Exhibit 13.3
TRANSCANADA CORPORATION
RECONCILIATION TO UNITED STATES GAAP
The unaudited consolidated financial statements of TransCanada Corporation (TransCanada or the Company) for the six months ended June 30, 2006 have been prepared in accordance with Canadian generally accepted accounting principles (GAAP), which in some respects differ from U.S. GAAP. The effects of these differences on the Company’s consolidated financial statements for the six months ended June 30, 2006 are provided in the following U.S. GAAP condensed consolidated financial statements which should be read in conjunction with TransCanada’s audited consolidated financial statements for the year ended December 31, 2005 and unaudited consolidated financial statements for the six months ended June 30, 2006 prepared in accordance with Canadian GAAP.
Condensed Statement of Consolidated Income and Comprehensive Income in Accordance with U.S. GAAP(1)
(millions of dollars except per share |
| Three months |
| Six months ended |
| ||||||||
amounts) |
| 2006 |
| 2005 |
| 2006 |
| 2005 |
| ||||
Revenues |
| 1,322 |
| 1,293 |
| 2,815 |
| 2,564 |
| ||||
Cost of sales |
| 267 |
| 188 |
| 632 |
| 409 |
| ||||
Other costs and expenses |
| 442 |
| 406 |
| 872 |
| 828 |
| ||||
Depreciation |
| 222 |
| 230 |
| 445 |
| 458 |
| ||||
|
| 931 |
| 824 |
| 1,949 |
| 1,695 |
| ||||
|
| 391 |
| 469 |
| 866 |
| 869 |
| ||||
Other (income)/expenses |
|
|
|
|
|
|
|
|
| ||||
Equity income(1) |
| (99 | ) | (69 | ) | (218 | ) | (167 | ) | ||||
Other expenses(2) |
| 182 |
| 218 |
| 361 |
| 343 |
| ||||
Income taxes |
| 70 |
| 118 |
| 239 |
| 264 |
| ||||
|
| 153 |
| 267 |
| 382 |
| 440 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Net income from continuing operations - U.S. GAAP |
| 238 |
| 202 |
| 484 |
| 429 |
| ||||
Net income from discontinued operations - U.S. GAAP |
| — |
| — |
| 28 |
| — |
| ||||
Net Income in Accordance with U.S. GAAP |
| 238 |
| 202 |
| 512 |
| 429 |
| ||||
Adjustments affecting comprehensive income under U.S. GAAP |
|
|
|
|
|
|
|
|
| ||||
Foreign currency translation adjustment, net of tax |
| (2 | ) | 5 |
| (6 | ) | 10 |
| ||||
Unrealized gain/(loss) on derivatives, net of tax(3) |
| 16 |
| (30 | ) | 34 |
| (39 | ) | ||||
Comprehensive Income in Accordance with U.S. GAAP |
| 252 |
| 177 |
| 540 |
| 400 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Net Income Per Share in Accordance with U.S. GAAP |
|
|
|
|
|
|
|
|
| ||||
Continuing operations |
| $ | 0.49 |
| $ | 0.42 |
| $ | 0.99 |
| $ | 0.88 |
|
Discontinued operations |
| — |
| — |
| 0.06 |
| — |
| ||||
Basic |
| $ | 0.49 |
| $ | 0.42 |
| $ | 1.05 |
| $ | 0.88 |
|
Diluted |
| $ | 0.49 |
| $ | 0.41 |
| $ | 1.05 |
| $ | 0.88 |
|
|
|
|
|
|
|
|
|
|
| ||||
Net Income Per Share in Accordance with Canadian GAAP - Basic and Diluted |
| $ | 0.50 |
| $ | 0.41 |
| $ | 1.06 |
| $ | 0.89 |
|
Dividends per common share |
| $ | 0.32 |
| $ | 0.305 |
| $ | 0.64 |
| $ | 0.61 |
|
|
|
|
|
|
|
|
|
|
| ||||
Common Shares Outstanding (millions) |
|
|
|
|
|
|
|
|
| ||||
Average for the period - Basic |
| 487.7 |
| 485.9 |
| 487.6 |
| 485.6 |
| ||||
Average for the period - Diluted |
| 490.1 |
| 488.4 |
| 490.0 |
| 488.1 |
|
1
Reconciliation of Income from Continuing Operations
|
| Three months |
| Six months ended |
| ||||
(millions of dollars) |
| 2006 |
| 2005 |
| 2006 |
| 2005 |
|
Net Income from Continuing Operations in Accordance with Canadian GAAP |
| 244 |
| 200 |
| 489 |
| 432 |
|
U.S. GAAP adjustments |
|
|
|
|
|
|
|
|
|
Unrealized (loss)/gain on energy contracts(3) |
| (12 | ) | 1 |
| (11 | ) | (9 | ) |
Tax impact of unrealized (loss)/gain on energy contracts |
| 4 |
| (1 | ) | 4 |
| 3 |
|
Equity investment gain(4)(5) |
| 1 |
| 1 |
| 1 |
| 3 |
|
Tax impact of equity investment gain |
| — |
| — |
| — |
| (1 | ) |
Unrealized gain on foreign exchange and interest rate derivatives(3) |
| 1 |
| 1 |
| 1 |
| 1 |
|
Tax impact of unrealized gain on foreign exchange and interest rate derivatives |
| — |
| — |
| — |
| — |
|
Net Income from Continuing Operations in Accordance with U.S. GAAP |
| 238 |
| 202 |
| 484 |
| 429 |
|
Condensed Statement of Consolidated Cash Flows in Accordance with U.S. GAAP(1)
|
| Three months |
| Six months ended |
| ||||
(millions of dollars) |
| 2006 |
| 2005 |
| 2006 |
| 2005 |
|
Cash Generated from Operations(6) |
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
| 471 |
| 271 |
| 965 |
| 535 |
|
|
|
|
|
|
|
|
|
|
|
Investing Activities |
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
| (683 | ) | (720 | ) | (947 | ) | (628 | ) |
|
|
|
|
|
|
|
|
|
|
Financing Activities |
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
| 178 |
| 12 |
| 117 |
| 83 |
|
|
|
|
|
|
|
|
|
|
|
Effect of Foreign Exchange Rate Changes on Cash and Short-Term Investments |
| (8 | ) | 20 |
| (7 | ) | 22 |
|
(Decrease)/Increase in Cash and Short-Term Investments |
| (42 | ) | (417 | ) | 128 |
| 12 |
|
Cash and Short-Term Investments |
|
|
|
|
|
|
|
|
|
Beginning of period |
| 253 |
| 556 |
| 83 |
| 127 |
|
Cash and Short-Term Investments |
|
|
|
|
|
|
|
|
|
End of period |
| 211 |
| 139 |
| 211 |
| 139 |
|
Condensed Consolidated Balance Sheet in Accordance with U.S. GAAP(1)
|
| June |
| December |
|
(millions of dollars) |
| 2006 |
| 2005 |
|
Current assets(7) |
| 1,041 |
| 1,058 |
|
Long-term investments(1)(4)(5) |
| 2,680 |
| 2,168 |
|
Plant, property and equipment |
| 17,167 |
| 17,348 |
|
Regulatory asset(8) |
| 2,134 |
| 2,601 |
|
Other assets(4) |
| 1,973 |
| 2,028 |
|
|
| 24,995 |
| 25,203 |
|
|
|
|
|
|
|
Current liabilities(9) |
| 2,059 |
| 2,754 |
|
Deferred amounts(3)(5) |
| 1,282 |
| 1,298 |
|
Long-term debt(3) |
| 10,435 |
| 9,675 |
|
Deferred income taxes(8) |
| 2,635 |
| 3,102 |
|
Preferred securities |
| 513 |
| 536 |
|
Non-controlling interests |
| 773 |
| 783 |
|
Shareholders’ equity |
| 7,298 |
| 7,055 |
|
|
| 24,995 |
| 25,203 |
|
2
Statement of Other Comprehensive Income in Accordance with U.S. GAAP
(millions of dollars) |
| Cumulative |
| Minimum |
| Cash Flow |
| Total |
|
Balance at December 31, 2005 |
| (89 | ) | (77 | ) | (58 | ) | (224 | ) |
Unrealized gain on derivatives, net of tax of $(15)(3) |
| — |
| — |
| 34 |
| 34 |
|
Foreign currency translation adjustment, net of tax of $(34) |
| (6 | ) | — |
| — |
| (6 | ) |
Balance at June 30, 2006 |
| (95 | ) | (77 | ) | (24 | ) | (196 | ) |
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004 |
| (71 | ) | (26 | ) | (4 | ) | (101 | ) |
Unrealized loss on derivatives, net of tax of $20(3) |
| — |
| — |
| (39 | ) | (39 | ) |
Foreign currency translation adjustment, net of tax of $18 |
| 10 |
| — |
| — |
| 10 |
|
Balance at June 30, 2005 |
| (61 | ) | (26 | ) | (43 | ) | (130 | ) |
(1) In accordance with U.S. GAAP, the Condensed Statement of Consolidated Income, Statement of Consolidated Cash Flows and Consolidated Balance Sheet of TransCanada are prepared using the equity method of accounting for joint ventures.
(2) Other expenses included an allowance for funds used during construction of $3 million for the six months ended June 30, 2006 (June 30, 2005 - $1 million).
(3) All foreign exchange and interest rate derivatives are recorded in the Company’s consolidated financial statements at fair value under Canadian GAAP. Under the provisions of Statement of Financial Accounting Standards (SFAS) No. 133 “Accounting for Derivatives and Hedging Activities”, all derivatives are recognized as assets and liabilities on the balance sheet and measured at fair value. For derivatives designated as fair value hedges, changes in the fair value are recognized in earnings together with an equal or lesser amount of changes in the fair value of the hedged item attributable to the hedged risk. For derivatives designated as cash flow hedges, changes in the fair value of the derivative that are effective in offsetting the hedged risk are recognized in other comprehensive income until the hedged item is recognized in earnings. Any ineffective portion of the change in fair value is also recognized in earnings each period. Substantially all of the amounts recorded in the six months ended June 30, 2006 and 2005 as differences between U.S. and Canadian GAAP, for income from continuing operations, relate to the differences in accounting treatment with respect to the hedged item and, for comprehensive income, relate to cash flow hedges.
Substantially all of the amounts recorded in the six months ended June 30, 2006 and 2005 as differences between U.S. and Canadian GAAP in respect of energy contracts relate to gains and losses on derivative energy contracts for periods before they were documented as hedges for purposes of U.S. GAAP and to differences in accounting with respect to physical energy contracts.
(4) Under Canadian GAAP, pre-operating costs incurred during the commissioning phase of a new project are deferred until commercial production levels are achieved. After such time, those costs are amortized over the estimated life of the project. Under U.S. GAAP, such costs are expensed as incurred. Certain start-up costs incurred by Bruce Power L.P. (Bruce B), an equity investment, are required to be expensed under U.S. GAAP. Under both Canadian GAAP and U.S. GAAP, interest is capitalized on expenditures relating to construction of development projects actively being prepared for their intended use. In Bruce B, under U.S. GAAP, the carrying value of development projects against which interest is capitalized is lower due to the expensing of pre-operating costs.
(5) Financial Interpretation (FIN) 45 requires the recognition of a liability for the fair value of certain guarantees that require payments contingent on specified types of future events. The measurement standards of FIN 45 are applicable to guarantees entered into after January 1, 2003. For U.S. GAAP purposes, the fair value of guarantees recorded as a liability at June 30, 2006 was $17 million (December 31, 2005 - $17 million) and relates to the Company’s equity interest in Bruce B and Bruce Power A L.P. The net income impact with respect to the guarantees for the six months ended June 30, 2006 was $1 million (June 30, 2005 - nil).
3
(6) In accordance with U.S. GAAP, all current taxes are included in cash generated from operations.
(7) Current assets at June 30, 2006 include derivative contracts of $30 million (December 31, 2005 - $49 million) and hedging deferrals of $61 million (December 31, 2005 - $93 million).
(8) Under U.S. GAAP, the Company is required to record a deferred income tax liability for its cost-of-service regulated businesses. As these deferred income taxes are recoverable through future revenues, a corresponding regulatory asset is recorded for U.S. GAAP purposes. A reduction in Canadian federal and provincial corporate income tax rates enacted in second quarter 2006 resulted in a decrease of $406 million in the deferred income tax liability and corresponding regulatory asset.
(9) Current liabilities at June 30, 2006 include dividends payable of $161 million (December 31, 2005 - $154 million) and current taxes payable of $168 million (December 31, 2005 - $251 million).
Other
In May 2005, the Financial Accounting Standards Board (FASB) issued SFAS No. 154 “Accounting Changes and Error Corrections - a replacement of APB Opinion No. 20 and SFAS No. 3” which is effective for fiscal years beginning after December 15, 2005. SFAS No. 154 changes the requirements for the accounting for and reporting of a change in accounting principle and error correction. It establishes, unless impracticable, retrospective application as the required method for reporting a change in accounting principle in the absence of explicit transition requirements specific to the newly adopted accounting principle. Adopting the provisions under SFAS No. 154, as of January 1, 2006, has had no impact on the U.S. GAAP financial statements of the Company.
In February 2006, FASB issued SFAS No. 155 “Accounting for Certain Hybrid Financial Instruments - an amendment of SFAS No. 133 and 140” which is effective for fiscal years beginning after September 15, 2006. Earlier adoption is permitted as of the beginning of an entity’s fiscal year, provided the entity has not yet issued financial statements, including interim statements for any interim period, for that fiscal year. SFAS No. 155 permits fair value remeasurement of any hybrid instrument that contains an embedded derivative that otherwise would require bifurcation. Adopting the provisions under SFAS No. 155, as of January 1, 2007, is not expected to have an impact on the U.S. GAAP financial statements of the Company.
In March 2006, FASB issued SFAS No. 156 “Accounting for Servicing of Financial Assets - an amendment of FASB Statement No. 140” which is effective for fiscal years beginning after September 15, 2006. Earlier adoption is permitted as of the beginning of an entity’s fiscal year, provided the entity has not yet issued financial statements, including interim statements for any interim period, for that fiscal year. SFAS No. 156 requires recognition of a servicing asset or liability when an entity enters into arrangements to service financial instruments in certain situations. Such servicing assets or servicing liabilities are required to be initially measured at fair value, if practicable. SFAS No. 156 also allows an entity to subsequently measure its servicing assets or servicing liabilities using either an amortization method or a fair value method. Adopting the provisions under SFAS No. 156, as of January 1, 2007, is not expected to have an impact on the U.S. GAAP financial statements of the Company.
In July 2006, FASB issued FIN 48 “Accounting for Income Tax Uncertainties” which is effective for fiscal years beginning after December 15, 2006. FIN 48 clarifies, for US GAAP purposes, the accounting for uncertain tax positions. The best estimate of the impact of a company’s tax position taken for income tax return purposes is required to be recorded if it is probable of being sustained on audit. The guidance provided in FIN 48 seeks to reduce the diversity in practice associated with certain aspects of the recognition and measurement related to accounting for income taxes. TransCanada is in the process of assessing the impact of the application of FIN 48 on its US GAAP financial statements.
Summarized Financial Information of Long-Term Investments
The following summarized financial information of long-term investments includes those investments that are accounted for by the equity method under U.S. GAAP (including those that are accounted for by the proportionate consolidation method under Canadian GAAP).
|
| Three months |
| Six months ended |
| ||||
(millions of dollars) |
| 2006 |
| 2005 |
| 2006 |
| 2005 |
|
Income |
|
|
|
|
|
|
|
|
|
Revenues |
| 348 |
| 300 |
| 704 |
| 614 |
|
Other costs and expenses |
| (176 | ) | (163 | ) | (350 | ) | (309 | ) |
Depreciation |
| (47 | ) | (40 | ) | (87 | ) | (84 | ) |
Financial charges and other |
| (26 | ) | (28 | ) | (49 | ) | (54 | ) |
Proportionate share of income before income taxes of long-term investments |
| 99 |
| 69 |
| 218 |
| 167 |
|
4
|
| June |
| December |
|
(millions of dollars) |
| 2006 |
| 2005 |
|
Balance Sheet |
|
|
|
|
|
Current assets |
| 428 |
| 456 |
|
Plant, property and equipment |
| 3,745 |
| 3,365 |
|
Other assets (net) |
| 183 |
| — |
|
Current liabilities |
| (356 | ) | (319 | ) |
Deferred amounts (net) |
| — |
| (2 | ) |
Non-recourse debt |
| (1,293 | ) | (1,307 | ) |
Deferred income taxes |
| (27 | ) | (25 | ) |
Proportionate share of net assets of long-term investments |
| 2,680 |
| 2,168 |
|
5