Risk Management Overview

TransCanada and its subsidiaries are exposed to market, financial and counterparty risks in the normal course of their business activities. The risk management function assists in managing these various business activities and the risks associated with them. A strong commitment to a risk management culture by TransCanada's Management supports this function. TransCanada's primary risk management objective is to protect earnings and cash flow and ultimately, shareholder value.

The risk management function is guided by the following principles that are applied to all businesses and risk types:

• Board Oversight – Risk strategies, policies and limits are subject to review and approval by TransCanada's Board of Directors.
• Independent Review – Risk-taking activities are subject to independent review, separate from the business lines that initiate the activity.
• Assessment – Processes are in place to ensure that risks are properly assessed at the transaction and counterparty levels.
• Review and Reporting – Market positions and exposures, and the creditworthiness of counterparties are subject to ongoing review and reporting to executive management.
• Accountability – Business lines are accountable for all risks and the related returns for their particular businesses.
• Audit Review – Individual risks are subject to internal audit review, with independent reporting to the Audit Committee of TransCanada's Board of Directors.

The processes within TransCanada's risk management function are designed to ensure that risks are properly identified, quantified, reported and managed. Risk management strategies, policies and limits are designed to ensure TransCanada's risk-taking is consistent with the Company's business objectives and risk tolerance. Risks are managed within limits ultimately established by the Company's Board of Directors and implemented by senior management, monitored by risk management personnel and audited by internal audit personnel.

TransCanada manages market, financial and counterparty risks and related exposures in accordance with the Company's market risk, interest rate and foreign exchange risk and counterparty risk policies. The Company's primary market and financial risks result from volatility in commodity prices, interest rates and foreign currency exchange rates.

Senior management reviews these exposures and reports on a regular basis to the Audit Committee of TransCanada's Board of Directors.

Market Risk Management

In order to manage market risk exposures created by fixed and variable pricing arrangements at different pricing indices and delivery points, the Company enters into offsetting physical positions and derivative financial instruments. Market risks are quantified using value-at-risk methodology and are reviewed weekly by senior management.

Financial Risk Management

TransCanada monitors the financial market risk exposures relating to the Company's investments in foreign currency denominated net assets, regulated and non-regulated long-term debt portfolios and foreign currency exposure on transactions. The market risk exposures created by these business activities are managed by establishing offsetting positions or through the use of derivative financial instruments.

Counterparty Risk Management

Counterparty risk is the financial loss that the Company would experience if the counterparty failed to meet its obligations in accordance with the terms and conditions of its contracts with the Company. Counterparty risk is mitigated by conducting financial and other assessments to establish a counterparty's creditworthiness, setting exposure limits and monitoring exposures against these limits, and, where warranted, obtaining financial assurances.

The Company's counterparty risk management practices and positions are further described in Note 15 to the consolidated financial statements.

Development Projects and Acquisitions

TransCanada continues to focus on growing its Pipelines and Energy operations through greenfield projects and acquisitions. TransCanada defers costs incurred on certain of its development projects during the period prior to construction when the project meets specific criteria including an expectation that the project will proceed to ultimate completion. If an individual project does not proceed, the related deferred costs would be expensed at that time. With respect to TransCanada's acquisition of existing assets and operations, there is a risk that certain commercial opportunities and operational synergies may not materialize as originally expected.

Foreign Exchange

A portion of TransCanada's earnings from its Pipelines and Energy operations in the U.S. are generated in U.S. dollars and are subject to currency fluctuations. The performance of the Canadian dollar relative to the U.S. dollar could either positively or negatively impact TransCanada's net earnings, although much of this foreign exchange impact is offset by exposures in certain of TransCanada's businesses as well as through the Company's hedging activities. With the acquisition of ANR and a greater ownership interest in PipeLines LP, TransCanada expects to have a greater exposure to U.S. dollar fluctuations.

Risks and Risk Management Related to Environmental Regulations

Climate change remains a serious issue for TransCanada. The change of government in Canada in early 2006 resulted in a shift of focus from meeting greenhouse gas reduction targets to a broader emphasis on clean air as well as greenhouse gas emissions. The Government of Canada released the Clean Air Act on October 19, 2006. At this time, however, the policy framework for the new regulations has not been released by the federal government and detailed sectoral targets and timeframes as well as compliance options have not been set. At a provincial level, the Québec government has passed legislation for a hydrocarbon royalty on industrial greenhouse gas emitters. The details as to how the royalty will be applied have not yet been determined but it is expected these details will be set in the coming year. In Alberta, the government has indicated it will continue with its own plan for implementing regulations to manage greenhouse gas emissions. It is yet to be determined how this effort will tie into a federal program.

In the U.S., state level initiatives are under way to limit greenhouse gas emissions, particularly in the northeastern U.S. and California. Details have not been finalized and the impact to TransCanada's U.S.-based assets is uncertain.

Despite this uncertainty, TransCanada continues with its programs to manage greenhouse gas emissions from its assets, and to evaluate new processes and technologies that result in improved efficiencies and lower greenhouse gas emissions rates. In addition, TransCanada remains involved in policy discussions in those jurisdictions where policy development is under way and where the Company has operations.