Other Risks

Development Projects and Acquisitions

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

Health, Safety and Environment Risk Management

Health, safety and environment (HS&E) is a priority in all of TransCanada's operations and is guided by the Company's HS&E Commitment Statement. The Commitment Statement outlines guiding principles for a safe and healthy environment for TransCanada's employees, contractors and the public, and that strive to protect the environment. All employees are held responsible and accountable for HS&E performance. The Company is committed to being an industry leader in conducting its business so that it meets or exceeds all applicable laws and regulations, and minimizes risk to people and the environment. The Company is committed to tracking and improving its HS&E performance, and to promoting safety on and off the job in the belief that all occupational injuries and illnesses are preventable. TransCanada endeavours to do business with companies and contractors that share its perspective on HS&E performance and to influence them to improve their collective performance. TransCanada is committed to respecting the diverse environments and cultures in which it operates and to supporting open communication with the public, policy makers, scientists and public interest groups with whom it shares stewardship of the world it inhabits.

TransCanada is committed to ensuring compliance with its internal policies and regulated requirements. The HS&E Committee of TransCanada's Board of Directors monitors compliance with the Company's HS&E corporate policy through regular reporting. TransCanada's HS&E management system is modeled on the International Organization of Standardization's (ISO) standard for environmental management systems, ISO 14001, and focuses resources on the areas of significant risk to the organization's HS&E business activities. Management is informed regularly of all important HS&E operational issues and initiatives through formal reporting processes. TransCanada's HS&E management system and performance are assessed by an independent outside firm every three years. The most recent assessment occurred in November 2006. The HS&E management system also is subject to ongoing internal review to ensure that it remains effective as circumstances change.

In 2008, employee and contractor health and safety performance continued to be a top priority. TransCanada's assets were highly reliable and there were no incidents that were material to TransCanada's operations.

The safety and integrity of the Company's pipelines is a top priority. The Company expects to spend approximately $185 million in 2009 for pipeline integrity on its wholly owned pipelines, which is higher than the amount spent in 2008 primarily due to increased levels of in-line pipeline inspection on all systems. Under the approved regulatory models in Canada, pipeline integrity expenditures on NEB- and AUC-regulated pipelines are treated on a flow-through basis and, as a result, have no impact on TransCanada's earnings. Expenditures on the GTN System are also recovered through a cost recovery mechanism in its rates. Pipeline safety in 2008 continued to be very good, as TransCanada experienced only one small-diameter pipeline failure in a remote part of east central Alberta. The break resulted in minimal impact with no injuries or property damage. Spending associated with public safety on the Energy assets is focused primarily on the Company's hydro dams and associated equipment, and is consistent with previous years.

Environment

TransCanada's facilities are subject to various federal, provincial, state and local statutes and regulations, including requirements to establish compliance and remediation obligations. Compliance obligations can result in significant costs associated with installing and maintaining pollution controls, fines and penalties resulting from any failure to comply, and potential limitations on operations. Remediation obligations can result in significant costs associated with the investigation and remediation of contaminated properties, some of which have been designated as Superfund sites by the U.S. Environmental Protection Agency under the Comprehensive Environmental Response, Compensation and Liability Act, and with damage claims arising out of the contamination of properties or impact on natural resources. It is not possible for the Company to estimate exactly the amount and timing of all future expenditures related to environmental matters due to:

• uncertainties in estimating pollution control and clean-up costs, including sites where only preliminary site investigation or agreements have been completed;
• the potential discovery of new sites or additional information at existing sites;
• the uncertainty in quantifying liability under environmental laws that impose joint and several liability on all potentially responsible parties;
• the evolving nature of environmental laws and regulations, including the interpretation and enforcement thereof; and
• the potential for litigation on existing or discontinued assets.

Environmental risks from TransCanada's operating facilities typically include: air emissions, such as nitrogen oxides, particulate matter and greenhouse gases; potential impacts on land, including land reclamation or restoration following construction; the use, storage or release of chemicals or hydrocarbons; the generation, handling and disposal of wastes and hazardous wastes; and water impacts such as uncontrolled water discharge. Environmental controls including physical design, programs, procedures and processes are in place to effectively manage these risks. TransCanada has ongoing inspection programs designed to keep all of its facilities in compliance with environmental requirements and the Company is confident that its systems are in material compliance with the applicable requirements.

In 2008, TransCanada conducted environmental risk assessments and remediation work, resulting in total costs of approximately $7 million and US$6 million for work conducted on TransCanada's Canadian and U.S. facilities, respectively. TransCanada also conducted various retirement, reclamation and restoration work in 2008, which resulted in total costs of approximately $7 million. At December 31, 2008, TransCanada had recorded liabilities of approximately $86 million for compliance and remediation obligations. The Company believes it has considered all necessary contingencies and established appropriate reserves for environmental liabilities, however, there is the risk that unforeseen matters may arise requiring the Company to set aside additional amounts.

TransCanada is not aware of any material outstanding orders, claims or lawsuits against the Company in relation to the release or discharge of any material into the environment or in connection with environmental protection.

North American climate change policy continues to evolve at regional and national levels. While recent political and economic events may significantly affect the scope and timing of new measures that are put in place, TransCanada anticipates that most of the company's facilities in Canada and the U.S. will be captured under future regional and/or federal climate change regulations to manage industrial greenhouse gas (GHG) emissions.

In 2008, the Company owned assets in three regions affected by climate change policy measures related to industrial emissions. In Alberta, the Specified Gas Emitters Regulation, which came into effect in 2007, requires industrial facilities to reduce GHG emissions intensities by 12 per cent. TransCanada's Alberta-based pipeline and power facilities are subject to this regulation, as are the Sundance and Sheerness coal-fired power facilities with which TransCanada has commercial arrangements. The Company's total cost of compliance incurred by the Alberta-based facilities for the period from July 2007 to December 2007 was approximately $12 million. Costs for 2008 compliance are estimated to be $28 million and will be finalized when compliance reports are submitted in March 2009. Compliance costs of the Alberta System are recovered through tolls paid by customers. Recovery of compliance costs for the Company's power generation facilities and interests in Alberta is partially achieved through contracts and the impact of increased operating costs on Alberta power market prices.

The hydrocarbon royalty in Québec is collected by the natural gas distributor on behalf of the Québec government via a green fund contribution charge on gas consumed. In 2008, the cost pertaining to the Bécancour facility arising from the hydrocarbon royalty was less than $1 million as a result of an agreement between TransCanada and Hydro-Québec to temporarily suspend the facility's power generation. The cost is expected to increase when the plant returns to service in 2010.

B.C.'s carbon tax, which came into effect in mid-2008, applies to carbon dioxide (CO₂) emissions arising from fossil fuel combustion. Compliance costs for fuel combustion at the Company's compressor and meter stations in B.C. are recovered through tolls paid by customers. Costs related to the carbon tax for 2008 were $1 million. This cost is expected to increase over the next four years as the tax charge per tonne of CO₂ increases by $5 per tonne annually from the initial tax rate of $10 per tonne.

TransCanada has assets located in Ontario and Manitoba, where the provincial governments have announced climate change strategies that will impact industrial sources of GHG emissions. The details of these programs and how they will align with the Canadian government's climate change policies are still uncertain.

The Canadian government has expressed interest in pursuing the development of a North American cap and trade system for GHG emissions. In April 2007, the Government of Canada released the Regulatory Framework for Air Emissions (Framework). The Framework outlines short-, medium- and long-term objectives for managing both GHG emissions and air pollutants in Canada. TransCanada expects a number of its facilities will be affected by pending federal climate change regulations that will be put in place to meet the Framework's objectives. It is not known at this time whether the impacts from the pending regulations will be material as the draft regulations have not yet been released. It is uncertain how the Framework will fit within a North American cap and trade system and what the specific requirements for industrial emitters will be.

Climate change is a strategic issue for the new U.S. government administration and federal policy to manage domestic GHG emissions is expected to be a priority. Seven western states and four Canadian provinces are focused on the implementation of a cap and trade program under the Western Climate Initiative (WCI). Northeastern states that are members of the Regional Greenhouse Gas Initiative (RGGI) implemented a CO₂ cap and trade program for electricity generators effective January 1, 2009. Participants in the Midwestern Greenhouse Gas Reduction Accord, which involves six states and one province, are developing a regional strategy for reducing members' GHG emissions that will include a multi-sector cap and trade mechanism.

The Company anticipates a number of its facilities will be affected by these legislative initiatives. Under the RGGI, both the Ravenswood and OSP facilities will be required to submit allowances by December 31, 2011. It is expected that the costs will be recovered from the market and the net impact to TransCanada will be minimal. Company assets located in regions affected by the WCI and Midwestern Greenhouse Gas Reduction Accord and in California are most likely to be covered by GHG reduction measures put in place, however, the level of impact is uncertain as key policy details remain outstanding.

TransCanada monitors climate change policy developments and, when warranted, participates in policy discussions in jurisdictions where the Company has operations. The Company is also continuing its programs to manage GHG emissions from its facilities and to evaluate new processes and technologies that result in improved efficiencies and lower GHG emission rates.