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TransCanada Reports First Quarter 2017 Financial Results; Strong Results Build Upon Transformational 2016 – Part 16


Offsetting of derivative instruments

The Company enters into derivative contracts with the right to offset in the normal course of business as well as in the event of default. TransCanada has no master netting agreements, however, similar contracts are entered into containing rights to offset. The Company has elected to present the fair value of derivative instruments with the right to offset on a gross basis in the balance sheet. The following table shows the impact on the presentation of the fair value of derivative instrument assets and liabilities had the Company elected to present these contracts on a net basis:

/T/

---------------------------------------------------------------------------- ---------------------------------------------------------------------------- at March 31, 2017

Gross derivative instruments Amounts presented on available the balance for Net (unaudited - millions of Canadian $) sheet offset(1) amounts ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Derivative - Asset Commodities 540 (333) 207 Foreign exchange 21 (20) 1 Interest rate 5 (2) 3 ---------------------------------------------------------------------------- Total 566 (355) 211 ---------------------------------------------------------------------------- Derivative - Liability Commodities (566) 333 (233) Foreign exchange (371) 20 (351) Interest rate (4) 2 (2) ---------------------------------------------------------------------------- Total (941) 355 (586) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- (1) Amounts available for offset do not include cash collateral pledged or received.

/T/

The following table shows the impact on the presentation of the fair value of derivative instrument assets and liabilities had the Company elected to present these contracts on a net basis as at December 31, 2016:

/T/

---------------------------------------------------------------------------- ---------------------------------------------------------------------------- at December 31, 2016

Gross derivative instruments Amounts presented on available the balance for Net (unaudited - millions of Canadian $) sheet offset(1) amounts ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Derivative - Asset Commodities 479 (362) 117 Foreign exchange 26 (26) - Interest rate 4 (1) 3 ---------------------------------------------------------------------------- Total 509 (389) 120 ---------------------------------------------------------------------------- Derivative - Liability Commodities (448) 362 (86) Foreign exchange (486) 26 (460) Interest rate (3) 1 (2) ---------------------------------------------------------------------------- Total (937) 389 (548) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- (1) Amounts available for offset do not include cash collateral pledged or received.

/T/

With respect to the derivative instruments presented above as at March 31, 2017, the Company provided cash collateral of $310 million (December 31, 2016 - $305 million) and letters of credit of $22 million (December 31, 2016 - $27 million) to its counterparties. The Company held nil (December 31, 2016 - nil) in cash collateral and $3 million (December 31, 2016 - $3 million) in letters of credit from counterparties on asset exposures at March 31, 2017.

Credit risk related contingent features of derivative instruments

Derivative contracts entered into to manage market risk often contain financial assurance provisions that allow parties to the contracts to manage credit risk. These provisions may require collateral to be provided if a credit-risk-related contingent event occurs, such as a downgrade in the Company's credit rating to non-investment grade.

Based on contracts in place and market prices at March 31, 2017, the aggregate fair value of all derivative instruments with credit-risk-related contingent features that were in a net liability position was $20 million (December 31, 2016 - $19 million), for which the Company had provided collateral in the normal course of business of nil (December 31, 2016 - nil). If the credit-risk-related contingent features in these agreements were triggered on March 31, 2017, the Company would have been required to provide additional collateral of $20 million (December 31, 2016 - $19 million) to its counterparties. Collateral may also need to be provided should the fair value of derivative instruments exceed pre-defined contractual exposure limit thresholds.

The Company has sufficient liquidity in the form of cash and undrawn committed revolving credit facilities to meet these contingent obligations should they arise.

FAIR VALUE HIERARCHY

The Company's financial assets and liabilities recorded at fair value have been categorized into three categories based on a fair value hierarchy.

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---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Levels How fair value has been determined ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Level I Quoted prices in active markets for identical assets and liabilities that the Company has the ability to access at the measurement date. ---------------------------------------------------------------------------- Level II Valuation based on the extrapolation of inputs, other than quoted prices included within Level I, for which all significant inputs are observable directly or indirectly. Inputs include published exchange rates, interest rates, interest rate swap curves, yield curves and broker quotes from external data service providers. This category includes interest rate and foreign exchange derivative assets and liabilities where fair value is determined using the income approach and commodity derivatives where fair value is determined using the market approach. Transfers between Level I and Level II would occur when there is a change in market circumstances. ---------------------------------------------------------------------------- Level III Valuation of assets and liabilities are measured using a market approach based on extrapolation of inputs that are unobservable or where observable data does not support a significant portion of the derivative's fair value. This category mainly includes long- dated commodity transactions in certain markets where liquidity is low and the Company uses the most observable inputs available or, if not available, long-term broker quotes to estimate the fair value for these transactions. Valuation of options is based on the Black-Scholes pricing model. Assets and liabilities measured at fair value can fluctuate between Level II and Level III depending on the proportion of the value of the contract that extends beyond the time frame for which significant inputs are considered to be observable. As contracts near maturity and observable market data become available, they are transferred out of Level III and into Level II. ---------------------------------------------------------------------------- ----------------------------------------------------------------------------

/T/

The fair value of the Company's derivative assets and liabilities measured on a recurring basis, including both current and non-current portions for 2017, are categorized as follows:

/T/

---------------------------------------------------------------------------- ----------------------------------------------------------------------------

Significant Quoted prices other Significant in active observable unobservable at March 31, 2017 markets inputs inputs (unaudited - millions (Level I)(1) (Level II)(1) (Level III)(1) Total of Canadian $) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Derivative instrument assets: Commodities 82 433 25 540 Foreign exchange - 21 - 21 Interest rate - 5 - 5 Derivative instrument liabilities: Commodities (64) (487) (15) (566) Foreign exchange - (371) - (371) Interest rate - (4) - (4) ---------------------------------------------------------------------------- 18 (403) 10 (375) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- (1) There were no transfers from Level I to Level II or from Level II to Level III for the three months ended March 31, 2017.

/T/

The fair value of the Company's derivative assets and liabilities measured on a recurring basis, including both current and non-current portions for 2016, are categorized as follows:

/T/

---------------------------------------------------------------------------- ----------------------------------------------------------------------------

Significant Quoted prices other Significant in active observable unobservable at December 31, 2016 markets inputs inputs (unaudited - millions of Canadian $) (Level I)(1) (Level II)(1) (Level III)(1) Total ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Derivative instrument assets: Commodities 134 326 19 479 Foreign exchange - 26 - 26 Interest rate - 4 - 4 Derivative instrument liabilities: Commodities (102) (343) (3) (448) Foreign exchange - (486) - (486) Interest rate - (3) - (3) ---------------------------------------------------------------------------- 32 (476) 16 (428) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- (1) There were no transfers from Level I to Level II or from Level II to Level III for the year ended December 31, 2016.

/T/

The following table presents the net change in fair value of derivative assets and liabilities classified as Level III of the fair value hierarchy:

/T/

---------------------------------------------------------------------------- ----------------------------------------------------------------------------

three months ended March 31 ------------------------------ (unaudited - millions of Canadian $) 2017 2016 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Balance at beginning of period 16 9 Transfers out of Level III (4) (3) Sales (2) (1) Settlements - 1 Total gains included in net income - 3 ---------------------------------------------------------------------------- Balance at end of period(1) 10 9 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- (1) For the three months ended March 31, 2017, revenues include unrealized losses of less than $1 million attributed to derivatives in the Level III category that were still held at March 31, 2017 (2016 - gains of $2 million).

/T/

A 10 per cent increase or decrease in commodity prices, with all other variables held constant, would result in a less than $1 million change in the fair value of outstanding derivative instruments included in Level III as at March 31, 2017.

12. Commitments, contingencies and guarantees

COMMITMENTS

TransCanada's operating lease commitments at March 31, 2017 include future payments related to our U.S. Northeast power business. At the close of the sale of Ravenswood, TransCanada's commitments are expected to decrease by $3 million in 2017, $53 million in 2018, $35 million in 2019 and $105 million in 2022 and beyond.

CONTINGENCIES

TransCanada and its subsidiaries are subject to various legal proceedings, arbitrations 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.

In March 2017, the U.S. Department of State issued a U.S. Presidential Permit authorizing construction of the U.S./Canada border crossing facilities of the Keystone XL pipeline. TransCanada discontinued the claim under Chapter 11 of the North American Free Trade Agreement and has also withdrawn the U.S. Constitutional challenge.

GUARANTEES



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