EXHIBIT 13.2
Condensed consolidated statement of income
three months ended September 30 | nine months ended September 30 | |||||||||||||||
(unaudited - millions of Canadian $ except per share amounts) | 2013 | 2012 | 2013 | 2012 | ||||||||||||
Revenues | ||||||||||||||||
Natural gas pipelines | 1,083 | 1,058 | 3,271 | 3,177 | ||||||||||||
Oil pipelines | 281 | 259 | 830 | 769 | ||||||||||||
Energy | 840 | 809 | 2,364 | 1,972 | ||||||||||||
2,204 | 2,126 | 6,465 | 5,918 | |||||||||||||
Income from Equity Investments | 177 | 71 | 423 | 196 | ||||||||||||
Operating and Other Expenses | ||||||||||||||||
Plant operating costs and other | 650 | 627 | 1,939 | 1,846 | ||||||||||||
Commodity purchases resold | 299 | 337 | 958 | 758 | ||||||||||||
Property taxes | 138 | 131 | 353 | 346 | ||||||||||||
Depreciation and amortization | 366 | 342 | 1,089 | 1,032 | ||||||||||||
1,453 | 1,437 | 4,339 | 3,982 | |||||||||||||
Financial Charges/(Income) | ||||||||||||||||
Interest expense | 235 | 249 | 745 | 730 | ||||||||||||
Interest income and other | (31 | ) | (34 | ) | (33 | ) | (70 | ) | ||||||||
204 | 215 | 712 | 660 | |||||||||||||
Income before Income Taxes | 724 | 545 | 1,837 | 1,472 | ||||||||||||
Income Taxes (Recovery)/Expense | ||||||||||||||||
Current | (3 | ) | 6 | 40 | 101 | |||||||||||
Deferred | 193 | 128 | 363 | 247 | ||||||||||||
190 | 134 | 403 | 348 | |||||||||||||
Net Income | 534 | 411 | 1,434 | 1,124 | ||||||||||||
Net income attributable to non-controlling interests | 33 | 29 | 87 | 90 | ||||||||||||
Net Income Attributable to Controlling Interests | 501 | 382 | 1,347 | 1,034 | ||||||||||||
Preferred share dividends | 20 | 13 | 55 | 41 | ||||||||||||
Net Income Attributable to Common Shares | 481 | 369 | 1,292 | 993 | ||||||||||||
Net Income per Common Share | ||||||||||||||||
Basic and diluted | $0.68 | $0.52 | $1.83 | $1.41 | ||||||||||||
Dividends Declared per Common Share | $0.46 | $0.44 | $1.38 | $1.32 | ||||||||||||
Weighted Average Number of Common Shares (millions) | ||||||||||||||||
Basic | 707 | 705 | 707 | 704 | ||||||||||||
Diluted | 708 | 706 | 708 | 705 |
See accompanying notes to the condensed consolidated financial statements.
TRANSCANADA [39
THIRD QUARTER REPORT 2013
Condensed consolidated statement of comprehensive income
three months ended September 30 | nine months ended September 30 | |||||||||||
(unaudited - millions of Canadian $) | 2013 | 2012 | 2013 | 2012 | ||||||||
Net Income | 534 | 411 | 1,434 | 1,124 | ||||||||
Other Comprehensive (Loss)/Income, Net of Income Taxes | ||||||||||||
Foreign currency translation gains and losses on net investments in foreign operations | (140 | ) | (196 | ) | 196 | (189 | ) | |||||
Change in fair value of net investment hedges | 62 | 99 | (122 | ) | 76 | |||||||
Change in fair value of cash flow hedges | 14 | 60 | (9 | ) | 43 | |||||||
Reclassification to net income of gains on cash flow hedges | 27 | 47 | 34 | 119 | ||||||||
Unrealized actuarial gains and losses on pension and other post-retirement benefit plans | 1 | — | 1 | — | ||||||||
Reclassification to net income of actuarial gains and losses and prior service costs on pension and other post-retirement benefit plans | 5 | 4 | 17 | 18 | ||||||||
Other comprehensive loss on equity investments | (1 | ) | (3 | ) | (4 | ) | (1 | ) | ||||
Other comprehensive (loss)/income (Note 7) | (32 | ) | 11 | 113 | 66 | |||||||
Comprehensive Income | 502 | 422 | 1,547 | 1,190 | ||||||||
Comprehensive income/(loss) attributable to non-controlling interests | 5 | (5 | ) | 116 | 59 | |||||||
Comprehensive Income Attributable to Controlling Interests | 497 | 427 | 1,431 | 1,131 | ||||||||
Preferred share dividends | 20 | 13 | 55 | 41 | ||||||||
Comprehensive Income Attributable to Common Shares | 477 | 414 | 1,376 | 1,090 |
See accompanying notes to the condensed consolidated financial statements.
TRANSCANADA [40
THIRD QUARTER REPORT 2013
Condensed consolidated statement of cash flows
three months ended September 30 | nine months ended September 30 | |||||||||||
(unaudited - millions of Canadian $) | 2013 | 2012 | 2013 | 2012 | ||||||||
Cash Generated from Operations | ||||||||||||
Net income | 534 | 411 | 1,434 | 1,124 | ||||||||
Depreciation and amortization | 366 | 342 | 1,089 | 1,032 | ||||||||
Deferred income taxes | 193 | 128 | 363 | 247 | ||||||||
Income from equity investments | (177 | ) | (71 | ) | (423 | ) | (196 | ) | ||||
Distributed earnings received from equity investments | 163 | 95 | 427 | 252 | ||||||||
Employee post-retirement benefits funding lower/(higher) than expense | 7 | (23 | ) | 33 | (11 | ) | ||||||
Other | (40 | ) | (16 | ) | (6 | ) | 18 | |||||
Decrease/(increase) in operating working capital | 72 | 235 | (252 | ) | 80 | |||||||
Net cash provided by operations | 1,118 | 1,101 | 2,665 | 2,546 | ||||||||
Investing Activities | ||||||||||||
Capital expenditures | (992 | ) | (694 | ) | (3,030 | ) | (1,555 | ) | ||||
Equity investments | (30 | ) | (144 | ) | (101 | ) | (557 | ) | ||||
Acquisitions | (99 | ) | — | (154 | ) | — | ||||||
Deferred amounts and other | (103 | ) | 40 | (267 | ) | 82 | ||||||
Net cash used in investing activities | (1,224 | ) | (798 | ) | (3,552 | ) | (2,030 | ) | ||||
Financing Activities | ||||||||||||
Dividends on common and preferred shares | (346 | ) | (322 | ) | (1,012 | ) | (956 | ) | ||||
Distributions paid to non-controlling interests | (44 | ) | (33 | ) | (114 | ) | (101 | ) | ||||
Notes payable repaid, net | (1,177 | ) | (930 | ) | (618 | ) | (341 | ) | ||||
Long-term debt issued, net of issue costs | 2,173 | 995 | 2,917 | 1,488 | ||||||||
Repayment of long-term debt | (521 | ) | (12 | ) | (1,230 | ) | (782 | ) | ||||
Common shares issued, net of issue costs | 4 | 17 | 59 | 35 | ||||||||
Partnership units of subsidiary issued, net of issue costs | — | — | 384 | — | ||||||||
Preferred shares issued, net of issue costs | — | — | 585 | — | ||||||||
Net cash provided by/(used in) financing activities | 89 | (285 | ) | 971 | (657 | ) | ||||||
Effect of Foreign Exchange Rate Changes on Cash and Cash Equivalents | (12 | ) | (14 | ) | 10 | (19 | ) | |||||
(Decrease)/increase in Cash and Cash Equivalents | (29 | ) | 4 | 94 | (160 | ) | ||||||
Cash and Cash Equivalents | ||||||||||||
Beginning of period | 674 | 490 | 551 | 654 | ||||||||
Cash and Cash Equivalents | ||||||||||||
End of period | 645 | 494 | 645 | 494 |
See accompanying notes to the condensed consolidated financial statements.
TRANSCANADA [41
THIRD QUARTER REPORT 2013
Condensed consolidated balance sheet
September 30 | December 31 | |||||||
(unaudited - millions of Canadian $) | 2013 | 2012 | ||||||
ASSETS | ||||||||
Current Assets | ||||||||
Cash and cash equivalents | 645 | 551 | ||||||
Accounts receivable | 913 | 1,052 | ||||||
Inventories | 238 | 224 | ||||||
Other | 636 | 997 | ||||||
2,432 | 2,824 | |||||||
Plant, Property and Equipment, net of accumulated depreciation of $17,598 and $16,540, respectively | 35,985 | 33,713 | ||||||
Equity Investments | 5,395 | 5,366 | ||||||
Goodwill | 3,575 | 3,458 | ||||||
Regulatory Assets | 1,924 | 1,629 | ||||||
Intangible and Other Assets | 1,518 | 1,343 | ||||||
50,829 | 48,333 | |||||||
LIABILITIES | ||||||||
Current Liabilities | ||||||||
Notes payable | 1,688 | 2,275 | ||||||
Accounts payable and other | 1,771 | 2,344 | ||||||
Accrued interest | 330 | 368 | ||||||
Current portion of long-term debt | 971 | 894 | ||||||
4,760 | 5,881 | |||||||
Regulatory Liabilities | 238 | 268 | ||||||
Other Long-Term Liabilities | 811 | 882 | ||||||
Deferred Income Tax Liabilities | 4,163 | 3,953 | ||||||
Long-Term Debt | 20,066 | 18,019 | ||||||
Junior Subordinated Notes | 1,028 | 994 | ||||||
31,066 | 29,997 | |||||||
EQUITY | ||||||||
Common shares, no par value | 12,136 | 12,069 | ||||||
Issued and outstanding: | September 30, 2013 - 707 million shares | |||||||
December 31, 2012 - 705 million shares | ||||||||
Preferred shares | 1,813 | 1,224 | ||||||
Additional paid-in capital | 406 | 379 | ||||||
Retained earnings | 5,001 | 4,687 | ||||||
Accumulated other comprehensive loss (Note 7) | (1,364 | ) | (1,448 | ) | ||||
Controlling Interests | 17,992 | 16,911 | ||||||
Non-controlling interests | 1,771 | 1,425 | ||||||
19,763 | 18,336 | |||||||
50,829 | 48,333 | |||||||
Contingencies and Guarantees (Note 11) | ||||||||
Subsequent Events (Note 12) |
See accompanying notes to the condensed consolidated financial statements.
TRANSCANADA [42
THIRD QUARTER REPORT 2013
Condensed consolidated statement of equity
nine months ended September 30 | ||||||
(unaudited - millions of Canadian $) | 2013 | 2012 | ||||
Common Shares | ||||||
Balance at beginning of period | 12,069 | 12,011 | ||||
Shares issued on exercise of stock options | 67 | 38 | ||||
Balance at end of period | 12,136 | 12,049 | ||||
Preferred Shares | ||||||
Balance at beginning of period | 1,224 | 1,224 | ||||
Shares issued, net of issue costs | 589 | — | ||||
Balance at end of period | 1,813 | 1,224 | ||||
Additional Paid-In Capital | ||||||
Balance at beginning of period | 379 | 380 | ||||
Exercise of stock options, net of issuances | (2 | ) | — | |||
Dilution impact from TC PipeLines, LP units issued | 29 | — | ||||
Balance at end of period | 406 | 380 | ||||
Retained Earnings | ||||||
Balance at beginning of period | 4,687 | 4,628 | ||||
Net income attributable to controlling interests | 1,347 | 1,034 | ||||
Common share dividends | (976 | ) | (930 | ) | ||
Preferred share dividends | (57 | ) | (41 | ) | ||
Balance at end of period | 5,001 | 4,691 | ||||
Accumulated Other Comprehensive Loss | ||||||
Balance at beginning of period | (1,448 | ) | (1,449 | ) | ||
Other comprehensive income | 84 | 97 | ||||
Balance at end of period | (1,364 | ) | (1,352 | ) | ||
Equity Attributable to Controlling Interests | 17,992 | 16,992 | ||||
Equity Attributable to Non-Controlling Interests | ||||||
Balance at beginning of period | 1,425 | 1,465 | ||||
Net income attributable to non-controlling interests | ||||||
TC PipeLines, LP | 63 | 70 | ||||
Preferred share dividends of TCPL | 17 | 17 | ||||
Portland | 7 | 3 | ||||
Other comprehensive income/(loss) attributable to non-controlling interests | 29 | (31 | ) | |||
Sale of TC PipeLines, LP units | ||||||
Proceeds, net of issue costs | 384 | — | ||||
Decrease in TransCanada’s ownership | (47 | ) | — | |||
Distributions to non-controlling interests | (114 | ) | (101 | ) | ||
Foreign exchange and other | 7 | (4 | ) | |||
Balance at end of period | 1,771 | 1,419 | ||||
Total Equity | 19,763 | 18,411 |
See accompanying notes to the condensed consolidated financial statements.
TRANSCANADA [43
THIRD QUARTER REPORT 2013
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 U.S. GAAP. The accounting policies applied are consistent with those outlined in TransCanada’s annual audited consolidated financial statements for the year ended December 31, 2012. Capitalized and abbreviated terms that are used but not otherwise defined herein are identified in TransCanada’s 2012 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 2012 audited consolidated financial statements included in TransCanada’s 2012 Annual Report. Certain comparative figures have been reclassified to conform with the current period’s presentation.
Earnings for interim periods may not be indicative of results for the fiscal year in the Company’s Natural Gas Pipelines segment due to the timing of regulatory decisions and 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 significant accounting policies included in the consolidated financial statements for the year ended December 31, 2012, except as described in Note 2, Changes in accounting policies.
2. Changes in Accounting Policies
CHANGES IN ACCOUNTING POLICIES FOR 2013
Balance Sheet Offsetting/Netting
Effective January 1, 2013, the Company adopted the ASU on disclosures about balance sheet offsetting as issued by the FASB to enable understanding of the effects of netting arrangements on the Company’s financial position. Adoption of the ASU has resulted in increased qualitative and quantitative disclosures regarding certain derivative instruments that are either offset in accordance with current U.S. GAAP or are subject to a master netting arrangement or similar agreement.
Accumulated Other Comprehensive Income
Effective January 1, 2013, the Company adopted the ASU on reporting of amounts reclassified out of AOCI as issued by the FASB. Adoption of the ASU has resulted in providing additional qualitative and quantitative disclosures regarding significant amounts reclassified out of accumulated other comprehensive income into net income.
FUTURE ACCOUNTING CHANGES
Obligations Resulting from Joint and Several Liability Arrangements
In February 2013, the FASB issued guidance for the recognition, measurement and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation is fixed at the reporting date. Examples of obligations within the scope of this ASU include debt arrangements, other contractual obligations, and settled litigation and judicial rulings. This ASU is effective retrospectively for fiscal years, and interim reporting periods within those years, beginning after December 15, 2013. The Company is currently evaluating the impact of the adoption of this ASU on its consolidated financial statements, but does not expect it to have a material impact.
TRANSCANADA [44
THIRD QUARTER REPORT 2013
Foreign Currency Matters - Cumulative Translation Adjustment
In March 2013, the FASB issued amended guidance related to the release of the cumulative translation adjustment into net income when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a business. This ASU is effective prospectively for fiscal years, and interim reporting periods within those years, beginning after December 15, 2013. Early adoption is permitted as of the beginning of the entity's fiscal year. The Company is currently evaluating the impact of the adoption of this ASU on its consolidated financial statements, but does not expect it to have a material impact.
Unrecognized Tax Benefit
In July 2013, the FASB issued amended guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. This ASU is effective prospectively for fiscal years and interim reporting periods within those years, beginning after December 15, 2014. Early adoption is permitted. We are evaluating the impact that adopting the ASU would have on our consolidated financial statements, but do not expect it to have a material impact.
3. Segmented Information
three months ended September 30 | Natural gas pipelines | Oil pipelines | Energy | Corporate | Total | |||||||||||||||||||||||||
(unaudited - millions of Canadian $) | 2013 | 2012 | 2013 | 2012 | 2013 | 2012 | 2013 | 2012 | 2013 | 2012 | ||||||||||||||||||||
Revenues | 1,083 | 1,058 | 281 | 259 | 840 | 809 | — | — | 2,204 | 2,126 | ||||||||||||||||||||
Income from equity investments | 36 | 37 | — | — | 141 | 34 | — | — | 177 | 71 | ||||||||||||||||||||
Plant operating costs and other | (326 | ) | (331 | ) | (81 | ) | (72 | ) | (217 | ) | (203 | ) | (26 | ) | (21 | ) | (650 | ) | (627 | ) | ||||||||||
Commodity purchases resold | — | — | — | — | (299 | ) | (337 | ) | — | — | (299 | ) | (337 | ) | ||||||||||||||||
Property taxes | (109 | ) | (104 | ) | (11 | ) | (10 | ) | (18 | ) | (17 | ) | — | — | (138 | ) | (131 | ) | ||||||||||||
Depreciation and amortization | (248 | ) | (231 | ) | (37 | ) | (37 | ) | (77 | ) | (70 | ) | (4 | ) | (4 | ) | (366 | ) | (342 | ) | ||||||||||
436 | 429 | 152 | 140 | 370 | 216 | (30 | ) | (25 | ) | 928 | 760 | |||||||||||||||||||
Interest expense | (235 | ) | (249 | ) | ||||||||||||||||||||||||||
Interest income and other | 31 | 34 | ||||||||||||||||||||||||||||
Income before Income Taxes | 724 | 545 | ||||||||||||||||||||||||||||
Income taxes expense | (190 | ) | (134 | ) | ||||||||||||||||||||||||||
Net Income | 534 | 411 | ||||||||||||||||||||||||||||
Net Income Attributable to Non-Controlling Interests | (33 | ) | (29 | ) | ||||||||||||||||||||||||||
Net Income Attributable to Controlling Interests | 501 | 382 | ||||||||||||||||||||||||||||
Preferred Share Dividends | (20 | ) | (13 | ) | ||||||||||||||||||||||||||
Net Income Attributable to Common Shares | 481 | 369 |
TRANSCANADA [45
THIRD QUARTER REPORT 2013
nine months ended September 30 | Natural gas pipelines | Oil pipelines | Energy | Corporate | Total | |||||||||||||||||||||||||
(unaudited - millions of Canadian $) | 2013 | 2012 | 2013 | 2012 | 2013 | 2012 | 2013 | 2012 | 2013 | 2012 | ||||||||||||||||||||
Revenues | 3,271 | 3,177 | 830 | 769 | 2,364 | 1,972 | — | — | 6,465 | 5,918 | ||||||||||||||||||||
Income from equity investments | 105 | 120 | — | — | 318 | 76 | — | — | 423 | 196 | ||||||||||||||||||||
Plant operating costs and other | (983 | ) | (989 | ) | (242 | ) | (209 | ) | (637 | ) | (583 | ) | (77 | ) | (65 | ) | (1,939 | ) | (1,846 | ) | ||||||||||
Commodity purchases resold | — | — | — | — | (958 | ) | (758 | ) | — | — | (958 | ) | (758 | ) | ||||||||||||||||
Property taxes | (264 | ) | (257 | ) | (34 | ) | (34 | ) | (55 | ) | (55 | ) | — | — | (353 | ) | (346 | ) | ||||||||||||
Depreciation and amortization | (746 | ) | (697 | ) | (111 | ) | (109 | ) | (220 | ) | (215 | ) | (12 | ) | (11 | ) | (1,089 | ) | (1,032 | ) | ||||||||||
1,383 | 1,354 | 443 | 417 | 812 | 437 | (89 | ) | (76 | ) | 2,549 | 2,132 | |||||||||||||||||||
Interest expense | (745 | ) | (730 | ) | ||||||||||||||||||||||||||
Interest income and other | 33 | 70 | ||||||||||||||||||||||||||||
Income before Income Taxes | 1,837 | 1,472 | ||||||||||||||||||||||||||||
Income taxes expense | (403 | ) | (348 | ) | ||||||||||||||||||||||||||
Net Income | 1,434 | 1,124 | ||||||||||||||||||||||||||||
Net Income Attributable to Non-Controlling Interests | (87 | ) | (90 | ) | ||||||||||||||||||||||||||
Net Income Attributable to Controlling Interests | 1,347 | 1,034 | ||||||||||||||||||||||||||||
Preferred Share Dividends | (55 | ) | (41 | ) | ||||||||||||||||||||||||||
Net Income Attributable to Common Shares | 1,292 | 993 |
TOTAL ASSETS
(unaudited - millions of Canadian $) | September 30, 2013 | December 31, 2012 | ||||
Natural Gas Pipelines | 24,206 | 23,210 | ||||
Oil Pipelines | 12,065 | 10,485 | ||||
Energy | 13,116 | 13,157 | ||||
Corporate | 1,442 | 1,481 | ||||
50,829 | 48,333 |
4. Income Taxes
At September 30, 2013, the total unrecognized tax benefit of uncertain tax positions was approximately $24 million (December 31, 2012 - $49 million). TransCanada recognizes interest and penalties related to income tax uncertainties in income tax expense. There is no interest expense or penalties included in net tax expense for the three and nine months ended September 30, 2013 (September 30, 2012 - a reversal of $2 and $1 million, for three and nine months ended of interest expense, respectively, and nil for penalties). At September 30, 2013, the Company had $5 million accrued for interest expense and nil accrued for penalties (December 31, 2012 - $5 million accrued for interest expense and nil for penalties).
The effective tax rates for the nine-month periods ended September 30, 2013 and 2012 were 22 per cent and 23.6 per cent, respectively. The lower effective tax rate in 2013 was a result of the impact of the NEB’s decision on the Canadian Restructuring Proposal and the enactment of certain Canadian Federal tax legislation.
TransCanada recognized a favourable income tax adjustment of approximately $25 million due to the enactment of certain Canadian Federal tax legislation in June 2013. Subject to the results of audit examinations by taxing 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, 2013, TransCanada capitalized interest related to capital projects of $80 million and $195 million, respectively (September 30, 2012 - $74 million and $224 million, respectively).
In January 2013, TransCanada PipeLines Limited issued US$750 million of 0.75 per cent per annum senior notes due in 2016.
TRANSCANADA [46
THIRD QUARTER REPORT 2013
In July 2013, TransCanada PipeLines Limited issued US$500 million of three-year London Interbank Offered Rate-based (LIBOR) floating rate notes maturing in 2016, bearing interest at an initial annual rate of 0.95 per cent.
Also in July 2013, TransCanada PipeLines Limited issued $450 million of ten-year and $300 million of 30-year senior notes maturing in July 2023 and November 2041, bearing interest rates of 3.69 and 4.55 per cent, respectively.
In July 2013, TC PipeLines, LP entered into a five-year, US$500 million term loan maturing in July 2018. Borrowings under the term loan facility bear interest based on LIBOR, or the base rate, plus an applicable margin. The applicable margin for the term loans is based on TC PipeLines, LP's senior debt rating and ranges between 1.125 per cent and 2.00 per cent for LIBOR borrowings and 0.125 per cent and 1.00 per cent for base rate borrowings. The LIBOR based interest rate on TC PipeLines, LP term loan facility averaged 1.44 per cent for the three months ended September 30, 2013.
In June 2013, TransCanada PipeLines Limited retired US$350 million of 4.00 per cent senior notes.
In August 2013, TransCanada PipeLines Limited retired US$500 million of 5.05 per cent senior notes.
6. Equity and Share Capital
On May 22, 2013, TC PipeLines, LP completed a public offering of 8,855,000 common units at a price of $43.85 per unit, resulting in gross proceeds of approximately US$388 million. TransCanada contributed an additional approximate US$8 million to maintain its general partnership interest and did not purchase any other units. Upon completion of this offering, TransCanada’s ownership interest in TC PipeLines, LP decreased from 33.3 per cent to 28.9 per cent and an after-tax dilution impact of $29 million ($47 million pre-tax) was recorded in Additional Paid-In Capital.
PREFERRED SHARE ISSUE
In March 2013, TransCanada completed a public offering of 24 million Series 7 cumulative redeemable first preferred shares. The Series 7 preferred shares were issued at $25 per share resulting in gross proceeds of $600 million. The holders of the Series 7 preferred shares are entitled to receive fixed cumulative dividends at an annual rate of $1.00 per share, payable quarterly. The dividend rate will reset on April 30, 2019 and every five years thereafter to a yield per annum equal to the sum of the then five-year Government of Canada bond yield and 2.38 per cent. The preferred shares are redeemable by TransCanada on or after April 30, 2019 and on April 30 of every fifth year thereafter at a price of $25 per share plus accrued and unpaid dividends.
The Series 7 preferred shareholders will have the right to convert their shares into Series 8 cumulative redeemable first preferred shares on April 30, 2019 and on April 30 of every fifth year thereafter. The holders of Series 8 preferred shares will be entitled to receive quarterly floating rate cumulative dividends at a yield per annum equal to the sum of the then 90-day Government of Canada treasury bill rate and 2.38 per cent.
7. Other Comprehensive Income And Accumulated Other Comprehensive Loss
Components of other comprehensive income including non-controlling interests and the related tax effects are as follows:
three months ended September 30, 2013 (unaudited - millions of Canadian $) | Before tax amount | Income taxes recovery/ (expense) | Net of tax amount | ||||||
Foreign currency translation gains and losses on net investments in foreign operations | (104 | ) | (36 | ) | (140 | ) | |||
Change in fair value of net investment hedges | 83 | (21 | ) | 62 | |||||
Change in fair value of cash flow hedges | 27 | (13 | ) | 14 | |||||
Reclassification to net income of gains and losses on cash flow hedges | 38 | (11 | ) | 27 | |||||
Unrealized actuarial gains and losses on pension and other post-retirement benefit plans | 2 | (1 | ) | 1 | |||||
Reclassification to net income of actuarial gains and losses and prior service costs on pension and other post-retirement benefit plans | 9 | (4 | ) | 5 | |||||
Other comprehensive loss on equity investments | (1 | ) | — | (1 | ) | ||||
Other comprehensive income/(loss) | 54 | (86 | ) | (32 | ) |
TRANSCANADA [47
THIRD QUARTER REPORT 2013
three months ended September 30, 2012 (unaudited - millions of Canadian $) | Before tax amount | Income taxes recovery/ (expense) | Net of tax amount | ||||||
Foreign currency translation gains and losses on net investments in foreign operations | (145 | ) | (51 | ) | (196 | ) | |||
Change in fair value of net investment hedges | 133 | (34 | ) | 99 | |||||
Change in fair value of cash flow hedges | 88 | (28 | ) | 60 | |||||
Reclassification to net income of gains and losses on cash flow hedges | 73 | (26 | ) | 47 | |||||
Reclassification to net income of actuarial gains and losses and prior service costs on pension and other post-retirement benefit plans | 6 | (2 | ) | 4 | |||||
Other comprehensive loss on equity investments | (4 | ) | 1 | (3 | ) | ||||
Other comprehensive income | 151 | (140 | ) | 11 |
nine months ended September 30, 2013 (unaudited - millions of Canadian $) | Before tax amount | Income taxes recovery/ (expense) | Net of tax amount | ||||||
Foreign currency translation gains and losses on net investments in foreign operations | 144 | 52 | 196 | ||||||
Change in fair value of net investment hedges | (165 | ) | 43 | (122 | ) | ||||
Change in fair value of cash flow hedges | (3 | ) | (6 | ) | (9 | ) | |||
Reclassification to net income of gains and losses on cash flow hedges | 49 | (15 | ) | 34 | |||||
Unrealized actuarial gains and losses on pension and other post-retirement benefit plans | 2 | (1 | ) | 1 | |||||
Reclassification to net income of actuarial gains and losses and prior service costs on pension and other post-retirement benefit plans | 26 | (9 | ) | 17 | |||||
Other comprehensive loss on equity investments | (5 | ) | 1 | (4 | ) | ||||
Other comprehensive income | 48 | 65 | 113 |
nine months ended September 30, 2012 (unaudited - millions of Canadian $) | Before tax amount | Income taxes recovery/ (expense) | Net of tax amount | ||||||
Foreign currency translation gains and losses on net investments in foreign operations | (141 | ) | (48 | ) | (189 | ) | |||
Change in fair value of net investment hedges | 102 | (26 | ) | 76 | |||||
Change in fair value of cash flow hedges | 52 | (9 | ) | 43 | |||||
Reclassification to net income of gains and losses on cash flow hedges | 186 | (67 | ) | 119 | |||||
Reclassification to net income of actuarial gains and losses and prior service costs on pension and other post-retirement benefit plans | 17 | 1 | 18 | ||||||
Other comprehensive loss on equity investments | (1 | ) | — | (1 | ) | ||||
Other comprehensive income | 215 | (149 | ) | 66 |
The changes in accumulated other comprehensive loss by component are as follows:
three months ended September 30, 2013 (unaudited - millions of Canadian $) | Currency translation adjustments | Cash flow hedges | Pension and OPEB plan adjustments | Total1 | ||||||||
AOCI Balance at July 1, 2013 | (612 | ) | (129 | ) | (619 | ) | (1,360 | ) | ||||
Other comprehensive (loss)/income before reclassifications2 | (50 | ) | 14 | — | (36 | ) | ||||||
Amounts reclassified from accumulated other comprehensive loss | — | 27 | 5 | 32 | ||||||||
Net current period other comprehensive (loss)/income | (50 | ) | 41 | 5 | (4 | ) | ||||||
AOCI Balance at September 30, 2013 | (662 | ) | (88 | ) | (614 | ) | (1,364 | ) |
1 | All amounts are net of tax. Amounts in parentheses indicate losses. |
2 | Other comprehensive loss before reclassifications on currency translation adjustments is net of non-controlling interest of $28 million. |
TRANSCANADA [48
THIRD QUARTER REPORT 2013
nine months ended September 30, 2013 (unaudited - millions of Canadian $) | Currency translation adjustments | Cash flow hedges | Pension and OPEB plan adjustments | Total1 | ||||||||
AOCI Balance at January 1, 2013 | (707 | ) | (110 | ) | (631 | ) | (1,448 | ) | ||||
Other comprehensive income/(loss) before reclassifications2 | 45 | (12 | ) | — | 33 | |||||||
Amounts reclassified from accumulated other comprehensive loss3 | — | 34 | 17 | 51 | ||||||||
Net current period other comprehensive income | 45 | 22 | 17 | 84 | ||||||||
AOCI Balance at September 30, 2013 | (662 | ) | (88 | ) | (614 | ) | (1,364 | ) |
1 | All amounts are net of tax. Amounts in parentheses indicate losses. |
2 | Other comprehensive income before reclassifications on currency translation adjustments is net of non-controlling interest of $29 million. |
3 | 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 $26 million ($17 million, net of tax) at September 30, 2013. 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. |
Details about reclassifications out of accumulated other comprehensive loss are as follows:
Amounts reclassified from accumulated other comprehensive loss 1 | Affected line item in the condensed consolidated statement of income | |||||||
(unaudited - millions of Canadian $) | three months ended September 30, 2013 | nine months ended September 30, 2013 | ||||||
Cash flow hedges | ||||||||
Power & Natural Gas | (34 | ) | (37 | ) | Revenue (Energy) | |||
Interest | (4 | ) | (12 | ) | Interest expense | |||
(38 | ) | (49 | ) | Total before tax | ||||
11 | 15 | Income taxes expense | ||||||
(27 | ) | (34 | ) | Net of tax | ||||
Pension and other post-retirement plan adjustments | ||||||||
Amortization of actuarial loss and past service cost 2 | (9 | ) | (26 | ) | Total before tax | |||
4 | 9 | Income taxes expense | ||||||
(5 | ) | (17 | ) | Net of tax |
1 | All amounts in parentheses indicate expenses to the condensed consolidated statement of income. |
2 | These accumulated other comprehensive loss components are included in the computation of net benefit cost. Refer to Note 8 for additional detail. |
TRANSCANADA [49
THIRD QUARTER REPORT 2013
8. Employee Post-Retirement Benefits
The net benefit cost recognized for the Company’s defined benefit pension plans and other post-retirement benefit plans is as follows:
three months ended September 30 | nine months ended September 30 | |||||||||||||||||||||||
Pension benefit plans | Other post-retirement benefit plans | Pension benefit plans | Other post-retirement benefit plans | |||||||||||||||||||||
(unaudited - millions of Canadian $) | 2013 | 2012 | 2013 | 2012 | 2013 | 2012 | 2013 | 2012 | ||||||||||||||||
Service cost | 21 | 16 | 1 | 1 | 62 | 49 | 2 | 2 | ||||||||||||||||
Interest cost | 24 | 24 | 2 | 2 | 71 | 71 | 6 | 6 | ||||||||||||||||
Expected return on plan assets | (31 | ) | (28 | ) | — | — | (89 | ) | (85 | ) | (1 | ) | (1 | ) | ||||||||||
Amortization of actuarial loss | 8 | 5 | 1 | — | 23 | 14 | 2 | 1 | ||||||||||||||||
Amortization of past service cost | — | — | — | — | 1 | 1 | — | — | ||||||||||||||||
Amortization of regulatory asset | 7 | 5 | — | — | 22 | 15 | 1 | — | ||||||||||||||||
Amortization of transitional obligation related to regulated business | — | — | — | 1 | — | — | 1 | 2 | ||||||||||||||||
Net benefit cost recognized | 29 | 22 | 4 | 4 | 90 | 65 | 11 | 10 |
9. Risk Management and Financial Instruments
COUNTERPARTY CREDIT 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, portfolio investments recorded at fair value, the fair value of derivative assets and notes, and loans and advances receivable. The carrying amounts and fair values of these financial assets, except amounts for derivative assets, are included in accounts receivable and other, and available for sale assets in the Non-Derivative Financial Instruments Summary table below. The majority of counterparty credit exposure is with counterparties that are investment grade or the exposure is supported by financial assurances provided by investment grade parties. The Company regularly reviews its accounts receivable and records an allowance for doubtful accounts as necessary using the specific identification method. At September 30, 2013, there were no significant amounts past due or impaired, and there were no significant credit losses during the period.
At September 30, 2013, the Company had a credit risk concentration of $228 million (December 31, 2012 - $259 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.
NET INVESTMENT IN FOREIGN OPERATIONS
The Company hedges its net investment in foreign operations (on an after-tax basis) with U.S. dollar-denominated debt, cross-currency interest rate swaps, foreign exchange forward contracts and foreign exchange options.
U.S. DOLLAR-DENOMINATED DEBT DESIGNATED AS A NET INVESTMENT HEDGE
(unaudited - billions of Canadian $) | September 30, 2013 | December 31, 2012 | ||
Carrying value | 12.5 (US 12.2) | 11.1 (US 11.2) | ||
Fair value | 14.5 (US 14.1) | 14.3 (US 14.4) |
TRANSCANADA [50
THIRD QUARTER REPORT 2013
FAIR VALUE OF DERIVATIVES USED TO HEDGE OUR
U.S. DOLLAR INVESTMENT IN FOREIGN OPERATIONS
(unaudited - millions of Canadian $) | September 30, 2013 | December 31, 2012 | ||||
Other current assets | 32 | 71 | ||||
Intangible and other assets | 7 | 47 | ||||
Accounts payable and other | (14 | ) | (6 | ) | ||
Other long-term liabilities | (81 | ) | (30 | ) | ||
(56 | ) | 82 |
The fair values and notional principal amounts for the derivatives designated as a net investment hedge were as follows:
September 30, 2013 | December 31, 2012 | |||||||||
(unaudited - millions of Canadian $) | Fair Value1 | Notional or principal amount | Fair value1 | Notional or principal amount | ||||||
Asset/(liability) | ||||||||||
U.S. dollar cross-currency swaps | ||||||||||
(maturing 2013 to 2019)2 | (56 | ) | US 3,950 | 82 | US 3,800 | |||||
U.S. dollar forward foreign exchange contracts | ||||||||||
(maturing 2013 to 2014) | — | US 875 | — | US 250 | ||||||
(56 | ) | US 4,825 | 82 | US 4,050 |
1 | Fair values equal carrying values. |
2 | Net Income in the three and nine months ended September 30, 2013 included net realized gains of $8 million and $22 million, respectively, (2012 - gains of $8 million and $22 million, respectively) related to the interest component of cross-currency swap settlements. |
FINANCIAL INSTRUMENTS
Non-Derivative Financial Instruments Summary
The carrying and fair values of non-derivative financial instruments are as follows:
September 30, 2013 | December 31, 2012 | |||||||||||
(unaudited - millions of Canadian $) | Carrying amount1 | Fair value2 | Carrying amount1 | Fair value2 | ||||||||
Financial assets | ||||||||||||
Cash and cash equivalents | 645 | 645 | 551 | 551 | ||||||||
Accounts receivable and other3 | 1,127 | 1,176 | 1,288 | 1,337 | ||||||||
Available for sale assets | 61 | 61 | 44 | 44 | ||||||||
1,833 | 1,882 | 1,883 | 1,932 | |||||||||
Financial liabilities4 | ||||||||||||
Notes payable | 1,688 | 1,688 | 2,275 | 2,275 | ||||||||
Accounts payable and other long-term liabilities5 | 1,125 | 1,125 | 1,535 | 1,535 | ||||||||
Accrued interest | 330 | 330 | 368 | 368 | ||||||||
Long-term debt | 21,037 | 24,720 | 18,913 | 24,573 | ||||||||
Junior subordinated notes | 1,028 | 1,054 | 994 | 1,054 | ||||||||
25,208 | 28,917 | 24,085 | 29,805 |
1 | Recorded at amortized cost, except for US$200 million (December 31, 2012 - US$350 million) of long-term debt that is attributed to hedged risk and 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 hierarchy 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, 2013, financial assets of $913 million (December 31, 2012 - $1.1 billion) are included in accounts receivable, $41 million (December 31, 2012 - $40 million) in other current assets and $234 million (December 31, 2012 - $240 million) in intangible and other assets. |
4 | Condensed consolidated statement of income in the three and nine months ended September 30, 2013 included losses of nil and $7 million, respectively, (2012 - losses of $2 million and $14 million, respectively) for fair value adjustments attributable to the hedged interest rate risk associated with interest |
TRANSCANADA [51
THIRD QUARTER REPORT 2013
rate swap fair value hedging relationships on US$200 million of long-term debt at September 30, 2013 (December 31, 2012 - US$350 million). There were no other unrealized gains or losses from fair value adjustments to the non-derivative financial instruments.
5 | At September 30, 2013, financial liabilities of $1.1 billion (December 31, 2012 - $1.5 billion) are included in accounts payable and $33 million (December 31, 2012 - $38 million) in other long-term liabilities. |
Derivative Instruments Summary
Information for the Company’s derivative instruments for 2013, excluding hedges of the Company’s net investment in foreign operations, is as follows:
(unaudited - millions of Canadian $ unless noted otherwise) | Power | Natural gas | Foreign exchange | Interest | ||||||||||||
Derivative instruments held for trading1 | ||||||||||||||||
Fair values2 | ||||||||||||||||
Assets | $140 | $65 | $— | $9 | ||||||||||||
Liabilities | ($164 | ) | ($80 | ) | ($2 | ) | ($9 | ) | ||||||||
Notional values | ||||||||||||||||
Volumes3 | ||||||||||||||||
Sales | 31,548 | 64 | — | — | ||||||||||||
Purchases | 31,705 | 93 | — | — | ||||||||||||
Canadian dollars | — | — | — | 462 | ||||||||||||
U.S. dollars | — | — | US 978 | US 150 | ||||||||||||
Net unrealized gains/(losses) in the period4 | ||||||||||||||||
three months ended September 30, 2013 | $18 | $13 | $16 | $— | ||||||||||||
nine months ended September 30, 2013 | $15 | $1 | ($1 | ) | $— | |||||||||||
Net realized (losses)/gains in the period4 | ||||||||||||||||
three months ended September 30, 2013 | ($10 | ) | ($14 | ) | $3 | $— | ||||||||||
nine months ended September 30, 2013 | ($46 | ) | ($21 | ) | ($5 | ) | $— | |||||||||
Maturity dates | 2013-2017 | 2013-2016 | 2013-2014 | 2013-2016 | ||||||||||||
Derivative instruments in hedging relationships5,6 | ||||||||||||||||
Fair values2 | ||||||||||||||||
Assets | $46 | $— | $— | $7 | ||||||||||||
Liabilities | ($42 | ) | $— | ($1 | ) | ($1 | ) | |||||||||
Notional values | ||||||||||||||||
Volumes3 | ||||||||||||||||
Sales | 6,300 | — | — | — | ||||||||||||
Purchases | 11,264 | — | — | — | ||||||||||||
U.S. dollars | — | — | US 15 | US 350 | ||||||||||||
Cross-currency | — | — | — | — | ||||||||||||
Net realized (losses)/gains in the period4 | ||||||||||||||||
three months ended September 30, 2013 | ($18 | ) | $— | $— | $1 | |||||||||||
nine months ended September 30, 2013 | ($29 | ) | ($1 | ) | $— | $5 | ||||||||||
Maturity dates | 2013-2018 | 2013 | 2014 | 2015-2018 |
1 | All derivative 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 held for trading derivative instruments 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 the change in fair value of derivative instruments in hedging relationships is initially recognized in OCI 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 $7 million and a notional amount of US$200 million. For the three and nine months ended September 30, 2013, net realized gains on fair value hedges were $1 million and $5 million, respectively and were included in interest expense. For the three and nine months ended September 30, 2013, 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, 2013, 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. |
TRANSCANADA [52
THIRD QUARTER REPORT 2013
Derivative Instruments Summary
Information for the Company’s derivative instruments for 2012, excluding hedges of the Company’s net investment in foreign operations, is as follows:
(unaudited – millions of Canadian $ unless noted otherwise) | Power | Natural gas | Foreign exchange | Interest | ||||||||||||
Derivative instruments held for trading1 | ||||||||||||||||
Fair values2,3 | ||||||||||||||||
Assets | $139 | $88 | $1 | $14 | ||||||||||||
Liabilities | ($176 | ) | ($104 | ) | ($2 | ) | ($14 | ) | ||||||||
Notional values3 | ||||||||||||||||
Volumes4 | ||||||||||||||||
Sales | 31,066 | 65 | — | — | ||||||||||||
Purchases | 31,135 | 83 | — | — | ||||||||||||
Canadian dollars | — | — | — | 620 | ||||||||||||
U.S. dollars | — | — | US 1,408 | US 200 | ||||||||||||
Net unrealized gains/(losses) in the period5 | ||||||||||||||||
three months ended September 30, 2012 | $1 | $12 | $13 | $— | ||||||||||||
nine months ended September 30, 2012 | ($17 | ) | $2 | $5 | $— | |||||||||||
Net realized gains/(losses) in the period5 | ||||||||||||||||
three months ended September 30, 2012 | $4 | ($4 | ) | $6 | $— | |||||||||||
nine months ended September 30, 2012 | $8 | ($19 | ) | $21 | $— | |||||||||||
Maturity dates | 2013 -2017 | 2013-2016 | 2013 | 2013-2016 | ||||||||||||
Derivative instruments in hedging relationships 6,7 | ||||||||||||||||
Fair values2,3 | ||||||||||||||||
Assets | $76 | $— | $— | $10 | ||||||||||||
Liabilities | ($97 | ) | ($2 | ) | ($38 | ) | $— | |||||||||
Notional values3 | ||||||||||||||||
Volumes4 | ||||||||||||||||
Sales | 7,200 | 1 | — | — | ||||||||||||
Purchases | 15,184 | — | — | — | ||||||||||||
U.S. dollars | — | — | US 12 | US 350 | ||||||||||||
Cross-currency | — | — | 136/ US 100 | — | ||||||||||||
Net realized (losses)/gains in the period5 | ||||||||||||||||
three months ended September 30, 2012 | ($49 | ) | ($7 | ) | $— | $2 | ||||||||||
nine months ended September 30, 2012 | ($101 | ) | ($21 | ) | $— | $5 | ||||||||||
Maturity dates | 2013-2018 | 2013 | 2013-2014 | 2013-2015 |
1 | All derivative 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, 2012. |
4 | Volumes for power and natural gas derivatives are in GWh and Bcf, respectively. |
5 | Realized and unrealized gains and losses on held for trading derivative instruments 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 change in fair value of derivative instruments in hedging relationships is initially recognized in OCI 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 $10 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. |
7 | 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. |
TRANSCANADA [53
THIRD QUARTER REPORT 2013
BALANCE SHEET PRESENTATION OF DERIVATIVE INSTRUMENTS
The fair value of the derivative instruments in the Company’s balance sheet is as follows:
(unaudited - millions of Canadian $) | September 30, 2013 | December 31, 2012 | ||||
Current | ||||||
Other current assets | 194 | 259 | ||||
Accounts payable and other | (208 | ) | (283 | ) | ||
Long term | ||||||
Intangible and other assets | 112 | 187 | ||||
Other long-term liabilities | (186 | ) | (186 | ) |
DERIVATIVES IN CASH FLOW HEDGING RELATIONSHIPS
The components of OCI related to derivatives in cash flow hedging relationships are as follows:
Cash flow hedges1 | Power | Natural gas | Foreign exchange | Interest | ||||||||||||||||||||
three months ended September 30 (unaudited - millions of Canadian $, pre-tax) | 2013 | 2012 | 2013 | 2012 | 2013 | 2012 | 2013 | 2012 | ||||||||||||||||
Change in fair value of derivative instruments recognized in OCI (effective portion) | 28 | 96 | (1 | ) | (3 | ) | 1 | (5 | ) | (1 | ) | — | ||||||||||||
Reclassification of gains and losses on derivative instruments from AOCI to net income (effective portion) | 33 | 54 | 1 | 15 | — | — | 4 | 4 | ||||||||||||||||
Gains and losses on derivative instruments recognized in earnings (ineffective portion) | 6 | 5 | — | 1 | — | — | — | — |
1 | No amounts have been excluded from the assessment of hedge effectiveness. |
Cash flow hedges1 | Power | Natural gas | Foreign exchange | Interest | ||||||||||||||||||||
nine months ended September 30 (unaudited - millions of Canadian $, pre-tax) | 2013 | 2012 | 2013 | 2012 | 2013 | 2012 | 2013 | 2012 | ||||||||||||||||
Change in fair value of derivative instruments recognized in OCI (effective portion) | (6 | ) | 74 | (1 | ) | (17 | ) | 5 | (5 | ) | (1 | ) | — | |||||||||||
Reclassification of gains and losses on derivative instruments from AOCI to net income (effective portion) | 34 | 129 | 3 | 43 | — | — | 12 | 14 | ||||||||||||||||
Gains and losses on derivative instruments recognized in earnings (ineffective portion) | (1 | ) | 6 | — | — | — | — | — | — |
1 | No amounts have been excluded from the assessment of hedge effectiveness. |
TRANSCANADA [54
THIRD QUARTER REPORT 2013
OFFSETTING OF DERIVATIVE INSTRUMENTS
The Company enters into derivative contracts with the right to offset in the normal course of business as well as in the event of default. TransCanada has no master netting agreements, however, similar contracts are entered into containing rights of offset. The Company has elected to present the fair value of derivative instruments with the right to offset on a gross basis in the balance sheet. The following table shows the impact on the presentation of the fair value of derivative instrument assets and liabilities had the Company elected to present these contracts on a net basis:
at September 30, 2013 (unaudited - millions of Canadian $) | Gross derivative instruments presented in the balance sheet | Amounts available for offset1 | Net amounts | ||||||
Derivative - Asset | |||||||||
Power | 186 | (116 | ) | �� | 70 | ||||
Natural gas | 65 | (61 | ) | 4 | |||||
Foreign exchange | 39 | (24 | ) | 15 | |||||
Interest | 16 | (2 | ) | 14 | |||||
Total | 306 | (203 | ) | 103 | |||||
Derivative - Liability | |||||||||
Power | (206 | ) | 116 | (90 | ) | ||||
Natural gas | (80 | ) | 61 | (19 | ) | ||||
Foreign exchange | (98 | ) | 24 | (74 | ) | ||||
Interest | (10 | ) | 2 | (8 | ) | ||||
Total | (394 | ) | 203 | (191 | ) |
1 | Amounts available for offset do not include cash collateral pledged or received. |
With respect to all financial arrangements, including the derivative instruments presented above, as at September 30, 2013, the Company had provided cash collateral of $144 million and letters of credit of $30 million to its counterparties. The Company held $1 million in cash collateral and $4 million in letters of credit on asset exposures at September 30, 2013.
The following table shows the impact on the presentation of the fair value of derivative instrument assets and liabilities had the Company elected to present these contracts on a net basis as at December 31, 2012:
at December 31, 2012 (unaudited - millions of Canadian $) | Gross derivative instruments presented in the balance sheet | Amounts available for offset1 | Net amounts | ||||||
Derivative - Asset | |||||||||
Power | 215 | (132 | ) | 83 | |||||
Natural gas | 88 | (83 | ) | 5 | |||||
Foreign exchange | 119 | (37 | ) | 82 | |||||
Interest | 24 | (6 | ) | 18 | |||||
Total | 446 | (258 | ) | 188 | |||||
Derivative - Liability | |||||||||
Power | (273 | ) | 132 | (141 | ) | ||||
Natural gas | (106 | ) | 83 | (23 | ) | ||||
Foreign exchange | (76 | ) | 37 | (39 | ) | ||||
Interest | (14 | ) | 6 | (8 | ) | ||||
Total | (469 | ) | 258 | (211 | ) |
1 | Amounts available for offset do not include cash collateral pledged or received. |
With respect to all financial arrangements, including the derivative instruments presented above as at December 31, 2012, the Company had provided cash collateral of $189 million and letters of credit of $45 million to its counterparties. The Company held $2 million in cash collateral and $5 million in letters of credit on asset exposures at December 31, 2012.
CREDIT RISK RELATED CONTINGENT FEATURES
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.
TRANSCANADA [55
THIRD QUARTER REPORT 2013
Based on contracts in place and market prices at September 30, 2013, the aggregate fair value of all derivative instruments with credit-risk-related contingent features that were in a net liability position was $18 million (December 31, 2012 - $37 million), for which the Company had provided collateral in the normal course of business of nil (December 31, 2012 - nil). If the credit-risk-related contingent features in these agreements were triggered on September 30, 2013, the Company would have been required to provide collateral of $18 million (December 31, 2012 - $37 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 feels it 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.
Levels | How fair value has been determined |
Level I | Quoted prices in active markets for identical assets and liabilities that the Company has the ability to access at the measurement date. |
Level II | Valuation based on the extrapolation of inputs, other than quoted prices included within Level I, for which all significant inputs are observable directly or indirectly. Inputs include published exchange rates, interest rates, interest rate swap curves, yield curves and broker quotes from external data service providers. This category includes interest rate and foreign exchange derivative assets and liabilities where fair value is determined using the income approach and power and natural gas commodity derivatives where fair value is determined using the market approach. Transfers between Level I and Level II would occur when there is a change in market circumstances. |
Level III | Valuation of assets and liabilities measured on a recurring basis using a market approach based on inputs that are unobservable and significant to the overall fair value measurement. This category includes long-dated commodity transactions in certain markets where liquidity is low. Long-term electricity prices are estimated using a third-party modeling tool which takes into account physical operating characteristics of generation facilities in the markets in which we operate. Model inputs 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. Significant decreases in fuel prices or demand for electricity or natural gas, or increases in the supply of electricity or natural gas is expected to or may result in a lower fair value measurement of contracts included in Level III. 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. |
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:
Quoted prices in active markets (Level I)1 | Significant other observable inputs (Level II)1 | Significant unobservable inputs (Level III)1 | Total | |||||||||||||||||||||
(unaudited - millions of Canadian $, pre-tax) | Sep 30, 2013 | Dec 31, 2012 | Sep 30, 2013 | Dec 31, 2012 | Sep 30, 2013 | Dec 31, 2012 | Sep 30, 2013 | Dec 31, 2012 | ||||||||||||||||
Derivative instrument assets: | ||||||||||||||||||||||||
Power commodity contracts | — | — | 179 | 213 | 7 | 2 | 186 | 215 | ||||||||||||||||
Natural gas commodity contracts | 56 | 75 | 9 | 13 | — | — | 65 | 88 | ||||||||||||||||
Foreign exchange contracts | — | — | 39 | 119 | — | — | 39 | 119 | ||||||||||||||||
Interest rate contracts | — | — | 16 | 24 | — | — | 16 | 24 | ||||||||||||||||
Derivative instrument liabilities: | ||||||||||||||||||||||||
Power commodity contracts | — | — | (198 | ) | (269 | ) | (8 | ) | (4 | ) | (206 | ) | (273 | ) | ||||||||||
Natural gas commodity contracts | (71 | ) | (95 | ) | (9 | ) | (11 | ) | — | — | (80 | ) | (106 | ) | ||||||||||
Foreign exchange contracts | — | — | (98 | ) | (76 | ) | — | — | (98 | ) | (76 | ) | ||||||||||||
Interest rate contracts | — | — | (10 | ) | (14 | ) | — | — | (10 | ) | (14 | ) | ||||||||||||
Non-derivative financial instruments: | ||||||||||||||||||||||||
Available for sale assets | — | — | 61 | 44 | — | — | 61 | 44 | ||||||||||||||||
(15 | ) | (20 | ) | (11 | ) | 43 | (1 | ) | (2 | ) | (27 | ) | 21 |
1 | There were no transfers from Level I to Level II or from Level II to Level III for the nine months ended September 30, 2013 and 2012. |
TRANSCANADA [56
THIRD QUARTER REPORT 2013
The following table presents the net change in the Level III fair value category:
Derivatives1 | ||||||||||||
three months ended September 30 | nine months ended September 30 | |||||||||||
(unaudited - millions of Canadian $, pre-tax) | 2013 | 2012 | 2013 | 2012 | ||||||||
Balance at beginning of period | — | 7 | (2 | ) | (15 | ) | ||||||
Settlements | — | — | 1 | (1 | ) | |||||||
Transfers out of Level III | — | (12 | ) | (1 | ) | (10 | ) | |||||
Total gains and losses included in Net Income | (1 | ) | 7 | (1 | ) | 8 | ||||||
Total gains and losses included in OCI | — | 2 | 2 | 22 | ||||||||
Balance at end of period | (1 | ) | 4 | (1 | ) | 4 |
1 | For the three and nine months ended September 30, 2013 the unrealized gains or losses included in net income attributed to derivatives in the level III category that were still held at the reporting date was nil (2012 - nil). |
A 10 per cent increase or decrease in commodity prices, with all other variables held constant, would result in a $3 million decrease or increase, respectively, in the fair value of outstanding derivative instruments included in Level III as at September 30, 2013.
10. Acquisitions and Disposition
On June 28, 2013, TransCanada acquired the first of nine Ontario solar power facilities from Canadian Solar Solutions Inc. for $55 million.
On September 30, 2013, TransCanada completed the acquisition of two additional Ontario solar power facilities from Canadian Solar Solutions Inc. for $99 million.
TransCanada measured the assets and liabilities acquired at fair value with substantially all of the purchase price allocated to Plant, Property and Equipment. The combined capacity of the nine projects is 86 MW and the cost of the portfolio will be approximately $470 million. TransCanada anticipates the remaining projects will come into service and be acquired by the end of 2014. The renewable energy produced from these projects will be sold to the Ontario Power Authority under a series of 20-year PPAs.
On July 1, 2013, TransCanada completed the sale of a 45 per cent interest in each of Gas Transmission Northwest LLC (GTN LLC) and Bison Pipeline LLC (Bison LLC) to TC PipeLines, LP for an aggregate purchase price of US$1.05 billion, which included US$146 million of long-term debt for 45 per cent of GTN LLC debt outstanding plus normal closing adjustments. GTN LLC and Bison LLC own the GTN and Bison natural gas pipelines, respectively.
11. 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 2013, TransCanada currently expects spot prices to be less than the floor price for the year, therefore no amounts received under the floor price mechanism in the first nine months of 2013 are expected to be repaid.
GUARANTEES
TransCanada and its joint venture partners on Bruce Power, Cameco Corporation and BPC Generation Infrastructure Trust (BPC), have each severally guaranteed one-third of certain contingent financial obligations of Bruce B related to power sales agreements, a lease agreement and contractor services. In addition, TransCanada and BPC have each severally guaranteed one-half of certain contingent financial obligations of Bruce A related to a sublease agreement and certain other financial obligations. The Company’s exposure under certain of these guarantees is unlimited.
TRANSCANADA [57
THIRD QUARTER REPORT 2013
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, PPA payments and the payment of liabilities. 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.
The carrying value of these guarantees has been included in other long term liabilities. Information regarding the Company’s guarantees is as follows:
at September 30, 2013 (unaudited - millions of Canadian $) | Term | Potential Exposure1 | Carrying Value | |||||
Bruce Power | ranging to 20192 | 665 | 9 | |||||
Other jointly owned entities | ranging to 2040 | 41 | 8 | |||||
706 | 17 |
1 | TransCanada’s share of the potential estimated current or contingent exposure. |
2 | Except for one guarantee with no termination date. |
12. Subsequent Events
In October 2013, TransCanada PipeLines Limited issued US$625 million of senior notes, maturing on October 16, 2023 and bearing interest at 3.75 per cent per annum and US$625 million of senior notes, maturing on October 16, 2043 and bearing interest at 5.0 per cent per annum.
Also in October 2013, TransCanada PipeLines Limited redeemed all of the four million outstanding 5.60 per cent Cumulative Redeemable First Preferred Shares Series U. The Series U Shares were redeemed at a price of $50 per share plus $0.5907 representing accrued and unpaid dividends to the redemption date.