NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 12 – PRICE RISK MANAGEMENT AND FINANCIAL INSTRUMENTS Carrying Values of Derivatives Fair Values of Financial Instruments  Credit Risk  FOREIGN INVESTMENTS Notional Amounts At December 31, 2001 and 2000, the Company had foreign currency denominated assets and liabilities which create an exposure to changes in exchange rates. The Company uses foreign currency derivatives to hedge this exposure on an after-tax basis. The cross-currency swaps have a floating interest rate which the Company partially hedges by entering into interest rate swaps and forward rate agreements. The fair values shown in the table below for foreign exchange risk are offset by translation gains or losses on the net assets and are recorded in the foreign exchange adjustment in Shareholders’ Equity. Notional principal amounts are not recorded in the financial statements because these amounts are not exchanged by the Company and its counterparties and are not a measure of the Company’s exposure. Notional amounts are used only as the basis for calculating payments for certain derivatives. Credit risk results from the possibility that a counterparty to a derivative in which the Company has an unrealized gain fails to perform accord- ing to the terms of the contract. Credit exposure is minimized by dealing with creditworthy counterparties in accordance with established credit approval practices. At December 31, 2001, for foreign currency and interest rate derivatives, total credit risk and the largest credit expo- sure to a single counterparty are $398 million and $107 million, respectively. The fair values of foreign exchange and interest rate derivatives have been estimated using year-end market rates. These fair values approx- imate the amount that the Company would receive or pay if the instruments were closed out at these dates. Cash and short-term investments and notes payable are valued at their carrying amounts due to the short period to maturity. The fair values of long-term debt, non-recourse long-term debt of joint ventures and junior subordinated debentures are determined using market prices for the same or similar issues. The carrying amounts of derivatives, which hedge the price risk of the foreign currency denominated assets and liabilities and represent the net unrealized gains or losses on the derivatives, partially offset the foreign exchange adjustment in Shareholders’ Equity. Carrying amounts for interest rate swaps represent the net accrued interest from the last payment date to the reporting date. Foreign currency transactions hedged by foreign exchange contracts are recorded at the contract rate. The carrying amounts shown in the tables that follow are recorded in the Consolidated Balance Sheet. The Company issues short and long-term debt including amounts in foreign currencies, purchases and sells power energy commodities and invests in foreign operations. These activities result in exposures to interest rates, energy prices and foreign currency exchange rates. The Company uses derivatives to manage the price or cash flow risk that results from these activities. The principal amounts of cross-currency swaps are US$150 million (2000 - US$150 million). Principal amounts of forward foreign exchange contracts are US$375 million (2000 – US$35 million). RECONCILIATION OF FOREIGN EXCHANGE ADJUSTMENT December 31  (millions of dollars) 2001 2000 Balance at beginning of year 13 18 Translation gains/(losses) on foreign currency denominated net assets 11 (1) Foreign exchange losses on derivatives, and other (11) (4) 13 13 Liability at December 31  (millions of dollars) 2001 2000 Carrying Fair Carrying Fair Amount Value Amount Value Foreign Exchange Risk Cross-currency swaps U.S. Dollars 5 5 18 18 Forward foreign exchange contracts U.S. Dollars 6 6 1 1 TRANSCANADA 56