TransCanada Corporation (TSX:TRP) (NYSE:TRP) (TransCanada or the
Company) today announced comparable earnings for third quarter 2012
of $349 million or $0.50 per share. Net income attributable to
common shares for third quarter 2012 was $369 million or $0.52 per
share. TransCanada's Board of Directors also declared a quarterly
dividend of $0.44 per common share for the quarter ending December
31, 2012, equivalent to $1.76 per common share on an annualized
basis.
"TransCanada's diverse, high-quality energy infrastructure
assets performed well in the third quarter," said Russ Girling,
TransCanada's president and chief executive officer. "While the
majority of our assets continued to generate stable and predictable
earnings and cash flow, plant outages at Bruce Power and Sundance A
along with a lower contribution from certain natural gas pipelines
did adversely affect our financial results. Looking forward,
TransCanada is well positioned to grow earnings, cash flow and
dividends as we complete our current capital program, benefit from
a recovery in natural gas and power prices and secure attractive
new growth opportunities."
Over the next three years, TransCanada expects to complete $13
billion of projects that are currently in advanced stages of
development. They include the Bruce Power Unit 1 and 2 Restart
Project, the Gulf Coast Project, Keystone XL, the Tamazunchale
extension, Canadian Solar and the ongoing expansion of the Alberta
System.
Since the beginning of 2012, TransCanada has also commercially
secured an additional $7 billion of long-life, contracted energy
infrastructure opportunities that are expected to be placed into
service in 2016 and beyond. They include the Coastal GasLink
Pipeline Project that would move natural gas to Canada's West Coast
for liquefaction and shipment to Asian markets, the Northern
Courier and Grand Rapids Oil Pipeline Projects in Northern Alberta
and the 900 megawatt Napanee Generating Station in Eastern Ontario.
TransCanada expects each of these projects to generate significant,
sustained earnings and cash flow and deliver superior returns to
its shareholders.
Highlights
(All financial figures are unaudited and in Canadian dollars
unless noted otherwise)
-- Third quarter financial results
-- Comparable earnings of $349 million or $0.50 per share
-- Net income attributable to common shares of $369 million or $0.52
per share
-- Comparable earnings before interest, taxes, depreciation and
amortization (EBITDA) of $1.1 billion
-- Funds generated from operations of $866 million
-- Declared a quarterly dividend of $0.44 per common share for the quarter
ending December 31
-- Bruce Power completed the refurbishment of Units 1 and 2 and placed
Unit 1 into commercial service on October 22. Unit 2 is expected to
commence commercial operations shortly. TransCanada's share of the net
capital cost is approximately $2.4 billion.
-- Signed a memorandum of understanding with the Ontario Power Authority
(OPA) to develop a new 900 megawatt (MW) natural gas-fired power plant
in Eastern Ontario
-- Continued to advance several growth initiatives in the Oil Pipelines
business
-- Commenced construction on the US$2.3 billion Gulf Coast Project that
will transport crude oil from Cushing, Oklahoma to the U.S. Gulf
Coast
-- Submitted an alternative route in Nebraska for the US$5.3 billion
Keystone XL Project
-- Selected to develop the proposed $660 million Northern Courier
Pipeline in Northern Alberta
-- Entered into binding agreements to jointly develop the proposed $3
billion Grand Rapids Pipeline project that includes both a bitumen
and a diluent line
Comparable earnings for third quarter 2012 were $349 million or
$0.50 per share compared to $416 million or $0.59 per share for the
same period in 2011. Higher earnings from Keystone and recently
commissioned assets were more than offset by lower contributions
from Bruce Power, Western Power and certain natural gas pipelines
including the Canadian Mainline, ANR and Great Lakes.
Net income attributable to common shares for third quarter 2012
was $369 million or $0.52 per share compared to $386 million or
$0.55 per share in third quarter 2011.
Notable recent developments in Oil Pipelines, Natural Gas
Pipelines, Energy and Corporate include:
Oil Pipelines:
-- Gulf Coast Project: In August 2012, TransCanada started construction on
the US$2.3 billion Gulf Coast Project. The 36-inch pipeline, which will
extend from Cushing, Oklahoma to the U.S. Gulf Coast, is expected to
have an initial capacity of up to 700,000 barrels per day (bbl/d) with
an ultimate capacity of 830,000 bbl/d. Included in the US$2.3 billion
cost is US$300 million for the 76 kilometre (km) (47-mile) Houston
Lateral pipeline that will transport crude oil to Houston area
refineries. TransCanada expects the Gulf Coast Project to be in service
in late 2013. As of September 30, 2012, approximately US$900 million has
been invested in the project.
-- Keystone XL: In May 2012, TransCanada filed a Presidential Permit
application (cross border permit) with the U.S. Department of State
(DOS) for the Keystone XL Pipeline which will extend from the
U.S./Canada border in Montana to Steele City, Nebraska. TransCanada will
supplement the application with an alternative route in Nebraska as soon
as that route is selected.
The Company continues to work collaboratively with the Nebraska
Department of Environmental Quality (NDEQ) to finalize an alternative
route that avoids the Nebraska Sandhills. In September 2012, the Company
submitted a Supplemental Environmental Report to the NDEQ for the
preferred alternative route. The NDEQ has indicated that it will
complete its review by the end of 2012. TransCanada has also provided an
environmental report to the DOS which is required as part of the DOS
review of the Company's Presidential Permit application.
Subject to regulatory approvals, TransCanada expects the Keystone XL
Pipeline to be in service in late 2014 or early 2015. The approximate
cost of the 36-inch, 830,000 bbl/d line is US$5.3 billion. As of
September 30, 2012, US$1.6 billion has been invested in this project.
-- Northern Courier Pipeline: In August 2012, TransCanada announced that it
had been selected by Fort Hills Energy Limited Partnership (Fort Hills)
to design, build, own and operate the proposed Northern Courier Pipeline
project. The project, with an estimated capital cost of $660 million, is
a 90 km (54-mile) pipeline system that will transport bitumen and
diluent between the Fort Hills mine site and the Voyageur Upgrader
located north of Fort McMurray, Alberta. The pipeline is fully
subscribed under long-term contract to service the Fort Hills mine,
which is jointly owned by Suncor Energy Inc., Total E&P Canada Ltd. and
Teck Resources Limited. Northern Courier is conditional on and subject
to the Fort Hills project receiving sanction by its co-owners and
obtaining regulatory approval. TransCanada expects to file its initial
regulatory application in early 2013.
-- Grand Rapids: In October, TransCanada announced that it has entered
into binding agreements with Phoenix Energy Holdings Limited (Phoenix)
to develop the Grand Rapids Pipeline Project in Northern Alberta.
TransCanada and Phoenix will each own 50 per cent of the proposed $3
billion pipeline project that includes both a crude oil and a diluent
line to transport volumes approximately 500 km (300-miles) between the
producing area northwest of Fort McMurray and the Edmonton / Heartland
region. The Grand Rapids Pipeline system is expected to be in service by
early 2017, subject to regulatory approvals, and will have the capacity
to move up to 900,000 bbl/d of crude oil and 330,000 bbl/d of diluent.
TransCanada will operate the system and Phoenix has entered a long-term
commitment to ship crude oil and diluent on the system.
-- Canadian Mainline Conversion: TransCanada has determined a conversion of
a portion of the Canadian Mainline natural gas pipeline system to crude
oil service is both technically and economically feasible. Through a
combination of converted natural gas pipeline and new construction, the
proposed pipeline would deliver crude oil between Hardisty, Alberta and
markets in Eastern Canada. The Company has begun soliciting input from
stakeholders and prospective shippers to determine market acceptance of
the proposed project.
Natural Gas Pipelines:
-- Alberta System: During the first nine months of 2012, TransCanada
continued to expand its Alberta System by completing and placing in
service twelve separate pipeline projects at a total cost of
approximately $680 million. This included the completion of the
approximate $250 million Horn River project in May 2012 that extended
the Alberta System into the Horn River shale play in British Columbia.
The National Energy Board (NEB) has approved additional pipeline
expansions with aggregate costs of approximately $630 million, including
the $162 million Leismer-Kettle River Crossover project, which is
intended to provide increased capacity to meet demand in northeast
Alberta. Approximately $340 million of projects are still awaiting NEB
approval, including the Komie North project which would extend the
Alberta System further into the Horn River area.
-- Canadian Mainline: In 2011, TransCanada filed a comprehensive
application with the NEB to change the business structure and the terms
and conditions of service for the Canadian Mainline, and to set tolls
for 2012 and 2013. The hearing, with respect to this application, began
on June 4, 2012 with final arguments to be heard from TransCanada and
the intervenors beginning November 13, 2012. A final decision from the
NEB is not expected before late first quarter 2013.
In May 2012, TransCanada received NEB approval to construct new pipeline
infrastructure to provide southern Ontario with additional natural gas
supply from the Marcellus shale basin. Construction continues on the new
pipeline facilities and it is expected that the Marcellus shale supply
will begin moving to market on November 1, 2012.
-- Coastal GasLink: TransCanada announced in second quarter it was selected
by Shell Canada Limited (Shell) and its partners to design, build, own
and operate the proposed Coastal GasLink Pipeline Project, an estimated
$4 billion pipeline that will transport natural gas from the Montney
gas-producing region near Dawson Creek, British Columbia (B.C.) to the
recently announced LNG Canada liquefied natural gas export facility
near Kitimat, B.C. The LNG Canada project is a joint venture led by
Shell, with partners Korea Gas Corporation, Mitsubishi Corporation and
PetroChina Company Limited. The approximate 700 km (420-mile)
pipeline is expected to have an initial capacity of more than 1.7
billion cubic feet per day and be placed in service toward the end of
the decade. A proposed contractual extension of the Alberta System
using capacity on the Coastal GasLink pipeline, to a point near
Vanderhoof, B.C., will allow TransCanada to also offer gas transmission
service to interconnecting natural gas pipelines serving the West
Coast. TransCanada expects to elicit interest in and commitments for
such service through an open season process in early 2013 subject to
the overall project schedule.
Energy:
-- Bruce Power: In October 2012, Bruce Power completed the refurbishment
of Unit 1 and returned this unit to service on October 22, 2012. Bruce
Power also synchronized Unit 2 to Ontario's electrical grid on October
16, 2012 and commercial operations for this unit are expected to
commence shortly. Units 1 and 2 are expected to produce clean and
reliable power for the province of Ontario until at least 2037.
Following the return to service of both Units 1 and 2, Bruce Power will
be capable of producing 6,200 MW of emission-free power.
TransCanada's share of the total net capital cost for the refurbishment
project is approximately $2.4 billion.
In August 2012, Bruce Power continued to invest in its strategy to
maximize the lives of its reactors by commencing an expanded outage
investment program on Unit 4. The outage, expected to conclude in late
fourth quarter 2012, will extend the operating life of Unit 4 to at
least 2021, and align it with Unit 3. In June 2012, Bruce Power returned
Unit 3 to service after completing the seven month West Shift Plus life
extension outage.
-- Ravenswood: In 2011, TransCanada and other parties jointly filed two
formal complaints with the Federal Energy Regulatory Commission (FERC)
regarding the manner in which the New York Independent System Operator
(NYISO) has applied pricing rules for two new power plants that have
recently begun service in the New York Zone J market. In June 2012, the
FERC addressed the first complaint and indicated it will take steps to
increase transparency and accountability with regard to future
Mitigation Exemption Test (MET) decisions which determine whether a new
facility is exempt from offering its capacity at a floor price.
In September 2012, the FERC granted an order on the second complaint.
The FERC directed the NYISO to retest the two new facilities, making
changes to several parameters that form the basis of the MET
calculations. Based on the changes the FERC has ordered, the
recalculation could result in one or both entrants having to offer
their capacity at a floor price which TransCanada anticipates will
result in higher capacity auction prices in the future. The order is
prospective and will not impact capacity prices for prior periods.
-- Sundance A: In July 2012, a decision was received relating to the
binding arbitration hearing to address the Sundance A Power Purchase
Arrangement (PPA) force majeure and economic destruction claims. The
arbitration panel determined the PPA should not be terminated and
ordered TransAlta Corporation (TransAlta) to rebuild Units 1 and 2. The
panel also limited TransAlta's force majeure claim from November 20,
2011 until such time the units can reasonably be returned to service.
According to the terms of the arbitration decision, TransAlta has an
obligation under the PPA to exercise all reasonable efforts to mitigate
or limit the effects of the force majeure. TransAlta announced that it
expects the units to be returned to service in the fall of 2013. Until
TransAlta returns the Sundance A units to service, TransCanada will not
realize the generation or related revenues it would otherwise be
entitled to under the PPA but will be relieved of the associated
capacity payments.
-- Napanee Generating Station: In September 2012, TransCanada, the
Government of Ontario, the OPA and Ontario Power Generation announced
that two Memorandums of Understanding (MOU) were executed authorizing
TransCanada to develop, construct, own and operate a new 900 MW facility
at Ontario Power Generation's Lennox site in Eastern Ontario in the town
of Greater Napanee. The Napanee Generating Station would act as a
replacement facility for one that was planned and subsequently cancelled
in the community of Oakville. Under the terms of the MOUs, TransCanada
will be reimbursed for approximately $250 million of verifiable costs,
primarily for natural gas turbines at Oakville which will be deployed
at Napanee. The Company will further invest approximately $1.0 billion
in the replacement Napanee facility. Definitive contracts are expected
to be executed by mid-December and include a 20-year Clean Energy Supply
contract.
-- Cartier Wind: The 111 MW second phase of Gros-Morne is expected to be
operational in November 2012. This will complete construction of the 590
MW Cartier Wind project in Quebec. All of the power produced by Cartier
Wind is sold under 20-year PPAs to Hydro-Quebec.
Corporate:
-- The Board of Directors of TransCanada declared a quarterly dividend of
$0.44 per share for the quarter ending December 31, 2012 on
TransCanada's outstanding common shares. The quarterly amount is
equivalent to $1.76 per common share on an annual basis.
-- In August 2012, TransCanada issued US$1.0 billion of senior notes
maturing on August 1, 2022 and bearing interest at an annual rate of 2.5
per cent. The net proceeds of the offering were used for general
corporate purposes and to reduce short-term indebtedness.
-- As previously disclosed, TransCanada adopted U.S. generally accepted
accounting principles (U.S. GAAP) effective January 1, 2012.
Accordingly, the 2012 financial information, along with comparative
financial information for 2011, has been prepared in accordance with
U.S. GAAP.
Teleconference - Audio and Slide Presentation:
TransCanada will hold a teleconference and webcast on Tuesday,
October 30, 2012 to discuss its third quarter 2012 financial
results. Russ Girling, TransCanada president and chief executive
officer and Don Marchand, executive vice-president and chief
financial officer, along with other members of the TransCanada
executive leadership team, will discuss the financial results and
Company developments at 9:00 a.m. (MDT) / 11:00 a.m. (EDT).
Analysts, members of the media and other interested parties are
invited to participate by calling 866.226.1793 or 416.340.2218
(Toronto area). Please dial in 10 minutes prior to the start of the
call. No pass code is required. A live webcast of the
teleconference will be available at www.transcanada.com.
A replay of the teleconference will be available two hours after
the conclusion of the call until midnight (EDT) November 6, 2012.
Please call 905.694.9451 or 800.408.3053 (North America only) and
enter pass code 8130635.
The unaudited interim Consolidated Financial Statements and
Management's Discussion and Analysis (MD&A) are available on
SEDAR at www.sedar.com, with the U.S. Securities and Exchange
Commission on EDGAR at www.sec.gov/info/edgar.shtml and on the
TransCanada website at www.transcanada.com.
With more than 60 years' experience, TransCanada is a leader in
the responsible development and reliable operation of North
American energy infrastructure, including natural gas and oil
pipelines, power generation and gas storage facilities. TransCanada
operates a network of natural gas pipelines that extends more than
68,500 kilometres (42,500 miles), tapping into virtually all major
gas supply basins in North America. TransCanada is one of the
continent's largest providers of gas storage and related services
with approximately 380-billion cubic feet of storage capacity. A
growing independent power producer, TransCanada owns or has
interests in over 10,900 megawatts of power generation in Canada
and the United States. TransCanada is developing one of North
America's largest oil delivery systems. TransCanada's common shares
trade on the Toronto and New York stock exchanges under the symbol
TRP. For more information visit: www.transcanada.com/ or check us
out on Twitter @TransCanada.
Forward Looking Information
This news release contains certain information that is
forward-looking and is subject to important risks and uncertainties
(such statements are usually accompanied by words such as
"anticipate", "expect", "would", "believe", "may", "will", "plan",
"intend" or other similar words). Forward-looking statements in
this document are intended to provide TransCanada security holders
and potential investors with information regarding TransCanada and
its subsidiaries, including management's assessment of
TransCanada's and its subsidiaries' future financial and
operational plans and outlook. All forward-looking statements
reflect TransCanada's beliefs and assumptions based on information
available at the time the statements were made and as such are not
guarantees of future performance. Readers are cautioned not to
place undue reliance on this forward-looking information, which is
given as of the date it is expressed in this news release, and not
to use future-oriented information or financial outlooks for
anything other than their intended purpose. TransCanada undertakes
no obligation to update or revise any forward-looking information
except as required by law. For additional information on the
assumptions made, and the risks and uncertainties which could cause
actual results to differ from the anticipated results, refer to
TransCanada's MD&A filed February 15, 2012 under TransCanada's
profile on SEDAR at www.sedar.com and other reports filed by
TransCanada with Canadian securities regulators and with the U.S.
Securities and Exchange Commission.
Non-GAAP Measures
This news release contains references to non-GAAP measures that
do not have any standardized meaning as prescribed by U.S. GAAP and
may therefore not be comparable to similar measures used by other
companies. These non-GAAP measures are calculated on a consistent
basis from period to period and are adjusted for specific items in
each period, as applicable. For more information on non-GAAP
measures, refer to TransCanada's Quarterly Report to Shareholders
dated October 29, 2012.
Third Quarter 2012 Financial Highlights
Operating Results(1)
Three months ended Nine months ended
(unaudited) September 30 September 30
(millions of dollars) 2012 2011 2012 2011
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Revenues 2,126 2,043 5,918 5,824
Comparable EBITDA(2) 1,083 1,188 3,193 3,424
Net Income Attributable to Common
Shares 369 386 993 1,150
Comparable Earnings(2) 349 416 1,012 1,194
Cash Flows
Funds generated from operations(2) 866 928 2,466 2,614
Decrease in operating working
capital 235 80 80 145
----------------------------------------
Net cash provided by operations 1,101 1,008 2,546 2,759
----------------------------------------
----------------------------------------
Capital Expenditures 694 505 1,555 1,593
----------------------------------------
----------------------------------------
Common Share Statistics
Three months ended Nine months ended
September 30 September 30
(unaudited) 2012 2011 2012 2011
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net Income per Common Share - Basic $0.52 $0.55 $1.41 $1.64
Comparable Earnings per Common
Share(2) $0.50 $0.59 $1.44 $1.70
Dividends Declared per Common Share $0.44 $0.42 $1.32 $1.26
Basic Common Shares Outstanding
(millions)
Average for the period 705 703 704 701
End of period 705 703 705 703
----------------------------------------
----------------------------------------
(1) Certain comparative figures have been reclassified to conform with the
financial statement presentation adopted for the current period.
(2) Refer to the Non-GAAP Measures section in TransCanada's Quarterly Report
to Shareholders dated October 29, 2012 for further discussion of
Comparable EBITDA, Comparable Earnings, Funds Generated from Operations
and Comparable Earnings per Share.
TRANSCANADA CORPORATION - THIRD QUARTER 2012
Quarterly Report to Shareholders
Management's Discussion and Analysis
This Management's Discussion and Analysis (MD&A) dated
October 29, 2012 should be read in conjunction with the
accompanying unaudited Condensed Consolidated Financial Statements
of TransCanada Corporation (TransCanada or the Company) for the
three and nine months ended September 30, 2012. The condensed
consolidated financial statements of the Company have been prepared
in accordance with United States (U.S.) generally accepted
accounting principles (U.S. GAAP). Comparative figures, which were
previously presented in accordance with Canadian generally accepted
accounting principles as defined in Part V of the Canadian
Institute of Chartered Accountants Handbook (CGAAP), have been
adjusted as necessary to be compliant with the Company's accounting
policies under U.S. GAAP, which is discussed further in the Changes
in Accounting Policies section in this MD&A. This MD&A
should also be read in conjunction with the audited Consolidated
Financial Statements and notes thereto, and the MD&A contained
in TransCanada's 2011 Annual Report, as prepared in accordance with
CGAAP, for the year ended December 31, 2011. Additional information
relating to TransCanada, including the Company's Annual Information
Form and other continuous disclosure documents, is available on
SEDAR at www.sedar.com under TransCanada Corporation's profile.
"TransCanada" or "the Company" includes TransCanada Corporation and
its subsidiaries, unless otherwise indicated. Amounts are stated in
Canadian dollars unless otherwise indicated. Abbreviations and
acronyms used but not otherwise defined in this MD&A are
identified in the Glossary of Terms contained in TransCanada's 2011
Annual Report.
Forward-Looking Information
This MD&A contains certain information that is forward
looking and is subject to important risks and uncertainties. The
words "anticipate", "expect", "believe", "may", "will", "should",
"estimate", "project", "outlook", "forecast", "intend", "target",
"plan" or other similar words are typically used to identify such
forward-looking information. Forward-looking statements in this
document are intended to provide TransCanada security holders and
potential investors with information regarding TransCanada and its
subsidiaries, including management's assessment of TransCanada's
and its subsidiaries' future plans and financial outlook.
Forward-looking statements in this document may include, but are
not limited to, statements regarding:
-- anticipated business prospects;
-- financial and operational performance of TransCanada and its
subsidiaries and affiliates;
-- expectations or projections about strategies and goals for growth and
expansion;
-- expected cash flows;
-- expected costs;
-- expected costs for projects under construction;
-- expected schedules for planned projects (including anticipated
construction and completion dates);
-- expected regulatory processes and outcomes;
-- expected outcomes with respect to legal proceedings, including
arbitration;
-- expected capital expenditures and contractual obligations;
-- expected operating and financial results; and
-- expected impact of future commitments and contingent liabilities.
These forward-looking statements reflect TransCanada's beliefs
and assumptions based on information available at the time the
statements were made and, as such, are not guarantees of future
performance. By their nature, forward-looking statements are
subject to various assumptions, risks and uncertainties which could
cause TransCanada's actual results and achievements to differ
materially from the anticipated results or expectations expressed
or implied in such statements.
Key assumptions on which TransCanada's forward-looking
statements are based include, but are not limited to, assumptions
about:
-- commodity and capacity prices;
-- inflation rates;
-- timing of debt issuances and hedging;
-- regulatory decisions and outcomes;
-- arbitration decisions and outcomes;
-- foreign exchange rates;
-- interest rates;
-- tax rates;
-- planned and unplanned outages and utilization of the Company's pipeline
and energy assets;
-- asset reliability and integrity;
-- access to capital markets;
-- anticipated construction costs, schedules and completion dates; and
-- acquisitions and divestitures.
The risks and uncertainties that could cause actual results or
events to differ materially from current expectations include, but
are not limited to:
-- the ability of TransCanada to successfully implement its strategic
initiatives and whether such strategic initiatives will yield the
expected benefits;
-- the operating performance of the Company's pipeline and energy assets;
-- the availability and price of energy commodities;
-- amount of capacity payments and revenues from the Company's energy
business;
-- regulatory decisions and outcomes;
-- outcomes with respect to legal proceedings, including arbitration;
-- counterparty performance;
-- changes in political environment;
-- changes in environmental and other laws and regulations;
-- competitive factors in the pipeline and energy sectors;
-- construction and completion of capital projects;
-- labour, equipment and material costs;
-- access to capital markets;
-- interest and currency exchange rates;
-- weather;
-- technological developments; and
-- economic conditions in North America.
Additional information on these and other factors is available
in the reports filed by TransCanada with Canadian securities
regulators and with the U.S. Securities and Exchange Commission
(SEC).
Readers are cautioned against placing undue reliance on
forward-looking information, which is given as of the date it is
expressed in this MD&A or otherwise stated, and not to use
future-oriented information or financial outlooks for anything
other than their intended purpose. TransCanada undertakes no
obligation to publicly update or revise any forward-looking
information in this MD&A or otherwise stated, whether as a
result of new information, future events or otherwise, except as
required by law.
Non-GAAP Measures
TransCanada uses the measures Comparable Earnings, Comparable
Earnings per Share, Earnings Before Interest, Taxes, Depreciation
and Amortization (EBITDA), Comparable EBITDA, Earnings Before
Interest and Taxes (EBIT), Comparable EBIT, Comparable Interest
Expense, Comparable Interest Income and Other, Comparable Income
Taxes and Funds Generated from Operations in this MD&A. These
measures do not have any standardized meaning as prescribed by U.S.
GAAP. They are, therefore, considered to be non-GAAP measures and
are unlikely to be comparable to similar measures presented by
other entities. Management of TransCanada uses these non-GAAP
measures to improve its ability to compare financial results among
reporting periods and to enhance its understanding of operating
performance, liquidity and ability to generate funds to finance
operations. These non-GAAP measures are also provided to readers as
additional information on TransCanada's operating performance,
liquidity and ability to generate funds to finance operations.
EBITDA is an approximate measure of the Company's pre-tax
operating cash flow and is generally used to better measure
performance and evaluate trends of individual assets. EBITDA
comprises earnings before deducting interest and other financial
charges, income taxes, depreciation and amortization, net income
attributable to non-controlling interests and preferred share
dividends. EBITDA includes income from equity investments. EBIT is
a measure of the Company's earnings from ongoing operations and is
generally used to better measure performance and evaluate trends
within each segment. EBIT comprises earnings before deducting
interest and other financial charges, income taxes, net income
attributable to non-controlling interests and preferred share
dividends. EBIT includes income from equity investments.
Comparable Earnings, Comparable EBITDA, Comparable EBIT,
Comparable Interest Expense, Comparable Interest Income and Other,
and Comparable Income Taxes comprise Net Income Applicable to
Common Shares, EBITDA, EBIT, Interest Expense, Interest Income and
Other, and Income Taxes, respectively, and are adjusted for
specific items that are significant but are not reflective of the
Company's underlying operations in the period. Specific items are
subjective, however, management uses its judgement and informed
decision-making when identifying items to be excluded in
calculating these non-GAAP measures, some of which may recur.
Specific items may include but are not limited to certain fair
value adjustments relating to risk management activities, income
tax adjustments, gains or losses on sales of assets, legal and
bankruptcy settlements, and write-downs of assets and investments.
These non-GAAP measures are calculated on a consistent basis from
period to period. The specific items for which such measures are
adjusted in each applicable period may only be relevant in certain
periods and are disclosed in the Reconciliation of Non-GAAP
Measures table in this MD&A.
The Company engages in risk management activities to reduce its
exposure to certain financial and commodity price risks by
utilizing derivatives. The risk management activities which
TransCanada excludes from Comparable Earnings provide effective
economic hedges but do not meet the specific criteria for hedge
accounting treatment and, therefore, changes in their fair values
are recorded in Net Income each year. The unrealized gains or
losses from changes in the fair value of these derivative contracts
are not considered to be representative of the underlying
operations in the current period or the positive margin that will
be realized upon settlement. As a result, these amounts have been
excluded in the determination of Comparable Earnings.
The Reconciliation of Non-GAAP Measures table in this MD&A
presents a reconciliation of these non-GAAP measures to Net Income
Attributable to Common Shares. Comparable Earnings per Common Share
is calculated by dividing Comparable Earnings by the weighted
average number of common shares outstanding for the period.
Funds Generated from Operations comprise Net Cash Provided by
Operations before changes in operating working capital and allows
management to better measure consolidated operating cash flow,
excluding fluctuations from working capital balances which may not
necessarily be reflective of underlying operations in the same
period. A reconciliation of Funds Generated from Operations to Net
Cash Provided by Operations is presented in the Summarized Cash
Flow table in the Liquidity and Capital Resources section in this
MD&A.
Reconciliation of Non-GAAP Measures
Three months ended Natural
September Gas Oil
30(unaudited) Pipelines Pipelines Energy Corporate Total
(millions of dollars) 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Comparable EBITDA 660 698 177 156 267 352 (21) (18) 1,083 1,188
Depreciation and
amortization (231)(231) (37) (38) (70) (65) (4) (3) (342) (337)
-----------------------------------------------------
Comparable EBIT 429 467 140 118 197 287 (25) (21) 741 851
-----------------------------------------
-----------------------------------------
Other Income Statement
Items
Comparable interest
expense (249) (242)
Comparable interest
income and other 22 (4)
Comparable income taxes (123) (144)
Net income attributable
to non-controlling
interests (29) (32)
Preferred share
dividends (13) (13)
------------
Comparable Earnings 349 416
Specific items (net of
tax):
Risk management
activities(1) 20 (30)
------------
Net Income Attributable
to Common Shares 369 386
------------
------------
Three months ended September 30
(unaudited) (millions of dollars) 2012 2011
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Comparable Interest Expense (249) (242)
Specific item:
Risk management activities(1) - 2
------------
Interest Expense (249) (240)
------------
------------
Comparable Interest Income and Other 22 (4)
Specific item:
Risk management activities(1) 12 (39)
------------
Interest Income and Other 34 (43)
------------
------------
Comparable Income Taxes (123) (144)
Specific items:
Income taxes attributable to risk management activities(1) (11) 13
------------
Income Taxes Expense (134) (131)
------------
------------
Comparable Earnings per Common Share $0.50 $0.59
Specific items (net of tax):
Risk management activities 0.02 (0.04)
------------
Net Income per Share $0.52 $0.55
------------
------------
(1) Three months ended September 30
(unaudited)(millions of dollars) 2012 2011
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Risk Management Activities Gains/(Losses):
Canadian Power 11 -
U.S. Power 20 (3)
Natural Gas Storage (12) (3)
Interest rate - 2
Foreign exchange 12 (39)
Income taxes attributable to risk management activities (11) 13
------------
Risk Management Activities 20 (30)
------------
------------
Reconciliation of Non-GAAP Measures
Nine months ended
September 30
(unaudited) Natural Gas Oil
(millions of Pipelines Pipelines Energy Corporate Total
dollars) 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Comparable EBITDA 2,051 2,159 526 408 681 914 (65) (57) 3,193 3,424
Depreciation and
amortization (697) (688)(109) (95)(215)(194) (11) (10) (1,032) (987)
---------------------------------------------------------
Comparable EBIT 1,354 1,471 417 313 466 720 (76) (67) 2,161 2,437
-------------------------------------------
-------------------------------------------
Other Income
Statement Items
Comparable interest
expense (730) (688)
Comparable interest
income and other 66 52
Comparable income
taxes (354) (470)
Net income
attributable to
non-controlling
interests (90) (96)
Preferred share
dividends (41) (41)
--------------
Comparable Earnings 1,012 1,194
Specific items (net
of tax):
Sundance A PPA
arbitration
decision (15) -
Risk management
activities(1) (4) (44)
--------------
Net Income
Attributable to
Common Shares 993 1,150
--------------
--------------
Nine months ended September 30
(unaudited) (millions of dollars) 2012 2011
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Comparable Interest Expense (730) (688)
Specific item:
Risk management activities(1) - 2
--------------
Interest Expense (730) (686)
--------------
--------------
Comparable Interest Income and Other 66 52
Specific item:
Risk management activities(1) 4 (40)
--------------
Interest Income and Other 70 12
--------------
--------------
Comparable Income Taxes (354) (470)
Specific items:
Income taxes attributable to Sundance A PPA arbitration
decision 5 -
Income taxes attributable to risk management activities(1) 1 21
--------------
Income Taxes Expense (348) (449)
--------------
--------------
Comparable Earnings per Common Share $1.44 $1.70
Specific items (net of tax):
Sundance A PPA arbitration decision (0.02) -
Risk management activities (0.01) (0.06)
--------------
Net Income per Share $1.41 $1.64
--------------
--------------
(1) Nine months ended September 30
(unaudited)(millions of dollars) 2012 2011
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Risk Management Activities Gains/(Losses):
Canadian Power 10 1
U.S. Power 4 (15)
Natural Gas Storage (23) (13)
Interest rate - 2
Foreign exchange 4 (40)
Income taxes attributable to risk management activities 1 21
------------
Risk Management Activities (4) (44)
------------
------------
Consolidated Results of Operations
Third Quarter Results
Comparable Earnings in third quarter 2012 were $349 million or
$0.50 per share compared to $416 million or $0.59 per share for the
same period in 2011. Comparable Earnings excluded net unrealized
after-tax gains of $20 million ($31 million pre-tax) (2011 - losses
of $30 million after tax ($43 million pre-tax)) resulting from
changes in the fair value of certain risk management
activities.
Comparable Earnings decreased $67 million or $0.09 per share in
third quarter 2012 compared to the same period in 2011 and
reflected the following:
-- decreased Canadian Natural Gas Pipelines Comparable net income primarily
due to lower earnings from the Canadian Mainline which excluded
incentive earnings and reflected a lower investment base;
-- decreased U.S. and International Natural Gas Pipelines EBIT which
primarily reflected lower revenue from ANR as well as the impact of
capacity sold at lower rates on Great Lakes;
-- increased Oil Pipelines Comparable EBIT which reflected higher revenues
primarily due to higher contracted volumes and higher final fixed tolls
for the Cushing Extension section of the Keystone Pipeline system which
came into effect in July 2012;
-- decreased Energy Comparable EBIT primarily due to the Sundance A power
purchase arrangement (PPA) force majeure, lower Alberta PPA volumes, as
well as a decrease in Equity Income from Bruce Power primarily due to a
planned maintenance outage at Bruce A Unit 4, partially offset by higher
contributions from Eastern Power due to higher Becancour contractual
earnings, and incremental earnings from Montagne-Seche and phase one of
Gros-Morne at Cartier Wind which were both placed in service in November
2011;
-- increased Comparable Interest Income and Other due to higher realized
gains in 2012 compared to losses in 2011 on derivatives used to manage
the Company's exposure to foreign exchange rate fluctuations on U.S.
dollar-denominated income, as well as gains in 2012 compared to losses
in 2011 on translation of foreign denominated working capital balances;
and
-- decreased Comparable Income Taxes primarily due to lower pre-tax
earnings in 2012 compared to 2011.
Comparable Earnings in the first nine months of 2012 were $1,012
million or $1.44 per share compared to $1,194 million or $1.70 per
share for the same period in 2011. Comparable Earnings in the first
nine months of 2012 excluded net unrealized after-tax losses of $4
million ($5 million pre-tax) (2011 - losses of $44 million after
tax ($65 million pre-tax)) resulting from changes in the fair value
of certain risk management activities. Comparable Earnings in the
first nine months of 2012 also excluded a negative after-tax charge
of $15 million ($20 million pre-tax) following the July 2012
Sundance A PPA arbitration decision that was recorded in second
quarter 2012 but related to amounts originally recorded in fourth
quarter 2011.
Comparable Earnings decreased $182 million or $0.26 per share
for the first nine months of 2012 compared to the same period in
2011 and reflected the following:
-- decreased Canadian Natural Gas Pipelines Comparable net income primarily
due to lower earnings from the Canadian Mainline which excluded
incentive earnings and reflected a lower investment base;
-- decreased U.S. and International Natural Gas Pipelines EBIT which
primarily reflected lower revenue resulting from uncontracted capacity
and lower rates on Great Lakes as well as lower revenue from ANR,
partially offset by incremental earnings from the Guadalajara pipeline,
which was placed in service in June 2011;
-- increased Oil Pipelines Comparable EBIT as the Company commenced
recording earnings from the Keystone Pipeline System in February 2011
and higher final fixed tolls for the Cushing Extension and the Wood
River/Patoka sections which came into effect in July 2012 and May 2011,
respectively, as well as higher volumes;
-- decreased Energy Comparable EBIT primarily as a result of the Sundance A
PPA force majeure, a decrease in Equity Income from Bruce Power
primarily due to lower volumes resulting from increased planned outage
days, lower realized power prices and reduced waterflows at U.S. hydro
facilities and lower Natural Gas Storage revenue, partially offset by
higher contributions from Eastern Power primarily due to higher
Becancour contractual earnings and incremental earnings from Montagne-
Seche and phase one of Gros-Morne which were placed in service in
November 2011;
-- increased Comparable Interest Expense due to the negative impact of a
stronger U.S. dollar on U.S. dollar-denominated interest, incremental
interest expense on new debt issues in 2012 and 2011 and lower
capitalized interest as assets under construction were placed in
service;
-- increased Comparable Interest Income and Other due to gains in 2012
compared to losses in 2011 on translation of foreign denominated working
capital balances; and
-- decreased Comparable Income Taxes primarily due to lower pre-tax
earnings in 2012 compared to 2011.
U.S. Dollar-Denominated Balances
On a consolidated basis, the impact of changes in the value of
the U.S. dollar on U.S. operations is partially offset by other
U.S. dollar-denominated items as set out in the following table.
The resultant pre-tax net exposure is managed using derivatives,
further reducing the Company's exposure to changes in Canadian-U.S.
foreign exchange rates. The average exchange rates to convert a
U.S. dollar to a Canadian dollar for the three and nine months
ended September 30, 2012 were 0.99 and 1.00, respectively (2011 -
0.98 and 0.98, respectively).
Summary of Significant U.S. Dollar-Denominated Amounts
Three months ended Nine months ended
(unaudited) September 30 September 30
(millions of U.S. dollars) 2012 2011 2012 2011
----------------------------------------------------------------------------
----------------------------------------------------------------------------
U.S. Natural Gas Pipelines
Comparable EBIT(1) 139 166 501 578
U.S. Oil Pipelines Comparable
EBIT(1) 92 78 269 210
U.S. Power Comparable EBIT(1) 57 63 71 160
Interest on U.S. dollar-denominated
long-term debt (185) (187) (554) (549)
Capitalized interest on U.S. capital
expenditures 28 21 81 93
U.S. non-controlling interests and
other (44) (48) (140) (143)
----------------------------------------
87 93 228 349
----------------------------------------
----------------------------------------
(1) Refer to the Non-GAAP Measures section in this MD&A for further
discussion of Comparable EBIT.
Natural Gas Pipelines
Natural Gas Pipelines' Comparable EBIT was $429 million and $1.4
billion in the three and nine months ended September 30, 2012,
respectively, compared to $467 million and $1.5 billion,
respectively, for the same periods in 2011.
Natural Gas Pipelines Results
Three months ended Nine months ended
(unaudited) September 30 September 30
(millions of dollars) 2012 2011 2012 2011
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Canadian Natural Gas Pipelines
Canadian Mainline 247 264 744 796
Alberta System 194 191 554 557
Foothills 29 31 90 96
Other (TQM(1), Ventures LP) 7 9 22 26
----------------------------------------
Canadian Natural Gas Pipelines
Comparable EBITDA(2) 477 495 1,410 1,475
Depreciation and amortization(3) (179) (177) (533) (533)
----------------------------------------
Canadian Natural Gas Pipelines
Comparable EBIT(2) 298 318 877 942
----------------------------------------
U.S. and International Natural Gas
Pipelines (in U.S. dollars)
ANR 41 55 191 233
GTN(4) 28 29 84 105
Great Lakes(5) 16 26 51 81
TC PipeLines, LP(1)(6)(7) 19 22 57 64
Other U.S. Pipelines (Iroquois(1),
Bison(8), Portland(7)(9)) 22 18 79 80
International (Tamazunchale,
Guadalajara(10), TransGas(1), Gas
Pacifico/INNERGY(1)) 27 27 85 52
General, administrative and support
costs - (2) (4) (6)
Non-controlling interests(7) 39 45 122 127
----------------------------------------
U.S. and International Natural Gas
Pipelines Comparable EBITDA(2) 192 220 665 736
Depreciation and amortization(3) (53) (54) (164) (158)
----------------------------------------
U.S. and International Natural Gas
Pipelines Comparable EBIT(2) 139 166 501 578
Foreign exchange (1) (3) 1 (12)
----------------------------------------
U.S. and International Natural Gas
Pipelines Comparable EBIT(2) (in
Canadian dollars) 138 163 502 566
----------------------------------------
Natural Gas Pipelines Business
Development Comparable EBITDA and
EBIT(2) (7) (14) (25) (37)
----------------------------------------
Natural Gas Pipelines Comparable
EBIT(2) 429 467 1,354 1,471
----------------------------------------
----------------------------------------
Summary:
Natural Gas Pipelines Comparable
EBITDA(2) 660 698 2,051 2,159
Depreciation and amortization(3) (231) (231) (697) (688)
----------------------------------------
Natural Gas Pipelines Comparable
EBIT(2) 429 467 1,354 1,471
----------------------------------------
----------------------------------------
(1) Results from TQM, Northern Border, Iroquois, TransGas and Gas
Pacifico/INNERGY reflect the Company's share of equity income from
these investments.
(2) Refer to the Non-GAAP Measures section in this MD&A for further
discussion of Comparable EBITDA and Comparable EBIT.
(3) Does not include depreciation and amortization from equity investments.
(4) Results reflect TransCanada's direct ownership interest of 75 per cent
effective May 2011 and 100 per cent prior to that date.
(5) Represents TransCanada's 53.6 per cent direct ownership interest.
(6) Effective May 2011, TransCanada's ownership interest in TC PipeLines,
LP decreased from 38.2 per cent to 33.3 per cent. As a result, the TC
PipeLines, LP results include TransCanada's decreased ownership in TC
PipeLines, LP and TransCanada's effective ownership through TC
PipeLines, LP of 8.3 per cent of each of GTN and Bison since May 2011.
(7) Non-Controlling Interests reflects Comparable EBITDA for the portions
of TC PipeLines, LP and Portland not owned by TransCanada.
(8) Results reflect TransCanada's direct ownership of 75 per cent of Bison
effective May 2011 when 25 per cent was sold to TC PipeLines, LP and
100 per cent since January 2011 when Bison was placed in service.
(9) Represents TransCanada's 61.7 per cent ownership interest.
(10) Includes Guadalajara's operations since June 2011 when the asset was
placed in service.
Net Income for Wholly Owned Canadian Natural Gas Pipelines
Three months ended Nine months ended
(unaudited) September 30 September 30
(millions of U.S. dollars) 2012 2011 2012 2011
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Canadian Mainline 47 61 140 186
Alberta System 53 51 153 149
Foothills 4 6 14 18
----------------------------------------
----------------------------------------
Canadian Natural Gas Pipelines
Canadian Mainline's net income of $47 million and $140 million
in the three and nine months ended September 30, 2012,
respectively, decreased $14 million and $46 million from $61
million and $186 million in the same periods in 2011. Canadian
Mainline's net income for the three and nine months ended September
30, 2011 included incentive earnings earned under an incentive
arrangement in the five-year tolls settlement which expired
December 31, 2011. In the absence of a National Energy Board (NEB)
decision with respect to the 2012-2013 tolls application, which is
not expected until late first quarter 2013, Canadian Mainline's
2012 year-to-date results continued to reflect the last
NEB-approved rate of return on common equity of 8.08 per cent on
deemed common equity of 40 per cent and excluded incentive
earnings. In addition, Canadian Mainline's 2012 year-to-date net
income decreased as a result of a lower average investment base
compared to the prior year.
The Alberta System's net income in the three and nine months
ended September 30, 2012, was $53 million and $153 million,
respectively, compared to $51 million and $149 million for the same
periods in 2011. The positive impact on 2012 net income from a
higher average investment base was mostly offset by lower incentive
earnings for the three and nine months ending September 30,
2012.
Canadian Mainline's Comparable EBITDA for the three and nine
months ended September 30, 2012 of $247 million and $744 million,
respectively, decreased $17 million and $52 million compared to the
same periods in 2011. EBITDA from the Canadian Mainline reflects
the net income variances discussed above as well as variances in
depreciation, financial charges and income taxes which are
recovered in revenue on a flow-through basis and, therefore, do not
impact net income.
U.S. and International Natural Gas Pipelines
ANR's Comparable EBITDA in the three and nine months ended
September 30, 2012 was US$41 million and US$191 million,
respectively, compared to US$55 million and US$233 million for the
same periods in 2011. The decreases were primarily due to lower
transportation and storage revenues, higher operating and
maintenance costs, lower incidental commodity sales and a second
quarter 2011 settlement with a counterparty.
GTN's Comparable EBITDA in the three and nine months ended
September 30, 2012 was US$28 million and US$84 million,
respectively, compared to US$29 million and US$105 million for the
same periods in 2011. The decrease in the nine months ended
September 2012 compared to 2011 was primarily due to TransCanada's
sale of a 25 per cent interest in GTN to TC PipeLines, LP in May
2011.
Great Lakes' Comparable EBITDA in the three and nine months
ended September 30, 2012 was US$16 million and US$51 million,
respectively, compared to US$26 million and US$81 million for the
same periods in 2011. The decreases were due to lower
transportation revenue resulting from unsold long-haul winter
capacity as well as summer capacity sold under short-term contracts
at lower rates compared to the same period in 2011.
International Comparable EBITDA increased US$33 million for the
nine months ended September 30, 2012 compared to the same period in
2011. The increase was primarily due to incremental earnings from
the Guadalajara pipeline which was placed in service in June
2011.
Business Development
Natural Gas Pipelines' Business Development Comparable EBITDA
loss from business development activities decreased $7 million and
$12 million in the three and nine months ended September 30, 2012,
respectively, compared to the same periods in 2011. The decreases
in business development costs were primarily related to reduced
activity in 2012 for the Alaska Pipeline Project and a levy charged
by the NEB in March 2011 to recover the Aboriginal Pipeline Group's
proportionate share of costs relating to the Mackenzie Gas Project
hearings.
Depreciation and Amortization
Natural Gas Pipelines' Depreciation and Amortization increased
$9 million for the nine months ended September 30, 2012 compared to
the same period in 2011. The increase was primarily due to
incremental depreciation for the Guadalajara pipeline which was
placed in service in June 2011.
Operating Statistics
Nine months ended Canadian Alberta
September 30 Mainline(1) System(2) ANR(3)
(unaudited) 2012 2011 2012 2011 2012 2011
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Average investment base
(millions of dollars) 5,748 6,250 5,426 5,017 n/a n/a
Delivery volumes (Bcf)
Total 1,167 1,474 2,697 2,580 1,199 1,276
Average per day 4.3 5.4 9.8 9.5 4.4 4.7
------------------------------------------------
------------------------------------------------
(1) Canadian Mainline's throughput volumes in the above table reflect
physical deliveries to domestic and export markets. Canadian Mainline's
physical receipts originating at the Alberta border and in Saskatchewan
for the nine months ended September 30, 2012 were 659 Bcf (2011 - 912
Bcf); average per day was 2.4 Bcf (2011 - 3.3 Bcf).
(2) Field receipt volumes for the Alberta System for the nine months ended
September 30, 2012 were 2,747 Bcf (2011 - 2,643 Bcf); average per day
was 10.0 Bcf (2011 - 9.7 Bcf).
(3) Under its current rates, which are approved by the FERC, ANR's results
are not impacted by changes in its average investment base.
Oil Pipelines
Oil Pipelines Comparable EBIT for the three and nine months
ended September 30, 2012 was $140 million and $417 million,
respectively, compared to $118 million and $313 million for the
three and eight month periods in 2011.
Oil Pipelines Results
Eight
Nine months months
ended ended
Three months ended September September
(unaudited) September 30 30 30
(millions of dollars) 2012 2011 2012 2011
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Keystone Pipeline System 180 157 532 410
Oil Pipeline Business
Development (3) (1) (6) (2)
--------------------------------------------
Oil Pipelines Comparable
EBITDA(1) 177 156 526 408
Depreciation and amortization (37) (38) (109) (95)
--------------------------------------------
Oil Pipelines Comparable EBIT(1) 140 118 417 313
--------------------------------------------
--------------------------------------------
Comparable EBIT denominated as
follows:
Canadian dollars 48 41 147 108
U.S. dollars 92 78 269 210
Foreign exchange - (1) 1 (5)
--------------------------------------------
Oil Pipelines Comparable EBIT(1) 140 118 417 313
--------------------------------------------
--------------------------------------------
(1) Refer to the Non-GAAP Measures section in this MD&A for further
discussion of Comparable EBITDA and Comparable EBIT.
Keystone Pipeline System
The Keystone Pipeline System's Comparable EBITDA of $180 million
and $532 million for the three and nine months ended September 30,
2012, respectively, increased $23 million and $122 million compared
to the three and eight month periods in 2011. These increases
reflected higher revenues primarily resulting from higher
contracted volumes, the impact of higher final fixed tolls on the
Cushing Extension and Wood River/Patoka sections of the system
which came into effect in July 2012 and May 2011, respectively, and
nine months of earnings being recorded in 2012 compared to eight
months in 2011.
EBITDA from the Keystone Pipeline System is primarily generated
from payments received under long-term commercial arrangements for
committed capacity that are not dependant on actual throughput.
Uncontracted capacity is offered to the market on a spot basis and,
when capacity is available, provides opportunities to generate
incremental EBITDA.
Depreciation and Amortization
Oil Pipelines Depreciation and Amortization increased $14
million for the nine months ended September 30, 2012 compared to
the corresponding period in 2011 and primarily reflected nine
months of operations compared to eight months in 2011 for the Wood
River/Patoka and Cushing Extension sections of the Keystone
Pipeline System.
Operating Statistics
Eight
Nine months months
Three months ended ended ended
September 30 September 30 September 30
(unaudited) 2012 2011 2012 2011
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Delivery volumes (thousands
of barrels)(1)
Total 44,564 39,696 139,261 92,329
Average per day 484 431 508 382
-----------------------------------------------
-----------------------------------------------
(1) Delivery volumes reflect physical deliveries.
Energy
Energy's Comparable EBIT was $197 million and $466 million for
the three and nine months ended September 30, 2012, respectively,
compared to $287 million and $720 million, respectively, for the
same periods in 2011.
Energy Results
Three months ended Nine months ended
(unaudited) September 30 September 30
(millions of dollars) 2012 2011 2012 2011
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Canadian Power
Western Power(1)(2) 93 150 251 341
Eastern Power(1)(3) 85 72 251 215
Bruce Power(1) 4 47 22 111
General, administrative and support
costs (12) (11) (34) (28)
----------------------------------------
Canadian Power Comparable EBITDA(4) 170 258 490 639
Depreciation and amortization(5) (38) (37) (117) (106)
----------------------------------------
Canadian Power Comparable EBIT(4) 132 221 373 533
----------------------------------------
U.S. Power (in U.S. dollars)
Northeast Power 100 100 195 270
General, administrative and support
costs (13) (10) (34) (29)
----------------------------------------
U.S. Power Comparable EBITDA(4) 87 90 161 241
Depreciation and amortization (30) (27) (90) (81)
----------------------------------------
U.S. Power Comparable EBIT(4) 57 63 71 160
Foreign exchange (1) - - (3)
----------------------------------------
U.S. Power Comparable EBIT(4) (in
Canadian dollars) 56 63 71 157
----------------------------------------
Natural Gas Storage
Alberta Storage(1) 20 12 54 62
General, administrative and support
costs (3) (1) (7) (6)
----------------------------------------
Natural Gas Storage Comparable
EBITDA(4) 17 11 47 56
Depreciation and amortization(5) (2) (2) (8) (9)
----------------------------------------
Natural Gas Storage Comparable
EBIT(4) 15 9 39 47
----------------------------------------
Energy Business Development
Comparable EBITDA and EBIT(1)(4) (6) (6) (17) (17)
----------------------------------------
Energy Comparable EBIT(1)(4) 197 287 466 720
----------------------------------------
----------------------------------------
Summary:
Energy Comparable EBITDA(4) 267 352 681 914
Depreciation and amortization(5) (70) (65) (215) (194)
----------------------------------------
Energy Comparable EBIT(4) 197 287 466 720
----------------------------------------
----------------------------------------
(1) Results from ASTC Power Partnership, Portlands Energy, Bruce Power and
CrossAlta reflect the Company's share of equity income from these
investments.
(2) Includes Coolidge effective May 2011.
(3) Includes Montagne-Seche and phase one of Gros-Morne at Cartier Wind
effective November 2011.
(4) Refer to the Non-GAAP Measures section in this MD&A for further
discussion of Comparable EBITDA and Comparable EBIT.
(5) Does not include depreciation and amortization of equity investments.
Canadian Power
Western and Eastern Canadian Power Comparable EBIT(1)(2)(3)
Three months ended Nine months ended
(unaudited) September 30 September 30
(millions of dollars) 2012 2011 2012 2011
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Revenue
Western Power(2) 152 239 482 603
Eastern Power(3) 108 99 309 286
Other(4) 19 14 66 54
----------------------------------------
279 352 857 943
----------------------------------------
Income from Equity Investments(5) 28 39 45 85
----------------------------------------
Commodity Purchases Resold
Western Power (70) (103) (207) (279)
Other(6) (1) (4) (3) (13)
----------------------------------------
(71) (107) (210) (292)
----------------------------------------
Plant operating costs and other (58) (62) (160) (180)
Sundance A PPA arbitration
decision(7) - - (30) -
General, administrative and support
costs (12) (11) (34) (28)
----------------------------------------
Comparable EBITDA(1) 166 211 468 528
Depreciation and amortization(8) (38) (37) (117) (106)
----------------------------------------
Comparable EBIT(1) 128 174 351 422
----------------------------------------
----------------------------------------
(1) Refer to the Non-GAAP Measures section in this MD&A for further
discussion of Comparable EBITDA and Comparable EBIT.
(2) Includes Coolidge effective May 2011.
(3) Includes Montagne-Seche and phase one of Gros-Morne at Cartier Wind
effective November 2011.
(4) Includes sales of excess natural gas purchased for generation and
thermal carbon black.
(5) Results reflect equity income from TransCanada's 50 per cent ownership
interest in each of ASTC Power Partnership, which holds the Sundance B
PPA, and Portlands Energy.
(6) Includes the cost of excess natural gas not used in operations.
(7) Refer to the Recent Developments section in this MD&A for more
information regarding the Sundance A PPA arbitration decision.
(8) Excludes depreciation and amortization of equity investments.
Western and Eastern Canadian Power Operating Statistics(1)
Three months ended Nine months ended
September 30 September 30
(unaudited) 2012 2011 2012 2011
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Volumes (GWh)
Generation
Western Power(2) 652 630 1,977 1,937
Eastern Power(3) 1,426 1,014 3,476 2,862
Purchased
Sundance A, B and Sheerness
PPAs(4) 1,555 2,074 4,889 6,034
Other purchases - 60 46 203
----------------------------------------
3,633 3,778 10,388 11,036
----------------------------------------
Contracted
Western Power(2) 2,012 2,182 6,048 6,256
Eastern Power(3) 1,426 1,014 3,476 2,862
Spot
Western Power 195 582 864 1,918
----------------------------------------
3,633 3,778 10,388 11,036
----------------------------------------
----------------------------------------
Plant Availability(5)
Western Power(2)(6) 91% 98% 96% 97%
Eastern Power(3)(7) 97% 96% 89% 96%
----------------------------------------
----------------------------------------
(1) Includes TransCanada's share of Equity Investments' volumes.
(2) Includes Coolidge effective May 2011.
(3) Includes Montagne-Seche and phase one of Gros-Morne at Cartier Wind
effective November 2011 and volumes related to TransCanada's 50 per cent
ownership interest in Portlands Energy.
(4) Includes TransCanada's 50 per cent ownership interest of Sundance B
volumes through the ASTC Power Partnership. No volumes were delivered
under the Sundance A PPA in 2012 or 2011.
(5) Plant availability represents the percentage of time in a period that
the plant is available to generate power regardless of whether it is
running.
(6) Excludes facilities that provide power under PPAs.
(7) Becancour has been excluded from the availability calculation as power
generation has been suspended since 2008.
Western Power's Comparable EBITDA of $93 million and $251
million for the three and nine months ended September 30, 2012
decreased $57 million and $90 million compared to the same periods
of 2011, respectively.
Throughout first quarter 2012, revenues and costs related to the
Sundance A PPA had been recorded as though the outages of Units 1
and 2 were interruptions of supply. As a result of the Sundance A
PPA arbitration decision received in July 2012, a $30 million
charge, equivalent to the amount of pre-tax income recorded in
first quarter 2012, was recorded in second quarter 2012. Because
the plant is now in force majeure, revenues and costs will not be
recorded until the plant returns to service. Western Power's
Comparable EBITDA for the three and nine months ended September 30,
2011 included $48 million and $99 million, respectively, of accrued
earnings related to the Sundance A PPA. Refer to the Recent
Developments section in this MD&A for further discussion
regarding the Sundance A PPA arbitration decision.
The decrease in Western Power's Comparable EBITDA in third
quarter 2012 compared to 2011 was primarily due to the Sundance A
PPA force majeure as well as lower volumes, partially offset by
higher realized power prices.
The decrease in Western Power's Comparable EBITDA for the nine
months ended September 30, 2012 compared to the same period in 2011
primarily reflected the Sundance A PPA force majeure as well as the
impact of lower volumes sold, partially offset by the impact of
lower fuel costs, incremental earnings from Coolidge which was
placed in service in May 2011, and higher realized power
prices.
Purchased volumes for the three and nine months ended September
30, 2012 decreased compared to the same periods in 2011 primarily
due to decreased utilization of the Sundance B and Sheerness PPAs
during periods of lower spot market power prices and higher plant
outage days. Average spot market power prices decreased 18 per cent
to $78 per megawatt hour (MWh) and 23 per cent to $59 per MWh for
the three and nine months ended September 30, 2012, respectively,
compared to the same periods in 2011. Despite the decrease in spot
prices, Western Power earned a higher realized price per MWh for
the three and nine months ended September 30, 2012 compared to the
same periods in 2011 as a result of contracting activities.
Western Power's Power Revenue of $152 million and $482 million
for the three and nine months ended September 30, 2012,
respectively, decreased $87 million and $121 million, respectively,
compared to the same periods in 2011 primarily due to the Sundance
A PPA force majeure as well as lower purchased volumes, partially
offset by higher realized power prices. Revenue for the nine months
ended September 30, 2012 was also positively affected by Coolidge
being placed in service in May 2011.
Western Power's Commodity Purchases Resold of $70 million and
$207 million for the three and nine months ended September 30,
2012, respectively, decreased $33 million and $72 million,
respectively, compared to the same periods in 2011 primarily due to
the Sundance A PPA force majeure, as well as lower purchased
volumes.
Eastern Power's Comparable EBITDA of $85 million and $251
million for the three and nine months ended September 30, 2012
increased $13 million and $36 million, respectively, compared to
the same periods in 2011. Similarly, Eastern Power's Power Revenues
of $108 million and $309 million for the three and nine months
ended September 30, 2012 increased $9 million and $23 million,
respectively, compared to the same periods in 2011. The increases
were primarily due to higher Becancour contractual earnings and
incremental earnings from Montagne-Seche and phase one of
Gros-Morne at Cartier Wind, which were both placed in service in
November 2011.
Income from Equity Investments of $28 million and $45 million,
respectively, for the three and nine months ended September 30,
2012 decreased $11 million and $40 million, respectively, compared
to the same periods in 2011 primarily due to lower earnings from
the ASTC Power Partnership as a result of lower Sundance B PPA
volumes and lower spot market power prices. Income from Equity
Investments for the nine months ended September 30, 2012 was also
impacted by lower earnings from Portlands Energy due to an
unplanned outage in second quarter 2012.
Plant Operating Costs and Other, which includes fuel gas
consumed in power generation, of $58 million and $160 million for
the three and nine months ended September 30, 2012, respectively,
decreased $4 million and $20 million compared to the same periods
in 2011 primarily due to decreased natural gas fuel prices in 2012
compared to 2011.
Depreciation and Amortization for the nine months ended
September 30, 2012 increased $11 million compared to the same
period in 2011 primarily due to Montagne-Seche and phase one of
Gros-Morne at Cartier Wind and Coolidge being placed in
service.
Approximately 91 per cent of Western Power sales volumes were
sold under contract in third quarter 2012 compared to 81 per cent
in third quarter 2011. To reduce its exposure to spot market prices
in Alberta, as at September 30, 2012, Western Power had entered
into fixed-price power sales contracts to sell approximately 2,100
gigawatt hours (GWh) for the remainder of 2012 and 5,700 GWh for
2013.
Eastern Power's sales volumes were 100 per cent sold under
contract and are expected to be fully contracted going forward.
Bruce Power Results
(TransCanada's share) Three months ended Nine months ended
(unaudited) September 30 September 30
(millions of dollars unless
otherwise indicated) 2012 2011 2012 2011
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Income/(Loss) from Equity
Investments(1)
Bruce A (39) 16 (95) 48
Bruce B 43 31 117 63
----------------------------------------
4 47 22 111
----------------------------------------
----------------------------------------
Comprised of:
Revenues 188 221 535 636
Operating expenses (142) (135) (402) (417)
Depreciation and other (42) (39) (111) (108)
----------------------------------------
4 47 22 111
----------------------------------------
----------------------------------------
Bruce Power - Other Information
Plant availability(2)
Bruce A 59% 97% 55% 98%
Bruce B 99% 94% 94% 88%
Combined Bruce Power 87% 95% 76% 91%
Planned outage days
Bruce A 60 - 213 5
Bruce B - 19 46 92
Unplanned outage days
Bruce A 7 4 7 13
Bruce B 2 - 25 24
Sales volumes (GWh)(1)
Bruce A 943 1,489 2,585 4,425
Bruce B 2,241 2,111 6,197 5,903
----------------------------------------
3,184 3,600 8,782 10,328
----------------------------------------
----------------------------------------
Realized sales price per MWh
Bruce A $68 $66 $68 $66
Bruce B(3) $54 $53 $55 $54
Combined Bruce Power $57 $57 $57 $58
----------------------------------------
----------------------------------------
(1) Represents TransCanada's 48.9 per cent ownership interest in Bruce A and
31.6 per cent ownership interest in Bruce B.
(2) Plant availability represents the percentage of time in a year that the
plant is available to generate power regardless of whether it is
running.
(3) Includes revenue received under the floor price mechanism and from
contract settlements as well as volumes and revenues associated with
deemed generation.
TransCanada's Equity Income from Bruce A decreased $55 million
and $143 million for the three and nine months ended September 30,
2012, respectively, to losses of $39 million and $95 million
compared to income of $16 million and $48 million for the same
periods in 2011. The third quarter decrease was primarily due to
lower volumes resulting from the Unit 4 planned outage which
commenced on August 2, 2012. The decrease for the nine months ended
September 30, 2012 also reflected the impact of the Unit 3 West
Shift Plus planned outage which commenced in November 2011 and was
completed in June 2012. Refer to the Recent Developments section in
this MD&A for further discussion of these planned outages.
TransCanada's Equity Income from Bruce B for the three and nine
months ended September 30, 2012 of $43 million and $117 million,
respectively, increased $12 million and $54 million compared to the
same periods in 2011. The increases were primarily due to higher
volumes and lower operating costs resulting from fewer planned
outage days, lower lease expense and higher realized prices.
Provisions in the Bruce B lease agreement with Ontario Power
Generation provide for a reduction in annual lease expense if the
annual average Ontario spot price for electricity is less than $30
per MWh. The average spot price has been below $30 per MWh for the
first nine months of 2012, and this is expected to continue
throughout 2012.
Under a contract with the Ontario Power Authority (OPA), all
output from Bruce A in third quarter 2012 was sold at a fixed price
of $68.23 per MWh (before recovery of fuel costs from the OPA)
compared to $66.33 per MWh in third quarter 2011. Also under a
contract with the OPA, all output from the Bruce B units was
subject to a floor price of $51.62 per MWh in third quarter 2012
compared to $50.18 in third quarter 2011. Both the Bruce A and
Bruce B contract prices are adjusted annually for inflation on
April 1.
Amounts received under the Bruce B floor price mechanism, within
a calendar year, are subject to repayment if the monthly average
spot price exceeds the floor price. With respect to 2012,
TransCanada currently expects spot prices to be less than the floor
price for the year, therefore, no amounts recorded in revenues in
2012 are expected to be repaid.
The Unit 4 outage, which commenced on August 2, 2012, is
expected to be completed in late fourth quarter 2012. There are no
further outages planned at Bruce Power for the remainder of 2012.
In October 2012, Bruce Power completed the refurbishment of Units 1
and 2 and returned Unit 1 to service on October 22, 2012. Bruce
Power also synchronized Unit 2 to Ontario's electrical grid on
October 16, 2012 and commercial operations for this unit are
expected to commence shortly.
U.S. Power
U.S. Power Comparable EBIT(1)(2)
Three months ended Nine months ended
(unaudited) September 30 September 30
(millions of U.S. dollars) 2012 2011 2012 2011
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Revenues
Power(3) 408 336 836 931
Capacity 75 70 181 183
Other(4) 5 11 29 54
----------------------------------------
488 417 1,046 1,168
----------------------------------------
Commodity purchases resold (268) (168) (548) (499)
Plant operating costs and other(4) (120) (149) (303) (399)
General, administrative and support
costs (13) (10) (34) (29)
----------------------------------------
Comparable EBITDA(1) 87 90 161 241
Depreciation and amortization (30) (27) (90) (81)
----------------------------------------
Comparable EBIT(1) 57 63 71 160
----------------------------------------
----------------------------------------
(1) Refer to the Non-GAAP Measures section in this MD&A for further
discussion of Comparable EBITDA and Comparable EBIT.
(2) Certain comparative figures have been reclassified to conform with the
financial statement presentation adopted for the current period.
(3) The realized gains and losses from financial derivatives used to
purchase and sell power, natural gas and fuel oil to manage U.S. Power's
assets are presented on a net basis in Power Revenues.
(4) Includes revenues and costs related to a third-party service agreement
at Ravenswood, the activity level of which decreased in 2011.
U.S. Power Operating Statistics
Three months ended Nine months ended
September 30 September 30
(unaudited) 2012 2011 2012 2011
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Physical Sales Volumes (GWh)
Supply
Generation 2,350 2,137 5,291 5,369
Purchased 3,601 1,657 6,858 4,777
----------------------------------------
5,951 3,794 12,149 10,146
----------------------------------------
----------------------------------------
Plant Availability(1) 96% 96% 86% 88%
----------------------------------------
----------------------------------------
(1) Plant availability represents the percentage of time in a period that
the plant is available to generate power regardless of whether it is
running.
U.S Power's Comparable EBITDA of US$87 million and US$161
million for the three and nine months ended September 30, 2012,
respectively, decreased US$3 million and US$80 million compared to
the same periods in 2011. The reductions were primarily due to
lower realized power prices, higher load serving costs, and reduced
water flows at the U.S. hydro facilities, partially offset by
increased sales to wholesale, commercial and industrial
customers.
Physical sales volumes for the three and nine months ended
September 30, 2012 have increased compared to the same period in
2011 primarily due to higher purchased volumes to serve increased
sales to wholesale, commercial and industrial customers in the PJM
and New England markets. Generation volumes have been negatively
impacted by reduced hydro volumes throughout 2012, however this was
more than offset by higher generation volumes from other U.S. Power
facilities in third quarter 2012.
U.S Power's Power Revenue of US$408 million for the three months
ended September 30, 2012 increased US$72 million compared to the
same period in 2011. The increase was primarily due to higher sales
volumes to wholesale, commercial and industrial customers,
partially offset by lower realized power prices. Power Revenue of
US$836 million for the nine months ended September 30, 2012
decreased US$95 million compared to the same period in 2011
primarily due to lower realized power prices partially offset by
increased sales volumes.
Capacity Revenue of US$75 million for the three months ended
September 30, 2012 increased US$5 million compared to the same
period in 2011 due to higher realized capacity prices in New York
partially offset by lower New England capacity prices. Capacity
Revenue of US$181 million for the nine months ended September 30,
2012, decreased US$2 million compared to the same period in 2011 as
lower capacity prices in New England more than offset higher
realized capacity prices in New York.
Commodity Purchases Resold of US$268 million and US$548 million
for the three and nine months ended September 30, 2012,
respectively, increased US$100 million and US$49 million compared
to the same periods in 2011 due to higher volumes of physical power
purchased for resale under power sales commitments to wholesale,
commercial and industrial customers and higher load serving costs,
partially offset by lower power prices.
Plant Operating Costs and Other, which includes fuel gas
consumed in generation, of US$120 million and US$303 million for
the three and nine months ended September 30, 2012, respectively,
decreased US$29 million and US$96 million compared to the same
periods in 2011 primarily due to lower natural gas fuel prices.
As at September 30, 2012, approximately 1,200 GWh or 53 per cent
and 2,700 GWh or 35 per cent of U.S. Power's planned generation is
contracted for the remainder of 2012 and for 2013, respectively.
Planned generation fluctuates depending on hydrology, wind
conditions, commodity prices and the resulting dispatch of the
assets. Power sales fluctuate based on customer usage.
Natural Gas Storage
Natural Gas Storage's Comparable EBITDA of $17 million for the
three months ended September 30, 2012 increased $6 million compared
to the same period in 2011 primarily due to higher realized natural
gas storage price spreads and lower operating costs.
Natural Gas Storage's Comparable EBITDA of $47 million for the
nine months ended September 30, 2012 decreased $9 million compared
to the same period in 2011 primarily as a result of the impact of
lower realized natural gas storage price spreads in the first
quarter of 2012, partially offset by lower operating costs
throughout the year.
Other Income Statement Items
Comparable Interest Expense(1)
Three months ended Nine months ended
(unaudited) September 30 September 30
(millions of dollars) 2012 2011 2012 2011
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Interest on long-term debt(2)
Canadian dollar-denominated 130 121 385 365
U.S. dollar-denominated 185 187 554 549
Foreign exchange 1 (4) 1 (12)
----------------------------------------
316 304 940 902
Other interest and amortization 7 4 14 17
Capitalized interest (74) (66) (224) (231)
----------------------------------------
Comparable Interest Expense(1) 249 242 730 688
----------------------------------------
----------------------------------------
(1) Refer to the Non-GAAP Measures section in this MD&A for further
discussion of Comparable Interest Expense.
(2) Includes interest on Junior Subordinated Notes.
Comparable Interest Expense of $249 million and $730 million for
the three and nine months ended September 30, 2012 increased $7
million and $42 million, respectively, compared to the same periods
in 2011. The increase in interest expense for the nine months ended
September 30, 2012 reflected incremental interest on debt issues of
US$1.0 billion in August 2012, US$500 million in March 2012 and
$750 million in November 2011, and a TC PipeLines, LP debt issue of
US$350 million in June 2011. These increases also reflected the
negative impact of a stronger U.S. dollar on U.S.
dollar-denominated interest, and lower capitalized interest for
Keystone, Coolidge and Guadalajara as a result of placing these
assets in service, partially offset by higher realized gains in
2012 compared to 2011 from derivatives used to manage the Company's
exposure to rising interest rates and the impact of Canadian and
U.S. dollar-denominated debt maturities in 2012 and 2011.
Comparable Interest Income and Other of $22 million and $66
million for the three and nine months ended September 30, 2012
increased $26 million and $14 million, respectively, compared to
the same periods in 2011. The increase for the three months ended
September 30, 2012 was primarily due to gains in 2012 compared to
losses in 2011 on derivatives used to manage the Company's net
exposure to foreign exchange rate fluctuations on U.S.
dollar-denominated income and on translation of foreign denominated
working capital balances. The increase for the nine months ended
September 30, 2012 was primarily due to gains in 2012 compared to
losses in 2011 on the translation of foreign denominated working
capital balances.
Comparable Income Taxes were $123 million and $354 million in
the three and nine months ended September 30, 2012, respectively,
compared to $144 million and $470 million for the same periods in
2011. The decreases of $21 million and $116 million, respectively,
were primarily due to lower pre-tax earnings in 2012 compared to
2011.
Liquidity and Capital Resources
TransCanada believes that its financial position remains sound
as does its ability to generate cash in the short and long term to
provide liquidity, maintain financial capacity and flexibility, and
provide for planned growth. TransCanada's liquidity is underpinned
by cash flow from operations, available cash balances and
unutilized committed revolving bank lines of US$1.0 billion, US$300
million, US$1.0 billion and $2.0 billion, maturing in November
2012, February 2013, October 2013 and October 2017, respectively.
These facilities also support the Company's three commercial paper
programs. In addition, at September 30, 2012, TransCanada's
proportionate share of unutilized capacity on committed bank
facilities at the Company's operated affiliates was $90 million
with maturity dates in 2016. As at September 30, 2012, TransCanada
had remaining capacity of $2.0 billion, $1.25 billion and US$2.5
billion under its equity, Canadian debt and U.S. debt shelf
prospectuses, respectively. TransCanada's liquidity, market and
other risks are discussed further in the Risk Management and
Financial Instruments section in this MD&A.
Operating Activities
Funds Generated from Operations(1)
Three months ended Nine months ended
(unaudited) September 30 September 30
(millions of dollars) 2012 2011 2012 2011
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Cash Flows
Funds generated from operations(1) 866 928 2,466 2,614
Decrease in operating working
capital 235 80 80 145
----------------------------------------
Net cash provided by operations 1,101 1,008 2,546 2,759
----------------------------------------
----------------------------------------
(1) Refer to the Non-GAAP Measures section in this MD&A for further
discussion of Funds Generated from Operations.
Net Cash Provided by Operations increased $93 million in the
three months ended September 30, 2012 compared to the same period
in 2011 primarily due to changes in working capital, partially
offset by increased funding for pension plans and lower
distributions received from equity investments. Net Cash Provided
by Operations decreased $213 million in the nine months ended
September 30, 2012 compared to the same periods in 2011 primarily
due to lower earnings in addition to the previously mentioned third
quarter changes.
As at September 30, 2012, TransCanada's current assets were $2.6
billion and current liabilities were $4.8 billion resulting in a
working capital deficiency of $2.2 billion. The Company believes
this shortfall can be managed through its ability to generate cash
flow from operations as well as its ongoing access to capital
markets.
Investing Activities
In the three and nine months ended September 30, 2012, capital
expenditures totalled $694 million and $1,555 million, respectively
(2011- $505 million and $1,593 million, respectively) related to
the expansions of the Keystone Pipeline System and the Alberta
System. Equity investments of $144 million and $557 million for the
three and nine months ended September 30, 2012, respectively (2011
- $213 million and $451 million, respectively) were primarily
related to the Company's investment in the refurbishment and
restart of Bruce Power Units 1 and 2 which were completed in
October 2012 and the West Shift Plus life extension outage on Unit
3.
Financing Activities
In August 2012, the Company issued US$1.0 billion of senior
notes maturing on August 1, 2022 and bearing interest at an annual
rate of 2.5 per cent. In March 2012, the Company issued US$500
million of senior notes maturing on March 2, 2015 and bearing
interest at an annual rate of 0.875 per cent. These notes were
issued under the US$4.0 billion debt shelf prospectus filed in
November 2011. The net proceeds of these offerings were used for
general corporate purposes and to reduce short-term
indebtedness.
The Company believes it has the capacity to fund its existing
capital program through internally-generated cash flow, continued
access to capital markets and liquidity underpinned by in excess of
$4 billion of committed credit facilities. TransCanada's financial
flexibility is further bolstered by opportunities for portfolio
management, including an ongoing role for TC PipeLines, LP.
Dividends
On October 29, 2012, TransCanada's Board of Directors declared a
quarterly dividend of $0.44 per share for the quarter ending
December 31, 2012 on the Company's outstanding common shares. The
dividend is payable on January 31, 2013 to shareholders of record
at the close of business on December 31, 2012. In addition,
quarterly dividends of $0.2875 and $0.25 per Series 1 and Series 3
preferred share, respectively, were declared for the quarter ending
December 31, 2012. The dividends are payable on December 31, 2012
to shareholders of record at the close of business on November 30,
2012. Furthermore, a quarterly dividend of $0.275 per Series 5
preferred share was declared for the period ending January 30,
2013, payable on January 30, 2013 to shareholders of record at the
close of business on December 31, 2012.
Contractual Obligations
There have been no material changes, except for an increase in
capital commitments of $1.4 billion, primarily related to the Gulf
Coast Project and Keystone XL Pipeline, offset by the decreases to
market-based commodity purchase commitments of approximately $1.3
billion, to TransCanada's contractual obligations from December 31,
2011 to September 30, 2012, including payments due for the next
five years and thereafter. For further information on these
contractual obligations, refer to the MD&A in TransCanada's
2011 Annual Report.
Accounting Policies and Critical Accounting Estimates
Effective January 1, 2012, TransCanada commenced reporting under
U.S. GAAP as permitted. Comparative figures, which were previously
presented in accordance with CGAAP, have been adjusted as necessary
to be compliant with the Company's accounting policies under U.S.
GAAP. The financial reporting impact of TransCanada adopting U.S.
GAAP is disclosed in Note 25 of TransCanada's 2011 audited
Consolidated Financial Statements included in TransCanada's 2011
Annual Report. The accounting policies and critical accounting
estimates applied are consistent with those outlined in
TransCanada's 2011 Annual Report, except as described below, which
outlines the Company's significant accounting policies that have
changed upon adoption of U.S. GAAP.
In preparing the financial statements, TransCanada is required
to make estimates and assumptions that affect both the amount and
timing of recording assets, liabilities, revenues and expenses
since the determination of these items may be dependent on future
events. The Company uses the most current information available and
exercises careful judgement in making these estimates and
assumptions.
Changes to Accounting Policies Upon Adoption of U.S. GAAP
Principles of Consolidation
The condensed consolidated financial statements include the
accounts of TransCanada and its subsidiaries. The Company
consolidates its interests in entities over which it is able to
exercise control. To the extent there are interests owned by other
parties, these interests are included in Non-Controlling Interests.
TransCanada uses the equity method of accounting for joint ventures
in which the Company is able to exercise joint control and for
investments in which the Company is able to exercise significant
influence. TransCanada records its proportionate share of undivided
interests in certain assets.
Inventories
Inventories primarily consist of materials and supplies,
including spare parts and fuel, and natural gas inventory in
storage, and are carried at the lower of weighted average cost or
market.
Income Taxes
The Company uses the liability method of accounting for income
taxes. This method requires the recognition of deferred income tax
assets and liabilities for future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases.
Deferred income tax assets and liabilities are measured using
enacted tax rates at the balance sheet date that are anticipated to
apply to taxable income in the years in which temporary differences
are expected to be recovered or settled. Changes to these balances
are recognized in income in the period during which they occur
except for changes in balances related to the Canadian Mainline,
Alberta System and Foothills, which are deferred until they are
refunded or recovered in tolls, as permitted by the NEB.
Canadian income taxes are not provided on the unremitted
earnings of foreign investments that the Company does not intend to
repatriate in the foreseeable future.
Employee Benefit and Other Plans
The Company sponsors defined benefit pension plans (DB Plans),
defined contribution plans (DC Plans), a Savings Plan and other
post-retirement benefit plans. Contributions made by the Company to
the DC Plans and Savings Plan are expensed in the period in which
contributions are made. The cost of the DB Plans and other
post-retirement benefits received by employees is actuarially
determined using the projected benefit method pro-rated based on
service and management's best estimate of expected plan investment
performance, salary escalation, retirement age of employees and
expected health care costs.
The DB Plans' assets are measured at fair value. The expected
return on the DB Plans' assets is determined using market-related
values based on a five-year moving average value for all of the DB
Plans' assets. Past service costs are amortized over the expected
average remaining service life of the employees. Adjustments
arising from plan amendments are amortized on a straight-line basis
over the average remaining service period of employees active at
the date of amendment. The Company recognizes the overfunded or
underfunded status of its DB Plans as an asset or liability on its
Balance Sheet and recognizes changes in that funded status through
Other Comprehensive Income/(Loss) (OCI) in the year in which the
change occurs. The excess of net actuarial gains or losses over 10
per cent of the greater of the benefit obligation and the
market-related value of the DB Plans' assets, if any, is amortized
out of Accumulated Other Comprehensive Income/(Loss) (AOCI) over
the average remaining service period of the active employees. For
certain regulated operations, post-retirement benefit amounts are
recoverable through tolls as benefits are funded. The Company
records any unrecognized gains and losses or changes in actuarial
assumptions related to these post-retirement benefit plans as
either regulatory assets or liabilities which are then amortized on
a straight-line basis over the average remaining service life of
active employees. When the restructuring of a benefit plan gives
rise to both a curtailment and a settlement, the curtailment is
accounted for prior to the settlement.
The Company has medium-term incentive plans, under which
payments are made to eligible employees. The expense related to
these incentive plans is accounted for on an accrual basis. Under
these plans, benefits vest when certain conditions are met,
including the employees' continued employment during a specified
period and achievement of specified corporate performance
targets.
Long-Term Debt Transaction Costs
The Company records long-term debt transaction costs as deferred
assets and amortizes these costs using the effective interest
method for all costs except those related to the Canadian natural
gas regulated pipelines, which continue to be amortized on a
straight-line basis in accordance with the provisions of tolling
mechanisms.
Guarantees
Upon issuance, the Company records the fair value of certain
guarantees entered into by the Company on behalf of partially owned
entities for which contingent payments may be made. The fair value
of these guarantees is estimated by discounting the cash flows that
would be incurred by the Company if letters of credit were used in
place of the guarantees. Guarantees are recorded as an increase to
Equity Investments, Plant, Property and Equipment, or a charge to
Net Income, and a corresponding liability is recorded in Deferred
Amounts.
Changes in Accounting Policies for 2012
Fair Value Measurement
Effective January 1, 2012, the Company adopted the Accounting
Standards Update (ASU) on fair value measurements as issued by the
Financial Accounting Standards Board (FASB). Adoption of the ASU
has resulted in an increase in the qualitative and quantitative
disclosures regarding Level III measurements.
Intangibles - Goodwill and Other
Effective January 1, 2012, the Company adopted the ASU on
testing goodwill for impairment as issued by the FASB. Adoption of
the ASU has resulted in a change in the accounting policy related
to testing goodwill for impairment, as the Company is now permitted
under U.S. GAAP to first assess qualitative factors affecting the
fair value of a reporting unit in comparison to the carrying amount
as a basis for determining whether it is required to proceed to the
two-step quantitative impairment test.
Future Accounting Changes
Balance Sheet Offsetting/Netting
In December 2011, the FASB issued amended guidance to enhance
disclosures that will enable users of the financial statements to
evaluate the effect, or potential effect, of netting arrangements
on an entity's financial position. The amendments result in
enhanced disclosures by requiring additional information regarding
financial instruments and derivative instruments that are either
offset in accordance with current U.S. GAAP or subject to an
enforceable master netting arrangement. This guidance is effective
for annual periods beginning on or after January 1, 2013. Adoption
of these amendments is expected to result in an increase in
disclosure regarding financial instruments which are subject to
offsetting as described in this amendment.
Financial Instruments and Risk Management
TransCanada continues to manage and monitor its exposure to
market risk, counterparty credit risk and liquidity risk.
Counterparty Credit and Liquidity Risk
TransCanada's maximum counterparty credit exposure with respect
to financial instruments at the balance sheet date, without taking
into account security held, consisted of accounts receivable, the
fair value of derivative assets and notes receivable. The carrying
amounts and fair values of these financial assets, except amounts
for derivative assets, are included in Accounts Receivable and
Other in the Non-Derivative Financial Instruments Summary table
below. Letters of credit and cash are the primary types of security
provided to support these amounts. The majority of counterparty
credit exposure is with counterparties who are investment grade. At
September 30, 2012, there were no significant amounts past due or
impaired.
At September 30, 2012, the Company had a credit risk
concentration of $266 million due from a counterparty. This amount
is expected to be fully collectible and is secured by a guarantee
from the counterparty's parent company.
The Company continues to manage its liquidity risk by ensuring
sufficient cash and credit facilities are available to meet its
operating and capital expenditure obligations when due, under both
normal and stressed economic conditions.
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 September 30, 2012, the
Company had designated as a net investment hedge U.S.
dollar-denominated debt with a carrying value of $11.0 billion
(US$11.2 billion) and a fair value of $14.4 billion (US$14.6
billion). At September 30, 2012, $60 million (December 31, 2011 -
$79 million) was included in Other Current Assets, $96 million
(December 31, 2011 - $66 million) was included in Intangibles and
Other Assets, $6 million (December 31, 2011 - $15 million) was
included in Accounts Payable and $18 million (December 31, 2011 -
$41 million) was included in Deferred Amounts for the fair value of
forwards and swaps used to hedge the Company's net U.S. dollar
investment in self-sustaining foreign operations.
Derivatives Hedging Net Investment in Self-Sustaining Foreign
Operations
The fair values and notional principal amounts for the
derivatives designated as a net investment hedge were as
follows:
September 30, 2012 December 31, 2011
----------------------------------------
----------------------------------------
Notional Notional
Asset/(Liability) or or
(unaudited) Fair Principal Fair Principal
(millions of dollars) Value(1) Amount Value(1) Amount
----------------------------------------------------------------------------
----------------------------------------------------------------------------
U.S. dollar cross-currency swaps
(maturing 2012 to 2019)(2) 131 US 3,950 93 US 3,850
U.S. dollar forward foreign exchange
contracts (maturing 2012) 1 US 100 (4) US 725
----------------------------------------
132 US 4,050 89 US 4,575
----------------------------------------
----------------------------------------
(1) Fair values equal carrying values.
(2) Consolidated Net Income in the three and nine months ended September 30,
2012 included net realized gains of $8 million and $22 million,
respectively (2011 - gains of $8 million and $20 million, respectively)
related to the interest component of cross-currency swap settlements.
Non-Derivative Financial Instruments Summary
The carrying and fair values of non-derivative financial
instruments were as follows:
September 30, 2012 December 31, 2011
----------------------------------------
----------------------------------------
(unaudited) Carrying Fair Carrying Fair
(millions of dollars) Amount(1) Value(2) Amount(1) Value(2)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Financial Assets
Cash and cash equivalents 494 494 654 654
Accounts receivable and other(3) 1,102 1,158 1,359 1,403
Available-for-sale assets(3) 32 32 23 23
----------------------------------------
1,628 1,684 2,036 2,080
----------------------------------------
----------------------------------------
Financial Liabilities(4)
Notes payable 1,470 1,470 1,863 1,863
Accounts payable and deferred
amounts(5) 1,069 1,069 1,329 1,329
Accrued interest 346 346 365 365
Long-term debt 18,969 24,938 18,659 23,757
Junior subordinated notes 983 1,048 1,016 1,027
----------------------------------------
22,837 28,871 23,232 28,341
----------------------------------------
----------------------------------------
(1) Recorded at amortized cost, except for US$350 million (December 31, 2011
- US$350 million) of Long-Term Debt that is recorded at fair value. This
debt which is recorded at fair value on a recurring basis is classified
in Level II of the fair value category using the income approach based
on interest rates from external data service providers.
(2) The fair value measurement of financial assets and liabilities recorded
at amortized cost for which the fair value is not equal to the carrying
value would be included in Level II of the fair value hierarchy using
the income approach based on interest rates from external data service
providers.
(3) At September 30, 2012, the Condensed Consolidated Balance Sheet included
financial assets of $873 million (December 31, 2011 - $1.1 billion) in
Accounts Receivable, $39 million (December 31, 2011 - $41 million) in
Other Current Assets and $222 million (December 31, 2011 - $247 million)
in Intangibles and Other Assets.
(4) Consolidated Net Income in the three and nine months ended September 30,
2012 included losses of $2 million and $14 million, respectively (2011 -
losses of $7 million and $18 million, respectively) for fair value
adjustments related to interest rate swap agreements on US$350 million
(2011 - US$350 million) of Long-Term Debt. There were no other
unrealized gains or losses from fair value adjustments to the non-
derivative financial instruments.
(5) At September 30, 2012, the Condensed Consolidated Balance Sheet included
financial liabilities of $967 million (December 31, 2011 - $1.2 billion)
in Accounts Payable and $102 million (December 31, 2011 - $137 million)
in Deferred Amounts.
Derivative Financial Instruments Summary
Information for the Company's derivative financial instruments,
excluding hedges of the Company's net investment in self-sustaining
foreign operations, is as follows:
September 30, 2012
(unaudited)
(millions of Canadian
dollars unless otherwise Natural Foreign
indicated) Power Gas Exchange Interest
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Derivative Financial
Instruments Held for
Trading(1)
Fair Values(2)
Assets $ 168 $ 107 $ 7 $ 16
Liabilities $ (195) $ (126) $ (13) $ (16)
Notional Values
Volumes(3)
Purchases 31,717 99 - -
Sales 32,700 73 - -
Canadian dollars - - - 620
U.S. dollars - - US 1,255 US 200
Cross-currency - - 47/US 37 -
Net unrealized
gains/(losses) in the
period(4)
Three months ended
September 30, 2012 $ 1 $ 12 $ 13 -
Nine months ended September
30, 2012 $ (17) $ 2 $ 5 -
Net realized (losses)/gains
in the period(4)
Three months ended
September 30, 2012 $ 4 $ (4) $ 6 -
Nine months ended September
30, 2012 $ 8 $ (19) $ 21 -
Maturity Dates 2012-2016 2012-2016 2012-2013 2013-2016
Derivative Financial
Instruments in Hedging
Relationships(5)(6)
Fair Values(2)
Assets $ 85 - - $ 13
Liabilities $ (130) $ (6) $ (41) -
Notional Values
Volumes(3)
Purchases 17,745 3 - -
Sales 7,467 - - -
U.S. dollars - - US 42 US 350
Cross-currency - - 136/US 100 -
Net realized gains/(losses)
in the period(4)
Three months ended
September 30, 2012 $ (49) $ (7) - $ 2
Nine months ended September
30, 2012 $ (101) $ (21) - $ 5
Maturity dates 2012-2018 2012-2013 2012-2014 2013-2015
------------------------------------------------
------------------------------------------------
(1) All derivative financial instruments held for trading 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 and natural gas derivatives are in GWh and Bcf,
respectively.
(4) Realized and unrealized gains and losses on derivative financial
instruments held for trading used to purchase and sell power and
natural gas are included net in Revenues. Realized and unrealized gains
and losses on interest rate and foreign exchange derivative financial
instruments held for trading are included in Interest Expense and
Interest Income and Other, respectively. The effective portion of
unrealized gains and losses on derivative financial instruments in cash
flow hedging relationships is initially recognized in Other
Comprehensive Income and reclassified to Revenues, Interest Expense and
Interest Income and Other, as appropriate, as the original hedged item
settles.
(5) 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 $13 million and a notional amount of US$350
million. Net realized gains on fair value hedges for the three and nine
months ended September 30, 2012 were $2 million and $6 million,
respectively, and were included in Interest Expense. In the three and
nine months ended September 30, 2012, the Company did not record any
amounts in Net Income related to ineffectiveness for fair value hedges.
(6) For the three and nine months ended September 30, 2012, there were no
gains or losses included in Net Income for discontinued cash flow hedges
where it was probable that the anticipated transaction would not occur.
No amounts have been excluded from the assessment of hedge
effectiveness.
2011
(unaudited)
(millions of Canadian
dollars unless otherwise Natural Foreign
indicated) Power Gas Exchange Interest
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Derivative Financial
Instruments Held for
Trading(1)
Fair Values(2)(3)
Assets $ 185 $ 176 3 $ 22
Liabilities $ (192) $ (212) $ (14) $ (22)
Notional Values(3)
Volumes(4)
Purchases 21,905 103 - -
Sales 21,334 82 - -
Canadian dollars - - - 684
U.S. dollars - - US 1,269 US 250
Cross-currency - - 47/US 37 -
Net unrealized
gains/(losses) in the
period(5)
Three months ended
September 30, 2011 $ 6 $ (13) $ (41) $ 1
Nine months ended September
30, 2011 $ 9 $ (39) $ (41) $ 1
Net realized gains/(losses)
in the period(5)
Three months ended
September 30, 2011 $ 15 $ (20) $ (7) -
Nine months ended September
30, 2011 $ 20 $ (61) $ 26 $ 1
Maturity dates 2012-2016 2012-2016 2012 2012-2016
Derivative Financial
Instruments in Hedging
Relationships(6)(7)
Fair Values(2)(3)
Assets $ 16 $ 3 - $ 13
Liabilities $ (277) $ (22) $ (38) $ (1)
Notional Values(3)
Volumes(4)
Purchases 17,188 8 - -
Sales 8,061 - - -
U.S. dollars - - US 73 US 600
Cross-currency - - 136/US 100 -
Net realized losses in the
period(5)
Three months ended
September 30, 2011 $ (56) $ (6) - $ (4)
Nine months ended September
30, 2011 $ (112) $ (14) - $ (13)
Maturity dates 2012-2017 2012-2013 2012-2014 2012-2015
------------------------------------------------
------------------------------------------------
(1) All derivative financial instruments held for trading 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) As at December 31, 2011.
(4) Volumes for power and natural gas derivatives are in GWh and Bcf,
respectively.
(5) Realized and unrealized gains and losses on derivative financial
instruments held for trading used to purchase and sell power and natural
gas are included net in Revenues. Realized and unrealized gains and
losses on interest rate and foreign exchange derivative financial
instruments held for trading are included in Interest Expense and
Interest Income and Other, respectively. The effective portion of
unrealized gains and losses on derivative financial instruments in cash
flow hedging relationships is initially recognized in Other
Comprehensive Income and reclassified to Revenues, Interest Expense and
Interest Income and Other, as appropriate, as the original hedged item
settles.
(6) 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 $13 million and a notional amount of US$350
million at December 31, 2011. Net realized gains on fair value hedges
for the three and nine months ended September 30, 2011 were $1 million
and $5 million, respectively, and were included in Interest Expense. In
the three and nine months ended September 30, 2011, the Company did not
record any amounts in Net Income related to ineffectiveness for fair
value hedges.
(7) For the three and nine months ended September 30, 2011, there were no
gains or losses included in Net Income for discontinued cash flow hedges
where it was probable that the anticipated transaction would not occur.
No amounts were excluded from the assessment of hedge effectiveness.
Balance Sheet Presentation of Derivative Financial Instruments
The fair value of the derivative financial instruments in the Company's
Balance Sheet was as follows:
(unaudited)
(millions of dollars) September 30 2012 December 31 2011
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Current
Other current assets 302 361
Accounts payable (340) (485)
Long term
Intangibles and other assets 250 202
Deferred amounts (211) (349)
------------------------------------------
------------------------------------------
Derivatives in Cash Flow Hedging Relationships
The components of OCI related to derivatives in cash flow hedging
relationships are as follows:
Cash Flow Hedges
--------------------------------------------
--------------------------------------------
Three months ended September 30 Natural Foreign
(unaudited) Power Gas Exchange Interest
(millions of dollars, pre-tax) 2012 2011 2012 2011 2012 2011 2012 2011
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Changes in fair value of
derivative instruments
recognized in OCI (effective
portion) 96 (25) (3) (14) (5) 13 - (1)
Reclassification of gains and
(losses) on derivative
instruments from AOCI to Net
Income (effective portion) 54 26 15 27 - - 4 11
Gains on derivative instruments
recognized in earnings
(ineffective portion) 5 1 1 1 - - - -
--------------------------------------------
--------------------------------------------
Cash Flow Hedges
--------------------------------------------
--------------------------------------------
Nine months ended September 30 Natural Foreign
(unaudited) Power Gas Exchange Interest
(millions of dollars, pre-tax) 2012 2011 2012 2011 2012 2011 2012 2011
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Changes in fair value of
derivative instruments
recognized in OCI (effective
portion) 74 (128) (17) (39) (5) 6 - (1)
Reclassification of gains on
derivative instruments from
AOCI to Net Income (effective
portion) 129 58 43 80 - - 14 33
Gains on derivative instruments
recognized in earnings
(ineffective portion) 6 2 - - - - - -
--------------------------------------------
--------------------------------------------
Derivative contracts entered into to manage market risk often
contain financial assurance provisions that allow parties to the
contracts to manage credit risk. These provisions may require
collateral to be provided if a credit-risk-related contingent event
occurs, such as a downgrade in the Company's credit rating to
non-investment grade. Based on contracts in place and market prices
at September 30, 2012, the aggregate fair value of all derivative
instruments with credit-risk-related contingent features that were
in a net liability position was $41 million (2011 - $77 million),
for which the Company had provided collateral of nil (2011 - $6
million) in the normal course of business. If the
credit-risk-related contingent features in these agreements were
triggered on September 30, 2012, the Company would have been
required to provide collateral of $41 million (2011 - $71 million)
to its counterparties. Collateral may also need to be provided
should the fair value of derivative instruments exceed pre-defined
contractual exposure limit thresholds. The Company has sufficient
liquidity in the form of cash and undrawn committed revolving bank
lines to meet these contingent obligations should they arise.
Fair Value Hierarchy
The Company's assets and liabilities recorded at fair value have
been classified into three categories based on the fair value
hierarchy.
In Level I, the fair value of assets and liabilities is
determined by reference to quoted prices in active markets for
identical assets and liabilities that the Company has the ability
to access at the measurement date.
In Level II, the fair value of interest rate and foreign
exchange derivative assets and liabilities is determined using the
income approach. The fair value of power and gas commodity assets
and liabilities is determined using the market approach. Under both
approaches, valuation is based on the extrapolation of inputs,
other than quoted prices included within Level I, for which all
significant inputs are observable directly or indirectly. Such
inputs include published exchange rates, interest rates, interest
rate swap curves, yield curves, and broker quotes from external
data service providers. Transfers between Level I and Level II
would occur when there is a change in market circumstances. There
were no transfers between Level I and Level II in the nine months
ended September 30, 2012 and 2011.
In Level III, the fair value of assets and liabilities measured
on a recurring basis is determined using a market approach based on
inputs that are unobservable and significant to the overall fair
value measurement. Assets and liabilities measured at fair value
can fluctuate between Level II and Level III depending on the
proportion of the value of the contract that extends beyond the
time frame for which inputs are considered to be observable. As
contracts near maturity and observable market data becomes
available, they are transferred out of Level III and into Level
II.
Long-dated commodity transactions in certain markets where
liquidity is low are included in Level III of the fair value
hierarchy, as the related commodity prices are not readily
observable. Long-term electricity prices are estimated using a
third-party modelling tool which takes into account physical
operating characteristics of generation facilities in the markets
in which the Company operates. Inputs into the model include market
fundamentals such as fuel prices, power supply additions and
retirements, power demand, seasonal hydro conditions and
transmission constraints. Long-term North American natural gas
prices are based on a view of future natural gas supply and demand,
as well as exploration and development costs. Long-term prices are
reviewed by management and the Board on a periodic basis.
Significant decreases in fuel prices or demand for electricity or
natural gas, or increases in the supply of electricity or natural
gas may result in a lower fair value measurement of contracts
included in Level III.
The fair value of the Company's assets and liabilities measured
on a recurring basis, including both current and non-current
portions, are categorized as follows:
Significant
Quoted Prices Other Significant
in Active Observable Unobservable
Markets Inputs Inputs
(Level I) (Level II) (Level III) Total
------------------------------------------------------------
------------------------------------------------------------
(unaudited)
(millions of
dollars, pre- Sept 30 Dec 31 Sept 30 Dec 31 Sept 30 Dec 31 Sept 30 Dec 31
tax) 2012 2011 2012 2011 2012 2011 2012 2011
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Derivative
Financial
Instrument
Assets:
Interest rate
contracts - - 29 36 - - 29 36
Foreign
exchange
contracts - - 160 141 - - 160 141
Power commodity
contracts - - 242 201 9 - 251 201
Gas commodity
contracts 90 124 17 55 - - 107 179
Derivative
Financial
Instrument
Liabilities:
Interest rate
contracts - - (16) (23) - - (16) (23)
Foreign
exchange
contracts - - (75) (102) - - (75) (102)
Power commodity
contracts - - (318) (454) (5) (15) (323) (469)
Gas commodity
contacts (114) (208) (18) (26) - - (132) (234)
Non-Derivative
Financial
Instruments:
Available-for-
sale assets 32 23 - - - - 32 23
------------------------------------------------------------
8 (61) 21 (172) 4 (15) 33 (248)
------------------------------------------------------------
------------------------------------------------------------
The following table presents the net change in the Level III
fair value category:
Derivatives(1)
--------------------------------------------
--------------------------------------------
Three months ended Nine months ended
(unaudited September 30 September 30
(millions of dollars, pre-tax) 2012 2011 2012 2011
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Balance at beginning of period 7 (30) (15) (8)
New contracts - - - 1
Settlements - 1 (1) 1
Transfers out of Level III (12) 2 (10) 2
Total gains included in Net
Income(2) 7 - 8 -
Total gains/(losses) included in
OCI 2 10 22 (13)
--------------------------------------------
Balance at end of period 4 (17) 4 (17)
--------------------------------------------
--------------------------------------------
(1) The fair value of derivative assets and liabilities is presented on a
net basis.
(2) For the three and nine months ended September 31, 2012, the unrealized
gains or losses included in Net Income attributed to derivatives that
were still held at the reporting date was a loss of $1 million (2011 -
nil).
A 10 per cent increase or decrease in commodity prices, with all
other variables held constant, would result in a $6 million
decrease or increase, respectively, in the fair value of
outstanding derivative financial instruments included in Level III
as at September 30, 2012.
Other Risks
Additional risks faced by the Company are discussed in the
MD&A in TransCanada's 2011 Annual Report. These risks remain
substantially unchanged since December 31, 2011.
Controls and Procedures
As of September 30, 2012, an evaluation was carried out under
the supervision of, and with the participation of management,
including the President and Chief Executive Officer and the Chief
Financial Officer, of the effectiveness of TransCanada's disclosure
controls and procedures as defined under the rules adopted by the
Canadian securities regulatory authorities and by the SEC. Based on
this evaluation, the President and Chief Executive Officer and the
Chief Financial Officer concluded that the design and operation of
TransCanada's disclosure controls and procedures were effective at
a reasonable assurance level as at September 30, 2012.
During the quarter ended September 30, 2012, there have been no
changes in TransCanada's internal controls over financial reporting
that have materially affected, or are reasonably likely to
materially affect, the Company's internal controls over financial
reporting.
Outlook
Since the disclosure in TransCanada's 2011 Annual Report, the
Company's overall earnings outlook for 2012 will be negatively
impacted by the Sundance A PPA arbitration decision received in
July 2012 which is expected to result in the Company not recording
earnings from the Sundance A PPA in 2012. In addition, reduced
demand for natural gas and electricity due to unseasonably warm
winter weather, combined with continued strong U.S. natural gas
production, has resulted in historically high natural gas storage
levels and low natural gas prices, which are having a negative
impact on revenues in U.S. Pipelines as well as power prices in
Canadian and U.S. Power. Delays in restarting the Bruce Power Units
1 and 2 as well as an expanded planned outage at Unit 4 have also
reduced the 2012 earnings outlook. For further information on
outlook, refer to the MD&A in TransCanada's 2011 Annual
Report.
Recent Developments
Natural Gas Pipelines
Canadian Pipelines
Canadian Mainline
2012-2013 Tolls Application
In 2011, TransCanada filed a comprehensive tolls application
with the NEB to change the business structure and the terms and
conditions of service for the Canadian Mainline and to set tolls
for 2012 and 2013. The hearing with respect to this application
began on June 4, 2012 with final arguments to be heard from
TransCanada and the intervenors beginning November 13, 2012. A
final decision from the NEB on the application is not expected
before late first quarter 2013.
As part of the Canadian Mainline hearing, TransCanada filed an
updated throughput forecast for 2013 through 2020. Based on natural
gas prices being lower by approximately US$1.40 per million BTUs in
2010 dollars on an annual average basis compared to the previous
forecast, the Western Mainline Receipts are expected to be lower,
on average, by approximately one billion cubic feet (Bcf) per day
over the forecasted period.
Marcellus Facilities Expansion
In May 2012, TransCanada received NEB approval with respect to
an application that was re-filed in November 2011 to construct new
pipeline infrastructure to provide Southern Ontario with additional
natural gas supply from the Marcellus shale basin. Construction
continues on the new pipeline facilities and it is expected that
the Marcellus shale gas supply will begin moving to market as of
November 1, 2012.
Mainline New Capacity Open Season
In response to requests for capacity to bring additional
Marcellus shale gas volumes into Canada, TransCanada held a new
capacity open season that closed in May 2012 for firm
transportation service on the integrated Canadian Mainline from
Niagara and Chippawa as well as from other receipt points to all
delivery points, including points east of Parkway. As a result of
revised project timelines for the approval and construction of the
necessary facilities, TransCanada is in the process of amending the
Precedent Agreements resulting from the open season to reflect a
revised contract in-service date of November 2015. The ultimate
facilities requirements associated with the Precedent Agreements
are still being assessed.
Alberta System
Expansion Projects
In the first three quarters of 2012, TransCanada continued to
expand its Alberta System by completing and placing in service 12
separate pipeline projects at a total cost of approximately $680
million. This included the completion of the approximate $250
million Horn River project in May 2012 that extended the Alberta
System into the Horn River shale play in British Columbia.
The NEB has approved additional Alberta System expansions
totaling approximately $630 million, including the Leismer-Kettle
River Crossover project, a 30 inch, 77 kilometre (km) pipeline
which was approved in June 2012. This project has an estimated
construction cost of $162 million and is intended to provide
increased capacity to meet demand in Northeast Alberta.
Approximately $340 million of projects are still awaiting NEB
approval, including the Komie North project which would extend the
Alberta System further into the Horn River area.
NGL Extraction Convention
In October 2012, the Alberta System withdrew its NEB application
to implement the NGL Extraction Convention (NEXT) extraction rights
model. Business circumstances have significantly changed since the
model was developed that could negatively impact gas production. As
a result, the application to implement the model was withdrawn.
Coastal GasLink Pipeline Project
TransCanada has been selected by Shell Canada Limited (Shell)
and its partners to design, build, own and operate the proposed
Coastal GasLink Pipeline Project, an estimated $4 billion pipeline
that will transport natural gas from the Montney gas-producing
region near Dawson Creek, British Columbia (B.C.) to the recently
announced LNG Canada liquefied natural gas (LNG) export facility
near Kitimat, B.C. The LNG Canada project is a joint venture led by
Shell, with partners Korea Gas Corporation, Mitsubishi Corporation
and PetroChina Company Limited. The approximately 700 km pipeline
is expected to have an initial capacity of more than 1.7 Bcf/d and
be placed in service toward the end of the decade. A proposed
contractual extension of the Alberta System using capacity on the
Coastal GasLink pipeline, to a point near Vanderhoof, B.C., will
allow TransCanada to also offer gas transmission service to
interconnecting natural gas pipelines serving the West Coast.
TransCanada expects to elicit interest in and commitments for such
service through an open season process in early 2013 subject to the
overall project schedule.
U.S. Pipelines
Northern Border
Northern Border filed with the Federal Energy Regulatory
Commission (FERC) a settlement with its customers to modify its
transportation rates beginning in January 2013. If approved by the
FERC, the settlement will result in an 11 per cent reduction in
rates relative to current rates, includes a three-year moratorium
on filing rate cases or challenging the settlement rates and
requires Northern Border to file for new rates no later than
January 1, 2018. Although Northern Border's revenues will decrease
beginning in January 2013, the settlement provides rate certainty
for up to five years. Northern Border is 50 per cent owned by TC
PipeLines LP and TransCanada owns 33 per cent of the TC PipeLines
LP units.
ANR
The FERC issued an Order in June 2012 approving the sale of the
offshore assets by ANR to its affiliate TC Offshore LLC, a newly
created wholly-owned subsidiary of ANR, and allowing TC Offshore
LLC to operate these assets as a standalone interstate pipeline.
The FERC issued two orders in September 2012 that facilitate the
commercial start up of TC Offshore as a new interstate natural gas
pipeline entity comprised of ANR's offshore assets and authorized
the tariff services and rate structure for this new entity. TC
Offshore LLC is expected to begin commercial operations on November
1, 2012.
Alaska Pipeline Project
The Alaska North Slope producers (ExxonMobil, ConocoPhillips and
BP), along with TransCanada through its participation in the Alaska
Pipeline Project, have agreed on a work plan aimed at
commercializing North Slope natural gas resources via an LNG
option. In May 2012, TransCanada received approval from the State
of Alaska to curtail its activities on the Alaska/Alberta route and
focus on the LNG alternative, thereby allowing TransCanada to defer
its obligation to file for a FERC certificate for the Alberta route
beyond the original fall 2012 deadline. TransCanada held an open
season in September 2012 to solicit interest in the LNG option and
the project received a number of non-binding expressions of
interest from potential shippers from a broad range of industry
sectors located in North America and Asia.
Mackenzie Gas Project
Project activities have been curtailed largely due to natural
gas market conditions. TransCanada's future funding obligations for
the Aboriginal Pipeline Group during such curtailment are expected
to be nominal.
Oil Pipelines
Keystone Pipeline System
In May 2012, TransCanada filed revised fixed tolls for the
Cushing Extension section of the Keystone Pipeline System with both
the NEB and the FERC. The revised tolls, which reflect the final
project costs of the Keystone Pipeline System, became effective
July 1, 2012.
Gulf Coast Project
The Company announced in February 2012 that what had previously
been the Cushing to U.S. Gulf Coast portion of the Keystone XL
Project has its own independent value to the marketplace and will
be constructed as the stand-alone Gulf Coast Project, which is not
part of the Presidential Permit process. The 36-inch pipeline,
which will extend from Cushing, Oklahoma to the U.S. Gulf Coast, is
expected to have an initial capacity of up to 700,000 barrels per
day (bbl/d) with an ultimate capacity of 830,000 bbl/d. TransCanada
started construction in August 2012 and expects to place the Gulf
Coast Project in service in late 2013. As of September 30, 2012,
US$0.9 billion has been invested in the project. Included in the
US$2.3 billion cost is US$300 million for the 76 km (47 mile)
Houston Lateral pipeline that will transport crude oil to Houston
refineries.
Keystone XL Pipeline
In May 2012, TransCanada filed a Presidential Permit application
(cross border permit) with the U.S. Department of State (DOS) for
the Keystone XL Pipeline from the U.S./Canada border in Montana to
Steele City, Nebraska. TransCanada will supplement that application
with an alternative route in Nebraska as soon as that route is
selected.
The Company continues to work collaboratively with the Nebraska
Department of Environmental Quality (NDEQ) to finalize an
alternative route that avoids the Nebraska Sandhills. A proposed
route submitted by TransCanada in April 2012 has been modified in
response to comments received from the NDEQ and the public. In
September 2012, the Company submitted a Supplemental Environmental
Report (SER) to the NDEQ for the preferred alternative route. The
NDEQ has indicated that it will complete its review by the end of
2012. In addition to submitting a SER to the NDEQ, TransCanada has
provided an environmental report to the DOS. The environmental
report is required as part of the DOS review of the Company's
Presidential Permit application.
The approximate cost of the 36-inch line is US$5.3 billion and,
subject to regulatory approvals, TransCanada expects the Keystone
XL Pipeline to be in service in late 2014 or early 2015. As of
September 30, 2012, US$1.6 billion has been invested in this
project.
Keystone Hardisty Terminal
In May 2012, TransCanada announced that it had secured binding
long-term commitments exceeding 500,000 bbl/d for the Keystone
Hardisty Terminal. As a result of strong commercial support for the
project, the Company has expanded the proposed two million barrel
project to a 2.6 million barrel terminal located at Hardisty,
Alberta. The Keystone Hardisty Terminal Project will provide new
crude oil batch accumulation tankage and pipeline infrastructure
for Western Canadian producers and access to the Keystone Pipeline
System. The project is expected to be operational in late 2014 and
cost approximately $275 million.
Northern Courier Pipeline
In August 2012, TransCanada announced that it had been selected
by Fort Hills Energy Limited Partnership to design, build, own and
operate the proposed Northern Courier Pipeline Project. The
project, with an estimated capital cost of $660 million, is a 90 km
(54 mile) pipeline system that will transport bitumen and diluent
between the Fort Hills mine site and the Voyageur Upgrader located
north of Fort McMurray, Alberta.
Northern Courier Pipeline is fully subscribed under long-term
contracts to service the Fort Hills Mine, which is jointly owned by
Suncor Energy Inc, Total E&P Canada Ltd. and Teck Resources
Limited and is operated by Suncor Energy Operating Inc. The
Northern Courier Pipeline Project is conditional on and subject to
the Fort Hills project receiving sanction by its co-owners and
obtaining regulatory approval. TransCanada expects to file its
initial regulatory application in early 2013.
Grand Rapids
In October, TransCanada announced that it has entered into
binding agreements with Phoenix Energy Holdings Limited (Phoenix)to
develop the Grand Rapids Pipelines project in Northern Alberta.
TransCanada and Phoenix will each own 50 per cent of the proposed
$3 billion pipeline project that includes both a crude oil and a
diluent line to transport volumes approximately 500 km (300 miles)
between the producing area northwest of Fort McMurray and the
Edmonton/ Heartland region. The Grand Rapids Pipeline system is
expected to be in service by early 2017, subject to regulatory
approvals, and will have the capacity to move up to 900,000 bbl/d
of crude oil and 330,000 bbl/d of diluent. TransCanada will operate
the system and Phoenix has entered a long-term commitment to ship
crude oil and diluent on the system.
Canadian Mainline Conversion
TransCanada has determined a conversion of a portion of the
Canadian Mainline natural gas pipeline system to crude oil service
is both technically and economically feasible. Through a
combination of converted natural gas pipeline and new construction,
the proposed pipeline would deliver crude oil between Hardisty,
Alberta and markets in Eastern Canada. The Company has begun
soliciting input from stakeholders and prospective shippers to
determine market acceptance of the proposed project.
Energy
Bruce Power
In October 2012, Bruce Power completed the refurbishment of Unit
1 and returned this unit to service on October 22, 2012. Bruce
Power also synchronized Unit 2 to Ontario's electrical grid on
October 16, 2012 and commercial operations for this unit are
expected to commence shortly. Units 1 and 2 are expected to produce
clean and reliable power for the province of Ontario until at least
2037. Following the return to service of both Units 1 and 2, Bruce
Power will be capable of producing 6,200 megawatts (MW) of
emission-free power.
The return to service of Units 1 and 2 had been delayed as a
result of a May 2012 incident which occurred within the Unit 2
electrical generator on the non-nuclear side of the plant. Bruce
Power's force majeure claim related to this incident was accepted
by the OPA and Bruce Power continues to receive the contracted
price for power generated at Bruce A.
In August 2012, Bruce Power continued to invest in its strategy
to maximize the lives of its reactors by commencing an expanded
outage investment program on Unit 4 in support of extending the
life of the unit. The Unit 4 outage, expected to conclude in late
fourth quarter 2012, will align the lifespan of Unit 4 to that of
Unit 3. In June 2012, Bruce Power returned Unit 3 to service after
completing the West Shift Plus life extension outage which
commenced in November 2011 at a cost of approximately $300 million.
This investment is expected to allow Unit 3 to produce low cost
electricity until at least 2021.
Sundance A
In December 2010, Sundance Units 1 and 2 were withdrawn from
service and were subject to a force majeure claim by TransAlta
Corporation (TransAlta) in January 2011. In February 2011,
TransAlta notified TransCanada that it had determined it was
uneconomic to repair Units 1 and 2 and that the Sundance A PPA
should therefore be terminated.
TransCanada disputed both the force majeure and economic
destruction claims under the binding dispute resolution process
provided in the PPA. The binding arbitration proceedings concluded
during second quarter 2012 and a decision was received in July
2012. The arbitration panel determined that the PPA should not be
terminated and ordered TransAlta to rebuild Units 1 and 2. The
panel also limited TransAlta's force majeure claim from November
20, 2011 until such time that the units can reasonably be returned
to service. According to the terms of the arbitration decision,
TransAlta has an obligation under the PPA to exercise all
reasonable efforts to mitigate or limit the effects of the force
majeure. TransAlta announced that it expects the units to be
returned to service in the fall of 2013.
The impact of this decision was recorded in the results for
second quarter 2012. TransCanada had recorded $188 million of
EBITDA from the commencement of the outages in December 2010 to the
end of March 2012 as it considered the outages to be an
interruption of supply. As a result of the decision, the Company
realized $138 million of this amount. The difference of $50 million
was recorded as a charge to second quarter 2012 earnings. The net
book value of the Sundance A PPA recorded in Intangibles and Other
Assets remains fully recoverable. TransCanada will not realize
revenues from the Sundance A PPA until the units return to
service.
Ravenswood
In 2011, TransCanada and other parties jointly filed two formal
complaints with the FERC regarding the manner in which the New York
Independent System Operator (NYISO) has applied pricing rules for
two new power plants that have recently begun service in the New
York Zone J market. In June 2012, the FERC addressed the first
complaint and indicated it will take steps to increase transparency
and accountability with regard to future Mitigation Exemption Test
(MET) decisions which determine whether a new facility is exempt
from offering its capacity at a floor price.
In September 2012, the FERC granted an order on the second
complaint. The FERC directed the NYISO to retest the two new
facilities, making changes to several parameters that form the
basis of the MET calculations. Based on the changes the FERC has
ordered, the recalculation could result in one or both entrants
having to offer their capacity at a floor price which TransCanada
anticipates will result in higher capacity auction prices in the
future. The order is prospective and will not impact capacity
prices for prior periods.
Ontario Solar
In late 2011, TransCanada agreed to purchase nine Ontario solar
projects from Canadian Solar Solutions Inc., with a combined
capacity of 86 megawatts, for approximately $470 million. Under the
terms of the agreement, each of the nine solar projects will be
developed and constructed by Canadian Solar Solutions Inc. using
photovoltaic panels. TransCanada will purchase each project once
construction and acceptance testing have been completed and
operations have begun under 20-year PPAs with the OPA under the
Feed-In Tariff program in Ontario. TransCanada expects the
acquisitions of these two projects to occur in early 2013 once
acceptance testing has been completed. TransCanada anticipates the
remaining projects will be placed in service and acquired in 2013
and 2014, subject to regulatory approvals.
Napanee Generating Station
In September 2012, TransCanada, the Government of Ontario, the
OPA and Ontario Power Generation announced that two Memorandums of
Understanding (MOU) were executed authorizing TransCanada to
develop, construct, own and operate a new 900 MW facility at
Ontario Power Generation's Lennox site in Eastern Ontario in the
town of Greater Napanee. The Napanee Generating Station would act
as a replacement facility for one that was planned and subsequently
cancelled in the community of Oakville. Under the terms of the
MOUs, TransCanada will be reimbursed for approximately $250 million
of verifiable costs, primarily for natural gas turbines at Oakville
which will be deployed at Napanee. The Company will further invest
approximately $1.0 billion in the replacement Napanee facility.
Definitive contracts are expected to be executed by mid-December
and include a 20-year Clean Energy Supply contract.
Cartier Wind
The 111 MW second phase of Gros-Morne is expected to be
operational in November 2012. This will complete construction of
the 590 MW Cartier Wind project in Quebec. All of the power
produced by Cartier Wind is sold under 20-year PPAs to
Hydro-Quebec.
Becancour
In June 2012, Hydro-Quebec notified TransCanada it would
exercise its option to extend the agreement to suspend all
electricity generation from the Becancour power plant throughout
2013. Under the terms of the suspension agreement, Hydro-Quebec has
the option, subject to certain conditions, to extend the suspension
on an annual basis until such time as regional electricity demand
levels recover. TransCanada will continue to receive capacity
payments under the agreement similar to those that would have been
received under the normal course of operation while energy
production and payments are suspended.
Share Information
At October 25, 2012, TransCanada had 705 million issued and
outstanding common shares, and had 22 million Series 1, 14 million
Series 3 and 14 million Series 5 issued and outstanding first
preferred shares that are convertible to 22 million Series 2, 14
million Series 4 and 14 million Series 6 preferred shares,
respectively. In addition, there were eight million outstanding
options to purchase common shares, of which five million were
exercisable as at October 25, 2012.
Selected Quarterly Consolidated Financial Data(1)(2)
2012 2011 2010
------------------ ------------------------- ------
(millions of dollars,
except per share
amounts) Third Second First Fourth Third Second First Fourth
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Revenues 2,126 1,847 1,945 2,015 2,043 1,851 1,930 1,743
Net income attributable
to controlling
interests 382 286 366 390 399 367 425 277
Share Statistics
Net Income per common
share
Basic $0.52 $0.39 $0.50 $0.53 $0.55 $0.50 $0.59 $0.38
Diluted $0.52 $0.39 $0.50 $0.53 $0.55 $0.50 $0.59 $0.37
Dividend declared per
common share $0.44 $0.44 $0.44 $0.42 $0.42 $0.42 $0.42 $0.40
---------------------------------------------------
---------------------------------------------------
(1) The selected quarterly consolidated financial data has been prepared in
accordance with U.S. GAAP and is presented in Canadian dollars.
(2) Certain comparative figures have been reclassified to conform with the
financial statement presentation adopted for the current period.
Factors Affecting Quarterly Financial Information
In Natural Gas Pipelines, which consists primarily of the
Company's investments in regulated natural gas pipelines and
regulated natural gas storage facilities, annual revenues, EBIT and
net income fluctuate over the long term based on regulators'
decisions and negotiated settlements with shippers. Generally,
quarter-over-quarter revenues and net income during any particular
fiscal year remain relatively stable with fluctuations resulting
from adjustments being recorded due to regulatory decisions and
negotiated settlements with shippers, seasonal fluctuations in
short-term throughput volumes on U.S. pipelines, acquisitions and
divestitures, and developments outside of the normal course of
operations.
In Oil Pipelines, which consists of the Company's investment in
the Keystone Pipeline System, earnings are primarily generated by
contractual arrangements for committed capacity that are not
dependent on actual throughput. Quarter-over-quarter revenues, EBIT
and net income during any particular fiscal year remain relatively
stable with fluctuations resulting from planned and unplanned
outages, and changes in the amount of spot volumes transported and
the associated rate charged. Spot volumes transported are affected
by customer demand, market pricing, planned and unplanned outages
of refineries, terminals and pipeline facilities, and developments
outside of the normal course of operations.
In Energy, which consists primarily of the Company's investments
in electrical power generation plants and non-regulated natural gas
storage facilities, quarter-over-quarter revenues, EBIT and net
income are affected by seasonal weather conditions, customer
demand, market prices, hydrology, capacity prices, planned and
unplanned plant outages, acquisitions and divestitures, certain
fair value adjustments and developments outside of the normal
course of operations.
Significant developments that affected the last eight quarters'
EBIT and Net Income are as follows:
-- Third Quarter 2012, EBIT included net unrealized gains of $31 million
pre-tax ($20 million after tax) from certain risk management activities.
-- Second Quarter 2012, EBIT included a $50 million pre-tax ($37 million
after tax) charge from the Sundance A PPA arbitration decision and net
unrealized losses of $14 million pre-tax ($13 million after tax) from
certain risk management activities.
-- First Quarter 2012, EBIT included net unrealized losses of $22 million
pre-tax ($11 million after tax) from certain risk management activities.
-- Fourth Quarter 2011, EBIT included net unrealized gains of $13 million
pre-tax ($11 million after tax) resulting from certain risk management
activities.
-- Third Quarter 2011, Energy's EBIT included the positive impact of higher
prices for Western Power. EBIT included net unrealized losses of $43
million pre-tax ($30 million after tax) resulting from certain risk
management activities.
-- Second Quarter 2011, Natural Gas Pipelines' EBIT included incremental
earnings from Guadalajara, which was placed in service in June 2011.
Energy's EBIT included incremental earnings from Coolidge, which was
placed in service in May 2011. EBIT included net unrealized losses of $3
million pre-tax ($2 million after tax) resulting from certain risk
management activities.
-- First Quarter 2011, Natural Gas Pipelines' EBIT included incremental
earnings from Bison, which was placed in service in January 2011. Oil
Pipelines began recording EBIT for the Wood River/Patoka and Cushing
Extension sections of the Keystone Pipeline System in February 2011.
EBIT included net unrealized losses of $19 million pre-tax ($12 million
after tax) resulting from certain risk management activities.
-- Fourth Quarter 2010, Natural Gas Pipelines' EBIT decreased as a result
of recording a $146 million pre-tax ($127 million after tax) valuation
provision for advances to the Aboriginal Pipeline Group for the
Mackenzie Gas Project. Energy's EBIT included contributions from the
second phase of Kibby Wind, which was placed in service in October 2010,
and net unrealized gains of $46 million pre-tax ($29 million after tax)
resulting from certain risk management activities.
Condensed Consolidated Statement of Income
Three months ended Nine months ended
(unaudited) September 30 September 30
(millions of Canadian dollars except
per share amounts) 2012 2011 2012 2011
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Revenues
Natural Gas Pipelines 1,058 1,036 3,177 3,107
Oil Pipelines 259 229 769 575
Energy 809 778 1,972 2,142
----------------------------------------
2,126 2,043 5,918 5,824
Income from Equity Investments 71 127 196 328
Operating and Other Expenses
Plant operating costs and other 758 717 2,192 1,973
Commodity purchases resold 337 271 758 782
Depreciation and amortization 342 337 1,032 987
----------------------------------------
1,437 1,325 3,982 3,742
----------------------------------------
Financial Charges/(Income)
Interest expense 249 240 730 686
Interest income and other (34) 43 (70) (12)
----------------------------------------
215 283 660 674
----------------------------------------
Income before Income Taxes 545 562 1,472 1,736
----------------------------------------
Income Taxes Expense
Current 6 49 101 197
Deferred 128 82 247 252
----------------------------------------
134 131 348 449
----------------------------------------
Net Income 411 431 1,124 1,287
Net Income Attributable to Non-
Controlling Interests 29 32 90 96
----------------------------------------
Net Income Attributable to
Controlling Interests 382 399 1,034 1,191
Preferred Share Dividends 13 13 41 41
----------------------------------------
Net Income Attributable to Common
Shares 369 386 993 1,150
----------------------------------------
----------------------------------------
Net Income per Common Share
Basic and Diluted $0.52 $0.55 $1.41 $1.64
----------------------------------------
----------------------------------------
Dividends Declared per Common Share $0.44 $0.42 $1.32 $1.26
----------------------------------------
----------------------------------------
Weighted Average Number of Common
Shares (millions)
Basic 705 703 704 701
Diluted 706 704 705 702
----------------------------------------
----------------------------------------
See accompanying notes to the condensed consolidated financial statements.
Condensed Consolidated Statement of Comprehensive Income
Three months ended Nine months ended
(unaudited) September 30 September 30
(millions of Canadian dollars) 2012 2011 2012 2011
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net Income 411 431 1,124 1,287
----------------------------------------
Other Comprehensive Income/(Loss),
Net of Income Taxes
Change in foreign currency
translation gains and losses on
investments in foreign
operations(1) (196) 416 (189) 262
Change in fair value of derivative
instruments to hedge the net
investments in foreign
operations(2) 99 (213) 76 (141)
Change in fair value of derivative
instruments designated as cash flow
hedges(3) 60 (18) 43 (113)
Reclassification to Net Income of
losses on derivative instruments
designated as cash flow hedges(4) 47 44 119 114
Reclassification to Net Income of
actuarial losses and prior service
costs on pension and other post-
retirement benefit plans(5) 4 2 18 7
Other Comprehensive (Loss)/Income of
Equity Investments(6) (3) 1 (1) 1
----------------------------------------
Other Comprehensive Income 11 232 66 130
----------------------------------------
Comprehensive Income 422 663 1,190 1,417
Comprehensive (Loss)/Income
Attributable to Non-Controlling
Interests (5) 104 59 150
----------------------------------------
Comprehensive Income Attributable to
Controlling Interests 427 559 1,131 1,267
Preferred Share Dividends 13 13 41 41
----------------------------------------
Comprehensive Income Attributable to
Common Shares 414 546 1,090 1,226
----------------------------------------
----------------------------------------
(1) Net of income tax expense of $51 million and $48 million for the three
and nine months ended September 30, 2012, respectively (2011 - recovery
of $97 million and $57 million, respectively).
(2) Net of income tax expense of $34 million and $26 million for the three
and nine months ended September 30, 2012, respectively (2011 - recovery
of $78 million and $51 million, respectively).
(3) Net of income tax expense of $28 million and $9 million for the three
and nine months ended September 30, 2012, respectively (2011 - recovery
of $9 million and $49 million, respectively).
(4) Net of income tax expense of $26 million and $67 million for the three
and nine months ended September 30, 2012, respectively (2011 - expense
of $20 million and $57 million, respectively).
(5) Net of income tax expense of $2 million and recovery of $1 million for
the three and nine months ended September 30, 2012, respectively (2011 -
expense of $1 million and $3 million, respectively).
(6) Primarily related to reclassification to Net Income of actuarial losses
on pension and other post-retirement benefit plans, gains and losses on
derivative instruments designated as cash flow hedges, offset by change
in gains and losses on derivative instruments designated as cash flow
hedges, net of income tax recovery of $1 million and nil for the three
and nine months ended September 30, 2012, respectively (2011 - recovery
of $2 million and expense of $3 million, respectively).
See accompanying notes to the condensed consolidated financial statements.
Condensed Consolidated Statement of Cash Flows
Three months ended Nine months ended
(unaudited) September 30 September 30
(millions of Canadian dollars) 2012 2011 2012 2011
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Cash Generated from Operations
Net income 411 431 1,124 1,287
Depreciation and amortization 342 337 1,032 987
Deferred income taxes 128 82 247 252
Income from equity investments (71) (127) (196) (328)
Distributions received from equity
investments 95 127 252 307
Employee future benefits expense
(less than)/in excess of funding (23) 6 (11) 4
Other (16) 72 18 105
Decrease in operating working
capital 235 80 80 145
----------------------------------------
Net cash provided by operations 1,101 1,008 2,546 2,759
----------------------------------------
Investing Activities
Capital expenditures (694) (505) (1,555) (1,593)
Equity investments (144) (213) (557) (451)
Deferred amounts and other 40 93 82 133
----------------------------------------
Net cash used in investing
activities (798) (625) (2,030) (1,911)
----------------------------------------
Financing Activities
Dividends on common and preferred
shares (322) (308) (956) (706)
Distributions paid to non-
controlling interests (33) (33) (101) (87)
Notes payable (repaid)/issued, net (930) 154 (341) (257)
Long-term debt issued, net of issue
costs 995 54 1,488 573
Reduction of long-term debt (12) (206) (782) (946)
Common shares issued 17 14 35 39
Partnership units of subsidiary
issued, net of costs - - - 321
----------------------------------------
Net cash used in financing
activities (285) (325) (657) (1,063)
----------------------------------------
Effect of Foreign Exchange Rate
Changes on Cash and Cash
Equivalents (14) 27 (19) 12
----------------------------------------
Increase/(Decrease) in Cash and Cash
Equivalents 4 85 (160) (203)
----------------------------------------
Cash and Cash Equivalents
Beginning of period 490 372 654 660
----------------------------------------
Cash and Cash Equivalents
End of period 494 457 494 457
----------------------------------------
----------------------------------------
See accompanying notes to the condensed consolidated financial statements.
Condensed Consolidated Balance Sheet
(unaudited) September 30 December 31
(millions of Canadian dollars) 2012 2011
----------------------------------------------------------------------------
----------------------------------------------------------------------------
ASSETS
Current Assets
Cash and cash equivalents 494 654
Accounts receivable 873 1,094
Inventories 214 248
Other 973 1,114
----------------------------
2,554 3,110
Plant, Property and Equipment, net of
accumulated depreciation of $16,259 and
$15,406, respectively 32,379 32,467
Equity Investments 5,520 5,077
Goodwill 3,419 3,534
Regulatory Assets 1,629 1,684
Intangibles and Other Assets 1,440 1,466
----------------------------
46,941 47,338
----------------------------
----------------------------
LIABILITIES
Current Liabilities
Notes payable 1,470 1,863
Accounts payable 1,877 2,359
Accrued interest 346 365
Current portion of long-term debt 1,070 935
----------------------------
4,763 5,522
Regulatory Liabilities 321 297
Deferred Amounts 706 929
Deferred Income Tax Liabilities 3,858 3,591
Long-Term Debt 17,899 17,724
Junior Subordinated Notes 983 1,016
----------------------------
28,530 29,079
EQUITY
Common shares, no par value 12,049 12,011
Issued and outstanding: September 30, 2012 - 705
million shares
December 31, 2011 - 704 million shares
Preferred shares 1,224 1,224
Additional paid-in capital 380 380
Retained earnings 4,691 4,628
Accumulated other comprehensive loss (1,352) (1,449)
----------------------------
Controlling Interests 16,992 16,794
Non-controlling interests 1,419 1,465
----------------------------
Equity 18,411 18,259
----------------------------
46,941 47,338
----------------------------
----------------------------
Contingencies and Guarantees (Note 8)
See accompanying notes to the condensed consolidated financial statements.
Condensed Consolidated Statement of Accumulated Other Comprehensive
(Loss)/Income
Pension and
Other Post-
Currency Cash Flow retirement
(unaudited)(millions of Translation Hedges Plan
Canadian dollars) Adjustments and Other Adjustments Total
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Balance at December 31, 2011 (643) (281) (525) (1,449)
Change in foreign currency
translation gains and
losses on investments in
foreign operations(1) (158) - - (158)
Change in fair value of
derivative instruments to
hedge net investments in
foreign operations(2) 76 - - 76
Change in fair value of
derivative instruments
designated as cash flow
hedges(3) - 43 - 43
Reclassification to Net
Income of losses on
derivative instruments
designated as cash flow
hedges pertaining to prior
periods(4)(5) - 119 - 119
Reclassification of
actuarial losses and prior
service costs on pension
and other post-retirement
benefit plans(6) - - 18 18
Other Comprehensive
(Loss)/Income of Equity
Investments (7) - (12) 11 (1)
------------------------------------------------
Balance at September 30,
2012 (725) (131) (496) (1,352)
------------------------------------------------
------------------------------------------------
Pension and
Other Post-
Currency Cash Flow retirement
(unaudited)(millions of Translation Hedges Plan
Canadian dollars) Adjustments and Other Adjustments Total
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Balance at December 31, 2010 (683) (194) (366) (1,243)
Change in foreign currency
translation gains and
losses on investments in
foreign operations(1) 216 - - 216
Change in fair value of
derivative instruments to
hedge net investments in
foreign operations(2) (141) - - (141)
Change in fair value of
derivative instruments
designated as cash flow
hedges(3) - (113) - (113)
Reclassification to Net
Income of losses on
derivative instruments
designated as cash flow
hedges(4)(5) - 106 - 106
Reclassification of
actuarial losses and prior
service costs on pension
and other post-retirement
benefit plans(6) - - 7 7
Other Comprehensive
(Loss)/Income of Equity
Investments (7) - (7) 8 1
------------------------------------------------
Balance at September 30,
2011 (608) (208) (351) (1,167)
------------------------------------------------
------------------------------------------------
(1) Net of income tax expense of $48 million and non-controlling interest
losses of $31 million for the nine months ended September 30, 2012 (2011
- recovery of $57 million; gain of $46 million).
(2) Net of income tax expense of $26 million for the nine months ended
September 30, 2012 (2011 - recovery of $51 million).
(3) Net of income tax expense of $9 million for the nine months ended
September 30, 2012 (2011 - recovery of $49 million).
(4) Net of income tax expense of $67 million and non-controlling interest
losses of nil for the nine months ended September 30, 2012 (2011 -
expense of $57 million; gain of $8 million).
(5) Losses related to cash flow hedges reported in AOCI and expected to be
reclassified to Net Income in the next 12 months are estimated to be $56
million ($31 million, net of tax). These estimates assume constant
commodity prices, interest rates and foreign exchange rates over time,
however, the amounts reclassified will vary based on the actual value of
these factors at the date of settlement.
(6) Net of income tax recovery of $1 million for the nine months ended
September 30, 2012 (2011 - expense of $3 million).
(7) Primarily related to reclassification to Net Income of actuarial losses
on pension and other post-retirement benefit plans, reclassification to
Net Income of gains and losses on derivative instruments designated as
cash flow hedges, partially offset by changes in gains and losses on
derivative instruments designated as cash flow hedges, net of income tax
expense of nil for the nine months ended September 30, 2012
(2011 - nil).
See accompanying notes to the condensed consolidated financial statements.
Condensed Consolidated Statement of Equity
Nine months ended
(unaudited) September 30
(millions of Canadian dollars) 2012 2011
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Common Shares
Balance at beginning of period 12,011 11,745
Shares issued under dividend reinvestment plan - 202
Shares issued on exercise of stock options 38 40
----------------------------
Balance at end of period 12,049 11,987
----------------------------
Preferred Shares
Balance at beginning and end of period 1,224 1,224
----------------------------
Additional Paid-In Capital
Balance at beginning of period 380 349
Issuance of stock options, net of exercises - 1
Dilution gain from TC PipeLines, LP units issued - 30
----------------------------
Balance at end of period 380 380
----------------------------
Retained Earnings
Balance at beginning of period 4,628 4,273
Net income attributable to controlling interests 1,034 1,191
Common share dividends (930) (884)
Preferred share dividends (41) (41)
----------------------------
Balance at end of period 4,691 4,539
----------------------------
Accumulated Other Comprehensive Loss
Balance at beginning of period (1,449) (1,243)
Other comprehensive income 97 76
----------------------------
Balance at end of period (1,352) (1,167)
----------------------------
Equity Attributable to Controlling Interests 16,992 16,963
----------------------------
Equity Attributable to Non-Controlling Interests
Balance at beginning of period 1,465 1,157
Net income attributable to non-controlling
interests 90 96
Other comprehensive (loss)/income attributable
to non-controlling interests (31) 54
Sale of TC PipeLines, LP units
Proceeds, net of issue costs - 321
Decrease in TransCanada's ownership - (50)
Distributions to non-controlling interests (101) (95)
Other (4) 13
----------------------------
Balance at end of period 1,419 1,496
----------------------------
Total Equity 18,411 18,459
----------------------------
----------------------------
See accompanying notes to the condensed consolidated financial statements.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
These condensed consolidated financial statements of TransCanada
Corporation (TransCanada or the Company) have been prepared by
management in accordance with United States generally accepted
accounting principles (U.S. GAAP). Comparative figures, which were
previously presented in accordance with Canadian generally accepted
accounting principles as defined in Part V of the Canadian
Institute of Chartered Accountants Handbook (CGAAP), have been
adjusted as necessary to be compliant with the Company's accounting
policies under U.S. GAAP. The amounts adjusted for U.S. GAAP
presented in these condensed consolidated financial statements for
the three and nine months ended September 30, 2011 are the same as
those that have been previously reported in the Company's September
30, 2011 Reconciliation to U.S. GAAP. The amounts adjusted for U.S.
GAAP at December 31, 2011 are the same as those reported in Note 25
of TransCanada's 2011 audited Consolidated Financial Statements
included in TransCanada's 2011 Annual Report. The accounting
policies and critical accounting estimates applied are consistent
with those outlined in TransCanada's 2011 Annual Report, except as
described in Note 2, which outlines the Company's significant
accounting policies that have changed upon adoption of U.S. GAAP.
Capitalized and abbreviated terms that are used but not otherwise
defined herein are identified in the Glossary of Terms contained in
TransCanada's 2011 Annual Report.
These condensed consolidated financial statements reflect
adjustments, all of which are normal recurring adjustments that
are, in the opinion of management, necessary to reflect the
financial position and results of operations for the respective
periods. These condensed consolidated financial statements do not
include all disclosures required in the annual financial statements
and should be read in conjunction with the 2011 audited
Consolidated Financial Statements included in TransCanada's 2011
Annual Report. Certain comparative figures have been reclassified
to conform with the financial statement presentation adopted for
the current period.
Earnings for interim periods may not be indicative of results
for the fiscal year in the Company's Natural Gas Pipeline segment
due to seasonal fluctuations in short-term throughput volumes on
U.S. pipelines. Earnings for interim periods may also not be
indicative of results for the fiscal year in the Company's Energy
segment due to the impact of seasonal weather conditions on
customer demand and market pricing in certain of the Company's
investments in electrical power generation plants and non-regulated
gas storage facilities.
Use of Estimates and Judgements
In preparing these financial statements, TransCanada is required
to make estimates and assumptions that affect both the amount and
timing of recording assets, liabilities, revenues and expenses
since the determination of these items may be dependent on future
events. The Company uses the most current information available and
exercises careful judgement in making these estimates and
assumptions. In the opinion of management, these condensed
consolidated financial statements have been properly prepared
within reasonable limits of materiality and within the framework of
the Company's accounting policies.
2. Changes in Accounting Policies
Changes to Accounting Policies Upon Adoption of U.S. GAAP
Principles of Consolidation
The condensed consolidated financial statements include the
accounts of TransCanada and its subsidiaries. The Company
consolidates its interests in entities over which it is able to
exercise control. To the extent there are interests owned by other
parties, these interests are included in Non-Controlling Interests.
TransCanada uses the equity method of accounting for joint ventures
in which the Company is able to exercise joint control and for
investments in which the Company is able to exercise significant
influence. TransCanada records its proportionate share of undivided
interests in certain assets.
Inventories
Inventories primarily consist of materials and supplies,
including spare parts and fuel, and natural gas inventory in
storage, and are carried at the lower of weighted average cost or
market.
Income Taxes
The Company uses the liability method of accounting for income
taxes. This method requires the recognition of deferred income tax
assets and liabilities for future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases.
Deferred income tax assets and liabilities are measured using
enacted tax rates at the balance sheet date that are anticipated to
apply to taxable income in the years in which temporary differences
are expected to be recovered or settled. Changes to these balances
are recognized in income in the period during which they occur
except for changes in balances related to the Canadian Mainline,
Alberta System and Foothills, which are deferred until they are
refunded or recovered in tolls, as permitted by the NEB.
Canadian income taxes are not provided on the unremitted
earnings of foreign investments that the Company does not intend to
repatriate in the foreseeable future.
Employee Benefit and Other Plans
The Company sponsors defined benefit pension plans (DB Plans),
defined contribution plans (DC Plans), a Savings Plan and other
post-retirement benefit plans. Contributions made by the Company to
the DC Plans and Savings Plan are expensed in the period in which
contributions are made. The cost of the DB Plans and other
post-retirement benefits received by employees is actuarially
determined using the projected benefit method pro-rated based on
service and management's best estimate of expected plan investment
performance, salary escalation, retirement age of employees and
expected health care costs.
The DB Plans' assets are measured at fair value. The expected
return on the DB Plans' assets is determined using market-related
values based on a five-year moving average value for all of the DB
Plans' assets. Past service costs are amortized over the expected
average remaining service life of the employees. Adjustments
arising from plan amendments are amortized on a straight-line basis
over the average remaining service period of employees active at
the date of amendment. The Company recognizes the overfunded or
underfunded status of its DB Plans as an asset or liability on its
Balance Sheet and recognizes changes in that funded status through
Other Comprehensive Income/(Loss) (OCI) in the year in which the
change occurs. The excess of net actuarial gains or losses over 10
per cent of the greater of the benefit obligation and the
market-related value of the DB Plans' assets, if any, is amortized
out of Accumulated Other Comprehensive Income/(Loss) (AOCI) over
the average remaining service period of the active employees. For
certain regulated operations, post-retirement benefit amounts are
recoverable through tolls as benefits are funded. The Company
records any unrecognized gains and losses or changes in actuarial
assumptions related to these post-retirement benefit plans as
either regulatory assets or liabilities. The regulatory assets or
liabilities are amortized on a straight-line basis over the average
remaining service life of active employees. When the restructuring
of a benefit plan gives rise to both a curtailment and a
settlement, the curtailment is accounted for prior to the
settlement.
The Company has medium-term incentive plans, under which
payments are made to eligible employees. The expense related to
these incentive plans is accounted for on an accrual basis. Under
these plans, benefits vest when certain conditions are met,
including the employees' continued employment during a specified
period and achievement of specified corporate performance
targets.
Long-Term Debt Transaction Costs
The Company records long-term debt transaction costs as deferred
assets and amortizes these costs using the effective interest
method for all costs except those related to the Canadian natural
gas regulated pipelines, which continue to be amortized on a
straight-line basis in accordance with the provisions of tolling
mechanisms.
Guarantees
Upon issuance, the Company records the fair value of certain
guarantees entered into by the Company on behalf of partially owned
entities for which contingent payments may be made. The fair value
of these guarantees is estimated by discounting the cash flows that
would be incurred by the Company if letters of credit were used in
place of the guarantees. Guarantees are recorded as an increase to
Equity Investments, Plant, Property and Equipment, or a charge to
Net Income, and a corresponding liability is recorded in Deferred
Amounts.
Changes in Accounting Policies for 2012
Fair Value Measurement
Effective January 1, 2012, the Company adopted the Accounting
Standards Update (ASU) on fair value measurements as issued by the
Financial Accounting Standards Board (FASB). Adoption of the ASU
has resulted in an increase in the qualitative and quantitative
disclosures regarding Level III measurements.
Intangibles - Goodwill and Other
Effective January 1, 2012, the Company adopted the ASU on
testing goodwill for impairment as issued by the FASB. Adoption of
the ASU has resulted in a change in the accounting policy related
to testing goodwill for impairment, as the Company is now permitted
under U.S. GAAP to first assess qualitative factors affecting the
fair value of a reporting unit in comparison to the carrying amount
as a basis for determining whether it is required to proceed to the
two-step quantitative impairment test.
Future Accounting Changes
Balance Sheet Offsetting/Netting
In December 2011, the FASB issued amended guidance to enhance
disclosures that will enable users of the financial statements to
evaluate the effect, or potential effect, of netting arrangements
on an entity's financial position. The amendments result in
enhanced disclosures by requiring additional information regarding
financial instruments and derivative instruments that are either
offset in accordance with current U.S. GAAP or subject to an
enforceable master netting arrangement. This guidance is effective
for annual periods beginning on or after January 1, 2013. Adoption
of these amendments is expected to result in an increase in
disclosure regarding financial instruments which are subject to
offsetting as described in this amendment.
3. Segmented Information
Three months
ended
September 30
(unaudited)
(millions of Natural Gas Oil
Canadian Pipelines Pipelines Energy Corporate Total
dollars) 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Revenues 1,058 1,036 259 229 809 778 - - 2,126 2,043
Income from
equity
investments 37 39 - - 34 88 - - 71 127
Plant
operating
costs and
other (435) (376) (82) (73) (220) (250) (21) (18) (758) (717)
Commodity
purchases
resold - - - - (337) (271) - - (337) (271)
Depreciation
and
amortization (231) (231) (37) (38) (70) (65) (4) (3) (342) (337)
---------------------------------------------------------------
429 468 140 118 216 280 (25) (21) 760 845
-------------------------------------------------
-------------------------------------------------
Interest
expense (249) (240)
Interest
income and
other 34 (43)
--------------
Income before
Income Taxes 545 562
Income taxes
expense (134) (131)
--------------
Net Income 411 431
Net Income Attributable to Non-Controlling Interests (29) (32)
--------------
Net Income Attributable to Controlling Interests 382 399
Preferred
Share
Dividends (13) (13)
--------------
Net Income Attributable to Common Shares 369 386
--------------
--------------
Nine months
ended
September 30
(unaudited)
(millions of Natural Gas Oil
Canadian Pipelines Pipelines(1) Energy Corporate Total
dollars) 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Revenues 3,177 3,107 769 575 1,972 2,142 - - 5,918 5,824
Income from
equity
investments 120 117 - - 76 211 - - 196 328
Plant
operating
costs and
other (1,246)(1,064) (243) (167) (638) (685) (65) (57) (2,192)(1,973)
Commodity
purchases
resold - - - - (758) (782) - - (758) (782)
Depreciation
and
amortization (697) (688) (109) (95) (215) (194) (11) (10) (1,032) (987)
---------------------------------------------------------------
1,354 1,472 417 313 437 692 (76) (67) 2,132 2,410
-------------------------------------------------
-------------------------------------------------
Interest
expense (730) (686)
Interest
income and
other 70 12
--------------
Income before
Income Taxes 1,472 1,736
Income taxes
expense (348) (449)
--------------
Net Income 1,124 1,287
Net Income Attributable to Non-Controlling Interests (90) (96)
--------------
Net Income Attributable to Controlling Interests 1,034 1,191
Preferred
Share
Dividends (41) (41)
--------------
Net Income Attributable to Common Shares 993 1,150
--------------
--------------
(1) Commencing in February 2011, TransCanada began recording earnings
related to the Wood River/Patoka and Cushing Extension sections of
Keystone.
Total Assets
(unaudited) September 30, December 31,
(millions of Canadian dollars) 2012 2011
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Natural Gas Pipelines 22,862 23,161
Oil Pipelines 9,628 9,440
Energy 13,223 13,269
Corporate 1,228 1,468
------------------------------
46,941 47,338
------------------------------
------------------------------
4. Income Taxes
At September 30, 2012, the total unrecognized tax benefit of
uncertain tax positions was approximately $50 million (December 31,
2011 - $52 million). TransCanada recognizes interest and penalties
related to income tax uncertainties in income tax expense. Included
in net tax expense for the three and nine months ended September
30, 2012 is a reversal of interest expense of $2 million and $1
million, respectively, and nil for penalties (2011 - reversal of
interest expense of $11 million and $13 million, respectively, and
nil for penalties). At September 30, 2012, the Company had $6
million accrued for interest expense and nil accrued for penalties
(December 31, 2011 - $7 million accrued for interest expense and
nil accrued for penalties).
The effective tax rates for the nine-month periods ended
September 30, 2012 and 2011 were 23.6 per cent and 25.9 per cent,
respectively. The lower effective tax rate in 2012 was a result of
a reduction in the Canadian statutory tax rate, and changes in the
proportion of income earned between Canadian and foreign
jurisdictions.
TransCanada expects the enactment of certain Canadian Federal
tax legislation in the next twelve months which is expected to
result in a favourable income tax adjustment of approximately $25
million. Otherwise, subject to the results of audit examinations by
taxation authorities and other legislative amendments, TransCanada
does not anticipate further adjustments to the unrecognized tax
benefits during the next twelve months that would have a material
impact on its financial statements.
5. Long-Term Debt
In the three and nine months ended September 30, 2012, the
Company capitalized interest related to capital projects of $74
million and $224 million, respectively (2011 - $66 million and $231
million, respectively).
In January 2012, TransCanada PipeLine USA Ltd. repaid the
remaining principal of US$500 million on its five-year term
loan.
In March 2012, TransCanada PipeLines Limited (TCPL) issued
US$500 million of 0.875 per cent senior notes due in 2015.
In May 2012, TCPL retired US$200 million of 8.625 per cent
senior notes.
In August 2012, TCPL issued US$1.0 billion of 2.5 per cent
senior notes due in 2022.
6. Employee Post-Retirement Benefits
The net benefit plan expense for the Company's defined benefit
pension plans and other post-retirement benefit plans is as
follows:
Three months ended Nine months ended September
September 30 30
-----------------------------------------------------
-----------------------------------------------------
Other Post- Other Post-
retirement retirement
Pension Benefit Pension Benefit
(unaudited) Benefit Plans Plans Benefit Plans Plans
(millions of Canadian
dollars) 2012 2011 2012 2011 2012 2011 2012 2011
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Service cost 16 14 1 - 49 41 2 1
Interest cost 24 23 2 2 71 68 6 6
Expected return on plan
assets (28) (29) - - (85) (85) (1) (1)
Amortization of
actuarial loss 5 3 - - 14 8 1 1
Amortization of past
service cost - - - - 1 1 - -
Amortization of
regulatory asset 5 3 - - 15 10 - -
Amortization of
transitional
obligation related to
regulated business - - 1 - - - 2 1
-----------------------------------------------------
Net Benefit Cost
Recognized 22 14 4 2 65 43 10 8
-----------------------------------------------------
-----------------------------------------------------
7. Financial Instruments and Risk Management
Counterparty Credit and Liquidity Risk
TransCanada's maximum counterparty credit exposure with respect
to financial instruments at the balance sheet date, without taking
into account security held, consisted of accounts receivable, the
fair value of derivative assets and notes receivable. The carrying
amounts and fair values of these financial assets, except amounts
for derivative assets, are included in Accounts Receivable and
Other in the Non-Derivative Financial Instruments Summary table
below. Letters of credit and cash are the primary types of security
provided to support these amounts. The majority of counterparty
credit exposure is with counterparties who are investment grade. At
September 30, 2012, there were no significant amounts past due or
impaired.
At September 30, 2012, the Company had a credit risk
concentration of $266 million due from a counterparty. This amount
is expected to be fully collectible and is secured by a guarantee
from the counterparty's parent company.
The Company continues to manage its liquidity risk by ensuring
sufficient cash and credit facilities are available to meet its
operating and capital expenditure obligations when due, under both
normal and stressed economic conditions.
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 September 30, 2012, the
Company had designated as a net investment hedge U.S.
dollar-denominated debt with a carrying value of $11.0 billion
(US$11.2 billion) and a fair value of $14.4 billion (US$14.6
billion). At September 30, 2012, $60 million (December 31, 2011 -
$79 million) was included in Other Current Assets, $96 million
(December 31, 2011 - $66 million) was included in Intangibles and
Other Assets, $6 million (December 31, 2011 - $15 million) was
included in Accounts Payable and $18 million (December 31, 2011 -
$41 million) was included in Deferred Amounts for the fair value of
forwards and swaps used to hedge the Company's net U.S. dollar
investment in self-sustaining foreign operations.
Derivatives Hedging Net Investment in Self-Sustaining Foreign
Operations
The fair values and notional principal amounts for the
derivatives designated as a net investment hedge were as
follows:
September 30, 2012 December 31, 2011
------------------------------------------
------------------------------------------
Asset/(Liability) Notional or Notional or
(unaudited) Fair Principal Fair Principal
(millions of dollars) Value(1) Amount Value(1) Amount
----------------------------------------------------------------------------
----------------------------------------------------------------------------
U.S. dollar cross-currency swaps
(maturing 2012 to 2019)(2) 131 US 3,950 93 US 3,850
U.S. dollar forward foreign
exchange contracts
(maturing 2012) 1 US 100 (4) US 725
------------------------------------------
132 US 4,050 89 US 4,575
------------------------------------------
------------------------------------------
(1) Fair values equal carrying values.
(2) Consolidated Net Income in the three and nine months ended September 30,
2012 included net realized gains of $8 million and $22 million,
respectively (2011 - gains of $8 million and $20 million, respectively)
related to the interest component of cross-currency swap settlements.
Non-Derivative Financial Instruments Summary
The carrying and fair values of non-derivative financial
instruments were as follows:
September 30, 2012 December 31, 2011
----------------------------------------
----------------------------------------
(unaudited) Carrying Fair Carrying Fair
(millions of dollars) Amount(1) Value(2) Amount(1) Value(2)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Financial Assets
Cash and cash equivalents 494 494 654 654
Accounts receivable and other(3) 1,102 1,158 1,359 1,403
Available-for-sale assets(3) 32 32 23 23
----------------------------------------
1,628 1,684 2,036 2,080
----------------------------------------
----------------------------------------
Financial Liabilities(4)
Notes payable 1,470 1,470 1,863 1,863
Accounts payable and deferred
amounts(5) 1,069 1,069 1,329 1,329
Accrued interest 346 346 365 365
Long-term debt 18,969 24,938 18,659 23,757
Junior subordinated notes 983 1,048 1,016 1,027
----------------------------------------
22,837 28,871 23,232 28,341
----------------------------------------
----------------------------------------
(1) Recorded at amortized cost, except for US$350 million (December 31, 2011
- US$350 million) of Long-Term Debt that is recorded at fair value. This
debt which is recorded at fair value on a recurring basis is classified
in Level II of the fair value category using the income approach based
on interest rates from external data service providers.
(2) The fair value measurement of financial assets and liabilities recorded
at amortized cost for which the fair value is not equal to the carrying
value would be included in Level II of the fair value hierarchy using
the income approach based on interest rates from external data service
providers.
(3) At September 30, 2012, the Condensed Consolidated Balance Sheet included
financial assets of $873 million (December 31, 2011 - $1.1 billion) in
Accounts Receivable, $39 million (December 31, 2011 - $41 million) in
Other Current Assets and $222 million (December 31, 2011 - $247 million)
in Intangibles and Other Assets.
(4) Consolidated Net Income in the three and nine months ended September 30,
2012 included losses of $2 million and $14 million, respectively (2011 -
losses of $7 million and $18 million, respectively) for fair value
adjustments related to interest rate swap agreements on US$350 million
(2011 - US$350 million) of Long-Term Debt. There were no other
unrealized gains or losses from fair value adjustments to the non-
derivative financial instruments.
(5) At September 30, 2012, the Condensed Consolidated Balance Sheet included
financial liabilities of $967 million (December 31, 2011 - $1.2 billion)
in Accounts Payable and $102 million (December 31, 2011 - $137 million)
in Deferred Amounts.
Derivative Financial Instruments Summary
Information for the Company's derivative financial instruments,
excluding hedges of the Company's net investment in self-sustaining
foreign operations, is as follows:
September 30, 2012
(unaudited)
(millions of Canadian dollars Natural Foreign
unless otherwise indicated) Power Gas Exchange Interest
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Derivative Financial Instruments
Held for Trading(1)
Fair Values(2)
Assets $ 168 $ 107 $ 7 $ 16
Liabilities $ (195) $ (126) $ (13) $ (16)
Notional Values
Volumes(3)
Purchases 31,717 99 - -
Sales 32,700 73 - -
Canadian dollars - - - 620
U.S. dollars - - US 1,255 US 200
Cross-currency - - 47/US 37 -
Net unrealized gains/(losses) in
the period(4)
Three months ended September
30, 2012 $ 1 $ 12 $ 13 -
Nine months ended September
30, 2012 $ (17) $ 2 $ 5 -
Net realized (losses)/gains in
the period(4)
Three months ended September
30, 2012 $ 4 $ (4) $ 6 -
Nine months ended September
30, 2012 $ 8 $ (19) $ 21 -
Maturity dates 2012-2016 2012-2016 2012-2013 2013-2016
Derivative Financial Instruments
in Hedging Relationships(5)(6)
Fair Values(2)
Assets $ 85 - - $ 13
Liabilities $ (130) $ (6) $ (41) -
Notional Values
Volumes(3)
Purchases 17,745 3 - -
Sales 7,467 - - -
U.S. dollars - - US 42 US 350
Cross-currency - - 136/US 100 -
Net realized gains/(losses) in
the period(4)
Three months ended September
30, 2012 $ (49) $ (7) - $ 2
Nine months ended September
30, 2012 $ (101) $ (21) - $ 5
Maturity dates 2012-2018 2012-2013 2012-2014 2013-2015
--------------------------------------------
--------------------------------------------
(1) All derivative financial instruments held for trading 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 and natural gas derivatives are in GWh and Bcf,
respectively.
(4) Realized and unrealized gains and losses on derivative financial
instruments held for trading used to purchase and sell power and natural
gas are included net in Revenues. Realized and unrealized gains and
losses on interest rate and foreign exchange derivative financial
instruments held for trading are included in Interest Expense and
Interest Income and Other, respectively. The effective portion of
unrealized gains and losses on derivative financial instruments in cash
flow hedging relationships is initially recognized in Other
Comprehensive Income and reclassified to Revenues, Interest Expense and
Interest Income and Other, as appropriate, as the original hedged item
settles.
(5) 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 $13 million and a notional amount of US$350
million. Net realized gains on fair value hedges for the three and nine
months ended September 30, 2012 were $2 million and $6 million,
respectively, and were included in Interest Expense. In the three and
nine months ended September 30, 2012, the Company did not record any
amounts in Net Income related to ineffectiveness for fair value hedges.
(6) For the three and nine months ended September 30, 2012, there were no
gains or losses included in Net Income for discontinued cash flow hedges
where it was probable that the anticipated transaction would not occur.
No amounts have been excluded from the assessment of hedge
effectiveness.
2011
(unaudited)
(millions of Canadian dollars Natural Foreign
unless otherwise indicated) Power Gas Exchange Interest
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Derivative Financial Instruments
Held for Trading(1)
Fair Values(2)(3)
Assets $ 185 $ 176 3 $ 22
Liabilities $ (192) $ (212) $ (14) $ (22)
Notional Values(3)
Volumes(4)
Purchases 21,905 103 - -
Sales 21,334 82 - -
Canadian dollars - - - 684
U.S. dollars - - US 1,269 US 250
Cross-currency - - 47/US 37 -
Net unrealized gains/(losses) in
the period(5)
Three months ended September
30, 2011 $ 6 $ (13) $ (41) $ 1
Nine months ended September
30, 2011 $ 9 $ (39) $ (41) $ 1
Net realized gains/(losses) in
the period(5)
Three months ended September
30, 2011 $ 15 $ (20) $ (7) -
Nine months ended September
30, 2011 $ 20 $ (61) $ 26 $ 1
Maturity dates 2012-2016 2012-2016 2012 2012-2016
Derivative Financial Instruments
in Hedging Relationships(6)(7)
Fair Values(2)(3)
Assets $ 16 $ 3 - $ 13
Liabilities $ (277) $ (22) $ (38) $ (1)
Notional Values(3)
Volumes(4)
Purchases 17,188 8 - -
Sales 8,061 - - -
U.S. dollars - - US 73 US 600
Cross-currency - - 136/US 100 -
Net realized losses in the
period(5)
Three months ended September
30, 2011 $ (56) $ (6) - $ (4)
Nine months ended September
30, 2011 $ (112) $ (14) - $ (13)
Maturity dates 2012-2017 2012-2013 2012-2014 2012-2015
--------------------------------------------
--------------------------------------------
(1) All derivative financial instruments held for trading 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) As at December 31, 2011.
(4) Volumes for power and natural gas derivatives are in GWh and Bcf,
respectively.
(5) Realized and unrealized gains and losses on derivative financial
instruments held for trading used to purchase and sell power and natural
gas are included net in Revenues. Realized and unrealized gains and
losses on interest rate and foreign exchange derivative financial
instruments held for trading are included in Interest Expense and
Interest Income and Other, respectively. The effective portion of
unrealized gains and losses on derivative financial instruments in cash
flow hedging relationships is initially recognized in Other
Comprehensive Income and reclassified to Revenues, Interest Expense and
Interest Income and Other, as appropriate, as the original hedged item
settles.
(6) 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 $13 million and a notional amount of US$350
million at December 31, 2011. Net realized gains on fair value hedges
for the three and nine months ended September 30, 2011 were $1 million
and $5 million, respectively, and were included in Interest Expense. In
the three and nine months ended September 30, 2011, the Company did not
record any amounts in Net Income related to ineffectiveness for fair
value hedges.
(7) For the three and nine months ended September 30, 2011, there were no
gains or losses included in Net Income for discontinued cash flow hedges
where it was probable that the anticipated transaction would not occur.
No amounts were excluded from the assessment of hedge effectiveness.
Balance Sheet Presentation of Derivative Financial
Instruments
The fair value of the derivative financial instruments in the
Company's Balance Sheet was as follows:
(unaudited) September 30 December 31
(millions of dollars) 2012 2011
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Current
Other current assets 302 361
Accounts payable (340) (485)
Long term
Intangibles and other assets 250 202
Deferred amounts (211) (349)
------------------------------
------------------------------
Derivatives in Cash Flow Hedging Relationships
The components of OCI related to derivatives in cash flow
hedging relationships are as follows:
Cash Flow Hedges
------------------------------------------------
------------------------------------------------
Three months ended September 30
(unaudited) Foreign
(millions of dollars, pre- Power Natural Gas Exchange Interest
tax) 2012 2011 2012 2011 2012 2011 2012 2011
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Changes in fair value of
derivative instruments
recognized in OCI
(effective portion) 96 (25) (3) (14) (5) 13 - (1)
Reclassification of gains
and (losses) on derivative
instruments from AOCI to
Net Income (effective
portion) 54 26 15 27 - - 4 11
Gains on derivative
instruments recognized in
earnings (ineffective
portion) 5 1 1 1 - - - -
------------------------------------------------
------------------------------------------------
Cash Flow Hedges
------------------------------------------------
------------------------------------------------
Nine months ended September 30
(unaudited) Foreign
(millions of dollars, pre- Power Natural Gas Exchange Interest
tax) 2012 2011 2012 2011 2012 2011 2012 2011
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Changes in fair value of
derivative instruments
recognized in OCI
(effective portion) 74 (128) (17) (39) (5) 6 - (1)
Reclassification of gains on
derivative instruments from
AOCI to Net Income
(effective portion) 129 58 43 80 - - 14 33
Gains on derivative
instruments recognized in
earnings (ineffective
portion) 6 2 - - - - - -
------------------------------------------------
------------------------------------------------
Derivative contracts entered into to manage market risk often
contain financial assurance provisions that allow parties to the
contracts to manage credit risk. These provisions may require
collateral to be provided if a credit-risk-related contingent event
occurs, such as a downgrade in the Company's credit rating to
non-investment grade. Based on contracts in place and market prices
at September 30, 2012, the aggregate fair value of all derivative
instruments with credit-risk-related contingent features that were
in a net liability position was $41 million (2011 - $77 million),
for which the Company had provided collateral of nil (2011 - $6
million) in the normal course of business. If the
credit-risk-related contingent features in these agreements were
triggered on September 30, 2012, the Company would have been
required to provide collateral of $41 million (2011 - $71 million)
to its counterparties. Collateral may also need to be provided
should the fair value of derivative instruments exceed pre-defined
contractual exposure limit thresholds. The Company has sufficient
liquidity in the form of cash and undrawn committed revolving bank
lines to meet these contingent obligations should they arise.
Fair Value Hierarchy
The Company's assets and liabilities recorded at fair value have
been classified into three categories based on the fair value
hierarchy.
In Level I, the fair value of assets and liabilities is
determined by reference to quoted prices in active markets for
identical assets and liabilities that the Company has the ability
to access at the measurement date.
In Level II, the fair value of interest rate and foreign
exchange derivative assets and liabilities is determined using the
income approach. The fair value of power and gas commodity assets
and liabilities is determined using the market approach. Under both
approaches, valuation is based on the extrapolation of inputs,
other than quoted prices included within Level I, for which all
significant inputs are observable directly or indirectly. Such
inputs include published exchange rates, interest rates, interest
rate swap curves, yield curves, and broker quotes from external
data service providers. Transfers between Level I and Level II
would occur when there is a change in market circumstances. There
were no transfers between Level I and Level II in the nine months
ended September 30, 2012 and 2011.
In Level III, the fair value of assets and liabilities measured
on a recurring basis is determined using a market approach based on
inputs that are unobservable and significant to the overall fair
value measurement. Assets and liabilities measured at fair value
can fluctuate between Level II and Level III depending on the
proportion of the value of the contract that extends beyond the
time frame for which inputs are considered to be observable. As
contracts near maturity and observable market data becomes
available, they are transferred out of Level III and into Level
II.
Long-dated commodity transactions in certain markets where
liquidity is low are included in Level III of the fair value
hierarchy, as the related commodity prices are not readily
observable. Long-term electricity prices are estimated using a
third-party modelling tool which takes into account physical
operating characteristics of generation facilities in the markets
in which the Company operates. Inputs into the model include market
fundamentals such as fuel prices, power supply additions and
retirements, power demand, seasonal hydro conditions and
transmission constraints. Long-term North American natural gas
prices are based on a view of future natural gas supply and demand,
as well as exploration and development costs. Long-term prices are
reviewed by management and the Board on a periodic basis.
Significant decreases in fuel prices or demand for electricity or
natural gas, or increases in the supply of electricity or natural
gas may result in a lower fair value measurement of contracts
included in Level III.
The fair value of the Company's assets and liabilities measured
on a recurring basis, including both current and non-current
portions, are categorized as follows:
Significant
Quoted Prices Other Significant
in Active Observable Unobservable
Markets Inputs Inputs
(Level I) (Level II) (Level III) Total
------------------------------------------------------------
------------------------------------------------------------
(unaudited)
(millions of
dollars, pre- Sept 30 Dec 31 Sept 30 Dec 31 Sept 30 Dec 31 Sept 30 Dec 31
tax) 2012 2011 2012 2011 2012 2011 2012 2011
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Derivative
Financial
Instrument
Assets:
Interest rate
contracts - - 29 36 - - 29 36
Foreign
exchange
contracts - - 160 141 - - 160 141
Power commodity
contracts - - 242 201 9 - 251 201
Gas commodity
contracts 90 124 17 55 - - 107 179
Derivative
Financial
Instrument
Liabilities:
Interest rate
contracts - - (16) (23) - - (16) (23)
Foreign
exchange
contracts - - (75) (102) - - (75) (102)
Power commodity
contracts - - (318) (454) (5) (15) (323) (469)
Gas commodity
contacts (114) (208) (18) (26) - - (132) (234)
Non-Derivative
Financial
Instruments:
Available-for-
sale assets 32 23 - - - - 32 23
------------------------------------------------------------
8 (61) 21 (172) 4 (15) 33 (248)
------------------------------------------------------------
------------------------------------------------------------
The following table presents the net change in the Level III
fair value category:
Derivatives(1)
-------------------------------
-------------------------------
Three months Nine months
ended ended
(unaudited) September 30 September 30
(millions of dollars, pre-tax) 2012 2011 2012 2011
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Balance at beginning of period 7 (30) (15) (8)
New contracts - - - 1
Settlements - 1 (1) 1
Transfers out of Level III (12) 2 (10) 2
Total gains included in Net Income(2) 7 - 8 -
Total gains/(losses) included in OCI 2 10 22 (13)
--------------------------------
Balance at end of period 4 (17) 4 (17)
--------------------------------
--------------------------------
(1) The fair value of derivative assets and liabilities is presented on a
net basis.
(2) For the three and nine months ended September 31, 2012, the unrealized
gains or losses included in Net Income attributed to derivatives that
were still held at the reporting date was a loss of $1 million (2011 -
nil).
A 10 per cent increase or decrease in commodity prices, with all
other variables held constant, would result in a $6 million
decrease or increase, respectively, in the fair value of
outstanding derivative financial instruments included in Level III
as at September 30, 2012.
8. Contingencies and Guarantees
TransCanada and its subsidiaries are subject to various legal
proceedings, arbitrations and actions arising in the normal course
of business. While the final outcome of such legal proceedings and
actions cannot be predicted with certainty, it is the opinion of
management that the resolution of such proceedings and actions will
not have a material impact on the Company's consolidated financial
position or results of operations.
Amounts received under the Bruce B floor price mechanism within
a calendar year are subject to repayment if the monthly average
spot price exceeds the floor price. With respect to 2012,
TransCanada currently expects spot prices to be less than the floor
price for the year, therefore no amounts recorded in revenues in
first nine months of 2012 are expected to be repaid.
Guarantees
TransCanada and its joint venture partners on Bruce Power,
Cameco Corporation and BPC Generation Infrastructure Trust (BPC),
have severally guaranteed one-third of certain contingent financial
obligations of Bruce B related to power sales agreements, a lease
agreement and contractor services. The guarantees have terms
ranging from 2018 to perpetuity. In addition, TransCanada and BPC
have each severally guaranteed one-half of certain contingent
financial obligations related to an agreement with the Ontario
Power Authority to refurbish and restart Bruce A power generation
units. The guarantees have terms ending in 2018 and 2019.
TransCanada's share of the potential exposure under these Bruce A
and Bruce B guarantees was estimated to be $760 million at
September 30, 2012. The fair value of these Bruce Power guarantees
at September 30, 2012 is estimated to be $15 million. The Company's
exposure under certain of these guarantees is unlimited.
In addition to the guarantees for Bruce Power, the Company and
its partners in certain other jointly owned entities have either
(i) jointly and severally, (ii) jointly or (iii) severally
guaranteed the financial performance of these entities related
primarily to redelivery of natural gas, power purchase arrangement
(PPA) payments and the payment of liabilities. TransCanada's share
of the potential maximum exposure under these assurances was
estimated at September 30, 2012 to range from $160 million to $431
million. The fair value of these guarantees at September 30, 2012
is estimated to be $68 million, which has been included in Deferred
Amounts. For certain of these entities, any payments made by
TransCanada under these guarantees in excess of its ownership
interest are to be reimbursed by its partners.
Contacts: TransCanada Media Enquiries: Shawn Howard/Grady
Semmens 403.920.7859 or 800.608.7859 TransCanada Investor &
Analyst Enquiries: David Moneta/Terry Hook/Lee Evans 403.920.7911
or 800.361.6522 www.transcanada.com
TC Energy (TSX:TRP)
Historical Stock Chart
From Mar 2024 to Apr 2024
TC Energy (TSX:TRP)
Historical Stock Chart
From Apr 2023 to Apr 2024