TransCanada Trust -- summary under Sub Trust Notes

Overview

An Ontario units trust (the Trust) controlled by TCPL, which has already issued U.S.$1.95B in notes, is proposing to issue a further U.S.$1.2B, with the proceeds to be on-lent under unsecured subordinated notes to TCPL at roughly a 25 b.p spread. This debt is expected to qualify for Basket ''C'' equity treatment by Moody's, and for Intermediate Equity Credit treatment by S&P. Somewhat equity-like features include the term of around 60 years, automatic conversion into preferred shares (with the same redemption amount) on specified insolvency events and the right of TCPL to satisfy interest payments in preferred shares. The Trust notes are expected to be treated as debt for Code purposes. TCPL has the right to cause the Trust notes to be redeemed in the event that it receives an option that as a result of a tax law change, the interest has ceased to be deductible for Code purposes.

TCPL

TransCanada Corporation (''TCC'') is currently the sole shareholder of TCPL. TCPL's indebtedness as of December 31, 2016 was approximately $33.6 billion, all of which would be senior in right of payment to TCPL's guarantee of the Trust Notes — Series 2017-A and to the TCPL Sub Notes.

The Trust/structure

The Trust is an Ontario unit trust established by Valiant Trust Company pursuant to a declaration of trust dated as of September 16, 2014. The Trust proposes to issue and sell U.S.$1,500,000,000 principal amount of unsecured, subordinated Trust Notes — Series 2017-A due March 15, 2077. The Trust's objective is to acquire and hold assets comprised primarily of the TCPL Sub Notes issued by TCPL, in order to fund payments under the Trust Notes. The offering will provide TCPL with a cost-effective means of raising capital which qualifies for Basket ''C'' equity treatment by Moody's and for ''Intermediate Equity Credit'' treatment by S&P. The Trust has also issued its voting trust units to TCPL, or subsidiaries of TCPL, U.S.$750,000,000 principal amount of unsecured, subordinated Trust Notes Series — 2015-A due May 20, 2075 and U.S.$1,200,000,000 principal amount of unsecured, subordinated Trust Notes Series — Series 2016-A due August 15, 2076.

Trust Note interest

The interest rate on the Trust Notes — Series 2017-A will initially be 5.30% per annum, payable in arrears. Starting on March 15, 2027, and on every quarterly date thereafter until March 15, 2077 (each such date, a ''Series 2017-A Interest Reset Date''), the interest rate will be reset as follows: (i) starting on March 15, 2027, on every Series 2017-A Interest Reset Date, until March 15, 2047, the interest rate on the Trust Notes — Series 2017-A will be reset at the three month LIBOR plus 3.208%; (ii) starting on March 15, 2047 – at LIBOR plus 3.958%.

Sub Notes interest

At a spread to the above rates, i.e., 5.55%, LIBOR plus 3.458%, and LIBOR plus 4.208%.

Maturity Date

March 15, 2077 (for Sub Notes as well).

Dividend stopper

TCC and TCPL will covenant (under the ''Dividend Stopper Undertaking'') that, in the event of a Deferral Event in respect of the Trust Notes — Series 2017-A, TCPL and TCC will not declare dividends on their preferred shares or, if none are outstanding, their common shares (collectively, “Dividend Restricted Shares'') from the relevant Deferral Date (as defined herein) until no TCPL Deferral Preferred Shares are outstanding.

Deferral Event

(i) The failure of TCPL, other than during a Dividend Restricted Period (as described above), to declare cash dividends on TCPL Preferred Shares, if any, consistent with TCPL's dividend practice in effect from time to time with respect to TCPL Preferred Shares; or (ii) the election by TCPL, at its sole option, prior to the commencement of the Series 2017-A Interest Period ending on the day preceding the relevant Series 2017-A Interest Payment Date.

Conversion of interest to Preferred Shares following Deferral Date

On each Series 2017-A Interest Payment Date in respect of which a Deferral Event has occurred in respect of the Trust Notes — Series 2017-A (each a ''Deferral Date''), interest will be applied to acquire a new series of ''TCPL Deferral Preferred Shares''.

Trust redemption right

On or after March 15, 2027, the Trust may, at its option or at the direction of TCPL, redeem the Trust Notes — Series 2017-A in whole or in part at par, together with accrued and unpaid interest.

TCPL Deferral Preferred

The TCPL Deferral Preferred Shares will carry the right to receive fixed quarterly cumulative preferential cash dividends at the Perpetual Preferred Share Rate

Perpetual Preferred Share Rate

Equal to the interest rate per annum applicable to the Trust Notes — Series 2017-A, from time to time: (i) in the case of TCPL Exchange Preferred Shares, at the Exchange Time; or (ii) in the case of TCPL Deferral Preferred Shares, on the date of issuance of each series of TCPL Deferral Preferred Shares.

Automatic Exchange on insolvency event

The Trust Notes — Series 2017-A, including accrued and unpaid interest thereon, will be exchanged automatically (the ''Automatic Exchange'') into TCPL Exchange Preferred Shares upon the occurrence of an "Automatic Exchange Event" (defined by reference to TCPL becoming insolvent or bankrupt or resolving to wind-up or being ordered to be wound-up or liquidated) with one TCPL Exchange Preferred Share being received for each U.S.$1,000 principal amount of Trust Notes — Series 2017-A, and with accrued and unpaid interest also being converted. Upon an Automatic Exchange, TCPL reserves the right not to issue TCPL Exchange Preferred Shares to an Ineligible Person. In such circumstance, the Exchange Trustee will hold all TCPL Exchange Preferred Shares, which would otherwise be delivered to Ineligible Persons, as agent for Ineligible Persons and the Exchange Trustee will attempt to sell such TCPL Exchange Preferred Shares (to parties other than TCPL and its affiliates) on behalf of such Ineligible Persons.

TCPL Exchange Preferred

The TCPL Exchange Preferred Shares will carry the right to receive fixed quarterly cumulative preferential cash dividends at the Perpetual Preferred Share Rate.

Redemption on Tax or Rating Event

Upon the occurrence of a Tax Event or a Rating Event, TCPL may cause the Trust to redeem all (but not less than all) of the Trust Notes —Series 2017-A at a redemption price equal to par (in the case of a Tax Event) and par plus $20 (2%) (in the case of a Rating Event) plus accrued and unpaid interest to the date fixed for redemption.

Rating Event

Confirmation from S&P or Moody's that due to any change in hybrid capital methodology, the application of a different hybrid capital methodology (due to any reason other than solely as a result of a decrease in the credit rating previously assigned to the Trust Notes) the Trust Notes — Series 2017-A will no longer be eligible for the same or a higher amount of ''equity credit.”

Tax Event

Re opinion of independent counsel that any change in tax law (including the official administrative in interpretation) would limit an interest deduction for U.S. tax purposes so as to result in the Trust or TCPL/TCC being subject to significant additional taxes or the interest being subject to significant withholding.

Guarantee by TCPL

TCPL will guarantee, on a subordinated basis, the Trust Notes — Series 2017-A and all the Trust's obligations to the holders of the Trust Notes — Series 2017-A pursuant to the Share Exchange Agreement and the Assignment and Set-Off Agreement.

Subordination

The Trust's obligations under the Trust Notes — Series 2017-A (and TCPL's obligations under its guarantee of the Trust Notes — Series 2017-A and TCPL's obligations under the TCPL Sub Notes) are subordinated in right of payment to all of the Trust's (TCPL's) current and future senior indebtedness (including TCPL's outstanding senior notes and other senior indebtedness), other than non-recourse obligations or any other obligations specifically designated as being subordinate in right of payment to such senior indebtedness.

Canadian tax consequences

No interest withholding

Interest, principal and premium, if any, paid or credited, or deemed to be paid or credited to a Non-Resident Holder on Trust Notes — Series 2017-A, including any interest that is applied on behalf of a Non-Resident Holder to acquire TCPL Deferral Preferred Shares upon a Deferral Event and any interest that is paid to the Non-Resident Holder by the issuance of rights to acquire TCPL Exchange Preferred Shares upon an Automatic Exchange, will be exempt from Canadian non-resident withholding tax.

Automatic Exchange/Deferral Event rights

The value to Non-Resident Holders of the rights granted to Non-Resident Holders on the Closing Date under each of the Automatic Exchange and the Deferral Event Subscription is nominal.

Automatic Exchange

An exchange of Trust Notes — Series 2017-A by a Non-Resident Holder for rights to acquire TCPL Exchange Preferred Shares pursuant to an Automatic Exchange will result in a disposition of such Trust Notes — Series 2017-A for purposes of the Tax Act for proceeds equal to the fair market value of the TCPL Exchange Preferred Shares which the Non-Resident Holder has the right to acquire, not including any amount considered to be interest. A Non-Resident Holder will not generally be subject to tax under the Tax Act in respect of such disposition or the exercise of such rights to acquire TCPL Exchange Preferred Shares.

U.S. tax consequences

Notes as debt

While the Company believes that the Notes should be treated as debt and intends to take that position, there is no certainty that the IRS or a court will agree with that position….

No OID/deferral prospect remote

Under applicable Treasury regulations, the possibility that interest on the Trust Notes — Series 2017-A might be deferred could result in the Trust Notes — Series 2017-A being treated as issued with original issue discount (''OID''), notwithstanding that the Trust Notes — Series 2017-A are issued at par, unless the likelihood of such deferral is remote. TCPLbelieves that the likelihood of interest deferral on the Trust Notes — Series 2017-A is remote within the meaning of the Treasury regulations and therefore that the possibility of such deferral will not result in the Trust Notes — Series 2017-A being treated as issued with OID.

Automatic exchange

The exchange of Trust Notes — Series 2017-A for TCPL Exchange Shares pursuant to the Automatic Exchange should be treated as a tax free recapitalization for U.S. federal income tax purposes. Any TCPL Exchange Shares will be treated as first being received for the accrued but unpaid interest and the remainder will be treated as received in exchange for the Trust Notes — Series 2017-A.