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Financial Analysis

Canadian Mainline

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

The Canadian Mainline currently operates under a five-year tolls settlement effective from 2007 to 2011. The cost of capital reflects an ROE as determined by the NEB's ROE formula on deemed common equity of 40 per cent. The remaining capital structure consists of short- and long-term debt, following the agreed upon redemption of the US$460 million 8.25 per cent Preferred Securities in 2007.

The settlement also established certain elements of the Canadian Mainline's fixed operating, maintenance and administration (OM&A) costs for each of the five years. The variance between actual and agreed-upon OM&A costs accrues entirely to TransCanada from 2007 to 2009, and will be shared equally between TransCanada and its customers in 2010 and 2011. All other cost elements of the revenue requirement are treated on a flow-through basis. The settlement also allows for performance-based incentive arrangements that the Company believes are mutually beneficial to both TransCanada and its customers.

Net earnings of $278 million in 2008 were $5 million higher than $273 million in 2007 primarily due to higher performance-based incentives earned and increased OM&A cost savings and an ROE of 8.71 per cent in 2008, as determined by the NEB, compared to 8.46 per cent in 2007. These increases were partially offset by a lower average investment base.

Net earnings of $273 million in 2007 were $34 million higher than $239 million in 2006. The increase primarily reflected the positive impact of the increase in deemed common equity ratio to 40 per cent from 36 per cent as a result of the Canadian Mainline tolls settlement, performance-based incentives earned and OM&A cost savings. These increases were partially offset by a lower allowed ROE of 8.46 per cent in 2007 (2006 — 8.88 per cent) and a lower average investment base.

Alberta System

Construction and operation of the Alberta System's facilities and the terms and conditions of its services, including rates, are regulated by the AUC, primarily under the provisions of the Gas Utilities Act (Alberta) and the Pipeline Act (Alberta).

In December 2008, the AUC approved TransCanada's 2008-2009 Revenue Requirement Settlement Application, as discussed further in the "Pipelines — Opportunities and Developments" section of this MD&A.

The Alberta System's net earnings of $145 million in 2008 were $7 million higher than in 2007. The increase was due to the recognition of earnings related to the revenue requirement settlement. Earnings in 2007 reflected an ROE of 8.51 per cent on deemed common equity of 35 per cent.

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

ANR

TransCanada completed the acquisition of ANR in February 2007. The operations of ANR are regulated primarily by the U.S. Federal Energy Regulatory Commission (FERC). ANR provides natural gas transportation, storage and various capacity-related services to a variety of customers in both the U.S. and Canada. ANR's transmission system has a peak-day capacity of 6.8 billion cubic feet per day (Bcf/d). Due to the seasonal nature of its business, ANR's volumes and revenues are generally expected to be higher in the winter months. ANR also owns and operates 250 Bcf of underground natural gas storage facilities in Michigan. ANR's regulated natural gas storage and transportation services operate under current FERC-approved tariff rates. These tariffs include maximum and minimum rate levels for services and permit ANR to discount or negotiate rates on a non-discriminatory basis.

ANR Pipeline Company's (ANR Pipeline) rates were established pursuant to a settlement approved by the FERC effective November 1997. ANR Storage Company's rates were established pursuant to a settlement approved by the FERC effective June 1990. None of ANR's FERC-regulated operations are required to file for new rates at any time in the future, nor are any of the operations prohibited from filing a rate case.

Net income for 2008 was $132 million compared to $104 million for the period from the date of acquisition on February 22, 2007 to December 31, 2007. The increase in 2008 was primarily due to a full year of earnings in 2008 and increased revenues from new growth projects, partially offset by higher OM&A costs, including remediation expenditures for damage caused by Hurricane Ike.

GTN

Both of GTN's systems, the GTN System and North Baja (collectively, GTN), are subject to FERC-approved tariffs that establish maximum and minimum rates for various services. GTN's pipeline rates were established pursuant to a settlement approved by the FERC in January 2008, and these rates became effective January 1, 2007. Under the settlement, a five-year moratorium was established during which the GTN System and the settling parties are prohibited under the Natural Gas Act of 1938 from taking certain actions, including any filings to adjust rates. The settlement also requires the GTN System to file a rate case within seven years of the effective date. The systems are permitted to discount or negotiate these rates on a non-discriminatory basis. GTN's earnings are affected by variations in contracted volume levels, volumes delivered and prices charged under the various service types, as well as by variations in the costs of providing services.

GTN's comparable earnings were $65 million in 2008, an increase of $7 million compared to 2007 primarily due to decreased OM&A expenses. An increase in revenues for North Baja was offset by a decrease in revenues for the GTN System.

Comparable earnings were $58 million in 2007, a $12 million increase from 2006. The increase was primarily due to the positive impact of the rate case settlement in 2007, partially offset by lower long-term firm contracted volumes, a higher provision taken for non-payment of contract revenues from Calpine and a weaker U.S. dollar in 2007.

Other Pipelines

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

TransCanada's comparable earnings from Other Pipelines were $96 million in 2008 compared to $87 million in 2007. The increase was primarily due to lower general, administrative and support costs, and higher earnings from PipeLines LP, Tamazunchale and Iroquois, partially offset by lower earnings from Gas Pacifico/INNERGY, TransGas, Portland and Great Lakes.

Comparable earnings from Other Pipelines were $87 million in 2007, a $6 million increase compared to 2006. The increase was primarily due to higher PipeLines LP earnings resulting from TransCanada's increased ownership interests in PipeLines LP and Great Lakes, and a full year of earnings in 2007 from Tamazunchale. These increases were partially offset by higher project development and support costs associated with growing the Pipelines business, the effects of a weaker U.S. dollar in 2007 and proceeds of a bankruptcy settlement received by Portland in 2006.

At December 31, 2008, Other Assets included $74 million and $42 million for capitalized costs related to the Keystone expansion to the U.S. Gulf Coast and the Bison pipeline project, respectively.