Note 18: Risk Management and Financial Instruments

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Risk Management Overview

TransCanada has exposure to market risk, counterparty credit risk and liquidity risk. TransCanada engages in risk management activities with the objective being to protect earnings, cash flow and, ultimately, shareholder value.

Risk management strategies, policies and limits are designed to ensure TransCanada's risks and related exposures are in line with the Company's business objectives and risk tolerance. Risks are managed within limits ultimately established by the Company's Board of Directors, implemented by senior management and monitored by risk management and internal audit personnel. The Board of Directors' Audit Committee oversees how management monitors compliance with risk management policies and procedures, and oversees management's review of the adequacy of the risk management framework. Internal audit personnel assist the Audit Committee in its oversight role by performing regular and ad-hoc reviews of risk management controls and procedures, the results of which are reported to the Audit Committee.

Market Risk

The Company constructs and invests in large infrastructure projects, purchases and sells energy commodities, issues short-term and long-term debt, including amounts in foreign currencies, and invests in foreign operations. These activities expose the Company to market risk from changes in commodity prices, foreign exchange rates and interest rates, which affect the Company's earnings and the value of the financial instruments it holds.

The Company uses derivatives as part of its overall risk management strategy to manage the exposure to market risk that results from these activities. Derivative contracts used to manage market risk generally consist of the following:

• Forwards and futures contracts — contractual agreements to purchase or sell a specific financial instrument or commodity at a specified price and date in the future. TransCanada enters into foreign exchange and commodity forwards and futures to mitigate the impact of volatility in foreign exchange rates and commodity prices.
• Swaps — contractual agreements between two parties to exchange streams of payments over time according to specified terms. The Company enters into interest rate, cross-currency and commodity swaps to mitigate the impact of changes in interest rates, foreign exchange rates and commodity prices.
• Options — contractual agreements to convey the right, but not the obligation, of the purchaser to buy or sell a specific amount of a financial instrument or commodity at a fixed price, either at a fixed date or at any time within a specified period. The Company enters into option agreements to mitigate the impact of changes in interest rates, foreign exchange rates and commodity prices.

Commodity Price Risk

The Company is exposed to commodity price movements as part of its normal business operations, particularly in relation to the prices of electricity, natural gas and oil products. A number of strategies are used to mitigate these exposures, including the following:

• Subject to its overall risk management strategy, the Company commits a significant portion of its expected power supply to fixed-price medium-term or long-term sales contracts, while reserving an amount of unsold supply to mitigate price risk in its asset portfolio.
• The Company purchases a portion of the natural gas and oil products required for its power plants or enters into contracts that base the sales price of electricity on the cost of natural gas, effectively locking in a margin. A significant portion of the electricity needed to fulfill the Company's power sales commitments is fulfilled through power generation or purchased through contracts, thereby reducing the Company's exposure to fluctuating commodity prices.
• The Company enters into offsetting or back-to-back positions using derivative financial instruments to manage price risk exposure in power and natural gas commodities created by certain fixed and variable pricing arrangements for different pricing indices and delivery points.

The Company assesses its commodity contracts and derivative instruments used to manage commodity risk to determine the appropriate accounting treatment. Contracts, with the exception of leases, have been assessed to determine whether they or certain aspects of them meet the definition of a derivative. Certain commodity purchase and sale contracts are derivatives but are not within the scope of the CICA Handbook Section 3855 "Financial Instruments — Recognition and Measurement", as they were entered into and continue to be held for the purpose of receipt or delivery in accordance with the Company's expected purchase, sale or usage requirements. Certain other contracts are not within the scope of Section 3855 as they are considered to meet other exemptions.

TransCanada manages its exposure to seasonal natural gas price spreads in its natural gas storage business by economically hedging storage capacity with a portfolio of third-party storage capacity contracts and proprietary natural gas purchases and sales. TransCanada simultaneously enters into a forward purchase of natural gas for injection into storage and an offsetting forward sale of natural gas for withdrawal at a later period, thereby locking in future positive margins and effectively eliminating exposure to natural gas price movements. Fair value adjustments recorded each period on proprietary natural gas inventory in storage and these forward contracts may not be representative of the amounts that will be realized on settlement.

Natural Gas Inventory Price Risk

At December 31, 2009, the fair value of proprietary natural gas inventory in storage, as measured using a weighted average of forward prices for the following four months less selling costs, was $73 million (2008 — $76 million). The change in fair value of proprietary natural gas inventory in storage in 2009 resulted in a net pre-tax unrealized gain of $3 million (2008 — unrealized loss of $7 million; 2007 — nil), which was recorded as an increase to Revenues and Inventories. The net change in fair value of natural gas forward purchase and sales contracts in 2009 resulted in a net pre-tax unrealized loss of $2 million (2008 — unrealized gain of $7 million; 2007 unrealized gain of $10 million), which was recorded as a decrease in Revenues.

Foreign Exchange and Interest Rate Risk

Foreign exchange and interest rate risk is created by fluctuations in the fair value or cash flow of financial instruments due to changes in foreign exchange rates and market interest rates.

A portion of TransCanada's earnings from its Pipelines and Energy segments is generated in U.S. dollars and, as such, movement of the Canadian dollar relative to the U.S. dollar can affect TransCanada's earnings. This foreign exchange impact is offset by certain related debt and financing costs being denominated in U.S. dollars and by the Company's hedging activities. TransCanada has a greater exposure to U.S. currency fluctuations than in prior years due to growth in its U.S. operations, partially offset by increased levels of U.S. dollar-denominated debt.

The Company uses foreign currency and interest rate derivatives to manage the foreign exchange and interest rate risks related to its debt and other U.S. dollar-denominated transactions, and to manage the interest rate exposures of the Canadian Mainline, Alberta System and Foothills operations. Certain of the realized gains and losses on these derivatives are shared with shippers on predetermined terms. These gains and losses are deferred as regulatory assets and liabilities until they are recovered from or paid to the shippers in accordance with the terms of the shipping agreements.

TransCanada has floating interest rate debt, which subjects it to interest rate cash flow risk. The Company uses a combination of interest rate swaps and options to manage its exposure to this risk.

On a consolidated basis, the impact of changes in the U.S. dollar on U.S. Pipelines and Energy earnings is largely offset by the impact on U.S. dollar interest expense. The resultant net exposure is managed using derivatives, effectively reducing the Company's exposure to changes in foreign exchange rates.

Net Investment in Self-Sustaining Foreign Operations

The Company hedges its net investment in self-sustaining foreign operations (on an after-tax basis) with U.S. dollar-denominated debt, cross-currency interest rate swaps, forward foreign exchange contracts and foreign exchange options. At December 31, 2009, the Company had designated as a net investment hedge U.S. dollar-denominated debt with a carrying value of $7.9 billion (US$7.6 billion) (2008 — $7.2 billion (US$5.9 billion)) and a fair value of $9.8 billion (US$9.3 billion) (2008 — $5.9 billion (US$4.8 billion)). At December 31, 2009, $96 million was included in Intangibles and Other Assets (2008 — $254 million in Deferred Amounts) for the fair value of the forwards, swaps and options used to hedge the Company's net U.S. dollar investment in foreign operations.

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

	2009		2008
Asset/(Liability) December 31 (millions of dollars)	Fair Value(1)	Notional or Principal Amount	Fair Value(1)	Notional or Principal Amount
U.S. dollar cross-currency swaps
(maturing 2010 to 2014)	86	U.S. 1,850	(218)	U.S. 1,650
U.S. dollar forward foreign exchange contracts
(maturing 2010)	9	U.S. 765	(42)	U.S. 2,152
U.S. dollar options
(maturing 2010)	1	U.S. 100	6	U.S. 300
	96	U.S. 2,715	(254)	U.S. 4,102

(1)	Fair values equal carrying values.

VaR Analysis

TransCanada uses a Value-at-Risk (VaR) methodology to estimate the potential impact resulting from its exposure to market risk on its open liquid positions. VaR estimates the potential change in pre-tax earnings over a given holding period for a specified confidence level. The VaR number calculated and used by TransCanada reflects a 95 per cent probability that the daily change resulting from normal market fluctuations in its open liquid positions will not exceed the reported VaR. The VaR methodology is a statistically- calculated, probability-based approach that takes into consideration market volatilities as well as risk diversification by recognizing offsetting positions and correlations among products and markets. Risks are measured across all products and markets, and risk measures are aggregated to arrive at a single VaR number.

There is currently no uniform industry methodology for estimating VaR. The use of VaR has limitations because it is based on historical correlations and volatilities in commodity prices, interest rates and foreign exchange rates, and assumes that future price movements will follow a statistical distribution. Although losses are not expected to exceed the statistically estimated VaR on 95 per cent of occasions, losses on the other five per cent of occasions could be substantially greater than the estimated VaR.

TransCanada's estimation of VaR includes wholly owned subsidiaries and incorporates relevant risks associated with each market or business unit. The calculation does not include the Pipelines segment as the rate-regulated nature of the pipeline business reduces the impact of market risks. TransCanada's Board of Directors has established a VaR limit, which is monitored on an ongoing basis as part of the Company's risk management policy. TransCanada's consolidated VaR was $12 million at December 31, 2009 (2008 — $23 million). The decline from December 31, 2008 was primarily due to decreased prices and lower open positions in the U.S. power portfolio.

Counterparty Credit Risk

Counterparty credit risk represents the financial loss the Company would experience if a counterparty to a financial instrument failed to meet its obligations in accordance with the terms and conditions of its contracts with the Company.

Counterparty credit risk is managed through established credit management techniques, including conducting financial and other assessments to establish and monitor a counterparty's creditworthiness, setting exposure limits, monitoring exposures against these limits, using master netting arrangements and obtaining financial assurances where warranted. In general, financial assurances include guarantees, letters of credit and cash. The Company monitors and manages its concentration of counterparty credit risk on an ongoing basis. The Company believes these measures minimize its counterparty credit risk but there is no certainty that they will protect it against all material losses.

TransCanada's maximum counterparty credit exposure with respect to financial instruments at the balance sheet date consisted primarily of non-derivative financial assets such as accounts receivable, loans and notes receivable, as well as the fair value of derivative assets. Within these balances, the Company does not have significant concentrations of counterparty credit risk with any individual counterparties and the majority of counterparty credit exposure is with counterparties who are investment grade. At December 31, 2009, there were no significant amounts past due or impaired.

TransCanada has significant credit and performance exposures to financial institutions as they provide committed credit lines and cash deposit facilities, critical liquidity in the foreign exchange derivative, interest rate derivative and energy wholesale markets, and letters of credit to mitigate TransCanada's exposure to non-creditworthy counterparties.

As a level of uncertainty continues to exist in the global financial markets, TransCanada continues to closely monitor and reassess the creditworthiness of its counterparties. This has resulted in TransCanada reducing or mitigating its exposure to certain counterparties where it was deemed warranted and permitted under contractual terms. As part of its ongoing operations, TransCanada must balance its market and counterparty credit risks when making business decisions.

Certain subsidiaries of Calpine Corporation (Calpine) filed for bankruptcy protection in both Canada and the U.S. in 2005. Gas Transmission Northwest Corporation (GTNC) and Portland reached agreements with Calpine for allowed unsecured claims in the Calpine bankruptcy. In February 2008, GTNC and Portland received initial distributions of 9.4 million common shares and 6.1 million common shares, respectively, of Calpine, which represented approximately 85 per cent of their agreed-upon claims. In 2008, these shares were sold into the open market and resulted in total pre-tax gains of $279 million. Claims by NGTL and Foothills Pipe Lines (South B.C.) Ltd. for $32 million and $44 million, respectively, were received in cash in January 2008 and were passed on to shippers on these systems in 2008 and 2009.

Liquidity Risk

Liquidity risk is the risk that TransCanada will not be able to meet its financial obligations when due. The Company's approach to managing liquidity risk is to ensure that, under both normal and stressed conditions, it always has sufficient cash and credit facilities to meet its obligations when due without incurring unacceptable losses or damage to the Company's reputation.

Management continuously forecasts cash flows for a period of 12 months to identify financing requirements. These requirements are then managed through a combination of committed and demand credit facilities and access to capital markets, as discussed under the heading Capital Management below.

At December 31, 2009, the Company had committed revolving bank lines of US$1.0 billion, $2.0 billion, US$1.0 billion and US$300 million maturing November 2010, December 2012, December 2012 and February 2013, respectively. At December 31, 2009, the US$300 million facility was fully drawn and no draws were made on any of the other facilities. The Company has maintained continuous access to the Canadian commercial paper market on competitive terms.

The Company has access to capital markets under the following prospectuses:

• In December 2009, TCPL filed a US$4.0 billion debt base shelf prospectus qualifying for the issuance of up to US$4.0 billion of debt securities in the U.S. At December 31, 2009, no amounts were issued under the base shelf prospectus.
• In September 2009, TransCanada filed a $3.0 billion base shelf prospectus qualifying for the issuance of up to $3.0 billion of equity instruments in Canada and the U.S. until October 2011. At December 31, 2009 the Company had $2.45 billion available under the prospectus.
• In April 2009, TCPL filed a $2.0 billion Medium-Term Notes base shelf prospectus in Canada. At December 31, 2009, no amounts were issued under this base shelf prospectus.

Capital Management

The primary objective of capital management is to ensure TransCanada has strong credit ratings to support its businesses and maximize shareholder value. In 2009, the overall objective and policy for managing capital remained unchanged from the prior year.

TransCanada manages its capital structure in a manner consistent with the risk characteristics of the underlying assets. The Company's management considers its capital structure to consist of net debt, Non-Controlling Interests and Shareholders' Equity. Net debt is comprised of Notes Payable, Long-Term Debt and Junior Subordinated Notes less Cash and Cash Equivalents. Net debt only includes obligations that the Company controls and manages. Consequently, it does not include Cash and Cash Equivalents, Notes Payable and Long-Term Debt of TransCanada's joint ventures.

The capital structure was as follows:

December 31 (millions of dollars)	2009	2008
Notes payable	1,678	1,685
Long-term debt	16,664	16,154
Junior subordinated notes	1,036	1,213
Cash and cash equivalents	(896)	(1,117)
Net debt	18,482	17,935
Non-controlling interests	1,174	1,194
Shareholders' equity	15,759	12,898
Total equity	16,933	14,092
Total Capital	35,415	32,027

Fair Values

Certain financial instruments included in Cash and Cash Equivalents, Accounts Receivable, Intangibles and Other Assets, Notes Payable, Accounts Payable, Accrued Interest and Deferred Amounts have carrying amounts that approximate their fair value due to the nature of the item or the short time to maturity. The fair value of foreign exchange and interest rate derivatives has been calculated using year-end market rates. The fair value of power, natural gas and oil products derivatives has been calculated using quoted market prices where available. In the absence of quoted market prices, third-party broker quotes or other valuation techniques are used. Credit risk has been taken into consideration when calculating the fair value of derivatives.

The fair value of the Company's Long-Term Debt was estimated based on quoted market prices for the same or similar debt instruments and, when such information was not available, was estimated by discounting future payments of interest and principal at estimated interest rates that were made available to the Company.

Non-Derivative Financial Instruments Summary

The carrying and fair values of non-derivative financial instruments were as follows:

	2009		2008
December 31 (millions of dollars)	Carrying Amount	Fair Value	Carrying Amount	Fair Value
Financial Assets(1)
Cash and cash equivalents	997	997	1,308	1,308
Accounts receivable and intangibles and other assets(2)(3)	1,432	1,483	1,427	1,427
Available-for-sale assets(2)	23	23	27	27
	2,452	2,503	2,762	2,762
Financial Liabilities(1)(3)
Notes payable	1,687	1,687	1,702	1,702
Accounts payable and deferred amounts(4)	1,538	1,538	1,372	1,372
Accrued interest	377	377	359	359
Long-term debt	16,664	19,377	16,154	15,337
Junior subordinated notes	1,036	976	1,213	815
Long-term debt of joint ventures	965	1,025	1,076	1,052
	22,267	24,980	21,876	20,637

(1)	Consolidated Net Income in 2009 included $6 million (2008 — $15 million) for fair value adjustments related to interest rate swap agreements on US$250 million (2008 — US$200 million and $50 million) of long-term debt. There were no other unrealized gains or losses from fair value adjustments to these financial instruments.
(2)	At December 31, 2009, the Consolidated Balance Sheet included financial assets of $966 million (2008 — $1,280 million) in Accounts Receivable and $489 million (2008 — $174 million) in Intangibles and Other Assets.
(3)	Recorded at amortized cost except for certain Long-Term Debt and Notes Receivable which are adjusted to fair value.
(4)	At December 31, 2009, the Consolidated Balance Sheet included financial liabilities of $1,513 million (2008 — $1,350 million) in Accounts Payable and $25 million (2008 — $22 million) in Deferred Amounts.

The following tables detail the remaining contractual maturities for TransCanada's non-derivative financial liabilities, including both the principal and interest cash flows at December 31, 2009:

Contractual Repayments of Financial Liabilities⁽¹⁾

		Payments Due by Period
(millions of dollars)	Total	2010	2011 and 2012	2013 and 2014	2015 and Thereafter
Notes payable	1,687	1,687	—	—	—
Long-term debt and junior subordinated notes	17,700	478	2,099	1,879	13,244
Long-term debt of joint ventures	965	212	174	94	485
	20,352	2,377	2,273	1,973	13,729

(1)	The anticipated timing of settlement of derivative contracts is presented in the Derivatives Financial Instrument Summary in this note.

Interest Payments on Financial Liabilities

		Payments Due by Period
(millions of dollars)	Total	2010	2011 and 2012	2013 and 2014	2015 and Thereafter
Long-term debt and junior subordinated notes	17,123	1,186	2,260	2,093	11,584
Long-term debt of joint ventures	305	46	73	65	121
	17,428	1,232	2,333	2,158	11,705

Derivative Financial Instruments Summary

Information for the Company's derivative financial instruments for 2009 is as follows:

	2009
December 31 (all amounts in millions unless otherwise indicated)	Power	Natural  Gas	Oil  Products	Foreign  Exchange	Interest
Derivative Financial Instruments Held for Trading(1)
Fair Values(2)
Assets	$150	$107	$5	$—	$25
Liabilities	$(98)	$(112)	$(5)	$(66)	$(68)
Notional Values
Volumes(3)
Purchases	15,275	238	180	—	—
Sales	13,185	194	180	—	—
Canadian dollars	—	—	—	—	574
U.S. dollars	—	—	—	U.S. 444	U.S. 1,325
Cross-currency	—	—	—	227/U.S. 157	—
Net unrealized gains/(losses) in the year	$3	$(5)	$1	$3	$27
Net realized gains/(losses) in the year	$70	$(76)	$—	$36	(22)
Maturity dates	2010–2015	2010–2014	2010	2010–2012	2010–2018
Derivative Financial Instruments in Hedging Relationships(4)(5)
Fair Values(2)
Assets	$175	$2	$—	$—	$15
Liabilities	$(148)	$(22)	$—	$(43)	$(50)
Notional Values
Volumes(3)
Purchases	13,641	33	—	—	—
Sales	14,311	—	—	—	—
U.S. dollars	—	—	—	U.S. 120	U.S. 1,825
Cross-currency	—	—	—	136/U.S. 100	—
Net realized gains/(losses) in the year	$156	$(29)	$—	$—	$(37)
Maturity dates	2010–2015	2010–2014	—	2010–2014	2010–2020

(1)	All derivative financial instruments in the held-for-trading classification have been entered into for risk management purposes and are subject to the Company's risk management strategies, policies and limits. These include derivatives that have not been designated as hedges or do not qualify for hedge accounting treatment but have been entered into as economic hedges to manage the Company's exposures to market risk.
(2)	Fair values equal carrying values.
(3)	Volumes for power, natural gas and oil products derivatives are in GWh, billion cubic feet (Bcf) and thousands of barrels, respectively.
(4)	All hedging relationships are designated as cash flow hedges except for interest rate derivative financial instruments designated as fair value hedges with a fair value of $4 million and a notional amount of US$150 million. Net realized gains on fair value hedges for December 31, 2009 were $4 million and were included in Interest Expense. In 2009, the Company did not record any amounts in Net Income related to ineffectiveness for fair value hedges.
(5)	In 2009, Net Income included losses of $5 million for the changes in fair value of power and natural gas cash flow hedges that were ineffective in offsetting the change in fair value of their related underlying positions. In 2009, there were no gains or losses included in Net Income for discontinued cash flow hedges. No amounts have been excluded from the assessment of hedge effectiveness.

The anticipated timing of settlement of the derivative contracts assumes constant commodity prices, interest rates and foreign exchange rates from December 31, 2009. Settlements will vary based on the actual value of these factors at the date of settlement. The anticipated timing of settlement of these contracts is as follows:

Year ended December 31 (millions of dollars)	Total	2010	2011 and  2012	2013 and  2014	2015 and  Thereafter
Derivative financial instruments held for trading
Assets	287	201	73	11	2
Liabilities	(349)	(233)	(85)	(27)	(4)
Derivative financial instruments in hedging relationships
Assets	288	142	106	35	5
Liabilities	(263)	(106)	(89)	(66)	(2)
	(37)	4	5	(47)	1

Derivative Financial Instruments Summary

Information for the Company's derivative financial instruments for 2008 is as follows:

	2008
December 31 (all amounts in millions unless otherwise indicated)	Power	Natural  Gas	Oil  Products	Foreign  Exchange	Interest
Derivative Financial Instruments Held for Trading
Fair Values(1)
Assets	$132	$144	$10	$41	$57
Liabilities	$(82)	$(150)	$(10)	$(55)	$(117)
Notional Values
Volumes(2)
Purchases	4,035	172	410	—	—
Sales	5,491	162	252	—	—
Canadian dollars	—	—	—	—	1,016
U.S. dollars	—	—	—	U.S. 479	U.S. 1,575
Japanese yen (in billions)	—	—	—	JPY 4.3	—
Cross-currency	—	—	—	227/U.S. 157	—
Net unrealized gains/(losses) in the year	$24	$(23)	$1	$(9)	$(61)
Net realized gains/(losses) in the year	$23	$(2)	$1	$6	$13
Maturity dates	2009–2014	2009–2011	2009	2009–2012	2009–2018
Derivative Financial Instruments in Hedging Relationships(3)(4)
Fair Values(1)
Assets	$115	$—	$—	$2	$8
Liabilities	$(160)	$(18)	$—	$(24)	$(122)
Notional Values
Volumes(2)
Purchases	8,926	9	—	—	—
Sales	13,113	—	—	—	—
Canadian dollars	—	—	—	—	50
U.S. dollars	—	—	—	U.S. 15	U.S. 1,475
Cross-currency	—	—	—	136/U.S. 100	—
Net realized (losses)/gains in the year	$(56)	$15	$—	$—	$(10)
Maturity dates	2009–2014	2009–2011	—	2009–2013	2009–2019

(1)	Fair values equal carrying values.
(2)	Volumes for power, natural gas and oil products derivatives are in GWh, Bcf and thousands of barrels, respectively.
(3)	All hedging relationships are designated as cash flow hedges except for interest rate derivative financial instruments designated as fair value hedges with a fair value of $8 million and notional amounts of $50 million and US$50 million. Net realized gains on fair value hedges at December 31, 2008 were $1 million. In 2008, the Company did not record any amounts in Net Income related to ineffectiveness for fair value hedges.
(4)	In 2008, Net Income included losses of $6 million for changes in fair value of power and natural gas cash flow hedges that were ineffective in offsetting the change in fair value of their related underlying positions. In 2008, there were no gains or losses included in Net Income for discontinued cash flow hedges.

Balance Sheet Presentation of Derivative Financial Instruments

The fair value of the derivative financial instruments in the Company's Balance Sheet was as follows:

December 31 (millions of dollars)	2009	2008
Current
Other current assets	315	318
Accounts payable	(340)	(298)
Long-term
Intangibles and other assets	260	191
Deferred amounts	(272)	(694)

Derivative Financial Instruments of Joint Ventures

Included in the Balance Sheet Presentation of Derivative Financial Instruments summary are amounts related to power derivatives used by one of the Company's joint ventures to manage commodity price risk. The Company's proportionate share of the fair value of these power sales derivatives was $105 million at December 31, 2009 (2008 — $75 million). These contracts mature from 2010 to 2015. The Company's proportionate share of the notional sales volumes of power associated with this exposure was 6,312 gigawatt hours (GWh) at December 31, 2009 (2008 — 7,600 GWh). The Company's proportionate share of the notional purchased volumes of power associated with this exposure was 2,747 GWh at December 31, 2009 (2008 — 47 GWh).

Fair Value Hierarchy

The Company's financial assets and liabilities recorded at fair value have been categorized into three categories based upon a fair value hierarchy. Fair value of assets and liabilities included in Level I is determined by reference to quoted prices in active markets for identical assets and liabilities. Assets and liabilities in Level II include valuations using inputs other than quoted prices for which all significant outputs are observable, either directly or indirectly. This category includes fair value determined using valuation techniques, such as option pricing models and extrapolation using observable inputs. Level III valuations are based on inputs that are not readily observable and are significant to the overall fair value measurement. Long-dated commodity transactions in certain markets and the fair value of guarantees are included in this category. Long-dated commodity prices are derived with a third party modelling tool that uses market fundamentals to derive long-term prices. The fair value of guarantees is estimated by discounting the cash flows that would be incurred if letters of credit were used in place of the guarantees.

Assets and liabilities measured at fair value as of December 31, 2009, including both current and non-current portions, are categorized as follows. There were no transfers between Level I and Level II in 2009.

(millions of dollars, pre-tax)	Quoted Prices in Active Markets (Level I)	Significant Other Observable Inputs (Level II)	Significant Unobservable Inputs (Level III)	Total
Natural Gas Inventory	—	73	—	73
Derivative Financial Instruments:
Assets	65	509	14	588
Liabilities	(109)	(500)	(16)	(625)
Non-Derivative Financial Instruments: Available-for-sale assets	23	—	—	23
Guarantee Liabilities(1)	—	—	(9)	(9)
	(21)	82	(11)	50

(1)	The fair value of guarantees is included in Deferred Amounts as at December 31, 2009.

The following table presents the net change in assets and liabilities measured at fair value and included in the Level III fair value category:

(millions of dollars, pre-tax)	Derivatives(1)	Guarantees(2)	Total
Balance at December 31, 2008	—	(9)	(9)
New contracts(3)	(14)	—	(14)
Transfers into Level III(4)	12	—	12
Total realized and unrealized gains/(losses) included in Deferred Amounts	—	(7)	(7)
Other	—	7	7
Balance at December 31, 2009	(2)	(9)	(11)

(1)	The fair value of derivative assets and liabilities is presented on a net basis.
(2)	The fair value of guarantees is recognized in Deferred Amounts. No amounts were recognized in earnings for the periods presented.
(3)	The total amount of net gains included in earnings attributable to derivatives that were entered into during the period and still held at the reporting date is nil for the year ended December 31, 2009.
(4)	These contracts were previously included in Level II but were reclassified to Level III due to reduced liquidity in the market to which they relate.

A 10 per cent increase or 10 per cent decrease in commodity prices, with all other variables held constant, would cause an $18 million decrease or an $18 million increase, respectively, in the fair value of derivative financial instruments outstanding as at December 31, 2009.

A 100 basis points increase or 100 basis points decrease in the letter of credit rate, with all other variables held constant, would cause a $6 million increase or a $6 million decrease, respectively, in the fair value of guarantee liabilities outstanding as at December 31, 2009. Similarly, the effect of a 100 basis points increase or 100 basis points decrease in the discount rate on the fair value of guarantee liabilities outstanding as at December 31, 2009 would cause a $2 million decrease in the liability or a $2 million increase in the liability, respectively.