NOTE 1    ORGANIZATION

TC PipeLines, LP and its subsidiaries are collectively referred to herein as the Partnership. The Partnership was formed by TransCanada PipeLines Limited, a wholly-owned subsidiary of TransCanada Corporation (collectively referred to herein as TransCanada), to acquire, own and participate in the management of energy infrastructure assets in North America.

The Partnership owns the following interests in natural gas pipeline systems:

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a 46.45 percent general partner interest in Great Lakes Gas Transmission Limited Partnership (Great Lakes), a Delaware limited partnership. Great Lakes owns a 2,115-mile pipeline that transports natural gas serving markets in Minnesota, Wisconsin, Michigan and Eastern Canada;

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a 50 percent general partner interest in Northern Border Pipeline Company (Northern Border), a Texas general partnership. Northern Border owns a 1,398-mile U.S. interstate pipeline system that transports natural gas from the Montana-Saskatchewan border to markets in the Midwestern U.S.;

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a 100 percent interest in North Baja Pipeline, LLC (North Baja), a Delaware limited liability company. North Baja owns an 86-mile U.S. interstate pipeline system that transports natural gas between an interconnection with El Paso Natural Gas Company pipeline near Ehrenberg, Arizona and an interconnection near Ogilby, California on the California/Mexico border with the Gasoducto Bajanorte natural gas pipeline system; and

•

a 100 percent interest in Tuscarora Gas Transmission Company (Tuscarora), a Nevada general partnership. Tuscarora owns a 305-mile U.S. interstate pipeline system that transports natural gas from Oregon, where it interconnects with facilities of Gas Transmission Northwest Corporation, a wholly-owned subsidiary of TransCanada, to a terminus in Northern Nevada.

The Partnership is managed by its General Partner, TC PipeLines GP, Inc. (TC PipeLines GP), a wholly-owned subsidiary of TransCanada. The General Partner provides management and operating services for the Partnership and is reimbursed for its costs and expenses. In addition to its aggregate two percent general partner interest in the Partnership, the General Partner owns 5,797,106 common units, representing an effective 14.3 percent interest in the Partnership at December 31, 2010. TransCanada also indirectly holds 11,287,725 common units representing an effective 23.9 percent limited partner interest in the Partnership at December 31, 2010.

NOTE 2    SIGNIFICANT ACCOUNTING POLICIES

(a)    Basis of Presentation

The accompanying financial statements and related notes present the financial position of the Partnership as at December 31, 2010 and 2009 and the results of its operations, cash flows and changes in partners' equity for the years ended December 31, 2010, 2009 and 2008. The Partnership uses the equity method of accounting for its investments in Great Lakes and Northern Border, over which it is able to exercise significant influence. The Partnership consolidates its investments in North Baja and Tuscarora.

On July 1, 2009, the Partnership acquired a 100 percent interest in North Baja from TransCanada. The acquisition was accounted for as a transaction between entities under common control, similar to a pooling of interests, whereby the assets and liabilities of North Baja were recorded at TransCanada's carrying value and the Partnership's historical financial information was recast to include North Baja for all periods presented on a consolidated basis. Refer to Note 6 for additional disclosure regarding the North Baja acquisition.

Amounts are stated in U.S. dollars. Certain comparative figures have been reclassified to conform to the current year's presentation.

(b)    Use of Estimates

The preparation of financial statements in conformity with United States of America (U.S.) generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Although management believes these estimates are reasonable, actual results could differ from these estimates. In the opinion of management, these consolidated financial statements have been properly prepared within reasonable limits of materiality and include all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of the financial results for the periods presented.

(c)    Cash and Cash Equivalents

The Partnership'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.

(d)    Plant, Property and Equipment

Plant, property and equipment of North Baja and Tuscarora is stated at original cost. Costs of restoring the land above and around the pipeline are capitalized to pipeline facilities and depreciated over the remaining life of the related pipeline facilities. Depreciation of pipeline facilities and compression equipment is provided on a straight-line composite basis over the estimated useful life of the pipeline and compression equipment of 25 to 30 years. Metering and other is depreciated on a straight-line basis over the estimated useful lives of the equipment, which range from 3 to 30 years. Repair and maintenance costs are expensed as incurred. Costs that are considered a betterment are capitalized. An allowance for funds used during construction, using the rate of return on rate base approved by the Federal Energy Regulatory Commission (FERC), is capitalized and included in the cost of plant, property and equipment. Amounts included in construction work in progress are not amortized until transferred into service.

The Partnership tests its long-lived assets for impairment whenever events or changes in circumstances indicate that its carrying amount may exceed the undiscounted cash flows expected to be generated by the asset. If the carrying amount exceeds the undiscounted cash flows, impairment is recognized to the extent the carrying amount exceeds its fair value.

(e)    Partners' Equity

Costs incurred in connection with the issuance of units are deducted from the proceeds received.

(f)    Revenue Recognition

Transmission revenues relate to North Baja and Tuscarora operations and are recognized in the period in which the service is provided. When a rate case is pending final FERC approval, a portion of the revenue collected is subject to possible refund. As at December 31, 2010, 2009 and 2008, the Partnership has not recognized any transmission revenue that is subject to possible refund.

(g)    Income Taxes

The Partnership is not subject to federal or state income tax. The tax effect of the Partnership's activities accrues to its partners. The Partnership's taxable income or loss, which may vary substantially from the net income or loss reported in the consolidated statement of income, is includable in the federal income tax returns of each partner. The aggregate difference in the basis of the Partnership's net assets for financial and income tax purposes cannot be readily determined because all information regarding each partner's tax attributes related to the partnership is not available.

(h)    Acquisitions and Goodwill

The Partnership accounts for business acquisitions from third parties using the purchase method of accounting and, accordingly, the assets and liabilities of the acquired entities are recorded at their estimated fair values at the date of acquisition. The excess of the purchase price over the fair value of net assets acquired is attributed to goodwill. Goodwill is not amortized for accounting purposes; however, it is tested on an annual basis for impairment, or more frequently if any indicators of impairment are evident.

The Partnership accounts for business acquisitions between entities under common control using a method similar to a pooling of interests, whereby the assets and liabilities of the acquired entities are recorded at TransCanada's carrying value and the Partnership's historical financial information is recast to include the acquired entities for all periods presented. If the fair market value paid for the acquired entities is greater than the recorded net assets of the acquired entities, the excess purchase price paid is recorded as a reduction to Partners' Equity. Similarly, if the fair market value paid for the acquired entities is less than the recorded net assets of the acquired entities, the excess of assets acquired is recorded as an increase to Partners' Equity.

(i)    Derivative Financial Instruments and Hedging Activities

The Partnership utilizes derivative and other financial instruments to manage its exposure to changes in interest rates. Derivatives and other hedging instruments must be designated as hedges and be effective to qualify for hedge accounting. For cash flow hedges, unrealized gains or losses relating to derivatives are recognized as other comprehensive income. In the event that a derivative does not meet the designation or effectiveness criteria, any unrealized gain or loss on the instrument is recognized immediately in earnings.

If a derivative that previously qualified as a hedge is settled, de-designated or ceases to be effective, the gain or loss at that date is recognized in the same period and in the same financial statement category as the corresponding hedged transactions. If a hedged anticipated transaction is no longer probable to occur, related gains or losses are immediately recognized in earnings and amounts previously recognized in other comprehensive income are reclassified to earnings prospectively. Costs associated with the purchase of certain hedging instruments are deferred and amortized against interest expense.

(j)    Asset Retirement Obligation

The Partnership recognizes and measures liabilities associated with the retirement of tangible long-lived assets at fair value as incurred and capitalize them as part of the cost of the related tangible long-lived assets. Accretion of the liabilities due to the passage of time is classified as an operating expense. Retirement obligations associated with relevant long-lived are those for which a legal obligation exists under enacted laws, statutes, ordinances, or written or oral contracts, including obligations arising under the doctrine of promissory estoppel.

No amount is recorded for asset retirement obligations relating to the assets as it is not possible to make a reasonable estimate of the fair value of the liability due to the inability to determine the scope and timing of the asset retirements.

(k)    Government Regulation

North Baja and Tuscarora, the Partnership's wholly-owned pipeline systems, are subject to regulation by the FERC. Under regulatory accounting principles, certain assets or liabilities that result from the regulated ratemaking process may be recorded that would not be recorded under GAAP for non-regulated entities. The Partnership regularly evaluates the continued applicability of regulatory accounting, considering such factors as regulatory changes, the impact of competition, and the ability to recover regulatory assets. As at December 31, 2010, Tuscarora has no regulatory assets (2009 – nil) and $0.5 million in regulatory liabilities (2009 – nil). North Baja has no regulatory assets or liabilities as at December 31, 2010 and 2009. Allowance for funds used during construction is capitalized and included in plant, property and equipment.

(l)    Debt Issuance Costs

Costs related to the issuance of debt are deferred and amortized using the effective interest rate method over the term of the related debt.

NOTE 3    INVESTMENT IN GREAT LAKES

The Partnership owns a 46.45 percent general interest in Great Lakes. TransCanada owns the other 53.55 percent partnership interest and is also the operator of Great Lakes. Great Lakes is regulated by the FERC.

TC GL Intermediate Limited Partnership, as one of the general partners, may be exposed to the commitments and contingencies of Great Lakes. The Partnership holds a 98.9899 percent limited partnership interest in TC GL Intermediate Limited Partnership.

On November 19, 2009, the FERC issued an order in FERC Docket No. RP10-149 (November 2009 Order) instituting an investigation pursuant to Section 5 of the Natural Gas Act (GL Rate Proceeding). The FERC alleged, based on a review of certain historical information, that Great Lakes' revenues might substantially exceed Great Lakes' actual cost of service and therefore may be unjust and unreasonable. As a result of extensive settlement negotiations, in July 2010, the FERC approved the settlement without modification, establishing the terms pursuant to which all matters in the GL Rate Proceeding were resolved. The settlement was effective May 1, 2010 and applies to all current and future shippers on Great Lakes' system.

The Partnership uses the equity method of accounting for its investment in Great Lakes. The Partnership's equity income from its investment in Great Lakes amounted to $58.7 million for the year ended December 31, 2010 (2009 – $59.1 million; 2008 – $57.3). Great Lakes had no undistributed earnings for the years ended December 31, 2010, 2009, and 2008.

At December 31, 2010 and 2009, the partnership had a $458.4 million difference between the carrying value of Great Lakes and the underlying equity in the net assets primarily resulting from the recognition of goodwill as part of the Partnership's investment in Great Lakes relating to the Partnership's February 2007 acquisition of a 46.45 percent general interest in Great Lakes.

The Partnership made an equity contribution of $4.6 million to Great Lakes in 2010. This amount represents the Partnership's 46.45 percent share of a $10.0 million cash call issued by Great Lakes to expand backhaul capacity from St. Clair, Michigan, U.S. to Emerson, Manitoba, Canada. The Partnership also made an equity contribution of $4.7 million to Great Lakes in 2010, which represents the Partnership's 46.45 percent share of a $10.0 million cash call from Great Lakes to make a scheduled debt repayment and is the result of a change in Great Lakes' distribution policy in 2010, whereby Great Lakes commenced funding its debt repayments with cash calls to its partners and making distributions to its partners before deducting amounts for debt repayments.

The following tables contain summarized financial information of Great Lakes as at December 31, 2010 and 2009 and for the years ended December 31, 2010, 2009 and 2008:

Summarized Consolidated Great Lakes Balance Sheet

Summarized Consolidated Great Lakes Income Statement

NOTE 4    INVESTMENT IN NORTHERN BORDER

The Partnership owns a 50 percent general partner interest in Northern Border. The other 50 percent partnership interest in Northern Border is held by ONEOK Partners, L.P., a publicly traded limited partnership. Northern Border is regulated by the FERC. Northern Border is operated by TransCanada.

TC PipeLines Intermediate Limited Partnership, as one of the general partners, may be exposed to the commitments and contingencies of Northern Border. The Partnership holds a 98.9899 percent limited partnership interest in TC PipeLines Intermediate Limited Partnership.

The Partnership uses the equity method of accounting for its investment in Northern Border. The Partnership's equity income from its investment in Northern Border amounted to $67.3 million for the year ended December 31, 2010 (2009 – $40.3 million; 2008 – $65.3 million). Equity income from Northern Border includes a twelve-year amortization of a $10.0 million transaction fee paid to the operator of Northern Border as an inducement to become operator at the time of the additional 20 percent acquisition in April 2006. Northern Border had no undistributed earnings for the years ended December 31, 2010, 2009 and 2008.

At December 31, 2010, the Partnership had a $120.8 million (2009 – $121.2 million) difference between the carrying value of Northern Border and the underlying equity in the net assets primarily resulting from the recognition of goodwill as part of the Partnership's investment in Northern Border relating to the Partnership's April 2006 acquisition of an additional 20 percent general partnership interest in Northern Border.

The following tables contain summarized financial information of Northern Border as at December 31, 2010 and 2009 and for the years ended December 31, 2010, 2009 and 2008:

Summarized Northern Border Balance Sheet

Summarized Northern Border Income Statement

NOTE 5    PLANT, PROPERTY AND EQUIPMENT

NOTE 6    ACQUISITIONS AND REVISED INCENTIVE DISTRIBUTION RIGHTS

On July 1, 2009, the Partnership acquired a 100 percent interest in North Baja, a Delaware limited liability company, from TransCanada. The North Baja pipeline system extends from an interconnection with EPNG near Ehrenberg, Arizona to a point near Ogilby, California on the California/Mexico border where it connects with the Gasoducto Bajanorte natural gas pipeline system owned by Sempra Energy International. North Baja is regulated by the FERC and is operated by TransCanada.

The purchase price of $271.4 million was financed through a combination of (i) a draw of $170.0 million on the Partnership's $250.0 million revolving portion of its revolving credit and term loan agreement (Senior Credit Facility), (ii) issuance of 2,609,680 common units at $30.042 per common unit to TransCanada for gross proceeds of $78.4 million, (iii) issuance of additional general partner interest to the General Partner of $1.6 million, which was required to maintain the General Partner's two percent general partner interest in the Partnership, and (iv) approximately $21.4 million of cash on hand.

The acquisition of North Baja was accounted for as a transaction between entities under common control, similar to a pooling of interests, whereby the assets and liabilities of North Baja were recorded at TransCanada's carrying value and the Partnership's historical financial information was recast to include North Baja for all periods presented. The purchase price was recorded as follows: Working capital of $2.0 million; Plant, property and equipment of $193.5 million; Goodwill of $48.5 million; Other assets of $0.1 million; and Other long-term liabilities of $0.4 million. As the fair value paid for North Baja was greater than the recorded net assets of North Baja, the excess purchase price paid of $27.7 million was recorded as a reduction to Partners' Equity. The effect of recasting the Partnership's consolidated financial statements to account for the common control transaction increased the Partnershi p's net income by $8.3 million and $15.3 million for the years ended December 31, 2009 and 2008, respectively, from amounts previously reported.

Concurrent with the acquisition of North Baja, the Partnership entered into an exchange agreement with its General Partner whereby the Partnership issued 3,762,000 common units to the General Partner and provided for revised incentive distribution rights (Revised IDRs) in exchange for the cancellation of the incentive distribution rights available to the General Partner (Old IDRs) under the Amended and Restated Agreement of Limited Partnership of the Partnership.

Under the terms of the Revised IDRs, the distributions to the General Partner were reset to two percent, down from the General Partner distribution levels of the Old IDRs at 50 percent (for combined general partner interest and incentive distribution interest). The incentive distribution levels of the Revised IDRs will result in increased combined distributions to the General Partner (for general partner interest and incentive distribution interest) of 15 percent and a maximum of 25 percent when quarterly distributions increase to $0.81 and $0.88 per common unit or $3.24 and $3.52 per common unit on an annualized basis, respectively.

At the time of the July 1, 2009 acquisition of North Baja, TransCanada had begun an expansion project of the North Baja pipeline from the Mexico/Arizona border to Yuma, Arizona (Yuma Lateral). The Partnership agreed to acquire the expansion facilities and contracts for an additional sum up to $10.0 million, if TransCanada completed the project by June 30, 2010. On March 5, 2010, the Partnership acquired the expansion facilities and contracts in place at that time for a purchase price of $7.6 million. The Yuma Lateral was placed into service on March 13, 2010. The North Baja Acquisition Agreement provided that an additional payment of up to $2.4 million be made to TransCanada in the event that any other shippers contracted for services on the Yuma Lateral before June 30, 2010. A potential shipper signed a precedent agreement with North Baja on June 29, 2010 to enter into agreemen ts for service on the Yuma Lateral. Accordingly, an amendment to the Acquisition Agreement between the Partnership and TransCanada was entered into on June 29, 2010 to allow TransCanada to continue to pursue additional contracts until December 31, 2010. On July 28, 2010, TransCanada secured additional contracts and, as a result, an additional payment of up to $2.4 million will be paid to TransCanada when the facilities associated with the additional contracts go into service which is anticipated in first quarter 2011.

The Yuma Lateral asset purchase was accounted for as a transaction between entities under common control, similar to a pooling of interests, whereby the assets acquired were recorded at TransCanada's carrying value. As the fair value paid for the Yuma Lateral assets of $7.6 million was less than the $7.7 million recorded as plant, property and equipment, the excess amount of assets acquired of $0.1 million was recorded as an increase to Partners' Equity at December 31, 2010.

NOTE 7    CREDIT FACILITIES AND LONG-TERM DEBT

The Partnership's Senior Credit Facility consists of a $475.0 million senior term loan and a $250.0 million senior revolving credit facility with a banking syndicate. At December 31, 2010, $475.0 million remained outstanding under the senior term loan (2009 – $475.0 million) and $8.0 million was outstanding under the senior revolving credit facility (2009 – $9.0 million), leaving $242.0 million available for future borrowings.

The Senior Credit Facility matures on December 12, 2011, subject to two one-year extensions at the option of the Partnership and with the approval of a majority of the lenders thereunder. Amounts borrowed may be repaid in part, or in full, prior to that time without penalty. However, once a senior term loan is repaid, it cannot be re-borrowed. Borrowings under the Senior Credit Facility bear interest based, at the Partnership's election, on the London Interbank Offered Rate (LIBOR) or the prime rate plus, in either case, an applicable margin. There was $483.0 million outstanding under the Senior Credit Facility at December 31, 2010 (2009 – $484.0 million). The interest rate on the Senior Credit Facility averaged 0.91 percent for the year ended December 31, 2010 (2009 – 1.42 percent). After hedging activity, the interest rate incurred on the Se nior Credit Facility averaged 4.30 percent for the year ended December 31, 2010 (2009 – 4.10 percent). Prior to hedging activities, the interest rate was 0.83 percent at December 31, 2010 (2009 – 0.97 percent).

At December 31, 2010, the Partnership was in compliance with its financial covenants, in addition to the other covenants which include restrictions on entering into mergers, consolidations and sales of assets, granting liens, material amendments to the Partnership Agreement, incurring additional debt and distributions to unitholders.

On December 21, 2010, Tuscarora's Series A and B Senior Notes matured. Also on December 21, 2010, Tuscarora issued $27.0 million of 3.82 percent Series D Senior Notes, which require principal and interest payments over approximately seven years. The Series D Senior Notes mature on August 21, 2017.

Series C and D Senior Notes are secured by Tuscarora's transportation contracts, supporting agreements and substantially all of Tuscarora's property. The note purchase agreements contain certain provisions that include, among other items, limitations on additional indebtedness and distributions to partners.

The principal repayments required on the long-term debt are as follows:

On April 22, 2010, the Partnership filed an automatic universal shelf registration statement on Form S-3 (ASR) with the Securities and Exchange Commission, which replaced the universal shelf registration filed in December 2008. The ASR will allow the Partnership to issue an indeterminate amount of securities of the Partnership, including both senior and subordinated debt securities and/or common units representing limited partnership interests in the Partnership. The ASR was effective immediately upon filing and will expire April 22, 2013.

NOTE 8    PARTNERS' EQUITY

At December 31, 2010, Partners' equity includes 46,227,766 common units (2009 – 46,227,766 common units) representing an aggregate 98 percent limited partner interest in the Partnership (including 5,797,106 common units held by the General Partner and 11,287,725 common units held indirectly by TransCanada) and an aggregate two percent general partner interest. In aggregate, the General Partner's interests represent an effective 14.3 percent ownership in the Partnership at December 31, 2010 (December 31, 2009 – 14.3 percent).

On November 18, 2009, the Partnership completed a public offering of 5,000,000 common units at $38.00 per common unit for gross proceeds of $190.0 million and net proceeds of $181.8 million after unit issuance costs. TC PipeLines GP maintained its two percent general partner interest in the Partnership by contributing $3.8 million to the Partnership in connection with the offering.

Refer to Note 6 for disclosure regarding the equity issuance in connection with the acquisition of North Baja in 2009.

NOTE 10    NET INCOME PER COMMON UNIT

Net income per common unit is computed by dividing net income, after deduction of the General Partner's allocation, by the weighted average number of common units outstanding. The General Partner's allocation is equal to an amount based upon the General Partner's two percent interest, plus an amount equal to incentive distributions. Incentive distributions are paid to the General Partner if quarterly cash distributions on the common units exceed levels specified in the Partnership Agreement.

Net income per common unit was determined as follows: