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TransCanada Reports First Quarter 2017 Financial Results; Strong Results Build Upon Transformational 2016 – Part 9


At May 4, 2017, our operated affiliates had an additional $0.7 billion of undrawn capacity on committed credit facilities.

See Financial risks and financial instruments for more information about liquidity, market and other risks.

CONTRACTUAL OBLIGATIONS

Our capital commitments have decreased by approximately $0.5 billion since December 31, 2016 primarily as a result of decreased commitments for the NGTL System and Sur de Texas natural gas pipelines due to the progression of construction. Transportation by others commitments have increased by approximately $0.7 billion since December 31, 2016, primarily related to Canadian Mainline contracts.

Our commitments at March 31, 2017 include operating leases and other purchase obligations related to our U.S. Northeast power business. At the close of the sale of Ravenswood, Ironwood, Kibby Wind and Ocean State Power, our commitments are expected to decrease by $42 million in 2017, $97 million in 2018, $79 million in 2019, $29 million in 2020, $23 million in 2021 and $259 million in 2022 and beyond.

There were no other material changes to our contractual obligations in first quarter 2017 or to payments due in the next five years or after. See the MD&A in our 2016 Annual Report for more information about our contractual obligations.

Financial risks and financial instruments

We are exposed to liquidity risk, counterparty credit risk and market risk, and have strategies, policies and limits in place to mitigate their impact on our earnings, cash flow and, ultimately, shareholder value. These are designed to ensure our risks and related exposures are in line with our business objectives and risk tolerance.

See our 2016 Annual Report for more information about the risks we face in our business. Our risks have not changed substantially since December 31, 2016.

LIQUIDITY RISK

We manage our liquidity risk by continuously forecasting our cash flow for a 12 month period to ensure we have adequate cash balances, cash flow from operations, committed and demand credit facilities and access to capital markets to meet our operating, financing and capital expenditure obligations under both normal and stressed economic conditions.

COUNTERPARTY CREDIT RISK

We have exposure to counterparty credit risk in the following areas:

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-- accounts receivable
-- the fair value of derivative assets
-- cash and cash equivalents
-- notes receivable.

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We review our accounts receivable regularly and record allowances for doubtful accounts using the specific identification method. At March 31, 2017, we had no significant credit losses, no significant credit risk concentration and no significant amounts past due or impaired.

We have significant credit and performance exposure to financial institutions because they hold cash deposits and provide committed credit lines and letters of credit that help manage our exposure to counterparties and provide liquidity in commodity, foreign exchange and interest rate derivative markets.

FOREIGN EXCHANGE AND INTEREST RATE RISK

We generate revenues and incur expenses that are denominated in currencies other than Canadian dollars. As a result, our earnings and cash flows are exposed to currency fluctuations.

A portion of our businesses generate earnings in U.S. dollars, but since we report our financial results in Canadian dollars, changes in the value of the U.S. dollar against the Canadian dollar can affect our net income. As our U.S. dollar-denominated operations continue to grow, this exposure increases. The majority of this risk is offset by interest expense on U.S. dollar-denominated debt and by using foreign exchange derivatives.

We have floating interest rate debt which subjects us to interest rate cash flow risk. We manage this using a combination of interest rate swaps and options.

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Average exchange rate - U.S. to Canadian dollars

------------------------------------------------------------------ ------------------------------------------------------------------ three months ended March 31, 2017 1.32 three months ended March 31, 2016 1.35 ------------------------------------------------------------------ ------------------------------------------------------------------

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The impact of changes in the value of the U.S. dollar on our U.S. operations is significantly offset by interest on U.S. dollar-denominated long-term debt, as set out in the table below. Comparable EBIT is a non-GAAP measure. See our Reconciliation of non-GAAP measures section for more information.

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Significant U.S. dollar-denominated amounts

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three months ended March 31 ------------------------------ (unaudited - millions of US$) 2017 2016 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- U.S. Natural Gas Pipelines comparable EBIT 431 200 Mexico Natural Gas Pipelines comparable EBIT 89 33 U.S. Liquids Pipelines comparable EBIT 135 127 U.S. Power comparable EBIT 54 44 AFUDC on U.S. dollar-denominated projects 38 45 Interest on U.S. dollar-denominated long-term debt (317) (246) Capitalized interest on U.S. dollar- denominated capital expenditures - 7 U.S. dollar non-controlling interests (68) (60) ---------------------------------------------------------------------------- 362 150 ---------------------------------------------------------------------------- ----------------------------------------------------------------------------

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Derivatives designated as a net investment hedge

We hedge our net investment in foreign operations (on an after-tax basis) with U.S. dollar-denominated debt, cross-currency interest rate swaps, foreign exchange forward contracts and foreign exchange options.

The fair values and notional or principal amounts for the derivatives designated as a net investment hedge were as follows:

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March 31, 2017 December 31, 2016 ---------------------- ---------------------- (unaudited - millions of Notional or Notional or Canadian $, unless noted Fair principal Fair principal otherwise) value(1) amount value(1) amount ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- U.S. dollar cross-currency interest rate swaps (maturing 2017 to 2019)(2) (337) US 2,000 (425) US 2,350 U.S. dollar foreign exchange forward contracts - - (7) US 150 ---------------------------------------------------------------------------- (337) US 2,000 (432) US 2,500 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- (1) Fair values equal carrying values. (2) In the three months ended March 31, 2017, net realized gains of $1 million (2016 - gains of $2 million) related to the interest component of cross-currency swaps settlements are included in interest expense.

U.S. dollar-denominated debt designated as a net investment hedge

---------------------------------------------------------------------------- ---------------------------------------------------------------------------- (unaudited - millions of Canadian $, unless noted otherwise) March 31, 2017 December 31, 2016 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Notional amount 28,400 (US 21,400) 26,600 (US 19,800) Fair value 31,500 (US 23,600) 29,400 (US 21,900) ---------------------------------------------------------------------------- ----------------------------------------------------------------------------

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FINANCIAL INSTRUMENTS

All financial instruments, including both derivative and non-derivative instruments, are recorded on the balance sheet at fair value unless they were entered into and continue to be held for the purpose of receipt or delivery in accordance with our normal purchase and sales exemptions and are documented as such. In addition, fair value accounting is not required for other financial instruments that qualify for certain accounting exemptions.

Derivative instruments

We use derivative instruments to reduce volatility associated with fluctuations in commodity prices, interest rates and foreign exchange rates. We apply hedge accounting to derivative instruments that qualify and are designated for hedge accounting treatment.

The majority of derivative instruments that are not designated or do not qualify for hedge accounting treatment have been entered into as economic hedges to manage our exposure to market risk (held for trading). Changes in the fair value of held for trading derivative instruments are recorded in net income in the period of change. This may expose us to increased variability in reported operating results since the fair value of the held for trading derivative instruments can fluctuate significantly fr om period to period.

Balance sheet presentation of derivative instruments

The balance sheet classification of the fair value of derivative instruments is as follows:

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---------------------------------------------------------------------------- ---------------------------------------------------------------------------- (unaudited - millions of $) March 31, 2017 December 31, 2016 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Other current assets 413 376 Intangible and other assets 153 133 Accounts payable and other (607) (607) Other long-term liabilities (334) (330) ---------------------------------------------------------------------------- (375) (428) ---------------------------------------------------------------------------- ----------------------------------------------------------------------------

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Unrealized and realized (losses)/gains of derivative instruments

The following summary does not include hedges of our net investment in foreign operations.

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three months ended March 31 ------------------------------ (unaudited - millions of $, pre-tax) 2017 2016 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Derivative instruments held for trading(1) Amount of unrealized (losses)/gains in the period Commodities(2) (56) (67) Foreign exchange 15 27 Interest rate 1 - Amount of realized (losses)/gains in the period Commodities (48) (95) Foreign exchange (4) 44 Derivative instruments in hedging relationships Amount of realized gains/(losses) in the period Commodities 6 (73) Foreign exchange 5 (63) Interest rate 1 2 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- (1) Realized and unrealized gains and losses on held for trading derivative instruments used to purchase and sell commodities are included net in revenues. Realized and unrealized gains and losses on interest rate and foreign exchange held for trading derivative instruments are included net in interest expense and interest income and other, respectively. (2) Following the March 17, 2016 announcement of our intention to sell the U.S. Northeast power business, a loss of $49 million and a gain of $7 million were recorded in net income in the three months ended March 31, 2016 relating to discontinued cash flow hedges where it was probable that the anticipated underlying transaction would not occur as a result of a future sale.

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Derivatives in cash flow hedging relationships

The components of the condensed consolidated statement of OCI related to derivatives in cash flow hedging relationships including the portion attributable to non-controlling interests is as follows:

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three months ended March 31 ------------------------------ (unaudited - millions of $, pre-tax) 2017 2016 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Change in fair value of derivative instruments recognized in OCI (effective portion)(1) Commodities 5 (16) Foreign exchange - (35) Interest rate 1 (3) ---------------------------------------------------------------------------- 6 (54) ---------------------------------------------------------------------------- Reclassification of (losses)/gains on derivative instruments from AOCI to net income (effective portion)(1) Commodities(2) (4) 82 Foreign exchange(3) - 34 Interest rate(4) 4 4 ---------------------------------------------------------------------------- - 120 ---------------------------------------------------------------------------- Losses on derivative instruments recognized in net income (ineffective portion) Commodities(2) - (58) ---------------------------------------------------------------------------- - (58) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- (1) No amounts have been excluded from the assessment of hedge effectiveness. Amounts in parentheses indicate losses recorded to OCI. (2) Reported within revenues on the condensed consolidated statement of income. (3) Reported within interest income and other on the condensed consolidated statement of income. (3) Reported within interest expense on the condensed consolidated statement of income.

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