |  | Vice-President, Taxation                               |  | Prior to April 2002, Director, Taxation.                         
|                  
|Rhondda E.S. Grant |  | Vice-President, Communications and Corporate Secretary |  | Prior to February 2005, Vice-President and Corporate Secretary.  
|                  
|Lee G. Hobbs       |  | Vice-President and Controller                          |  | Prior to July 2001, Director, Accounting.                        
|                  
|Garry E. Lamb      |  | Vice-President, Risk Management                        |  | Prior to October 2001, Vice-President, Audit and Risk Management.
|                  
|Donald R. Marchand |  | Vice-President, Finance and Treasurer                  |  | Vice-President, Finance and Treasurer                            
|                  

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 United StatesSarbanes-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 National Policy 58-201, Corporate Governance Guidelines, and National Instrument 58-101, Disclosure of Corporate Governance
Practices (collectively, the "Canadian Governance Guidelines"). In 2005, the Canadian Governance Guidelines came into effect and for purposes of the TSX
replaced the TSX Corporate Governance Guidelines.

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 Harry G. Schaefer (Chair),
Douglas D. Baldwin, Kevin E. Benson, Paule Gauthier and Paul L. Joskow. Mr. Jackson is a non-voting member of the Audit Committee.

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. Schaefer 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. Schaefer
earned a Bachelor of Commerce from the University of Alberta, is a Chartered Accountant and is a Fellow of the Canadian Institute of Chartered Accountants. He serves
on and has served on the boards of several public companies and other organizations, including as Chairman of the Alberta Chapter of the Institute of Corporate

18TRANSCANADA
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Directors,
and on the audit committees of certain of those boards. Mr. Schaefer has also held several executive positions with public companies. He is currently Chair of the Audit Committee and
of the audit committees of two other public companies.

Mr. Baldwin
earned a Bachelor of Science in Chemical Engineering from the University of Saskatchewan. He has served on the boards of several public companies and other
organizations and on the audit committees of certain of those boards. Mr. Baldwin has also held the position of President and Chief Executive Officer of TCPL and other senior executive
positions with Imperial Oil Limited and Esso Resources Canada Limited. Mr. Baldwin will retire from the Board at the Annual Meeting of Shareholders to be held on April 28, 2006.

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 is the President and Chief Executive Officer of Laidlaw International, Inc. 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.

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 has served on the boards of several public companies and other organizations and on the audit committees of certain of those.

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 the link specified above under the heading "Corporate Governance".

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 in both instances 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 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.

TRANSCANADA CORPORATION19

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External Auditor Service Fees

The aggregate fees for external auditor services rendered by the External Auditor for TransCanada and its subsidiaries in each of 2005 and 2004 fiscal years, are shown in the
table below:

|Fee Category       |  | 2005                  |  | 2004 |  | Description of Fee Category                                                                                                                                                                                                                                                                                                                                                                   
|------------------ |  | --------------------- |  | ---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                  
|                   |  | (millions of dollars) |  |     
|Audit Fees         |  | 3.15                  |  | 2.50 |  | Aggregate fees for audit services rendered by TransCanada's External Auditor for the audit of TransCanada's and its subsidiaries' annual 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 |  | 0.11                  |  | 0.06 |  | Aggregate fees for assurance and related services rendered by TransCanada's External Auditor that are reasonably related to performance of the audit or review of TransCanada's 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 TransCanada's various pension plans.                
|                  
|Tax Fees           |  | 0.12                  |  | 0.06 |  | Aggregate fees rendered by TransCanada's External Auditor for tax compliance and tax advice. The nature of these services consisted of: tax compliance including the review of Canadian and U.S. 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.                              
|                  
|All Other Fees     |  | 0.14                  |  | 0.05 |  | Aggregate fees for products and services other than those reported in this table above rendered by TransCanada's External Auditor. The nature of these services consisted of advice with respect to TransCanada's compliance
with SOX.                                                                                                                                                        
|                  
|Total              |  | 3.52                  |  | 2.67 |  |                                                                                                                                                                                                                                                                                                                                                                                               
|                  

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, sits on each of Board's committees as a non-voting member. The voting members of each of these committees, as of Year End, are
identified below:

|Governance Committee |  | Health, Safety & Environment Committee |  | Human Resources Committee
|-------------------- |  | -------------------------------------- |  | -------------------------
|Chair:               |  | W.K. Dobson                            |  | Chair:                   
|Members:             |  | D.H. Burney                            |  | Members:                 
|                     |  | P.L. Joskow                            |  |                          
|                     |  | D.P. O'Brien                           |  |                          
|                     |  | H.G. Schaefer                          |  |                          

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The charters of the Governance Committee, the Health, Safety & Environment Committee and the Human Resources Committee are attached as
Schedules "C", "D" and "E", respectively, and can be found on TransCanada's website under the Corporate Governance  Board Committees page at the link
specified below.

Further
information about TransCanada's Board committees and corporate governance can be found in the Proxy Circular under the heading "Corporate Governance" or on TransCanada's website
located at: http://www.transcanada.com/company/board_committees.html.

Conflicts of Interest

The Board and members of TransCanada's management are not aware of any existing or potential material conflicts of interest between TransCanada or a subsidiary and any director
or officer of TransCanada or its subsidiary. 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 theCanada Business Corporations Act. If a director or officer has such a
conflict, TransCanada requires that the director or officer absent himself or herself from any discussion or voting relating to the matter giving rise to the material existing or
potential conflict.

ADDITIONAL INFORMATION

TRANSCANADA CORPORATION21

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GLOSSARY

|AIF                      |  | Annual Information Form of TransCanada Corporation dated February 27, 2006                                                       
|------------------------ |  | ---------------------------------------------------------------------------------------------------------------------------------
|Alberta System           |  | A natural gas transmission system throughout the province of Alberta                                                             
|Annual Report            |  | TransCanada's Annual Report to Shareholders for the year ended, December 31, 2005                                                
|APG                      |  | Aboriginal Pipeline Group or Mackenzie Valley Aboriginal Pipeline Limited Partnership                                            
|Bcf                      |  | Billion cubic feet                                                                                                               
|BC System                |  | A natural gas transmission system in southeastern B.C.                                                                           
|Bécancour Plant          |  | A power plant near Trois-Rivières, Québec                                                                                        
|Board                    |  | TransCanada's Board of Directors                                                                                                 
|Bruce A                  |  | Bruce Power A L.P.                                                                                                               
|Bruce B                  |  | Bruce Power L.P.                                                                                                                 
|Canadian Mainline        |  | A natural gas pipeline system running from the Alberta border east to delivery points in eastern Canada and along the U.S. border
|CSA                      |  | Canadian Securities Administrators                                                                                               
|EUB                      |  | Alberta Energy and Utilities Board                                                                                               
|External Auditor         |  | KPMGLLP                                                                                                                          
|FERC                     |  | Federal Energy Regulatory Commission (USA)                                                                                       
|Foothills                |  | Foothills Pipe Lines Ltd.                                                                                                        
|Foothills System         |  | A natural gas pipeline system in southeastern B.C., southern Alberta and southwestern Saskatchewan                               
|Grandview Plant          |  | A power plant in Saint John, New Brunswick                                                                                       
|Great Lakes System       |  | A natural gas pipeline system in the north central U.S., roughly parallel to the Canada-U.S. Border                              
|HS&E                     |  | Health, Safety and Environment                                                                                                   
|Iroquois System          |  | A natural gas pipeline system in New York                                                                                        
|LNG                      |  | Liquefied Natural Gas                                                                                                            
|Mackenzie Producers      |  | Mackenzie Delta Producers Group                                                                                                  
|MD&A                     |  | TransCanada's Management's Discussion and Analysis dated February 27, 2006                                                       
|MW                       |  | Megawatts                                                                                                                        
|NBPL                     |  | Northern Border Pipeline                                                                                                         
|NEB                      |  | National Energy Board                                                                                                            
|NEGT                     |  | National Energy & Gas Transmission, Inc.                                                                                         
|NGTL                     |  | NOVA Gas Transmission Ltd.                                                                                                       
|Northern Border Pipeline |  | Northern Border Pipeline Company                                                                                                 
|NYSE                     |  | New York Stock Exchange                                                                                                          
|OPG                      |  | Ontario Power Generation Inc.                                                                                                    
|Power LP                 |  | TransCanada Power, L.P.                                                                                                          
|Proxy Circular           |  | TransCanada's Management Proxy Circular dated February 28, 2006                                                                  
|SEC                      |  | U.S. Securities and Exchange Commission                                                                                          
|Shell                    |  | Shell US Gas & Power LLC                                                                                                         
|SOX                      |  | U.S.Sarbanes-Oxley Actof 2002                                                                                                    
|Tcf                      |  | Trillion cubic feet                                                                                                              
|TCPL                     |  | TransCanada PipeLines Limited                                                                                                    
|TQM                      |  | Trans Québec & Maritimes Pipeline Inc.                                                                                           
|TQM System               |  | A natural gas pipeline system in southeastern Québec                                                                             
|TransCanada              |  | TransCanada Corporation                                                                                                          
|TSX                      |  | Toronto Stock Exchange                                                                                                           
|Tuscarora                |  | Tuscarora Gas Transmission Company                                                                                               
|USGen                    |  | US Gen New England, Inc.                                                                                                         
|Year End                 |  | December 31, 2005                                                                                                                

22TRANSCANADA
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SCHEDULE "A"

Exchange Rate of the Canadian Dollar

All dollar amounts in the AIF are in Canadian dollars, except where otherwise indicated. The following table shows the yearly high and low noon rates, the yearly average noon
rates and the year-end noon spot rates for the U.S. dollar for the past five years, each expressed in Canadian dollars, as reported by the Bank of Canada.

|                        
|------------------------
|
|
|                        
|Yearly High Noon Rate   
|Yearly Low Noon Rate    
|Yearly Average Noon Rate
|Year-End Noon Rate      
|                        

On February 27, 2006, the noon rate for the U.S. dollar as reported by the Bank of Canada was
US $1.00 = Cdn. $1.1420.

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                      |  | Factor                                                                                                                      
|--------------- |  | ----------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------
|               
|Kilometres      |  | Miles                         |  | 0.62                                                                                                                        
|               
|Millimetres     |  | Inches                        |  | 0.04                                                                                                                        
|               
|Gigajoules      |  | Million British thermal units |  | 0.95                                                                                                                        
|               
|Cubic metres*   |  | Cubic feet                    |  | 35.3                                                                                                                        
|               
|Kilopascals     |  | Pounds per square inch        |  | 0.15                                                                                                                        
|               
|Degrees 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
|               

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SCHEDULE "B"
CHARTER OF
THE AUDIT COMMITTEE

1.     Purpose





2.     Roles and Responsibilities







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3.     Composition of Audit Committee



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4.     Appointment of Audit Committee Members



5.     Vacancies



6.     Audit Committee Chair



7.     Absence of Audit Committee Chair



8.     Secretary of Audit Committee



9.     Meetings



10.  Quorum



11.  Notice of Meetings



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12.  Attendance of Company Officers and Employees at Meeting



13.  Procedure, Records and Reporting



14.  Review of Charter and Evaluation of Audit Committee



15.  Outside Experts and Advisors



16.  Reliance



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SCHEDULE "C"
CHARTER OF
THE GOVERNANCE COMMITTEE

1.     Purpose



2.     Roles and Responsibilities



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3.     Composition of Committee



4.     Appointment of Committee Members



5.     Vacancies



6.     Committee Chair



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7.     Absence of Committee Chair



8.     Secretary of Committee



9.     Meetings



10.  Quorum



11.  Notice of Meetings



12.  Attendance of Company Officers or Employees at Meeting



13.  Procedure, Records and Reporting



14.  Review of Charter and Evaluation of Committee



15.  Outside Experts and Advisors



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SCHEDULE "D"
CHARTER OF
THE HEALTH, SAFETY AND ENVIRONMENT COMMITTEE

1.     Purpose



2.     Roles and Responsibilities



3.     Composition of Committee



4.     Appointment of Committee Members



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5.     Vacancies



6.     Committee Chair



7.     Absence of Committee Chair



8.     Secretary of Committee



9.     Meetings



10.  Quorum



11.  Notice of Meetings



12.  Attendance of Company Officers and Employees at Meeting



13.  Procedure, Records and Reporting



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14.  Review of Charter and Evaluation of Committee



15.  Outside Experts and Advisors



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SCHEDULE "E"
CHARTER OF
THE HUMAN RESOURCES COMMITTEE

1.     Purpose



2.     Roles and Responsibilities



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3.     Composition of Committee



4.     Appointment of Committee Members



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5.     Vacancies



6.     Committee Chair



7.     Absence of Committee Chair



8.     Secretary of Committee



9.     Meetings



10.  Quorum



11.  Notice of Meetings



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12.  Attendance of Company Officers and Employees at Meeting



13.  Procedure, Records and Reporting



14.  Review of Charter and Evaluation of Committee



15.  Outside Experts and Advisors



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GRAPHIC

GRAPHIC

GRAPHIC

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

| | Year ended December 31
(millions of dollars)     |  | 2005   |   | 2004   |  | 2003   |  | 2002   |  | 2001   |   | 2000  
| | ------------------------------------------------ |  | ------ | - | ------ |  | ------ |  | ------ |  | ------ | - | ------
| |                                                 
| | Income Statement                                 |  |        |   |        |  |        |  |        |  |        |   |       
| | Net income/(loss)                                |  |        |   |        |  |        |  |        |  |        |   |       
| | Continuing operations                            |  | 1,209  |   | 980    |  | 801    |  | 747    |  | 686    |   | 628   
| | Discontinued operations                          |  |       |   | 52     |  | 50     |  |       |  | (67    | ) | 61    
| |                                                 
| |                                                  |  | 1,209  |   | 1,032  |  | 851    |  | 747    |  | 619    |   | 689   
| |                                                 
| |                                                 
| | Cash Flow Statement                              |  |        |   |        |  |        |  |        |  |        |   |       
| | Funds generated from operations                  |  | 1,951  |   | 1,703  |  | 1,822  |  | 1,843  |  | 1,625  |   | 1,484 
| | (Increase)/decrease in operating working capital |  | (49    | ) | 29     |  | 93     |  | 92     |  | (487   | ) | 437   
| |                                                 
| | Net cash provided by operations                  |  | 1,902  |   | 1,732  |  | 1,915  |  | 1,935  |  | 1,138  |   | 1,921 
| |                                                 
| |                                                 
| | Capital expenditures and acquisitions            |  | 2,071  |   | 2,046  |  | 965    |  | 851    |  | 1,082  |   | 1,144 
| | Balance Sheet                                    |  |        |   |        |  |        |  |        |  |        |   |       
| | Total assets                                     |  | 24,113 |   | 22,422 |  | 20,887 |  | 20,555 |  | 20,531 |   | 25,245
| | Long-term debt                                   |  | 9,640  |   | 9,749  |  | 9,516  |  | 8,899  |  | 9,444  |   | 10,008
| | Common shareholders' equity                      |  | 7,206  |   | 6,565  |  | 6,091  |  | 5,747  |  | 5,426  |   | 5,211 
| | Common Share Statistics
Year ended December 31   |  | 2005   |   | 2004   |  | 2003   |  | 2002   |  | 2001   |   | 2000  
| |                                                 
| | Net income/(loss) per share  Basic              |  |        |   |        |  |        |  |        |  |        |   |       
| | Continuing operations                            |  | $2.49  |   | $2.02  |  | $1.66  |  | $1.56  |  | $1.44  |   | $1.32 
| | Discontinued operations                          |  |       |   | 0.11   |  | 0.10   |  |       |  | (0.14  | ) | 0.13  
| |                                                 
| |                                                  |  | $2.49  |   | $2.13  |  | $1.76  |  | $1.56  |  | $1.30  |   | $1.45 
| |                                                 
| |                                                 
| | Net income/(loss) per share  Diluted            |  |        |   |        |  |        |  |        |  |        |   |       
| | Continuing operations                            |  | $2.47  |   | $2.01  |  | $1.66  |  | $1.55  |  | $1.44  |   | $1.32 
| | Discontinued operations                          |  |       |   | 0.11   |  | 0.10   |  |       |  | (0.14  | ) | 0.13  
| |                                                 
| |                                                  |  | $2.47  |   | $2.12  |  | $1.76  |  | $1.55  |  | $1.30  |   | $1.45 
| |                                                 
| |                                                 
| | Dividends declared per share                     |  | $1.22  |   | $1.16  |  | $1.08  |  | $1.00  |  | $0.90  |   | $0.80 
| | Common shares outstanding (millions)             |  |        |   |        |  |        |  |        |  |        |   |       
| | Average for the year                             |  | 486.2  |   | 484.1  |  | 481.5  |  | 478.3  |  | 475.8  |   | 474.6 
| | End of year                                      |  | 487.2  |   | 484.9  |  | 483.2  |  | 479.5  |  | 476.6  |   | 474.9 

---

GRAPHIC

TRANSCANADA CORPORATION1

---





|Chairman's
Message |  | TransCanada has in place the key building blocks of a truly great company  the right team, the right businesses and the right strategy.
|------------------ |  | ----------------------------------------------------------------------------------------------------------------------------------------

|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|PHOTO |  | TransCanada continues to make great strides in achieving its goal of becoming the leading North American energy infrastructure company. The company's financial strength and focused execution in 2005 delivered excellent
results and consequently we were able to increase the dividend in January 2006 for the sixth consecutive year.
Our Board was again honoured this past year to be recognized as one of Canada's top corporate boards. It is a privilege to work with such a highly respected group. The commitment to meeting the highest standards of integrity and governance best
practices is unquestioned, but a key focus remains on what we strongly believe is the most important role of the Board  making the strategic decisions that are in the best interests of shareholders and other stakeholders. Our primary
responsibility is to foster the long-term success of the company and a cornerstone of that responsibility is the Board's active role in the discussion, refinement and approval of the company's strategic activities.
That kind of strategic leadership is exemplified by Doug Baldwin, a director who will retire from the Board at the Annual Meeting in April 2006. As a director since 1999, and as President and Chief Executive Officer from August 1999 to
April 2001, Mr. Baldwin played a pivotal role in bringing TransCanada to where it is today.
We also thank Tom Stephens, who stepped down from the Board in 2005, for his valued contribution and dedicated service.
Three new directors joined the Board over the last year, their backgrounds reflecting TransCanada's growing presence in the North American energy market. Mr. Kevin E. Benson, President and Chief Executive Officer, Laidlaw International,
 Inc. contributes significant financial and business leadership. Dr. E. Linn Draper, Former Chairman, President and Chief Executive Officer, American Electric Power Co., Inc., brings tremendous knowledge of and insight into
U.S. energy markets and nuclear power. Mr. Derek H. Burney, O.C., Chairman of the Board, New Brunswick Power, offers unique experience in federal government and Canada-U.S. relations. All three are valuable additions to an already
strong and representative Board.
Looking forward, the Board is pleased to approve the nomination of D. Michael G. Stewart, Principal, Ballinacurra Group, to the Board at our annual meeting in April. Mr. Stewart brings a wealth of experience in the oil and gas and utility
industries.
Along with the Board, I would express our appreciation to the management and the employees of TransCanada for their commitment and exceptional performance over the past year and for continuing to exemplify TransCanada's core values of integrity,
trust and respect. The combination of this excellent team, our strong and growing core businesses, and a proven strategy makes TransCanada a company in which we can all take great pride.
On behalf of the Board of Directors,
|      |  | SIG                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|      |  | S. Barry JacksonChair                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

2CHAIRMAN'S
MESSAGE

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|Letter
to Shareholders |  | Six years ago, we took the strategic decision to focus on our core businesses of natural gas transmission and power. Our strategies then, and now, are to grow those businesses, to maximize the long-term
value of our existing assets, to focus on operational excellence and to enhance our corporate strength and competitive position within North America. As we begin 2006, we can confidently say the growth strategies we embraced six years ago have proven
successful.
|---------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|PHOTO |  | Delivering value for our shareholdersNet income from continuing operations (net earnings) grew to a record $1.209 billion or $2.49 per share in
2005. Excluding gains on sale of TransCanada Power, L.P., units of TC PipeLines, LP and P.T. Paiton Energy Company, net earnings were $852 million or $1.75 per share.
Funds generated from operations were approximately $2.0 billion. This strong underlying cash flow, combined with proceeds from the sale of non-core assets, allowed us to invest approximately $2.1 billion in our core businesses of natural
gas transmission and power. As in previous years, we were able to make those investments without issuing common equity or weakening our financial position.
|      |  | During 2005, the Board of Directors increased the annual dividend on the company's common shares from $1.16 to $1.22 and our share value increased from $29.80 at the end of 2004 to $36.65 at December 31, 2005. Total shareholder return in 2005
was approximately 28 per cent.                                                                                                                                                                                                                                                                                                                                                                                                                                               
|      |  | In January 2006, TransCanada's Board of Directors raised the quarterly dividend on the company's common shares to $0.32 per share, which is equivalent, on an annualized basis, to $1.28 per share.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|      |  | Since 2000, dividends per common share have grown from 80 cents to $1.28, an increase of eight per cent per year.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|      |  | Building on a solid track recordThe results we achieved in 2005 build on the track record of success we have established since 1999 and are driven by the diligent
and disciplined execution of our growth strategies.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|      |  | During the past six years:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|      |  |   Net income per share from continuing operations, excluding gains, has grown from $1.08 to $1.75, an increase of eight per cent per year                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|      |  |   Funds generated from operations have grown from approximately $1.0 billion to approximately $2.0 billion, an increase of 11 per cent per year                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|      |  |   Total shareholder return has averaged 25 per cent per year                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|      |  | For a company the size of TransCanada, it takes substantial investment to deliver measurable growth in earnings. Since 1999, we've invested more than $8.5 billion in our core businesses. Notably, we could have invested more. However, we are
determined to stay within our strategic parameters and to evaluate opportunities rigorously. We pursue only those acquisitions and development projects that make sense for TransCanada, that deliver benefits to our shareholders and other stakeholders,
and that offer potential for future growth.                                                                                                                                                                         
|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

LETTER TO SHAREHOLDERS3

---



| |  | Growing our Pipeline Business                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Strategic acquisitions and expansionsIn our natural gas transmission business, we are focused on growing our system to offer our customers unparalleled connections from
traditional and emerging supply basins to key North American markets. No other company shares TransCanada's market reach. We continue to extend our presence through acquisitions including the Gas Transmisssion Northwest System and North Baja System
in the western United States that deliver natural gas into the California and Mexico markets and over time, will connect us to new and proposed liquefied natural gas (LNG) terminals on the west coast of Mexico.                                                                                                                                                                                                         
| |  | We've also increased our ownership interests in strategically significant pipeline systems such as Foothills, which forms the "pre-build" portion of the proposed Alaska Highway Pipeline Project, Iroquois Gas Transmission which serves the high-demand
market of New York City, and Portland Natural Gas Transmission, which delivers natural gas to growing markets in New England. In February 2006, through TC PipeLines, LP, we entered into agreements which increase our interest in
Northern Border Pipeline, the largest natural gas pipeline serving the U.S. Midwest. In early 2007, TransCanada will become the operator of this pipeline that annually transports more than 20 per cent of the natural gas exported from
Canada to the U.S. and is positioned to play a significant role in delivering northern natural gas to market.        
| |  | Northern developmentWe remain active in the advancement of the Mackenzie Gas and Alaska Highway pipeline projects to bring much-needed northern natural gas to market. We were
pleased to see the Mackenzie Gas Pipeline Project move to hearings before the National Energy Board in January 2006 and to participate in the hearings of the Joint Review Panel the following month. With respect to Alaska, we remain encouraged by
the process that has unfolded between the Alaska North Slope Producers and the State of Alaska during recent months, and await its substantive conclusion. TransCanada, as the holder of the Canadian rights under the Northern Pipeline Act (NPA), is
ready to work with North Slope producers to complete the Canadian section of an Alaska Highway pipeline and assist where possible with the project within Alaska.
| |  | MexicoFurther south, we've set our sights on opportunities in Mexico. In 2005, we began construction on the 125 kilometre Tamazunchale Pipeline in Mexico. We view Mexico as
an integral component of the broader North American natural gas market, and anticipate future growth through the development of new natural gas pipelines and LNG terminals.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |  | Growing Power                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  | Exponential growthIn Power, since 1999, we've grown our portfolio of generating capacity by approximately thirteen times to more than 6,700 megawatts (MW) at the start
of 2006. In doing so, we've built a diversified portfolio of low-cost, base-load power generation in selected markets where we enjoy competitive advantage. Notable investments over the past six years include our interest in Bruce Power, one of
Ontario's largest independent power generators. In 2005, Bruce Power initiated a restart and refurbishment program for the Bruce A units, which will bring Bruce Power's total generating capacity to 6,200 MW. TransCanada will invest approximately
$2.125 billion in the restart program through 2011.                                                                                                                        
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

4LETTER TO
SHAREHOLDERS

---



| |  | Value-creating acquisitionsIn April 2005, we acquired hydroelectric generation assets in New England with 567 MW of capacity. These are low-cost, base-load
facilities that fit well with our existing operations in the Northeastern U.S. The acquisition was immediately accretive to earnings and cash flow.                                                                                                                                                                                                                                                                                                                                           
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | In December 2005, TransCanada acquired the remaining rights and obligations of the 756 MW Sheerness Power Purchase Arrangement (PPA). This acquisition adds to the Sundance A and B PPAs we acquired in 2001 and 2002, respectively, providing
the company with additional low-cost, base-load power and further expanding and diversifying our power business in Alberta.                                                                                                                                                                                                                                                                                
| |  | Partner of choiceWe've continued to build our profile as a partner of choice in the development of efficient and environmentally responsible cogeneration plants. Since 1999,
we've built six cogeneration plants, including the 90 MW Grandview plant in New Brunswick, which was commissioned in January 2005. Over the course of the year, TransCanada continued construction of the 550 MW Bécancour
plant  our largest cogeneration plant to date  and we're on track to bring the plant into commercial service in late 2006.                                                                                                                     
| |  | Wind energyWith wind power becoming increasingly viable from an economic and technological standpoint, TransCanada is positioned to become one of North America's largest
providers of wind energy through our 62 per cent interest in Cartier Wind Energy Inc. Cartier Wind was awarded six projects by Hydro-Québec Distribution representing a total of 739.5 MW. Construction is scheduled to begin
in early 2006. The first wind farm is anticipated to be operational beginning in late 2006 with the remaining projects continuing through 2012.                                                                                                   
| |  | New Opportunities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  | Oil transmissionTransCanada is in the business of connecting energy supplies to markets. During the past year, we've made significant progress on the Keystone crude oil pipeline
project  a US$2.1 billion, 2,960 kilometre pipeline that combines new build in the U.S., Alberta and Manitoba with the conversion of a portion of TransCanada's existing pipeline facilities from natural gas to crude oil
transmission in Canada. The pipeline would initially be capable of shipping 435,000 barrels per day of crude oil from Alberta to markets in the U.S. Midwest and could be expanded to 590,000 barrels per day with additional
pump stations.
| |  | TransCanada has secured firm, long-term shipping commitments on the proposed Keystone pipeline totalling approximately 340,000 barrels per day, with a duration averaging 18 years. This commercial support, including a significant commitment
from ConocoPhillips Company, confirms that our project is an innovative and cost-competitive way to link rising oil sands production to preferred markets in the U.S. Midwest.                                                                                                                                                                                                                            
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

LETTER TO SHAREHOLDERS5

---



| |  | Natural Gas StorageIn 2005, we initiated construction of our Edson natural gas storage facility in Alberta and anticipate beginning to offer storage capacity on a phased-in basis
in mid-2006. With capacity of 60 petajoules, the Edson facility, combined with storage capacity that we own through CrossAlta Gas Storage & Services and lease of storage capacity through a third party, will position TransCanada to
become one of the largest natural gas storage providers in Western Canada. We believe Alberta-based natural gas storage will continue to serve market needs and will play an important role in the connection of northern natural gas to
North American markets. We see natural gas storage as a natural extension to our gas transmission business.                                                                                                                                                                                       
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | LNGWe continue to pursue the construction and operation of LNG terminals in Québec and New York.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |  | In February 2006, Québec's Ministry of Environment notified TransCanada it will begin its public consultation period allowing the next phase for the proposed Cacouna Energy LNG terminal to begin. In September 2005, residents from the
village of Cacouna, Québec gave the Cacouna Energy project a vote of confidence in a town referendum with approximately 57 per cent of voters supporting the proposed development of an LNG facility near the town, which is located near
Rivière-du-Loup. The Cacouna Energy project, a partnership between TransCanada and Petro-Canada, would be capable of receiving, storing, and regasifying imported LNG with an average send-out capacity of approximately 500 million
cubic feet per day of natural gas.                                                                                                                                                                                                          
| |  | In January 2006, Broadwater Energy filed its formal application with the U.S. Federal Energy Regulatory Commission for approval to construct and operate the Broadwater LNG project in Long Island Sound. Broadwater plans to begin operation in
late 2010 supplying one billion cubic feet of natural gas per day, an amount equal to the needs of four million New York and Connecticut residences. Broadwater is being developed jointly by TransCanada and Shell US Gas &
Power LLC, the world's leading LNG player.                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  | Future opportunitiesThe need for new natural gas and power infrastructure is becoming critical in many parts of North America. Existing systems have delivered more
and more natural gas and power to growing markets over many years, and many of those systems have now reached their limits. Deregulation has made it more difficult to undertake large and complex infrastructure projects, while complex regulatory
processes have delayed the construction of new and essential infrastructure. North America is facing an "infrastructure deficit" that must be addressed in the near to medium term.                                                                                                                                                                                                                                                                                                                                                         
| |  | North America's infrastructure challenge creates significant opportunities for companies like TransCanada. With more than 50 years experience in the planning, construction and operation of large-scale infrastructure, TransCanada plays a vital
role in the North American energy market. As new sources of supply are developed  from northern gas, LNG and oil sands to power generated by wind, nuclear, clean coal and natural gas  the growth initiatives we've
embarked on over the last six years position TransCanada to play a key role in connecting new supplies with ever-growing demand in our preferred North American markets.                                                                                                                                                                                                                                                                                                                   
| |  | The development of future opportunities is a strategic priority at TransCanada. Over the past six years we have studied the energy markets of North America from an infrastructure perspective. We have identified market regions that will need new
infrastructure, and we have identified sources of natural gas and electricity that could meet the demands of growing market regions. We have acquired key assets upon which we can build, such as the Gas Transmission Northwest System, Bruce Power and
the Foothills System. We have developed new projects that are now under construction, including Bécancour, Cartier Wind, Edson gas storage, the Tamazunchale Pipeline and the Bruce A restart. We have created new projects that are moving towards
construction, including Keystone, North Baja and our two LNG projects at Cacouna and Broadwater. At all times we have focused on our core regions and relied on our genuine competitive advantages.
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

6LETTER TO
SHAREHOLDERS

---



| |  | The cycle of opportunity generation, business development and project implementation is essential to the long-term future of our company. We will continue to analyze, develop and expand our portfolio of attractive capital projects, to ensure that
TransCanada is well positioned to create significant shareholder value for many years to come.                                                                                                                                                                                              
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Pipe, power and peopleWe would not have this wonderful growth story to tell without the hard work and dedication of TransCanada's people. The TransCanada team is
highly competent, energized, motivated and committed to the objectives and priorities of the company. Our success over the past six years is testament to their efforts.                                                                                                                                                                                                         
| |  | In ClosingI wish to acknowledge the exceptional contributions of Doug Baldwin who will retire from TransCanada's Board of Directors in April 2006.                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | Mr. Baldwin stepped forward to serve as TransCanada's Chief Executive Officer from August 1999 to April 2001. Under Doug's leadership, the new TransCanada emerged  a strong, Calgary-based enterprise engaged in natural
gas transmission and power generation with a strong focus on blue-chip opportunities in Canada and the northern United States. TransCanada has evolved and we have broadened our focus over the five years since Doug retired as CEO, but we have not
strayed from the key strategies that were developed in his tenure.
| |  | On behalf of TransCanada's employees, I express our sincere thanks to Doug Baldwin for his astute leadership, extraordinary common sense and unwavering commitment to the long-term success of our company. Doug, we wish you the very best.                                                                                                                                                                                                                                                                                                       
| |  | SIG                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  | Hal KvislePresident and Chief Executive Officer                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

LETTER TO SHAREHOLDERS7

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TABLE OF CONTENTS

|                                               
|-----------------------------------------------
|CONSOLIDATED FINANCIAL REVIEW                  
|                                               
|                                               
|                                               
|FORWARD-LOOKING INFORMATION                    
|OVERVIEW AND STRATEGIC PRIORITIES              
|                                               
|                                               
|                                               
|                                               
|                                               
|                                               
|                                               
|                                               
|                                               
|GAS TRANSMISSION                               
|                                               
|                                               
|                                               
|                                               
|                                               
|                                               
|                                               
|                                               
|                                               
|POWER                                          
|                                               
|                                               
|                                               
|                                               
|                                               
|                                               
|                                               
|                                               
|CORPORATE                                      
|LIQUIDITY AND CAPITAL RESOURCES                
|CONTRACTUAL OBLIGATIONS                        
|FINANCIAL AND OTHER INSTRUMENTS                
|RISK MANAGEMENT                                
|CRITICAL ACCOUNTING POLICY                     
|CRITICAL ACCOUNTING ESTIMATE                   
|ACCOUNTING CHANGES                             
|DISCONTINUED OPERATIONS                        
|SUBSIDIARIES AND INVESTMENTS                   
|SELECTED THREE YEAR CONSOLIDATED FINANCIAL DATA
|SELECTED QUARTERLY CONSOLIDATED FINANCIAL DATA 
|FOURTH QUARTER 2005 HIGHLIGHTS                 
|SHARE INFORMATION                              
|OTHER INFORMATION                              
|GLOSSARY OF TERMS                              

8MANAGEMENT'S
DISCUSSION AND ANALYSIS

---



The Management's Discussion and Analysis (MD&A) dated February 27, 2006 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, 2005. Amounts are stated in Canadian dollars unless otherwise indicated.

---

CONSOLIDATED FINANCIAL REVIEW

HIGHLIGHTS

---

Net Income



Net Earnings



Investing Activities



Balance Sheet



Dividend



---

CONSOLIDATED RESULTS-AT-A-GLANCEYear ended December 31 (millions of dollars except per share amounts)

|                             |  | 2005  |  | 2004  |  | 2003 
|---------------------------- |  | ----- |  | ----- |  | -----
|                            
|Net Income                   |  |       |  |       |  |      
|Continuing operations        |  | 1,209 |  | 980   |  | 801  
|Discontinued operations      |  |      |  | 52    |  | 50   
|                            
|                             |  | 1,209 |  | 1,032 |  | 851  
|                            
|                            
|Net Income Per Share  Basic |  |       |  |       |  |      
|Continuing operations        |  | $2.49 |  | $2.02 |  | $1.66
|Discontinued operations      |  |      |  | 0.11  |  | 0.10 
|                            
|                             |  | $2.49 |  | $2.13 |  | $1.76
|                            
|                            

MANAGEMENT'S DISCUSSION AND
ANALYSIS9

---





---

SEGMENT RESULTS-AT-A-GLANCEYear ended December 31 (millions of dollars except per share amounts)

|                              |                                    | 2005  |       | 2004  |       | 2003 |      
|----------------------------- | ---------------------------------- | ----- | ----- | ----- | ----- | ---- | -----
|                              |                                   
|Gas Transmission Net Earnings |                                    |       |       |       |       |      |      
|                              | Excluding gains                    |       | 635   |       | 579   |      | 622  
|                              | Gain on sale of PipeLines LP units |       | 49    |       |      |      |     
|                              | Gain on sale of Millennium         |       |      |       | 7     |      |     
|                              |                                   
|                              |                                    | 684   |       | 586   |       | 622  |      
|                              |                                   
|Power Net Earnings            |                                    |       |       |       |       |      |      
|                              | Excluding gains                    |       | 253   |       | 209   |      | 220  
|                              | Gain on sale of Paiton Energy      |       | 115   |       |      |      |     
|                              | Gains related to Power LP          |       | 193   |       | 187   |      |     
|                              |                                   
|                              |                                    | 561   |       | 396   |       | 220  |      
|                              |                                   
|Corporate                     |                                    | (36   | )     | (2    | )     | (41  | )    
|                              |                                   
|Net Income                    |                                    |       |       |       |       |      |      
|                              | Continuing Operations(1)           |       | 1,209 |       | 980   |      | 801  
|                              | Discontinued Operations            |       |      |       | 52    |      | 50   
|                              |                                   
|                              |                                    | 1,209 |       | 1,032 |       | 851  |      
|                              |                                   
|                              |                                   
|Net Income Per Share  Basic  |                                    |       |       |       |       |      |      
|                              | Continuing Operations(2)           |       | $2.49 |       | $2.02 |      | $1.66
|                              | Discontinued Operations            |       |      |       | 0.11  |      | 0.10 
|                              |                                   
|                              |                                    |       | $2.49 |       | $2.13 |      | $1.76
|                              |                                   
|                              |                                   

| | (1)Net Income from Continuing Operations:           |                                                                       |  |       |  |       | 
| | --------------------------------------------------- | --------------------------------------------------------------------- |  | ----- |  | ----- | 
| |                                                     | Excluding gains                                                       |  | 852   |  | 786   | 
| |                                                     | Gains related to Paiton Energy, PipeLines LP, Power LP and Millennium |  | 357   |  | 194   | 
|
| |                                                     | 1,209                                                                 |  | 980   |  | 801  
|
|
| | (2)Net Income Per Share from Continuing Operations: |                                                                       |  |       |  |       | 
| |                                                     | Excluding gains                                                       |  | $1.75 |  | $1.62 | 
| |                                                     | Gains related to Paiton Energy, PipeLines LP, Power LP and Millennium |  | 0.74  |  | 0.40  | 
|
| |                                                     | $2.49                                                                 |  | $2.02 |  | $1.66
|
|

Net income for the year ended December 31, 2005 was $1,209 million or $2.49 per share compared to $1,032 million or $2.13 per
share for 2004 and $851 million or $1.76 per share for 2003. This includes net income from discontinued operations of $52 million or $0.11 per share in 2004 and $50 million or
$0.10 per share in 2003, reflecting income recognized on the initially deferred gains relating to the disposition in 2001 of the company's Gas Marketing business.

TransCanada's
net earnings for the year ended December 31, 2005 were $1,209 million or $2.49 per share compared to $980 million or $2.02 per share and
$801 million or $1.66 per share in 2004 and 2003, respectively. Net earnings for 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) and $49 million on the sale of TC
PipeLines, LP (PipeLines LP) units, while net earnings for 2004 included after-tax gains of $187 million on the sale of the ManChief and Curtis Palmer assets to
Power LP and the recognition of dilution gains

10MANAGEMENT'S
DISCUSSION AND ANALYSIS

---



resulting
from a reduction in TransCanada's ownership interest in Power LP and other previously deferred gains, as well as a $7 million after-tax gain on sale of the
company's equity interest in the Millennium Pipeline Project (Millennium).

Excluding
the total gains of $357 million recorded in 2005 and total gains of $194 million recorded in 2004, net earnings for 2005 of $852 million or $1.75 per share
increased $66 million or $0.13 per share compared to 2004. This was mainly due to an increase in net earnings from the Gas Transmission and Power businesses, partially offset by an increase in
net expenses in Corporate.

Excluding
the gains on sale of PipeLines LP units in 2005 and the Millennium interest in 2004, the $56 million increase in net earnings from the Gas Transmission business
for 2005 compared to 2004 was primarily attributable to a $57 million increase as a result of a full year of net earnings from the Gas Transmission Northwest System and the North Baja System
(collectively GTN), acquired on November 1, 2004. In addition, Gas Transmission's net earnings for 2005 included approximately $35 million ($13 million related to 2004 and
$22 million related to 2005) as a result of the April 2005 National Energy Board (NEB) decision on the Canadian Mainline's 2004 Tolls and Tariff Application (Phase II). This
decision dealt with capital structure and included an increase in the deemed common equity ratio to 36 per cent from 33 per cent for 2004, which was also effective for 2005
under the 2005 tolls settlement. The increase in Canadian Mainline's net earnings for 2005 as a result of this NEB decision was partially offset by a combination of a lower average investment base,
lower earnings related to operating cost savings and a decrease in the approved rate of return on common equity (ROE) in 2005 compared to 2004. These increases in net earnings were partially offset by
lower net earnings from TransCanada's Other Gas Transmission businesses.

Excluding
the gains related to the company's investments in Power LP in 2004 and 2005 and Paiton Energy in 2005, Power's net earnings for 2005 increased $44 million
compared to 2004 as a result of higher operating and other income from Bruce Power (being the collective investments in Bruce Power A L.P. (Bruce A) and Bruce Power L.P. (Bruce
B)) and Eastern Operations, partially offset by a lower contribution from Western Operations and higher general, administrative, support costs and other.

The
increase in net expenses of $34 million in Corporate in 2005 compared to 2004 was primarily due to increased net interest expense on higher average long-term debt
and commercial paper balances in 2005 as well as the release in 2004 of previously established restructuring provisions.

The
increase in net earnings of $179 million or $0.36 per share in 2004 compared to 2003 included $187 million of gains related to Power LP and a $7 million
gain on sale of Millennium. Excluding these gains, 2004 net earnings decreased $15 million from 2003. Lower net earnings in the Gas Transmission and Power businesses were partially offset by
reduced net expenses in Corporate. The decrease in net earnings, excluding gains, of $43 million in the Gas Transmission business in 2004 compared to 2003 was primarily due to a decline in the
Alberta System's and Canadian Mainline's net earnings. The $11 million decrease in Power's net earnings, excluding gains, in 2004 compared to 2003 was primarily due to a $19 million
after-tax settlement with a counterparty in 2003. The decrease in net expenses of $39 million in Corporate in 2004 compared to 2003 was primarily due to the positive impacts of
income tax, foreign exchange related items and release of the restructuring provisions in 2004.

FORWARD-LOOKING INFORMATION

Certain information in this MD&A includes forward-looking statements. All forward-looking statements are based on TransCanada's
beliefs and assumptions based on information available at the time the assumptions were made. Forward-looking statements relate to, among other things, anticipated financial performance,
business prospects, strategies, regulatory developments, new services, market forces, commitments and technological developments. By its nature, such forward-looking information is subject
to various risks and uncertainties, including those material risks discussed in this MD&A under "Gas Transmission  Business Risks" and
"Power  Business Risks", which could cause TransCanada's actual results and experience to differ materially from the anticipated results or other expectations
expressed. The material assumptions in making these forward-looking statements are disclosed in this MD&A under the headings "Overview and Strategic Priorities", "Gas
Transmission  Opportunities and Developments", "Gas Transmission 

MANAGEMENT'S DISCUSSION AND
ANALYSIS11

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Outlook", "Power  Opportunities and Developments" and "Power  Outlook". 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 MD&A or otherwise, and TransCanada undertakes no obligation to update publicly or revise any
forward-looking information, whether as a result of new information, future events or otherwise.

TRANSCANADA OVERVIEW

TransCanada is a leading North American energy infrastructure company with a strong focus on natural gas transmission and power generation opportunities located in regions in
which it has significant competitive advantages. Natural gas transmission and power are complementary businesses for TransCanada. They are driven by similar supply and demand fundamentals, they are
both capital intensive businesses, and they use similar technology and operating practices. They are also businesses with significant long-term growth prospects.

North
American natural gas demand is growing and is mainly driven by the demand for electricity. Experts predict that demand for electricity will increase at an average annual rate of
approximately two per cent over the next ten years
primarily due to a growing population and an increase in gross domestic product. A large part of this growth is expected to be met through higher utilization of natural gas-fired power
generating plants that were built as part of the significant capacity additions that occurred in many North American markets over the last five years.

Nuclear
facilities have played, and will continue to play, a significant role in supplying North America with power and new nuclear capacity is expected to come on stream over time.
Coal-fired plants remain the largest source of electric power in North America and coal reserves are significant. However, the long lead times required to complete new coal and nuclear
projects, the associated environmental and socio-economic issues, the high capital costs and the difficulty in locating these plants near load centres may impede the development and completion of new
coal or nuclear generation 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 its growing electricity
needs in the near term. This is expected to lead to a significant increase in natural gas consumption. Natural gas demand in North America, including Mexico, is expected to grow to approximately
92 billion cubic feet per day (Bcf/d) by 2015, an increase of 16 Bcf/d when compared to 2005. New natural gas-fired power generation is expected to account for
approximately 10 Bcf/d of that growth.

While
growing demand will provide a number of opportunities, the natural gas industry also faces a number of challenges. 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. Current high natural gas prices suggest that North America is in a period of transition and significant change.
Natural gas supply is tight and this is likely to continue until major investments are made in the infrastructure required to bring new supply to market. Looking forward, production from North
America's traditional basins is expected to essentially remain flat over the next decade. An increase in production in the United States Rockies will likely only offset declines in other
basins, including the Gulf of Mexico. This outlook for traditional basins means that northern gas and offshore liquefied natural gas (LNG) will be required to fill the expected shortfall between
supply and demand. TransCanada is well positioned in North America to serve growing power demand in the near term and to bring new natural gas supplies to market in the medium to longer term.

TRANSCANADA'S STRATEGY

TransCanada's strong position is the direct result of successfully executing its corporate strategy which was first adopted in 2000. While the plan has evolved over time in
response to actual and anticipated changes in the business environment, it fundamentally remains the same. Today, TransCanada's corporate strategy consists of the following five components:



12MANAGEMENT'S
DISCUSSION AND ANALYSIS

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Gas Transmission

Strategy

The company's strategy in Gas Transmission is focused on growing its North American business while maximizing the long-term value of its existing natural gas
transmission assets. In order to grow the Gas Transmission business, TransCanada is focusing its efforts on expanding and extending its existing systems to connect new supply to growing markets,
increasing its ownership in partially-owned entities, acquiring or constructing pipelines that provide it with a significant regional presence, expanding into crude oil transmission and in the long
term, connecting new sources of supply in the form of northern natural gas and LNG.

Over
the past 50 years, TransCanada has developed significant expertise in large-diameter, cold-climate natural gas pipeline design, construction, operation and
maintenance. It has also developed significant expertise in the design, optimization and operation of large gas turbine compressor stations. Today, TransCanada operates one of the largest, most
sophisticated, remote-controlled pipeline networks in the world with a solid reputation for safety and reliability. TransCanada also has strong project development and management skills and is
committed to the highest levels of operational excellence. The company's strong financial position allows it to build large-scale infrastructure and act quickly on quality opportunities as they arise.

In
addition to growing the North American Gas Transmission business, the company continues to place a strategic priority on maximizing the long-term value of its wholly-owned
pipelines. Efforts in this area are focused
on achieving a fair return on invested capital, developing highly competitive tariff structures, and streamlining and harmonizing processes and tariff provisions for and among TransCanada's regulated
pipelines. Further, the company continues to work collaboratively with its customers to develop and implement new services that deliver value to customers while sustaining TransCanada's Gas
Transmission business.

Existing Pipelines

TransCanada's natural gas transmission assets link the Western Canada Sedimentary Basin (WCSB) with premium North American markets. With more than 41,000 kilometres (km)
of pipeline, the company's wholly-owned gas transmission network is one of the largest in North America.

In
2005, the wholly-owned Alberta System gathered 66 per cent of the natural gas produced in Western Canada, equal to 17 per cent of total North American
production. TransCanada exports gas from the WCSB to Eastern Canada as well as the U.S. West, Midwest and Northeast through four wholly-owned pipeline systems:



TransCanada
also exports gas from the WCSB to Eastern Canada as well as the U.S. West, Midwest and Northeast through six pipeline systems in which TransCanada holds the following
ownership interests:



MANAGEMENT'S DISCUSSION AND
ANALYSIS13

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Northern Development

In 2005, TransCanada continued to pursue pipeline opportunities to move both Mackenzie Delta and Alaska North Slope natural gas to markets throughout North America. If the
Mackenzie Gas Pipeline Project and the Alaska Highway Pipeline Project are constructed and connected to TransCanada's existing infrastructure, they will represent additional growth opportunities for
TransCanada and enhance the long-term viability and value of the company's existing Gas Transmission business, especially the wholly-owned pipelines.

Mexico

In June 2005, TransCanada was awarded a contract to construct, own and operate a natural gas pipeline in east-central Mexico. The 36 inch,
125 km Tamazunchale Pipeline will extend from the facilities of Pemex Gas near Naranjos, Veracruz and transport natural gas to an electricity generation station near Tamazunchale, San Luis
Potosi. TransCanada expects to invest approximately US$181 million in the project with a planned in-service date of December 1, 2006. The pipeline will be designed to
transport initial volumes of
170 million cubic feet per day (mmcf/d). Under the contract, the capacity of the Tamazunchale Pipeline is expected to be expanded beginning in 2009 to approximately 430 mmcf/d to
meet the needs of two additional proposed power plants near Tamazunchale. TransCanada continues to explore other pipeline and energy infrastructure opportunities in Mexico.

LNG

TransCanada continues to work toward gaining regulatory approval for its two LNG projects: Cacouna in Québec, a joint venture with Petro-Canada; and the
Broadwater Energy project (Broadwater), offshore of New York State in Long Island Sound, a joint venture with Shell US Gas & Power LLC (Shell). TransCanada, on behalf of
Broadwater, filed a formal application with the U.S. Federal Energy Regulatory Commission (FERC) on January 30, 2006 for federal approval to construct and operate Broadwater.

Natural Gas Storage

The company's initiatives in the natural gas storage business are a logical extension of its Gas Transmission business. TransCanada believes Alberta-based natural gas storage
will continue to serve market needs and could play an important role should northern gas be connected to North American markets. In the first quarter of 2005, TransCanada started development of a
natural gas storage facility near Edson, Alberta. The Edson facility is expected to have a capacity of approximately 60 petajoules (PJ) and will connect to TransCanada's Alberta System. In
addition, in 2004, the company secured a long-term contract with a third party for existing Alberta-based natural gas storage capacity, increasing from 20 PJ in 2005 to 30 PJ
in 2006 and to 40 PJ in 2007. These initiatives, combined with the company's current 60 per cent ownership interest in CrossAlta Gas Storage & Services Ltd.
(CrossAlta), position TransCanada to become one of the largest natural gas storage providers in Western Canada. With more than 130 PJ of storage capacity by 2007, TransCanada will own or lease
approximately one-third of the natural gas storage capacity available in Alberta.

Oil Transmission

In November 2005, TransCanada, ConocoPhillips Company and ConocoPhillips Pipe Line Company (CPPL), a wholly-owned subsidiary of ConocoPhillips Company, signed a
Memorandum of Understanding (MOU) which commits ConocoPhillips Company to ship crude oil on the proposed Keystone oil pipeline (Keystone pipeline), and gives CPPL the right to acquire up to a
50 per cent participating interest in the pipeline. On January 31, 2006, TransCanada announced that through the binding Open Season held in fourth quarter 2005 it had secured
firm, long-term contracts totalling 340,000 barrels per day of crude oil with an average term of 18 years. The Keystone pipeline, expected to cost approximately
US$2.1 billion, will have an initial capacity to transport approximately 435,000 barrels per day of crude oil from Hardisty, Alberta to Patoka, Illinois through a 2,960 km
pipeline system.

Regulatory

In 2005, TransCanada's principal regulatory activities and events included:



14MANAGEMENT'S
DISCUSSION AND ANALYSIS

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Power

TransCanada has built a substantial power business over the past decade. The power plants and power supply that TransCanada owns, operates and/or controls, including projects
under construction, represent approximately 6,700 megawatts (MW) of power generation capacity in Canada and the U.S. The company's power assets are concentrated in two main
regions  the western business focused in Alberta and the eastern business focused in the Northeastern U.S. and Eastern Canada markets.

Strategy

TransCanada's strategy for growth and value creation in Power is driven by four principles:



TransCanada's
ability to successfully execute its strategy is directly related to the following core competencies in the power business:



In
2005, TransCanada continued to add to its diverse portfolio of quality power generation assets.

Bécancour and Cartier Wind

Throughout 2005, TransCanada continued to advance the Bécancour and Cartier Wind Energy (Cartier Wind) power projects. Construction of the 550 MW
Bécancour cogeneration plant near Trois Rivières, Québec, remains on schedule to begin operations in September 2006. The 739.5 MW Cartier
Wind project, 62 per cent owned by TransCanada, awarded construction contracts in late 2005, and is expected to commence construction in early 2006. Located in the

MANAGEMENT'S DISCUSSION AND
ANALYSIS15

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Gaspésie
region of Québec, the first of the six projects that comprise Cartier Wind is anticipated to be commissioned beginning in late 2006 with the remaining projects
being commissioned through to 2012. The entire power output from both Bécancour and Cartier Wind will be supplied to Hydro-Québec Distribution
(Hydro-Québec) under 20 year power purchase contracts.

TC Hydro

In April 2005, TransCanada acquired from USGen New England, Inc. (USGen), hydroelectric generation assets (TC Hydro) with total generating capacity
of 567 MW, for approximately US$503 million. These are low operating cost power generation assets serving the New England market.

Bruce Power

In October 2005, Bruce Power and the Ontario Power Authority (OPA), entered into a long-term agreement whereby Bruce A will restart and refurbish 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. The capital
program for the restart and refurbishment work is expected to total approximately $4.25 billion and TransCanada's approximate $2.125 billion share will be financed through capital
contributions to 2011. Work to refurbish Units 1 and 2 was initiated in 2005 and the first unit is expected to be on-line in 2009. Restarting Units 1 and 2 will add
approximately 1,500 MW to Bruce Power's existing generation capacity of 4,700 MW. All of the Bruce A output will be sold to the OPA under fixed price contract terms.

As
a result of the agreement between Bruce Power and the OPA, and the decision by Cameco Corporation (Cameco) not to participate in the restart and refurbishment program, a new
partnership, Bruce A, was created. The Bruce A partnership subleases the Bruce A facilities, comprised of Units 1 to 4, from Bruce B. The effect of these transactions was that TransCanada and BPC
Generation Infrastructure Trust (BPC) each incurred a net cash outlay of $100 million and as at December 31, 2005 each owned a 47.9 per cent interest in Bruce A.

Sheerness PPA

In December 2005, TransCanada acquired the remaining rights and obligations under the 756 MW Sheerness Power Purchase Arrangement (PPA) from the Alberta Balancing
Pool for $585 million. The remaining term of the PPA is 15 years. The Sheerness power plant, which consists of two low-cost coal-fired thermal power generating
units, is located approximately 230 km northeast of Calgary, Alberta.

Grandview

Construction of the 90 MW Grandview natural gas-fired cogeneration power plant located in Saint John, New Brunswick, was completed at the end of 2004.
It was commissioned in January 2005. Under a 20 year tolling arrangement, 100 per cent of the plant's heat and electricity output is sold to Irving Oil (Irving).

TransCanada
expects its Power business to continue to be a key growth driver. The company is committed to growing the Power business through asset acquisitions, selected greenfield
developments and further expansions of its existing business. TransCanada's goal is to build and establish a diverse portfolio of high quality assets that deliver strong returns to shareholders.

OPERATIONAL EXCELLENCE AND "SPIRIT"

In addition to growing its Gas Transmission and Power businesses, TransCanada is committed to an operational excellence business model. The company's focus is on being a
low-cost, reliable and safe operator that provides responsive services to its customers in an effective and timely manner.

The
company's values guide the way business is conducted at TransCanada. Within TransCanada, these values are commonly referred to as "SPIRIT". They are the principles that direct how
the company works and they include: Social responsibility, Passion, Integrity, Results, Innovation and Teamwork. The company's commitment to these values helps ensure it maintains its reputation as
one of North America's premier energy infrastructure companies.

16MANAGEMENT'S
DISCUSSION AND ANALYSIS

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COMPETITIVE STRENGTH AND ENDURING VALUE

TransCanada's strategy also focuses on developing and enhancing those strengths that are at the core of its corporate success:



These
initiatives bring competitive advantage and facilitate the effective delivery of results for the company's Gas Transmission and Power businesses.

TransCanada
has approximately 2,350 employees who through their talent, integrity, hard work and results provide the company with a strong competitive advantage driven by
industry-leading expertise in pipeline and power operations, depth of market and industry knowledge, financial acumen and exceptional infrastructure project capabilities.

OUTLOOK

TransCanada's corporate strategy is underpinned by a long-term focus on growing its Gas Transmission and Power businesses in a disciplined and measured manner. This
strategy was initiated in 2000 and has been consistently followed. In 2006 and beyond, the company's net earnings and cash flow, combined with a strong balance sheet, are expected to continue to
provide the financial flexibility for TransCanada to capture further opportunities and create additional long-term value for shareholders.

In
Gas Transmission, the company will continue to focus its efforts on maximizing the long-term value from its pipeline and natural gas storage assets, including efforts to
connect new long-term supply to growing markets. This focus will take a variety of forms in 2006 including:



MANAGEMENT'S DISCUSSION AND
ANALYSIS17

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In
addition, Gas Transmission will continue to grow its natural gas storage business in 2006 through completion of the Edson facility, an expanded CrossAlta facility and increased
capacity under a long-term contract with a third party. TransCanada will also seek to continue to capitalize on opportunities to increase its ownership in its partially-owned pipelines and
acquire interests in new pipelines in markets where TransCanada has a significant regional presence.

In
Power, TransCanada has had significant success in growing this segment and, in 2006, will continue to focus its efforts on further growth. As in 2005 and prior years, this growth is
expected to come from a combination of greenfield developments, new acquisitions and organic growth within its existing assets and markets. In particular, in 2006, TransCanada is expected to:



The
following discussion reflects management's expectations for 2006, as discussed throughout this MD&A. A number of risk factors and developments may positively or negatively affect the
actual results for 2006, including new acquisitions, advancement of greenfield developments, regulatory decisions and settlements, customer bankruptcies, market changes in commodity prices, weather
and interest rates as well as unplanned outages on various Gas Transmission and Power assets. The performance of the Canadian dollar relative to the U.S. dollar would either positively or
negatively impact TransCanada's net earnings, although this impact is mitigated by partially offsetting exposures in certain of the company's businesses as well as through the company's hedging
activities.

In
2006, TransCanada expects reduced net earnings from the Gas Transmission business compared to 2005 (excluding the gain on sale of PipeLines LP units in 2005). The combined
effects of an expected net decline in the rate base of each of the Canadian Mainline and Alberta System and the decline in each of their respective allowed ROEs are expected to decrease net earnings
on these systems compared to 2005. In addition, reduced firm contract volumes on the Gas Transmission Northwest System, partially due to the effects of customer bankruptcies, are expected to have a
slightly negative impact on the Gas Transmission Northwest System results compared to 2005, although it is uncertain what impact the 2006 rate case filing may have on the system's results. Lastly,
anticipated lower firm service revenues on certain partially-owned pipelines and a full year of reduced ownership of PipeLines LP are expected to be only partially
offset by the effects of a higher allowed deemed common equity component on the Foothills System and the BC System and the expected growth in natural gas storage net earnings.

In
the Power business, 2006 net earnings are expected to be higher than in 2005 (excluding the gains on sales related to Power LP and Paiton Energy in 2005) due to higher Bruce
Power results reflecting an increased ownership in Bruce A and fewer planned outages, increased contributions from Western Operations reflecting the acquisition of the Sheerness PPA, slightly
improved Eastern Operations' results reflecting a full year of TC Hydro operations as well as initial contributions from Bécancour and Cartier Wind expected in late 2006. Offsetting
these improved results is the loss of income due to the sale of Power LP in 2005.

In
2006, Corporate is expected to incur higher net expenses compared to 2005 primarily due to the income tax refunds and positive income tax adjustments recorded in 2005 that are not
currently expected to recur in 2006. In addition, Corporate's results in 2006 could be impacted by debt levels, interest rates, foreign exchange movements and income tax refunds and adjustments.

18MANAGEMENT'S
DISCUSSION AND ANALYSIS

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GAS TRANSMISSION

HIGHLIGHTS

Net Earnings



Canadian Mainline



Alberta System



GTN



Foothills System and BC System



Other Gas Transmission



MANAGEMENT'S DISCUSSION AND
ANALYSIS19

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GRAPHIC

CANADIAN MAINLINETransCanada's 100 per cent owned, 14,898 km natural gas transmission system in Canada 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 SYSTEMTransCanada's 100 per cent owned natural gas transmission system in Alberta gathers natural gas for use within
the province and delivers it to provincial boundary points for connection with the Canadian Mainline, BC System, the Foothills System and other pipelines. The 23,339 km system is one of the
largest carriers of natural gas in North America.

GAS TRANSMISSION NORTHWEST SYSTEMTransCanada's 100 per cent owned, 2,174 km natural gas transmission system links the
BC System and the Foothills System with Pacific Gas and Electric Company's California Gas Transmission System, with the Northwest Pipeline and with Tuscarora, a partially-owned entity that runs from
the Oregon/California border into Nevada.

FOOTHILLS SYSTEMTransCanada's 100 per cent owned, 1,040 km natural gas 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.

BC SYSTEMTransCanada's 100 per cent owned natural gas transmission system extends 201 km from Alberta's western
border through British Columbia to connect with the Gas Transmission Northwest System at the U.S. border, serving markets in B.C. as well as the Pacific Northwest, California and Nevada.

20MANAGEMENT'S
DISCUSSION AND ANALYSIS

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NORTH BAJA SYSTEMTransCanada's 100 per cent owned, 129 km natural gas transmission system extends from southwestern
Arizona to a point near Ogilby, California on the California/Mexico border and connects with the Gasoducto Bajanorte pipeline system in Mexico.

VENTURES LPVentures LP, which is 100 per cent owned by TransCanada, owns a 121 km pipeline and related
facilities which supply natural gas to the oil sands region of northern Alberta, and a 27 km pipeline which supplies natural gas to a petrochemical complex at Joffre, Alberta.

GREAT LAKESGreat Lakes connects with the Canadian Mainline at Emerson, Manitoba and serves markets in central Canada and the eastern and
midwestern U.S. TransCanada has a 50 per cent ownership interest in this 3,402 km pipeline system.

TQMTQM is a 572 km natural gas pipeline system which connects with the Canadian Mainline and transports natural gas from
Montréal to Québec City and to the Portland system. TransCanada holds a 50 per cent ownership interest in TQM.

IROQUOISIroquois 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 663 km pipeline system.

PORTLANDPortland 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 Portland.

NORTHERN BORDERNorthern Border is a 2,010 km natural gas pipeline system which serves the U.S. Midwest from a connection
with the Foothills System near Monchy, Saskatchewan. TransCanada indirectly owns approximately 4 per cent of Northern Border through its 13.4 per cent ownership interest in
PipeLines LP.

TUSCARORATuscarora operates a 386 km pipeline system transporting natural gas from the Gas Transmission Northwest System at Malin,
Oregon to Wadsworth, Nevada with delivery points in northeastern California and northwestern Nevada. TransCanada owns an aggregate 7.6 per cent interest in Tuscarora, of which
6.6 per cent is held through TransCanada's interest in PipeLines LP.

TAMAZUNCHALETransCanada is currently constructing the Tamazunchale natural gas pipeline in east central Mexico. The 125 km pipeline
will extend from the facilities of Pemex Gas near Naranjos, Veracruz to an electricity generation station near Tamazunchale, San Luis Potosi. TransCanada will operate and own
100 per cent of the pipeline. This pipeline is expected to be in service on December 1, 2006.

TRANSGASTransGas is a 344 km natural gas pipeline system which runs from Mariquita in the central region of Colombia to Cali in the
southwest of Colombia. TransCanada holds a 46.5 per cent ownership interest in this pipeline.

GAS PACIFICOGas Pacifico is a 540 km natural gas pipeline extending from Loma de la Lata, Argentina to Concepción,
Chile. TransCanada holds a 30 per cent ownership interest in Gas Pacifico.

INNERGYINNERGY is an industrial natural gas marketing and distribution company based in Concepción, Chile that markets and
distributes natural gas transported on Gas Pacifico. TransCanada holds a 30 per cent ownership interest in INNERGY.

CROSSALTACrossAlta 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 56 PJ with a maximum deliverability capability of 0.45 PJ per day. TransCanada holds a 60 per cent ownership interest in
CrossAlta.

EDSONTransCanada is currently developing the Edson natural gas storage facility near Edson, Alberta. The Edson facility is expected to
have a capacity of approximately 60 PJ and will connect to TransCanada's Alberta System. Storage capacity is expected to be available from the Edson facility, on a phased-in basis,
commencing mid-2006.

BROADWATERBroadwater, a joint venture with Shell, is a proposed LNG project offshore of New York State in Long Island Sound,
capable of receiving, storing and regasifying imported LNG with an average send-out capacity of approximately one Bcf/d of natural gas.

CACOUNACacouna, a joint venture with Petro-Canada, is a proposed LNG project at Gros Cacouna harbour on the
St. Lawrence River, capable of receiving, storing and regasifying imported LNG with an average send-out capacity of approximately 500 mmcf/d of natural gas.

MANAGEMENT'S DISCUSSION AND
ANALYSIS21

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

|                                               |                                                  | 2005 |     | 2004 |     | 2003 |    
|---------------------------------------------- | ------------------------------------------------ | ---- | --- | ---- | --- | ---- | ---
|                                               |                                                 
|Wholly-Owned Pipelines                         |                                                  |      |     |      |     |      |    
|                                               | Canadian Mainline                                |      | 283 |      | 272 |      | 290
|                                               | Alberta System                                   |      | 150 |      | 150 |      | 190
|                                               | GTN(1)                                           |      | 71  |      | 14  |      |   
|                                               | Foothills System(2)                              |      | 21  |      | 22  |      | 20 
|                                               | BC System                                        |      | 6   |      | 7   |      | 6  
|                                               |                                                 
|                                               |                                                  | 531  |     | 465  |     | 506  |    
|                                               |                                                 
|Other Gas Transmission                         |                                                  |      |     |      |     |      |    
|                                               | Great Lakes                                      |      | 46  |      | 55  |      | 52 
|                                               | Iroquois                                         |      | 17  |      | 17  |      | 18 
|                                               | PipeLines LP(3)                                  |      | 9   |      | 16  |      | 15 
|                                               | Portland(4)                                      |      | 11  |      | 10  |      | 11 
|                                               | Ventures LP(5)                                   |      | 12  |      | 15  |      | 10 
|                                               | TQM                                              |      | 7   |      | 8   |      | 8  
|                                               | CrossAlta                                        |      | 19  |      | 13  |      | 6  
|                                               | TransGas                                         |      | 11  |      | 11  |      | 22 
|                                               | Northern Development                             |      | (4  | )    | (6  | )    | (4 
|                                               | General, administrative, support costs and other |      | (24 | )    | (25 | )    | (22
|                                               |                                                 
|                                               |                                                  | 104  |     | 114  |     | 116  |    
|Gain on sale of PipeLines LP units (after tax) |                                                  | 49   |     |     |     |     |    
|Gain on sale of Millennium (after tax)         |                                                  |     |     | 7    |     |     |    
|                                               |                                                 
|                                               |                                                  | 153  |     | 121  |     | 116  |    
|                                               |                                                 
|Net earnings                                   |                                                  | 684  |     | 586  |     | 622  |    
|                                               |                                                 
|                                               |                                                 

In 2005, net earnings from the Gas Transmission business were $684 million compared to $586 million and $622 million in 2004
and 2003, respectively. The increase in 2005 compared to 2004 was mainly due to higher net earnings from Wholly-Owned Pipelines and a gain on sale of PipeLines LP units, partially offset by
lower net earnings from Other Gas Transmission. The increase in Wholly-Owned Pipelines' net earnings in 2005 was primarily due to a full year of GTN net earnings and higher Canadian Mainline net
earnings. Lower net earnings in 2005 from Other Gas Transmission were primarily due to decreased earnings from Great Lakes and PipeLines LP, partially offset by higher earnings for CrossAlta.

The
overall decrease of $36 million in 2004 Gas Transmission net earnings compared to 2003 was mainly due to lower net earnings from Wholly-Owned Pipelines. The decrease in
Wholly-Owned Pipelines' net earnings in 2004 was primarily due to a reduction in the Alberta System's net earnings, reflecting the EUB's disallowance of certain operating costs in

22MANAGEMENT'S
DISCUSSION AND ANALYSIS

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its
decision on Phase I of the 2004 General Rate Application (GRA) and in its decision in the generic cost of capital (GCOC) proceeding to allow an ROE in 2004 lower than the return implicit in
the 2003 revenue requirement settlement with stakeholders. In addition, net earnings on the Canadian Mainline were lower in 2004 compared to 2003 due to a decline in both the average investment base
and the allowed ROE. The addition of GTN had a positive effect on net earnings in 2004.

GAS TRANSMISSION  FINANCIAL ANALYSIS

Canadian Mainline

The Canadian Mainline is 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's average investment base. In addition, new facilities are approved by the NEB before construction begins. Net earnings of the Canadian Mainline are affected by
changes in investment base, the ROE, the level of deemed common equity and the potential for incentive earnings.

The
Canadian Mainline generated net earnings of $283 million in 2005, an increase of $11 million over 2004. The increase in net earnings is primarily due to the NEB's
decision on the 2004 Tolls and Tariff Application (Phase II) which included an increase in the deemed common equity ratio to 36 per cent from 33 per cent for 2004
which is also effective for 2005 under the tolls settlement. The Phase II decision resulted in a $35 million ($13 million related to 2004 and $22 million related to 2005)
increase to Canadian Mainline's 2005 net earnings compared to 2004. However, this earnings increase was partially offset by the combination of a lower average investment base, lower operating cost
savings and a lower approved ROE in 2005. The NEB-approved ROE decreased to 9.46 per cent in 2005 from 9.56 per cent in 2004.

Net
earnings of $272 million in 2004 were $18 million lower than 2003 net earnings of $290 million. The decrease was primarily due to a lower average investment base
and allowed ROE. The NEB-approved ROE was 9.56 per cent in 2004 compared to 9.79 per cent in 2003.

GRAPHIC

Alberta System

The Alberta System is regulated by the EUB primarily under the provisions of theGas Utilities Act (Alberta)(GUA) and the Pipeline Act (Alberta). Under the GUA, its rates, tolls and other charges, and terms and conditions of service are subject to approval by the EUB. In
addition, major facilities are approved by the EUB before construction begins.

Net
earnings of $150 million in 2005 were unchanged from 2004 due to the negative impacts of a lower investment base and a lower approved rate of return in 2005 being offset by
the positive impact of higher allowed operating costs in 2005 than in 2004 as a result of cost disallowances in 2004 as a result of the EUB's decision on Phase I of the 2004 GRA. Net earnings
in 2004 and 2005 reflect an ROE of 9.60 and 9.50 per cent, respectively, as prescribed by the EUB, on deemed common equity of 35 per cent.

MANAGEMENT'S DISCUSSION AND
ANALYSIS23

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Net
earnings in 2004 of $150 million were $40 million lower than 2003 net earnings of $190 million. The decrease was primarily due to the impact of the EUB decisions
in respect of Phase I of the 2004 GRA and the GCOC proceeding. The GRA Phase I decision disallowed approximately $24 million of operating costs, and the GCOC decision resulted in
a lower return on deemed common equity in 2004 compared to 2003.

GRAPHIC

GTN

Both the Gas Transmission Northwest System and the North Baja System operate under fixed rate models, under which maximum and minimum rates for various service types have been
ordered by FERC and which GTN is permitted to discount or negotiate on a non-discriminatory basis. The Gas Transmission Northwest System's last filed rate case was in 1994 and it was
settled and approved by FERC in 1996. The North Baja System's rates were established in FERC's initial order in 2002, certifying construction and operation of the system. The net earnings of GTN are
impacted by variations in volumes delivered and prices charged under the various service types that are provided, as well as by variations in the costs of providing transportation service. Net
earnings were $71 million for the year ended December 31, 2005 compared to $14 million for November and December 2004.

Other Gas Transmission

TransCanada's other direct and indirect investments in various natural gas pipelines and gas transmission related businesses are included in Other Gas Transmission. It also
includes TransCanada's natural gas storage facilities and project development activities related to TransCanada's pursuit of new pipeline and natural gas and crude oil transmission related
opportunities throughout North America.

TransCanada's
net earnings from Other Gas Transmission in 2005 were $153 million compared to $121 million and $116 million in 2004 and 2003, respectively. Excluding
the gains on sale of PipeLines LP units in 2005 and Millennium in 2004, net earnings for 2005 were $10 million lower compared to 2004. The decrease was primarily due to lower net
earnings of Great Lakes as a result of lower short-term revenues and higher operating and maintenance costs, and lower earnings from PipeLines LP as a result of the reduced
ownership. Results were also negatively impacted by a weaker U.S. dollar in 2005. These decreases were partially offset by higher earnings from CrossAlta as a result of more favourable natural
gas storage conditions in 2005.

Excluding
the gain on sale of Millennium, net earnings in 2004 were $2 million lower than 2003. Higher net earnings from CrossAlta and Ventures LP were more than offset by
an $11 million positive tax adjustment recorded in TransGas de Occidente S.A. (TransGas) in 2003 and the negative impact of a weaker U.S. dollar in 2004 compared to 2003.

GAS TRANSMISSION  OPPORTUNITIES AND DEVELOPMENTS

Tamazunchale Pipeline

In June 2005, TransCanada announced it was awarded a contract by Mexico's Comisión Federal de Electricidad (CFE) to construct, own and operate a natural
gas pipeline in east-central Mexico. The 36 inch, 125 kilometre Tamazunchale Pipeline will extend from the facilities of Pemex Gas near Naranjos, Veracruz and transport
natural gas under a 26 year

24MANAGEMENT'S
DISCUSSION AND ANALYSIS

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contract
with the CFE to an electricity generation station near Tamazunchale, San Luis Potosi. TransCanada expects to invest approximately US$181 million in the project with a planned
in-service date of December 1, 2006.

The
pipeline will be designed to transport initial volumes of 170 mmcf/d. Under the contract, the capacity of the Tamazunchale Pipeline is expected to be expanded beginning in
2009 to approximately 430 mmcf/d to meet the needs of two additional proposed power plants near Tamazunchale.

North Baja System

In February 2006, the North Baja System filed an application with FERC for a certificate for a two-phase expansion of its existing natural gas pipeline in
southern California and the construction of a new pipeline lateral in California's Imperial Valley. The expansion project envisions substantially increasing the capacity of the existing pipeline and
allowing for bi-directional flow of natural gas. Natural gas currently flows on the North Baja System southward from its interconnection with El Paso Natural Gas Company at Ehrenberg,
Arizona.

The
proposed North Baja System expansion links to a corresponding expansion of the Gasoducto Bajanorte line in Mexico owned by Sempra Energy. Together, the expansions may allow for
import into the U.S. of up to 2.7 Bcfd/d of natural gas supplied from several potential LNG terminals near Baja California, Mexico, including the Costa Azul terminal that is currently
under construction. Shippers have indicated their commercial support for the projects by signing precedent agreements in support of the expansion plan as filed with FERC.

In
addition to its FERC certificate of public convenience and necessity (which includes a determination on environmental issues), the project will need various permits and leases from
the federal Bureau of Land Management, the California State Lands Commission and other agencies.

Mackenzie Gas Pipeline Project

The Mackenzie Gas Pipeline Project would result in a natural gas pipeline being constructed from Inuvik, Northwest Territories, to the northern border of Alberta, where it
would then connect with the Alberta System. Through 2005, the Mackenzie Gas Pipeline Project continued to progress, with substantial milestones being achieved in reaching agreement with certain of the
northern aboriginal groups as to the terms of land access for the pipeline right of way. As a consequence, in late 2005, the project proponents indicated their readiness to proceed to the public
hearings phase of the regulatory review of the project. Hearings commenced in January 2006 and are expected to continue throughout 2006.

In
2003, TransCanada entered into an agreement with the Mackenzie Valley Aboriginal Pipeline Limited Partnership (known as the APG) by which TransCanada agreed to finance the APG's
one-third share of the pipeline pre-development costs associated with the Mackenzie Gas Pipeline Project. Cumulative advances made by TransCanada in this respect constitute a
loan to the APG, which becomes repayable only after the date upon which the pipeline commences commercial operations. If the project does not proceed, TransCanada has no recourse against the APG for
recovery of advances made.

TransCanada's
loan advances to the APG were originally estimated to total approximately $90 million, with an acknowledgement that these costs could rise as a result of project
delays and increased project costs. Given that the project has experienced delays and is entering into a protracted regulatory hearing process, the total loan advances by TransCanada, on behalf of the
APG, are currently forecast to increase to approximately $145 million. These advances are expected to ultimately form part of the rate base of the pipeline, and the loan will subsequently be
repaid from the APG's share of available future pipeline revenues or from alternate financing. As at December 31, 2005, TransCanada had funded $87 million of this loan. The ability to
recover this investment remains dependent upon the successful outcome of the project. Under the terms of the agreement, TransCanada gains an immediate opportunity to acquire up to five per cent
equity ownership of the 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 of
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 producers and the
APG sharing the balance.

MANAGEMENT'S DISCUSSION AND
ANALYSIS25

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Alaska Highway Pipeline Project

In 2005, TransCanada continued its discussions with Alaska North Slope producers and the State of Alaska relating to the Alaskan portion of the proposed Alaska Highway Pipeline
Project. In June 2004, TransCanada filed an application under the State of Alaska'sStranded Gas Development Actand requested the State resume
processing of its long-pending application for a right-of-way lease across State lands. If the right-of-way lease is approved, TransCanada
is prepared to convey the lease to another entity if that entity is willing to connect the final project to TransCanada's pipeline system. The lease conveyance would require an interconnection
agreement with TransCanada at the Yukon/Alaska border. TransCanada's Stranded Gas Application is one of three applications currently before the State. In October 2005, the State Administration
and ConocoPhillips Company reached a preliminary agreement under theStranded Gas Development Act. On February 21, 2006, the State announced that it had
reached a preliminary agreement with BP Resources and ExxonMobil. In addition, on February 21, 2006, the State announced it would be proposing legislation for a new oil and gas production tax
regime. It is not expected that a natural gas deal would be submitted to the legislative assembly of Alaska for ratification until after a new oil and gas production tax regime has
been enacted.

Foothills
Pipe Lines Ltd. (Foothills) holds the priority right to build, own and operate the first pipeline through Canada for the transportation of Alaskan natural gas. This
right was granted under theNorthern Pipeline Act of Canada(NPA), following a lengthy competitive hearing before the NEB in the late 1970s, which
resulted in 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 and Saskatchewan which constitute a prebuild for the Alaska Highway Pipeline Project, and to expand those facilities five times, the latest of which was in 1998.
TransCanada continues to seek commercial alignment with the Alaska North Slope producers on the Canadian portion of the project. Continued development under the NPA should ensure the earliest
in-service date for the project.

Supply

In 2005, the upstream energy sector responded to high natural gas prices by drilling a record number of natural gas wells in the WCSB. TransCanada continued to see supply
growth from the west central foothills area as well as unconventional production from coalbed methane (CBM), primarily from the Horseshoe Canyon coals located in central Alberta between Edmonton and
Calgary.

TransCanada
will continue to focus on the cost effective and timely connection of these volumes that will enable customers to access markets where natural gas continues to achieve
premium prices. As well, service flexibility will continue to be a focus to ensure TransCanada remains competitive.

Western Markets

TransCanada continues to pursue growth opportunities within existing and new natural gas markets. In 2005, TransCanada further pursued the provision of cost effective
incremental delivery service into the Fort McMurray, Alberta market. As demand for natural gas continued to grow at unprecedented levels, numerous oil sands projects, both mining and
in-situ, were announced in this region in 2005 resulting in incremental natural gas demand.

In
late 2004 and throughout 2005, TransCanada executed firm contracts for delivery service to the Fort McMurray area on the Alberta System for volumes in excess of 900 mmcf/d. As
a result of the ten and 20 year contracts, TransCanada has filed applications with the EUB to construct new natural gas transmission facilities to serve the contracted demand. The construction
will begin in late 2006 with a contracted on-stream date of April 1, 2007. In 2008 and 2009, TransCanada expects to add additional facilities as the Fort McMurray oil sands demand
continues to grow.

26MANAGEMENT'S
DISCUSSION AND ANALYSIS

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Eastern Markets

Power generation continues to be the primary driver for incremental natural gas demand in Eastern Canada and the U.S. Northeast markets. Power projects that will require
significant incremental natural gas volumes continue to be developed and, as a result, the Canadian Mainline is expected to see modest throughput increases in the short to medium term on a long haul
basis. Modest expansions, underpinned with long term firm transportation (FT) contracts, are expected to be placed into service in 2006 and 2007 to meet incremental demand in the eastern markets.

Desire
for options in accessing natural gas supply is reflected in the continuing trend towards increased demand for short haul contracts by customers in the eastern markets. TransCanada
continues to work with these customers to provide service flexibility and optionality.

LNG

In September 2005, the village of Cacouna, Québec, voted 57.2 per cent in favour of an LNG terminal to be built in the area. The Cacouna
Energy joint venture between Petro-Canada and TransCanada was originally announced in September 2004 and proposes a $660 million project at Gros Cacouna harbour on the St. Lawrence
River, capable of receiving, storing and regasifying imported LNG with an average send-out capacity of approximately 500 mmcf/d of natural gas. TransCanada will operate the planned
facility, while Petro-Canada will contract for all of the capacity and supply the LNG. Québec's Ministry of Environment commenced its 45 day public consultation period on
February 22, 2006, regarding its next phase for this project.

In
November 2004, TransCanada and Shell announced plans to jointly develop an offshore LNG regasification terminal, Broadwater, in the New York State waters of Long Island
Sound. The proposed floating storage and regasification unit would be located approximately 15 km off the Long Island coast and 18 km off the Connecticut coast. The proposed terminal
would be capable of receiving, storing and regasifying imported LNG with an average send-out capacity of approximately one Bcf/d of natural gas. Broadwater Energy LLC, an
entity which will be owned 50 per cent by TransCanada, will own and operate the facility, while Shell will contract for all of the capacity and supply the LNG. The estimated cost of
construction is expected to be approximately US$700 million to US$1 billion. Construction of the facility is subject to regulatory approval from U.S. federal and state
governments. On January 30, 2006, a formal application was filed with FERC for federal approval to construct and operate Broadwater. Provided the necessary approvals are received, it is
expected the facility will be in service in late 2010 or early 2011.

Natural Gas Storage

TransCanada's natural gas storage business is situated in Alberta, and is comprised of a long-term natural gas storage contract, 60 per cent ownership
in CrossAlta and the wholly-owned Edson facility which is currently under construction. By mid-2007, TransCanada will own or lease more than 130 PJ, or approximately
one-third of the natural gas storage capacity in Alberta.

Natural
gas market price volatility, partly due to extreme weather, supply disruptions and sharp increases in oil prices, contributed to strong storage values during 2005. TransCanada
commenced commercial natural gas storage operations in second quarter 2005 through marketing and optimizing the 20 PJ of contracted natural gas storage capacity. The capacity under contract
increases to 30 PJ in 2006 and to 40 PJ in 2007.

TransCanada
commenced construction of the Edson facility in early 2005. The construction cost of the project is currently expected to be approximately $270 million, which is a
$70 million increase from the initial estimate due to higher drilling and construction costs, and higher base gas costs. The Edson facility is expected to have a capacity of approximately
60 PJ and will connect to TransCanada's Alberta System. Storage capacity is expected to be available from the Edson facility, on a phased-in basis, commencing in
mid-2006.

TransCanada
also has a 60 per cent interest in the CrossAlta natural gas storage facility, which has a total working natural gas capacity of 56 PJ. In 2005,
CrossAlta completed expansion projects that improved the injection and withdrawal rates and increased developed capacity from 44 PJ to 56 PJ.

Current
market fundamentals for natural gas storage are expected to remain strong. The imbalance in North American natural gas supply and demand has created natural gas price volatility,
resulting in demand for storage service.

MANAGEMENT'S DISCUSSION AND
ANALYSIS27

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TransCanada
believes Alberta-based storage will continue to serve market needs and could play an even more important role when northern natural gas is connected to North American markets.

Keystone Pipeline

In November 2005, TransCanada, ConocoPhillips Company and CPPL signed an MOU which commits ConocoPhillips Company to ship crude oil on the proposed Keystone pipeline,
and gives CPPL the right to acquire up to a 50 per cent ownership interest in the pipeline. On January 31, 2006, TransCanada announced it has secured firm, long-term
contracts totalling 340,000 barrels per day with a duration averaging 18 years. The commitments were obtained through the successful completion of a binding Open Season held during
fourth quarter 2005. With these commitments from shippers, TransCanada will proceed with regulatory filings for approval of the project.

At
an estimated cost of approximately US$2.1 billion, the Keystone pipeline is intended to transport approximately 435,000 barrels per day of crude oil from Hardisty,
Alberta, to Patoka, Illinois through a 2,960 km pipeline system. The pipeline can be expanded to 590,000 barrels per day with additional pump stations. In addition to approximately
1,730 km of new pipeline construction in the U.S., the Canadian portion of the proposed project includes the construction of approximately 370 km of new pipeline and the conversion of
approximately 860 km of TransCanada's existing pipeline facilities from natural gas to crude oil transmission. The Keystone pipeline, upon receipt of the
appropriate regulatory approvals in Canada and the U.S., is expected to be in service in 2009. Construction is proposed to begin in late 2007.

Shippers
have also expressed interest in proposed extensions of the Keystone pipeline to Cushing, Oklahoma and Fort Saskatchewan, Alberta. TransCanada expects to hold a binding Open
Season for these two extensions later in 2006.

TransCanada
is in the business of connecting energy supplies to markets and it views this opportunity as another way of providing a valuable service to its customers. Converting one of
the company's natural gas pipeline assets for crude oil transportation is an innovative, cost-competitive way to meet the need for pipeline expansions to accommodate anticipated growth in
Canadian crude oil production during the next decade.

GAS TRANSMISSION  REGULATORY DEVELOPMENTS

In 2005, TransCanada's principal regulatory activities included receiving the decision from the NEB regarding the Canadian Mainline's 2004 Tolls and Tariff Application
(Phase II); a negotiated settlement with respect to 2005 Canadian Mainline tolls; a three year revenue requirement settlement for the Alberta System; a hearing before the EUB on the rate design
of the Alberta System, with potential implications for the competitiveness of the Alberta System; and the successful negotiation with shippers and CAPP for their support on increasing the deemed
common equity ratio on the Foothills System and the BC System. TransCanada is also currently in negotiation for a settlement with its Canadian Mainline shippers regarding 2006 tolls.

Canadian Mainline

In April 2005, the NEB issued its decision on the Canadian Mainline's 2004 Tolls and Tariff Application (Phase II) which increased the Canadian Mainline deemed
common equity to 36 per cent from 33 per cent for 2004 tolls.

In
April 2005, the NEB approved TransCanada's application for a negotiated settlement of the 2005 Canadian Mainline tolls as filed. The settlement established operating,
maintenance and administration (OM&A) costs for 2005 at $169.5 million with variances between actual OM&A costs in 2005 and those agreed to in the settlement accruing to TransCanada. The
majority of other cost elements of the 2005 revenue requirement were to be treated on a flow through basis. Further, the 2005 ROE was set at 9.46 per cent and the deemed common equity
component in 2005 reflected the outcome of the NEB's Phase II decision with respect to the Canadian Mainline's 2004 capital structure.

In
May 2005, in compliance with the NEB's decision regarding the Canadian Mainline's 2004 Tolls and Tariff Application (Phase II), TransCanada filed separate final tolls
applications with the NEB for 2004 and 2005. In June 2005, the NEB issued its decision approving the 2004 and 2005 final tolls applications as filed.

In
December 2005, the NEB approved the 2006 interim tolls, effective January 1, 2006. TransCanada is currently engaged in settlement discussions with its stakeholders on
matters related to the Canadian Mainline's 2006 tolls and

28MANAGEMENT'S
DISCUSSION AND ANALYSIS

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tariff.
Pending progress on the settlement discussions, TransCanada intends to file an application for approval of the 2006 tolls and tariff with the NEB in first quarter 2006.

The
formula-based ROE for the Canadian Mainline for 2006 is 8.88 per cent.

Alberta System

In December 2004, TransCanada filed its 2005 Phase I GRA with the EUB. In March 2005, a settlement was reached with shippers and other interested parties
regarding the annual revenue requirements of the Alberta System for the years 2005, 2006 and 2007. The settlement encompasses all elements of the Alberta System revenue requirement, including OM&A
costs, return on equity, depreciation, and income and municipal taxes.

In
the Alberta System settlement, OM&A costs were fixed at $193 million for 2005, $201 million for 2006, and $207 million for 2007. Any variance between actual OM&A
and other fixed costs and those agreed to in the settlement in each year accrue to TransCanada. The majority of other cost elements of the 2005, 2006 and 2007 revenue requirements are treated on a
flow through basis.

The
return on equity will be calculated annually during the term of the settlement using the EUB formula for the purpose of establishing the annual generic rate of return for Alberta
utilities on deemed common equity of 35 per cent. For 2005, ROE under the EUB formula was 9.50 per cent. In addition, depreciation expenses are determined using the
depreciation rates and methodology that was proposed to the EUB in the 2004 GRA. Depreciation expense was $303 million in 2005 and is expected to be approximately $285 million in 2006
and $282 million in 2007.

In
June 2005, the EUB approved the negotiated settlement of the Alberta System's three year revenue requirement. As stipulated in the settlement, TransCanada then
discontinued the action it had commenced to appeal the EUB's disallowance of certain incentive compensation and long-term incentive compensation costs in the 2004 revenue requirement and
its work on an application to the EUB to review and vary this same decision.

Interim
tolls approved in December 2004 were charged throughout 2005 for transportation service on the Alberta System. With the issuance on February 21, 2006 of the EUB's
decision on Phase II of the Alberta System's 2005 GRA, in
which the application to retain the Alberta System's current rate design and cost allocation methodologies was approved, final tolls for 2005 can be determined. An application for 2005 final tolls
will be made in March 2006.

On
December 15, 2005, the EUB approved the application to charge interim tolls for transportation service, effective January 1, 2006. The 2006 interim tolls, which replaced
the 2005 interim tolls, will be finalized through an application to the EUB in March 2006 in which the flow-through cost components of the revenue requirement will be updated to
reflect actual costs and revenues from the prior year as stipulated under the Alberta System's 2005, 2006 and 2007 revenue requirement settlement.

The
formula-based ROE for the Alberta System for 2006 is 8.93 per cent.

GTN

TransCanada is preparing a rate case for the Gas Transmission Northwest System that is expected to be filed by summer 2006. The primary reason for a rate case is decreased
revenues due to contract non-renewals and shipper defaults. Currently, the Gas Transmission Northwest System has about 12 per cent of its long-term capacity
unsubscribed and there is a risk of additional contracts not being renewed during the remainder of 2006. FERC typically suspends the effectiveness of rate increase filings for a five month
period, so the company anticipates that the new rates, which are subject to refund pending the final result of the case, would go into effect near the end of 2006.

Foothills and BC Systems

TransCanada filed applications with the NEB in early December 2005 for approval of 2006 tolls for the Foothills System and the BC System reflecting an agreement
with CAPP and other stakeholders to increase the deemed equity component of the capital structure of each system to 36 per cent from 30 per cent. On December 21,
2005, the NEB approved the Foothills System application as filed. On February 22, 2006, the NEB finalized the BC System's 2006 tolls as filed.

MANAGEMENT'S DISCUSSION AND
ANALYSIS29

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GAS TRANSMISSION  BUSINESS RISKS

Competition

TransCanada faces competition at both the supply end and the market end of its systems. The competition is a result of other pipelines accessing an increasingly mature WCSB and
markets served by TransCanada's pipelines. In addition, the continued expiration of long-term FT contracts has resulted in significant reductions in long-term firm contracted
capacity on the Canadian Mainline, the Alberta System, the BC System and the Gas Transmission Northwest System, and shifts to short-term firm contracts.

As
of December 2004, the WCSB had remaining discovered natural gas reserves of approximately 55 trillion cubic feet and a
reserves-to-production ratio of approximately nine years at current levels of production. Historically, additional reserves have continually been discovered to maintain the
reserves-to-production ratio at close to nine years. Natural gas prices in the future are expected to be higher than long-term historical averages due to a tighter
supply/demand balance which should stimulate exploration and production in the WCSB. However, WCSB supply is expected to remain essentially flat. With the expansion of capacity on TransCanada's
wholly- and partially-owned pipelines over the past decade, and the competition provided by other pipelines, combined with significant growth in natural gas demand in Alberta, TransCanada anticipates
there will be excess pipeline capacity out of the WCSB for the foreseeable future.

TransCanada's
Alberta System is the major natural gas gathering and transportation system for the WCSB which connects most of the natural gas processing plants in Alberta to domestic and
export markets. The Alberta System has faced, and will continue to face, increasing competition from other pipelines.

The
Canadian Mainline is TransCanada's cross-continental natural gas pipeline serving mid-western and eastern markets in Canada and the U.S. The demand for natural gas
in TransCanada's key eastern markets 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 U.S. Northeast have access to an array of
pipeline and supply options. Eastern Canadian markets that historically received Canadian supplies only from TransCanada are now capable of receiving supplies from new pipelines into the region that
can source Western Canadian, Atlantic Canadian and U.S. supplies.

Over
the last few years, the Canadian Mainline has experienced reductions in long haul FT contracts. This has been partially offset by increases in short haul contracts. While decreases
in throughput do not directly impact Canadian Mainline earnings, such decreases will impact the competitiveness of its tolls. Over the course of 2005, strong natural gas prices in Eastern Canada and
the Northeast U.S. resulted in higher than anticipated flows on the Canadian Mainline to serve those markets. In addition to increases in flow, the Canadian Mainline has also experienced an
increase in short-term contracts and a resulting decrease in tolls. Looking forward, in the short to medium term, there is expected to be limited opportunity to further reduce tolls by
increasing long haul volumes on the Canadian Mainline. Further, throughput and contract levels are expected to return to more modest levels.

The
Gas Transmission Northwest System must compete with other pipelines to access natural gas supplies as well as to access markets. Transportation service capacity on the Gas
Transmission Northwest System provides customers with
access to supplies of natural gas primarily from the WCSB and serves markets in the Pacific Northwest, California and Nevada. These three markets may also access supplies from other competing basins
in addition to supplies from the WCSB. Historically, natural gas supplies from the WCSB have been competitively priced in relation to natural gas supplies from the other supply regions serving these
markets. The Gas Transmission Northwest System experienced contract non-renewals in 2005 and additional contracts may not be renewed in 2006. Natural gas transported from the WCSB on the
Gas Transmission Northwest System competes in the California and Nevada markets against supplies from the Rocky Mountain and southwest U.S. supply basins. In the Pacific Northwest market,
natural gas transported on the Gas Transmission Northwest System competes against Rocky Mountain gas supply as well as additional Western Canadian supply that is transported by the Northwest Pipeline.

Transportation
service on the North Baja System provides access to natural gas supplies primarily from both the Permian Basin, located in western Texas and southeastern
New Mexico, and the San Juan Basin, primarily located in northwestern New Mexico and Colorado. The North Baja System delivers natural gas to the Gasoducto Bajanorte

30MANAGEMENT'S
DISCUSSION AND ANALYSIS

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pipeline
at the California/Mexico border, which transports the natural gas to markets in northern Baja California, Mexico. While there are currently no direct competitors to deliver natural gas to the
North Baja System's downstream markets, the pipeline may compete with fuel oil which is an alternative to natural gas in the operation of some electric generation plants in the North Baja region.

Counterparty Risk

The risk of customer defaults and bankruptcy has always been present. In December 2005, Calpine Corporation and certain of its subsidiaries (Calpine) filed for
bankruptcy protection. Calpine has transportation contracts on certain of TransCanada's Canadian and U.S. pipelines. TransCanada presently holds the maximum financial assurances allowable under
the respective tariffs. As at February 27, 2006, these transportation contracts had not been accepted or rejected. Should the Calpine contracts with TransCanada's Canadian pipeline systems be
rejected, TransCanada considers that it has been prudent in obtaining the maximum financial assurances and would make an application to the regulator for recovery under the current regulatory model of
any lost revenue, net of the assurances, and any revenues from the defaulted capacity. Should contracts be rejected on TransCanada's U.S. systems, the unmitigated annual after-tax
exposure of the contract obligations is estimated at $10 million for the Gas Transmission Northwest System and $10 million for Portland Natural Gas Transmission System Partnership, in
which TransCanada holds a 61.7 per cent ownership interest. Mitigating factors exist which are expected to reduce this exposure including recovery through future general rate case
filings, recontracting at maximum or discounted rates where applicable, recontracting as short-term or interruptible service, and recovery from bankruptcy proceedings. The potential impact
of such mitigating factors and the resulting net exposure are unknown at this time.

Financial Risk

Regulatory decisions continue to have a significant impact on the financial returns for existing and future investments in TransCanada's Canadian wholly-owned pipelines.
TransCanada remains concerned the approved financial returns
discourage additional investment in existing Canadian natural gas transmission systems. TransCanada had applied for a return of 11 per cent on 40 per cent deemed common
equity for both the Canadian Mainline and the Alberta System to the NEB and EUB, respectively. The outcome of these proceedings resulted in the current Canadian Mainline's 36 per cent
deemed equity thickness and Alberta System's 35 per cent deemed equity thickness. Additionally, the NEB reaffirmed its return on equity formula, while the EUB set a generic ROE which
largely aligns with the formula of the NEB. In 2005, the NEB's ROE formula provided an ROE of 9.46 per cent and the EUB's generic ROE was 9.50 per cent. In 2006, the
Canadian Mainline and Alberta System's ROEs decline to 8.88 percent and 8.93 per cent, respectively.

The
company remains cognizant of the views and shares the concerns of credit rating agencies regarding the Canadian regulatory environment. Credit ratings and liquidity continue to be at
the forefront of investor attention. While recent regulatory decisions increasing the deemed equity component of the capital structure of the company's Canadian pipelines may serve to somewhat
mitigate these concerns in the long run, significantly reduced allowed ROE on NEB and EUB regulated pipelines are expected to offset any positive effect in 2006.

Foreign Exchange

TransCanada's earnings from GTN, as well as a significant amount of earnings in Other Gas Transmission are generated in U.S. dollars. The performance of the Canadian
dollar relative to the U.S. dollar would either positively or negatively impact Gas Transmission's net earnings, although this impact is mitigated by offsetting exposures in certain of
TransCanada's other businesses as well as through the company's hedging activities.

Throughput Risk

As transportation contracts expire on Great Lakes, Northern Border and GTN, these pipelines will be more exposed to throughput risk and their revenues will more likely
experience increased variability. Throughput risk is created by supply and market competition, gas basin pricing, economic activity, weather variability, pipeline competition and pricing of
alternative fuels.

MANAGEMENT'S DISCUSSION AND
ANALYSIS31

---



GAS TRANSMISSION  OTHER

Operational Excellence

TransCanada continued its commitment to operational excellence in 2005 by further advancing initiatives that will improve the company's ability to provide low-cost,
reliable and responsive service to customers. TransCanada continues to pursue the operational excellence strategy in order to continue to be the preferred company for customers wishing to connect new
natural gas supplies and markets.

TransCanada
maintained a high level of plant operating performance, as measured by the number of operational perfect days on both the Canadian Mainline and the Alberta System. GTN was
effectively integrated in 2005, and maintained high levels of operating performance as well.

Receiving
the American Society of Mechanical Engineers' inaugural award for pipeline technology in 2005 further recognized the efforts of TransCanada to ensure high reliability levels
are sustained over the long term.

The
annual Customer Satisfaction Survey, conducted by Ipsos Reid in the fall of 2005, found that TransCanada maintained high levels of overall customer satisfaction and improved
significantly in the area of senior management relationships. As part of the Customer Express website, TransCanada launched the "Toll Calculator", an online tool that allows customers to quickly
obtain the cost of shipping on TransCanada's wholly-owned and affiliated pipeline systems. Feedback from customers and other stakeholders indicates this tool was well received and support for further
development of on-line tools is strong.

Also,
2005 was a very productive year with respect to collaborative efforts with customers. The Tolls Task Force, the Canadian Mainline stakeholder group, produced twenty resolutions in
2005 including process improvements, several service enhancements, a new service and a settlement for the Canadian Mainline. The Tolls, Tariff, Facilities and Procedures committee, the Alberta System
stakeholder group, had eleven resolutions in 2005 focusing on greater service flexibility and process efficiency for the Alberta System. Many of these initiatives will result in increasing service
flexibility and more efficient service delivery. Productive collaborative processes also result in costs savings for both TransCanada and industry by avoiding costs associated with regulatory
proceedings.

In
2006, TransCanada will continue to focus efforts on efficiencies, operational reliability, and environmental and safety performance. Greenhouse gas emissions management programs will
continue to receive focused attention and in 2006 further efforts will be undertaken to improve contractor safety performance.

Safety

TransCanada worked closely with regulators, customers and communities during 2005 to ensure the continued safety of employees and the public. Pipeline safety performance in
2005 was very good with only one small diameter pipeline line-break located in a relatively remote area of northern Alberta. The break resulted in minimal impact
with no injuries or property damage. Under the approved regulatory models in Canada, expenditures on pipeline integrity for the NEB and EUB regulated pipelines have no negative impact on TransCanada's
earnings. The company expects to spend approximately $105 million in 2006 for pipeline integrity on its Wholly-Owned Pipelines, which is an increase from the $64 million spent in 2005.
The increase is due primarily to initial inspections of the Gas Transmission Northwest System, additional inspections for stress corrosion cracking on the Canadian Mainline and repairs to several
water crossings in southern Alberta that were damaged during flood events in June 2005. TransCanada continues to use a rigorous risk management system that focuses spending on issues and areas
that have the largest impact on maintaining or improving the reliability and safety of the pipeline system.

Environment

In 2005, TransCanada continued to address and assess environmental issues through proactive sampling, monitoring and remediation programs. Activities on the Canadian Mainline
included the completion of three ongoing remediation projects, as well as building containment integrity improvement projects at seven compressor stations. All facilities on the Foothills System were
assessed through the company's Site Assessment, Remediation and Monitoring program in 2005, along with the majority of facilities on GTN. In addition, the decommissioning and reclamation of
four Canadian

32MANAGEMENT'S
DISCUSSION AND ANALYSIS

---



Mainline
compressor plants and two Alberta System compressor plants was carried out in 2005. TransCanada will continue to actively invest in improved environmental protection measures.

For
information on management of risks with respect to the Gas Transmission business, see the "Risk Management" section.

GAS TRANSMISSION  OUTLOOK

As demand for natural gas continues to grow across North America, TransCanada's Gas Transmission business will continue to play a critical role in the reliable transportation
of natural gas. For 2006, the business will focus on the reliable delivery of natural gas to growing markets, connecting new supply and progressing development of new infrastructure to connect
northern gas. TransCanada will also focus on development of the Keystone pipeline.

Looking
forward, it is expected that producers will continue to explore and develop new fields, particularly in northeastern B.C. and the west central foothills regions of Alberta, as
well as unconventional supply such as gas production from CBM reserves. New facilities will be required to move this incremental supply based on the location of the resource, even though overall WCSB
supply is expected to remain essentially flat. The Alberta System anticipates filing an application during 2006 with the EUB, to construct new facilities required to connect additional natural gas
supplies anticipated to be delivered to the Alberta System from the Mackenzie Delta.

In
2006, TransCanada will continue to focus on serving the growing demand in the Fort McMurray area with construction of new natural gas transmission facilities, beginning in
late 2006, with a contractual on-stream date of April 1, 2007. In 2008 and 2009, TransCanada anticipates constructing additional facilities as the Fort McMurray oil
sands demand for natural gas continues to grow.

It
is expected that incremental supply from LNG will serve growing North American markets in the mid to long term. As a result, TransCanada will take prudent steps to further evaluate
the potential commercial and operational implications of connecting LNG facilities to those systems affected.

Prior
to the onset of new supply from LNG and northern gas, many of the markets served by TransCanada's systems may be exposed to volatile natural gas prices. As a result, TransCanada
will continue to focus on operational excellence and collaborative efforts with all stakeholders on negotiated settlements and service options that will increase the value of TransCanada's business to
customers and shareholders.

Earnings

TransCanada's earnings from its Canadian wholly-owned pipelines are primarily determined by the average investment base, ROE, deemed common equity and opportunity for incentive
earnings. In the short to medium term, the company expects a modest level of investment in these mature assets and therefore anticipates a continued net decline in the average investment base due to
depreciation expense in excess of capital expenditures. Accordingly, without an increase in ROE, deemed common equity or incentive opportunities, future earnings are anticipated to decrease. However,
these mature assets will continue to generate strong cash flows that can be redeployed to other projects offering higher returns. Under the current regulatory model, earnings from the Canadian
wholly-owned pipelines are not affected by short-term fluctuations in the commodity price of natural gas, changes in throughput volumes or changes in contract levels.

In
December 2005, the NEB established the 2006 ROE for the Canadian Mainline at 8.88 per cent compared to 9.46 per cent in 2005. In addition, the 2006
average investment base is expected to continue to decline. These two factors are expected to lower earnings on the Canadian Mainline in 2006 relative to 2005 if there are no offsetting factors.
TransCanada is currently engaged in settlement discussions with its stakeholders on matters related to the Canadian Mainline's 2006 tolls.

Alberta
System earnings in 2006 will be negatively influenced by the decrease in the EUB's generic ROE to 8.93 per cent in 2006 from 9.50 per cent in 2005,
and an anticipated decrease in the average investment base. The three year revenue requirement settlement reached in 2005 does provide the opportunity for limited incentive earnings as the settlement
contains some at-risk cost components. If TransCanada is successful in its focus on cost efficiency,

MANAGEMENT'S DISCUSSION AND
ANALYSIS33

---



there
is an opportunity to partially mitigate the effect of a lower ROE and average investment base for the Alberta System in 2006.

In
2006, earnings from Portland and the Gas Transmission Northwest System may be negatively impacted should Calpine contracts be rejected on the respective systems. Calpine's FT contract
accounts for approximately 24 per cent of Portland's total FT revenues. On the Gas Transmission Northwest System, approximately seven per cent of transportation revenues come from
Calpine's FT contracts. It is not possible at this time to determine the impact of any potential mitigating factors on 2006 earnings if these contracts are rejected.

Reduced
firm contract volumes on the Gas Transmission Northwest System, including the effects of customer bankruptcies, are expected to have a slightly negative impact on the Gas
Transmission Northwest System results compared to 2005. The impact of the 2006 rate case filing on the system's results in 2006 is uncertain at this time.

Anticipated
lower firm service revenues on certain partially-owned pipelines and a full year of reduced ownership of PipeLines LP are expected to be partially offset by the
effects of a higher deemed equity structure on the Foothills System and BC System and the expected growth in natural gas storage net earnings.

Capital Expenditures

Total capital spending for the Wholly-Owned Pipelines during 2005 was $135 million. Overall capital spending on the Wholly-Owned Pipelines in 2006 is expected to be
approximately $382 million. Capital expenditures on the Edson natural gas storage project and the Tamazunchale Pipeline are expected to be approximately $105 million and
$95 million, respectively, in 2006.

---

NATURAL GAS THROUGHPUT VOLUMES(Bcf)(1)

|                                     |  | 2005  |  | 2004  |  | 2003 
|------------------------------------ |  | ----- |  | ----- |  | -----
|                                    
|Canadian Mainline(2)                 |  | 2,997 |  | 2,621 |  | 2,628
|Alberta System(3)                    |  | 3,999 |  | 3,909 |  | 3,883
|Gas Transmission Northwest System(4) |  | 777   |  | 181   |  |      
|Foothills System                     |  | 1,051 |  | 1,139 |  | 1,110
|BC System                            |  | 321   |  | 360   |  | 325  
|North Baja System(4)                 |  | 84    |  | 13    |  |      
|Great Lakes                          |  | 850   |  | 801   |  | 856  
|Northern Border                      |  | 808   |  | 845   |  | 850  
|Iroquois                             |  | 394   |  | 356   |  | 341  
|TQM                                  |  | 166   |  | 159   |  | 164  
|Ventures LP                          |  | 192   |  | 136   |  | 111  
|Portland                             |  | 62    |  | 50    |  | 53   
|Tuscarora                            |  | 25    |  | 25    |  | 22   
|TransGas                             |  | 19    |  | 18    |  | 16   

34MANAGEMENT'S
DISCUSSION AND ANALYSIS

---



POWER

HIGHLIGHTS

Net Earnings



Expanding Asset Base



Plant Availability



MANAGEMENT'S DISCUSSION AND
ANALYSIS35

---





GRAPHIC

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

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

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

SUNDANCE A&BThe Sundance power facility in Alberta is the largest coal-fired electrical generating facility in Western Canada.
TransCanada owns the 560 MW Sundance A PPA, ending in 2017. TransCanada effectively owns 50 per cent of the 706 MW Sundance B PPA, ending in 2020.

SHEERNESSIn December 2005, TransCanada acquired the remaining rights and obligations of the 756 MW Sheerness PPA with a
remaining term of 15 years. The plant consists of two coal-fired thermal power generating units.

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

CANCARBThe 27 MW Cancarb facility at Medicine Hat, Alberta is fuelled by waste heat from TransCanada's adjacent thermal carbon
black facility.

36MANAGEMENT'S
DISCUSSION AND ANALYSIS

---



BRUCE POWERAt December 31, 2005, TransCanada owned 31.6 per cent of Bruce B, consisting of operating
Units 5 to 8 with approximately 3,200 MW of generating capacity. In addition, TransCanada owned 47.9 per cent of Bruce A, consisting of operating Units 3 and
4 with approximately 1,500 MW of generating capacity and currently idle Units 1 and 2 with approximately 1,500 MW of generating capacity. Units 1 and
2 are currently being refurbished for expected restart of the first unit commencing in 2009.

OSPThe OSP plant is a 560 MW natural gas-fired, combined-cycle facility in Rhode Island.

BÉCANCOURThe 550 MW Bécancour natural gas-fired cogeneration power plant located near
Trois-Rivières, Québec is under construction and is expected to be in service in late 2006. The entire power output will be supplied to Hydro-Québec under
a 20 year power purchase contract. Steam will also be sold to local businesses.

CARTIER WINDCartier Wind, 62 per cent owned by TransCanada, is comprised of six wind projects totalling 739.5 MW to
be commissioned between 2006 and 2012. Construction on the first two projects, with a combined generating capacity of 210 MW, is expected to commence early 2006 and the first project is
expected to be in service in late 2006. The entire power output will be supplied to Hydro-Québec under a 20 year power purchase contract.

GRANDVIEWA 90 MW natural gas-fired cogeneration power plant located in Saint John, New Brunswick was
commissioned and in service in January 2005. Under a 20 year tolling arrangement, 100 per cent of the plant's heat and electricity output is sold to Irving.

TC HYDROIn April 2005, TransCanada closed the acquisition of hydroelectric generation assets from USGen. These merchant assets have
a total generating capacity of 567 MW and are located in New Hampshire, Vermont and Massachusetts.

MANAGEMENT'S DISCUSSION AND
ANALYSIS37

---





---

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

|                                                        |  | 2005 |   | 2004 |   | 2003 |  
|------------------------------------------------------- |  | ---- | - | ---- | - | ---- | -
|                                                        | 
|Bruce Power                                             |  | 195  |   | 130  |   | 99   |  
|Western operations                                      |  | 123  |   | 138  |   | 160  |  
|Eastern operations                                      |  | 137  |   | 108  |   | 127  |  
|Power LP investment                                     |  | 29   |   | 29   |   | 35   |  
|General, administrative, support costs and other        |  | (102 | ) | (89  | ) | (86  | )
|                                                        | 
|Operating and other income                              |  | 382  |   | 316  |   | 335  |  
|Financial charges                                       |  | (11  | ) | (13  | ) | (12  | )
|Income taxes                                            |  | (118 | ) | (94  | ) | (103 | )
|                                                        | 
|                                                        |  | 253  |   | 209  |   | 220  |  
|Gains related to Power LP and Paiton Energy (after tax) |  | 308  |   | 187  |   |     |  
|                                                        | 
|Net earnings                                            |  | 561  |   | 396  |   | 220  |  
|                                                        | 
|                                                        | 

Power's net earnings in 2005 of $561 million increased $165 million compared to $396 million in 2004 primarily due to gains
related to Paiton Energy and Power LP. In 2005, TransCanada sold its approximate 11 per cent interest in Paiton Energy to subsidiaries of The Tokyo Electric Power Company for
gross proceeds of US$103 million ($122 million) resulting in an after-tax gain of $115 million. In August 2005, TransCanada sold its ownership interest in
Power LP to EPCOR Utilities Inc. (EPCOR) for net proceeds of $523 million resulting in an after-tax gain of $193 million. Included in 2004 net earnings was an
after-tax gain of $187 million comprised of a $15 million after-tax gain on the sale of TransCanada's Curtis Palmer and ManChief power facilities to
Power LP as well as $172 million of after-tax dilution and other gains.

Excluding
the Paiton Energy and Power LP-related gains in 2005 and 2004, respectively, Power's net earnings for the year ended December 31, 2005 of
$253 million increased $44 million compared to $209 million in 2004. The increase was primarily due to higher operating and other income from Bruce Power and Eastern Operations,
partially offset by a reduced contribution from Western Operations and higher general, administrative, support costs and other.

In
2003, Western Operations' results included a $31 million pre-tax ($19 million after tax) settlement with a former counterparty that defaulted in 2001 under
power forward contracts. Power's net earnings for 2004, excluding gains related to Power LP in 2004 and the counterparty settlement in 2003, increased $8 million
year-over-year. Pre-tax equity income from Bruce Power of $130 million in 2004 increased $31 million compared to TransCanada's period of ownership in
2003. This was partially offset by lower contributions from Eastern Operations and Power LP investment.

GRAPHIC

38MANAGEMENT'S
DISCUSSION AND ANALYSIS

---



---

POWER PLANTS  NOMINAL GENERATING CAPACITY AND FUEL TYPE

|                                  |                 | MW    |     | Fuel Type
|--------------------------------- | --------------- | ----- | --- | ---------
|                                 
|Bruce Power(1)                    |                 | 2,450 |     | Nuclear  
|                                 
|Western operations                |                 |       |     |          
|                                  | Sheerness(2)    |       | 756 |          
|                                  | Sundance A(3)   |       | 560 |          
|                                  | Sundance B(3)   |       | 353 |          
|                                  | MacKay River    |       | 165 |          
|                                  | Carseland       |       | 80  |          
|                                  | Bear Creek      |       | 80  |          
|                                  | Redwater        |       | 40  |          
|                                  | Cancarb         |       | 27  |          
|                                 
|                                  |                 | 2,061 |     |          
|                                 
|Eastern operations                |                 |       |     |          
|                                  | TC Hydro(4)     |       | 567 |          
|                                  | OSP             |       | 560 |          
|                                  | Bécancour(5)    |       | 550 |          
|                                  | Cartier Wind(6) |       | 458 |          
|                                  | Grandview(7)    |       | 90  |          
|                                 
|                                  |                 | 2,225 |     |          
|                                 
|Total Nominal Generating Capacity |                 | 6,736 |     |          
|                                 
|                                 

POWER  FINANCIAL ANALYSIS

Bruce Power

On October 31, 2005, Bruce Power and the OPA completed a long-term agreement whereby Bruce A will restart and refurbish 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. As a result of the agreement between Bruce Power and the OPA, and
Cameco's decision not to participate in the restart and refurbishment program, a new partnership was created. Bruce A subleases its facilities, which are comprised of Units 1
to 4, from Bruce B. TransCanada and BPC each incurred a net cash outlay of approximately $100 million on the formation of Bruce A. As

MANAGEMENT'S DISCUSSION AND
ANALYSIS39

---



at
December 31, 2005, TransCanada and BPC each owned a 47.9 per cent interest in Bruce A. The remaining 4.2 per cent is owned by the Power Worker's Union
Trust No. 1 and The Society of Energy Professionals Trust. The day-to-day operations of the Bruce Power facilities are expected to be unaffected by the formation
of Bruce A and TransCanada continues to own 31.6 per cent of the Bruce B Units 5 to 8.

Upon
reorganizing, 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 the full six-unit operation for all periods. The Bruce Power information below includes
adjustments to eliminate the effect of certain intercompany transactions between Bruce A and Bruce B.

---

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

|                                                             | 2005                                                            |                               | 2004   |        | 2003  |       
|------------------------------------------------------------ | --------------------------------------------------------------- | ----------------------------- | ------ | ------ | ----- | ------
|                                                             |                                                                
|Bruce Power (100 per cent basis)                             |                                                                 |                               |        |        |       |       
|                                                             | Revenues                                                        |                               |        |        |       |       
|                                                             |                                                                 | Power                         | 1,907  |        | 1,563 |       
|                                                             |                                                                 | Other(1)                      | 35     |        | 20    |       
|                                                             |                                                                
|                                                             | 1,942                                                           |                               | 1,583  |        | 1,208 |       
|                                                             |                                                                
|                                                             | Operating expenses                                              |                               |        |        |       |       
|                                                             |                                                                 | Operations and maintenance    | (871   | )      | (793  | )     
|                                                             |                                                                 | Fuel                          | (77    | )      | (68   | )     
|                                                             |                                                                 | Supplemental rent             | (164   | )      | (156  | )     
|                                                             |                                                                 | Depreciation and amortization | (198   | )      | (161  | )     
|                                                             |                                                                
|                                                             | (1,310                                                          | )                             | (1,178 | )      | (853  | )     
|                                                             |                                                                
|                                                             | Operating income                                                | 632                           |        | 405    |       | 355   
|                                                             | Financial charges under equity accounting  to October 31, 2005 | (58                           | )      | (67    | )     | (69   
|                                                             |                                                                
|                                                             | 574                                                             |                               | 338    |        | 286   |       
|                                                             |                                                                
|                                                             |                                                                
|TransCanada's proportionate share                            | 188                                                             |                               | 107    |        | 65    |       
|Adjustments                                                  | 7                                                               |                               | 23     |        | 34    |       
|                                                             |                                                                
|TransCanada's operating and other income from Bruce Power(2) | 195                                                             |                               | 130    |        | 99    |       
|                                                             |                                                                
|                                                             |                                                                
|Bruce Power  Other Information                              |                                                                 |                               |        |        |       |       
|Plant availability                                           | 80%                                                             |                               | 82%    |        | 83%   |       
|Sales volumes (GWh)(3)                                       |                                                                 |                               |        |        |       |       
|                                                             | Bruce Power  100 per cent                                      | 32,900                        |        | 33,600 |       | 21,060
|                                                             | TransCanada's proportionate share                               | 10,732                        |        | 10,608 |       | 6,655 
|Results per MWh(4)                                           |                                                                 |                               |        |        |       |       
|                                                             | Power revenues                                                  | $58                           |        | $47    |       | $48   
|                                                             | Fuel                                                            | $2                            |        | $2     |       | $2    
|                                                             | Total operating expenses(5)                                     | $40                           |        | $35    |       | $36   
|Percentage of output sold to spot market                     | 49%                                                             |                               | 52%    |        | 35%   |       

40MANAGEMENT'S
DISCUSSION AND ANALYSIS

---





TransCanada's operating and other income from its combined investment in Bruce Power for 2005 was $195 million compared to
$130 million for 2004. The increase of $65 million was primarily due to higher realized prices in 2005 and was offset in part by higher maintenance costs, higher depreciation and lower
capitalization of labour and other in-house costs following the restart of Unit 3 in first quarter 2004. Adjustments to TransCanada's combined interest in Bruce Power's income
before income taxes for 2005 were lower than in 2004 primarily due to a lower amortization of the purchase price allocated to the fair value of sales contracts in place at the time of acquisition in
2003.

Combined
Bruce Power prices achieved during 2005 (excluding Bruce cost recoveries) were $58 per MWh compared to $47 per MWh in 2004 reflecting higher prices on uncontracted volumes sold
into the spot market. Bruce Power's combined operating expenses (net of cost recoveries) increased to $40 per MWh for 2005 from $35 per MWh in 2004. This was primarily the result of one
additional planned maintenance outage in 2005 compared to 2004 as well as higher maintenance costs, higher depreciation and lower capitalization of labour and other in-house costs
following the restart of Unit 3.

The
Bruce units ran at a combined average availability of 80 per cent in 2005, compared to an 82 per cent average availability during 2004. The lower
availability in 2005 was the result of 67 additional days of planned maintenance outages plus an additional 45 forced outage days in 2005 as compared to 2004. The additional forced
outage days in 2005 are due in large part to a 27 day forced outage that occurred as a result of a transformer fire at Unit 6.

TransCanada's
operating and other income from its combined investment in Bruce Power for 2004 was $130 million compared to $99 million for 2003. This increase was primarily
due to higher output in 2004 as a result of the return to service of Units 3 and 4 as well as a full year of earnings in 2004 on Units 5 to 8 compared to earnings from February 14
to December 31 in 2003, reflecting TransCanada's period of ownership in 2003. Adjustments to TransCanada's interest in Bruce Power income before taxes for 2004 were lower than the same period
in 2003 primarily due to the cessation of interest capitalization upon the return to service of Units 3 and 4.

Income
from Bruce B is directly impacted by fluctuations in wholesale spot market prices for electricity and income from both Bruce A and Bruce B units is impacted
by overall plant availability, which in turn, is impacted by scheduled and unscheduled maintenance. To reduce its exposure to spot market prices, Bruce B had, as at December 31, 2005,
entered into fixed price sales contracts to sell forward approximately 13,000 GWh hours of 2006 output and approximately 3,600 GWh of 2007 output. As a result of the contract with the
OPA, all of the output from Bruce A will be sold at a fixed price of $57.37 per MWh, adjusted annually on April 1 for inflation, before recovery of fuel costs from the OPA. Under the
terms of the arrangement between Bruce A and the OPA, effective October 31, 2005, Bruce A receives a contract price for power generated, where the price is adjusted for inflation
annually on April 1 and capital cost variances associated with the restart and refurbishment project but will not vary with changes in the wholesale price of power in the Ontario market. As
part of this contract, sales from the Bruce B Units 5 to 8 are subject to a floor price of $45 per MWh, adjusted annually for inflation on April 1. Receipts by Bruce Power
under this floor price mechanism are refundable if prices subsequently increase above the floor price.

The
overall plant availability percentage in 2006 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
outage on Bruce A Unit 3 is scheduled to last approximately one month during first quarter 2006 and a two month maintenance outage of Bruce A Unit 4 is expected to commence
in second quarter 2006. The only planned maintenance outage for 2006 for Bruce B is an approximate two month outage scheduled for Unit 8 beginning in third quarter 2006.

MANAGEMENT'S DISCUSSION AND
ANALYSIS41

---



In
2005, cash distributions to partners, excluding a special distribution, were $400 million of which TransCanada's share was $126 million. No distributions were made to
partners in 2004. The 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 restart and refurbishment project.

Bruce A's
capital program for the restart and refurbishment project is expected to total approximately $4.25 billion and TransCanada's approximate $2.125 billion
share will be financed through capital contributions to 2011. A capital cost risk and reward sharing schedule with OPA is in place for spending below or in excess of the $4.25 billion base case
estimate. Work to refurbish Units 1 and 2 has commenced with the first unit expected to be online in 2009, subject to approval by the Canadian Nuclear Safety Commission. Restarting
Units 1 and 2, which have a combined capacity of approximately 1,500 MW, will boost the Bruce facilities' overall output to more than 6,200 MW. As at December 31,
2005, Bruce A had capitalized $324 million with respect to the restart and refurbishment project.

Western Operations

---

Western Operations Results-at-a-Glance(1) Year ended December 31 (millions of dollars)

|                           |          | 2005 |      | 2004 |      | 2003 |     
|-------------------------- | -------- | ---- | ---- | ---- | ---- | ---- | ----
|                           |         
|Revenues                   |          |      |      |      |      |      |     
|                           | Power    |      | 715  |      | 606  |      | 688 
|                           | Other(2) |      | 158  |      | 120  |      | 112 
|                           |         
|                           |          | 873  |      | 726  |      | 800  |     
|                           |         
|Cost of sales              |          |      |      |      |      |      |     
|                           | Power    |      | (476 | )    | (377 | )    | (442
|                           | Other(3) |      | (104 | )    | (64  | )    | (71 
|                           |         
|                           |          | (580 | )    | (441 | )    | (513 | )   
|                           |         
|Other costs and expenses   |          | (149 | )    | (125 | )    | (98  | )   
|Depreciation               |          | (21  | )    | (22  | )    | (29  | )   
|                           |         
|Operating and other income |          | 123  |      | 138  |      | 160  |     
|                           |         
|                           |         

42MANAGEMENT'S
DISCUSSION AND ANALYSIS

---



---

Western Operations Sales Volumes(1) Year ended December 31 (GWh)

|                    |            | 2005                |        | 2004   |        | 2003  
|------------------- | ---------- | ------------------- | ------ | ------ | ------ | ------
|                   
|Supply              |            |                     |        |        |        |       
|                    | Generation |                     | 2,245  |        | 2,105  |       
|                    | Purchased  |                     |        |        |        |       
|                    |            | Sundance A & B PPAs |        | 6,974  |        | 6,842 
|                    |            | Other purchases     |        | 2,687  |        | 2,748 
|                   
|                    |            | 11,906              |        | 11,695 |        | 12,296
|                   
|                   
|Contracted vs. Spot |            |                     |        |        |        |       
|                    | Contracted |                     | 10,374 |        | 10,705 |       
|                    | Spot       |                     | 1,532  |        | 990    |       
|                   
|                    |            | 11,906              |        | 11,695 |        | 12,296
|                   
|                   

As at December 31, 2005, Western Operations directly controlled approximately 2,100 MW of power supply in Alberta from its three
long-term PPAs and five natural gas-fired cogeneration facilities. The Western Operations power supply portfolio is now comprised of approximately 1,700 MW of
low-cost, base-load coal-fired generation supply 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. The three long-term PPAs include the December 2005 acquisition of the remaining rights and obligations of the 756 MW Sheerness PPA
in addition to the Sundance A and Sundance B PPAs acquired in 2001 and 2002, respectively. The Sheerness PPA was acquired from the Alberta Balancing Pool for $585 million and has a remaining
term of approximately 15 years. The PPAs entitle TransCanada to the output capacity of these coal facilities, ending in 2017 to 2020.

The
focus of Western Operations is to maximize the value of its power supply portfolio through a balanced portfolio of long- and short-term power sale contracts.
The focus is also on expanding its power supply portfolio though acquisitions and optimizing the value and output from its existing generation assets. The success of Western Operations is the direct
result of its two integrated functions  marketing and plant operations.

The
marketing function, based in Calgary, Alberta, purchases and resells electricity sourced from the PPAs, markets uncommitted generation volumes from the cogeneration facilities and
purchases and resells power and natural gas to maximize the value of the cogeneration facilities. The marketing function is integral to optimizing Power's return from its portfolio of power supply and
managing risks around uncontracted volumes. The intention for the Sheerness output is the same as the Sundance output, whereby a significant portion of the power supply is expected to be sold under
long-term contract to the extent possible in the market. The majority of the expected output from the cogeneration plants is also sold under long-term contract. Some portion of
power supply from the PPAs and the cogeneration assets is intentionally not committed under long-term sales contracts to assist in managing Power's overall portfolio of generation. This
approach to portfolio management assists in minimizing costs in situations where Power would otherwise have to purchase power in the open market to fulfill its contractual obligations. In 2005,
approximately 13 per cent of power sales volumes were sold into the spot market. To reduce exposure to spot market prices of uncontracted volumes, as at December 31, 2005, Western
Operations had fixed price sale contracts to sell forward approximately 9,800 GWh for 2006 and 6,000 GWh for 2007.

MANAGEMENT'S DISCUSSION AND
ANALYSIS43

---



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 majority of the expected output is sold under long-term contracts and the remainder is subject to fluctuations in the price
of power and natural gas. Market heat rates in Alberta in 2005 were at historic lows earlier in the year but improved substantially by year-end. Market heat rate is determined by dividing
the average price of power per 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 contract and plant
fuel-gas has not been purchased, the higher the market heat rate, the more profitable is a natural gas-fired generating facility. Market heat rates averaged approximately
8.3 GJ/MWh in 2005 compared to approximately 8.8 GJ/MWh in 2004. All plants, except the 80 MW Bear Creek facility located near Grand Prairie, operated with an average plant
availability in 2005 of approximately 93 per cent.

Bear
Creek experienced an unplanned outage in 2005 resulting from technical difficulties with its gas turbine in the early part of 2005 and the facility has remained on an unplanned
outage since May 31, 2005. Technical evaluation continued throughout 2005 regarding a possible long-term solution and the asset is expected to be back in service by
mid-2006.

Operating
and other income for 2005 was $123 million or $15 million lower compared to $138 million earned in 2004. This decrease was primarily due to reduced margins
in 2005 resulting from the lower market heat rates on uncontracted volumes of power generated, fee revenues earned in 2004 from Power LP and a lower contribution from Bear Creek. Revenues and
cost of sales increased in 2005 compared to 2004 primarily due to higher realized prices. Other costs and expenses, which include fuel gas consumed in generation, increased due to higher operating and
fuel usage costs at MacKay River resulting from a full year of operation and higher natural gas prices. Generation volumes in 2005 increased compared to 2004 primarily due to a full year of operations
at MacKay River partially offset by the unplanned outage at Bear Creek. The potential to earn fees to manage and operate Power LP's plants was eliminated with the sale of Power LP to
EPCOR in August 2005. In 2005, approximately 13 per cent of power sales volumes were sold into the spot market compared to eight per cent in 2004.

Operating
and other income in 2004 of $138 million was $22 million lower than the $160 million earned in 2003. The decrease was mainly due to a positive
$31 million pre-tax settlement in June 2003 with a former counterparty that defaulted in 2001 under power forward contracts, as well as reduced income from ManChief following
the sale of the plant to Power LP in April 2004. Partially offsetting these decreases were contributions from the MacKay River plant which was placed in service in 2004, fees earned with
respect to Power LP's asset acquisitions in 2004 and the impact of higher net margins achieved in second and third quarter 2004 on the overall portfolio.

44MANAGEMENT'S
DISCUSSION AND ANALYSIS

---



Eastern Operations

---

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

|                           |          | 2005 |      | 2004 |      | 2003 |     
|-------------------------- | -------- | ---- | ---- | ---- | ---- | ---- | ----
|                           |         
|Revenues                   |          |      |      |      |      |      |     
|                           | Power    |      | 505  |      | 535  |      | 608 
|                           | Other(2) |      | 412  |      | 238  |      | 200 
|                           |         
|                           |          | 917  |      | 773  |      | 808  |     
|                           |         
|Cost of sales              |          |      |      |      |      |      |     
|                           | Power    |      | (215 | )    | (288 | )    | (281
|                           | Other(2) |      | (373 | )    | (211 | )    | (185
|                           |         
|                           |          | (588 | )    | (499 | )    | (466 | )   
|                           |         
|Other costs and expenses   |          | (167 | )    | (146 | )    | (186 | )   
|Depreciation               |          | (25  | )    | (20  | )    | (29  | )   
|                           |         
|Operating and other income |          | 137  |      | 108  |      | 127  |     
|                           |         
|                           |         

---

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

|                    |            | 2005  |       | 2004  |       | 2003 
|------------------- | ---------- | ----- | ----- | ----- | ----- | -----
|                   
|Supply              |            |       |       |       |       |      
|                    | Generation |       | 2,879 |       | 1,467 |      
|                    | Purchased  |       | 2,627 |       | 4,731 |      
|                   
|                    |            | 5,506 |       | 6,198 |       | 6,906
|                   
|                   
|Contracted vs. Spot |            |       |       |       |       |      
|                    | Contracted |       | 4,919 |       | 6,055 |      
|                    | Spot       |       | 587   |       | 143   |      
|                   
|                    |            | 5,506 |       | 6,198 |       | 6,906
|                   
|                   

Eastern Operations conducts its business primarily in the Northeastern U.S. and Eastern Canada markets and excludes Bruce Power. In the
New England market, Eastern Operations has established a successful marketing operation and, in 2005, acquired a significant group of hydroelectric generation assets from USGen with generation
capacity of 567 MW. In Eastern Canada, construction continued on the 550 MW Bécancour natural gas-fired plant in Québec and the 90 MW
Grandview cogeneration facility was placed into service on January 1, 2005. In late 2005, development plans were finalized and construction is expected to commence early 2006 on the first two
of six wind farm projects, with generating capacity of 210 MW of the 739.5 MW Cartier Wind projects in Québec. Including facilities that are under construction or in
development, Eastern Operations owns more than 2,200 MW of power generation capacity.

MANAGEMENT'S DISCUSSION AND
ANALYSIS45

---



Eastern
Operations' success in the New England deregulated power markets is the direct result of a knowledgeable, region-specific marketing operation which is conducted through
its wholly-owned subsidiary, TransCanada Power Marketing Limited (TCPM), located in Westborough, Massachusetts. TCPM has firmly established itself as a leading
energy provider and marketer and is focused 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. To reduce its exposure to spot market prices, as at December 31, 2005, Eastern Operations had entered into fixed
price sales contracts to sell approximately 5,000 GWh of power for 2006 and approximately 3,500 GWh of power for 2007, although certain contracted volumes are dependent on customer usage
levels. TCPM is a full requirement electricity service provider offering varied products and services to assist customers in managing their power supply and power prices in volatile deregulated
power markets.

Eastern
Operations' operating power generation assets currently consist of TC Hydro, Ocean State Power (OSP) and Grandview.

The
TC Hydro assets, acquired on April 1, 2005, include 13 hydroelectric stations housing 39 generating units on the Connecticut River System in
New Hampshire and Vermont, and the Deerfield River System in Massachusetts and Vermont. These facilities were integrated into TransCanada in 2005. Water flows in 2005 through the hydro assets
were above the long-term average as a result of higher precipitation in the areas surrounding the river systems.

OSP
is a 560 MW natural gas-fired plant located in Rhode Island. In 2005, OSP was successful in restructuring its long-term natural gas fuel supply
contracts with its suppliers. The contract restructuring at OSP reduced the term of the long-term natural gas supply contracts by approximately three years (currently ending in
October 2008) and adjusted the pricing to track spot market pricing of natural gas at the Niagara delivery point versus the previously arbitrated pricing that had resulted in an above-market
cost of natural gas for OSP. The new contracts, for approximately 100,000 GJ per day, require OSP to take delivery of the natural gas irrespective of the fuel requirements at the plant. OSP
experienced an unplanned outage for most of the first half of 2005 resulting from a failure of one of the steam turbines at the plant. This unit was returned to service in mid-2005;
however, due to the nature of the failure, the second steam turbine at OSP was taken out of service to undertake repairs and was returned to service in January 2006. An insurance claim has been
filed in respect of this incident, including a claim for business interruption coverage. This claim is currently under discussion with the insurers.

Grandview
is a 90 MW natural gas-fired cogeneration facility on the site of the Irving refinery in Saint John, New Brunswick. The Grandview facility was
commissioned in January 2005. Under a 20 year tolling arrangement, Irving supplies fuel for the plant and contracts for 100 per cent of the plant's heat and electricity
output.

Eastern
Operations emerging presence in Eastern Canada is represented by the development and construction in 2006 of the 550 MW natural gas-fired
Bécancour plant and the first two of six wind farms of the Cartier Wind project. The first of the two wind farms is expected to be in service in late 2006. Bécancour is
expected to be operational in late 2006. Bécancour and Cartier Wind are located in Québec.

Operating
and other income for 2005 was $137 million or $29 million higher than the $108 million earned in 2004. Incremental income from the acquisition of the
TC Hydro assets and income from the Grandview cogeneration facility were the primary reasons for this increase. Partially offsetting these increases were a $16 million
pre-tax ($10 million after tax) contract restructuring payment made by OSP to its natural gas fuel suppliers in first quarter 2005, a $16 million pre-tax
($10 million after tax) reduction in income as a result of the sale of Curtis Palmer to
Power LP in April 2004, and a loss of operating income primarily associated with the expiration of certain long-term sales contracts in 2004.

Eastern
Operations' power revenues decreased in 2005 primarily due to lower long-term sales volumes resulting from the expiration of certain contracts at the end of 2004.
Partially offsetting this were higher realized prices in 2005. Other revenue and other cost of sales increased year-over-year as a result of natural gas purchased and resold
under the new

46MANAGEMENT'S
DISCUSSION AND ANALYSIS

---



natural
gas supply contracts at OSP. Cost of sales for power were lower in 2005 due to the impact of lower purchased volumes partially offset by higher prices for purchased power. Purchased power
volumes were lower in 2005 due to lower contracted sales volumes and the incremental power generation from the purchase of the TC Hydro assets. Volumes generated from the TC Hydro assets
reduced the requirement to purchase power to fulfill contractual sales obligations. Other costs and expenses in 2005 were higher primarily due to the acquisition of the TC Hydro assets.

Operating
and other income for 2004 was $108 million or $19 million lower than the $127 million earned in 2003. This decrease was mainly due to a reduction in income
as a result of the sale of the Curtis Palmer hydroelectric facilities to Power LP in April 2004, the unfavourable impact of higher natural gas fuel costs at OSP and a weaker
U.S. dollar in 2004. Partially offsetting these decreases was a $16 million positive impact from the restructuring transaction related to the power purchase contracts in 2004 between OSP
and Boston Edison Company (Boston Edison). TransCanada recognized earnings from the transaction's effective date of April 1, 2004.

Power LP Investment

On August 31, 2005, TransCanada closed the sale of all of its interest in Power LP to EPCOR for net proceeds of $523 million resulting in an
after-tax gain of $193 million. This divestiture included approximately 14.5 million Partnership units, representing approximately 30.6 per cent of the
outstanding units, 100 per cent ownership of the general partner of Power LP, and management and operations agreements governing the ongoing operation of Power LP's
generation assets. TransCanada's investment in Power LP generated operating and other income of $29 million in 2005 compared to $29 million and $35 million in 2004 and
2003, respectively.

---

Weighted Average Plant Availability(1)

|                                  |  | 2005 |  | 2004 |  | 2003
|--------------------------------- |  | ---- |  | ---- |  | ----
|                                 
|Bruce Power(2)                    |  | 80%  |  | 82%  |  | 83% 
|Western operations(3)             |  | 85%  |  | 95%  |  | 93% 
|Eastern operations(3)(4)          |  | 83%  |  | 95%  |  | 94% 
|Power LP investment(3)(5)         |  | 94%  |  | 97%  |  | 96% 
|All plants, excluding Bruce Power |  | 87%  |  | 96%  |  | 94% 
|All plants                        |  | 84%  |  | 90%  |  | 90% 

Weighted average plant availability, excluding Bruce Power, was 87 per cent in 2005 compared to 96 per cent in 2004.
Western Operations' weighted average plant availability was impacted in 2005 by an unplanned outage at Bear Creek

MANAGEMENT'S DISCUSSION AND
ANALYSIS47

---



and
a planned outage at MacKay River. In 2005, Eastern Operations experienced two significant outages at OSP. The first outage was completed in mid-2005 and the second outage was completed in
January 2006.

POWER  OPPORTUNITIES AND DEVELOPMENTS

TransCanada is committed to growing the Power business through acquisitions and development of greenfield opportunities in markets it knows and where it has a competitive
advantage  primarily Western Canada, Eastern Canada and the Northeastern U.S. The North American power industry is expansive and will provide many
opportunities for greenfield growth in power generation and power infrastructure projects. In addition to greenfield growth opportunities, TransCanada will continue to pursue acquisitions of
additional power assets, including opportunities resulting from, amongst other things, industry and corporate restructurings and corporate bankruptcies. Power's diverse power supply portfolio will
continue to include low-cost, base-load facilities with low operating costs and high reliability and/or be underpinned by secure long-term contracts.

The
Cartier Wind project is scheduled to commercially place in service the first of six wind farms in 2006. The remaining five wind farms are expected to be placed in service between
2007 and 2012. The Bécancour natural gas-fired cogeneration power plant is expected to be in service in late 2006. Bruce Power will continue refurbishment of the currently
idle Bruce A Units 1 and 2 for expected restart commencing in 2009.

In
February 2006, the Ontario Energy Minister directed the OPA to move forward to negotiate the terms for the construction of the 550 MW Portlands Energy Centre (PEC) in
downtown Toronto. TransCanada has a 50 per cent interest in PEC through a partnership with Ontario Power Generation.

POWER  BUSINESS RISKS

Plant Availability

Maintaining plant availability is critical to the continued success of the Power business and this risk is mitigated through a commitment to an operational excellence model
that provides low-cost, reliable operating performance at each of the company's power plants. This same commitment to operational excellence will be applied in 2006 and future years.
However, unexpected plant outages and/or the duration of outages could result in lower sales revenue, reduced margins, increased maintenance costs and may require power purchases at market prices to
enable TransCanada to meet the company's contractual power supply obligations.

Fluctuating Market Prices

TransCanada operates in highly competitive, deregulated power markets. Volatility in electricity prices is caused by market factors such as power plant fuel costs, fluctuating
supply and demand which are greatly affected by weather, power consumption and plant availability. TransCanada manages these inherent market risks through:



The
company's risk management practices are described further in the section on "Risk Management". See the section below "Power  Business
Risks  Uncontracted Volumes".

48MANAGEMENT'S
DISCUSSION AND ANALYSIS

---



Weather

Extreme temperature and weather events often affect power and natural gas demand and create price volatility, and may also impact the ability to transmit power to markets.
Seasonal changes in temperature also affect the efficiency and output capability of natural gas-fired power plants.

Hydrology

Power is subject to hydrology risk with its ownership of hydroelectric power generation facilities in the Northeastern U.S. Climate changes, weather events, local river
management and potential dam failures at these plants or upstream facilities pose potential risks to the company.

Uncontracted Volumes

Sale of uncontracted power in the open market is subject to market price volatility which directly impacts earnings. TransCanada has uncontracted sales volumes in both its
Eastern Operations and Western Operations. In addition, with the acquisition of the Sheerness PPA in late 2005, Western Operations significantly increased its level of uncontracted
sales volumes which are subject to price volatility in the Alberta wholesale marketplace. Although TransCanada seeks to generally secure sales under medium- to long-term contracts,
TransCanada retains an amount of unsold generation in the short term in order to provide flexibility in managing the company's portfolio of owned assets. Also, Bruce B has a significant amount of
uncontracted volumes sold into the wholesale spot market, although 100 per cent of the Bruce A output will be sold to the OPA under fixed price contract terms. Sales from the
Bruce B Units 5 to 8 are subject to a floor price of $45 per MWh, adjusted annually for inflation on April 1.

Execution and Capital Cost

TransCanada, including its investment in Bruce Power, is subject to execution and capital cost risk. Bruce A's four unit restart and refurbishment program is subject to
execution and capital cost risk. Bruce A and the OPA share capital costs that are above and below $4.25 billion on a 50/50 basis for cost overruns up to $618 million and
75/25 for any additional cost overruns. Similarly, Bruce A and OPA share 50/50 in cost benefits if costs are $240 million less than expected and 75/25 on the next
$150 million of savings.

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 reform as well as participate in and
lead discussions around these topics.

Foreign Exchange

TransCanada's earnings from Northeastern U.S. Operations are generated in U.S. dollars. The performance of the Canadian dollar relative to the U.S. dollar
would either positively or negatively impact Power's net earnings, although this impact is mitigated by offsetting exposures in certain of TransCanada's other businesses as well as through the
company's hedging activities.

POWER  OTHER

Operational Excellence

TransCanada's sale of Power LP to EPCOR allowed it to focus on larger, directly owned power assets. TC Hydro was effectively integrated in 2005 while maintaining
high levels of operating performance. TransCanada continues its commitment to an operational excellence strategy of providing low cost, reliable performance.

MANAGEMENT'S DISCUSSION AND
ANALYSIS49

---



POWER  OUTLOOK

Net earnings from Bruce Power are expected to be higher in 2006 as a result of higher generation volumes of output from fewer planned outages and TransCanada's increased
ownership in Bruce A. Bruce B earnings are subject to variability as a result of prices realized, and both Bruce A and Bruce B results are impacted by plant availability
and operating expense levels. The overall plant availability percentage in 2006, for planning purposes, is expected to be in the low 90s for the four Bruce B units and in the low 80s for the
two operating Bruce A units.

The
contribution from Western Operations is expected to be higher in 2006 primarily due to the December 2005 acquisition of the Sheerness PPA. At December 31, 2005 a
significant portion of the acquired generation from Sheerness was uncontracted. The intention for marketing the Sheerness output is the same as the Sundance output, whereby a significant portion of
the power supply is expected to be sold under long-term contract, providing this is possible in the market. The repair of Bear Creek is a high priority in 2006 and management expects the
facility to be back in service in mid-2006.

The
contribution from Eastern Operations is expected to rise slightly in 2006 compared to 2005 due to a full year of ownership of the TC Hydro assets and the expected commercial
in-service of Bécancour and the first of the Cartier wind farms in late 2006.

The
loss of earnings resulting from the sale of Power LP in August 2005 will partially offset these impacts.

Earnings
opportunities in Power may be affected by factors such as plant availability, fluctuating market prices for power and natural gas and ultimately market heat rates, regulatory
changes, weather, sales of uncontracted volumes, currency movements and overall stability of the power industry. See "Power  Business Risks" for a complete
discussion of these factors.

50MANAGEMENT'S
DISCUSSION AND ANALYSIS

---



CORPORATE

---

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

|                                                         |  | 2005 |   | 2004 |   | 2003 |  
|-------------------------------------------------------- |  | ---- | - | ---- | - | ---- | -
|                                                         | 
|Indirect financial charges and non-controlling interests |  | 130  |   | 79   |   | 89   |  
|Interest income and other                                |  | (29  | ) | (34  | ) | (21  | )
|Income taxes                                             |  | (65  | ) | (43  | ) | (27  | )
|                                                         | 
|Net expenses, after tax                                  |  | 36   |   | 2    |   | 41   |  
|                                                         | 
|                                                         | 

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



Net
expenses, after tax, in Corporate were $36 million in 2005 compared to $2 million in 2004 and $41 million in 2003.

The
increase of $34 million in net expenses in 2005 compared to 2004 was primarily due to increased interest expense on higher average long-term debt and commercial
paper balances in 2005 as well as the release in 2004 of previously established restructuring provisions. Income tax refunds and positive tax adjustments were comparable in 2004 and 2005.

The
decrease of $39 million in net expenses in 2004 compared to 2003 was primarily due to the positive impacts of income tax related items, including refunds received and the
recognition of income tax benefits relating to additional loss carryforwards utilized, the release in 2004 of previously established restructuring provisions and positive impacts of foreign exchange
related items.

In
2006, Corporate is expected to incur higher net expenses compared to 2005 primarily due to the income tax refunds and positive income tax adjustments recorded in 2005 that are not
currently expected to recur in 2006. In addition, Corporate's results in 2006 could be impacted by debt levels, interest rates, foreign exchange movements and income tax refunds and adjustments. The
performance of the Canadian dollar relative to the U.S. dollar would either positively or negatively impact Corporate's results, although this impact is mitigated by offsetting exposures in
certain of TransCanada's other businesses as well as through the company's hedging activities.

MANAGEMENT'S DISCUSSION AND
ANALYSIS51

---



LIQUIDITY AND CAPITAL RESOURCES

HIGHLIGHTS

Investing Activities



Dividend



Funds Generated from Operations

|GRAPHIC |  | Funds generated from operations were approximately $2.0 billion for 2005 compared to approximately $1.7 billion and $1.8 billion, for 2004 and 2003, respectively. The Gas Transmission business was the primary source of funds generated
from operations for each of the three years. As a result of rapid growth in the Power business in the last few years, the Power segment's funds generated from operations increased in 2005 compared to the two prior years. The decrease in 2004 compared
to 2003 was mainly a result of higher current income tax expense in 2004 compared to 2003.
 At December 31, 2005, 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, excluding acquisitions, totalled $754 million in 2005 compared to $530 million in 2004 and $395 million in 2003, respectively.
Expenditures in all three years related primarily to construction of new power plants in Canada and maintenance and capacity capital in TransCanada's Gas Transmission business.

|GRAPHIC |  | During 2005, TransCanada acquired the remaining rights and obligations of the Sheerness PPA for $585 million, invested a net cash outlay of $100 million in Bruce A as part of the Bruce Power reorganization, purchased the TC Hydro
assets for US$503 million and acquired an additional 3.5 per cent ownership interest in Iroquois Gas Transmission System L.P. for US$14 million. In 2005, TransCanada sold its ownership interest in Power LP for proceeds
of $444 million, net of current tax, its approximate 11 per cent ownership interest 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.
During 2004, TransCanada acquired GTN for US$1.2 billion, excluding assumed debt of approximately US$0.5 billion, and sold the ManChief and Curtis Palmer power facilities to Power LP for US$402.6 million, excluding closing
adjustments.
|------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

During 2003, TransCanada acquired a 31.6 per cent interest in Bruce Power for $409 million, the remaining interests in
Foothills previously not held by the company for $105 million, excluding assumed debt of $154 million, and increased its interest in Portland to 61.7 per cent from
33.3 per cent for US$51 million, excluding assumed debt of US$78 million.

52MANAGEMENT'S
DISCUSSION AND ANALYSIS

---



Financing Activities

In 2005, TransCanada retired long-term debt of $1,113 million. In June 2005, Gas Transmission Northwest Corporation (GTNC) redeemed all of its
outstanding US$150 million 7.80 per cent Senior Unsecured Debentures (Debentures). As a consequence, upon application by GTNC, the Debentures were de-listed from the
New York Stock Exchange and GTNC no longer has any securities registered under U.S. securities laws. In June 2005, GTNC 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 5.10 per cent medium-term notes due 2017 under the company's Canadian shelf prospectus. The company increased its notes payable by $416 million
during 2005.

In
2004, TransCanada retired long-term debt of $1,005 million. The company issued $200 million of 4.10 per cent medium-term notes due
2009, US$350 million of 5.60 per cent senior unsecured notes due 2034 and US$300 million of 4.875 per cent senior unsecured notes due 2015. The company
increased its notes payable by $179 million during 2004.

In
2003, TransCanada repaid long-term debt of $753 million, reduced notes payable by $62 million and redeemed all of its outstanding US$160 million,
8.75 per cent Junior Subordinated Debentures. The company issued $450 million of ten year, 5.65 per cent medium-term notes and US$350 million of
ten year, 4.00 per cent senior unsecured notes.

Dividends
on common shares of $586 million were paid in 2005 compared to $552 million in 2004 and $510 million in 2003.

In
January 2006, TransCanada's Board of Directors approved an increase in the quarterly common share dividend payment to $0.32 per share from $0.305 per share for the quarter
ending March 31, 2006. This was the sixth consecutive year of dividend increase since the $0.20 per share declared for fourth quarter 2000, which represents a 60 per cent increase
in per share dividends since 2000.

Certain
terms of the preferred shares, preferred securities and debt instruments of TransCanada PipeLines Limited (TCPL), a wholly-owned subsidiary of TransCanada, could
restrict TCPL's ability to declare dividends on preferred and common shares. At December 31, 2005, under the most restrictive provisions, approximately $1.6 billion was
available for the payment of dividends on TCPL's common shares which are held 100 per cent by TransCanada.

Financing
activities included a net reduction in TransCanada's proportionate share of non-recourse debt of joint ventures of $42 million in 2005 compared to a net
increase of $105 million in 2004 and a net decrease of $12 million in 2003.

Credit Activities

At December 31, 2005, TCPL had shelf prospectuses that qualified for issuance $1.2 billion of medium-term notes in Canada and US$1 billion of
debt securities in the U.S. In January 2006, $300 million of 4.3 per cent medium-term notes due 2011 were issued under the Canadian shelf prospectus.

At
December 31, 2005, total credit facilities of $2.0 billion were available to support the company's commercial paper program and for general corporate purposes. Of this
total, $1.5 billion is a committed five-year term syndicated credit facility. The facility is extendible on an annual basis and is revolving. In December 2005, the maturity
date of this facility was extended to December 2010. The remaining amounts are either demand or non-extendible facilities.

At
December 31, 2005, TransCanada had used approximately $271 million of its total lines of credit for letters of credit and to support ongoing commercial arrangements. If
drawn, interest on the lines of credit would be charged at prime rates of Canadian chartered and U.S. banks or at other negotiated financial bases.

TransCanada's
issuer rating assigned by Moody's Investors Service (Moody's) is A3 with a stable outlook. Credit ratings on TCPL's senior unsecured debt assigned by
Dominion Bond Rating Service Limited (DBRS), Moody's and Standard & Poor's are currently A, A2 and A-, respectively. DBRS and Moody's both maintain a 'stable' outlook on their
ratings and Standard & Poor's maintains a 'negative' outlook on its rating.

MANAGEMENT'S DISCUSSION AND
ANALYSIS53

---



CONTRACTUAL OBLIGATIONS

Obligations and Commitments

Total long-term debt at December 31, 2005 was approximately $10.0 billion compared to approximately $10.5 billion at December 31, 2004.
TransCanada's share of total debt of joint ventures at December 31, 2005 was $978 million compared to $893 million at December 31, 2004. Total notes payable at
December 31, 2005, including TransCanada's proportionate share of the notes payable of joint ventures, were $962 million compared to $546 million at December 31, 2004. The
security provided by each joint venture, except the capital lease obligations at Bruce Power, 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. TransCanada has provided certain pro-rata guarantees related to the capital lease obligations of Bruce Power.

Effective
January 1, 2005, under new Canadian accounting standards, the non-controlling interest component of preferred securities was classified as
long-term debt.

At
December 31, 2005, 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 are as follows.

---

PRINCIPAL REPAYMENTSYear ended December 31 (millions of dollars)

|                                 |  | 2006 |  | 2007 |  | 2008 |  | 2009 |  | 2010 |  | 2011+
|-------------------------------- |  | ---- |  | ---- |  | ---- |  | ---- |  | ---- |  | -----
|                                
|Long-term debt                   |  | 393  |  | 604  |  | 547  |  | 742  |  | 416  |  | 7,331
|Long-term debt of joint ventures |  | 41   |  | 28   |  | 29   |  | 89   |  | 286  |  | 505  
|                                
|Total principal repayments       |  | 434  |  | 632  |  | 576  |  | 831  |  | 702  |  | 7,836
|                                
|                                

---

INTEREST PAYMENTSYear ended December 31 (millions of dollars)

|                                                      |  | 2006 |  | 2007 |  | 2008 |  | 2009 |  | 2010 |  | 2011+
|----------------------------------------------------- |  | ---- |  | ---- |  | ---- |  | ---- |  | ---- |  | -----
|                                                     
|Interest payments on long-term debt                   |  | 806  |  | 784  |  | 734  |  | 682  |  | 637  |  | 7,320
|Interest payments on long-term debt of joint ventures |  | 70   |  | 68   |  | 67   |  | 64   |  | 52   |  | 356  
|                                                     
|Total interest payments                               |  | 876  |  | 852  |  | 801  |  | 746  |  | 689  |  | 7,676
|                                                     
|                                                     

At December 31, 2005, 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.

54MANAGEMENT'S
DISCUSSION AND ANALYSIS

---



---

OPERATING LEASE PAYMENTSYear ended December 31 (millions of dollars)

|                                     |  | 2006 |   | 2007 |   | 2008 |   | 2009 |   | 2010 |   | 2011+ |  
|------------------------------------ |  | ---- | - | ---- | - | ---- | - | ---- | - | ---- | - | ----- | -
|                                     | 
|Minimum lease payments               |  | 46   |   | 52   |   | 54   |   | 54   |   | 53   |   | 646   |  
|Amounts recoverable under sub-leases |  | (12  | ) | (12  | ) | (12  | ) | (11  | ) | (11  | ) | (13   | )
|                                     | 
|Net payments                         |  | 34   |   | 40   |   | 42   |   | 43   |   | 42   |   | 633   |  
|                                     | 
|                                     | 

The operating lease agreements for premises, services and equipment expire at various dates through 2011, with an option to renew certain lease
agreements for five years. The operating lease agreement for the natural gas storage facility expires in 2030 with lessee termination rights every fifth anniversary commencing in 2010 and with the
lessor having the right to terminate the agreement every five years commencing in 2015.

At
December 31, 2005, the company's future purchase obligations are approximately as follows.

---

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

|                                 |  | 2006  |  | 2007  |  | 2008  |  | 2009 |  | 2010 |  | 2011+
|-------------------------------- |  | ----- |  | ----- |  | ----- |  | ---- |  | ---- |  | -----
|                                
|Gas Transmission                 |  |       |  |       |  |       |  |      |  |      |  |      
|Transportation by others(2)      |  | 179   |  | 175   |  | 131   |  | 89   |  | 79   |  | 52   
|Other                            |  | 253   |  | 16    |  | 12    |  | 3    |  |     |  |     
|Power                            |  |       |  |       |  |       |  |      |  |      |  |      
|Commodity purchases(3)           |  | 1,163 |  | 1,039 |  | 881   |  | 522  |  | 525  |  | 4,802
|Capital expenditures(4)          |  | 534   |  | 390   |  | 145   |  | 70   |  |     |  |     
|Other(5)                         |  | 52    |  | 56    |  | 32    |  | 21   |  | 29   |  | 92   
|Corporate                        |  |       |  |       |  |       |  |      |  |      |  |      
|Information technology and other |  | 16    |  | 14    |  | 14    |  | 14   |  | 7    |  | 14   
|                                
|Total purchase obligations       |  | 2,197 |  | 1,690 |  | 1,215 |  | 719  |  | 640  |  | 4,960
|                                
|                                

MANAGEMENT'S DISCUSSION AND
ANALYSIS55

---



During 2006, TransCanada expects to make funding contributions to the company's pension plans and other benefit plans in the amount of
approximately $95 million and $7 million, respectively. The expected increase in total funding in 2006 from $74 million in 2005 is due to continued reductions in discount rates
used to calculate plan obligations partially offset by investment performance above long-term expectations in 2005. During 2006, TransCanada's proportionate share of expected funding
contributions to be made by joint ventures to their respective pension plans and other benefit plans is approximately $27 million and $2 million, respectively.

Bruce Power

Included in Power's capital expenditures in the table above is TransCanada's share of Bruce A's signed commitments to third party suppliers for the next five years for the
restart and refurbishment of the currently idle Units 1 and 2, extending the operating life of Unit 3 by replacing its steam generators and fuel channels when required and replacing the
steam generators on Unit 4, as follows.

Year ended December 31 (millions of dollars)

|2006 |  | 322
|---- |  | ---
|2007 |  | 311
|2008 |  | 142
|2009 |  | 69 
|2010 |  |   
|    
|     |  | 844
|    
|    

Aboriginal Pipeline Group

On June 18, 2003, the Mackenzie Delta gas producers, the APG and TransCanada reached an agreement which governs TransCanada's role in the Mackenzie Gas Pipeline Project.
The project would result in a natural gas pipeline being constructed from Inuvik, Northwest Territories, to the northern border of Alberta, where it would connect with the Alberta System. Under the
agreement, TransCanada agreed to finance the APG for its one-third share of project development costs. These costs were originally estimated to be approximately $90 million, but
given extended project delays, the protracted regulatory process and the projected timing to reach a decision to construct the pipeline, this share is currently forecast to increase to approximately
$145 million. As at December 31, 2005, TransCanada had funded $87 million (2004  $60 million) of this loan which is included in other
assets. The ability to recover this investment is dependent upon the outcome of the project.

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 or were
transacted at market prices and in the normal course of business.

Guarantees

TransCanada had no outstanding guarantees related to the long-term debt of unrelated third parties at December 31, 2005.

The
company, together with Cameco and BPC, has severally guaranteed one-third of certain contingent financial obligations of Bruce B related to power sales agreements,
operator licenses, the lease agreement, and contractor services. The terms of the guarantees currently range from 2018 to 2019.

As
part of the reorganization of Bruce Power, including the formation of Bruce A and the commitment to restart and refurbish the Bruce A units, the company, together with BPC, severally
guaranteed one-half of certain contingent financial obligations of Bruce A related to the refurbishment agreement with the OPA and cost sharing and sublease agreements with Bruce B. The
terms of the guarantees range from 2019 to 2036.

56MANAGEMENT'S
DISCUSSION AND ANALYSIS

---



TransCanada's
share of the net exposure under these Bruce Power guarantees at December 31, 2005 was estimated to be approximately $652 million of a calculated maximum of
$758 million. The current carrying amount of the liability related to these guarantees is nil and the fair value is approximately $17 million.

TransCanada
has guaranteed the equity undertaking of a subsidiary which supports the payment, under certain conditions, of principal and interest on US$133 million of public debt
obligations of TransGas. The company has a 46.5 per cent interest in TransGas. Under the terms of the agreement, the company severally with another major multinational company may be
required to 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 potential exposure is contingent on the impact of any change of law on TransGas' ability to service the debt. From the issuance of the debt in
1995 to date, there has been no change in applicable law and thus no exposure to TransCanada. The debt matures in 2010. The company has made no provision related to this guarantee.

In
connection with the acquisition of GTN, US$241 million of the purchase price was deposited into an escrow account. As at December 31, 2005, there was
US$54 million remaining in the escrow account. The outstanding funds in the escrow account represent the full face amount of the potential liability under certain GTN guarantees and are to be
used to satisfy the liability of GTN under these designated guarantees.

Contingencies

The Canadian Alliance of Pipeline Landowners' Associations and two individual landowners commenced an action in 2003 under Ontario'sClass 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 the
pipeline pursuant to Section 112 of theNEB Act. The company believes 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.

The
company 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 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.

FINANCIAL AND OTHER INSTRUMENTS

The company issues short-term and long-term debt, purchases and sells energy commodities including amounts in foreign currencies, and invests in foreign
operations. These activities result in exposures to interest rates, energy commodity prices and foreign currency exchange rates. The company utilizes derivatives to manage the risk that results from
these activities.

Derivatives
and other instruments must be designated and effective to qualify for hedge accounting. Derivatives are recorded at their fair value at each balance sheet date. For cash flow
and fair value hedges, gains or losses relating to derivatives are deferred and recognized in the same period and in the same financial statement category as the corresponding hedged transactions. For
hedges of net investments in self-sustaining foreign operations, exchange gains or losses on derivatives, net of tax, and designated foreign currency denominated debt are offset against
the exchange losses or gains arising on the translation of the financial statements of the foreign operations included in the foreign exchange adjustment account in Shareholders' Equity. In the event
that a derivative does not meet the designation or effectiveness criteria, realized and unrealized gains or losses are recognized in income each period in the same financial statement category as the
underlying transaction giving rise to the exposure being economically hedged. Premiums paid or received with respect to derivatives that are hedges are deferred and amortized to income over the
term of the hedge.

If
a derivative that previously qualified as a hedge is settled, de-designated or ceases to be effective, the gain or loss at that date is deferred and recognized in the same
period and in the same financial statement category as the

MANAGEMENT'S DISCUSSION AND
ANALYSIS57

---



corresponding
hedged transactions. If a hedged anticipated transaction is no longer probable to occur, related deferred gains or losses are recognized in income in the current period.

The
recognition of gains and losses on derivatives for Canadian Mainline, Alberta System, the Foothills System and the BC System exposures is determined through the regulatory process.

The
fair value of foreign exchange and interest rate derivatives has been estimated 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.

Net Investment in Foreign Operations

At December 31, 2005 and 2004, the company had net investments in self sustaining foreign operations with a U.S. dollar functional currency which created an
exposure to changes in exchange rates. The company uses U.S. dollar denominated debt and derivatives to hedge this exposure on an after-tax basis. The fair value for derivatives
used to manage the exposure is shown in the table below.

---

Asset/(Liability)

|                                                               |  |                      |  | 2005       |  | 2004                                 
|-------------------------------------------------------------- |  | -------------------- |  | ---------- |  | -------------------------------------
|
|                                                               |  |                      |  |           
|December 31
(millions of dollars)                              |  | Accounting Treatment |  | Fair Value |  | Notional or Notional Principal Amount
|                                                              
|U.S. dollar cross-currency swaps (maturing 2006 to 2012)       |  | Hedge                |  | 119        |  | U.S. 450                             
|U.S. dollar forward foreign exchange contracts (maturing 2006) |  | Hedge                |  | 5          |  | U.S. 525                             
|U.S. dollar options (maturing 2006)                            |  | Hedge                |  |           |  | U.S. 60                              

|
|

---

Reconciliation of Foreign Exchange Adjustment (Losses)/Gains

|December 31 (millions of dollars)                                |  | 2005 |   | 2004 |  
|---------------------------------------------------------------- |  | ---- | - | ---- | -
|                                                                 | 
|Balance at January 1                                             |  | (71  | ) | (40  | )
|Translation losses on foreign currency denominated net assets(1) |  | (21  | ) | (39  | )
|Gains on derivatives                                             |  | 23   |   | 52   |  
|Income taxes                                                     |  | (21  | ) | (44  | )
|                                                                 | 
|Balance at December 31                                           |  | (90  | ) | (71  | )
|                                                                 | 
|                                                                 | 

Foreign Exchange Gains/(Losses)

Foreign exchange gains included in Other Expenses/(Income) for the year ended December 31, 2005 are $19 million
(2004  $6 million; 2003  nil).

58MANAGEMENT'S
DISCUSSION AND ANALYSIS

---



Foreign Exchange and Interest Rate Management Activity

The company manages the foreign exchange and interest rate risks related to its U.S. dollar denominated debt, and transactions and interest rate exposures of the
Canadian Mainline, the Alberta System and the BC System through the use of foreign currency and interest rate derivatives. Certain of the realized gains and losses on these derivatives are shared with
shippers on predetermined terms. The details of the foreign exchange and interest rate derivatives are shown in the table below.

---

Asset/(Liability)

|                                  |                         |                         |           | 2005       |     | 2004                                 
|--------------------------------- | ----------------------- | ----------------------- | --------- | ---------- | --- | -------------------------------------
|
|                                  |                         |                         |           |           
|December 31
(millions of dollars) |                         | Accounting Treatment    |           | Fair Value |     | Notional or Notional Principal Amount
|                                 
|Foreign Exchange                  |                         |                         |           |            |     |                                      
|Cross- currency swaps             |                         |                         |           |            |     |                                      
|                                  | (maturing 2010 to 2013) |                         | Non-hedge |            | (86 | )                                    
|Interest Rate                     |                         |                         |           |            |     |                                      
|Interest rate swaps               |                         |                         |           |            |     |                                      
|                                  | Canadian dollars        |                         |           |            |     |                                      
|                                  |                         | (maturing 2007 to 2008) |           | Hedge      |     | 4                                    
|                                  |                         | (maturing 2006 to 2009) |           | Non-hedge  |     | 7                                    
|                                  |                         |                         |           |            |     |                                      
|                                  |                         |                         |           | 11         |     |                                      
|                                  |                         |                         |           |            |     |                                      
|                                  | U.S. dollars            |                         |           |            |     |                                      
|                                  |                         | (maturing 2007 to 2009) |           | Non-hedge  |     | 5                                    

MANAGEMENT'S DISCUSSION AND
ANALYSIS59

---



The company manages the foreign exchange and interest rate exposures of its other businesses through the use of foreign currency and interest rate
derivatives. The details of these foreign currency and interest rate derivatives are shown in the table below.

---

Asset/(Liability)

|                                   |                 |                         |           | 2005       |   | 2004                                 
|---------------------------------- | --------------- | ----------------------- | --------- | ---------- | - | -------------------------------------
|
|                                   |                 |                         |           |           
|December 31
(millions of dollars)  |                 | Accounting Treatment    |           | Fair Value |   | Notional or Notional Principal Amount
|                                  
|Foreign Exchange                   |                 |                         |           |            |   |                                      
|Options (maturing 2006)            |                 | Non-hedge               |           | 1          |   | U.S. 195                             
|Forward foreign exchange contracts |                 |                         |           |            |   |                                      
|                                   | (maturing 2006) |                         | Hedge     |            | 2 |                                      
|                                   | (maturing 2006) |                         | Non-hedge |            | 1 |                                      
|Interest Rate                      |                 |                         |           |            |   |                                      
|Options                            |                 | Non-hedge               |           |           |   |                                     
|Interest rate swaps                |                 |                         |           |            |   |                                      
|                                   | Canadian dollar |                         |           |            |   |                                      
|                                   |                 | (maturing 2007 to 2009) |           | Hedge      |   | 1                                    
|                                   |                 | (maturing 2006 to 2011) |           | Non-hedge  |   | 1                                    
|                                   |                 |                         |           |            |   |                                      
|                                   |                 |                         |           | 2          |   |                                      
|                                   |                 |                         |           |            |   |                                      
|                                   | U.S. dollar     |                         |           |            |   |                                      
|                                   |                 | (maturing 2013)         |           | Hedge      |   |                                     
|                                   |                 | (maturing 2006 to 2010) |           | Non-hedge  |   | 18                                   
|                                   |                 |                         |           |            |   |                                      
|                                   |                 |                         |           | 18         |   |                                      
|                                   |                 |                         |           |            |   |                                      

Certain of the company's joint ventures use interest rate derivatives to manage interest rate exposures. The company's proportionate share of the
fair value of the outstanding derivatives at December 31, 2005 was nil (2004  $1 million).

60MANAGEMENT'S
DISCUSSION AND ANALYSIS

---



Energy Price Risk Management

The company executes power, natural gas and heat rate derivatives for overall management of its asset portfolio. Heat rate contracts are contracts for the sale or purchase of
power that are priced based on a natural gas index. The fair value and notional volumes of contracts for differences and the swap, future, option and heat rate contracts are shown in the
tables below.

---

Power

Asset/(Liability)

|                                            |                         |                      |           | 2005       |      | 2004       |    
|------------------------------------------- | ----------------------- | -------------------- | --------- | ---------- | ---- | ---------- | ---
|
|                                            |                         |                      |           |            |     
|December 31 (millions of dollars)           |                         | Accounting Treatment |           | Fair Value |      | Fair Value |    
|                                            |                        
|Power  swaps and contracts for differences |                         |                      |           |            |      |            |    
|                                            | (maturing 2006 to 2011) |                      | Hedge     |            | (130 | )          | 7  
|                                            | (maturing 2006 to 2010) |                      | Non-hedge |            | 13   |            | (2 
|Gas  swaps, futures and options            |                         |                      |           |            |      |            |    
|                                            | (maturing 2006 to 2016) |                      | Hedge     |            | 17   |            | (39
|                                            | (maturing 2006 to 2008) |                      | Non-hedge |            | (11  | )          | (2 
|Heat rate contracts                         |                         |                      |           |            |      |            |    
|                                            | (maturing 2006)         |                      | Non-hedge |            |     |            | (1 

---

Notional Volumes

|                                                |                         |                      |           | Power (GWh) |       | Gas (Bcf)
|----------------------------------------------- | ----------------------- | -------------------- | --------- | ----------- | ----- | ---------
|
|                                                |                         |                      |           |            
|December 31, 2005                               |                         | Accounting Treatment |           | Purchases   |       | Sales    
|                                               
|Power  swaps and contracts for
    differences |                         |                      |           |             |       |          
|                                                | (maturing 2006 to 2011) |                      | Hedge     |             | 2,566 |          
|                                                | (maturing 2006 to 2010) |                      | Non-hedge |             | 1,332 |          
|Gas  swaps, futures and options                |                         |                      |           |             |       |          
|                                                | (maturing 2006 to 2016) |                      | Hedge     |             |      |          
|                                                | (maturing 2006 to 2008) |                      | Non-hedge |             |      |          
|Heat rate contracts                             |                         |                      |           |             |       |          
|                                                | (maturing 2006)         |                      | Non-hedge |             |      |          

|
|

|
|

|December 31, 2004                               |  |           |  |       |  |       |  |    |  |   
|----------------------------------------------- |  | --------- |  | ----- |  | ----- |  | -- |  | --
|                                               
|Power  swaps and contracts for
    differences |  | Hedge     |  | 3,314 |  | 7,029 |  |   |  |  
|                                                |  | Non-hedge |  | 438   |  |      |  |   |  |  
|Gas  swaps, futures and options                |  | Hedge     |  |      |  |      |  | 80 |  | 84
|                                                |  | Non-hedge |  |      |  |      |  | 5  |  | 8 
|Heat rate contracts                             |  | Non-hedge |  |      |  | 229   |  | 2  |  |  

Certain of the company's joint ventures use power derivatives to manage energy price risk exposures. The company's proportionate share of the fair
value of these outstanding power sales derivatives at December 31, 2005 was $(38) million (2004  nil) and relates to contracts which cover the period 2006
to 2008. The company's proportionate share of the notional sales volumes associated with this exposure at December 31, 2005 was 2,058 GWh
(2004  nil).

MANAGEMENT'S DISCUSSION AND
ANALYSIS61

---



RISK MANAGEMENT

Risk Management Overview

TransCanada and its subsidiaries are exposed to market, financial and counterparty risks in the normal course of their business activities. The risk management function assists
in managing these various business activities and the risks associated with them. A strong commitment to a risk management culture by TransCanada's management supports this function. TransCanada's
primary risk management objective is to protect earnings and cash flow and ultimately, shareholder value.

The
risk management function is guided by the following principles that are applied to all businesses and risk types:



The
processes within TransCanada's risk management function are designed to ensure that risks are properly identified, quantified, reported and managed. Risk management strategies,
policies and limits are designed to ensure TransCanada's risk taking is consistent with the company's business objectives and risk tolerance. Risks are managed within limits ultimately established by
the company's Board of Directors and implemented by senior management, monitored by risk management personnel and audited by internal audit personnel.

TransCanada
manages market, financial and counterparty risks and related exposures in accordance with the company's market risk, interest rate and foreign exchange risk, and counterparty
risk policies. The company's primary market and financial risks result from volatility in commodity positions and prices, interest rates and foreign currency exchange rates. Senior management reviews
these exposures and reports on a regular basis to the Audit Committee of TransCanada's Board of Directors.

Market Risk Management

In order to manage market risk exposures created by fixed and variable pricing arrangements at different pricing indices and delivery points, the company enters into offsetting
physical positions and derivative financial instruments. Market risks are quantified using value-at-risk methodology and are reviewed weekly by senior management.

Financial Risk Management

TransCanada monitors the financial market risk exposures relating to the company's investments in foreign currency denominated net assets, regulated and
non-regulated long-term debt portfolios and foreign
currency exposure on transactions. The market risk exposures created by these business activities are managed by establishing offsetting positions or through the use of derivative financial
instruments.

Counterparty Risk Management

Counterparty risk is the financial loss that the company would experience if the counterparty failed to meet its obligations in accordance with the terms and conditions of its
contracts with the company. Counterparty risk is mitigated by conducting financial and other assessments to establish a counterparty's creditworthiness, setting exposure limits and monitoring
exposures against these limits, and, where warranted, obtaining financial assurances.

62MANAGEMENT'S
DISCUSSION AND ANALYSIS

---



The
company's counterparty risk management practices and positions are further described in Note 16 to the consolidated financial statements.

Risks and Risk Management Related to the Kyoto Protocol

TransCanada is in the business of transporting natural gas and generating electricity to meet the growing energy needs of businesses and consumers throughout North America.
While expanding the company's businesses, TransCanada continuously identifies and takes action to manage issues that could affect the company's ability to provide consumers with safe, reliable and
cost-effective energy supplies. Among these issues are business risks associated with greenhouse gas emissions.

In
Canada, TransCanada's fossil-fired power plants, pipeline assets and carbon black facilities are expected to be covered under legislation for large final emitters. While the broad
elements of the proposed regulations to reduce greenhouse gas emissions intensities from large industrial emitters have been established, key policy elements remain outstanding, including details of
compliance options that entities may use to fulfill compliance obligations. At this time, it is difficult to determine the level of impact to the company's Canadian assets until these and other key
policy elements have been defined.

In
2006, TransCanada will continue with its strategy for managing the climate change issue. This strategy includes activities such as:



In
addition to these activities, TransCanada also ensures that the potential business risks and opportunities posed by increasing environmental priorities are considered when making
decisions regarding the company's businesses.

Disclosure Controls and Procedures and Internal Controls

Pursuant to regulations adopted by the U.S. Securities and Exchange Commission (SEC), under theSarbanes-Oxley Act of
2002and those of the Canadian Securities Administrators, TransCanada's management evaluates the effectiveness of the design and operation of the company's disclosure controls
and procedures (disclosure controls). This evaluation is done under the supervision of, and with the participation of, the President and Chief Executive Officer and the Chief Financial Officer.

As
of the end of the period covered by this Annual Report, TransCanada's management evaluated the effectiveness of its disclosure controls. Based on that evaluation, the President and
Chief Executive Officer and the Chief Financial Officer have concluded that TransCanada's disclosure controls are effective in ensuring that material information relating to TransCanada is made known
to management on a timely basis, and is included in this Annual Report.

During
the period covered by this Annual Report, there has been no change in internal control over financial reporting that has materially affected, or is reasonably likely to materially
affect, TransCanada's internal control over financial reporting.

CEO and CFO Certifications

With respect to the year ending December 31, 2005, TransCanada's President and Chief Executive Officer has provided the New York Stock Exchange with the annual
CEO certification 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 certifications regarding the quality of TransCanada's public disclosures relating to its fiscal 2005 reports
filed with the SEC.

MANAGEMENT'S DISCUSSION AND
ANALYSIS63

---



Compliance Expenditures

The total cost incurred by TransCanada to meet compliance requirements of Sections 302, 404 and 906 of theSarbanes-Oxley Act of
2002for the period January 1, 2002 to December 31, 2005, was estimated to be $9 million, including third party charges of $3 million.

CRITICAL ACCOUNTING POLICY

The company accounts for the impacts of rate regulation in accordance with generally accepted accounting principles (GAAP) as outlined in Notes 1 and 12 to the
consolidated financial statements. 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. 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 as detailed in Note 12 to the consolidated financial statements.

As
prescribed by the regulators, the taxes payable method of accounting for income taxes is used for tollmaking purposes for Canadian regulated natural gas transmission operations. As
permitted by GAAP, this method is also used for accounting purposes, since there is 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 rate
revenues. In the absence of rate regulation accounting, GAAP would require the recognition of future income tax liabilities. If the liability method of accounting had been used, additional future
income tax liabilities in the amount of $1,619 million at December 31, 2005 would have been recorded.

CRITICAL ACCOUNTING ESTIMATE

Since a determination of many assets, liabilities, revenues and expenses is dependent upon future events, the preparation of the company's consolidated financial statements
requires the use of estimates and assumptions which have been made using careful judgment. TransCanada's critical accounting estimate is depreciation expense. TransCanada's plant, property and
equipment are depreciated on a straight-line basis over their estimated useful lives. Depreciation expense for the year ended December 31, 2005 was $1,017 million.
Depreciation expense impacts the Gas Transmission and Power segments of the company. In the Gas Transmission business, depreciation rates are approved by the regulators, where applicable, and
depreciation expense is recoverable based on the cost of providing the services or products. A change in the estimation of the useful lives of the plant, property and equipment in the Gas Transmission
segment would, if recovery through rates is permitted by the regulators, have no material impact on TransCanada's net income but would directly impact funds generated from operations.

ACCOUNTING CHANGES

Financial Instruments  Disclosure and Presentation

Effective January 1, 2005, the Company adopted the amendment of the Canadian Institute of Chartered Accountants (CICA) to the existing Handbook Section "Financial
Instruments  Disclosure and Presentation" which provides guidance for classifying certain financial instruments that embody obligations that may be settled by
the issuance of the issuer's equity shares as debt when the instrument that embodies the obligations does not establish an ownership relationship. In accordance with this amendment, TransCanada
classified the non-controlling interest component of preferred

64MANAGEMENT'S
DISCUSSION AND ANALYSIS

---



securities
as long-term debt. This change was applied retroactively with restatement of prior periods. See Note 2 to the consolidated financial statements for the impact of
this accounting change.

Disclosure by Entities Subject to Rate Regulation

In May 2005, the Accounting Standards Board (AcSB) issued Accounting Guideline AcG-19 "Disclosures by Entities Subject to Rate Regulation" to improve the
quality and consistency of disclosures by entities subject to rate
regulation. Under AcG-19, all rate regulated entities are required to disclose general information about the rate-setting process, its accounting effects and the operations
affected. The new disclosure requirements were effective for fiscal years ending on or after December 31, 2005. The company adopted these requirements effective December 31, 2005. See
Note 12 to the consolidated financial statements for disclosures required under AcG-19.

Limited Partnerships

A wholly-owned subsidiary of TransCanada serves as the general partner of PipeLines LP. Effective December 31, 2005, TransCanada consolidated limited partnerships
when the general partner controls the strategic operating, financing and investing activities of the limited partnerships and the limited partners do not have substantive participating rights. This
change was applied retroactively with restatement of prior periods. There was no impact on previously recorded net income and the balance sheet and income statement impact was not material.

Consolidation of Variable Interest Entities

In June 2003, the Accounting Standards Board of the CICA issued a new Accounting Guideline "Consolidation of Variable Interest Entities" which requires enterprises to
identify variable interest entities in which they have an interest, determine whether they are the primary beneficiary of such entities and, if so, to consolidate them. For TransCanada, the
guideline's requirements were effective as of January 1, 2005. Adopting the provisions of this guideline had no impact on the company's consolidated financial statements.

Non-Monetary Transactions

In June 2005, the AcSB issued the new Handbook Section 3831 "Non-Monetary Transactions" replacing Section 3830 of the same title. The revised
standard requires all non-monetary transactions to be measured at fair value, subject to certain exceptions. Commercial substance replaces culmination of the earnings process as the test
for fair value measurement and is a function of the cash flows expected from the exchanged assets. The new requirements are effective for non-monetary transactions initiated in periods
beginning on or after January 1, 2006. Adopting the provisions of this standard is not expected to have an impact on the company's consolidated financial statements.

Financial Instruments  Recognition and Measurement

In January 2005, the AcSB issued the new Handbook Section 3855 "Financial Instruments  Recognition and Measurement" which
prescribes that all financial instruments within the scope of this standard, including derivatives, be included on a company's balance sheet and measured, either at their fair value or, in limited
circumstances when fair value may not be considered most relevant, at cost or amortized cost. It also specifies when gains and losses as a result
of changes in fair value are to be recognized in the income statement. This standard is effective for interim and annual financial statements for fiscal years beginning on or after October 1,
2006. This standard is substantially similar to the corresponding requirements under Statement of Financial Accounting Standards (SFAS) No. 115 "Accounting for Certain Investments in Debt and
Equity Securities" and SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities" which were adopted by the company for U.S. GAAP purposes, effective
January 1, 2001. This new Handbook section will be adopted by the company as of January 1, 2007 on a prospective basis. TransCanada does not expect the new Canadian requirement to have a
significant impact on the company's consolidated financial statements. See the company's reconciliation to United States GAAP posted on www.sec.gov/edgar.shtml for the impact of
SFAS No. 133 on the company's consolidated financial statements.

Hedges

In January 2005, the AcSB issued the new Handbook Section 3865 "Hedges" which specifies the circumstances under which hedge accounting is permissible, how hedge
accounting may be performed, and where the impacts should be recorded. The provisions of this standard introduce three specific types of hedging relationships: fair value hedges, cash

MANAGEMENT'S DISCUSSION AND
ANALYSIS65

---



flow
hedges and hedges of a net investment in self-sustaining foreign operations. This standard is effective for interim and annual financial statements for fiscal years beginning on or
after October 1, 2006. The standard builds on existing Accounting Guideline AcG-13 "Hedging Relationships" which was adopted by TransCanada effective January 1, 2004. This
new Handbook section will be adopted by the company as of January 1, 2007 on a prospective basis. TransCanada does not expect the new requirement to have a significant impact on the company's
consolidated financial statements.

Comprehensive Income

In January 2005, the AcSB issued the new Handbook Section 1530 "Comprehensive Income" which requires that an enterprise present comprehensive income and its
components, in a separate financial statement that is displayed with the same prominence as other financial statements. This Section introduces a new requirement to present certain gains and losses
temporarily outside net income. This standard is effective for interim and annual financial statements for fiscal years beginning on or after October 1, 2006. This standard is substantially
similar to the corresponding requirements under SFAS No. 130 "Reporting Comprehensive Income" and SFAS No. 133 "Accounting for Derivative Instruments and Hedging
Activities" which have already been adopted by the company for U.S. GAAP purposes. This Handbook section will be adopted by the company as of January 1, 2007 on a prospective basis.
TransCanada does not expect the new Canadian requirement to have a significant impact on the company's consolidated financial statements. See the company's reconciliation to United States GAAP
posted on www.sec.gov/edgar.shtml for the impact of SFAS No. 130 and SFAS No. 133 on the company's consolidated financial statements.

DISCONTINUED OPERATIONS

TransCanada's Board of Directors approved plans in previous years to dispose of the company's International, Canadian Midstream, Gas Marketing and certain other businesses. As
of December 31, 2003, TransCanada's investments in Gasoducto del Pacifico (Gas Pacifico), INNERGY Holdings S.A. (INNERGY) and Paiton Energy, which were previously approved for
disposal, were accounted for as part of continuing operations due to the length of time it had taken the company to dispose of these assets. Gas Pacifico and INNERGY are included in the Gas
Transmission segment. It is the intention of the company to continue with its plan to dispose of these investments. Paiton Energy was sold in November 2005 and the gain on sale was recorded in
the Power segment.

In
2005, the company reviewed the provision for loss on discontinued operations and concluded that the provision was adequate.

In
2004 and 2003, the company recognized in income $52 million and $50 million, respectively, related to the original $102 million after-tax deferred
gain on the sale of Gas Marketing.

66MANAGEMENT'S
DISCUSSION AND ANALYSIS

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SUBSIDIARIES AND INVESTMENTS

TransCanada's subsidiaries and investments that hold significant operating assets are noted below.

---

|Subsidiary Investment         |                                        | Major Operating Assets                               |                         | Organized Under the Laws of |          | Effective Percentage Ownership by TransCanada(1)
|----------------------------- | -------------------------------------- | ---------------------------------------------------- | ----------------------- | --------------------------- | -------- | ------------------------------------------------
|                             
|TransCanada PipeLines Limited |                                        | Canadian Mainline and BC System                      |                         | Canada                      |          | 100                                             
|                              | NOVA Gas Transmission Ltd.             |                                                      | Alberta System          |                             | Alberta  |                                                 
|                              |                                        | TransCanada Pipeline Ventures Ltd.                   |                         | Ventures LP                 |          | Alberta                                         
|                              | Foothills Pipe Lines Ltd.              |                                                      | Foothills System        |                             | Canada   |                                                 
|                              | TransCanada PipeLine USA Ltd.          |                                                      |                         |                             | Nevada   |                                                 
|                              |                                        | TransCanada Hydro Northeast Inc.                     |                         | TC Hydro                    |          | Delaware                                        
|                              |                                        | Gas Transmission Northwest Corporation               |                         | GTN                         |          | California                                      
|                              |                                        | TransCanada Power Marketing Ltd.                     |                         | U.S. Power assets           |          | Delaware                                        
|                              |                                        | Great Lakes Gas Transmission Limited
Partnership     |                         | Great Lakes                 |          | Delaware                                        
|                              |                                        | Iroquois Gas Transmission System L.P.                |                         | Iroquois                    |          | Delaware                                        
|                              |                                        | Portland Natural Gas Transmission System Partnership |                         | Portland                    |          | Maine                                           
|                              | TC PipeLines, LP                       |                                                      | TC PipeLines, LP assets |                             | Delaware |                                                 
|                              |                                        | Northern Border Pipeline Company                     |                         | Northern Border             |          | Texas                                           
|                              |                                        | Tuscarora Gas Transmission Company                   |                         | Tuscarora                   |          | Nevada                                          
|                              | TransCanada Energy Ltd.                |                                                      | Canadian Power assets   |                             | Canada   |                                                 
|                              |                                        | Bruce Power A L.P.                                   |                         | Bruce A Units 1 to 4        |          | Ontario                                         
|                              |                                        | Bruce Power L.P.                                     |                         | Bruce B Units 5 to 8        |          | Ontario                                         
|                              | Trans Québec & Maritimes Pipeline Inc. |                                                      | TQM                     |                             | Canada   |                                                 
|                              | CrossAlta Gas Storage & Services Ltd.  |                                                      | CrossAlta               |                             | Alberta  |                                                 
|                              | TransGas de Occidente S.A.             |                                                      | TransGas                |                             | Colombia |                                                 

MANAGEMENT'S DISCUSSION AND
ANALYSIS67

---





---

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

|                                    |                         | 2005   |       | 2004   |       | 2003  
|----------------------------------- | ----------------------- | ------ | ----- | ------ | ----- | ------
|                                   
|Income Statement                    |                         |        |       |        |       |       
|Revenues                            |                         | 6,124  |       | 5,497  |       | 5,636 
|Net income                          |                         |        |       |        |       |       
|                                    | Continuing operations   |        | 1,209 |        | 980   |       
|                                    | Discontinued operations |        |      |        | 52    |       
|                                   
|                                    | Total                   |        | 1,209 |        | 1,032 |       
|                                   
|                                   
|Balance Sheet                       |                         |        |       |        |       |       
|Total assets                        |                         | 24,113 |       | 22,422 |       | 20,887
|Long-term debt                      |                         | 9,640  |       | 9,749  |       | 9,516 
|Non-recourse debt of joint ventures |                         | 937    |       | 808    |       | 741   
|Preferred securities                |                         | 536    |       | 554    |       | 598   
|                                   
|Per Common Share Data               |                         |        |       |        |       |       
|Net income  Basic                  |                         |        |       |        |       |       
|                                    | Continuing operations   |        | $2.49 |        | $2.02 |       
|                                    | Discontinued operations |        |      |        | 0.11  |       
|                                   
|                                    |                         | $2.49  |       | $2.13  |       | $1.76 
|                                   
|                                   
|Net income  Diluted                |                         |        |       |        |       |       
|                                    | Continuing operations   |        | $2.47 |        | $2.01 |       
|                                    | Discontinued operations |        |      |        | 0.11  |       
|                                   
|                                    |                         | $2.47  |       | $2.12  |       | $1.76 
|                                   
|                                   
|Dividends declared                  |                         | $1.22  |       | $1.16  |       | $1.08 
|                                   
|                                   

68MANAGEMENT'S
DISCUSSION AND ANALYSIS

---



---

SELECTED QUARTERLY CONSOLIDATED FINANCIAL DATA(1)

|                                               |                         |        |       |        |       |        |       |       
|---------------------------------------------- | ----------------------- | ------ | ----- | ------ | ----- | ------ | ----- | ------
|
|                                               |                         |       
|(millions of dollars except per share amounts) |                         | Fourth |       | Third  |       | Second |       | First 
|                                              
|Revenues                                       |                         | 1,771  |       | 1,494  |       | 1,449  |       | 1,410 
|Net Income                                     |                         |        |       |        |       |        |       |       
|                                               | Continuing operations   |        | 350   |        | 427   |        | 200   |       
|                                               | Discontinued operations |        |      |        |      |        |      |       
|                                              
|                                               |                         | 350    |       | 427    |       | 200    |       | 232   
|                                              
|                                              
|Share Statistics                               |                         |        |       |        |       |        |       |       
|Net income per share  Basic                   |                         |        |       |        |       |        |       |       
|                                               | Continuing operations   |        | $0.72 |        | $0.88 |        | $0.41 |       
|                                               | Discontinued operations |        |      |        |      |        |      |       
|                                              
|                                               |                         | $0.72  |       | $0.88  |       | $0.41  |       | $0.48 
|                                              
|                                              
|Net income per share  Diluted                 |                         |        |       |        |       |        |       |       
|                                               | Continuing operations   |        | $0.71 |        | $0.87 |        | $0.41 |       
|                                               | Discontinued operations |        |      |        |      |        |      |       
|                                              
|                                               |                         | $0.71  |       | $0.87  |       | $0.41  |       | $0.48 
|                                              
|                                              
|Dividend declared per common share             |                         | $0.305 |       | $0.305 |       | $0.305 |       | $0.305
|                                              
|                                              

|                                   |                         |        |       |       |       |        |       |      
|---------------------------------- | ----------------------- | ------ | ----- | ----- | ----- | ------ | ----- | -----
|
|                                   |                         |       
|                                   |                         | Fourth |       | Third |       | Second |       | First
|                                  
|Revenues                           |                         | 1,480  |       | 1,311 |       | 1,347  |       | 1,359
|Net Income                         |                         |        |       |       |       |        |       |      
|                                   | Continuing operations   |        | 185   |       | 193   |        | 388   |      
|                                   | Discontinued operations |        |      |       | 52    |        |      |      
|                                  
|                                   |                         | 185    |       | 245   |       | 388    |       | 214  
|                                  
|                                  
|Share Statistics                   |                         |        |       |       |       |        |       |      
|Net income per share  Basic       |                         |        |       |       |       |        |       |      
|                                   | Continuing operations   |        | $0.38 |       | $0.40 |        | $0.80 |      
|                                   | Discontinued operations |        |      |       | 0.11  |        |      |      
|                                  
|                                   |                         | $0.38  |       | $0.51 |       | $0.80  |       | $0.44
|                                  
|                                  
|Net income per share  Diluted     |                         |        |       |       |       |        |       |      
|                                   | Continuing operations   |        | $0.38 |       | $0.39 |        | $0.80 |      
|                                   | Discontinued operations |        |      |       | 0.11  |        |      |      
|                                  
|                                   |                         | $0.38  |       | $0.50 |       | $0.80  |       | $0.44
|                                  
|                                  
|Dividend declared per common share |                         | $0.29  |       | $0.29 |       | $0.29  |       | $0.29
|                                  
|                                  

MANAGEMENT'S DISCUSSION AND
ANALYSIS69

---



Factors Impacting Quarterly Financial Information

In the Gas Transmission business, which consists primarily of the company's investments in regulated pipelines, 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 arising as a result of adjustments being recorded due to regulatory decisions and negotiated settlements with shippers and due to items outside of the normal course of operations.

In
the Power business, which builds, owns and operates electrical power generation plants and sells electricity, quarter over quarter revenues and net earnings are affected by seasonal
weather conditions, customer demand, market prices, planned and unplanned plant outages as well as items outside of the normal course of operations.

Significant
items which impacted 2005 and 2004 quarterly net earnings are as follows.



70MANAGEMENT'S
DISCUSSION AND ANALYSIS

---





FOURTH QUARTER 2005 HIGHLIGHTS

---

SEGMENT RESULTS-AT-A-GLANCEThree months ended December 31 (millions of dollars except per share amounts)

|                                |                               | 2005  |     | 2004  |   
|------------------------------- | ----------------------------- | ----- | --- | ----- | --
|                                |                              
|Gas Transmission                |                               | 160   |     | 157   |   
|                                |                              
|Power                           |                               |       |     |       |   
|                                | Excluding gains               |       | 82  |       | 31
|                                | Gain on sale of Paiton Energy |       | 115 |       |  
|                                |                              
|                                |                               | 197   |     | 31    |   
|                                |                              
|Corporate                       |                               | (7    | )   | (3    | ) 
|                                |                              
|Net Income(1)                   |                               | 350   |     | 185   |   
|                                |                              
|                                |                              
|Net Income Per Share  Basic(2) |                               | $0.72 |     | $0.38 |   
|                                |                              
|                                |                              

| | (1)Net Income                   |                               |  |       | 
| | ------------------------------- | ----------------------------- |  | ----- | 
| |                                 | Excluding gain                |  | 235   | 
| |                                 | Gain on sale of Paiton Energy |  | 115   | 
|
| |                                 | 350                           |  | 185  
|
|
| | (2)Net Income Per Share  Basic |                               |  |       | 
| |                                 | Excluding gain                |  | $0.48 | 
| |                                 | Gain on sale of Paiton Energy |  | 0.24  | 
|
| |                                 | $0.72                         |  | $0.38
|
|

Net income for fourth quarter 2005 of $350 million or $0.72 per share increased by $165 million or $0.34 per share compared to
$185 million or $0.38 per share for fourth quarter 2004. This increase was due to significantly higher net income from the Power business, including an after-tax gain of
$115 million or $0.24 per share from the sale of Paiton Energy.

Excluding
the $115 million gain related to the sale of Paiton Energy, net income for fourth quarter 2005 increased $50 million or $0.10 per share compared to fourth quarter
2004, to $235 million or $0.48 per share. This was due to increases of $51 million and $3 million in net income from the Power and Gas Transmission businesses, respectively,
partially offset by an increase of $4 million in net expenses in Corporate.

The
increase in Power's net income was primarily due to higher operating and other income from Bruce Power and Eastern Operations. Bruce Power's contribution to operating and other
income increased by $48 million in fourth quarter 2005 compared to fourth quarter 2004, primarily due to higher realized power prices on uncontracted volumes sold into Ontario's wholesale spot
market, higher generation volumes and an increased ownership interest in the Bruce A facilities effective October 31, 2005.

Western
Operations' operating and other income was $8 million higher in fourth quarter 2005 compared to fourth quarter 2004 primarily due to increased margins in fourth quarter
2005 as a result of higher market heat rates on uncontracted volumes of power sold. Partially offsetting this increase were lower contributions from the Bear Creek cogeneration facility which remained
on an unplanned outage throughout the quarter.

Eastern
Operations' operating and other income was $37 million higher in fourth quarter 2005 compared to fourth quarter 2004 primarily due to contributions from TC Hydro, acquired
on April 1, 2005, and from the Grandview

MANAGEMENT'S DISCUSSION AND
ANALYSIS71

---



cogeneration
facility placed into service in January 2005. Partially offsetting these increases was a fourth quarter 2004 positive impact due to a restructuring transaction relating to OSP
power purchase contracts and the loss of operating income associated with the expiration of certain long-term sales contracts in 2004.

General,
administrative, support costs and other increased $9 million in fourth quarter 2005 compared to fourth quarter 2004 primarily due to higher business development costs
expensed in 2005 and the positive impact in fourth quarter 2004 of the recognition of unrealized foreign exchange gains on Power LP's U.S. dollar denominated debt.

For
fourth quarter 2005, Gas Transmission's net income was $160 million compared to $157 million in fourth quarter 2004. The $3 million increase was due to a
$6 million increase in net income from the Other Gas Transmission businesses partially offset by a $3 million reduction in income from Wholly-Owned Pipelines. The reduction in income
from Wholly-Owned Pipelines was primarily due to a decline in the Canadian Mainline and the Alberta System net income. These decreases were partially offset by higher net income during the quarter
from TransCanada's investment in GTN which was acquired on November 1, 2004. The increase in net income from Other Gas Transmission was primarily due to lower project development costs expensed
in fourth quarter 2005 resulting from capitalization of costs of the Broadwater and Keystone projects in 2005 and higher income from Gas Pacifico. These increases were partially offset by lower income
from Great Lakes and Ventures LP.

Net
expenses, after tax, in Corporate for fourth quarter 2005 were $7 million compared to $3 million for the corresponding period in 2004. The $4 million increase in
net expenses was primarily due to increased net interest costs offset by an income tax refund received in fourth quarter 2005 relating to prior years.

SHARE INFORMATION

As at February 27, 2006, TransCanada had 487,489,628 issued and outstanding common shares. In addition, there were 9,661,488 outstanding options to purchase common
shares, of which 7,303,084 were exercisable as at February 27, 2006.

OTHER INFORMATION

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

Other
selected consolidated financial information for the years ended December 31, 2005, 2004, 2003, 2002, 2001 and 2000 is found under the heading "Six-Year Financial
Highlights" on pages 115 and 116 of this Annual Report.

72MANAGEMENT'S
DISCUSSION AND ANALYSIS

---



GLOSSARY OF TERMS

|AcSB                       |  | Accounting Standards Board                                                        
|-------------------------- |  | ----------------------------------------------------------------------------------
|APG                        |  | Aboriginal Pipeline Group/Mackenzie Valley Aboriginal Pipeline Limited Partnership
|Bcf                        |  | Billion cubic feet                                                                
|B.C.                       |  | British Columbia                                                                  
|Bcf/d                      |  | Billion cubic feet per day                                                        
|Boston Edison              |  | Boston Edison Company                                                             
|BPC                        |  | BPC Generation Infrastructure Trust                                               
|Broadwater                 |  | Broadwater Energy project                                                         
|Bruce A                    |  | Bruce Power A L.P.                                                                
|Bruce B                    |  | Bruce Power L.P.                                                                  
|Bruce Power                |  | Bruce A and Bruce B, collectively                                                 
|Calpine                    |  | Calpine Corporation and certain of its subsidiaries                               
|Cameco                     |  | Cameco Corporation                                                                
|CAPP                       |  | Canadian Association of Petroleum Producers                                       
|Cartier Wind               |  | Cartier Wind Energy                                                               
|CBM                        |  | Coalbed methane                                                                   
|CFE                        |  | Comisión Federal de Electricdad                                                   
|CICA                       |  | Canadian Institute of Chartered Accountants                                       
|CPPL                       |  | ConocoPhillips Pipe Line Company                                                  
|CrossAlta                  |  | CrossAlta Gas Storage & Services Ltd.                                             
|DBRS                       |  | Dominion Bond Rating Service Limited                                              
|Debentures                 |  | Senior Unsecured Debentures                                                       
|disclosure controls        |  | Disclosure controls and procedures                                                
|EPCOR                      |  | EPCOR Utilities Inc.                                                              
|EUB                        |  | Alberta Energy and Utilities Board                                                
|FERC                       |  | Federal Energy Regulatory Commission                                              
|Foothills                  |  | Foothills Pipe Lines Ltd.                                                         
|FT                         |  | Firm transportation                                                               
|GAAP                       |  | Generally accepted accounting principles                                          
|Gas Pacifico               |  | Gasoducto del Pacifico                                                            
|GCOC                       |  | Generic cost of capital                                                           
|GJ                         |  | Gigajoules                                                                        
|GRA                        |  | General Rate Application                                                          
|Great Lakes                |  | Great Lakes Gas Transmission System                                               
|GTN                        |  | Gas Transmission Northwest System and the North Baja System, collectively         
|GTNC                       |  | Gas Transmission Northwest Corporation                                            
|GUA                        |  | Gas Utilities Act (Alberta)                                                       
|GWh                        |  | Gigawatt hours                                                                    
|Hydro-Québec               |  | Hydro-Québec Distribution                                                         
|IID                        |  | Imperial Irrigation District                                                      
|INNERGY                    |  | INNERGY Holdings S.A.                                                             
|Iroquois                   |  | Iroquois Gas Transmission System                                                  
|Irving                     |  | Irving Oil                                                                        
|Keystone pipeline          |  | Keystone oil pipeline                                                             
|km                         |  | Kilometres                                                                        
|LNG                        |  | Liquefied natural gas                                                             
|Millennium                 |  | Millennium Pipeline Project                                                       
|mmcf/d                     |  | Million cubic feet per day                                                        
|Moody's                    |  | Moody's Investors Service                                                         
|MOU                        |  | Memorandum of Understanding                                                       
|MW                         |  | Megawatt                                                                          
|MWh                        |  | Megawatt hour                                                                     
|NEB                        |  | National Energy Board                                                             
|Net earnings               |  | Net income from continuing operations                                             
|Northern Border            |  | Northern Border Pipeline Company                                                  
|NPA                        |  | Northern Pipeline Act                                                             
|OM&A                       |  | Operating, maintenance and administration                                         
|OPA                        |  | Ontario Power Authority                                                           
|OSP                        |  | Ocean State Power                                                                 
|PG&E                       |  | Pacific Gas & Electric Company                                                    
|Paiton Energy              |  | P.T. Paiton Energy Company                                                        
|PipeLines LP               |  | TC PipeLines, LP                                                                  
|PJ                         |  | Petajoules                                                                        
|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                                                   
|SFAS                       |  | Statement of Financial Accounting Standards                                       
|Shell                      |  | Shell US Gas & Power LLC                                                          
|STFT                       |  | Short-term firm transportation service                                            
|TC Hydro                   |  | Hydroelectric generation assets acquired from USGen                               
|Tcf                        |  | Trillion cubic feet                                                               
|TCPL                       |  | TransCanada PipeLines Limited                                                     
|TCPM                       |  | TransCanada Power Marketing Limited                                               
|TQM                        |  | Trans Québec & Maritimes System                                                   
|TransCanada or the company |  | TransCanada Corporation                                                           
|TransGas                   |  | TransGas de Occidente S.A.                                                        
|Tuscarora                  |  | Tuscarora Gas Transmission System                                                 
|U.S.                       |  | United States                                                                     
|USGen                      |  | USGen New England                                                                 
|Ventures LP                |  | TransCanada Pipeline Ventures Limited Partnership                                 
|WCSB                       |  | Western Canada Sedimentary Basin                                                  

MANAGEMENT'S DISCUSSION AND
ANALYSIS73

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|Report of
Management |  | The consolidated financial statements included in this Annual Report are the responsibility of 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 has prepared Management's Discussion and Analysis which is based on the Company's financial results prepared in accordance with Canadian GAAP. It compares the Company's financial performance in 2005 to 2004 and should be read in
conjunction with the consolidated financial statements and accompanying notes. In addition, significant changes between 2004 and 2003 are highlighted.
Management has developed 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 which govern ethical business conduct.
The Board of Directors has appointed an Audit Committee consisting of unrelated, non-management directors which meets at least five times during the year with Management and independently with each of the internal and external auditors and as a group
to review any significant accounting, internal control and auditing matters. 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.
With respect to the external auditors, KPMG LLP, the Audit Committee approves the terms of engagement 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 independent external auditors, KPMG LLP, have been appointed by the shareholders to express an opinion as to whether the consolidated financial statements present fairly, in all material respects, the Company's financial position, results of
operations and cash flows in accordance with Canadian GAAP. The report of KPMG LLP on page 75 outlines the scope of their examination and their opinion on the consolidated financial statements.
|-------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

| |  | SIG                                   |  | SIG                                                                         
| |  | ------------------------------------- |  | ----------------------------------------------------------------------------
| |  | Harold N. Kvisle                      |  | Russell K. Girling                                                          
| |  | President and
Chief Executive Officer |  | Executive Vice-President, Corporate Development, and Chief Financial Officer
| |  | February 27, 2006                     |  |                                                                             

74TRANSCANADA
CORPORATION

---





|Auditors'
Report |  | To the Shareholders of TransCanada CorporationWe have audited the consolidated balance sheets of TransCanada Corporation as at December 31, 2005 and 2004 and the consolidated statements of income, retained earnings and cash flows for each of the years in the three-year period ended
December 31, 2005. 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. Those standards require that we plan and perform an audit to obtain reasonable assurance 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, 2005 and 2004 and the results of its operations and its cash flows for each of the years
in the three-year period ended December 31, 2005 in accordance with Canadian generally accepted accounting principles. GRAPHICChartered Accountants
Calgary, Canada
February 27, 2006
|---------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

CONSOLIDATED FINANCIAL
STATEMENTS75

---



TRANSCANADA CORPORATIONCONSOLIDATED INCOME

|Year ended December 31
(millions of dollars except per share amounts)               |                         | 2005  |       | 2004  |       | 2003  |      
|----------------------------------------------------------------------------------- | ----------------------- | ----- | ----- | ----- | ----- | ----- | -----
|                                                                                    |                        
|Revenues                                                                            |                         | 6,124 |       | 5,497 |       | 5,636 |      
|Operating Expenses                                                                  |                         |       |       |       |       |       |      
|Cost of sales                                                                       |                         | 1,168 |       | 940   |       | 979   |      
|Other costs and expenses                                                            |                         | 1,889 |       | 1,615 |       | 1,666 |      
|Depreciation                                                                        |                         | 1,017 |       | 948   |       | 917   |      
|                                                                                    |                        
|                                                                                    |                         | 4,074 |       | 3,503 |       | 3,562 |      
|                                                                                    |                        
|Operating Income                                                                    |                         | 2,050 |       | 1,994 |       | 2,074 |      
|Other Expenses/(Income)                                                             |                         |       |       |       |       |       |      
|Financial charges (Note 9)                                                          |                         | 836   |       | 858   |       | 878   |      
|Financial charges of joint ventures (Note 10)                                       |                         | 66    |       | 63    |       | 80    |      
|Equity income (Note 7)                                                              |                         | (247  | )     | (213  | )     | (206  | )    
|Interest income and other                                                           |                         | (63   | )     | (59   | )     | (60   | )    
|Gains on sale of assets (Note 8)                                                    |                         | (445  | )     | (204  | )     |      |      
|                                                                                    |                        
|                                                                                    |                         | 147   |       | 445   |       | 692   |      
|                                                                                    |                        
|Income from Continuing Operations before Income Taxes and Non-Controlling Interests |                         | 1,903 |       | 1,549 |       | 1,382 |      
|Income Taxes (Note 17)                                                              |                         |       |       |       |       |       |      
|                                                                                    | Current                 |       | 550   |       | 414   |       | 284  
|                                                                                    | Future                  |       | 60    |       | 77    |       | 230  
|                                                                                    |                        
|                                                                                    |                         | 610   |       | 491   |       | 514   |      
|Non-Controlling Interests (Note 14)                                                 |                         | 84    |       | 78    |       | 67    |      
|                                                                                    |                        
|Net Income from Continuing Operations                                               |                         | 1,209 |       | 980   |       | 801   |      
|Net Income from Discontinued Operations (Note 23)                                   |                         |      |       | 52    |       | 50    |      
|                                                                                    |                        
|Net Income                                                                          |                         | 1,209 |       | 1,032 |       | 851   |      
|                                                                                    |                        
|                                                                                    |                        
|Net Income Per Share (Note 15)                                                      |                         |       |       |       |       |       |      
|Basic                                                                               |                         |       |       |       |       |       |      
|                                                                                    | Continuing operations   |       | $2.49 |       | $2.02 |       | $1.66
|                                                                                    | Discontinued operations |       |      |       | 0.11  |       | 0.10 
|                                                                                    |                        
|                                                                                    |                         | $2.49 |       | $2.13 |       | $1.76 |      
|                                                                                    |                        
|                                                                                    |                        
|Diluted                                                                             |                         |       |       |       |       |       |      
|                                                                                    | Continuing operations   |       | $2.47 |       | $2.01 |       | $1.66
|                                                                                    | Discontinued operations |       |      |       | 0.11  |       | 0.10 
|                                                                                    |                        
|                                                                                    |                         | $2.47 |       | $2.12 |       | $1.76 |      
|                                                                                    |                        
|                                                                                    |                        

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

76CONSOLIDATED
FINANCIAL STATEMENTS

---



TRANSCANADA CORPORATIONCONSOLIDATED CASH FLOWS

|Year ended December 31
(millions of dollars)                               |  | 2005   |   | 2004   |   | 2003   |  
|-------------------------------------------------------------------------- |  | ------ | - | ------ | - | ------ | -
|                                                                           | 
|Cash Generated from Operations                                             |  |        |   |        |   |        |  
|Net income from continuing operations                                      |  | 1,209  |   | 980    |   | 801    |  
|Depreciation                                                               |  | 1,017  |   | 948    |   | 917    |  
|Gains on sale of assets, net of current tax (Note 8)                       |  | (318   | ) | (204   | ) |       |  
|Equity income in excess of distributions received (Note 7)                 |  | (71    | ) | (113   | ) | (117   | )
|Future income taxes                                                        |  | 60     |   | 77     |   | 230    |  
|Non-controlling interests                                                  |  | 84     |   | 78     |   | 67     |  
|Funding of employee future benefits in excess of expense                   |  | (9     | ) | (29    | ) | (65    | )
|Other                                                                      |  | (21    | ) | (34    | ) | (11    | )
|                                                                           | 
|Funds generated from operations                                            |  | 1,951  |   | 1,703  |   | 1,822  |  
|(Increase)/decrease in operating working capital (Note 21)                 |  | (49    | ) | 29     |   | 93     |  
|                                                                           | 
|Net cash provided by operations                                            |  | 1,902  |   | 1,732  |   | 1,915  |  
|                                                                           | 
|Investing Activities                                                       |  |        |   |        |   |        |  
|Capital expenditures                                                       |  | (754   | ) | (530   | ) | (395   | )
|Acquisitions, net of cash acquired (Note 8)                                |  | (1,317 | ) | (1,516 | ) | (570   | )
|Disposition of assets, net of current tax (Note 8)                         |  | 671    |   | 410    |   |       |  
|Deferred amounts and other                                                 |  | 64     |   | (12    | ) | (131   | )
|                                                                           | 
|Net cash used in investing activities                                      |  | (1,336 | ) | (1,648 | ) | (1,096 | )
|                                                                           | 
|Financing Activities                                                       |  |        |   |        |   |        |  
|Dividends on common shares                                                 |  | (586   | ) | (552   | ) | (510   | )
|Distributions paid to non-controlling interests                            |  | (74    | ) | (87    | ) | (79    | )
|Notes payable issued/(repaid), net                                         |  | 416    |   | 179    |   | (62    | )
|Long-term debt issued                                                      |  | 799    |   | 1,090  |   | 930    |  
|Reduction of long-term debt                                                |  | (1,113 | ) | (1,005 | ) | (753   | )
|Long-term debt of joint ventures issued                                    |  | 38     |   | 217    |   | 60     |  
|Reduction of long-term debt of joint ventures                              |  | (80    | ) | (112   | ) | (72    | )
|Common shares issued (Note 15)                                             |  | 44     |   | 32     |   | 65     |  
|Partnership units of joint ventures issued                                 |  |       |   | 88     |   |       |  
|Redemption of junior subordinated debentures                               |  |       |   |       |   | (218   | )
|                                                                           | 
|Net cash used in financing activities                                      |  | (556   | ) | (150   | ) | (639   | )
|                                                                           | 
|Effect of Foreign Exchange Rate Changes on Cash and Short-Term Investments |  | 11     |   | (87    | ) | (54    | )
|                                                                           | 
|Increase/(Decrease) in Cash and Short-Term Investments                     |  | 21     |   | (153   | ) | 126    |  
|Cash and Short-Term Investments                                            |  |        |   |        |   |        |  
|Beginning of year                                                          |  | 191    |   | 344    |   | 218    |  
|                                                                           | 
|Cash and Short-Term Investments                                            |  |        |   |        |   |        |  
|End of year                                                                |  | 212    |   | 191    |   | 344    |  
|                                                                           | 
|                                                                           | 

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

CONSOLIDATED FINANCIAL
STATEMENTS77

---



TRANSCANADA CORPORATIONCONSOLIDATED BALANCE SHEET

|December 31
(millions of dollars)                             |  | 2005   |   | 2004   |  
|------------------------------------------------------------- |  | ------ | - | ------ | -
|                                                              | 
|ASSETS                                                        |  |        |   |        |  
|Current Assets                                                |  |        |   |        |  
|Cash and short-term investments                               |  | 212    |   | 191    |  
|Accounts receivable                                           |  | 796    |   | 616    |  
|Inventories                                                   |  | 281    |   | 174    |  
|Other                                                         |  | 277    |   | 120    |  
|                                                              | 
|                                                              |  | 1,566  |   | 1,101  |  
|Long-Term Investments (Note 7)                                |  | 400    |   | 1,098  |  
|Plant, Property and Equipment (Notes 4, 9 and 10)             |  | 20,038 |   | 18,764 |  
|Other Assets (Note 5)                                         |  | 2,109  |   | 1,459  |  
|                                                              | 
|                                                              |  | 24,113 |   | 22,422 |  
|                                                              | 
|                                                              | 
|LIABILITIES AND SHAREHOLDERS' EQUITY                          |  |        |   |        |  
|Current Liabilities                                           |  |        |   |        |  
|Notes payable (Note 18)                                       |  | 962    |   | 546    |  
|Accounts payable                                              |  | 1,494  |   | 1,135  |  
|Accrued interest                                              |  | 222    |   | 214    |  
|Current portion of long-term debt (Note 9)                    |  | 393    |   | 774    |  
|Current portion of long-term debt of joint ventures (Note 10) |  | 41     |   | 85     |  
|                                                              | 
|                                                              |  | 3,112  |   | 2,754  |  
|Deferred Amounts (Note 11)                                    |  | 1,196  |   | 783    |  
|Future Income Taxes (Note 17)                                 |  | 703    |   | 509    |  
|Long-Term Debt (Note 9)                                       |  | 9,640  |   | 9,749  |  
|Long-Term Debt of Joint Ventures (Note 10)                    |  | 937    |   | 808    |  
|Preferred Securities (Note 13)                                |  | 536    |   | 554    |  
|                                                              | 
|                                                              |  | 16,124 |   | 15,157 |  
|                                                              | 
|Non-Controlling Interests (Note 14)                           |  | 783    |   | 700    |  
|Shareholders' Equity                                          |  |        |   |        |  
|Common shares (Note 15)                                       |  | 4,755  |   | 4,711  |  
|Contributed surplus                                           |  | 272    |   | 270    |  
|Retained earnings                                             |  | 2,269  |   | 1,655  |  
|Foreign exchange adjustment (Note 16)                         |  | (90    | ) | (71    | )
|                                                              | 
|                                                              |  | 7,206  |   | 6,565  |  
|                                                              | 
|Commitments, Contingencies and Guarantees (Note 22)           |  |        |   |        |  
|                                                              |  | 24,113 |   | 22,422 |  
|                                                              | 
|                                                              | 

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 |  | Harry G. SchaeferDirector

78CONSOLIDATED
FINANCIAL STATEMENTS

---



TRANSCANADA CORPORATIONCONSOLIDATED RETAINED EARNINGS

|Year ended December 31
(millions of dollars) |  | 2005  |   | 2004  |   | 2003  |  
|-------------------------------------------- |  | ----- | - | ----- | - | ----- | -
|                                             | 
|Balance at beginning of year                 |  | 1,655 |   | 1,185 |   | 854   |  
|Net income                                   |  | 1,209 |   | 1,032 |   | 851   |  
|Common share dividends                       |  | (595  | ) | (562  | ) | (520  | )
|                                             | 
|                                             |  | 2,269 |   | 1,655 |   | 1,185 |  
|                                             | 
|                                             | 

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

CONSOLIDATED FINANCIAL
STATEMENTS79

---



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, Gas Transmission and Power, each of
which offers different products and services.

Gas Transmission

The Gas Transmission segment owns and operates the following natural gas pipelines:



Gas
Transmission also holds the Company's investments in other natural gas pipelines and natural gas storage facilities located primarily in North America. In addition, Gas Transmission
investigates and develops new natural gas and crude oil transmission, natural gas storage and liquefied natural gas regasification facilities in North America.

Power

The Power segment builds, owns and operates electrical power generation plants, and sells electricity. Power also holds the Company's investments in other electrical power
generation plants. This business operates in Canada and the U.S. as follows:

TransCanada
owns and operates:



TransCanada
owns but does not operate:



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



TransCanada
has under construction:



NOTE 1    ACCOUNTING POLICIES

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

Since
a determination of many assets, liabilities, revenues and expenses is dependent upon future events, the preparation of these consolidated financial statements requires the use of
estimates and assumptions which have been made using careful judgment. In the opinion

80NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

---



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 Corporation 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.

Regulation

The Canadian Mainline, the BC System, the Foothills System and Trans Québec & Maritimes Pipeline Inc. (Trans Québec &
Maritimes) are subject to the authority of the National Energy Board (NEB) and the Alberta System is regulated by the Alberta Energy and Utilities Board (EUB). The Gas Transmission Northwest System,
the North Baja System 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. 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 revenues and expenses in these regulated businesses may differ
from that otherwise expected under GAAP. The impact of rate regulation on TransCanada is provided in Note 12.

Revenue Recognition

Gas Transmission

In the Gas Transmission business, revenues from the Canadian rate-regulated operations are recognized in accordance with the decisions made by the NEB and EUB.
Revenues from the U.S. rate-regulated operations 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.

Power

The majority of revenues from the Power business are derived from the sale of electricity from energy marketing and trading activities and are recorded in the month of delivery.
Revenues from the Power business are also derived from the sale of unutilized natural gas fuel and energy derivative contracts, including financial swaps, futures contracts and options.

Dilution Gains

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

Cash and Short-Term Investments

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

Inventories

Inventories consisting of natural gas in storage, uranium, materials and supplies, including spare parts, are carried at the lower of average cost or net realizable value.

Plant, Property and Equipment

Gas Transmission

Plant, property and equipment of natural gas transmission operations 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 are depreciated at various rates. An allowance for funds used during
construction, using the rate of return on rate base approved by the regulators, is capitalized and included in the cost of gas transmission plant.

Power

Major power generation plant, equipment and structures in the Power business 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 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

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS81

---



useful
life or remaining lease term. Other equipment is depreciated at various rates. The cost of major overhauls of equipment is capitalized and depreciated over the estimated service lives. Interest
is capitalized on projects 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.

Power Purchase Arrangements

PPAs are long-term contracts to purchase or sell power on a predetermined basis. The initial payments for PPAs acquired by TransCanada are deferred and amortized
over the terms of the contracts, from the dates of acquisition, which range from ten to 19 years. Certain PPAs under which TransCanada sells power are accounted for as operating leases and,
accordingly, the related plant, property and equipment are accounted for as assets under operating leases.

Stock Options

TransCanada's Stock Option Plan permits the award of options to purchase the Company's common shares to certain employees, some of whom are officers. The contractual life of
options granted subsequent to 2002 is seven years and for options granted prior to 2003, the contractual life is ten years. 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 Gas Transmission and Power segments.

Income Taxes

As prescribed by the regulators, the taxes payable method of accounting for income taxes is used for tollmaking purposes for Canadian natural gas transmission operations. Under
the taxes payable method, it is not necessary to provide for future income taxes. As permitted by 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 the time payable. The liability method of accounting for income taxes is used for the remainder of the
Company's operations. Under this 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 expected to apply to taxable income in the years in which temporary differences are expected 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 which 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 statements of consolidated income, consolidated retained earnings and consolidated cash flows are translated at the
exchange rates in effect at the time of the transaction. Translation adjustments are reflected in the foreign exchange adjustment in Shareholders' Equity.

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

Derivative Financial Instruments and Hedging Activities

The Company utilizes derivative and other financial instruments to manage its exposure to changes in foreign currency exchange rates, interest rates and energy commodity prices.

Derivatives
and other instruments must be designated and effective to qualify for hedge accounting. Derivatives are recorded at their fair value at each balance sheet date. For cash flow
and fair value hedges, gains or losses relating to derivatives are deferred and recognized in the same period and in the same financial statement category as the corresponding hedged transactions. For
hedges of net investments in self-sustaining foreign operations, exchange gains or losses on derivatives, net of tax, and designated foreign currency denominated debt are offset against
the exchange losses or gains arising on the translation of the financial statements of the foreign operations included in the foreign exchange adjustment account in Shareholders' Equity. In the event
that a derivative does not meet the designation or effectiveness criteria, realized and unrealized gains or losses are recognized in income each period in the same financial statement category as the
underlying transaction giving rise to the exposure being economically hedged. Premiums paid or received with respect to derivatives that are hedges are deferred and amortized to income over the term
of the hedge.

82NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

---



If
a derivative that previously qualified as a hedge is settled, de-designated or ceases to be effective, the gain or loss at that date is deferred and recognized in the same
period and in the same financial statement category as the corresponding hedged transactions. If a hedged anticipated transaction is no longer probable to occur, related deferred gains or losses are
recognized in income in the current period.

The
recognition of gains and losses on derivatives for Canadian Mainline, Alberta System, the BC System and the Foothills System exposures is determined through the regulatory process.

Asset Retirement Obligation

The Company recognizes the fair value of a liability for an asset retirement obligation, where a legal obligation exists, in the period in which it is incurred 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.

Employee Benefit and Other Plans

The Company sponsors defined benefit pension plans (DB Plans). The cost of defined benefit pensions and other post-employment benefits earned by employees is
actuarially determined using the projected benefit method pro-rated on service and Management's best estimate of expected plan investment performance, salary escalation, retirement ages of
employees and expected health care costs. Pension plan assets are measured at fair value. The expected return on pension plan assets is determined using market-related values based on a
five-year moving average value for all plan assets. 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 the net actuarial gain or loss over 10 per cent of the greater of the benefit obligation and the fair value of plan 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 at the date of vesting. 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 employee's continued employment during a specified
period and achievement of specified corporate performance targets.

Certain
of the Company's joint ventures sponsor DB Plans and other post-employment benefit 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

Financial Instruments  Disclosure and Presentation

Effective January 1, 2005, the Company adopted the amendment of the Canadian Institute of Chartered Accountants (CICA) to the existing Handbook Section "Financial
Instruments  Disclosure and Presentation", which provides guidance for classifying certain financial instruments that embody obligations that may be settled by
issuance of the issuer's equity shares as debt when the instrument does not establish an ownership relationship. In accordance with this amendment, TransCanada reclassified the
non-controlling interest component of preferred securities as long-term debt.

This
accounting change was applied retroactively with restatement of prior periods. The impact of this change on TransCanada's net income in prior years was nil.

The
impact of the accounting change on the Company's consolidated balance sheet as at December 31, 2004 is as follows.

|(millions of dollars)                      |                                    | Increase/(Decrease | )   
|------------------------------------------ | ---------------------------------- | ------------------ | ----
|                                           |                                   
|Deferred amounts(1)                        |                                    | 135                |     
|Preferred securities                       |                                    | 535                |     
|Non-controlling interest                   |                                    |                    |     
|                                           | Preferred securities of subsidiary |                    | (670
|                                           |                                   
|Total liabilities and shareholders' equity |                                    |                   |     
|                                           |                                   
|                                           |                                   

Limited Partnerships

A wholly-owned subsidiary of TransCanada serves as the general partner of TC PipeLines, LP (PipeLines LP). Effective December 31, 2005, TransCanada
consolidated limited partnerships when the general partner controls the strategic operating, financing and investing activities of the limited partnerships and the limited partners do not have
substantive participating rights. This change was applied retroactively. There was no impact on previously recorded net income and the balance sheet and income statement impact was not material.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS83

---



NOTE 3    SEGMENTED INFORMATION

NET INCOME/(LOSS)(1)

|Year ended December 31, 2005 (millions of dollars) |  | Gas Transmission |   | Power  |   | Corporate |   | Total  |  
|-------------------------------------------------- |  | ---------------- | - | ------ | - | --------- | - | ------ | -
|                                                   | 
|Revenues                                           |  | 4,163            |   | 1,961  |   |          |   | 6,124  |  
|Cost of sales(2)                                   |  |                 |   | (1,168 | ) |          |   | (1,168 | )
|Other costs and expenses                           |  | (1,380           | ) | (505   | ) | (4        | ) | (1,889 | )
|Depreciation                                       |  | (938             | ) | (79    | ) |          |   | (1,017 | )
|                                                   | 
|Operating income/(loss)                            |  | 1,845            |   | 209    |   | (4        | ) | 2,050  |  
|Financial charges and non-controlling interests    |  | (788             | ) | (2     | ) | (130      | ) | (920   | )
|Financial charges of joint ventures                |  | (57              | ) | (9     | ) |          |   | (66    | )
|Equity income                                      |  | 79               |   | 168    |   |          |   | 247    |  
|Interest income and other                          |  | 25               |   | 5      |   | 33        |   | 63     |  
|Gains on sale of assets                            |  | 82               |   | 363    |   |          |   | 445    |  
|Income taxes                                       |  | (502             | ) | (173   | ) | 65        |   | (610   | )
|                                                   | 
|Net income from continuing operations              |  | 684              |   | 561    |   | (36       | ) | 1,209  |  
|
|                                                   |  |                  |  
|
|                                                   |  |                  |  
|
|Net income from discontinued operations            |  |                  |   |        |   |           |   |       |  
|
|                                                   |  |                  |   |        |   |           |   |        |  
|Net Income                                         |  |                  |   |        |   |           |   | 1,209  |  
|
|                                                   |  |                  |   |        |   |           |   |        |  
|
|                                                   |  |                  |   |        |   |           |   |        |  

|Year ended December 31, 2004 (millions of dollars) |  |        |   |       |   |     |   |        |  
|-------------------------------------------------- |  | ------ | - | ----- | - | --- | - | ------ | -
|                                                   | 
|Revenues                                           |  | 3,929  |   | 1,568 |   |    |   | 5,497  |  
|Cost of sales(2)                                   |  |       |   | (940  | ) |    |   | (940   | )
|Other costs and expenses                           |  | (1,228 | ) | (384  | ) | (3  | ) | (1,615 | )
|Depreciation                                       |  | (876   | ) | (72   | ) |    |   | (948   | )
|                                                   | 
|Operating income/(loss)                            |  | 1,825  |   | 172   |   | (3  | ) | 1,994  |  
|Financial charges and non-controlling interests    |  | (848   | ) | (9    | ) | (79 | ) | (936   | )
|Financial charges of joint ventures                |  | (59    | ) | (4    | ) |    |   | (63    | )
|Equity income                                      |  | 83     |   | 130   |   |    |   | 213    |  
|Interest income and other                          |  | 8      |   | 14    |   | 37  |   | 59     |  
|Gains on sale of assets                            |  | 7      |   | 197   |   |    |   | 204    |  
|Income taxes                                       |  | (430   | ) | (104  | ) | 43  |   | (491   | )
|                                                   | 
|Net income from continuing operations              |  | 586    |   | 396   |   | (2  | ) | 980    |  
|
|                                                   |  |        |  
|
|                                                   |  |        |  
|
|Net income from discontinued operations            |  |        |   |       |   |     |   | 52     |  
|
|                                                   |  |        |   |       |   |     |   |        |  
|Net Income                                         |  |        |   |       |   |     |   | 1,032  |  
|
|                                                   |  |        |   |       |   |     |   |        |  
|
|                                                   |  |        |   |       |   |     |   |        |  

|Year ended December 31, 2003 (millions of dollars) |  |        |   |       |   |     |   |        |  
|-------------------------------------------------- |  | ------ | - | ----- | - | --- | - | ------ | -
|                                                   | 
|Revenues                                           |  | 3,968  |   | 1,668 |   |    |   | 5,636  |  
|Cost of sales(2)                                   |  |       |   | (979  | ) |    |   | (979   | )
|Other costs and expenses                           |  | (1,274 | ) | (385  | ) | (7  | ) | (1,666 | )
|Depreciation                                       |  | (834   | ) | (82   | ) | (1  | ) | (917   | )
|                                                   | 
|Operating income/(loss)                            |  | 1,860  |   | 222   |   | (8  | ) | 2,074  |  
|Financial charges and non-controlling interests    |  | (845   | ) | (11   | ) | (89 | ) | (945   | )
|Financial charges of joint ventures                |  | (79    | ) | (1    | ) |    |   | (80    | )
|Equity income                                      |  | 107    |   | 99    |   |    |   | 206    |  
|Interest income and other                          |  | 17     |   | 14    |   | 29  |   | 60     |  
|Income taxes                                       |  | (438   | ) | (103  | ) | 27  |   | (514   | )
|                                                   | 
|Net income from continuing operations              |  | 622    |   | 220   |   | (41 | ) | 801    |  
|
|                                                   |  |        |  
|
|                                                   |  |        |  
|
|Net income from discontinued operations            |  |        |   |       |   |     |   | 50     |  
|
|                                                   |  |        |   |       |   |     |   |        |  
|Net Income                                         |  |        |   |       |   |     |   | 851    |  
|
|                                                   |  |        |   |       |   |     |   |        |  
|
|                                                   |  |        |   |       |   |     |   |        |  

84NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

---



TOTAL ASSETS

|December 31 (millions of dollars) |  | 2005   |  | 2004   |  | 
|--------------------------------- |  | ------ |  | ------ |  | 
|
|                                  |  |       
|
|Gas Transmission                  |  | 18,252 |  | 18,720 |  | 
|Power                             |  | 4,923  |  | 2,802  |  | 
|Corporate                         |  | 938    |  | 900    |  | 
|
|                                  |  |       
|
|                                  |  | 24,113 |  | 22,422 |  | 
|
|                                  |  |       
|
|                                  |  |       
|

GEOGRAPHIC INFORMATION

|Year ended December 31 (millions of dollars) |  | 2005  |  | 2004  |  | 2003 
|-------------------------------------------- |  | ----- |  | ----- |  | -----
|                                            
|Revenues(3)                                  |  |       |  |       |  |      
|Canada  domestic                            |  | 3,499 |  | 3,214 |  | 3,324
|Canada  export                              |  | 1,160 |  | 1,261 |  | 1,293
|United States                                |  | 1,465 |  | 1,022 |  | 1,019
|                                            
|                                             |  | 6,124 |  | 5,497 |  | 5,636
|                                            
|                                            

PLANT, PROPERTY AND EQUIPMENT

|December 31 (millions of dollars) |  | 2005   |  | 2004   |  | 
|--------------------------------- |  | ------ |  | ------ |  | 
|
|                                  |  |       
|
|Canada                            |  | 15,647 |  | 14,757 |  | 
|United States                     |  | 4,306  |  | 4,007  |  | 
|Mexico                            |  | 85     |  |       |  | 
|
|                                  |  |       
|
|                                  |  | 20,038 |  | 18,764 |  | 
|
|                                  |  |       
|
|                                  |  |       
|

CAPITAL EXPENDITURES

|Year ended December 31 (millions of dollars) |  | 2005 |  | 2004 |  | 2003
|-------------------------------------------- |  | ---- |  | ---- |  | ----
|                                            
|Gas Transmission                             |  | 377  |  | 241  |  | 260 
|Power                                        |  | 373  |  | 285  |  | 132 
|Corporate                                    |  | 4    |  | 4    |  | 3   
|                                            
|                                             |  | 754  |  | 530  |  | 395 
|                                            
|                                            

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS85

---



NOTE 4    PLANT, PROPERTY AND EQUIPMENT

|                                  |                    |        |       |                          |       |                |       |        |       |                          |       |               
|--------------------------------- | ------------------ | ------ | ----- | ------------------------ | ----- | -------------- | ----- | ------ | ----- | ------------------------ | ----- | --------------
|
|                                  |                    |       
|December 31 (millions of dollars) |                    | Cost   |       | Accumulated Depreciation |       | Net Book Value |       | Cost   |       | Accumulated Depreciation |       | Net Book Value
|                                 
|Gas Transmission                  |                    |        |       |                          |       |                |       |        |       |                          |       |               
|Canadian Mainline                 |                    |        |       |                          |       |                |       |        |       |                          |       |               
|                                  | Pipeline           |        | 8,701 |                          | 3,665 |                | 5,036 |        | 8,695 |                          | 3,421 |               
|                                  | Compression        |        | 3,341 |                          | 1,066 |                | 2,275 |        | 3,322 |                          | 947   |               
|                                  | Metering and other |        | 359   |                          | 134   |                | 225   |        | 366   |                          | 125   |               
|                                 
|                                  |                    | 12,401 |       | 4,865                    |       | 7,536          |       | 12,383 |       | 4,493                    |       | 7,890         
|                                  | Under construction |        | 15    |                          |      |                | 15    |        | 16    |                          |      |               
|                                 
|                                  |                    | 12,416 |       | 4,865                    |       | 7,551          |       | 12,399 |       | 4,493                    |       | 7,906         
|                                 
|Alberta System                    |                    |        |       |                          |       |                |       |        |       |                          |       |               
|                                  | Pipeline           |        | 5,020 |                          | 2,203 |                | 2,817 |        | 4,978 |                          | 2,055 |               
|                                  | Compression        |        | 1,493 |                          | 676   |                | 817   |        | 1,496 |                          | 599   |               
|                                  | Metering and other |        | 799   |                          | 247   |                | 552   |        | 861   |                          | 262   |               
|                                 
|                                  |                    | 7,312  |       | 3,126                    |       | 4,186          |       | 7,335  |       | 2,916                    |       | 4,419         
|                                  | Under construction |        | 25    |                          |      |                | 25    |        | 20    |                          |      |               
|                                 
|                                  |                    | 7,337  |       | 3,126                    |       | 4,211          |       | 7,355  |       | 2,916                    |       | 4,439         
|                                 
|GTN(1)                            |                    |        |       |                          |       |                |       |        |       |                          |       |               
|                                  | Pipeline           |        | 1,381 |                          | 60    |                | 1,321 |        | 1,417 |                          | 8     |               
|                                  | Compression        |        | 507   |                          | 15    |                | 492   |        | 526   |                          | 2     |               
|                                  | Metering and other |        | 90    |                          |      |                | 90    |        | 101   |                          | 2     |               
|                                 
|                                  |                    | 1,978  |       | 75                       |       | 1,903          |       | 2,044  |       | 12                       |       | 2,032         
|                                  | Under construction |        | 18    |                          |      |                | 18    |        | 17    |                          |      |               
|                                 
|                                  |                    | 1,996  |       | 75                       |       | 1,921          |       | 2,061  |       | 12                       |       | 2,049         
|                                 
|Foothills System                  |                    |        |       |                          |       |                |       |        |       |                          |       |               
|                                  | Pipeline           |        | 815   |                          | 377   |                | 438   |        | 815   |                          | 346   |               
|                                  | Compression        |        | 373   |                          | 128   |                | 245   |        | 373   |                          | 114   |               
|                                  | Metering and other |        | 75    |                          | 31    |                | 44    |        | 78    |                          | 35    |               
|                                 
|                                  |                    | 1,263  |       | 536                      |       | 727            |       | 1,266  |       | 495                      |       | 771           
|                                 
|Joint Ventures and other(2)       |                    | 3,491  |       | 1,127                    |       | 2,364          |       | 3,293  |       | 1,073                    |       | 2,220         
|                                 
|                                  |                    | 26,503 |       | 9,729                    |       | 16,774         |       | 26,374 |       | 8,989                    |       | 17,385        
|                                 
|Power(3)                          |                    |        |       |                          |       |                |       |        |       |                          |       |               
|                                  | Nuclear(4)         |        | 1,265 |                          | 143   |                | 1,122 |        |       |                          |       |               
|                                  | Natural gas        |        | 1,121 |                          | 347   |                | 774   |        | 1,333 |                          | 374   |               
|                                  | Hydro              |        | 598   |                          | 9     |                | 589   |        | 61    |                          | 1     |               
|                                  | Other              |        | 67    |                          | 36    |                | 31    |        | 67    |                          | 32    |               
|                                 
|                                  |                    | 3,051  |       | 535                      |       | 2,516          |       | 1,461  |       | 407                      |       | 1,054         
|                                  | Under construction |        | 721   |                          |      |                | 721   |        | 288   |                          |      |               
|                                 
|                                  |                    | 3,772  |       | 535                      |       | 3,237          |       | 1,749  |       | 407                      |       | 1,342         
|                                 
|Corporate                         |                    | 73     |       | 46                       |       | 27             |       | 124    |       | 87                       |       | 37            
|                                 
|                                  |                    | 30,348 |       | 10,310                   |       | 20,038         |       | 28,247 |       | 9,483                    |       | 18,764        
|                                 
|                                 

86NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

---



NOTE 5    OTHER ASSETS

|December 31 (millions of dollars) |  | 2005  |  | 2004  |  | 
|--------------------------------- |  | ----- |  | ----- |  | 
|
|                                  |  |      
|
|Derivative contracts              |  | 209   |  | 180   |  | 
|Hedging deferrals                 |  | 118   |  | 50    |  | 
|PPAs  Canada(1)                  |  | 825   |  | 274   |  | 
|PPAs  U.S.(1)                    |  |      |  | 98    |  | 
|Pension and other benefit plans   |  | 304   |  | 253   |  | 
|Regulatory assets                 |  | 183   |  | 174   |  | 
|Loans and advances(2)             |  | 91    |  | 135   |  | 
|Goodwill                          |  | 57    |  | 58    |  | 
|Debt issue costs                  |  | 48    |  | 50    |  | 
|Other                             |  | 274   |  | 187   |  | 
|
|                                  |  |      
|
|                                  |  | 2,109 |  | 1,459 |  | 
|
|                                  |  |      
|
|                                  |  |      
|

|                                  |  |      |  |                          |  |                |  |      |  |                          |  |               
|--------------------------------- |  | ---- |  | ------------------------ |  | -------------- |  | ---- |  | ------------------------ |  | --------------
|
|                                  |  |     
|December 31 (millions of dollars) |  | Cost |  | Accumulated Amortization |  | Net Book Value |  | Cost |  | Accumulated Amortization |  | Net Book Value
|                                 
|PPAs  Canada                     |  | 915  |  | 90                       |  | 825            |  | 345  |  | 71                       |  | 274           
|PPAs  U.S.                       |  |     |  |                         |  |               |  | 102  |  | 4                        |  | 98            

NOTE 6    JOINT VENTURE INVESTMENTS

|                         |  |                    |        | TransCanada's Proportionate Share
|------------------------ |  | ------------------ | ------ | ---------------------------------
|
|                         |  |                    |        |                                  
|
|
|                         |  |                    |        |                                  
|(millions of dollars)    |  | Ownership Interest |        | 2005                             
|                        
|Gas Transmission         |  |                    |        |                                  
|Great Lakes              |  | 50.0%              | (1)    | 73                               
|Iroquois                 |  | 44.5%              | (1)(2) | 29                               
|Trans Québec & Maritimes |  | 50.0%              |        | 13                               
|CrossAlta                |  | 60.0%              | (1)    | 31                               
|Foothills                |  |                    | (3)    |                                 
|Other                    |  | Various            |        | 15                               
|Power                    |  |                    |        |                                  
|Bruce A                  |  | 47.9%              | (4)    | 19                               
|Bruce B                  |  | 31.6%              | (4)    | 5                                
|ASTC Power Partnership   |  | 50.0%              | (5)    |                                 
|Power LP                 |  |                    | (6)    | 25                               
|
|                         |  |                    |        |                                  
|                         |  |                    |        | 210                              
|
|                         |  |                    |        |                                  
|
|                         |  |                    |        |                                  

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS87

---



Consolidated
retained earnings at December 31, 2005 include undistributed earnings from these joint ventures of $765 million
(2004  $473 million).

Summarized Financial Information of Joint Ventures

|Year ended December 31 (millions of dollars)                        |  | 2005 |   | 2004 |   | 2003 |  
|------------------------------------------------------------------- |  | ---- | - | ---- | - | ---- | -
|                                                                    | 
|Income                                                              |  |      |   |      |   |      |  
|Revenues                                                            |  | 687  |   | 572  |   | 635  |  
|Other costs and expenses                                            |  | (328 | ) | (240 | ) | (278 | )
|Depreciation                                                        |  | (93  | ) | (90  | ) | (98  | )
|Financial charges and other                                         |  | (56  | ) | (51  | ) | (66  | )
|                                                                    | 
|Proportionate share of income before income taxes of joint ventures |  | 210  |   | 191  |   | 193  |  
|                                                                    | 
|                                                                    | 

|Year ended December 31 (millions of dollars)                                                    |  | 2005 |   | 2004 |   | 2003 |  
|----------------------------------------------------------------------------------------------- |  | ---- | - | ---- | - | ---- | -
|                                                                                                | 
|Cash Flows                                                                                      |  |      |   |      |   |      |  
|Operations                                                                                      |  | 346  |   | 270  |   | 259  |  
|Investing activities                                                                            |  | (133 | ) | (287 | ) | (139 | )
|Financing activities(1)                                                                         |  | (152 | ) | 35   |   | (115 | )
|Effect of foreign exchange rate changes on cash and short-term investments                      |  | (1   | ) | (5   | ) | (12  | )
|                                                                                                | 
|Proportionate share of increase/(decrease) in cash and short-term investments of joint ventures |  | 60   |   | 13   |   | (7   | )
|                                                                                                | 
|                                                                                                | 

|December 31 (millions of dollars)                   |  | 2005  |   | 2004  |   | 
|--------------------------------------------------- |  | ----- | - | ----- | - | 
|                                                    |  |      
|Balance Sheet                                       |  |       |   |       |   | 
|Cash and short-term investments                     |  | 123   |   | 63    |   | 
|Other current assets                                |  | 281   |   | 122   |   | 
|Plant, property and equipment                       |  | 2,707 |   | 1,708 |   | 
|Current liabilities                                 |  | (291  | ) | (155  | ) | 
|(Deferred amounts)/other assets (net)               |  | (45   | ) | 221   |   | 
|Long-term debt of joint ventures                    |  | (937  | ) | (808  | ) | 
|Future income taxes                                 |  | (18   | ) | (49   | ) | 
|
|                                                    |  |      
|
|Proportionate share of net assets of joint ventures |  | 1,820 |   | 1,102 |   | 
|
|                                                    |  |      
|
|                                                    |  |      
|

88NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

---



NOTE 7    LONG-TERM INVESTMENTS

|                      |  |                    |     | TransCanada's Share
|--------------------- |  | ------------------ | --- | -------------------
|
|                      |  |                    |     |                    
|
|
|                      |  |                    |     |                    
|(millions of dollars) |  | Ownership Interest |     | 2005               
|                     
|Gas Transmission      |  |                    |     |                    
|Northern Border       |  |                    | (1) | 76                 
|TransGas              |  | 46.5%              | (2) | 6                  
|Portland              |  | 61.7%              | (3) |                   
|Other                 |  | Various            |     | 10                 
|Power                 |  |                    |     |                    
|Bruce B               |  | 31.6%              | (4) | 84                 
|
|                      |  |                    |     |                    
|                      |  |                    |     | 176                
|
|                      |  |                    |     |                    
|
|                      |  |                    |     |                    

Consolidated
retained earnings at December 31, 2005 include undistributed earnings from these equity investments of $55 million
(2004  $294 million).

NOTE 8    ACQUISITIONS AND DISPOSITIONS

Acquisitions

Sheerness PPA

Effective December 31, 2005, TransCanada acquired the remaining rights and obligations of the Sheerness PPA from the Alberta Balancing Pool for $585 million. There
is approximately a 15 year term remaining on the PPA.

Bruce Power

In February 2003, the Company acquired a 31.6 per cent partnership interest in Bruce B for $409 million, which at that time owned the
currently idle Bruce A Units 1 and 2 as well as the currently operating Bruce A Units 3 and 4 and Bruce B Units 5 to 8. The Company accounted for this as an
equity investment. On October 31, 2005, as part of an agreement to restart the currently idle Bruce A Units 1 and 2, TransCanada acquired a partnership interest in a newly created
partnership, Bruce A, which subleased the Bruce A Units 1 to 4 from Bruce B (the Bruce A Sublease) and purchased certain other related assets. TransCanada
incurred a net cash outlay of $100 million as a result of this transaction and as at December 31, 2005 held a 47.9 per cent interest in Bruce A. As part of
this reorganization, both Bruce A and Bruce B became jointly controlled entities and TransCanada commenced proportionately consolidating its investments in both Bruce A and
Bruce B, on a prospective basis, effective October 31, 2005.

TC Hydro

In April 2005, TransCanada acquired certain hydroelectric generation assets from USGen New England, Inc. for approximately US$503 million.
Substantially all of the purchase price was allocated to plant, property and equipment. The financial results from these assets have been included in the Power segment as of the date of acquisition.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS89

---



GTN

In November 2004, TransCanada acquired GTN for US$1,728 million, including US$528 million of assumed debt and closing adjustments. The purchase price was
allocated as follows using fair values of the net assets at the date of acquisition.

Purchase Price Allocation

|(millions of U.S. dollars)    |  |       |  
|----------------------------- |  | ----- | -
|                              | 
|Current assets                |  | 40    |  
|Plant, property and equipment |  | 1,718 |  
|Other non-current assets      |  | 21    |  
|Goodwill                      |  | 48    |  
|Current liabilities           |  | (48   | )
|Long-term debt                |  | (528  | )
|Other non-current liabilities |  | (51   | )
|                              | 
|                              |  | 1,200 |  
|                              | 
|                              | 

Goodwill,
which is attributable to the North Baja System, is re-evaluated on an annual basis for impairment. Factors that contributed to goodwill include opportunities for
expansion, a strong competitive position, strong demand for natural gas in the western markets and access to an ample supply of relatively low-cost natural gas. The goodwill recognized on
this transaction is being amortized for tax purposes over 15 years.

The
acquisition was accounted for using the purchase method of accounting. The financial results of GTN were consolidated with those of TransCanada subsequent to the acquisition date and
included in the Gas Transmission segment.

Dispositions

The pre-tax gains on sale of assets are comprised of the following.

|Year ended December 31 (millions of dollars) |  | 2005 |  | 2004 |  | 
|-------------------------------------------- |  | ---- |  | ---- |  | 
|
|                                             |  |     
|
|Gains related to Power LP                    |  | 245  |  | 197  |  | 
|Gain on sale of Paiton Energy(1)             |  | 118  |  |     |  | 
|Gain on sale of PipeLines LP units           |  | 82   |  |     |  | 
|Gain on sale of Millennium(1)                |  |     |  | 7    |  | 
|
|                                             |  |     
|
|                                             |  | 445  |  | 204  |  | 
|
|                                             |  |     
|
|                                             |  |     
|

Power LP

In August 2005, TransCanada sold its ownership interest in Power LP to EPCOR Utilities Inc. (EPCOR) for net proceeds of $523 million and realized an
after-tax gain of $193 million. The net gain was recorded in the Power segment and the Company recorded a $52 million income tax charge, including $79 million of
current income tax expense, on this transaction. The book value of Power LP's assets and liabilities disposed of under this sale were $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 generation assets.

In
April 2004, TransCanada sold the ManChief and Curtis Palmer power facilities to Power LP for US$402.6 million, plus closing adjustments of US$12.8 million,
and recognized an after-tax gain on sale of $15 million. The net gain was recorded in the Power segment and the Company recorded a $10 million income tax charge.

At
a special meeting held in April 2004, Power LP's unitholders approved an amendment to the terms of the Power LP Partnership Agreement to remove Power LP's
obligation to redeem all units not owned by TransCanada at June 30, 2017. TransCanada was required to fund this redemption, thus the removal of Power LP's obligation eliminated this
requirement. The removal of the obligation and the reduction in TransCanada's ownership interest in Power LP resulted in a gain of $172 million.

Paiton Energy

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

PipeLines LP

In March and April 2005, TransCanada sold 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 Gas Transmission segment and the company recorded a $33 million income tax charge, including
$51 million of current income tax expense, on this transaction. Subsequent to these transactions, TransCanada continues to own a 13.4 per cent interest in PipeLines LP
represented by a general partner interest of 2.0 per cent and an 11.4 per cent limited partner interest.

90NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

---



NOTE 9    LONG-TERM DEBT

|                                                              |                                                 |                |              | 2005                        |       | 2004                                
|------------------------------------------------------------- | ----------------------------------------------- | -------------- | ------------ | --------------------------- | ----- | ------------------------------------
|
|                                                              |                                                 |                |              |                            
|                                                              |                                                 | Maturity Dates |              | Outstanding 
December 31(1) |       | Weighted 
Average 
Interest 
Rate(2)
|                                                             
|CANADIAN MAINLINE(4)                                          |                                                 |                |              |                             |       |                                     
|First Mortgage Pipe Line Bonds                                |                                                 |                |              |                             |       |                                     
|                                                              | Pounds Sterling (2005 and 2004  £25)           |                | 2007         |                             | 50    |                                     
|Debentures                                                    |                                                 |                |              |                             |       |                                     
|                                                              | Canadian dollars                                |                | 2008 to 2020 |                             | 1,354 |                                     
|                                                              | U.S. dollars (2005 and 2004   US$600)(3)       |                | 2012 to 2021 |                             | 702   |                                     
|Medium-Term Notes                                             |                                                 |                |              |                             |       |                                     
|                                                              | Canadian dollars                                |                | 2006 to 2031 |                             | 1,987 |                                     
|                                                              | U.S. dollars (2005 and 2004  US$120)           |                | 2010         |                             | 140   |                                     
|
|                                                              |                                                 |                |              | 4,233                       |       |                                     
|
|ALBERTA SYSTEM(5)                                             |                                                 |                |              |                             |       |                                     
|Debentures and Notes                                          |                                                 |                |              |                             |       |                                     
|                                                              | Canadian dollars                                |                | 2007 to 2024 |                             | 585   |                                     
|                                                              | U.S. dollars (2005 and 2004  US$375)           |                | 2012 to 2023 |                             | 437   |                                     
|Medium-Term Notes                                             |                                                 |                |              |                             |       |                                     
|                                                              | Canadian dollars                                |                | 2006 to 2030 |                             | 964   |                                     
|                                                              | U.S. dollars (2005 and 2004  US$233)           |                | 2026 to 2029 |                             | 272   |                                     
|
|                                                              |                                                 |                |              | 2,258                       |       |                                     
|
|GTN(6)                                                        |                                                 |                |              |                             |       |                                     
|Unsecured Debentures and Notes (2005  US$400; 2004  US$525) |                                                 | 2010 to 2035   |              | 466                         |       | 5.3%                                
|
|FOOTHILLS SYSTEM(4)                                           |                                                 |                |              |                             |       |                                     
|Senior Unsecured Notes                                        |                                                 | 2009 to 2014   |              | 400                         |       | 4.9%                                
|
|PORTLAND(7)                                                   |                                                 |                |              |                             |       |                                     
|Senior Secured Notes                                          |                                                 |                |              |                             |       |                                     
|                                                              | U.S. dollars (2005  US$241; 2004  US$256)     |                | 2018         |                             | 281   |                                     
|
|OTHER                                                         |                                                 |                |              |                             |       |                                     
|Medium-Term Notes(4)                                          |                                                 |                |              |                             |       |                                     
|                                                              | Canadian dollars                                |                | 2014 to 2030 |                             | 542   |                                     
|                                                              | U.S. dollars (2005 and 2004  US$521)           |                | 2006 to 2025 |                             | 607   |                                     
|Subordinated Debentures(4)                                    |                                                 |                |              |                             |       |                                     
|                                                              | U.S. dollars (2005 and 2004  US$57)            |                | 2006         |                             | 66    |                                     
|Unsecured Loans, Debentures and Notes(3)(8)                   |                                                 |                |              |                             |       |                                     
|                                                              | U.S. dollars (2005  US$1,014; 2004  US$1,119) |                | 2006 to 2034 |                             | 1,180 |                                     
|
|                                                              |                                                 |                |              | 2,395                       |       |                                     
|
|                                                              |                                                 |                |              | 10,033                      |       |                                     
|Less: Current Portion of Long-Term Debt                       |                                                 |                |              | 393                         |       |                                     
|
|                                                              |                                                 |                |              | 9,640                       |       |                                     
|
|

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS91

---



Principal Repayments

Principal repayments on the long-term debt of the Company approximate: 2006  $393 million;
2007  $604 million; 2008  $547 million; 2009  $742 million;
and 2010  $416 million.

Debt Shelf Programs

At December 31, 2005, $1.2 billion of medium-term note debentures could be issued under a base shelf program in Canada and US$1 billion of debt
securities could be issued under a debt shelf program in the U.S. In January 2006, the Company issued $300 million of five year medium-term notes bearing interest of
4.3 per cent under the Canadian base shelf program.

CANADIAN MAINLINE

First Mortgage Pipe Line Bonds

The Deed of Trust and Mortgage securing the Company's First Mortgage Pipe Line Bonds limits the specific and floating charges to those assets comprising the present and future
Canadian Mainline and TCPL's present and future gas transportation contracts.

ALBERTA SYSTEM

Debentures

Debentures amounting to $225 million have retraction provisions which 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 have been made to December 31, 2005.

Medium-Term Notes

Medium-term notes amounting to $50 million have a provision entitling the holders to extend the maturity of the medium-term notes from the initial
repayment date of 2007 to 2027. If extended, the interest rate would increase from 6.1 per cent to 7.0 per cent and the medium-term notes would become
redeemable at the option of the Company.

Financial Charges

|Year ended December 31 (millions of dollars) |  | 2005 |   | 2004 |   | 2003 |  
|-------------------------------------------- |  | ---- | - | ---- | - | ---- | -
|                                             | 
|Interest on long-term debt                   |  | 849  |   | 864  |   | 867  |  
|Interest on short-term debt                  |  | 23   |   | 7    |   | 16   |  
|Capitalized interest                         |  | (24  | ) | (11  | ) | (9   | )
|Amortizations and other financial charges    |  | (12  | ) | (2   | ) | 4    |  
|                                             | 
|                                             |  | 836  |   | 858  |   | 878  |  
|                                             | 
|                                             | 

The
Company made interest payments of $838 million for the year ended December 31, 2005 (2004  $864 million;
2003  $903 million).

92NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

---



NOTE 10    LONG-TERM DEBT OF JOINT VENTURES

|                                                          |                                 |                |              | 2005                        |     | 2004                                
|--------------------------------------------------------- | ------------------------------- | -------------- | ------------ | --------------------------- | --- | ------------------------------------
|
|                                                          |                                 |                |              |                            
|                                                          |                                 | Maturity Dates |              | Outstanding 
December 31(1) |     | Weighted 
Average 
Interest 
Rate(2)
|                                                         
|Great Lakes                                               |                                 |                |              |                             |     |                                     
|Senior Unsecured Notes                                    |                                 |                |              |                             |     |                                     
|                                                          | (2005  US$230; 2004   US$235) |                | 2011 to 2030 |                             | 268 |                                     
|Bruce Power                                               |                                 |                |              |                             |     |                                     
|Capital Lease Obligations                                 |                                 | 2018           |              | 254                         |     | 7.5%                                
|Iroquois                                                  |                                 |                |              |                             |     |                                     
|Senior Unsecured Notes                                    |                                 |                |              |                             |     |                                     
|                                                          | (2005  US $165; 2004  US$151) |                | 2010 to 2027 |                             | 192 |                                     
|Bank Loan                                                 |                                 |                |              |                             |     |                                     
|                                                          | (2005  US$25; 2004  US$36)    |                | 2008         |                             | 29  |                                     
|Trans Québec & Maritimes                                  |                                 |                |              |                             |     |                                     
|Bonds                                                     |                                 | 2009 to 2010   |              | 138                         |     | 6.0%                                
|Term Loan                                                 |                                 | 2010           |              | 29                          |     | 3.5%                                
|Power L.P.(3)                                             |                                 |                |              |                             |     |                                     
|Senior Unsecured Notes (2004   US$58)                    |                                 |                |              |                            |     |                                     
|Credit Facility                                           |                                 |                |              |                            |     |                                     
|Term Loan                                                 |                                 |                |              |                            |     |                                     
|Other                                                     |                                 | 2006 to 2012   |              | 68                          |     | 6.1%                                
|
|                                                          |                                 |                |              | 978                         |     |                                     
|Less: Current Portion of Long-Term Debt of Joint Ventures |                                 |                |              | 41                          |     |                                     
|
|                                                          |                                 |                |              | 937                         |     |                                     
|
|

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.

The
Company's proportionate share of principal repayments resulting from maturities and sinking fund obligations of the non-recourse joint venture debt approximates:
2006  $34 million; 2007  $20 million; 2008  $20 million;
2009  $78 million; and 2010  $273 million.

The
Company's proportionate share of principal payments resulting from the capital lease obligations of Bruce Power approximates:
2006  $7 million; 2007  $8 million; 2008  $9 million;
2009  $11 million; and 2010  $13 million.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS93

---



Financial Charges of Joint Ventures

|Year ended December 31 (millions of dollars)            |  | 2005 |  | 2004 |  | 2003
|------------------------------------------------------- |  | ---- |  | ---- |  | ----
|                                                       
|Interest on long-term debt                              |  | 60   |  | 59   |  | 77  
|Interest on capital lease obligations                   |  | 3    |  |     |  |    
|Interest on short-term debt and other financial charges |  | 1    |  | 2    |  | 1   
|Deferrals and amortizations                             |  | 2    |  | 2    |  | 2   
|                                                       
|                                                        |  | 66   |  | 63   |  | 80  
|                                                       
|                                                       

The
Company's proportionate share of the interest payments of joint ventures was $62 million for the year ended December 31, 2005
(2004  $58 million; 2003  $71 million).

The
Company's proportionate share of interest payments from the capital lease obligations of Bruce Power was $3 million for the year ended December 31, 2005 (2004 and
2003  nil).

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 the second to thirteenth renewals is for a period of two years.

NOTE 11    DEFERRED AMOUNTS

|December 31 (millions of dollars) |  | 2005  |  | 2004 |  | 
|--------------------------------- |  | ----- |  | ---- |  | 
|
|                                  |  |      
|
|Derivative contracts              |  | 212   |  | 135  |  | 
|Hedging deferrals                 |  | 72    |  | 53   |  | 
|Regulatory liabilities            |  | 597   |  | 392  |  | 
|Pensions and other benefit plans  |  | 168   |  | 82   |  | 
|Deferred revenue                  |  | 42    |  | 58   |  | 
|Asset retirement obligations      |  | 33    |  | 36   |  | 
|Other                             |  | 72    |  | 27   |  | 
|
|                                  |  |      
|
|                                  |  | 1,196 |  | 783  |  | 
|
|                                  |  |      
|
|                                  |  |      
|

NOTE 12    REGULATED BUSINESS

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

Canadian Regulated Operations

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

Rates
charged by TransCanada's wholly-owned and partially-owned Canadian pipelines are typically set through a process that involves filing an application for a change in rates with the
regulator. Under the regulation, rates are underpinned by the total annual revenue requirement which includes 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 regulated using a cost-of-service model, where the forecast costs plus a return on capital equals
the revenues for the upcoming year. To the extent that actual costs are more or less than the forecast costs, the regulators generally allow the difference to be deferred to a future period and
recovered or refunded in revenues at that
time. Those costs, for which the regulator does not allow the difference between actual and forecast costs to be deferred, are included in the determination of net income in the year in which they
are incurred.

The
Canadian Mainline, the BC System, the Foothills System and the TransQuébec & Maritimes System (TQM) are regulated by the NEB under the National
Energy Board Act. The Alberta System is regulated by the EUB primarily under the provisions of the Gas Utilities Act (Alberta) and the Pipeline Act (Alberta). The NEB and the EUB regulate the
construction, operations, tolls and the determination of revenues of the Canadian natural gas transmission operations.

94NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

---



Canadian Mainline

In February 2005, TransCanada and its Canadian Mainline shippers entered into a negotiated settlement that addresses all elements of the Canadian Mainline's 2005 tolls
(2005 Settlement). The 2005 Settlement was approved by the NEB in April 2005. Pursuant to the 2005 Settlement, the cost of capital of the Canadian Mainline's 2005 revenue
requirement and resulting tolls were determined based on the RH-2-2004 Phase II proceeding relating to the 2004 cost of capital of the Canadian Mainline. The
RH-2-2004 Phase II decision increased the deemed capital structure for the Canadian Mainline to 36 per cent from 33 per cent, effective
January 1, 2004. The impact of this has been recognized in 2005. The return on equity of the Canadian Mainline continues to be based on the NEB's approved rate of return on common equity (ROE)
formula which was established in the RH-2-94 Multi-Pipeline Cost of Capital proceeding.

Under
the 2005 Settlement, the Canadian Mainline's operations, maintenance and administrative (OM&A) costs for 2005 were fixed and variances between the 2005 negotiated and actual level
of OM&A costs accrued to TransCanada. All other cost and revenue component variances were treated on a full recovery basis. The allowed ROE in 2005 was 9.46 per cent.

Alberta System

The Alberta System operates 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 calculation of the revenue requirement for all three years, based on the recovery of all cost
components and the use of deferral accounts.

Fixed
costs are operating costs and certain other costs, including foreign exchange on interest payments, uninsured losses and amortization of severance costs. These costs were set for
each year for 2005, 2006 and 2007 and any difference between actual and forecast fixed costs will be included in the determination of net income in the year in which they are incurred. Costs other
than fixed costs are forecast at the beginning of each year and included in the calculation of the revenue requirement. Any variance between the forecast and actual costs incurred will be 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 rate of return on common equity
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 2005 was
9.50 per cent.

Other Canadian Pipelines

Similar to the Canadian Mainline, the NEB approves pipeline tolls on an annual cost of service basis for the BC System, Foothills System and TQM. 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 a 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 included in the following year's tolls. The ROE for these Canadian pipelines is based on the NEB's approved ROE formula which
was established in the RH-2-94 Multi-Pipeline Cost of Capital proceeding, being 9.46 per cent in 2005. The deemed equity component of each of the
pipelines' capital structure was set at 30 per cent for 2005.

U.S. Regulated Operations

TransCanada's wholly-owned and partially-owned U.S. pipelines, including Great Lakes, Iroquois, Portland, Northern Border and Tuscarora Gas Transmission System, are
'natural gas companies' operating under the provisions of the Natural Gas Act of 1938 and 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 in interstate
commerce.

Gas Transmission Northwest System and North Baja System

Rates and tariffs of the Gas Transmission Northwest System and the North Baja System have been approved by the FERC. These two systems operate under fixed rate models, whereby
maximum and minimum rates for various service types have been ordered by FERC and under which each of the two systems are permitted to discount or negotiate rates on a non-discriminatory
basis. General rates for mainline capacity on the Gas Transmission Northwest System were last reviewed by the FERC in a 1994 rate proceeding. A settlement of the 1994 rate proceeding, which set rate
levels that remain in effect today, was approved by the FERC in 1996. Rates for capacity on the North Baja System were established in the FERC's initial order certificating construction and operations
of its system.

Portland

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

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS95

---



Regulatory Assets and Liabilities

|Year ended December 31 (millions of dollars)    |                                                                                    | 2005 |     | 2004 |     | Remaining
Recovery/
Settlement
Period
|----------------------------------------------- | ---------------------------------------------------------------------------------- | ---- | --- | ---- | --- | -------------------------------------
|                                               
|                                                |                                                                                    |      |     |      |     | (years)                              
|Regulatory Assets                               |                                                                                    |      |     |      |     |                                      
|                                                | Unrealized losses on derivatives  Canadian Mainline(1)                            |      | 43  |      | 35  |                                      
|                                                | Unrealized losses on derivatives  BC System(1)                                    |      | 33  |      | 25  |                                      
|                                                | Foreign exchange  Alberta System(2)                                               |      | 32  |      | 33  |                                      
|                                                | Contractor claim  Trans Québec & Maritimes(3)                                     |      |    |      | 16  |                                      
|                                                | Phase II Preliminary Expenditures  Foothills System(4)                            |      | 23  |      | 25  |                                      
|                                                | Deferred charge on reacquired debt  Gas Transmission Northwest System(5)          |      | 14  |      | 6   |                                      
|                                                | Transitional other benefit obligations  Canadian Mainline(6)                      |      | 10  |      | 11  |                                      
|                                                | Other                                                                              |      | 28  |      | 23  |                                      
|
|                                                |                                                                                    |     
|
|Total Regulatory Assets (Other Assets)          |                                                                                    | 183  |     | 174  |     |                                      
|
|                                                |                                                                                    |     
|
|                                                |                                                                                    |     
|
|Regulatory Liabilities                          |                                                                                    |      |     |      |     |                                      
|                                                | Operating and debt service regulatory liabilities(7)                               |      | 273 |      | 146 |                                      
|                                                | Foreign exchange on long-term debt  Canadian Mainline(2)                          |      | 202 |      | 153 |                                      
|                                                | Foreign exchange on long-term debt  Alberta System(2)                             |      | 59  |      | 36  |                                      
|                                                | Foreign exchange on long-term debt  BC System(2)                                  |      | 20  |      | 16  |                                      
|                                                | Post-retirement benefits other than pension  Gas Transmission Northwest System(8) |      | 17  |      | 15  |                                      
|                                                | Other                                                                              |      | 26  |      | 26  |                                      
|
|                                                |                                                                                    |     
|
|Total Regulatory Liabilities (Deferred Amounts) |                                                                                    | 597  |     | 392  |     |                                      
|
|                                                |                                                                                    |     
|
|                                                |                                                                                    |     
|

96NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

---





As
prescribed by the regulators, the taxes payable method of accounting for income taxes is used for tollmaking purposes for Canadian regulated natural gas transmission operations. As
permitted by GAAP, this method is also used for accounting purposes, since there is 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 rate
revenues. In the absence of rate regulation accounting, GAAP would require the recognition of future income tax liabilities. If the liability method of accounting had been used, additional future
income tax liabilities in the amount of $1,619 million at December 31, 2005 (2004  $1,692 million) would have been recorded. For the
U.S. natural gas transmission operations, the liability method of accounting is used for both accounting and tollmaking purposes, whereby future income tax assets and liabilities are recognized
based on the differences between financial statement carrying amounts and the tax basis of such assets and liabilities. As this method is also used for tollmaking purposes for the U.S. natural
gas transmission operations, the current year's revenues include a tax provision which is calculated based on the liability method of accounting and therefore, there is no recognition of a related
regulatory asset or liability.

NOTE 13    PREFERRED SECURITIES

The US$460 million (2005  $536 million; 2004  $554 million)
8.25 per cent preferred securities of TCPL are redeemable by the issuer at par at any time. The issuer may elect to defer interest payments on the Preferred Securities and settle the
deferred interest in either cash or common shares.

NOTE 14    NON-CONTROLLING INTERESTS

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

|December 31 (millions of dollars)        |  | 2005 |  | 2004 |  | 
|---------------------------------------- |  | ---- |  | ---- |  | 
|
|                                         |  |     
|
|Preferred shares of subsidiary           |  | 389  |  | 389  |  | 
|Non-controlling interest in PipeLines LP |  | 318  |  | 235  |  | 
|Other                                    |  | 76   |  | 76   |  | 
|
|                                         |  |     
|
|                                         |  | 783  |  | 700  |  | 
|
|                                         |  |     
|
|                                         |  |     
|

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

|Year ended December 31 (millions of dollars) |  | 2005 |  | 2004 |  | 2003
|-------------------------------------------- |  | ---- |  | ---- |  | ----
|                                            
|Preferred share dividends of subsidiary      |  | 22   |  | 22   |  | 22  
|Non-controlling interest in PipeLines LP     |  | 52   |  | 46   |  | 43  
|Other                                        |  | 10   |  | 10   |  | 2   
|                                            
|                                             |  | 84   |  | 78   |  | 67  
|                                            
|                                            

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS97

---



Preferred Shares of Subsidiary

|December 31                                     |  | Number of
Shares |  | Dividend Rate
Per Share |  | Redemption
Price
Per Share |  | 2005                  |  | 2004                 
|----------------------------------------------- |  | ---------------- |  | ----------------------- |  | -------------------------- |  | --------------------- |  | ---------------------
|                                               
|                                                |  | (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 subsidiary are without par value.

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

At
December 31, 2005, the non-controlling interest in PipeLines LP is 86.6 per cent. Other non-controlling interests at
December 31, 2005 include the 38.3 per cent non-controlling interest in Portland. Revenues received from PipeLines LP and Portland with respect to services
provided by TransCanada for the year ended December 31, 2005 were $1 million (2004  $1 million; 2003 $1 million) and
$6 million (2004  $4 million; 2003  nil), respectively.

NOTE 15    COMMON SHARES

|                                 |                     | Number of Shares |       | Amount               
|-------------------------------- | ------------------- | ---------------- | ----- | ---------------------
|                                
|                                 |                     | (thousands)      |       | (millions of dollars)
|Outstanding at January 1, 2003   |                     | 479,502          |       | 4,614                
|                                 | Exercise of options |                  | 3,698 |                      
|                                
|Outstanding at December 31, 2003 |                     | 483,200          |       | 4,679                
|                                 | Exercise of options |                  | 1,714 |                      
|                                
|Outstanding at December 31, 2004 |                     | 484,914          |       | 4,711                
|                                 | Exercise of options |                  | 2,322 |                      
|                                
|Outstanding at December 31, 2005 |                     | 487,236          |       | 4,755                
|                                
|                                

Common Shares Issued and Outstanding

The Company is authorized to issue an unlimited number of common shares of no par value.

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 486.2 million and
489.1 million (2004  484.1 million and 486.7 million; 2003  481.5 million and
483.9 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.

98NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

---



Stock Options

|                                 |  | Number of Options |   | Weighted
Average
Exercise Prices |  | Options Exercisable
|-------------------------------- |  | ----------------- | - | -------------------------------- |  | -------------------
|                                
|                                 |  | (thousands)       |   |                                  |  | (thousands)        
|Outstanding at January 1, 2003   |  | 12,892            |   | $18.92                           |  | 10,258             
|Granted                          |  | 1,503             |   | $22.42                           |  |                    
|Exercised                        |  | (3,698            | ) | $17.59                           |  |                    
|Cancelled or expired             |  | (342              | ) | $24.07                           |  |                    
|
|Outstanding at December 31, 2003 |  | 10,355            |   | $19.73                           |  | 7,588              
|Granted                          |  | 1,331             |   | $26.85                           |  |                    
|Exercised                        |  | (1,714            | ) | $18.42                           |  |                    
|Cancelled or expired             |  | (7                | ) | $24.25                           |  |                    
|
|Outstanding at December 31, 2004 |  | 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              
|
|

The
following table summarizes information for stock options outstanding at December 31, 2005.

|                         |  | Options Outstanding |  | Options Exercisable                        
|------------------------ |  | ------------------- |  | -------------------------------------------
|
|                         |  |                    
|Range of Exercise Prices |  | Number of
Options   |  | Weighted
Average
Remaining
Contractual
Life
|                        
|                         |  | (thousands)         |  | (years)                                    
|$10.03 to $18.01         |  | 1,347               |  | 4.9                                        
|$18.81 to $20.59         |  | 1,303               |  | 3.2                                        
|$21.00 to $21.86         |  | 1,415               |  | 6.0                                        
|$22.33 to $24.49         |  | 1,787               |  | 3.9                                        
|$24.61 to $26.85         |  | 1,787               |  | 4.8                                        
|$30.09 to $36.67         |  | 1,075               |  | 6.2                                        
|
|                         |  | 8,714               |  | 4.8                                        
|
|

At
December 31, 2005, an additional four million common shares have been reserved for future issuance under TransCanada's Stock Option Plan. In 2005, TransCanada issued
1,075,000 options to purchase common shares at an average price of $30.21 under the Company's Stock Option Plan and the weighted average fair value of each option was determined to be $2.37.
The Company used the Black-Scholes model for these calculations with the weighted average assumptions being four years of expected life, 4.0 per cent interest rate,
15 per cent volatility and 3.3 per cent dividend yield. The amount expensed for stock options, with a corresponding increase in contributed surplus for the year ended
December 31, 2005, was $3 million (2004  $3 million; 2003  $2 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 which entitles certain holders to purchase common shares of the Company at 50 per cent of the then market price.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS99

---



NOTE 16    RISK MANAGEMENT AND FINANCIAL INSTRUMENTS

The Company issues short-term and long-term debt, purchases and sells energy commodities, including amounts in foreign currencies, and invests in foreign
operations. These activities result in exposures to changing interest rates, energy commodity prices and foreign currency exchange rates. The Company uses derivatives to manage the risk that results
from these activities.

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.

Net Investment in Foreign Operations

At December 31, 2005 and 2004, the Company had net investments in self sustaining foreign operations with a U.S. dollar functional currency which created an
exposure to changes in exchange rates. The Company uses U.S. dollar denominated debt and derivatives to hedge this exposure on an after-tax basis. The fair value for derivatives
used to manage the exposure is shown in the table below.

|                                                   |                         |                      |       | 2005       |     | 2004                                 
|-------------------------------------------------- | ----------------------- | -------------------- | ----- | ---------- | --- | -------------------------------------
|
|                                                   |                         |                      |       |           
|Asset/(Liability)December 31 (millions of dollars) |                         | Accounting Treatment |       | Fair Value |     | Notional or Notional
Principal
Amount
|                                                  
|U.S. dollar cross-currency swaps                   |                         |                      |       |            |     |                                      
|                                                   | (maturing 2006 to 2012) |                      | Hedge |            | 119 |                                      
|U.S. dollar forward foreign exchange contracts     |                         |                      |       |            |     |                                      
|                                                   | (maturing 2006)         |                      | Hedge |            | 5   |                                      
|U.S. dollar options                                |                         |                      |       |            |     |                                      
|                                                   | (maturing 2006)         |                      | Hedge |            |    |                                      

Reconciliation of Foreign Exchange Adjustment (Losses)/Gains

|December 31 (millions of dollars)                                |  | 2005 |   | 2004 |   |  | 
|---------------------------------------------------------------- |  | ---- | - | ---- | - |  | 
|
|                                                                 |  |      |  
|
|Balance at January 1                                             |  | (71  | ) | (40  | ) |  | 
|Translation losses on foreign currency denominated net assets(1) |  | (21  | ) | (39  | ) |  | 
|Gains on derivatives                                             |  | 23   |   | 52   |   |  | 
|Income taxes                                                     |  | (21  | ) | (44  | ) |  | 
|
|                                                                 |  |      |   |      |  
|
|Balance at December 31                                           |  | (90  | ) | (71  | ) |  | 
|
|                                                                 |  |      |   |      |  
|
|                                                                 |  |      |   |      |  
|

Foreign Exchange Gains/(Losses)

Foreign exchange gains included in Other Expenses/(Income) for the year ended December 31, 2005 are $19 million
(2004  $6 million; 2003  nil).

Foreign Exchange and Interest Rate Management Activity

The Company manages the foreign exchange and interest rate risks related to its U.S. dollar denominated debt, and transactions and interest rate exposures of the Canadian
Mainline, the Alberta System and the BC System through the use of foreign currency and interest rate

100NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

---



derivatives.
Certain of the realized gains and losses on these derivatives are shared with shippers on predetermined terms. The details of the foreign exchange and interest rate derivatives are shown
in the table below.

|                                                   |                         |                         |           | 2005       |     | 2004                                 
|-------------------------------------------------- | ----------------------- | ----------------------- | --------- | ---------- | --- | -------------------------------------
|
|                                                   |                         |                         |           |           
|Asset/(Liability)December 31 (millions of dollars) |                         | Accounting Treatment    |           | Fair Value |     | Notional or Notional
Principal
Amount
|                                                  
|Foreign Exchange                                   |                         |                         |           |            |     |                                      
|Cross- currency swaps                              |                         |                         |           |            |     |                                      
|                                                   | (maturing 2010 to 2013) |                         | Non-hedge |            | (86 | )                                    
|Interest Rate                                      |                         |                         |           |            |     |                                      
|Interest rate swaps                                |                         |                         |           |            |     |                                      
|                                                   | Canadian dollars        |                         |           |            |     |                                      
|                                                   |                         | (maturing 2007 to 2008) |           | Hedge      |     | 4                                    
|                                                   |                         | (maturing 2006 to 2009) |           | Non-hedge  |     | 7                                    
|
|                                                   |                         |                         |           | 11         |     |                                      
|
|                                                   | U.S. dollars            |                         |           |            |     |                                      
|                                                   |                         | (maturing 2007 to 2009) |           | Non-hedge  |     | 5                                    

The
Company manages the foreign exchange and interest rate exposures of its other businesses through the use of foreign currency and interest rate derivatives. The details of these
foreign currency and interest rate derivatives are shown in the table below.

|                                                   |                 |                         |           | 2005       |   | 2004                                 
|-------------------------------------------------- | --------------- | ----------------------- | --------- | ---------- | - | -------------------------------------
|
|                                                   |                 |                         |           |           
|Asset/(Liability)December 31 (millions of dollars) |                 | Accounting
Treatment    |           | Fair Value |   | Notional or Notional
Principal
Amount
|                                                  
|Foreign Exchange                                   |                 |                         |           |            |   |                                      
|Options (maturing 2006)                            |                 | Non-hedge               |           | 1          |   | U.S. 195                             
|Forward foreign exchange contracts                 |                 |                         |           |            |   |                                      
|                                                   | (maturing 2006) |                         | Hedge     |            | 2 |                                      
|                                                   | (maturing 2006) |                         | Non-hedge |            | 1 |                                      
|Interest Rate                                      |                 |                         |           |            |   |                                      
|Options                                            |                 | Non-hedge               |           |           |   |                                     
|Interest rate swaps                                |                 |                         |           |            |   |                                      
|                                                   | Canadian dollar |                         |           |            |   |                                      
|                                                   |                 | (maturing 2007 to 2009) |           | Hedge      |   | 1                                    
|                                                   |                 | (maturing 2006 to 2011) |           | Non-hedge  |   | 1                                    
|
|                                                   |                 |                         |           | 2          |   |                                      
|
|                                                   | U.S. dollar     |                         |           |            |   |                                      
|                                                   |                 | (maturing 2013)         |           | Hedge      |   |                                     
|                                                   |                 | (maturing 2006 to 2010) |           | Non-hedge  |   | 18                                   
|
|                                                   |                 |                         |           | 18         |   |                                      
|

Certain
of the Company's joint ventures use interest rate derivatives to manage interest rate exposures. The Company's proportionate share of the fair value of these outstanding
derivatives at December 31, 2005 was nil (2004  $1 million).

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS101

---



Energy Price Risk Management

The Company executes power, natural gas and heat rate derivatives for overall management of its asset portfolio. Heat rate contracts are contracts for the sale or purchase of
power that are priced based on a natural gas index. The fair value and notional volumes of contracts for differences and the swap, future, option and heat rate contracts are shown in the
tables below.

Power

|                                                   |                         |                      |           | 2005       |      | 2004       |    
|-------------------------------------------------- | ----------------------- | -------------------- | --------- | ---------- | ---- | ---------- | ---
|
|                                                   |                         |                      |           |            |     
|Asset/(Liability)December 31 (millions of dollars) |                         | Accounting Treatment |           | Fair Value |      | Fair Value |    
|                                                   |                        
|Power  swaps and contracts for differences        |                         |                      |           |            |      |            |    
|                                                   | (maturing 2006 to 2011) |                      | Hedge     |            | (130 | )          | 7  
|                                                   | (maturing 2006 to 2010) |                      | Non-hedge |            | 13   |            | (2 
|Gas  swaps, futures and options                   |                         |                      |           |            |      |            |    
|                                                   | (maturing 2006 to 2016) |                      | Hedge     |            | 17   |            | (39
|                                                   | (maturing 2006 to 2008) |                      | Non-hedge |            | (11  | )          | (2 
|Heat rate contracts                                |                         |                      |           |            |      |            |    
|                                                   | (maturing 2006)         |                      | Non-hedge |            |     |            | (1 

|
|

|
|

|                                            |                         |                      |           | Power (GWh)(1) |       | Gas (Bcf)(1)
|------------------------------------------- | ----------------------- | -------------------- | --------- | -------------- | ----- | ------------
|
|                                            |                         |                      |           |               
|Notional VolumesDecember 31, 2005           |                         | Accounting Treatment |           | Purchases      |       | Sales       
|                                           
|Power  swaps and contracts for differences |                         |                      |           |                |       |             
|                                            | (maturing 2006 to 2011) |                      | Hedge     |                | 2,566 |             
|                                            | (maturing 2006 to 2010) |                      | Non-hedge |                | 1,332 |             
|Gas  swaps, futures and options            |                         |                      |           |                |       |             
|                                            | (maturing 2006 to 2016) |                      | Hedge     |                |      |             
|                                            | (maturing 2006 to 2008) |                      | Non-hedge |                |      |             
|Heat rate contracts                         |                         |                      |           |                |       |             
|                                            | (maturing 2006)         |                      | Non-hedge |                |      |             

|December 31, 2004                           |  |           |  |       |  |       |  |    |  |   
|------------------------------------------- |  | --------- |  | ----- |  | ----- |  | -- |  | --
|                                           
|Power  swaps and contracts for differences |  | Hedge     |  | 3,314 |  | 7,029 |  |   |  |  
|                                            |  | Non-hedge |  | 438   |  |      |  |   |  |  
|Gas  swaps, futures and options            |  | Hedge     |  |      |  |      |  | 80 |  | 84
|                                            |  | Non-hedge |  |      |  |      |  | 5  |  | 8 
|Heat rate contracts                         |  | Non-hedge |  |      |  | 229   |  | 2  |  |  

Certain
of the Company's joint ventures use power derivatives to manage energy price risk exposures. The Company's proportionate share of the fair value of these outstanding power sales
derivatives at December 31, 2005 was $(38) million (2004  nil) and relates to contracts which cover the period 2006 to 2008. The Company's proportionate
share of the notional sales volumes associated with this exposure at December 31, 2005 was 2,058 GWh (2004  nil).

102NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

---



Fair Value of Financial Instruments

The fair value of cash and short-term investments and notes payable approximates their carrying amounts due to the short period to maturity. The fair value of
long-term debt, long-term debt of joint ventures and preferred securities is determined using market prices for the same or similar issues.

|                                  |  | 2005            |  | 2004      
|--------------------------------- |  | --------------- |  | ----------
|
|                                  |  |                
|December 31 (millions of dollars) |  | Carrying
Amount |  | Fair
Value
|                                 
|Long-Term Debt                    |  |                 |  |           
|Canadian Mainline                 |  | 4,233           |  | 5,327     
|Alberta System                    |  | 2,258           |  | 2,858     
|GTN                               |  | 466             |  | 470       
|Foothills System                  |  | 400             |  | 415       
|Portland                          |  | 281             |  | 292       
|Other                             |  | 2,395           |  | 2,486     
|Long-Term Debt of Joint Ventures  |  | 978             |  | 1,101     
|Preferred Securities              |  | 536             |  | 554       

The
fair value is provided solely for information purposes and is not recorded in the consolidated balance sheet.

Credit Risk

Credit risk results from the possibility that a counterparty to a derivative in which the Company has an unrealized gain fails to perform according to the terms of the contract.
Credit exposure is minimized through the use of established credit management techniques, including formal assessment processes, contractual and collateral requirements, master netting arrangements
and credit exposure limits. At December 31, 2005, for foreign currency and interest rate derivatives, total credit risk and the largest credit exposure to a single counterparty were
$127 million and $44 million, respectively. At December 31, 2005, for power, natural gas and heat rate derivatives, total credit risk and the largest credit exposure to a single
counterparty were $63 million and $39 million, respectively.

NOTE 17    INCOME TAXES

Provision for Income Taxes

|Year ended December 31 (millions of dollars) |  | 2005 |   | 2004 |  | 2003
|-------------------------------------------- |  | ---- | - | ---- |  | ----
|                                            
|Current                                      |  |      |   |      |  |     
|Canada                                       |  | 499  |   | 373  |  | 243 
|Foreign                                      |  | 51   |   | 41   |  | 41  
|                                            
|                                             |  | 550  |   | 414  |  | 284 
|                                            
|Future                                       |  |      |   |      |  |     
|Canada                                       |  | (46  | ) | 34   |  | 183 
|Foreign                                      |  | 106  |   | 43   |  | 47  
|                                            
|                                             |  | 60   |   | 77   |  | 230 
|                                            
|                                             |  | 610  |   | 491  |  | 514 
|                                            
|                                            

Geographic Components of Income

|Year ended December 31 (millions of dollars)                                        |  | 2005  |  | 2004  |  | 2003 
|----------------------------------------------------------------------------------- |  | ----- |  | ----- |  | -----
|                                                                                   
|Canada                                                                              |  | 1,316 |  | 1,207 |  | 1,058
|Foreign                                                                             |  | 587   |  | 342   |  | 324  
|                                                                                   
|Income from continuing operations before income taxes and non-controlling interests |  | 1,903 |  | 1,549 |  | 1,382
|                                                                                   
|                                                                                   

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS103

---



Reconciliation of Income Tax Expense

|Year ended December 31 (millions of dollars)                                        |  | 2005  |   | 2004  |   | 2003  |  
|----------------------------------------------------------------------------------- |  | ----- | - | ----- | - | ----- | -
|                                                                                    | 
|Income from continuing operations before income taxes and non-controlling interests |  | 1,903 |   | 1,549 |   | 1,382 |  
|Federal and provincial statutory tax rate                                           |  | 33.6  | % | 33.9  | % | 36.7  | %
|Expected income tax expense                                                         |  | 639   |   | 525   |   | 507   |  
|Income tax differential related to regulated operations                             |  | 71    |   | 62    |   | 29    |  
|Higher/(lower) effective foreign tax rates                                          |  | 2     |   | 2     |   | (2    | )
|Large corporations tax                                                              |  | 15    |   | 21    |   | 28    |  
|Lower effective tax rate on equity in earnings of affiliates                        |  | (29   | ) | (25   | ) | (27   | )
|Non-taxable portion of gains on sale of assets                                      |  | (68   | ) | (66   | ) |      |  
|Change in valuation allowance                                                       |  |      |   | (7    | ) | (3    | )
|Other                                                                               |  | (20   | ) | (21   | ) | (18   | )
|                                                                                    | 
|Actual income tax expense                                                           |  | 610   |   | 491   |   | 514   |  
|                                                                                    | 
|                                                                                    | 

Future Income Tax Assets and Liabilities

|December 31 (millions of dollars)                                   |  | 2005 |  | 2004 |  | 
|------------------------------------------------------------------- |  | ---- |  | ---- |  | 
|
|                                                                    |  |     
|
|Deferred costs                                                      |  | 119  |  | 71   |  | 
|Deferred revenue                                                    |  | 11   |  | 18   |  | 
|Alternative minimum tax credits                                     |  |     |  | 10   |  | 
|Net operating and capital loss carryforwards                        |  | 1    |  | 7    |  | 
|Other                                                               |  | 43   |  | 72   |  | 
|
|                                                                    |  |     
|
|                                                                    |  | 174  |  | 178  |  | 
|Less: Valuation allowance                                           |  | 14   |  | 17   |  | 
|
|                                                                    |  |     
|
|Future income tax assets, net of valuation allowance                |  | 160  |  | 161  |  | 
|
|                                                                    |  |     
|
|Difference in accounting and tax bases of plant, equipment and PPAs |  | 637  |  | 456  |  | 
|Investments in subsidiaries and partnerships                        |  | 131  |  | 114  |  | 
|Unrealized foreign exchange gains on long-term debt                 |  | 68   |  | 45   |  | 
|Other                                                               |  | 27   |  | 55   |  | 
|
|                                                                    |  |     
|
|Future income tax liabilities                                       |  | 863  |  | 670  |  | 
|
|                                                                    |  |     
|
|Net future income tax liabilities                                   |  | 703  |  | 509  |  | 
|
|                                                                    |  |     
|
|                                                                    |  |     
|

Unremitted Earnings of Foreign Investments

Income taxes have not been provided on the unremitted earnings of foreign investments which the Company does not intend to repatriate in the foreseeable future. If provision for
these taxes had been made, future income tax liabilities would increase by approximately $61 million at December 31, 2005
(2004  $57 million).

Income Tax Payments

Income tax payments of $531 million were made during the year ended December 31, 2005 (2004  $419 million;
2003  $220 million).

NOTE 18    NOTES PAYABLE

|                             |  | 2005                       |  | 2004                                                   
|---------------------------- |  | -------------------------- |  | -------------------------------------------------------
|
|                             |  |                           
|                             |  | Outstanding December 31(1) |  | Weighted Average Interest Rate Per Annum at December 31
|                            
|Canadian dollars             |  | 765                        |  | 3.4%                                                   
|U.S. dollars (2005  US$169) |  | 197                        |  | 4.5%                                                   
|
|                             |  | 962                        |  |                                                        
|
|

104NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

---



Notes payable consists of commercial paper and line of credit drawings. At December 31, 2005, total credit facilities of $2.0 billion
were available to support the Company's commercial paper programs and for general corporate purposes. Of this total, $1.5 billion was a committed five-year term syndicated credit
facility. This facility is extendible on an annual basis and is revolving. In December 2005, the facility was extended to December 2010. The remaining amounts are either demand or
non-extendible facilities.

At
December 31, 2005, the Company had used approximately $271 million of its total lines of credit for letters of credit and to support its ongoing commercial arrangements.
If drawn, interest on the lines of credit is charged at prime rates of Canadian chartered and U.S. banks and at other negotiated financial bases. The cost to maintain the unused portion of the
lines of credit was $2 million for the year ended December 31, 2005 (2004  $2 million).

NOTE 19    ASSET RETIREMENT OBLIGATIONS

At December 31, 2005, the estimated undiscounted cash flows required to settle the asset retirement obligations with respect to Gas Transmission were $46 million
(2004  $48 million), calculated using an inflation rate ranging from two to three per cent per annum. The estimated fair value of this liability
was $12 million (2004  $12 million) after discounting the estimated cash flows at rates ranging from 5.5 per cent to
6.6 per cent. At December 31, 2005, the expected timing of payment for settlement of the obligations ranges from 12 to 24 years. No amount has been recorded for asset
retirement obligations relating to the regulated natural gas transmission operation assets as it is not possible to make a reasonable estimate of the fair value of the liability due to the inability
to determine the scope and timing of the asset retirements. Management believes it is reasonable to assume that all retirement costs associated with the regulated pipelines will be recovered through
tolls in future periods.

At
December 31, 2005, the estimated undiscounted cash flows required to settle the asset retirement obligations with respect to the Power business were $95 million
(2004  $128 million), calculated using an inflation rate ranging from two to three per cent per annum. The estimated fair value of this liability
was $21 million (2004  $24 million) after discounting the estimated cash flows at rates ranging from 5.5 per cent to
6.6 per cent. At December 31, 2005, the expected timing of payment for settlement of the obligations ranges from 13 to 28 years.

For
the hydroelectric power plant assets, as it is not possible to make a reasonable estimate of the fair value of the liability due to the inability to determine the scope and timing of
the asset retirements, no amount has been recorded for asset retirement obligations. For the Bruce Power nuclear assets, as the lessor is responsible for decommissioning liabilities under the lease
agreement, no amount has been recorded for asset retirement obligations.

Reconciliation of Asset Retirement Obligations

|(millions of dollars)                                 |  | Gas Transmission |   | Power |   | Total |  
|----------------------------------------------------- |  | ---------------- | - | ----- | - | ----- | -
|                                                      | 
|Balance at January 1, 2003                            |  | 2                |   | 6     |   | 8     |  
|Revisions in estimated cash flows                     |  |                 |   | 1     |   | 1     |  
|                                                      | 
|Balance at December 31, 2003                          |  | 2                |   | 7     |   | 9     |  
|New obligations and revisions in estimated cash flows |  | 9                |   | 21    |   | 30    |  
|Removal of Power LP redemption obligations            |  |                 |   | (5    | ) | (5    | )
|Accretion expense                                     |  | 1                |   | 1     |   | 2     |  
|                                                      | 
|Balance at December 31, 2004                          |  | 12               |   | 24    |   | 36    |  
|Revisions in estimated cash flows and lives           |  | (1               | ) | 1     |   |      |  
|Sale of Power LP                                      |  |                 |   | (5    | ) | (5    | )
|Accretion expense                                     |  | 1                |   | 1     |   | 2     |  
|                                                      | 
|Balance at December 31, 2005                          |  | 12               |   | 21    |   | 33    |  
|                                                      | 
|                                                      | 

NOTE 20    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 Products Index (CPI). Past service costs are amortized over the expected average remaining service
life of employees, which is approximately 11 years.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS105

---



The
Company also provides its employees with 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 at December 31, 2005 was
approximately 12 years.

In
2005, the Company expensed $2 million (2004  $1 million; 2003  $1 million) related
to retirement savings plans for its U.S. employees.

Total
cash payments for employee future benefits for 2005, consisting of cash contributed by the Company to the DB Plans and other benefit plans was $74 million
(2004  $89 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 of January 1, 2006, and the next required valuation is as of January 1, 2007.

|                                                              |                                               | Pension Benefit Plans |       | Other Benefit Plans |      
|------------------------------------------------------------- | --------------------------------------------- | --------------------- | ----- | ------------------- | -----
|
|                                                              |                                               |                       |      
|(millions of dollars)                                         |                                               | 2005                  |       | 2004                |      
|                                                              |                                              
|Change in Benefit Obligation                                  |                                               |                       |       |                     |      
|                                                              | Benefit obligation  beginning of year        |                       | 1,100 |                     | 960  
|                                                              | Current service cost                          |                       | 32    |                     | 28   
|                                                              | Interest cost                                 |                       | 63    |                     | 58   
|                                                              | Employee contributions                        |                       | 3     |                     | 2    
|                                                              | Benefits paid                                 |                       | (60   | )                   | (66  
|                                                              | Actuarial loss/(gain)                         |                       | 149   |                     | 46   
|                                                              | Foreign exchange rate changes                 |                       | (3    | )                   |     
|                                                              | Curtailment                                   |                       | (2    | )                   |     
|                                                              | Acquisition                                   |                       |      |                     | 72   
|                                                              |                                              
|                                                              | Benefit obligation  end of year              |                       | 1,282 |                     | 1,100
|                                                              |                                              
|Change in Plan Assets                                         |                                               |                       |       |                     |      
|                                                              | Plan assets at fair value  beginning of year |                       | 970   |                     | 799  
|                                                              | Actual return on plan assets                  |                       | 119   |                     | 97   
|                                                              | Employer contributions                        |                       | 67    |                     | 84   
|                                                              | Employee contributions                        |                       | 3     |                     | 2    
|                                                              | Benefits paid                                 |                       | (60   | )                   | (66  
|                                                              | Foreign exchange rate changes                 |                       | (3    | )                   |     
|                                                              | Acquisition                                   |                       |      |                     | 54   
|                                                              |                                              
|                                                              | Plan assets at fair value  end of year       |                       | 1,096 |                     | 970  
|                                                              |                                              
|Funded status  plan deficit                                  |                                               | (186                  | )     | (130                | )    
|Unamortized net actuarial loss                                |                                               | 331                   |       | 255                 |      
|Unamortized past service costs                                |                                               | 36                    |       | 39                  |      
|                                                              |                                              
|Accrued benefit asset/(liability), net of valuation allowance |                                               | 181                   |       | 164                 |      
|                                                              |                                              
|                                                              |                                              

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

|                 |  | Pension Benefit Plans |   | Other Benefit Plans |  
|---------------- |  | --------------------- | - | ------------------- | -
|
|                 |  |                       |  
|                 |  | 2005                  |   | 2004                |  
|                 | 
|Other assets     |  | 268                   |   | 224                 |  
|Accounts payable |  | (70                   | ) | (42                 | )
|Deferred amounts |  | (17                   | ) | (18                 | )
|                 | 
|Total            |  | 181                   |   | 164                 |  
|                 | 
|                 | 

106NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

---



Included
in the above accrued benefit obligation and fair value of plan assets at year end are the following amounts in respect of plans that are not fully funded.

|                             |  | Pension Benefit Plans |   | Other Benefit Plans |  
|---------------------------- |  | --------------------- | - | ------------------- | -
|
|                             |  |                       |  
|                             |  | 2005                  |   | 2004                |  
|                             | 
|Accrued benefit obligation   |  | (1,263                | ) | (1,084              | )
|Fair value of plan assets    |  | 1,075                 |   | 952                 |  
|                             | 
|Funded status  plan deficit |  | (188                  | ) | (132                | )
|                             | 
|                             | 

The
Company's expected contributions for the year ended December 31, 2006 are approximately $95 million for the pension benefit plans and approximately $7 million
for the other benefit plans.

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

|(millions of dollars) |  | Pension Benefits |  | Other Benefits
|--------------------- |  | ---------------- |  | --------------
|                     
|2006                  |  | 58               |  | 6             
|2007                  |  | 59               |  | 7             
|2008                  |  | 62               |  | 7             
|2009                  |  | 64               |  | 8             
|2010                  |  | 67               |  | 8             
|Years 2011 to 2015    |  | 378              |  | 44            

The
significant weighted average actuarial assumptions adopted in measuring the Company's benefit obligations at December 31 are as follows.

|                              |  | Pension Benefit Plans |  | Other Benefit Plans
|----------------------------- |  | --------------------- |  | -------------------
|
|                              |  |                      
|                              |  | 2005                  |  | 2004               
|                             
|Discount rate                 |  | 5.00%                 |  | 5.75%              
|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 are as follows.

|                                                 |  | Pension Benefit Plans |  | Other Benefit Plans
|------------------------------------------------ |  | --------------------- |  | -------------------
|
|                                                 |  |                      
|                                                 |  | 2005                  |  | 2004               
|                                                
|Discount rate                                    |  | 5.75%                 |  | 6.00%              
|Expected long-term rate of return on plan assets |  | 6.90%                 |  | 6.90%              
|Rate of compensation increase                    |  | 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 both the portfolio in aggregate and for each asset class
in the portfolio. Assumed projected rates of return are selected after analyzing historical experience and future expectations of the level 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.

For
measurement purposes, a 9.0 per cent annual rate of increase in the per capita cost of covered health care benefits was assumed for 2006. The rate was assumed to
decrease gradually to 5.0 per cent for 2015 and remain at that level thereafter. A one percentage point increase or decrease 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            |  | 18       |  | (16      | )

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS107

---



The
Company's net benefit cost is as follows.

|                                                                                                        |  | Pension Benefit Plans |   | Other Benefit Plans |  
|------------------------------------------------------------------------------------------------------- |  | --------------------- | - | ------------------- | -
|
|                                                                                                        |  |                       |  
|Year ended December 31 (millions of dollars)                                                            |  | 2005                  |   | 2004                |  
|                                                                                                        | 
|Current service cost                                                                                    |  | 32                    |   | 28                  |  
|Interest cost                                                                                           |  | 63                    |   | 58                  |  
|Actual return on plan assets                                                                            |  | (119                  | ) | (97                 | )
|Actuarial loss/(gain)                                                                                   |  | 149                   |   | 46                  |  
|                                                                                                        | 
|Elements of net benefit cost prior to adjustments to recognize the long-term nature of net benefit cost |  | 125                   |   | 35                  |  
|                                                                                                        | 
|Difference between expected and actual return on plan assets                                            |  | 54                    |   | 39                  |  
|Difference between actuarial loss recognized and actual actuarial loss on accrued benefit obligation    |  | (131                  | ) | (32                 | )
|Difference between amortization of past service costs and actual plan amendments                        |  | 3                     |   | 3                   |  
|Amortization of transitional obligation related to regulated business                                   |  |                      |   |                    |  
|                                                                                                        | 
|Net benefit cost recognized                                                                             |  | 51                    |   | 45                  |  
|                                                                                                        | 
|                                                                                                        | 

The
Company's pension plans' weighted average asset allocations at December 31, by asset category, and weighted average target allocation at December 31, by asset category,
is as follows.

|                  |  | Percentage of Plan Assets |  | Target Allocation
|----------------- |  | ------------------------- |  | -----------------
|
|                  |  |                          
|Asset Category    |  | 2005                      |  | 2004             
|                 
|Debt securities   |  | 43%                       |  | 44%              
|Equity securities |  | 57%                       |  | 56%              
|
|                  |  |                           |  |                  
|
|                  |  | 100%                      |  | 100%             
|
|                  |  |                           |  |                  
|
|                  |  |                           |  |                  
|

Debt
securities include the Company's long-term debt in the amount of $3 million (0.3 per cent of total plan assets) at December 31, 2005 and
2004. Equity securities include the Company's common shares in the amounts of $5 million (0.5 per cent of total plan assets) and $3 million (0.3 per cent of
total plan assets) at December 31, 2005 and 2004, 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 amounts that follow represent TransCanada's proportionate
share with respect to these plans.

Total
cash payments for employee future benefits for 2005, consisting of cash contributed by the Company's joint ventures to DB Plans and other benefit plans was $4 million
(2004  $1 million).

108NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

---



The
Company's joint ventures measure the 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 of January 1, 2006, and the next required valuation will be as of January 1, 2007.

|                                                              |                                               | Pension Benefit Plans |     | Other Benefit Plans |   
|------------------------------------------------------------- | --------------------------------------------- | --------------------- | --- | ------------------- | --
|
|                                                              |                                               |                       |    
|(millions of dollars)                                         |                                               | 2005                  |     | 2004                |   
|                                                              |                                              
|Change in Benefit Obligation                                  |                                               |                       |     |                     |   
|                                                              | Benefit obligation  beginning of year        |                       | 45  |                     | 47
|                                                              | Current service cost                          |                       | 4   |                     | 1 
|                                                              | Interest cost                                 |                       | 7   |                     | 3 
|                                                              | Employee contributions                        |                       |    |                     |  
|                                                              | Benefits paid                                 |                       | (3  | )                   | (3
|                                                              | Actuarial loss                                |                       | 17  |                     |  
|                                                              | Foreign exchange rate changes                 |                       | (1  | )                   | (3
|                                                              | Bruce B(1)                                    |                       | 610 |                     |   
|                                                              |                                              
|                                                              | Benefit obligation  end of year              |                       | 679 |                     | 45
|                                                              |                                              
|Change in Plan Assets                                         |                                               |                       |     |                     |   
|                                                              | Plan assets at fair value  beginning of year |                       | 57  |                     | 56
|                                                              | Actual return on plan assets                  |                       | 18  |                     | 7 
|                                                              | Employer contributions                        |                       | 4   |                     | 1 
|                                                              | Employee contributions                        |                       |    |                     |  
|                                                              | Benefits paid                                 |                       | (3  | )                   | (3
|                                                              | Foreign exchange rate changes                 |                       | (1  | )                   | (4
|                                                              | Bruce B(1)                                    |                       | 510 |                     |   
|                                                              |                                              
|                                                              | Plan assets at fair value  end of year       |                       | 585 |                     | 57
|                                                              |                                              
|Funded status  plan deficit                                  |                                               | (94                   | )   | 12                  |   
|Unamortized net actuarial loss/(gain)                         |                                               | 125                   |     | 14                  |   
|Unamortized past service costs                                |                                               | 1                     |     |                    |   
|                                                              |                                              
|Accrued benefit asset/(liability), net of valuation allowance |                                               | 32                    |     | 26                  |   
|                                                              |                                              
|                                                              |                                              

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

|                 |  | Pension Benefit Plans |  | Other Benefit Plans | 
|---------------- |  | --------------------- |  | ------------------- | 
|
|                 |  |                       | 
|                 |  | 2005                  |  | 2004                | 
|                 | 
|Other assets     |  | 32                    |  | 26                  | 
|Deferred amounts |  |                      |  |                    | 
|                 | 
|Total            |  | 32                    |  | 26                  | 
|                 | 
|                 | 

Included
in the above accrued benefit obligation and fair value of plan assets at year end are the following amounts in respect of plans that are not fully funded.

|                             |  | Pension Benefit Plans |   | Other Benefit Plans |  
|---------------------------- |  | --------------------- | - | ------------------- | -
|
|                             |  |                       |  
|                             |  | 2005                  |   | 2004                |  
|                             | 
|Accrued benefit obligation   |  | (645                  | ) | (5                  | )
|Fair value of plan assets    |  | 534                   |   | 4                   |  
|                             | 
|Funded status  plan deficit |  | (111                  | ) | (1                  | )
|                             | 
|                             | 

The
Company's joint ventures' expected contributions for the year ended December 31, 2006 are approximately $27 million for the pension benefit plans and approximately
$2 million for the other benefit plans.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS109

---



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

|(millions of dollars) |  | Pension Benefits |  | Other Benefits
|--------------------- |  | ---------------- |  | --------------
|                     
|2006                  |  | 11               |  | 2             
|2007                  |  | 13               |  | 2             
|2008                  |  | 16               |  | 2             
|2009                  |  | 20               |  | 3             
|2010                  |  | 24               |  | 3             
|Years 2011 to 2015    |  | 172              |  | 21            

The
significant weighted average actuarial assumptions adopted in measuring the Company's joint ventures' benefit obligations at December 31 are as follows.

|                              |  | Pension Benefit Plans |  | Other Benefit Plans
|----------------------------- |  | --------------------- |  | -------------------
|
|                              |  |                      
|                              |  | 2005                  |  | 2004               
|                             
|Discount rate                 |  | 5.30%                 |  | 5.75%              
|Rate of compensation increase |  | 3.50%                 |  | 4.00%              

The
significant weighted average actuarial assumptions adopted in measuring the Company's joint ventures' net benefit plan cost for years ended December 31 are as follows.

|                                                 |  | Pension Benefit Plans |  | Other Benefit Plans
|------------------------------------------------ |  | --------------------- |  | -------------------
|
|                                                 |  |                      
|                                                 |  | 2005                  |  | 2004               
|                                                
|Discount rate                                    |  | 6.20%                 |  | 6.00%              
|Expected long-term rate of return on plan assets |  | 7.40%                 |  | 8.50%              
|Rate of compensation increase                    |  | 3.50%                 |  | 4.00%              

A
one percentage point increase or decrease 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            |  | 7        |  | (6       | )

110NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

---



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)                                                            |  | 2005                  |   | 2004               
|                                                                                                       
|Current service cost                                                                                    |  | 4                     |   | 1                  
|Interest cost                                                                                           |  | 7                     |   | 3                  
|Actual return on plan assets                                                                            |  | (18                   | ) | (7                 
|Actuarial loss                                                                                          |  | 17                    |   |                   
|                                                                                                       
|Elements of net benefit cost prior to adjustments to recognize the long-term nature of net benefit cost |  | 10                    |   | (3                 
|                                                                                                       
|Difference between expected and actual return on plan assets                                            |  | 9                     |   | 2                  
|Difference between actuarial loss recognized and actual actuarial loss on accrued benefit obligation    |  | (16                   | ) | 1                  
|Difference between amortization of past service costs and actual plan amendments                        |  |                      |   |                   
|                                                                                                       
|Net benefit cost recognized by joint ventures                                                           |  | 3                     |   |                   
|                                                                                                       
|                                                                                                       

The
Company's pension plans' weighted average asset allocations at December 31, by asset category, and weighted average target allocation at December 31, by asset category,
is as follows.

|                  |  | Percentage of Plan Assets |  | Target Allocation
|----------------- |  | ------------------------- |  | -----------------
|
|                  |  |                          
|Asset Category    |  | 2005                      |  | 2004             
|                 
|Debt securities   |  | 30%                       |  | 38%              
|Equity securities |  | 70%                       |  | 62%              
|
|                  |  |                           |  |                  
|
|                  |  | 100%                      |  | 100%             
|
|                  |  |                           |  |                  
|
|                  |  |                           |  |                  
|

Debt
securities include the Company's long-term debt in the amount of $1 million (0.2 per cent of total plan assets) and nil at December 31, 2005
and 2004, respectively. Equity securities include the Company's common shares in the amounts of $5 million (0.9 per cent of total plan assets) and nil at December 31, 2005
and 2004, 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 21    CHANGES IN OPERATING WORKING CAPITAL

|Year ended December 31 (millions of dollars) |  | 2005  |  | 2004 |  | 2003
|-------------------------------------------- |  | ----- |  | ---- |  | ----
|                                            
|(Increase)/decrease in accounts receivable   |  | (100) |  | 16   |  | 98  
|(Increase)/decrease in inventories           |  | (50)  |  |     |  | 15  
|(Increase)/decrease in other current assets  |  | (1)   |  | 24   |  | 28  
|Increase/(decrease) in accounts payable      |  | 97    |  | (4)  |  | (46)
|Increase/(decrease) in accrued interest      |  | 5     |  | (7)  |  | (2) 
|                                            
|                                             |  | (49)  |  | 29   |  | 93  
|                                            
|                                            

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS111

---



NOTE 22    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
|-------------------------------------------- |  | ---------------------- |  | ------------------------------------ | - | ------------
|                                            
|2006                                         |  | 46                     |  | (12                                  | ) | 34          
|2007                                         |  | 52                     |  | (12                                  | ) | 40          
|2008                                         |  | 54                     |  | (12                                  | ) | 42          
|2009                                         |  | 54                     |  | (11                                  | ) | 43          
|2010                                         |  | 53                     |  | (11                                  | ) | 42          

The
operating lease agreements for premises, services and equipment expire at various dates through 2011, with an option to renew certain lease agreements for five years. The operating
lease agreement for the natural gas storage facility expires in 2030 with lessee termination rights every fifth anniversary commencing in 2010 and with the lessor having the right to terminate the
agreement every five years commencing in 2015. Net rental expense on operating leases for the year ended December 31, 2005 was $17 million
(2004  $7 million; 2003  $2 million).

Bruce Power

TransCanada's share of Bruce A's signed commitments to third party suppliers for the next five years for the restart and refurbishment of the currently idle Units 1 and 2,
extending the operating life of Unit 3 by replacing its steam generators and fuel channels when required and replacing the steam generators on Unit 4, is as follows.

|Year ended December 31 (millions of dollars) |  |    
|-------------------------------------------- |  | ---
|                                            
|2006                                         |  | 322
|2007                                         |  | 311
|2008                                         |  | 142
|2009                                         |  | 69 
|2010                                         |  |   
|                                            
|                                             |  | 844
|                                            
|                                            

Aboriginal Pipeline Group

On June 18, 2003, the Mackenzie Delta gas producers, the APG and TransCanada reached an agreement which governs TransCanada's role in the Mackenzie Gas Pipeline Project.
The project would result in a natural gas pipeline being constructed from Inuvik, Northwest Territories, to the northern border of Alberta, where it would connect with the Alberta System. Under the
agreement, TransCanada agreed to finance the APG for its one-third share of project development costs. These costs were originally estimated to be approximately $90 million, but
given extended project delays, the protracted regulatory process and the projected timing to reach a decision to construct the pipeline, this share is currently forecasted to increase to approximately
$145 million. As at December 31, 2005, TransCanada had funded $87 million (2004  $60 million) of this loan which is included in other
assets. The ability to recover this investment is dependent upon the outcome of the project.

Contingencies

The Canadian Alliance of Pipeline Landowners' Associations 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 the pipeline pursuant to Section 112 of
the NEB Act. The Company believes 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.

The
Company 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 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.

112NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

---



Guarantees

The Company, together with Cameco Corporation and BPC Generation Infrastructure Trust (BPC), has severally guaranteed one-third of certain contingent financial
obligations of Bruce B related to power sales agreements, operator licenses, the lease agreement and contractor services. The terms of the guarantees range from 2007 to 2018.

As
part of the reorganization of Bruce Power, including the formation of Bruce A and the commitment to restart and refurbish the Bruce A units, the Company, together with BPC, severally
guaranteed one-half of certain contingent financial obligations of Bruce A related to the refurbishment agreement with the Ontario Power Authority and cost sharing and sublease agreements
with Bruce B. The terms of the guarantees currently range from 2018 to 2019.

TransCanada's
share of the exposure under these Bruce Power guarantees at December 31, 2005 was estimated to be approximately $652 million of a calculated maximum of
$758 million. The current carrying amount of the liability related to these guarantees is nil and the fair value is approximately $17 million.

TransCanada
has guaranteed the equity undertaking of a subsidiary which supports the payment, under certain conditions, of principal and interest on US$133 million of public debt
obligations of TransGas. The Company has a 46.5 per cent interest in TransGas. Under the terms of the agreement, the Company severally with another major multinational company may be
required to 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 potential exposure is contingent on the impact of any change of law on TransGas' ability to service the debt. From the issuance of the debt in
1995 to date, there has been no change in applicable law and thus no exposure to TransCanada. The debt matures in 2010. The Company has made no provision related to this guarantee.

In
connection with the acquisition of GTN, US$241 million of the purchase price was deposited into an escrow account. As at December 31, 2005, there was
US$54 million remaining in the escrow account. The outstanding funds in the escrow account represent the full face amount of the potential liability under certain GTN guarantees and are to be
used to satisfy the liability of GTN under these designated guarantees.

NOTE 23    DISCONTINUED OPERATIONS

The Board of Directors approved plans in previous years to dispose of the Company's International, Canadian Midstream, Gas Marketing and certain other businesses. Net income
from discontinued operations for the year ended December 31, 2005 was nil (2004  $52 million, net of $27 million of income taxes;
2003  $50 million, net of $29 million of income taxes). Included in accounts payable at December 31, 2005 was the remaining
$51 million provision for loss on discontinued operations (2004  $55 million).

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS113

---



SUPPLEMENTARY INFORMATION

QUARTERLY AND ANNUAL SHARE TRADING INFORMATION

|Toronto Stock Exchange(Stock trading symbol TRP)  |  | First |  | Second |  | Third |  | Fourth |  | Annual
|------------------------------------------------- |  | ----- |  | ------ |  | ----- |  | ------ |  | ------
|                                                 
|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 
|                                                 
|2004 (dollars)                                    |  |       |  |        |  |       |  |        |  |       
|High                                              |  | 29.72 |  | 29.40  |  | 28.60 |  | 30.35  |  | 30.35 
|Low                                               |  | 26.45 |  | 25.70  |  | 25.37 |  | 26.98  |  | 25.37 
|Close                                             |  | 28.28 |  | 26.40  |  | 27.65 |  | 29.80  |  | 29.80 
|Volume (millions of shares)                       |  | 90.4  |  | 70.1   |  | 62.8  |  | 56.8   |  | 280.1 
|                                                 
|2003 (dollars)                                    |  |       |  |        |  |       |  |        |  |       
|High                                              |  | 23.00 |  | 25.67  |  | 25.80 |  | 28.49  |  | 28.49 
|Low                                               |  | 20.77 |  | 21.60  |  | 23.60 |  | 24.76  |  | 20.77 
|Close                                             |  | 21.55 |  | 23.75  |  | 25.07 |  | 27.88  |  | 27.88 
|Volume (millions of shares)                       |  | 69.6  |  | 76.9   |  | 64.2  |  | 67.2   |  | 277.9 
|                                                 
|New York Stock Exchange(Stock trading symbol TRP) |  |       |  |        |  |       |  |        |  |       
|                                                 
|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  
|                                                 
|2004 (U.S. dollars)                               |  |       |  |        |  |       |  |        |  |       
|High                                              |  | 22.38 |  | 22.39  |  | 22.30 |  | 24.91  |  | 24.91 
|Low                                               |  | 19.70 |  | 18.75  |  | 19.40 |  | 21.80  |  | 18.75 
|Close                                             |  | 21.50 |  | 19.78  |  | 21.85 |  | 24.87  |  | 24.87 
|Volume (millions of shares)                       |  | 12.3  |  | 9.9    |  | 5.5   |  | 5.3    |  | 33.0  
|                                                 
|2003 (U.S. dollars)                               |  |       |  |        |  |       |  |        |  |       
|High                                              |  | 15.12 |  | 19.10  |  | 18.82 |  | 21.88  |  | 21.88 
|Low                                               |  | 14.16 |  | 14.62  |  | 17.45 |  | 18.47  |  | 14.16 
|Close                                             |  | 14.74 |  | 17.57  |  | 18.58 |  | 21.51  |  | 21.51 
|Volume (millions of shares)                       |  | 6.5   |  | 5.3    |  | 2.5   |  | 6.9    |  | 21.2  
|                                                 

114SUPPLEMENTARY
INFORMATION

---



SIX-YEAR FINANCIAL HIGHLIGHTS

|(millions of dollars except where indicated)               |                         | 2005             |       | 2004   |     | 2003   |     | 2002   |     | 2001   |     | 2000   |    
|---------------------------------------------------------- | ----------------------- | ---------------- | ----- | ------ | --- | ------ | --- | ------ | --- | ------ | --- | ------ | ---
|                                                           |                        
|Income Statement                                           |                         |                  |       |        |     |        |     |        |     |        |     |        |    
|Revenues                                                   |                         | 6,124            |       | 5,497  |     | 5,636  |     | 5,225  |     | 5,285  |     | 4,384  |    
|Net Income from continuing operations                      |                         | 1,209            |       | 980    |     | 801    |     | 747    |     | 686    |     | 628    |    
|Net income/(loss) by segment                               |                         |                  |       |        |     |        |     |        |     |        |     |        |    
|                                                           |                         | Gas Transmission |       | 684    |     | 586    |     | 622    |     | 653    |     | 585    |    
|                                                           |                         | Power            |       | 561    |     | 396    |     | 220    |     | 146    |     | 168    |    
|                                                           |                         | Corporate        |       | (36    | )   | (2     | )   | (41    | )   | (52    | )   | (67    | )  
|                                                           | Continuing operations   |                  | 1,209 |        | 980 |        | 801 |        | 747 |        | 686 |        | 628
|                                                           | Discontinued operations |                  |      |        | 52  |        | 50  |        |    |        | (67 | )      | 61 
|Net income                                                 |                         | 1,209            |       | 1,032  |     | 851    |     | 747    |     | 619    |     | 689    |    
|Cash Flow Statement                                        |                         |                  |       |        |     |        |     |        |     |        |     |        |    
|Funds generated from operations                            |                         | 1,951            |       | 1,703  |     | 1,822  |     | 1,843  |     | 1,625  |     | 1,484  |    
|(Increase)/decrease in operating working capital           |                         | (49              | )     | 29     |     | 93     |     | 92     |     | (487   | )   | 437    |    
|                                                           |                        
|Net cash provided by operations                            |                         | 1,902            |       | 1,732  |     | 1,915  |     | 1,935  |     | 1,138  |     | 1,921  |    
|                                                           |                        
|                                                           |                        
|Capital expenditures and acquisitions                      |                         | 2,071            |       | 2,046  |     | 965    |     | 851    |     | 1,082  |     | 1,144  |    
|Dividends on common shares                                 |                         | 586              |       | 552    |     | 510    |     | 466    |     | 418    |     | 423    |    
|Balance Sheet                                              |                         |                  |       |        |     |        |     |        |     |        |     |        |    
|Assets                                                     |                         |                  |       |        |     |        |     |        |     |        |     |        |    
|Plant, property and equipment                              |                         |                  |       |        |     |        |     |        |     |        |     |        |    
|                                                           |                         | Gas Transmission |       | 16,774 |     | 17,385 |     | 16,122 |     | 16,158 |     | 16,562 |    
|                                                           |                         | Power            |       | 3,237  |     | 1,342  |     | 1,310  |     | 1,340  |     | 1,116  |    
|                                                           |                         | Corporate        |       | 27     |     | 37     |     | 50     |     | 64     |     | 66     |    
|Total assets                                               |                         | 24,113           |       | 22,422 |     | 20,887 |     | 20,555 |     | 20,531 |     | 25,245 |    
|Capitalization                                             |                         |                  |       |        |     |        |     |        |     |        |     |        |    
|Long-term debt                                             |                         | 9,640            |       | 9,749  |     | 9,516  |     | 8,899  |     | 9,444  |     | 10,008 |    
|Long-term debt of joint ventures                           |                         | 937              |       | 808    |     | 741    |     | 1,193  |     | 1,262  |     | 1,280  |    
|Preferred securities                                       |                         | 536              |       | 554    |     | 598    |     | 944    |     | 950    |     | 1,208  |    
|Non-controlling interests  Preferred shares of subsidiary |                         | 389              |       | 389    |     | 389    |     | 389    |     | 389    |     | 389    |    
|Common shareholders' equity                                |                         | 7,206            |       | 6,565  |     | 6,091  |     | 5,747  |     | 5,426  |     | 5,211  |    
|                                                           |                         |                  |       |        |     |        |     |        |     |        |     |        |    

SUPPLEMENTARY INFORMATION115

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|Per Common Share Data (dollars)                  |                               |                             |       |        |       |        |       |        |       |        |       |        |      
|------------------------------------------------ | ----------------------------- | --------------------------- | ----- | ------ | ----- | ------ | ----- | ------ | ----- | ------ | ----- | ------ | -----
|Net income  Basic                               |                               |                             |       |        |       |        |       |        |       |        |       |        |      
|                                                 | Continuing operations         |                             | $2.49 |        | $2.02 |        | $1.66 |        | $1.56 |        | $1.44 |        | $1.32
|                                                 | Discontinued operations       |                             |      |        | 0.11  |        | 0.10  |        |      |        | (0.14 | )      | 0.13 
|                                                 |                              
|                                                 |                               | $2.49                       |       | $2.13  |       | $1.76  |       | $1.56  |       | $1.30  |       | $1.45  |      
|                                                 |                              
|Net income  Diluted                             |                               |                             |       |        |       |        |       |        |       |        |       |        |      
|                                                 | Continuing operations         |                             | $2.47 |        | $2.01 |        | $1.66 |        | $1.55 |        | $1.44 |        | $1.32
|                                                 | Discontinued operations       |                             |      |        | 0.11  |        | 0.10  |        |      |        | (0.14 | )      | 0.13 
|                                                 |                              
|                                                 |                               | $2.47                       |       | $2.12  |       | $1.76  |       | $1.55  |       | $1.30  |       | $1.45  |      
|                                                 |                              
|Dividends declared                               |                               | $1.22                       |       | $1.16  |       | $1.08  |       | $1.00  |       | $0.90  |       | $0.80  |      
|Book Value(1)(6)                                 |                               | $14.79                      |       | $13.54 |       | $12.61 |       | $11.99 |       | $11.38 |       | $10.97 |      
|Market Price                                     |                               |                             |       |        |       |        |       |        |       |        |       |        |      
|                                                 | Toronto Stock Exchange ($Cdn) |                             |       |        |       |        |       |        |       |        |       |        |      
|                                                 |                               | High                        |       | 37.90  |       | 30.35  |       | 28.49  |       | 23.91  |       | 21.13  |      
|                                                 |                               | Low                         |       | 28.94  |       | 25.37  |       | 20.77  |       | 19.05  |       | 14.85  |      
|                                                 |                               | Close                       |       | 36.65  |       | 29.80  |       | 27.88  |       | 22.92  |       | 19.87  |      
|                                                 |                               | Volume (millions of shares) |       | 238.0  |       | 280.1  |       | 277.9  |       | 280.6  |       | 288.2  |      
|                                                 | New York Stock Exchange ($US) |                             |       |        |       |        |       |        |       |        |       |        |      
|                                                 |                               | High                        |       | 32.41  |       | 24.91  |       | 21.88  |       | 15.56  |       | 13.41  |      
|                                                 |                               | Low                         |       | 23.36  |       | 18.75  |       | 14.16  |       | 11.89  |       | 9.88   |      
|                                                 |                               | Close                       |       | 31.48  |       | 24.87  |       | 21.51  |       | 14.51  |       | 12.51  |      
|                                                 |                               | Volume (millions of shares) |       | 31.6   |       | 33.0   |       | 21.2   |       | 16.3   |       | 16.8   |      
|Shares outstanding (millions)                    |                               |                             |       |        |       |        |       |        |       |        |       |        |      
|                                                 | Average for the year          |                             | 486.2 |        | 484.1 |        | 481.5 |        | 478.3 |        | 475.8 |        | 474.6
|                                                 | End of year                   |                             | 487.2 |        | 484.9 |        | 483.2 |        | 479.5 |        | 476.6 |        | 474.9
|Registered common shareholders(1)                |                               | 30,533                      |       | 31,837 |       | 33,133 |       | 34,902 |       | 36,350 |       | 30,758 |      
|Financial Ratios                                 |                               |                             |       |        |       |        |       |        |       |        |       |        |      
|Return on average common shareholders' equity(2) |                               | 17.6%                       |       | 16.3%  |       | 14.4%  |       | 13.4%  |       | 11.6%  |       | 13.6%  |      
|Dividend yield(3)                                |                               | 3.3%                        |       | 3.9%   |       | 3.9%   |       | 4.4%   |       | 4.5%   |       | 4.7%   |      
|Price/earnings multiple(4)(5)                    |                               | 14.7                        |       | 14.0   |       | 15.8   |       | 14.7   |       | 15.3   |       | 11.9   |      
|Price/book multiple(4)(6)                        |                               | 2.5                         |       | 2.2    |       | 2.2    |       | 1.9    |       | 1.7    |       | 1.6    |      
|Debt to debt plus shareholders' equity(7)        |                               | 59%                         |       | 63%    |       | 64%    |       | 64%    |       | 67%    |       | 69%    |      
|Total shareholder return(8)                      |                               | 28%                         |       | 11%    |       | 27%    |       | 21%    |       | 21%    |       | 48%    |      
|Earnings to fixed charges(9)                     |                               | 2.9                         |       | 2.5    |       | 2.3    |       | 2.3    |       | 2.1    |       | 1.9    |      
|                                                 |                              

116SUPPLEMENTARY
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

8.25%
Preferred Securities are listed on the New York Stock Exchange under the symbol: TCAPr

16.50%
First Mortgage Pipe Line Bonds due 2007 are listed on the London Stock Exchange

* TransCanada
PipeLines Limited (TCPL) is a wholly-owned subsidiary of TransCanada Corporation.

Annual MeetingThe annual meeting of shareholders is scheduled for April 28, 2006 at 10:30 a.m. (Mountain Daylight Time) at
the Roundup Centre, Calgary, Alberta.

Dividend Payment DatesScheduled common share dividend payment dates in 2006 are January 31, April 28, 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 (Montreal, Toronto, Calgary and Vancouver) and Computershare
Trust Company (New York)

TCPL Preferred SharesComputershare Trust Company of Canada (Montreal, Toronto, Calgary and Vancouver)

TCPL Preferred SecuritiesThe Bank of New York (New York)

TCPL First Mortgage Pipe Line BondsCIBC Mellon Trust Company, as agent for National Trust Company (Toronto).

Co-Registrar
and Paying Agent U.K. Series, 16.50%: Computershare Services PLC (London, England)

TCPL Debentures

Canadian
Series: CIBC Mellon Trust Company (Halifax, Montreal, 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%

TRANSCANADA CORPORATION117

---



TCPL Subordinated DebenturesThe Bank of Nova Scotia Trust Company of New York (New York) U.S. Series 9.125%

TCPL Canadian Medium Term NotesCIBC Mellon Trust Company (Halifax, Montreal, Toronto, Calgary and Vancouver)

TCPL U.S. Medium Term Notes (unsubordinated notes) and Senior NotesThe Bank of New York (New York)

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 2005 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

118TRANSCANADA
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, 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
2006, 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 CORPORATION119

---



BOARD OF DIRECTORS

|S. Barry Jackson*
Chairman
TransCanada Corporation
Calgary, Alberta Harold N. KvislePresident and CEO
TransCanada Corporation
Calgary, Alberta Douglas D. Baldwin(1)(3)
Corporate Director
Calgary, Alberta Kevin E. Benson(1)
President and CEO,
Laidlaw International, Inc.
Wheaton, Illinois |  | Derek H. Burney, O.C.(2)
Chairman of the Board
New Brunswick Power
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
Desjardins Ducharme L.L.P.
Québec, Québec |  | Kerry L. Hawkins(3)(4)
Retired President
Cargill Limited
Winnipeg, Manitoba Paul L. Joskow(1)(2)
Professor, Department of Economics
Massachusetts Institute of Technology
Cambridge, Massachusetts David P. O'Brien(2)(4)
Chairman
EnCana Corporation
Royal Bank of Canada
Calgary, Alberta Harry G. Schaefer, F.C.A.(1)(2)
President
Schaefer & Associates Ltd.
and Vice-Chairman
TransCanada Corporation
Calgary, Alberta
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

CORPORATE GOVERNANCE

Please refer to TransCanada's Notice of 2006 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, 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.

GRAPHIC

GRAPHIC

120TRANSCANADA
CORPORATION

---





TRANSCANADA CORPORATION
RECONCILIATION TO UNITED STATES GAAP

AUDITORS' REPORT ON RECONCILIATION TO UNITED STATES GAAP

To the Shareholders of TransCanada Corporation

On
February 27, 2006, we reported on the consolidated balance sheets of TransCanada Corporation as at December 31, 2005 and 2004 and the consolidated statements of income,
retained earnings and cash flows for each of the years in the three-year period ended December 31, 2005, which are included in the annual report on Form 40-F. In
connection with our audits conducted in accordance with Canadian generally accepted auditing standards of the aforementioned consolidated financial statements, we also have audited the related
supplemental note entitled "Reconciliation to United States GAAP" included in the 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 LLP

Chartered
Accountants
Calgary, Canada

February 27,
2006

1

---





TRANSCANADA CORPORATION  RECONCILIATION TO UNITED STATES GAAP

The 2005 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 U.S. GAAP. The effects of these differences on the Company's consolidated financial statements for the year
ended December 31, 2005 are provided in the following U.S. GAAP condensed consolidated financial statements which should be read in conjunction with TransCanada's 2005 audited
consolidated financial statements prepared in accordance with Canadian GAAP.

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)                                 |                                                     | 2005 |       | Restated(3)
2004 |   | Restated(3)
2003 |     
|----------------------------------------------------------------------------------------------------- | --------------------------------------------------- | ---- | ----- | ---------------- | - | ---------------- | ----
|Revenues                                                                                              |                                                     |      | 5,333 |                  |   | 5,014            |     
|                                                                                                      |                                                     |      |       |                  |   |                  |     
|Cost of sales                                                                                         |                                                     |      | 840   |                  |   | 777              |     
|Other costs and expenses                                                                              |                                                     |      | 1,794 |                  |   | 1,618            |     
|Depreciation                                                                                          |                                                     |      | 924   |                  |   | 857              |     
|                                                                                                      |                                                     |      |       |                  |   |                  |     
|                                                                                                      |                                                     |      | 3,558 |                  |   | 3,252            |     
|                                                                                                      |                                                     |      |       |                  |   |                  |     
|Operating income                                                                                      |                                                     |      | 1,775 |                  |   | 1,762            |     
|Other (income)/expenses                                                                               |                                                     |      |       |                  |   |                  |     
|                                                                                                      | Equity income(1)                                    |      |       | (458             | ) |                  | (402
|                                                                                                      | Other expenses(2)(3)(4)                             |      |       | 422              |   |                  | 872 
|                                                                                                      | Dilution gain(3)                                    |      |       |                 |   |                  | (40 
|                                                                                                      | Income taxes                                        |      |       | 607              |   |                  | 490 
|                                                                                                      |                                                     |      |       |                  |   |                  |     
|                                                                                                      |                                                     |      | 571   |                  |   | 920              |     
|                                                                                                      |                                                     |      |       |                  |   |                  |     
|Income from continuing operations  U.S. GAAP                                                         |                                                     |      | 1,204 |                  |   | 842              |     
|Net income from discontinued operations  U.S. GAAP                                                   |                                                     |      |      |                  |   | 52               |     
|                                                                                                      |                                                     |      |       |                  |   |                  |     
|Income before cumulative effect of the application of accounting changes in accordance with U.S. GAAP |                                                     |      | 1,204 |                  |   | 894              |     
|Cumulative effect of the application of accounting changes, net of tax                                |                                                     |      |      |                  |   |                 |     
|                                                                                                      |                                                     |      |       |                  |   |                  |     
|Net Income in Accordance with U.S. GAAP                                                               |                                                     |      | 1,204 |                  |   | 894              |     
|Adjustments affecting comprehensive income under U.S. GAAP                                            |                                                     |      |       |                  |   |                  |     
|                                                                                                      | Foreign currency translation adjustment, net of tax |      |       | (18              | ) |                  | (31 
|                                                                                                      | Changes in minimum pension liability, net of tax(5) |      |       | (51              | ) |                  | 72  
|                                                                                                      | Unrealized(loss)/gain on derivatives, net of tax(6) |      |       | (54              | ) |                  | 1   
|                                                                                                      |                                                     |      |       |                  |   |                  |     
|Comprehensive Income in Accordance with U.S. GAAP                                                     |                                                     |      | 1,081 |                  |   | 936              |     
|                                                                                                      |                                                     |      |       |                  |   |                  |     
|Net Income Per Share in Accordance with U.S. GAAP                                                     |                                                     |      |       |                  |   |                  |     
|                                                                                                      | Continuing operations                               |      | $     | 2.48             |   | $                | 1.74
|                                                                                                      | Discontinued operations                             |      |       |                 |   |                  | 0.11
|                                                                                                      |                                                     |      |       |                  |   |                  |     
|Income before cumulative effect of the application of accounting changes in accordance with U.S. GAAP |                                                     | $    | 2.48  |                  | $ | 1.85             |     
|Cumulative effect of the application of accounting changes, net of tax                                |                                                     |      |      |                  |   |                 |     
|                                                                                                      |                                                     |      |       |                  |   |                  |     
|                                                                                                      | Basic                                               |      | $     | 2.48             |   | $                | 1.85
|                                                                                                      |                                                     |      |       |                  |   |                  |     
|                                                                                                      | Diluted(7)                                          |      | $     | 2.46             |   | $                | 1.84
|                                                                                                      |                                                     |      |       |                  |   |                  |     
|                                                                                                      |                                                     |      |       |                  |   |                  |     

2

---



|Net Income Per Share in Accordance with Canadian GAAP |                                  |   |      |       |   |      |       |   |      |      
|----------------------------------------------------- | -------------------------------- | - | ---- | ----- | - | ---- | ----- | - | ---- | -----
|                                                      | Basic                            |   | $    | 2.49  |   | $    | 2.13  |   | $    | 1.76 
|                                                      |                                  |   |      |       |   |      |      
|                                                      | Diluted                          |   | $    | 2.47  |   | $    | 2.12  |   | $    | 1.76 
|                                                      |                                  |   |      |       |   |      |      
|Dividends per common share                            |                                  | $ | 1.22 |       | $ | 1.16 |       | $ | 1.08 |      
|                                                      |                                  |   |      |       |   |      |      
|Common Shares Outstanding(millions)                   |                                  |   |      |       |   |      |       |   |      |      
|                                                      | Average for the period  Basic   |   |      | 486.2 |   |      | 484.1 |   |      | 481.5
|                                                      |                                  |   |      |       |   |      |      
|                                                      | Average for the period  Diluted |   |      | 489.1 |   |      | 486.7 |   |      | 483.9
|                                                      |                                  |   |      |       |   |      |      

Reconciliation of Income from Continuing Operations

|Year ended December 31 (millions of dollars)                           |                                                                             | 2005  |     | Restated(3)
2004 |      | Restated(3)
2003 |    
|---------------------------------------------------------------------- | --------------------------------------------------------------------------- | ----- | --- | ---------------- | ---- | ---------------- | ---
|Net Income from Continuing Operations in Accordance with Canadian GAAP |                                                                             | 1,209 |     | 980              |      | 801              |    
|U.S. GAAP adjustments                                                  |                                                                             |       |     |                  |      |                  |    
|                                                                       | Unrealized (loss)/gain on energy contracts(6)                               |       | (14 | )                | 10   |                  | 28 
|                                                                       | Tax impact of unrealized (loss)/gain on energy contracts                    |       | 5   |                  | (3   | )                | (10
|                                                                       | Equity gain/(loss)(8)(9)                                                    |       | 5   |                  | (2   | )                | (18
|                                                                       | Tax impact of equity gain/(loss)                                            |       | (1  | )                |     |                  | 6  
|                                                                       | Unrealized gain/(loss) on foreign exchange and interest rate derivatives(6) |       | 1   |                  | (12  | )                | (9 
|                                                                       | Tax impact of gain/(loss) on foreign exchange and interest rate derivatives |       | (1  | )                | 4    |                  | 3  
|                                                                       | Amortization of deferred gains related to Power LP(3)(4)                    |       |    |                  | (3   | )                | (10
|                                                                       | Deferred gains related to Power LP(3)(4)                                    |       |    |                  | (132 | )                |   
|                                                                       |                                                                             |       |     |                  |      |                  |    
|Income from Continuing Operations in Accordance with U.S. GAAP         |                                                                             | 1,204 |     | 842              |      | 791              |    
|                                                                       |                                                                             |       |     |                  |      |                  |    

Condensed Statement of Consolidated Cash Flows in Accordance with U.S. GAAP(1)

|Year ended December 31 (millions of dollars)                               |  | 2005   |   | 2004   |   | 2003  |  
|-------------------------------------------------------------------------- |  | ------ | - | ------ | - | ----- | -
|Cash Generated from Operations(10)                                         |  |        |   |        |   |       |  
|Net cash provided by operating activities                                  |  | 1,628  |   | 1,620  |   | 1,759 |  
|Investing Activities                                                       |  |        |   |        |   |       |  
|Net cash used in investing activities                                      |  | (1,171 | ) | (1,367 | ) | (946  | )
|Financing Activities                                                       |  |        |   |        |   |       |  
|Net cash used in financing activities                                      |  | (514   | ) | (332   | ) | (626  | )
|Effect of Foreign Exchange Rate Changes on Cash and Short-Term Investments |  | 13     |   | (87    | ) | (54   | )
|                                                                           |  |        |   |        |   |       |  
|(Decrease)/Increase in Cash and Short-Term Investments                     |  | (44    | ) | (166   | ) | 133   |  
|Cash and Short-Term Investments                                            |  |        |   |        |   |       |  
|Beginning of year                                                          |  | 127    |   | 293    |   | 160   |  
|                                                                           |  |        |   |        |   |       |  
|Cash and Short-Term Investments                                            |  |        |   |        |   |       |  
|End of year                                                                |  | 83     |   | 127    |   | 293   |  
|                                                                           |  |        |   |        |   |       |  

3

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Condensed Balance Sheet in Accordance with U.S. GAAP(1)

|December 31 (millions of dollars) |  | 2005   |  | 2004  
|--------------------------------- |  | ------ |  | ------
|Current assets(11)                |  | 1,058  |  | 911   
|Long-term investments(8)(9)       |  | 2,168  |  | 2,163 
|Plant, property and equipment     |  | 17,348 |  | 17,083
|Regulatory asset(12)              |  | 2,601  |  | 2,606 
|Other assets(8)                   |  | 2,028  |  | 1,217 
|                                  |  |        |  |       
|                                  |  | 25,203 |  | 23,980
|                                  |  |        |  |       
|Current liabilities(13)           |  | 2,754  |  | 2,581 
|Deferred amounts(6)(9)            |  | 1,298  |  | 785   
|Long-term debt(6)                 |  | 9,675  |  | 9,789 
|Deferred income taxes(12)         |  | 3,102  |  | 3,048 
|Preferred securities              |  | 536    |  | 554   
|Non-controlling interests         |  | 783    |  | 700   
|Shareholders' equity              |  | 7,055  |  | 6,523 
|                                  |  |        |  |       
|                                  |  | 25,203 |  | 23,980
|                                  |  |        |  |       

Statement of Other Comprehensive Income in Accordance with U.S. GAAP

|(millions of dollars)                                        |  | Cumulative Translation Account |   | Minimum Pension Liability
(SFAS No. 87) |   | Cash Flow Hedges
(SFAS No. 133) |   | Total |  
|------------------------------------------------------------ |  | ------------------------------ | - | --------------------------------------- | - | ------------------------------- | - | ----- | -
|Balance at January 1, 2003                                   |  | 14                             |   | (96                                     | ) | (13                             | ) | (95   | )
|Changes in minimum pension liability, net of tax of $1(5)    |  |                               |   | (2                                      | ) |                                |   | (2    | )
|Unrealized gain on derivatives, net of tax of nil(6)         |  |                               |   |                                        |   | 8                               |   | 8     |  
|Foreign currency translation adjustment, net of tax of $(64) |  | (54                            | ) |                                        |   |                                |   | (54   | )
|                                                             |  |                                |   |                                         |   |                                 |   |       |  
|Balance at December 31, 2003                                 |  | (40                            | ) | (98                                     | ) | (5                              | ) | (143  | )
|Changes in minimum pension liability, net of tax of $(39)(5) |  |                               |   | 72                                      |   |                                |   | 72    |  
|Unrealized gain on derivatives, net of tax of $(3)(6)        |  |                               |   |                                        |   | 1                               |   | 1     |  
|Foreign currency translation adjustment, net of tax of $(44) |  | (31                            | ) |                                        |   |                                |   | (31   | )
|                                                             |  |                                |   |                                         |   |                                 |   |       |  
|Balance at December 31, 2004                                 |  | (71                            | ) | (26                                     | ) | (4                              | ) | (101  | )
|Changes in minimum pension liability, net of tax of $27(5)   |  |                               |   | (51                                     | ) |                                |   | (51   | )
|Unrealized loss on derivatives, net of tax of $28(6)         |  |                               |   |                                        |   | (54                             | ) | (54   | )
|Foreign currency translation adjustment, net of tax of $(21) |  | (18                            | ) |                                        |   |                                |   | (18   | )
|                                                             |  |                                |   |                                         |   |                                 |   |       |  
|Balance at December 31, 2005                                 |  | (89                            | ) | (77                                     | ) | (58                             | ) | (224  | )
|                                                             |  |                                |   |                                         |   |                                 |   |       |  

---

4

---





In
the period 1997 to 2001, the Company recorded certain transactions involving Power LP as sales of a revenue stream for both Canadian and U.S. GAAP purposes. For U.S. GAAP
purposes, these transactions should have been accounted for as dilution gains (see footnote 3 above). This was corrected on a retroactive basis. The impact on previously reported amounts
for U.S. GAAP purposes is as follows:

(millions of dollars except per share amounts)

2005

2004

2003Decrease in:Income from continuing operations




135


10Net income




135


10Net income per share in accordance with U.S. GAAPContinuing operations



$
0.28

$
0.02Discontinued operations







Basic



$
0.28

$
0.02Diluted



$
0.28

$
0.02




December 31 (millions of dollars)

2005

2004Prepaid benefit cost

6

183Regulatory asset

107

Other assets

37

1Accounts payable

(70
)
(42
)Deferred amounts

(17
)
(18
)Accumulated other comprehensive income

118

40Net amount recognized

181

164




Substantially
all of the amounts recorded in the twelve months ended December 31, 2005, 2004 and 2003 as differences between U.S. and Canadian GAAP in respect of energy contracts relate to
gains and losses on derivative energy contracts for periods before they were documented as hedges for purposes of U.S. GAAP and to differences in accounting with respect to physical energy
contracts.

During
2005, under the provisions of SFAS 133, net gains of $8 million (2004  $10 million;
2003  $47 million) from the hedges of changes in the fair value of long-term debt, and net losses of $8 million
(2004  $18 million; 2003  $53 million) in the fair value of the

5

---





6

---



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)                                                          |  | 2005  |  | 2004 
|------------------------------------------------------------------------------------------ |  | ----- |  | -----
|Deferred Tax Liabilities                                                                   |  |       |  |      
|Difference in accounting and tax bases of plant, equipment and power purchase arrangements |  | 1,724 |  | 1,741
|Taxes on future revenue requirement                                                        |  | 874   |  | 914  
|Investments in subsidiaries and partnerships                                               |  | 555   |  | 438  
|Other                                                                                      |  | 147   |  | 140  
|                                                                                           |  |       |  |      
|                                                                                           |  | 3,300 |  | 3,233
|                                                                                           |  |       |  |      
|Deferred Tax Assets                                                                        |  |       |  |      
|Net operating and capital loss carryforwards                                               |  | 1     |  | 7    
|Deferred amounts                                                                           |  | 148   |  | 89   
|Other                                                                                      |  | 63    |  | 106  
|                                                                                           |  |       |  |      
|                                                                                           |  | 212   |  | 202  
|Less: Valuation allowance                                                                  |  | 14    |  | 17   
|                                                                                           |  |       |  |      
|                                                                                           |  | 198   |  | 185  
|                                                                                           |  |       |  |      
|Net deferred tax liabilities                                                               |  | 3,102 |  | 3,048
|                                                                                           |  |       |  |      

Other

In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123 (revised 2004) "Share-Based Payment" which requires all
share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. The pro forma disclosures previously
permitted under SFAS No. 123 no longer will be an alternative to financial statement recognition. In 2002, TransCanada adopted accounting for its stock-based compensation plans using the
fair value recognition provisions under Canadian GAAP. Therefore, adopting the provisions under SFAS No 123 (revised 2004) has no impact on the U.S. GAAP financial statements of the
Company.

In
March 2005, (FASB) issued a Staff Position (FSP) on a previously issued Financial Interpretation (FIN). The provisions of FSP FIN 46 (R)-5 "Implicit Variable
Interests under revised FIN 46(R), Consolidation of Variable Interest Entities" require that a reporting enterprise consider consolidating implicit variable interests when applying the
provisions of FIN 46(R). Adopting these provisions has had no impact on the U.S. GAAP financial statements of the Company.

In
March 2005, FASB issued FIN 47 "Accounting for Conditional Asset Retirement Obligations  an interpretation of
FASB No. 143". FIN 47 clarifies that the term "conditional asset retirement obligation" as used in SFAS No. 143, refers to a legal obligation to perform an
asset retirement activity in which the timing and/or method of settlement are conditional on a future event that may or may not be within the control of the entity. It also clarifies when an entity
would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. Adopting the clarification under this interpretation has had no impact on the
U.S. GAAP financial statements of the Company.

In
May 2005, FASB issued SFAS No. 154 "Accounting Changes and Error Corrections  a replacement of APB Opinion No. 20
and SFAS No. 3" which is effective for fiscal years beginning after December 15, 2005. SFAS No. 154 changes the requirements for the accounting for and reporting of
a change in accounting principle and error correction. It establishes, unless impracticable, retrospective application as the required method for reporting a change in accounting principle in the
absence of explicit transition requirements specific to the newly adopted accounting principle. Adopting the provisions under SFAS No. 154, as of January 1, 2006, is not expected
to have an impact on the U.S. GAAP financial statements of the Company.

7

---



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)                               |  | 2005  |   | 2004  |   | 2003  |  
|-------------------------------------------------------------------------- |  | ----- | - | ----- | - | ----- | -
|Income                                                                     |  |       |   |       |   |       |  
|Revenues                                                                   |  | 1,233 |   | 1,249 |   | 1,169 |  
|Other costs and expenses                                                   |  | (508  | ) | (594  | ) | (552  | )
|Depreciation                                                               |  | (173  | ) | (173  | ) | (160  | )
|Financial charges and other                                                |  | (94   | ) | (80   | ) | (77   | )
|                                                                           |  |       |   |       |   |       |  
|Proportionate share of income before income taxes of long-term investments |  | 458   |   | 402   |   | 380   |  
|                                                                           |  |       |   |       |   |       |  

|
|

|December 31 (millions of dollars)                          |  | 2005   |   | 2004   |  
|---------------------------------------------------------- |  | ------ | - | ------ | -
|Balance Sheet                                              |  |        |   |        |  
|Current assets                                             |  | 456    |   | 358    |  
|Plant, property and equipment                              |  | 3,365  |   | 3,470  |  
|Current liabilities                                        |  | (319   | ) | (254   | )
|Deferred amounts (net)                                     |  | (73    | ) | (199   | )
|Non-recourse debt                                          |  | (1,236 | ) | (1,195 | )
|Deferred income taxes                                      |  | (25    | ) | (17    | )
|                                                           |  |        |   |        |  
|Proportionate share of net assets of long-term investments |  | 2,168  |   | 2,163  |  
|                                                           |  |        |   |        |  

The
distributed earnings from long-term investments for the year ended December 31, 2005 were $371 million
(2004  $258 million; 2003  $192 million).

8

---



Exhibit 99.1

COMMENTS BY AUDITORS FOR U.S. READERS ON CANADA-U.S.  REPORTING DIFFERENCE

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 changes described in
Note 2  Accounting Changes  to the Company's consolidated financial statements as at December 31,
2005 and 2004, and for each of the years in the three-year period ended December 31, 2005 which are incorporated by reference herein. Our report to the shareholders dated
February 27, 2006, which is incorporated by reference herein, 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 27, 2006

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