444 Seventh Avenue S.W. Calgary, Alberta T2P 0X8

TransCanada PipeLines Limited st 450 - 1 Street S.W. Calgary, Alberta, Canada T2P 5H1 Tel: 403.920.7184 Fax: 403.920.2347 Email: celine_belanger@trans...
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TransCanada PipeLines Limited st 450 - 1 Street S.W. Calgary, Alberta, Canada T2P 5H1 Tel: 403.920.7184 Fax: 403.920.2347 Email: [email protected]

August 19, 2005 National Energy Board 444 Seventh Avenue S.W. Calgary, Alberta T2P 0X8

Filed Electronically

Attention: Mr. Michel L. Mantha, Secretary Dear Sir: Re:

TransCanada PipeLines Limited (TransCanada) Mainline Elimination of Foreign Exchange Exposure on US Senior Debt Toll Task (TTF) Resolution 18.2005

TransCanada applies to the Board for approval of a change to the timeline previously approved by the Board for the conversion of the existing Mainline US Dollar Senior Debt obligations to Canadian Dollar obligations for toll making purposes. By letter dated May 27, 2005, the Board approved TransCanada’s application dated May 12, 2005 for the conversion, subject to certain conditions, as per TTF Resolution 10.2005. One of the conditions was that, for each debt instrument, the authority to convert the obligations would end the earlier of i) the conversion taking place, ii) a Date Certain of August 31, 2005, or iii) when TransCanada provides notice to the TTF that it can no longer accept the foreign exchange exposure on the US Senior Debt. In order to extend the opportunity to carry out the conversion, TransCanada seeks a change to the Date Certain from August 31, 2005 to December 31, 2005. This change is supported by unopposed TTF Resolution 18.2005, a copy of which is attached. Should the Board require additional information in respect of this application, please contact Wendy Heins at (403) 920-5368. Yours truly,

Céline Bélanger Vice President, Regulatory Services Attachments cc:

Tolls Task Force (on-line notification) Mainline Customers (by fax)

TTF Resolution 18.2005

2004 TOLLS TASK FORCE ISSUE Date Accepted As Issue: July 14, 2005 Date Issue Originated: July 14, 2005 Issue Originated By:

Resolution: 18.2005 Sheet Number: 1 of 2 TransCanada

Individual to Contact: Wendy Heins

Telephone Number: 403.920.5368

ISSUE: Elimination of Foreign Exchange Exposure on US Senior Debt-Extension

RESOLUTION: The Tolls Task Force agrees to extend the opportunity to convert TransCanada Mainline $US Senior Debt obligations to Canadian dollar obligations, for toll making purposes as described in the attached TTF resolution 10.2005, as follows; For each debt instrument, TTF authority to enter into the conversion would end the earlier of i) the conversion taking place, ii) a Date Certain of December 31, 2005 or iii) when TransCanada provides notice to the TTF that it can no longer accept the exposure. All other terms would remain as in TTF resolution 10.2005.

BACKGROUND: Resolution 10.2005 was approved by unopposed resolution at the May 5th, 2005 TTF meeting and later approved by the Natural Energy Board on May 27th, 2005. Resolution 10.2005 enables TransCanada to convert the Mainline debt obligations to Canadian dollars for toll making purposes should certain conditions be met. The resolution set foreign exchange and interest rate trigger points for two debt instruments. If these trigger points are reached, the US dollar obligations would be converted to Canadian dollar obligations for toll making purposes only. The actual debt would remain in place, however, with TransCanada taking on future exposure to foreign exchange risk.

August 8, 2005August 5, 2005

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To date the conditions outlined in Resolution 10.2005 have not yet been met. Hence, TransCanada is proposing to extend the Date Certain of the opportunity to convert from August 31, 2005 to December 31, 2005. Attached for additional details is Resolution 10.2005 Elimination of Foreign Exchange Exposure on US Senior Debt.

VOTING RESULTS The above resolution was approved as an unopposed resolution at the August 3, 2005 TTF meeting in Regina.

August 8, 2005August 5, 2005

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TTF Resolution 10.2005

2004 TOLLS TASK FORCE ISSUE Date Accepted As Issue: March 10, 2005 Date Issue Originated: March 10, 2005 Issue Originated By:

Resolutions: 10.2005 Sheet Number: 1 of 4 TransCanada

Individual to Contact: Wendy Heins

Telephone Number: 403.920.5368

ISSUE: Elimination of Foreign Exchange Exposure on US Senior Debt RESOLUTION: The Tolls Task Force agrees that following TTF resolution the existing TransCanada Mainline $US Senior Debt obligations will be converted to Canadian dollar obligations for toll making purposes as described in the Background section below. The Target FX Rate will be the Historic Exchange Rate for each debt issue, as described below. The Maximum Swap Differential, as described below, will be zero. The Date Certain, as described below, will be August 31, 2005.

BACKGROUND: TransCanada currently has two Mainline related $US Senior debt instruments which mature in approximately 7 and 16 years. The particulars of the instruments are outlined in the table below: Principal $US 200 m 400 m May 12, 2005

Interest (%) Interest$US Historic Exchange Rate 5/8 8 17.25 m 1.2005 7/8 9 39.50 m 1.1554 1 of 4

Issued

Maturing

May 1992 Jan 1991

May 2012 Jan 2021

These obligations were entered into in order to finance Mainline capital additions and/or existing rate base and cannot be redeemed prior to maturity. In addition to the ultimate obligation to repay the instrument in US dollars, annual interest payments are due in US dollars and exchange rate fluctuations create variations in the Cdn equivalent amounts that are ultimately collected through tolls. TransCanada is proposing to convert the Mainline shipper obligations to Canadian dollars should certain conditions be met. The proposal would see the TTF and TransCanada agree to foreign exchange and interest rate trigger points for each instrument. Once an agreement is in place, if the trigger points are reached, the US dollar obligations would be converted to Canadian dollar obligations for toll making purposes only. The actual debt would remain in place, however, with TransCanada taking on future exposure to foreign exchange risk. TransCanada is proposing the conversion because: i)

ii)

it understands, based on past discussions with shippers, that there is a desire amongst shippers to reduce the Mainline’s exposure to foreign exchange risk if this can be done with little or no negative toll impact; and, TransCanada has a significant portfolio of US dollar assets. These US dollar assets create a currency exposure which is hedged with long and short term US dollar liabilities. As a result of the recent GTN acquisition, TransCanada has a higher than normal level of short-term liabilities and is therefore able to assume more long-term US dollar obligations (the Mainline debt) by concurrently closing out an equivalent short-term exposure (see Attachment 1)

TransCanada believes that it is in the long-term interest of all Mainline stakeholders to reduce the Mainline’s foreign debt exposure, if this can be done on a cost effective basis. Importantly, TransCanada would neither gain nor lose from the transaction (with the exception of a sharing of the bid-ask spread described below). TransCanada would simply be replacing a portion of its short-term hedges with long-term hedges. For each piece of debt, TransCanada and the TTF would agree upon a Foreign Exchange (FX) rate at which the conversion would occur (the “Target FX Rate”). TransCanada is proposing the historic book rate. Once an agreement is in place, the conversion would take place on a real-time basis when the spot rate reached the Target FX Rate. The transaction must occur on a real time basis as TransCanada would concurrently unwind an equal amount of 3rd party hedges so as to maintain its overall FX position. The conversion would take place at the spot rate rather than any relevant forward FX rate as this reflects market convention for cross-currency swaps. May 12, 2005

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The conversion would reflect any differences in US and Canadian interest rates at the time of conversion. At any point in time, for any particular term and credit, US and Canadian interest rates are almost certain to be different. These differences ultimately reflect supply and demand. Currently, US interest rates are higher than Canadian rates. Thus, if one converts a fixed US interest rate to a fixed Canadian rate, the Canadian rate will generally be lower. The precise mechanics of how these conversions work are complex, but are a function of a very liquid and transparent marketplace. An example of how the US $200 million note would be converted is found in Attachment 2. First, the US fixed rate is first converted to an equivalent US floating rate. The US floating rate is then converted to a Canadian floating rate. Finally, the Canadian floating rate is converted to a Canadian fixed rate. In the example provided, the net result of the three steps is that the Canadian dollar rate is about 50 basis points lower than the US rate. Conceptually, a borrower of US dollars needs to pay more than a borrower of Canadian dollars because both sides ‘expect’ that the US dollar obligation will be worth less in Canadian dollar terms when it matures. As such, the US dollar lender needs a premium to the Canadian dollar interest rate to compensate for the expectation that the principal will be worth less when it is returned (In fact, FX forward rates are a function of interest rate differentials, not the other way around. It is not the case that US interest rates are higher because the US forward FX rate is lower. Rather, the lower value of US dollars in the forward rate falls out of the interest rate differential). The market price for each step changes constantly. Most market observers expect that US rates that result from these markets will remain above Canadian rates for some time, but that cannot be known with certainty. It is possible that Canadian rates will rise above US rates and the conversion would result in a higher coupon for the Mainline (historically, US rates have usually been below Canadian rates). As such, the TTF and TransCanada need to also agree in advance, for each debt instrument, on the maximum increase (if any) in coupon that the shippers are prepared to accept at the time of conversion (i.e. the number of basis points the shippers are prepared to pay, in Canadian dollar terms, over the historic US dollar coupon on each note). TransCanada is proposing that this “Maximum Swap Differential” be set at zero (i.e. a conversion would only take place if the resulting Canadian coupon was less than or equal to the historic US coupon). Thus, under TransCanada’s proposal, if the spot rate reached C$1.2005=US$1.00 between 7 a.m. and Noon, Calgary time, on any particular day, TC would automatically convert the US $200 million piece of debt to approximately C $240 May 12, 2005

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million so long as the Canadian dollar interest rate that resulted on that C $240 million was less than or equal to 85/8 %. The conversion would be done at the market interest rates prevailing when the currency reached the Target FX Rate. Mid-market rates would be used (i.e. halfway between the bid and ask prices) which splits the benefit of not using a bank equally between shippers and TransCanada. TransCanada would provide the back-up market data to verify the transaction to a TTF designate, but would ask that such designate be well versed in the workings of interest rate and foreign exchange markets. TransCanada suggests that its treasury personnel discuss the transaction with the TTF designate in advance of any final TTF authority so that both parties can agree on the specific mechanisms for determining the market rate. If both conditions to convert had already been met at the time of TTF authorization (e.g. for the US $200 million piece the spot FX rate was below 1.2005 and the actual swap differential was less than zero), then TransCanada would effect the conversion at Noon, Calgary time on the following business day (assuming conditions do not change) and any resultant foreign exchange gain on the debt principal would be reflected in subsequent tolls. Once a conversion has taken place, the debt instrument would be treated for toll making purposes as a Canadian dollar instrument and shippers would no longer be exposed to the foreign exchange risk associated with that piece of debt. For each debt instrument, TTF authority to enter into the conversion would end the earlier of i) the conversion taking place, ii) a Date Certain (TransCanada suggests August 31, 2005) or iii) when TransCanada provides notice to the TTF that it can no longer accept the exposure. TransCanada will also inform the TTF when any of the three conditions above have been met. TransCanada must reserve the right to withdraw from the agreement to convert at any time because future unanticipated changes in its net US asset position may mean that it no longer has the capacity to accept the Mainline US debt exposure.

VOTING RESULTS: The above resolution was approved by unopposed resolution at the May 5th, 2005 TTF meeting.

May 12, 2005

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Attachment 1 to TTF Resolution 10.2005 Debt Payment Illustration

Attachment 1 Current

Proposed

US Operations

Mainline US Debt

Non-Reg C$

US$

C$

Mainline US$ US Debt

Banks

1

May 12, 2005

US Operations

Non-Reg

Attachment 2 to TTF Resolution 10.2005 Cross Currency Example

Cross Currency Swap Pricing

Attachment 2

7yr Receive Fix US / Pay Fix CAD

For indicative purposes only

March 23/05

Market Data (based on Reuters feeds) 7yr CAD Swap 7yr USD Swap Basis Swap (BA's +)

Bid 4.430% 4.905% 0.075%

Offer 4.460% 4.935% 0.115%

Mid 4.445% 4.920% 0.095%

Assumption: - Cross Currency swap priced off straight 7yr term (slight adjustment would be necessary as bond is slightly greater than 7yrs) - All swap pricing based off of Mid-Market - CAD/USD FX rate of 1.20 (historic rate on debt)

Bond Holders Pay Fix USD ( $200M maturing May 15/2012) 8.625% Cross Currency Steps: (1)

Receive Fix USD (vanilla swap)

Receive Fix USD 8.625% Mainline LIBOR +

TransCanada

Notional USD Amount $200 M

TransCanada

Principle USD Amount $200 M

3.625%

Pay Floating USD + spread *

(2)

Cross Currency Swap (creating synthetic CAD Liability / USD Asset) Receive Floating USD + spread LIBOR +

3.625%

Mainline BA's + 3.610% + 0.095% Pay Floating CAD + spread * * + basis

(3)

Principle CAD Amount $240 M

Pay Fix CAD (vanilla swap) Receive Floating CAD + spread + basis BA's +

3.610% + 0.095%

Mainline

TransCanada 4.445% +

3.610% +

Notional CAD Amount $240 M

0.095%

Pay Fix CAD + spread + basis

End Result Bond Holders Pay Fix USD ($200M) 8.625% 8.625% USD

Principle Amounts $200 M USD

Mainline

TransCanada $240 M CAD 8.150% CAD

*

USD Vanilla Swap spread adjustment 8.625% 4.920% 3.705% -0.080% 3.625%

**

receive swap rate where the vanilla swap is actually trading diff day count adjustment (pay Libor is based on Act/360 day count where receive fix US rate is based on 30/360 day count basis)

Cross Currency Swap spread adjustment 3.625% spread over Libor on receive side of cross currency -0.015% adjustment associated with PV of a basis point diff between CAD and USD (takes into account differing yield curves and day counts) 3.610%

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