MANAGEMENT ’ S DISCUSSION AND ANALYSIS RISK MANAGEMENT TransCanada manages market risk exposures in accordance with its corporate market risk policy and position limits. The company’s primary market risks result from volatility in commodity prices, interest rates and foreign currency exchange rates. The company is also exposed to risk of loss due to the failure of counterparties to meet contractual financial obligations. Senior management reviews these exposures and reports to the Audit and Risk Management Committee of the Board of Directors regularly. 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 instru- ments. Market risks are quantified using value-at-risk methodology and are reviewed weekly by senior management. The net asset mark-to-market position of power energy trading contracts at December 31, 2001 was $333 million, comprised of $314 million related to the company’s initial payments for the Sundance A and B PPAs and supported by updated discounted cash flow analysis, and $19 million of other trading activities. The net asset mark-to-market posi- tion for the other trading activities was determined using prices actively quoted and substantially all of the positions mature by December 31, 2002. The net asset mark-to-market position increased by $84 million in 2001, which includes the Sundance B PPA payment of $110 million. TransCanada monitors the financial market risk exposures relating to its investments in foreign currency denom- inated net assets, its regulated and non-regulated long-term debt portfolios and its 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. The company’s financial risk management practices are described under the Foreign Exchange and Interest Rate Management Activity in Note 12 to the Consolidated Financial Statements. Counterparty risk entails a counterparty’s ability to meet its obligations in a timely manner as outlined under the terms and conditions of its contracts. Counterparty risk is mitigated by conducting financial assessments to estab- lish 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 described under Credit Risk in Note 12 to the Consolidated Financial Statements. Power Marketing Price Risk Management Financial Risk Management Counterparty Risk Management 35 2001 ANNUAL REPORT 