Exhibit 13.2
Consolidated Income
(unaudited) | Three months ended June 30 | Six months ended June 30 | ||||||||||||||
(millions of dollars except per share amounts) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
Revenues | 1,923 | 1,984 | 3,878 | 4,146 | ||||||||||||
Operating and Other Expenses | ||||||||||||||||
Plant operating costs and other | 764 | 792 | 1,511 | 1,607 | ||||||||||||
Commodity purchases resold | 216 | 182 | 472 | 411 | ||||||||||||
Depreciation and amortization | 341 | 345 | 684 | 691 | ||||||||||||
1,321 | 1,319 | 2,667 | 2,709 | |||||||||||||
Financial Charges/(Income) | ||||||||||||||||
Interest expense | 187 | 259 | 369 | 554 | ||||||||||||
Interest expense of joint ventures | 15 | 16 | 31 | 30 | ||||||||||||
Interest income and other | 18 | (34 | ) | (6 | ) | (56 | ) | |||||||||
220 | 241 | 394 | 528 | |||||||||||||
Income before Income Taxes and Non-Controlling Interests | 382 | 424 | 817 | 909 | ||||||||||||
Income Taxes | ||||||||||||||||
Current | (199 | ) | 35 | (118 | ) | 89 | ||||||||||
Future | 264 | 62 | 284 | 124 | ||||||||||||
65 | 97 | 166 | 213 | |||||||||||||
Non-Controlling Interests | ||||||||||||||||
Non-controlling interest in PipeLines LP | 17 | 8 | 39 | 32 | ||||||||||||
Preferred share dividends of subsidiary | 5 | 5 | 11 | 11 | ||||||||||||
Non-controlling interest in Portland | - | - | 3 | 5 | ||||||||||||
22 | 13 | 53 | 48 | |||||||||||||
Net Income | 295 | 314 | 598 | 648 | ||||||||||||
Preferred Share Dividends | 10 | - | 17 | - | ||||||||||||
Net Income Applicable to Common Shares | 285 | 314 | 581 | 648 | ||||||||||||
Net Income Per Share - Basic and Diluted | $ | 0.41 | $ | 0.50 | $ | 0.84 | $ | 1.04 | ||||||||
Average Shares Outstanding – Basic (millions) | 689 | 624 | 688 | 621 | ||||||||||||
Average Shares Outstanding – Diluted (millions) | 690 | 625 | 689 | 622 |
See accompanying notes to the consolidated financial statements.
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SECOND QUARTER REPORT 2010
Consolidated Cash Flows
(unaudited) | Three months ended June 30 | Six months ended June 30 | |||||||||||
(millions of dollars) | 2010 | 2009 | 2010 | 2009 | |||||||||
Cash Generated From Operations | |||||||||||||
Net income | 295 | 314 | 598 | 648 | |||||||||
Depreciation and amortization | 341 | 345 | 684 | 691 | |||||||||
Future income taxes | 264 | 62 | 284 | 124 | |||||||||
Non-controlling interests | 22 | 13 | 53 | 48 | |||||||||
Employee future benefits funding in excess of expense | (12 | ) | (23 | ) | (44 | ) | (57 | ) | |||||
Other | 25 | (19 | ) | 83 | 4 | ||||||||
935 | 692 | 1,658 | 1,458 | ||||||||||
(Increase)/decrease in operating working capital | (310 | ) | 246 | (201 | ) | 328 | |||||||
Net cash provided by operations | 625 | 938 | 1,457 | 1,786 | |||||||||
Investing Activities | |||||||||||||
Capital expenditures | (992 | ) | (1,263 | ) | (2,268 | ) | (2,386 | ) | |||||
Acquisitions, net of cash acquired | - | (115 | ) | - | (249 | ) | |||||||
Deferred amounts and other | 7 | (99 | ) | (209 | ) | (274 | ) | ||||||
Net cash used in investing activities | (985 | ) | (1,477 | ) | (2,477 | ) | (2,909 | ) | |||||
Financing Activities | |||||||||||||
Dividends on common and preferred shares | (195 | ) | (193 | ) | (383 | ) | (349 | ) | |||||
Distributions paid to non-controlling interests | (28 | ) | (24 | ) | (55 | ) | (51 | ) | |||||
Notes payable (repaid)/issued, net | (441 | ) | 233 | (9 | ) | (684 | ) | ||||||
Long-term debt issued, net of issue costs | 1,306 | - | 1,316 | 3,060 | |||||||||
Reduction of long-term debt | (142 | ) | (18 | ) | (283 | ) | (500 | ) | |||||
Long-term debt of joint ventures issued | 70 | 92 | 78 | 108 | |||||||||
Reduction of long-term debt of joint ventures | (113 | ) | (33 | ) | (139 | ) | (56 | ) | |||||
Common shares issued, net of issue costs | 5 | 1,792 | 14 | 1,803 | |||||||||
Preferred shares issued, net of issue costs | 340 | - | 679 | - | |||||||||
Net cash provided by financing activities | 802 | 1,849 | 1,218 | 3,331 | |||||||||
Effect of Foreign Exchange Rate Changes onCash and Cash Equivalents | 33 | (60 | ) | 16 | (34 | ) | |||||||
Increase in Cash and Cash Equivalents | 475 | 1,250 | 214 | 2,174 | |||||||||
Cash and Cash Equivalents | |||||||||||||
Beginning of period | 736 | 2,232 | 997 | 1,308 | |||||||||
Cash and Cash Equivalents | |||||||||||||
End of period | 1,211 | 3,482 | 1,211 | 3,482 | |||||||||
Supplementary Cash Flow Information | |||||||||||||
Income taxes paid, net of refunds received | 39 | 56 | 43 | 113 | |||||||||
Interest paid, net of capitalized interest | 119 | 274 | 358 | 537 |
See accompanying notes to the consolidated financial statements.
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SECOND QUARTER REPORT 2010
Consolidated Balance Sheet
(unaudited) | June 30, | December 31, | |||
(millions of dollars) | 2010 | 2009 | |||
ASSETS | |||||
Current Assets | |||||
Cash and cash equivalents | 1,211 | 997 | |||
Accounts receivable | 1,101 | 966 | |||
Inventories | 454 | 511 | |||
Other | 704 | 701 | |||
3,470 | 3,175 | ||||
Plant, Property and Equipment | 35,101 | 32,879 | |||
Goodwill | 3,807 | 3,763 | |||
Regulatory Assets | 1,483 | 1,524 | |||
Intangibles and Other Assets | 2,167 | 2,500 | |||
46,028 | 43,841 | ||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | |||||
Current Liabilities | |||||
Notes payable | 1,697 | 1,687 | |||
Accounts payable | 2,101 | 2,195 | |||
Accrued interest | 374 | 377 | |||
Current portion of long-term debt | 587 | 478 | |||
Current portion of long-term debt of joint ventures | 116 | 212 | |||
4,875 | 4,949 | ||||
Regulatory Liabilities | 313 | 385 | |||
Deferred Amounts | 947 | 743 | |||
Future Income Taxes | 3,008 | 2,856 | |||
Long-Term Debt | 17,258 | 16,186 | |||
Long-Term Debt of Joint Ventures | 795 | 753 | |||
Junior Subordinated Notes | 1,050 | 1,036 | |||
28,246 | 26,908 | ||||
Non-Controlling Interests | |||||
Non-controlling interest in PipeLines LP | 714 | 705 | |||
Preferred shares of subsidiary | 389 | 389 | |||
Non-controlling interest in Portland | 83 | 80 | |||
1,186 | 1,174 | ||||
Shareholders’ Equity | 16,596 | 15,759 | |||
46,028 | 43,841 |
See accompanying notes to the consolidated financial statements.
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SECOND QUARTER REPORT 2010
Consolidated Comprehensive Income
(unaudited) | Three months ended June 30 | Six months ended June 30 | ||||||||||||||
(millions of dollars) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
Net Income Applicable to Common Shares | 285 | 314 | 581 | 648 | ||||||||||||
Other Comprehensive Income/(Loss), Net of Income Taxes | ||||||||||||||||
Change in foreign currency translation gains and losses on investments in foreign operations(1) | 227 | (113 | ) | 80 | (151 | ) | ||||||||||
Change in gains and losses on hedges of investments in foreign operations(2) | (79 | ) | 96 | (20 | ) | 96 | ||||||||||
Change in gains and losses on derivative instruments designated as cash flow hedges(3) | (44 | ) | 37 | (121 | ) | 64 | ||||||||||
Reclassification to Net Income of gains and losses on derivative instruments designated as cash flow hedges pertaining to prior periods(4) | (3 | ) | (9 | ) | (2 | ) | (5 | ) | ||||||||
Other Comprehensive Income/(Loss) | 101 | 11 | (63 | ) | 4 | |||||||||||
Comprehensive Income | 386 | 325 | 518 | 652 |
(1) | Net of income tax recovery of $45 million and $15 million for the three and six months ended June 30, 2010, respectively (2009 – expense of $6 million and nil, respectively). |
(2) | Net of income tax recovery of $34 million and $8 million for the three and six months ended June 30, 2010, respectively (2009 – expense of $48 million and $52 million, respectively). |
(3) | Net of income tax recovery of $27 million and $84 million for the three and six months ended June 30, 2010, respectively (2009 – expense of $19 million and $16 million, respectively). |
(4) | Net of income tax expense of $16 million and $17 million for the three and six months ended June 30, 2010, respectively (2009 – recovery of $1 million and nil, respectively). |
See accompanying notes to the consolidated financial statements.
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SECOND QUARTER REPORT 2010
Consolidated Accumulated Other Comprehensive (Loss)/Income
Currency | ||||||||||
(unaudited) | Translation | Cash Flow | ||||||||
(millions of dollars) | Adjustments | Hedges | Total | |||||||
Balance at December 31, 2009 | (592 | ) | (40 | ) | (632 | ) | ||||
Change in foreign currency translation gains and losses on investments in foreign operations(1) | 80 | - | 80 | |||||||
Change in gains and losses on hedges of investments in foreign operations(2) | (20 | ) | - | (20 | ) | |||||
Change in gains and losses on derivative instruments designated as cash flow hedges(3) | - | (121 | ) | (121 | ) | |||||
Reclassification to Net Income of gains and losses on derivative instruments designated as cash flow hedges pertaining to prior periods(4)(5) | - | (2 | ) | (2 | ) | |||||
Balance at June 30, 2010 | (532 | ) | (163 | ) | (695 | ) | ||||
Balance at December 31, 2008 | (379 | ) | (93 | ) | (472 | ) | ||||
Change in foreign currency translation gains and losses on investments in foreign operations(1) | (151 | ) | - | (151 | ) | |||||
Change in gains and losses on hedges of investments in foreign operations(2) | 96 | - | 96 | |||||||
Changes in gains and losses on derivative instruments designated as cash flow hedges(3) | - | 64 | 64 | |||||||
Reclassification to Net Income of gains and losses on derivative instruments designated as cash flow hedges pertaining to prior periods(4) | - | (5 | ) | (5 | ) | |||||
Balance at June 30, 2009 | (434 | ) | (34 | ) | (468 | ) |
(1) | Net of income tax recovery of $15 million for the six months ended June 30, 2010 (2009 - nil). |
(2) | Net of income tax recovery of $8 million for the six months ended June 30, 2010 (2009 - $52 million expense). |
(3) | Net of income tax recovery of $84 million for the six months ended June 30, 2010 (2009 - $16 million expense). |
(4) | Net of income tax expense of $17 million for the six months ended June 30, 2010 (2009 - nil). |
(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 $74 million ($45 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.
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SECOND QUARTER REPORT 2010
Consolidated Shareholders’ Equity
(unaudited) | Six months ended June 30 | ||||||
(millions of dollars) | 2010 | 2009 | |||||
Common Shares | |||||||
Balance at beginning of period | 11,338 | 9,264 | |||||
Shares issued under dividend reinvestment plan | 170 | 109 | |||||
Proceeds from shares issued on exercise of stock options | 14 | 11 | |||||
Proceeds from shares issued under public offering, net of issue costs | - | 1,792 | |||||
Balance at end of period | 11,522 | 11,176 | |||||
Preferred Shares | |||||||
Balance at beginning of period | 539 | - | |||||
Proceeds from shares issued under public offering, net of issue costs | 685 | - | |||||
Balance at end of period | 1,224 | - | |||||
Contributed Surplus | |||||||
Balance at beginning of period | 328 | 279 | |||||
Issuance of stock options | 2 | 1 | |||||
Balance at end of period | 330 | 280 | |||||
Retained Earnings | |||||||
Balance at beginning of period | 4,186 | 3,827 | |||||
Net income | 598 | 648 | |||||
Common share dividends | (552 | ) | (494 | ) | |||
Preferred share dividends | (17 | ) | - | ||||
Balance at end of period | 4,215 | 3,981 | |||||
Accumulated Other Comprehensive (Loss)/Income | |||||||
Balance at beginning of period | (632 | ) | (472 | ) | |||
Other comprehensive (loss)/income | (63 | ) | 4 | ||||
Balance at end of period | (695 | ) | (468 | ) | |||
3,520 | 3,513 | ||||||
Total Shareholders’ Equity | 16,596 | 14,969 |
See accompanying notes to the consolidated financial statements.
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SECOND QUARTER REPORT 2010
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). The accounting policies applied are consistent with those outlined in TransCanada's annual audited Consolidated Financial Statements for the year ended December 31, 2009. 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 2009 audited Consolidated Financial Statements included in TransCanada’s 2009 Annual Report. Unl ess otherwise indicated, “TransCanada“ or “the Company“ includes TransCanada Corporation and its subsidiaries. Amounts are stated in Canadian dollars unless otherwise indicated. Certain comparative figures have been reclassified to conform with the current year’s presentation.
In Pipelines, which consists primarily of the Company's investments in regulated pipelines and regulated natural gas storage facilities, annual revenues and net income fluctuate over the long term based on regulators' decisions and negotiated settlements with shippers. Generally, quarter-over-quarter revenues and net income during any particular fiscal year remain relatively stable with fluctuations resulting from adjustments being recorded due to regulatory decisions and negotiated settlements with shippers, seasonal fluctuations in short-term throughput volumes on U.S. pipelines, acquisitions and divestitures, and developments outside of the normal course of operations.
In 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 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.
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.
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SECOND QUARTER REPORT 2010
2. | Changes in Accounting Policies |
The Company’s accounting policies have not changed materially from those described in TransCanada’s 2009 Annual Report. Future accounting changes that will impact the Company are as follows:
Future Accounting Changes
International Financial Reporting Standards
The Canadian Institute of Chartered Accountants’ (CICA) 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. As an SEC registrant, TransCanada has the option to prepare and file its consolidated financial statements using U.S. GAAP. Previously, TransCanada disclosed that effective January 1, 2011, the Company expected to begin reporting under IFRS. Prior to the developments noted below, the Company's IFRS conversion project was proceeding as planned to meet the January 1, 2011 conversion date.
Rate-Regulated Accounting
In accordance with Canadian GAAP, TransCanada currently follows specific accounting policies unique to a rate-regulated business which are consistent with rate-regulated accounting (RRA) standards in U.S. GAAP. Under RRA, the timing of recognition of certain expenses and revenues may differ from that otherwise expected under Canadian GAAP in order to appropriately reflect the economic impact of regulators' decisions regarding the Company's revenues and tolls. These timing differences are recorded as regulatory assets and regulatory liabilities on TransCanada's consolidated balance sheet and represent current rights and obligations regarding cash flows expected to be recovered from or refunded to customers, based on decisions and approvals by the applicable reg ulatory authorities. As at June 30, 2010, TransCanada reported $1.7 billion of regulatory assets and $0.4 billion of regulatory liabilities using RRA in addition to certain other impacts of RRA.
In July 2009, the IASB issued an Exposure Draft "Rate-Regulated Activities" which proposed a form of RRA under IFRS. To date, the IASB has not approved an RRA standard and TransCanada does not expect a final RRA standard under IFRS to be effective for 2011. As a result, in July 2010, the CICA’s AcSB issued an Exposure Draft applicable to Canadian publicly accountable enterprises that use RRA which, if approved, would allow these entities to defer the adoption of IFRS for two years. A final decision is expected by the AcSB before the end of 2010. Due to the continued uncertainty around the timing, scope and eventual adoption of an RRA standard under IFRS, if the AcSB Exposure Draft is approved, TransCanada expects to defer its ado ption of IFRS accordingly, and continue to prepare its consolidated financial statements in accordance with Canadian GAAP to maintain the use of RRA. During the deferral period, TransCanada will continue to actively monitor IASB developments with respect to RRA. If the AcSB Exposure Draft is not approved or the IASB has not approved an RRA standard within the two year deferral period that allows the Company’s rate-regulated activities to be appropriately reflected in its consolidated financial statements, TransCanada expects to re-evaluate its decision to adopt IFRS and reconsider the adoption of U.S. GAAP.
As a result of these developments related to RRA under IFRS, TransCanada cannot reasonably quantify the full impact that adopting IFRS would have on its financial position and future results if it proceeded with adopting IFRS. The Company will continue to monitor non-RRA IFRS developments and their potential impact on TransCanada.
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SECOND QUARTER REPORT 2010
3. Segmented Information
Three months ended June 30 | Pipelines | Energy(1) | Corporate | Total | ||||||||||||||||||||||||||||
(unaudited)(millions of dollars) | 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | ||||||||||||||||||||||||
Revenues | 1,061 | 1,142 | 862 | 842 | - | - | 1,923 | 1,984 | ||||||||||||||||||||||||
Plant operating costs and other | (365 | ) | (395 | ) | (377 | ) | (366 | ) | (22 | ) | (31 | ) | (764 | ) | (792 | ) | ||||||||||||||||
Commodity purchases resold | - | - | (216 | ) | (182 | ) | - | - | (216 | ) | (182 | ) | ||||||||||||||||||||
Depreciation and amortization | (251 | ) | (258 | ) | (90 | ) | (87 | ) | - | - | (341 | ) | (345 | ) | ||||||||||||||||||
445 | 489 | 179 | 207 | (22 | ) | (31 | ) | 602 | 665 | |||||||||||||||||||||||
Interest expense | (187 | ) | (259 | ) | ||||||||||||||||||||||||||||
Interest expense of joint ventures | (15 | ) | (16 | ) | ||||||||||||||||||||||||||||
Interest income and other | (18 | ) | 34 | |||||||||||||||||||||||||||||
Income taxes | (65 | ) | (97 | ) | ||||||||||||||||||||||||||||
Non-controlling interests | (22 | ) | (13 | ) | ||||||||||||||||||||||||||||
Net Income | 295 | 314 | ||||||||||||||||||||||||||||||
Preferred share dividends | (10 | ) | - | |||||||||||||||||||||||||||||
Net Income Applicable to Common Shares | 285 | 314 | ||||||||||||||||||||||||||||||
Six months ended June 30 | Pipelines | Energy(1) | Corporate | Total | ||||||||||||||||||||||||||||
(unaudited)(millions of dollars) | 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | ||||||||||||||||||||||||
Revenues | 2,190 | 2,406 | 1,688 | 1,740 | - | - | 3,878 | 4,146 | ||||||||||||||||||||||||
Plant operating costs and other | (726 | ) | (788 | ) | (737 | ) | (758 | ) | (48 | ) | (61 | ) | (1,511 | ) | (1,607 | ) | ||||||||||||||||
Commodity purchases resold | - | - | (472 | ) | (411 | ) | - | - | (472 | ) | (411 | ) | ||||||||||||||||||||
Depreciation and amortization | (504 | ) | (518 | ) | (180 | ) | (173 | ) | - | - | (684 | ) | (691 | ) | ||||||||||||||||||
960 | 1,100 | 299 | 398 | (48 | ) | (61 | ) | 1,211 | 1,437 | |||||||||||||||||||||||
Interest expense | (369 | ) | (554 | ) | ||||||||||||||||||||||||||||
Interest expense of joint ventures | (31 | ) | (30 | ) | ||||||||||||||||||||||||||||
Interest income and other | 6 | 56 | ||||||||||||||||||||||||||||||
Income taxes | (166 | ) | (213 | ) | ||||||||||||||||||||||||||||
Non-controlling interests | (53 | ) | (48 | ) | ||||||||||||||||||||||||||||
Net Income | 598 | 648 | ||||||||||||||||||||||||||||||
Preferred share dividends | (17 | ) | - | |||||||||||||||||||||||||||||
Net Income Applicable to Common Shares | 581 | 648 |
(1) | Effective January 1, 2010, the Company records in Revenues on a net basis, realized and unrealized gains and losses on derivatives used to purchase and sell power, natural gas and fuel oil in order to manage Energy’s assets. Comparative figures for 2009 reflect amounts reclassified from Commodity Purchases Resold to Revenues. |
Total Assets
(unaudited) (millions of dollars) | June 30, 2010 | December 31, 2009 | |||
Pipelines | 31,005 | 29,508 | |||
Energy | 12,798 | 12,477 | |||
Corporate | 2,225 | 1,856 | |||
46,028 | 43,841 |
4. | Long-Term Debt |
In June 2010, TCPL issued senior notes of US$500 million and US$750 million maturing on June 1, 2015 and June 1, 2040, respectively, and bearing interest at 3.40 per cent and 6.10 per cent, respectively. These notes were issued under the US$4.0 billion debt shelf prospectus filed in December 2009.
TRANSCANADA [10
SECOND QUARTER REPORT 2010
In the three and six months ended June 30, 2010, the Company capitalized interest related to capital projects of $143 million and $277 million, respectively (2009 - $63 million and $117 million).
5. | Share Capital |
Preferred Share Issuances
In June 2010, TransCanada completed a public offering of 14 million Series 5 cumulative redeemable first preferred shares, including the full exercise of an underwriters’ option of two million shares, under its September 2009 base shelf prospectus. The preferred shares were issued at a price of $25 per share, resulting in gross proceeds of $350 million including the underwriters' option. The holders of the Series 5 preferred shares are entitled to receive fixed cumulative dividends at an annual rate of $1.10 per share, payable quarterly, yielding 4.4 per cent per annum for the initial five and a half year period ending January 30, 2016. The first dividend payment will be made on November 1, 2010. The dividend rate will reset on January 30, 2016 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 1.54 per cent. The Series 5 preferred shares are redeemable by TransCanada on January 30, 2016 and on January 30 of every fifth year thereafter.
The Series 5 preferred shareholders will have the right to convert their shares into Series 6 cumulative redeemable first preferred shares on January 30, 2016 and on January 30 of every fifth year thereafter. The holders of Series 6 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 1.54 per cent.
In March 2010, TransCanada completed a public offering of 14 million Series 3 cumulative redeemable first preferred shares, including the full exercise of an underwriters’ option of two million shares, under its September 2009 base shelf prospectus. The preferred shares were issued at a price of $25 per share, resulting in gross proceeds of $350 million including the underwriters' option. The holders of the Series 3 preferred shares are entitled to receive fixed cumulative dividends at an annual rate of $1.00 per share, payable quarterly, yielding four per cent per annum for the initial five year period ending June 30, 2015. The first dividend payment was made on June 30, 2010. The dividend rate will reset on June 30, 2015 and every five years thereafter to a yield per annum equal to the sum of the then five year Government of Ca nada bond yield and 1.28 per cent. The Series 3 preferred shares are redeemable by TransCanada on June 30, 2015 and on June 30 of every fifth year thereafter.
The Series 3 preferred shareholders will have the right to convert their shares into Series 4 cumulative redeemable first preferred shares on June 30, 2015 and on June 30 of every fifth year thereafter. The holders of Series 4 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 1.28 per cent.
Dividend Reinvestment and Share Purchase Plan
In the three and six months ended June 30, 2010, TransCanada issued 2.6 million and 4.9 million (2009 – 1.4 million and 3.5 million) common shares, respectively, under its Dividend Reinvestment and Share Purchase Plan (DRP), in lieu of making cash dividend payments of $92 million and $170 million (2009 - $42 million and $109 million). The dividends under the DRP were paid with common shares issued from treasury.
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SECOND QUARTER REPORT 2010
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 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 June 30, 2010, there were no significant amounts past due or impaired.
At June 30, 2010, the Company had a credit risk concentration of $348 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 Inventory
At June 30, 2010, 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 $51 million (December 31, 2009 - $73 million). The change in fair value of proprietary natural gas inventory in storage in the three and six months ended June 30, 2010 resulted in net pre-tax unrealized gains of $4 million and net pre-tax unrealized losses of $20 million, respectively, which were recorded as an increase and a decrease, respectively, to Revenues and Inventories (2009 - losses of $6 million and $29 million). The change in fair value of natural gas forward purchase and sale contracts in the three and six months ended June 30, 2010 resulted in net pre-tax unrealized gains of $2 million and $5 million, respectively (2009 – lo sses of $1 million and gains of $9 million), which were 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 open liquid 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 $7 million at June 30, 2010 (December 31, 2009 – $12 million). The decrease from December 31, 2009 was primarily due to decreased prices and lower open positions in the U.S. Power portf olio.
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 June 30, 2010, the Company had designated as a net investment hedge U.S. dollar-denominated debt with a carrying value of $9.4 billion (US$8.8 billion) and a fair value of $9.7 billion (US$9.2 billion). At June 30, 2010, $20 million (December 31, 2009 - $96 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.
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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
June 30, 2010 | December 31, 2009 | ||||||||||||
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 2010 to 2014) | 37 | U.S. 2,100 | 86 | U.S. 1,850 | |||||||||
U.S. dollar forward foreign exchange contracts | |||||||||||||
(maturing 2010) | (17 | ) | U.S. 550 | 9 | U.S. 765 | ||||||||
U.S. dollar foreign exchange options | |||||||||||||
(matured 2010) | - | - | 1 | U.S. 100 | |||||||||
20 | U.S. 2,650 | 96 | U.S. 2,715 |
(1) | Fair values equal carrying values. |
Non-Derivative Financial Instruments Summary
The carrying and fair values of non-derivative financial instruments were as follows:
June 30, 2010 | December 31, 2009 | |||||||||||||||
(unaudited) (millions of dollars) | Carrying Amount | Fair Value | Carrying Amount | Fair Value | ||||||||||||
Financial Assets(1) | ||||||||||||||||
Cash and cash equivalents | 1,211 | 1,211 | 997 | 997 | ||||||||||||
Accounts receivable and other(2)(3) | 1,342 | 1,383 | 1,432 | 1,483 | ||||||||||||
Available-for-sale assets(2) | 20 | 20 | 23 | 23 | ||||||||||||
2,573 | 2,614 | 2,452 | 2,503 | |||||||||||||
Financial Liabilities(1)(3) | ||||||||||||||||
Notes payable | 1,697 | 1,697 | 1,687 | 1,687 | ||||||||||||
Accounts payable and deferred amounts(4) | 1,287 | 1,287 | 1,538 | 1,538 | ||||||||||||
Accrued interest | 374 | 374 | 377 | 377 | ||||||||||||
Long-term debt | 17,845 | 21,125 | 16,664 | 19,377 | ||||||||||||
Junior subordinated notes | 1,050 | 1,072 | 1,036 | 976 | ||||||||||||
Long-term debt of joint ventures | 911 | 1,011 | 965 | 1,025 | ||||||||||||
23,164 | 26,566 | 22,267 | 24,980 |
(1) | Consolidated Net Income in 2010 included gains of $9 million (2009 – $8 million) for fair value adjustments related to interest rate swap agreements on US$150 million (2009 – US$300 million) of long-term debt. There were no other unrealized gains or losses from fair value adjustments to the financial instruments. |
(2) | At June 30, 2010, the Consolidated Balance Sheet included financial assets of $867 million (December 31, 2009 – $966 million) in Accounts Receivable, $42 million in Other Current Assets (December 31, 2009 – nil) and $453 million (December 31, 2009 - $489 million) in Intangibles and Other Assets. |
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(3) | Recorded at amortized cost, except for certain long-term debt which is recorded at fair value. |
(4) | At June 30, 2010, the Consolidated Balance Sheet included financial liabilities of $1,258 million (December 31, 2009 – $1,513 million) in Accounts Payable and $29 million (December 31, 2009 - $25 million) in Deferred Amounts. |
Derivative Financial Instruments Summary
Information for the Company’s derivative financial instruments, excluding hedges of the Company’s net investment in self-sustaining foreign operations, is as follows:
June 30, 2010 | ||||||||||||
(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 | $210 | $146 | - | $29 | ||||||||
Liabilities | $(158 | ) | $(145 | ) | $(20 | ) | $(90 | ) | ||||
Notional Values | ||||||||||||
Volumes(3) | ||||||||||||
Purchases | 13,165 | 117 | - | - | ||||||||
Sales | 14,285 | 89 | - | - | ||||||||
Canadian dollars | - | - | - | 960 | ||||||||
U.S. dollars | - | - | U.S. 1,143 | U.S. 1,525 | ||||||||
Cross-currency | - | - | 47/U.S. 37 | - | ||||||||
Net unrealized (losses)/gains in the period(4) Three months ended June 30, 2010 | $(10 | ) | $3 | $(11 | ) | $(13 | ) | |||||
Six months ended June 30, 2010 | $(26 | ) | $5 | $(11 | ) | $(17 | ) | |||||
Net realized gains/(losses) in the period(4) | ||||||||||||
Three months ended June 30, 2010 | $15 | $(17 | ) | $(6 | ) | $(6 | ) | |||||
Six months ended June 30, 2010 | $37 | $(29 | ) | $2 | $(10 | ) | ||||||
Maturity dates | 2010-2015 | 2010-2014 | 2010-2012 | 2010-2018 | ||||||||
Derivative Financial Instruments in Hedging Relationships(5)(6) | ||||||||||||
Fair Values(2) | ||||||||||||
Assets | $124 | $1 | - | $9 | ||||||||
Liabilities | $(237 | ) | $(54 | ) | $(37 | ) | $(116 | ) | ||||
Notional Values | ||||||||||||
Volumes(3) | ||||||||||||
Purchases | 14,792 | 63 | - | - | ||||||||
Sales | 15,209 | - | - | - | ||||||||
U.S. dollars | - | - | U.S. 120 | U.S. 1,975 | ||||||||
Cross-currency | - | - | 136/U.S. 100 | - | ||||||||
Net realized losses in the period(4) | ||||||||||||
Three months ended June 30, 2010 | $(36 | ) | $(6 | ) | - | $(9 | ) | |||||
Six months ended June 30, 2010 | $(43 | ) | $(9 | ) | - | $(19 | ) | |||||
Maturity dates | 2010-2015 | 2010-2012 | 2010-2014 | 2011-2020 |
(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 GWh and billion cubic feet (Bcf), respectively. |
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SECOND QUARTER REPORT 2010
(4) | Realized and unrealized gains and losses on power and natural gas derivative financial instruments held for trading are included 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 hedging relationships are initially recognized in Other Comprehensive Income and are 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$150 million. Net realized gains on fair value hedges for the three and six months ended June 30, 2010 were $1 million and $2 million, respectively, and were included in Interest Expense. In second quarter 2010, the Company did not record any amounts in Net Income related to ineffectiveness for fair value hedges. |
(6) | Net Income for the three and six months ended June 30, 2010 included gains of $7 million and losses of $1 million, respectively, 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. There were no gains or losses included in Net Income for the three and six months ended June 30, 2010 for discontinued cash flow hedges. No amounts have been excluded from the assessment of hedge effectiveness. |
2009 | |||||||||||||||||
(unaudited) (all amounts in millions unless otherwise indicated) | Power | Natural Gas | Oil Products | Foreign Exchange | Interest | ||||||||||||
Derivative Financial Instruments Held for Trading | |||||||||||||||||
Fair Values(1)(2) | |||||||||||||||||
Assets | $150 | $107 | $5 | - | $25 | ||||||||||||
Liabilities | $(98 | ) | $(112 | ) | $(5 | ) | $(66 | ) | $(68 | ) | |||||||
Notional Values(2) | |||||||||||||||||
Volumes(3) | |||||||||||||||||
Purchases | 15,275 | 238 | 180 | - | - | ||||||||||||
Sales | 13,185 | 194 | 180 | - | - | ||||||||||||
Canadian dollars | - | - | - | - | 574 | ||||||||||||
U.S. dollars | - | - | - | U.S. 444 | U.S. 1,325 | ||||||||||||
Cross-currency | - | - | - | 227/U.S. 157 | - | ||||||||||||
Net unrealized (losses)/gains in the period(4) Three months ended June 30, 2009 | $(2 | ) | $10 | $(5 | ) | $1 | $27 | ||||||||||
Six months ended June 30, 2009 | $19 | $(25 | ) | $2 | $2 | $27 | |||||||||||
Net realized gains/(losses) in the period(4) | |||||||||||||||||
Three months ended June 30, 2009 | $20 | $(39 | ) | $2 | $11 | $(5 | ) | ||||||||||
Six months ended June 30, 2009 | $30 | $(13 | ) | $(1 | ) | $17 | $(9 | ) | |||||||||
Maturity dates(2) | 2010-2015 | 2010-2014 | 2010 | 2010-2012 | 2010-2018 | ||||||||||||
Derivative Financial Instruments in Hedging Relationships(5)(6) | |||||||||||||||||
Fair Values(1)(2) | |||||||||||||||||
Assets | $175 | $2 | - | - | $15 | ||||||||||||
Liabilities | $(148 | ) | $(22 | ) | - | $(43 | ) | $(50 | ) | ||||||||
Notional Values(2) | |||||||||||||||||
Volumes(3) | |||||||||||||||||
Purchases | 13,641 | 33 | - | - | - | ||||||||||||
Sales | 14,311 | - | - | - | - | ||||||||||||
U.S. dollars | - | - | - | U.S. 120 | U.S. 1,825 | ||||||||||||
Cross-currency | - | - | - | 136/U.S. 100 | - | ||||||||||||
Net realized gains/(losses) in the period(4) | |||||||||||||||||
Three months ended June 30, 2009 | $52 | $(10 | ) | - | - | $(10 | ) | ||||||||||
Six months ended June 30, 2009 | $78 | $(20 | ) | - | - | $(17 | ) | ||||||||||
Maturity dates(2) | 2010-2015 | 2010-2014 | n/a | 2010-2014 | 2010-2020 |
(1) | Fair values equal carrying values. |
(2) | As at December 31, 2009. |
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SECOND QUARTER REPORT 2010
(3) | Volumes for power, natural gas and oil products derivatives are in GWh, Bcf and thousands of barrels, respectively. |
(4) | Realized and unrealized gains and losses on power, natural gas and oil products derivative financial instruments held for trading are included 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 hedging relationships are initially recognized in Other Comprehensive Income, and are 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 $4 million and a notional amount of US$150 million at December 31, 2009. Net realized gains on fair value hedges for the three and six months ended June 30, 2009 were $1 million and $2 million, respectively, and were included in Interest Expense. In second quarter 2009, the Company did not record any amounts in Net Income related to ineffectiveness for fair value hedges. |
(6) | Net Income for the three and six months ended June 30, 2009 included losses of $4 million and gains of $1 million, respectively, 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. There were no gains or losses included in Net Income for the three and six months ended June 30, 2009 for discontinued cash flow hedges. No amounts have been excluded from the assessment of hedge effectiveness. |
Balance Sheet Presentation of Derivative Financial Instruments
The fair value of the derivative financial instruments in the Company’s Balance Sheet was as follows:
(unaudited) | ||||||
(millions of dollars) | June 30, 2010 | December 31, 2009 | ||||
Current | ||||||
Other current assets | 311 | 315 | ||||
Accounts payable | (406 | ) | (340 | ) | ||
Long-term | ||||||
Intangibles and other assets | 228 | 260 | ||||
Deferred amounts | (451 | ) | (272 | ) |
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. Fair value of assets and liabilities included in Level I is determined by reference to quoted prices in active markets for identical assets and liabilities. Assets and liabilities in Level II include valuations using inputs other than quoted prices for which all significant outputs are observable, either directly or indirectly. This category includes fair value determined using valuation techniques, such as option pricing models and extrapolation using observable inputs. Level III valuations are based on inputs that are not readily observable and are significant to the overall fair value measurement. Long-dated commodity transactions in certain markets and the fair value of guarantees 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. The fair value of guarantees is estimated by discounting the cash flows that would be incurred if letters of credit were used in place of the guarantees.
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SECOND QUARTER REPORT 2010
Financial assets and liabilities measured at fair value as of June 30, 2010, including both current and non-current portions, are categorized as follows. There were no transfers between Level I and Level II in second quarter 2010.
(unaudited) (millions of dollars, pre-tax) | Quoted Prices in Active Markets (Level I) | Significant Other Observable Inputs (Level II) | Significant Unobservable Inputs (Level III) | Total | ||||||||
Natural Gas Inventory | - | 51 | - | 51 | ||||||||
Derivative Financial Instruments: | ||||||||||||
Assets | 90 | 480 | 17 | 587 | ||||||||
Liabilities | (187 | ) | (696 | ) | (22 | ) | (905 | ) | ||||
Available-for-sale assets | 20 | - | - | 20 | ||||||||
Guarantee Liabilities(1) | - | - | (9 | ) | (9 | ) | ||||||
(77 | ) | (165 | ) | (14 | ) | (256 | ) |
(1) | The fair value of guarantees is included in Deferred Amounts. |
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:
(unaudited) | |||||||||
(millions of dollars, pre-tax) | Derivatives(1) | Guarantees(2) | Total | ||||||
Balance at December 31, 2009 | (2 | ) | (9 | ) | (11 | ) | |||
New contracts(3) | (10 | ) | - | (10 | ) | ||||
Settlements | (2 | ) | - | (2 | ) | ||||
Transfers out of Level III(4) | (15 | ) | - | (15 | ) | ||||
Change in unrealized gains recorded in Net Income | 14 | - | 14 | ||||||
Change in unrealized gains recorded in OtherComprehensive Income | 10 | - | 10 | ||||||
Balance at June 30, 2010 | (5 | ) | (9 | ) | (14 | ) |
(1) | The fair value of derivative assets and liabilities is presented on a net basis. |
(2) | The fair value of guarantees is included in Deferred Amounts. No amounts were recognized in Net Income for the periods presented. |
(3) | The total amount of net gains included in Net Income attributable to derivatives that were entered into during the period and still held at the reporting date was $1 million and nil for the three and six months ended June 30, 2010, respectively. |
(4) | As contracts near maturity, they are transferred out of Level III to Level II. |
A 10 per cent increase or decrease in commodity prices, with all other variables held constant, would result in a $28 million decrease or increase, respectively, in the fair value of derivative financial instruments included in Level III and outstanding as at June 30, 2010.
A 100 basis points increase or decrease in the letter of credit rate, with all other variables held constant, would result in a $3 million increase or decrease, respectively, in the fair value of guarantee liabilities outstanding as at June 30, 2010. Similarly, the effect of a 100 basis points increase or decrease in the risk-free interest rate, which is a component of the discount rate, on the fair value of guarantee liabilities outstanding as at June 30, 2010 would result in a $1 million decrease or increase, respectively, in the liability.
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7. | 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 June 30 | Pension Benefit Plans | Other Benefit Plans | |||||||||||
(unaudited)(millions of dollars) | 2010 | 2009 | 2010 | 2009 | |||||||||
Current service cost | 13 | 12 | 1 | 1 | |||||||||
Interest cost | 22 | 22 | 2 | 2 | |||||||||
Expected return on plan assets | (27 | ) | (26 | ) | (1 | ) | (1 | ) | |||||
Amortization of transitional obligation related to regulated business | - | - | 1 | 1 | |||||||||
Amortization of net actuarial loss | 2 | 1 | 1 | 1 | |||||||||
Amortization of past service costs | 1 | 1 | - | - | |||||||||
Net benefit cost recognized | 11 | 10 | 4 | 4 | |||||||||
Six months ended June 30 | Pension Benefit Plans | Other Benefit Plans | |||||||||||
(unaudited)(millions of dollars) | 2010 | 2009 | 2010 | 2009 | |||||||||
Current service cost | 25 | 23 | 1 | 1 | |||||||||
Interest cost | 45 | 45 | 4 | 4 | |||||||||
Expected return on plan assets | (54 | ) | (51 | ) | (1 | ) | (1 | ) | |||||
Amortization of transitional obligation related to regulated business | - | - | 1 | 1 | |||||||||
Amortization of net actuarial loss | 4 | 2 | 1 | 1 | |||||||||
Amortization of past service costs | 2 | 2 | - | - | |||||||||
Net benefit cost recognized | 22 | 21 | 6 | 6 |
8. | Commitments and Contingencies |
At June 30, 2010, TransCanada had entered into agreements totalling approximately $530 million to purchase construction materials and services for the Bison natural gas pipeline and Cartier Wind power projects.
Amounts received under the Bruce B floor price mechanism in any year are subject to repayment if average spot prices exceed the floor price. With respect to 2010, TransCanada currently expects average spot prices to be less than the floor price for the remainder of the year, therefore, no amounts recorded in revenue in the first six months of 2010 are expected to be repaid.
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: Cecily Dobson/Terry Cunha (403) 920-7859 or (800) 608-7859. | ||
Visit the TransCanada website at: http://www.transcanada.com. |