Exhibit 13.2
Consolidated Income
(unaudited) | Three months ended March 31 | |||||||
(millions of dollars except per share amounts) | 2011 | 2010 | ||||||
Revenues | 2,243 | 1,955 | ||||||
Operating and Other Expenses | ||||||||
Plant operating costs and other | 759 | 747 | ||||||
Commodity purchases resold | 277 | 256 | ||||||
Depreciation and amortization | 370 | 343 | ||||||
1,406 | 1,346 | |||||||
Financial Charges/(Income) | ||||||||
Interest expense | 211 | 182 | ||||||
Interest expense of joint ventures | 16 | 16 | ||||||
Interest income and other | (33 | ) | (24 | ) | ||||
194 | 174 | |||||||
Income before Income Taxes | 643 | 435 | ||||||
Income Taxes Expense | ||||||||
Current | 104 | 81 | ||||||
Future | 74 | 20 | ||||||
178 | 101 | |||||||
Net Income | 465 | 334 | ||||||
Net Income Attributable to Non-Controlling Interests | 36 | 31 | ||||||
Net Income Attributable to Controlling Interests | 429 | 303 | ||||||
Preferred Share Dividends | 14 | 7 | ||||||
Net Income Attributable to Common Shares | 415 | 296 | ||||||
Net Income per Common Share | ||||||||
Basic and Diluted | $0.59 | $0.43 | ||||||
Average Common Shares Outstanding – Basic (millions) | 698 | 686 | ||||||
Average Common Shares Outstanding – Diluted (millions) | 699 | 687 |
See accompanying notes to the consolidated financial statements.
TRANSCANADA [37
FIRST QUARTER REPORT 2011
Consolidated Comprehensive Income
(unaudited) | Three months ended March 31 | |||||||
(millions of dollars) | 2011 | 2010 | ||||||
Net Income | 465 | 334 | ||||||
Other Comprehensive (Loss)/Income, Net of Income Taxes | ||||||||
Change in foreign currency translation gains and losses on investments in foreign operations(1) | (98 | ) | (147 | ) | ||||
Change in gains and losses on financial derivatives to hedge the net investments in foreign operations(2) | 49 | 59 | ||||||
Change in gains and losses on derivative instruments designated as cash flow hedges(3) | (51 | ) | (76 | ) | ||||
Reclassification to Net Income of gains and losses on derivative instruments designated as cash flow hedges pertaining to prior periods(4) | 44 | (1 | ) | |||||
Other Comprehensive (Loss)/Income | (56 | ) | (165 | ) | ||||
Comprehensive Income | 409 | 169 | ||||||
Comprehensive Income Attributable to Non-Controlling Interests | 39 | 30 | ||||||
Comprehensive Income Attributable to Controlling Interests | 370 | 139 | ||||||
Preferred Share Dividends | 14 | 7 | ||||||
Comprehensive Income Attributable to Common Shares | 356 | 132 |
(1) | Net of income tax expense of $29 million for the three months ended March 31, 2011 (2010 – expense of $30 million). |
(2) | Net of income tax expense of $19 million for the three months ended March 31, 2011 (2010 – expense of $26 million). |
(3) | Net of income tax recovery of $18 million for the three months ended March 31, 2011 (2010 – recovery of $57 million). |
(4) | Net of income tax expense of $24 million for the three months ended March 31, 2011 (2010 – expense of $1 million). |
See accompanying notes to the consolidated financial statements.
TRANSCANADA [38
FIRST QUARTER REPORT 2011
Consolidated Cash Flows
(unaudited) | Three months ended March 31 | |||||||
(millions of dollars) | 2011 | 2010 | ||||||
Cash Generated From Operations | ||||||||
Net income | 465 | 334 | ||||||
Depreciation and amortization | 370 | 343 | ||||||
Future income taxes | 74 | 20 | ||||||
Employee future benefits funding in excess of expense | (11 | ) | (32 | ) | ||||
Other | 21 | 58 | ||||||
919 | 723 | |||||||
Decrease in operating working capital | 90 | 109 | ||||||
Net cash provided by operations | 1,009 | 832 | ||||||
Investing Activities | ||||||||
Capital expenditures | (784 | ) | (1,276 | ) | ||||
Deferred amounts and other | 5 | (216 | ) | |||||
Net cash used in investing activities | (779 | ) | (1,492 | ) | ||||
Financing Activities | ||||||||
Dividends on common and preferred shares | (200 | ) | (188 | ) | ||||
Distributions paid to non-controlling interests | (27 | ) | (27 | ) | ||||
Notes payable issued, net | 133 | 432 | ||||||
Long-term debt issued, net of issue costs | - | 10 | ||||||
Reduction of long-term debt | (321 | ) | (141 | ) | ||||
Long-term debt of joint ventures issued | - | 8 | ||||||
Reduction of long-term debt of joint ventures | (11 | ) | (26 | ) | ||||
Common shares issued | 21 | 9 | ||||||
Preferred shares issued, net of issue costs | - | 339 | ||||||
Net cash (used in)/provided by financing activities | (405 | ) | 416 | |||||
Effect of Foreign Exchange Rate Changes on Cash and Cash Equivalents | (13 | ) | (17 | ) | ||||
Decrease in Cash and Cash Equivalents | (188 | ) | (261 | ) | ||||
Cash and Cash Equivalents | ||||||||
Beginning of period | 764 | 997 | ||||||
Cash and Cash Equivalents | ||||||||
End of period | 576 | 736 | ||||||
Supplementary Cash Flow Information | ||||||||
Income taxes paid, net of refunds | 88 | 4 | ||||||
Interest paid | 253 | 239 |
See accompanying notes to the consolidated financial statements.
TRANSCANADA [39
FIRST QUARTER REPORT 2011
Consolidated Balance Sheet
(unaudited) | March 31, | December 31, | ||||||
(millions of dollars) | 2011 | 2010 | ||||||
ASSETS | ||||||||
Current Assets | ||||||||
Cash and cash equivalents | 576 | 764 | ||||||
Accounts receivable | 1,254 | 1,271 | ||||||
Inventories | 402 | 425 | ||||||
Other | 602 | 777 | ||||||
2,834 | 3,237 | |||||||
Plant, Property and Equipment | 36,113 | 36,244 | ||||||
Goodwill | 3,488 | 3,570 | ||||||
Regulatory Assets | 1,486 | 1,512 | ||||||
Intangibles and Other Assets | 2,070 | 2,026 | ||||||
45,991 | 46,589 | |||||||
LIABILITIES | ||||||||
Current Liabilities | ||||||||
Notes payable | 2,192 | 2,092 | ||||||
Accounts payable | 1,960 | 2,243 | ||||||
Accrued interest | 336 | 367 | ||||||
Current portion of long-term debt | 574 | 894 | ||||||
Current portion of long-term debt of joint ventures | 64 | 65 | ||||||
5,126 | 5,661 | |||||||
Regulatory Liabilities | 334 | 314 | ||||||
Deferred Amounts | 689 | 694 | ||||||
Future Income Taxes | 3,290 | 3,222 | ||||||
Long-Term Debt | 16,753 | 17,028 | ||||||
Long-Term Debt of Joint Ventures | 785 | 801 | ||||||
Junior Subordinated Notes | 962 | 985 | ||||||
27,939 | 28,705 | |||||||
SHAREHOLDERS’ EQUITY | ||||||||
Controlling interests | 16,903 | 16,727 | ||||||
Non-controlling interests | 1,149 | 1,157 | ||||||
18,052 | 17,884 | |||||||
45,991 | 46,589 |
See accompanying notes to the consolidated financial statements.
TRANSCANADA [40
FIRST QUARTER REPORT 2011
Consolidated Accumulated Other Comprehensive (Loss)/Income
Currency | ||||||||||||
(unaudited) | Translation | Cash Flow | ||||||||||
(millions of dollars) | Adjustments | Hedges | Total | |||||||||
Balance at December 31, 2010 | (683 | ) | (194 | ) | (877 | ) | ||||||
Change in foreign currency translation gains and losses on investments in foreign operations(1) | (98 | ) | - | (98 | ) | |||||||
Change in gains and losses on financial derivatives to hedge the net investments in foreign operations(2) | 49 | - | 49 | |||||||||
Change in gains and losses on derivative instruments designated as cash flow hedges(3) | - | (52 | ) | (52 | ) | |||||||
Reclassification to Net Income of gains and losses on derivative instruments designated as cash flow hedges pertaining to prior periods(4)(5) | - | 42 | 42 | |||||||||
Balance at March 31, 2011 | (732 | ) | (204 | ) | (936 | ) | ||||||
Balance at December 31, 2009 | (592 | ) | (40 | ) | (632 | ) | ||||||
Change in foreign currency translation gains and losses on investments in foreign operations(1) | (147 | ) | - | (147 | ) | |||||||
Change in gains and losses on financial derivatives to hedge the net investments in foreign operations(2) | 59 | - | 59 | |||||||||
Changes in gains and losses on derivative instruments designated as cash flow hedges(3) | - | (77 | ) | (77 | ) | |||||||
Reclassification to Net Income of gains and losses on derivative instruments designated as cash flow hedges pertaining to prior periods(4) | - | 1 | 1 | |||||||||
Balance at March 31, 2010 | (680 | ) | (116 | ) | (796 | ) |
(1) | Net of income tax expense of $29 million for the three months ended March 31, 2011 (2010 – expense of $30 million). |
(2) | Net of income tax expense of $19 million for the three months ended March 31, 2011 (2010 – expense of $26 million). |
(3) | Net of income tax recovery of $18 million for the three months ended March 31, 2011 (2010 – recovery of $57 million). |
(4) | Net of income tax expense of $24 million for the three months ended March 31, 2011 (2010 – expense of $1 million). |
(5) | Losses related to cash flow hedges reported in Accumulated Other Comprehensive (Loss)/Income and expected to be reclassified to Net Income in the next 12 months are estimated to be $86 million ($56 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. |
See accompanying notes to the consolidated financial statements.
TRANSCANADA [41
FIRST QUARTER REPORT 2011
Consolidated Shareholders’ Equity
(unaudited) | Three months ended March 31 | |||||||
(millions of dollars) | 2011 | 2010 | ||||||
Common Shares | ||||||||
Balance at beginning of period | 11,745 | 11,338 | ||||||
Shares issued under dividend reinvestment plan | 93 | 78 | ||||||
Shares issued on exercise of stock options | 21 | 9 | ||||||
Balance at end of period | 11,859 | 11,425 | ||||||
Preferred Shares | ||||||||
Balance at beginning of period | 1,224 | 539 | ||||||
Shares issued under public offering, net of issue costs | - | 342 | ||||||
Balance at end of period | 1,224 | 881 | ||||||
Contributed Surplus | ||||||||
Balance at beginning of period | 331 | 328 | ||||||
Issuance of stock options, net of exercises | - | 1 | ||||||
Balance at end of period | 331 | 329 | ||||||
Retained Earnings | ||||||||
Balance at beginning of period | 4,304 | 4,186 | ||||||
Net income attributable to controlling interests | 429 | 303 | ||||||
Common share dividends | (294 | ) | (275 | ) | ||||
Preferred share dividends | (14 | ) | (7 | ) | ||||
Balance at end of period | 4,425 | 4,207 | ||||||
Accumulated Other Comprehensive (Loss)/Income | ||||||||
Balance at beginning of period | (877 | ) | (632 | ) | ||||
Other comprehensive (loss)/income | (59 | ) | (164 | ) | ||||
Balance at end of period | (936 | ) | (796 | ) | ||||
3,489 | 3,411 | |||||||
Shareholders’ Equity Attributable to Controlling Interests | 16,903 | 16,046 | ||||||
Shareholders’ Equity Attributable to Non-Controlling Interests | ||||||||
Balance at beginning of period | 1,157 | 1,174 | ||||||
Net income attributable to non-controlling interests | ||||||||
PipeLines LP | 26 | 22 | ||||||
Preferred share dividends of subsidiary | 6 | 6 | ||||||
Portland | 4 | 3 | ||||||
Other comprehensive income/(loss) attributable to non-controlling interests | 3 | (1 | ) | |||||
Distributions to non-controlling interests | (27 | ) | (27 | ) | ||||
Other | (20 | ) | (21 | ) | ||||
Balance at end of period | 1,149 | 1,156 | ||||||
Total Shareholders’ Equity | 18,052 | 17,202 |
See accompanying notes to the consolidated financial statements.
TRANSCANADA [42
FIRST QUARTER REPORT 2011
Notes to Consolidated Financial Statements
(Unaudited)
1. | Significant Accounting Policies |
The consolidated financial statements of TransCanada Corporation (TransCanada or the Company) have been prepared in accordance with Canadian generally accepted accounting principles (GAAP) as defined in Part V of the Canadian Institute of Chartered Accountants (CICA) Handbook, which is discussed further in Note 2. The accounting policies applied are consistent with those outlined in TransCanada's annual audited Consolidated Financial Statements for the year ended December 31, 2010. These Consolidated Financial Statements reflect all normal recurring adjustments that are, in the opinion of management, necessary to present fairly the financial position and results of operations for the respective periods. These Consolidated Financial Statements do not include all disclosures required in the annual financial statements and should be read in conjunction with the 2010 audited Consolidated Financial Statements included in TransCanada’s 2010 Annual Report. Unless otherwise indicated, “TransCanada“ or “the Company“ includes TransCanada Corporation and its subsidiaries. Capitalized and abbreviated terms that are used but not otherwise defined herein are identified in the Glossary of Terms contained in TransCanada’s 2010 Annual Report. Amounts are stated in Canadian dollars unless otherwise indicated.
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 and TransCanada’s net income fluctuate over the long term based on regulators' decisions and negotiated settlements with shippers. Generally, quarter-over-quarter revenues and TransCanada’s 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 crude oil pipeline, annual revenues and TransCanada’s net income are based on contracted crude oil transportation and uncommitted spot transportation. Quarter-over-quarter revenues and TransCanada’s net income during any particular fiscal year remain relatively stable with fluctuations resulting from 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 and TransCanada’s net income are affected by seasonal weather conditions, customer demand, market prices, capacity payments, planned and unplanned plant outages, acquisitions and divestitures, certain fair value adjustments and developments outside of the normal course of operations.
TRANSCANADA [43
FIRST QUARTER REPORT 2011
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 consolidated financial statements have been properly prepared within reasonable limits of materiality and within the framework of the Company’s significant accounting policies.
2. | Changes in Accounting Policies |
Changes in Accounting Policies for 2011
Business Combinations, Consolidated Financial Statements and Non-Controlling Interests
Effective January 1, 2011, the Company adopted CICA Handbook Section 1582 “Business Combinations”, which is effective for business combinations with an acquisition date after January 1, 2011. This standard was amended to require additional use of fair value measurements, recognition of additional assets and liabilities, and increased disclosure. Adopting the standard is expected to have a significant impact on the way the Company accounts for future business combinations. Entities adopting Section 1582 were also required to adopt CICA Handbook Sections 1601 “Consolidated Financial Statements” and 1602 “Non-Controlling Interests”. Sections 1601 and 1602 require Non-Controlling Interests to be presented as part of Shareholders’ Equity on the balance sheet. In addition, the income statement of the controlling parent now includes 100 per cent of the subsidiary’s results and presents the allocation of income between the controlling and non-controlling interests. Changes resulting from the adoption of Section 1582 were applied prospectively and changes resulting from the adoption of Sections 1601 and 1602 were applied retrospectively.
Future Accounting Changes
U.S. GAAP/International Financial Reporting Standards
The CICA’s Accounting Standards Board (AcSB) previously announced that Canadian publicly accountable enterprises are required to adopt International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB), effective January 1, 2011.
In accordance with GAAP, TransCanada follows specific accounting policies unique to a rate-regulated business. These rate-regulated accounting (RRA) standards allow the timing of recognition of certain revenues and expenses to differ from the timing that may otherwise be expected in a non-rate-regulated business under GAAP in order to appropriately reflect the economic impact of regulators' decisions regarding the Company's revenues and tolls. The IASB has concluded that the development of RRA under IFRS requires further analysis and has removed the RRA project from its current agenda. TransCanada does not expect a final RRA standard under IFRS to be effective in the foreseeable future.
TRANSCANADA [44
FIRST QUARTER REPORT 2011
In October 2010, the AcSB and the Canadian Securities Administrators amended their policies applicable to Canadian publicly accountable enterprises that use RRA in order to permit these entities to defer the adoption of IFRS for one year. TransCanada deferred its adoption and accordingly will continue to prepare its consolidated financial statements in 2011 in accordance with Canadian GAAP, as defined by Part V of the CICA Handbook, in order to continue using RRA.
As an SEC registrant, TransCanada prepares and files a “Reconciliation to United States GAAP” and has the option to prepare and file its consolidated financial statements using U.S. GAAP. As a result of the developments noted above, the Company’s Board of Directors have approved the adoption of U.S. GAAP effective January 1, 2012.
US GAAP Conversion Project
Effective January 1, 2012, the Company will begin reporting under U.S. GAAP. The accounting policies and financial impact of adopting U.S. GAAP are consistent with that currently reported in the Company’s publicly-filed “Reconciliation to United States GAAP.” Significant changes to existing systems and processes are not required to implement U.S. GAAP as the Company’s primary accounting standard since IFRS TransCanada prepares and files a “Reconciliation to U.S. GAAP”.
TransCanada’s IFRS conversion team has been redeployed to support the conversion to U.S. GAAP. The conversion team is led by a multi-disciplinary Steering Committee that provides directional leadership for the adoption of U.S. GAAP. Management also updates TransCanada’s Audit Committee on the progress of the U.S. GAAP project at each Audit Committee meeting.
TRANSCANADA [45
FIRST QUARTER REPORT 2011
3. | Segmented Information |
For the three months ended March 31 | Natural Gas | Oil | ||||||||||||||||||||||||||||||||||||||
(unaudited) | Pipelines | Pipelines(1) | Energy | Corporate | Total | |||||||||||||||||||||||||||||||||||
(millions of dollars) | 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | ||||||||||||||||||||||||||||||
Revenues | 1,129 | 1,129 | 135 | - | 979 | 826 | - | - | 2,243 | 1,955 | ||||||||||||||||||||||||||||||
Plant operating costs and other | (333 | ) | (361 | ) | (36 | ) | - | (366 | ) | (360 | ) | (24 | ) | (26 | ) | (759 | ) | (747 | ) | |||||||||||||||||||||
Commodity purchases resold | - | - | - | - | (277 | ) | (256 | ) | - | - | (277 | ) | (256 | ) | ||||||||||||||||||||||||||
Depreciation and amortization | (244 | ) | (253 | ) | (23 | ) | - | (100 | ) | (90 | ) | (3 | ) | - | (370 | ) | (343 | ) | ||||||||||||||||||||||
552 | 515 | 76 | - | 236 | 120 | (27 | ) | (26 | ) | 837 | 609 | |||||||||||||||||||||||||||||
Interest expense | (211 | ) | (182 | ) | ||||||||||||||||||||||||||||||||||||
Interest expense of joint ventures | (16 | ) | (16 | ) | ||||||||||||||||||||||||||||||||||||
Interest income and other | 33 | 24 | ||||||||||||||||||||||||||||||||||||||
Income taxes | (178 | ) | (101 | ) | ||||||||||||||||||||||||||||||||||||
Net Income | 465 | 334 | ||||||||||||||||||||||||||||||||||||||
Net Income Attributable to Non-Controlling Interests | (36 | ) | (31 | ) | ||||||||||||||||||||||||||||||||||||
Net Income Attributable to Controlling Interests | 429 | 303 | ||||||||||||||||||||||||||||||||||||||
Preferred Share Dividends | (14 | ) | (7 | ) | ||||||||||||||||||||||||||||||||||||
Net Income Attributable to Common Shares | 415 | 296 |
(1) | Commencing in February 2011, TransCanada began recording earnings related to the Wood River/Patoka and Cushing Extension sections of Keystone. |
Total Assets
(unaudited) | ||||||||
(millions of dollars) | March 31, 2011 | December 31, 2010 | ||||||
Natural Gas Pipelines | 23,201 | 23,592 | ||||||
Oil Pipelines | 8,603 | 8,501 | ||||||
Energy | 12,693 | 12,847 | ||||||
Corporate | 1,494 | 1,649 | ||||||
45,991 | 46,589 |
4. | Long-Term Debt |
In the three months ended March 31, 2011, the Company capitalized interest related to capital projects of $97 million (2010 - $134 million).
5. | Share Capital |
In the three months ended March 31, 2011, TransCanada issued 2.6 million (2010 – 2.3 million) common shares under its Dividend Reinvestment and Share Purchase Plan (DRP), in lieu of making cash dividend payments of $93 million (2010 - $78 million). The dividends under the DRP were paid with common shares issued from treasury.
TRANSCANADA [46
FIRST QUARTER REPORT 2011
6. | Financial Instruments and Risk Management |
TransCanada continues to manage and monitor its exposure to counterparty credit, liquidity and market 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, 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 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 March 31, 2011, there were no significant amounts past due or impaired.
At March 31, 2011, the Company had a credit risk concentration of $297 million due from a creditworthy 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.
Natural Gas Storage Commodity Price Risk
At March 31, 2011, the fair value of proprietary natural gas inventory held in storage, as measured using a weighted average of forward prices for the following four months less selling costs, was $49 million (December 31, 2010 - $49 million). The change in the fair value adjustment of proprietary natural gas inventory in storage in the three months ended March 31, 2011 resulted in net pre-tax unrealized gains of $2 million (2010 - losses of $24 million), which was recorded as an increase in Revenues and Inventories. The change in fair value of natural gas forward purchase and sale contracts in the three months ended March 31, 2011 resulted in net pre-tax unrealized losses of $7 million (2010 – gains of $3 million), which was included in Revenues.
VaR Analysis
TransCanada uses a Value-at-Risk (VaR) methodology to estimate the potential impact from its exposure to market risk on its liquid open positions. VaR represents the potential change in pre-tax earnings over a given holding period. It is calculated assuming a 95 per cent confidence level that the daily change resulting from normal market fluctuations in its open positions will not exceed the reported VaR. Although losses are not expected to exceed the statistically estimated VaR on 95 per cent of occasions, losses on the other five per cent of occasions could be substantially greater than the estimated VaR. TransCanada’s consolidated VaR was $14 million at March 31, 2011 (December 31, 2010 – $12 million). The increase from December 31, 2010 was primarily due to increased Alberta power forward prices as well as increased price volatility in the Alberta power market.
TRANSCANADA [47
FIRST QUARTER REPORT 2011
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 March 31, 2011, the Company had designated as a net investment hedge U.S. dollar-denominated debt with a carrying value of $9.5 billion (US$9.8 billion) and a fair value of $10.8 billion (US$11.1 billion). At March 31, 2011, $251 million (December 31, 2010 - $181 million) was included in Intangibles and Other Assets for the fair value of forwards and swaps used to hedge the Company’s net U.S. dollar investment in foreign operations.
The fair values and notional principal amounts for the derivatives designated as a net investment hedge were as follows:
Derivatives Hedging Net Investment in Self-Sustaining Foreign Operations
March 31, 2011 | December 31, 2010 | |||||||||
Asset/(Liability) (unaudited) (millions of dollars) | Fair Value(1) | Notional or Principal Amount | Fair Value(1) | Notional or Principal Amount | ||||||
U.S. dollar cross-currency swaps | ||||||||||
(maturing 2011 to 2017) | 246 | US 3,150 | 179 | US 2,800 | ||||||
U.S. dollar forward foreign exchange contracts | ||||||||||
(maturing 2011) | 5 | US 550 | 2 | US 100 | ||||||
251 | US 3,700 | 181 | US 2,900 |
(1) | Fair values equal carrying values. |
Non-Derivative Financial Instruments Summary
The carrying and fair values of non-derivative financial instruments were as follows:
March 31, 2011 | December 31, 2010 | |||||||||||||||
(unaudited) (millions of dollars) | Carrying Amount | Fair Value | Carrying Amount | Fair Value | ||||||||||||
Financial Assets(1) | ||||||||||||||||
Cash and cash equivalents | 576 | 576 | 764 | 764 | ||||||||||||
Accounts receivable and other(2)(3) | 1,573 | 1,607 | 1,555 | 1,595 | ||||||||||||
Available-for-sale assets(2) | 25 | 25 | 20 | 20 | ||||||||||||
2,174 | 2,208 | 2,339 | 2,379 | |||||||||||||
Financial Liabilities(1)(3) | ||||||||||||||||
Notes payable | 2,192 | 2,192 | 2,092 | 2,092 | ||||||||||||
Accounts payable and deferred amounts(4) | 1,133 | 1,133 | 1,436 | 1,436 | ||||||||||||
Accrued interest | 336 | 336 | 367 | 367 | ||||||||||||
Long-term debt | 17,327 | 20,416 | 17,922 | 21,523 | ||||||||||||
Junior subordinated notes | 962 | 969 | 985 | 992 | ||||||||||||
Long-term debt of joint ventures | 849 | 944 | 866 | 971 | ||||||||||||
22,799 | 25,990 | 23,668 | 27,381 |
(1) | Consolidated Net Income in first quarter 2011 included losses of $9 million (2010 – losses of $7 million) for fair value adjustments related to interest rate swap agreements on US$350 million (2010 – US$250 million) of Long-Term Debt. There were no other unrealized gains or losses from fair value adjustments to the non-derivative financial instruments. |
(2) | At March 31, 2011, the Consolidated Balance Sheet included financial assets of $1,254 million (December 31, 2010 – $1,271 million) in Accounts Receivable, $38 million (December 31, 2010 – $40 million) in Other Current Assets and $306 million (December 31, 2010 - $264 million) in Intangibles and Other Assets. |
(3) | Recorded at amortized cost, except for the US$350 million (December 31, 2010 – US$250 million) of Long-Term Debt that is adjusted to fair value. |
(4) | At March 31, 2011, the Consolidated Balance Sheet included financial liabilities of $1,101 million (December 31, 2010 – $1,406 million) in Accounts Payable and $32 million (December 31, 2010 - $30 million) in Deferred Amounts. |
TRANSCANADA [48
FIRST QUARTER REPORT 2011
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:
March 31, 2011 | ||||||||||||
(unaudited) (all amounts in millions unless otherwise indicated) | Power | Natural Gas | Foreign Exchange | Interest | ||||||||
Derivative Financial Instruments Held for Trading(1) | ||||||||||||
Fair Values(2) | ||||||||||||
Assets | $175 | $123 | $10 | $17 | ||||||||
Liabilities | $(132 | ) | $(154 | ) | $(16 | ) | $(18 | ) | ||||
Notional Values | ||||||||||||
Volumes(3) | ||||||||||||
Purchases | 21,828 | 169 | - | - | ||||||||
Sales | 24,462 | 132 | - | - | ||||||||
Canadian dollars | - | - | - | 836 | ||||||||
U.S. dollars | - | - | US 1,839 | US 250 | ||||||||
Cross-currency | - | - | 47/US 37 | - | ||||||||
Net unrealized (losses)/gains in the three months ended March 31, 2011(4) | $(1 | ) | $(16 | ) | $2 | $(1 | ) | |||||
Net realized gains/(losses) in the three months ended March 31, 2011(4) | $3 | $(26 | ) | $21 | $2 | |||||||
Maturity dates | 2011-2015 | 2011-2015 | 2011-2012 | 2011-2016 | ||||||||
Derivative Financial Instruments in Hedging Relationships(5)(6) | ||||||||||||
Fair Values(2) | ||||||||||||
Assets | $75 | $6 | $- | $9 | ||||||||
Liabilities | $(177 | ) | $(19 | ) | $(56 | ) | $(19 | ) | ||||
Notional Values | ||||||||||||
Volumes(3) | ||||||||||||
Purchases | 18,273 | 16 | - | - | ||||||||
Sales | 7,906 | - | - | - | ||||||||
U.S. dollars | - | - | US 120 | US 1,000 | ||||||||
Cross-currency | - | - | 136/US 100 | - | ||||||||
Net realized losses in the three months ended March 31, 2011(4) | $(38 | ) | $(3 | ) | $- | $(5 | ) | |||||
Maturity dates | 2011-2015 | 2011-2013 | 2011- 2014 | 2011-2015 |
(1) | All derivative financial instruments in the held-for-trading classification 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 gigawatt hours (GWh) and billion cubic feet (Bcf), respectively. |
(4) | Realized and unrealized gains and losses on held-for-trading derivative financial 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 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 $9 million and a notional amount of US$350 million. Net realized gains on fair value hedges for the three months ended March 31, 2011 were $2 million and were included in Interest Expense. In first quarter 2011, the Company did not record any amounts in Net Income related to ineffectiveness for fair value hedges. |
(6) | For the three months ended March 31, 2011, Net Income included losses of $3 million for changes in the fair value of power and natural gas cash flow hedges that were ineffective in offsetting the change in fair value of their related underlying positions. For the three months ended March 31, 2011, there were no gains or losses included in Net Income for discontinued cash flow hedges. No amounts have been excluded from the assessment of hedge effectiveness. |
TRANSCANADA [49
FIRST QUARTER REPORT 2011
2010 | ||||||||||||
(unaudited) (all amounts in millions unless otherwise indicated) | Power | Natural Gas | Foreign Exchange | Interest | ||||||||
Derivative Financial Instruments Held for Trading | ||||||||||||
Fair Values(1)(2) | ||||||||||||
Assets | $169 | $144 | $8 | $20 | ||||||||
Liabilities | $(129 | ) | $(173 | ) | $(14 | ) | $(21 | ) | ||||
Notional Values(2) | ||||||||||||
Volumes(3) | ||||||||||||
Purchases | 15,610 | 158 | - | - | ||||||||
Sales | 18,114 | 96 | - | - | ||||||||
Canadian dollars | - | - | - | 736 | ||||||||
U.S. dollars | - | - | US 1,479 | US 250 | ||||||||
Cross-currency | - | - | 47/ US 37 | - | ||||||||
Net unrealized (losses)/gains in the three months ended March 31, 2010(4) | $(16 | ) | $2 | - | $(4 | ) | ||||||
Net realized gains/(losses) in the three months ended March 31, 2010(4) | $22 | $(12 | ) | $8 | $(4 | ) | ||||||
Maturity dates(2) | 2011-2015 | 2011-2015 | 2011-2012 | 2011-2016 | ||||||||
Derivative Financial Instruments in Hedging Relationships(5)(6) | ||||||||||||
Fair Values(1)(2) | ||||||||||||
Assets | $112 | $5 | $- | $8 | ||||||||
Liabilities | $(186 | ) | $(19 | ) | $(51 | ) | $(26 | ) | ||||
Notional Values(2) | ||||||||||||
Volumes(3) | ||||||||||||
Purchases | 16,071 | 17 | - | - | ||||||||
Sales | 10,498 | - | - | - | ||||||||
U.S. dollars | - | - | US 120 | US 1,125 | ||||||||
Cross-currency | - | - | 136/US 100 | - | ||||||||
Net realized losses in the three months ended March 31, 2010(4) | ($7 | ) | $(3 | ) | - | $(10 | ) | |||||
Maturity dates(2) | 2011-2015 | 2011-2013 | 2011-2014 | 2011-2015 |
(1) | Fair values equal carrying values. |
(2) | As at December 31, 2010. |
(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 financial 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 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 $8 million and a notional amount of US$250 million at December 31, 2010. Net realized gains on fair value hedges for the three months ended March 31, 2010 were $1 million and were included in Interest Expense. In first quarter 2010, the Company did not record any amounts in Net Income related to ineffectiveness for fair value hedges. |
(6) | For the three months ended March 31, 2010, Net Income included losses of $8 million for changes in the fair value of power and natural gas cash flow hedges that were ineffective in offsetting the change in fair value of their related underlying positions. For the three months ended March 31, 2010, there were no gains or losses included in Net Income for discontinued cash flow hedges. No amounts were excluded from the assessment of hedge effectiveness. |
TRANSCANADA [50
FIRST QUARTER REPORT 2011
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) | March 31, 2011 | December 31, 2010 | ||||||
Current | ||||||||
Other current assets | 243 | 273 | ||||||
Accounts payable | (326 | ) | (337 | ) | ||||
Long-term | ||||||||
Intangibles and other assets | 423 | 374 | ||||||
Deferred amounts | (265 | ) | (282 | ) |
Fair Value Hierarchy
The Company’s financial assets and liabilities recorded at fair value have been categorized into three categories based on a 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. In Level II, determination of the fair value of assets and liabilities includes valuations using inputs, other than quoted prices, for which all significant outputs are observable, directly or indirectly. This category includes fair value determined using valuation techniques, such as option pricing models and extrapolation using observable inputs. In Level III, determination of the fair value of assets and liabilities is based on inputs that are not readily observable and are significant to the overall fair value measurement. Long-dated commodity transactions in certain markets are included in this category. Long-dated commodity prices are derived with a third-party modelling tool that uses market fundamentals to derive long-term prices.
TRANSCANADA [51
FIRST QUARTER REPORT 2011
There were no transfers between Level I and Level II in first quarter 2011 and 2010. Financial assets and liabilities measured at fair value, including both current and non-current portions, are categorized as follows:
Quoted Prices in Active Markets (Level 1) | Significant Other Observable Inputs (Level II) | Significant Unobservable Inputs (Level III) | Total | |||||||||||||||||||||||||||||
(unaudited) (millions of dollars, pre-tax) | Mar 31 2011 | Dec 31 2010 | Mar 31 2011 | Dec 31 2010 | Mar 31 2011 | Dec 31 2010 | Mar 31 2011 | Dec 31 2010 | ||||||||||||||||||||||||
Natural Gas Inventory | - | - | 49 | 49 | - | - | 49 | 49 | ||||||||||||||||||||||||
Derivative Financial Instrument Assets: | ||||||||||||||||||||||||||||||||
Interest rate contracts | - | - | 26 | 28 | - | - | 26 | 28 | ||||||||||||||||||||||||
Foreign exchange contracts | 15 | 10 | 246 | 179 | - | - | 261 | 189 | ||||||||||||||||||||||||
Power commodity contracts | - | - | 232 | 269 | 4 | 5 | 236 | 274 | ||||||||||||||||||||||||
Natural gas commodity contracts | 72 | 93 | 53 | 56 | - | - | 125 | 149 | ||||||||||||||||||||||||
Derivative Financial Instrument Liabilities: | ||||||||||||||||||||||||||||||||
Interest rate contracts | - | - | (37 | ) | (47 | ) | - | - | (37 | ) | (47 | ) | ||||||||||||||||||||
Foreign exchange contracts | (14 | ) | (11 | ) | (58 | ) | (54 | ) | - | - | (72 | ) | (65 | ) | ||||||||||||||||||
Power commodity contracts | - | - | (282 | ) | (299 | ) | (13 | ) | (8 | ) | (295 | ) | (307 | ) | ||||||||||||||||||
Natural gas commodity contracts | (140 | ) | (178 | ) | (29 | ) | (15 | ) | - | - | (169 | ) | (193 | ) | ||||||||||||||||||
Non-Derivative Financial Instruments: | ||||||||||||||||||||||||||||||||
Available-for-sale assets | 25 | 20 | - | - | - | - | 25 | 20 | ||||||||||||||||||||||||
(42 | ) | (66 | ) | 200 | 166 | (9 | ) | (3 | ) | 149 | 97 |
The following table presents the net change in financial assets and liabilities measured at fair value and included in the Level III fair value category:
For the three months ended March 31 | ||||||||
(unaudited) | Derivatives | |||||||
(millions of dollars, pre-tax) | 2011 | 2010 | ||||||
Balance at beginning of period | (3 | ) | (2 | ) | ||||
New contracts(2) | 1 | (10 | ) | |||||
Transfers out of Level III(3) | (2 | ) | (5 | ) | ||||
Settlements | - | (1 | ) | |||||
Change in unrealized gains recorded in Net Income | - | 5 | ||||||
Change in unrealized (losses)/gains recorded in Other Comprehensive Income | (5 | ) | 8 | |||||
Balance at end of period | (9 | ) | (5 | ) |
(1) | The fair value of derivative assets and liabilities is presented on a net basis. |
(2) | For the three months ended March 31, 2011, there were no amounts (2010 – loss of $1 million) included in Net Income attributable to derivatives that were entered into during the period and still held at the reporting date. |
(3) | As contracts near maturity, they are transferred out of Level III and into Level II. |
A 10 per cent increase or decrease in commodity prices, with all other variables held constant, would result in a $7 million decrease or increase, respectively, in the fair value of derivative financial instruments included in Level III and outstanding as at March 31, 2011.
TRANSCANADA [52
FIRST QUARTER REPORT 2011
6. | Employee Future Benefits |
The net benefit plan expense for the Company’s defined benefit pension plans and other post-employment benefit plans is as follows:
Three months ended March 31 | Pension Benefit Plans | Other Benefit Plans | |||||||||
(unaudited)(millions of dollars) | 2011 | 2010 | 2011 | 2010 | |||||||
Current service cost | 14 | 12 | - | - | |||||||
Interest cost | 23 | 23 | 2 | 2 | |||||||
Expected return on plan assets | (28 | ) | (27 | ) | - | - | |||||
Amortization of net actuarial loss | 6 | 2 | - | - | |||||||
Amortization of past service costs | 1 | 1 | - | - | |||||||
Net benefit cost recognized | 16 | 11 | 2 | 2 |
7. | Contingencies |
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. No amounts recorded in revenues in the first three months of 2011 are expected to be repaid.
8. | Subsequent Events |
On April 26, 2011, the Company announced it entered into agreements to sell a 25 per cent interest in each of Gas Transmission Northwest LLC (GTN LLC) and Bison Pipeline LLC (Bison LLC) to PipeLines LP for an aggregate purchase price of US$605 million, which includes US$81 million of long-term debt or 25 per cent of GTN LLC debt outstanding. GTN LLC and Bison LLC own the GTN and Bison natural gas pipelines, respectively. The sale is expected to close in May 2011 and is subject to certain closing conditions.
At the end of April 2011, PipeLines LP announced an underwritten public offering of 6,300,000 common units at US$47.58 per unit. Gross proceeds of approximately US$300 million from this offering will be used to partially fund the acquisition with the balance funded by a draw on PipeLines LP’s committed and available US$400 million bridge loan facility and a draw on PipeLines LP's US$250 million committed and available senior revolving credit facility. The underwriters were also granted a 30-day option to purchase an additional 945,000 common units at the same price. The offering is expected to close on May 3, 2011.
As part of this offering, TransCanada will make a capital contribution of US$6 million to maintain its two per cent general partnership interest in PipeLines LP. Assuming the underwriters exercise their option to purchase additional units, TransCanada's ownership in PipeLines LP is expected to be approximately 33.3 per cent.
TransCanada welcomes questions from shareholders and potential investors. Please telephone: | ||
Investor Relations, at (800) 361-6522 (Canada and U.S. Mainland) or direct dial David Moneta/ Terry Hook at (403) 920-7911. The investor fax line is (403) 920-2457. Media Relations: Terry Cunha/Shawn Howard (403) 920-7859 or (800) 608-7859. | ||
Visit the TransCanada website at: www.transcanada.com. |