TRANSCANADA CORPORATION
RECONCILIATION TO UNITED STATES GAAP
March 31, 2011
TRANSCANADA CORPORATION
RECONCILIATION TO UNITED STATES GAAP
The unaudited consolidated financial statements of TransCanada Corporation (TransCanada or the Company) for the three months ended March 31, 2011 have been prepared in accordance with Canadian generally accepted accounting principles (GAAP), as defined by Part V of the Canadian Institute of Chartered Accountants Handbook, which, in some respects, differ from United States (U.S.) GAAP.
The effects of significant differences between Canadian and U.S. GAAP on the Company’s consolidated financial statements for the three months ended March 31, 2011 are described below and should be read in conjunction with TransCanada’s audited consolidated financial statements for the year ended December 31, 2010, and TransCanada’s U.S. GAAP reconciliation for the year ended December 31, 2010 and TransCanada’s unaudited consolidated financial statements for the three months ended March 31, 2011 prepared in accordance with Canadian GAAP.
Reconciliation of Net Income and Comprehensive Income
(unaudited) | Three months ended March 31 | |||||||
(millions of Canadian dollars, except per share amounts) | 2011 | 2010 | ||||||
Net Income in Accordance with Canadian GAAP | 465 | 334 | ||||||
U.S. GAAP adjustments: | ||||||||
Unrealized (gain)/loss on natural gas inventory held in storage(1) | (2 | ) | 24 | |||||
Tax impact of unrealized (gain)/loss on natural gas inventory held in storage | - | (7 | ) | |||||
Tax recovery due to a change in tax legislation not fully enacted(2) | (2 | ) | (2 | ) | ||||
Net Income in Accordance with U.S. GAAP | 461 | 349 | ||||||
Less: net income attributable to non-controlling interests | (36 | ) | (31 | ) | ||||
Net Income Attributable to Controlling Interests | 425 | 318 | ||||||
Less: preferred share dividends | (14 | ) | (7 | ) | ||||
Net Income Attributable to Common Shareholders in Accordance with U.S. GAAP | 411 | 311 | ||||||
Other Comprehensive (Loss)/Income in Accordance with Canadian GAAP | (56 | ) | (165 | ) | ||||
U.S. GAAP adjustments: | ||||||||
Change in funded status of postretirement plan liability(3) | 2 | 1 | ||||||
Change in equity investment funded status of postretirement plan liability | 4 | 1 | ||||||
Other Comprehensive Loss in Accordance with U.S. GAAP | (50 | ) | (163 | ) | ||||
Less: other comprehensive (income)/loss attributable to non-controlling interests | (3 | ) | 1 | |||||
Other Comprehensive Loss Attributable to Controlling Interests in Accordance with U.S. GAAP | (53 | ) | (162 | ) | ||||
Comprehensive Income Attributable to Controlling Interests in Accordance with U.S. GAAP | 372 | 156 | ||||||
Net Income per Share in Accordance with U.S. GAAP, Basic and Diluted | $ | 0.59 | $ | 0.45 | ||||
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Condensed Balance Sheet in Accordance with U.S. GAAP
(unaudited) (millions of Canadian dollars) | March 31, 2011 | December 31, 2010 | ||||||
Current assets(1)(4) | 2,324 | 2,711 | ||||||
Long-term investments(4) | 4,875 | 4,775 | ||||||
Plant, property and equipment(4) | 30,788 | 30,987 | ||||||
Goodwill(4) | 3,378 | 3,457 | ||||||
Regulatory assets(3)(4) | 1,660 | 1,699 | ||||||
Intangibles and other assets (3)(4)(5) | 1,517 | 1,512 | ||||||
44,542 | 45,141 | |||||||
Current liabilities(2)(4) | 4,758 | 5,316 | ||||||
Deferred amounts(3)(4) | 727 | 728 | ||||||
Regulatory liabilities(4) | 328 | 308 | ||||||
Deferred income taxes(1)(3)(4) | 3,239 | 3,169 | ||||||
Long-term debt and junior subordinated notes(4)(5) | 17,815 | 18,115 | ||||||
26,867 | 27,636 | |||||||
Shareholders’ equity: | ||||||||
Common shares | 11,859 | 11,745 | ||||||
Preferred shares | 1,224 | 1,224 | ||||||
Non-controlling interests | 1,149 | 1,157 | ||||||
Contributed surplus | 349 | 349 | ||||||
Retained earnings(1)(2) | 4,390 | 4,273 | ||||||
Accumulated other comprehensive (loss)/income(3)(6) | (1,296 | ) | (1,243 | ) | ||||
17,675 | 17,505 | |||||||
44,542 | 45,141 |
(1) | In accordance with Canadian GAAP, natural gas inventory held in storage is recorded at its fair value. Under U.S. GAAP, inventory is recorded at lower of cost or market. |
(2) | In accordance with Canadian GAAP, the Company recorded current income tax benefits resulting from substantively enacted Canadian federal income tax legislation. Under U.S. GAAP, the legislation must be fully enacted for income tax adjustments to be recorded. |
(3) | Represents the amortization of net loss and prior service cost amounts recorded in Accumulated Other Comprehensive (Loss)/Income (AOCI) for the Company’s defined benefit pension and other postretirement plans that have been previously recorded under U.S. GAAP. |
(4) | Under Canadian GAAP, the Company accounts for certain investments using the proportionate consolidation basis of accounting whereby the Company’s proportionate share of assets, liabilities, revenues, expenses and cash flows are included in the Company’s financial statements. U.S. GAAP does not allow the use of proportionate consolidation and requires that such investments be recorded on an equity accounting basis. Information on the balances that have been proportionately consolidated is located in Note 8 to the Company’s Canadian GAAP audited consolidated financial statements for the year ended December 31, 2010. |
As a consequence of using equity accounting for certain of these joint ventures under U.S. GAAP, the Company is required to reflect an additional liability of $137 million at March 31, 2011 (December 31, 2010 - $150 million) for certain guarantees related to debt and other performance commitments of the joint venture operations that were not required to be recorded when the underlying liability was reflected on the balance sheet under the proportionate consolidation method of accounting.
U.S. GAAP requires the disclosure of the difference, if any, between the carrying value of the investment and the investor’s underlying equity in the net assets of the investee on an ongoing basis, rather than only at the date of purchase as required under Canadian GAAP. At March 31, 2011 the Company has a US$121 million (December 31, 2010-US$121 million) difference between the carrying value of Northern Border Pipeline Company (Northern Border) and the underlying equity in the net assets primarily as a result of goodwill recognized from TC PipeLines, LP’s April 2006 acquisition of an additional 20 per cent general partnership interest in Northern Border.
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(5) | In accordance with U.S. GAAP, debt issue costs are recorded as a deferred asset rather than being included in Long-Term Debt as required by Canadian GAAP. |
(6) | At March 31, 2011, AOCI in accordance with U.S. GAAP is $360 million higher than under Canadian GAAP. The difference relates to the accounting treatment for defined benefit pension and other postretirement plans. At March 31, 2011, AOCI attributable to NCI of $8 million (December 31, 2010 - $11 million) is included in NCI. |
Hedging Instruments and Activities
U.S. GAAP disclosures regarding derivatives are intended to provide additional information about the effect derivatives and hedging activities have on an entity’s financial position, financial performance and cash flows. Much of the disclosure is provided in the Company’s unaudited consolidated financial statements at March 31, 2011 and audited consolidated annual financial statements at December 31, 2010 prepared under Canadian GAAP. Additional required information is provided below.
Derivatives in Cash Flow and Net Investment Hedging Relationships
Cash Flow Hedges | Net Investment Hedges | |||||||||
Three months ended March 31 | Power | Natural Gas | Foreign Exchange | Interest | Foreign Exchange | |||||
(unaudited) (millions of Canadian dollars, pre-tax) | 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | 2011 | 2010 |
Change in (losses)/gains on derivative instruments recognized in Other Comprehensive Income (effective portion) | (53) | (98) | (11) | (36) | (6) | 13 | - | (13) | 68 | 85 |
Reclassification of gains/(losses) on derivative instruments from AOCI to earnings (effective portion) | 29 | (12) | 28 | 1 | - | - | 9 | 13 | -(1) | -(1) |
(Losses)/gains on derivative instruments recognized in earnings (ineffective portion and amount excluded from effectiveness testing) | (2) | (8) | (1) | - | - | - | - | - | -(2) | -(2) |
(1) Location of gain/(loss) is Gain/(Loss) on Sale of Subsidiary
(2) Location of gain/(loss) is Other Income/(Expense)
Derivative contracts entered into to manage market risk often contain financial assurances provisions that allow parties to the contracts to manage credit risk. These provisions may require collateral to be provided if a credit-risk-related contingent event occurs, such as a downgrade in the Company’s credit rating to non-investment grade. Based on contracts in place and market prices at March 31, 2011, the aggregate fair value of all derivative instruments with credit-risk-related contingent features that are in a net liability position was $86 million, for which the Company has provided collateral of $3 million in the normal course of business. If the credit-risk-related contingent features in these agreements were triggered on March 31, 2011, the Company would have been required to provide additional collateral of $83 million to its counterparties. Collateral may also need to be provided should the fair value of derivative instruments exceed pre-defined contractual exposure limit thresholds. The Company has sufficient liquidity in the form of cash and undrawn committed revolving bank lines to meet its contingent obligations should they arise.
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Income Taxes
At March 31, 2011, the total unrecognized tax benefit of uncertain tax positions is approximately $65 million (December 31, 2010 - $62 million). TransCanada recognizes interest and penalties related to income tax uncertainties in income tax expense. Included in net tax expense for the three months ended March 31, 2011 is $1 million of interest expense and nil for penalties (March 31, 2010 - $1 million for interest expense and nil for penalties). At March 31, 2011, the Company had $20 million accrued for interest expense and nil accrued for penalties (December 31, 2010 - $19 million accrued for interest expense and nil accrued for penalties).
TransCanada expects the enactment of certain Canadian Federal tax legislation in the next twelve months which is expected to result in a favourable income tax adjustment of approximately $18 million. Otherwise, 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.
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