## NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

TransCanada PipeLines Limited (the Company or TransCanada) is a leading North American energy company. TransCanada oper- ates in two business segments, Transmission and Power, each of which offers different products and services. 

## TRANSMISSION 

The Transmission business owns and operates a natural gas transmission system in Alberta (the Alberta System), the natural gas transmission system extending from the Alberta border east into Québec (the Canadian Mainline) and a natural gas transmission system extending from the Alberta border west into southeastern British Columbia (the BC System). It also holds the Company’s investments in other natural gas pipelines in Canada and the United States, and investigates and develops new natural gas transmission facilities in Canada and the United States. 

## POWER 

The Power business builds, owns and operates electrical power plants, and markets and trades electricity. This business operates in both Canada and the United States. 

## NOTE 1 – ACCOUNTING POLICIES 

The consolidated financial statements of the Company have been prepared by Management in accordance with Canadian generally accepted accounting principles (Canadian GAAP). These accounting principles are different in some respects from United States generally accepted accounting principles (U.S. GAAP) and the significant differences are described in Note 20. Amounts are stated in Canadian dollars unless otherwise indicated. 

The Company’s financial statements reflect the plan approved by the Board of Directors in 2001 to dispose of the Gas Marketing business which is included in discontinued operations. All prior period comparative results have been restated to reflect Gas Marketing as discontinued operations. Certain other 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 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 PipeLines Limited and its subsidiaries, as well as its proportionate share of the accounts of its joint ventures. The Company uses the equity method of accounting for investments over which it is able to exercise significant influence. 

## REGULATION 

The Alberta System is regulated by the Alberta Energy and Utilities Board (EUB) and the Canadian Mainline and the BC System are subject to the author- ity of the National Energy Board (NEB). All Canadian natural gas transmission operations are regulated with respect to the determination of tolls, construction and operations. In November 2001, the NEB approved TransCanada’s 2001 and 2002 Tolls and Tariff Application for the Canadian Mainline which resolved all issues other than cost of capital. The NEB also determined that interim tolls will remain in place until a final decision is made on cost of capital. Any adjustments to the interim tolls will be recorded in accordance with the final NEB decision. The natural gas pipelines in the United States, the Ocean State Power plant and the Curtis Palmer Power plant are also subject to the authority of regulatory bodies. In order to achieve a proper match- ing of revenues and expenses, the timing of recognition of certain revenues and expenses in these businesses may differ from that otherwise expected under generally accepted accounting principles. 

## CASH AND SHORT-TERM INVESTMENTS 

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

## INVENTORIES 

Inventories are carried at the lower of average cost or net realizable value. 

## PLANT, PROPERTY AND EQUIPMENT 

## Transmission 

Plant, property and equipment of natural gas transmission operations are carried at cost. Depreciation is calculated on the straight-line basis. Pipeline and compression equipment are depreciated at annual rates ranging from two to five per cent and metering and other plant are depreciated at various rates. Removal and site restoration costs are not determinable and will be recorded when reasonably estimable and when approved by the regulators. 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. 

