RNS Number:7114P
TransCanada Pipelines Ld
03 August 2005
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13a-16 OR 15d-16 OF
THE SECURITIES EXCHANGE ACT OF 1934
For the month of August 2005
COMMISSION FILE No. 1-8887
TransCanada PipeLines Limited
(Translation of Registrant's Name into English)
450 - 1 Street S.W., Calgary, Alberta, T2P 5H1, Canada
(Address of Principal Executive Offices)
Indicate by check mark whether the registrant files or will file annual reports
under cover of Form 20-F or Form 40-F
Form 20-F ( ) Form 40-F x
Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
Yes ( ) No x
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I
The documents listed below in this Section and filed as Exhibits 13.1 to 13.3
and 99.1 to this Form 6-K are hereby filed with the Securities and Exchange
Commission for the purpose of being and hereby are incorporated by reference
into Registration Statement on Form F-9 (Reg. No. 333-121265) under the
Securities Act of 1933, as amended.
13.1 Management's Discussion and Analysis of Financial Condition and Results of
Operations of the registrant as at and for the period ended June 30, 2005.
13.2 Consolidated comparative interim unaudited financial statements of the
registrant for the period ended June 30, 2005 (included in the registrant's
Second Quarter 2005 Quarterly Report).
13.3 U.S. GAAP reconciliation of the consolidated comparative interim unaudited
financial statements of the registrant contained in the registrant's Second
Quarter 2005 Quarterly Report.
99.1 Schedule of earnings coverage calculations at June 30, 2005.
II
The document listed below in this Section and in the Exhibit Index to this Form
6-K is hereby filed with the Securities and Exchange Commission.
99.2 Comfort letter of KPMG LLP dated July 29, 2005.
99.3 Consent letter of KPMG LLP dated July 29, 2005.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TRANSCANADA PIPELINES LIMITED
By: /s/ Russell K. Girling
_______________________________________
Russell K. Girling
Executive Vice-President, Corporate
Development and Chief Financial Officer
By: /s/ Lee G. Hobbs
_______________________________________
Lee G. Hobbs
Vice-President and Controller
August 2, 2005
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EXHIBIT INDEX
13.1 Management's Discussion and Analysis of Financial Condition and Results of
Operations of the registrant as at and for the period ended June 30, 2005.
13.2 Consolidated comparative interim unaudited financial statements of the
registrant for the period ended June 30, 2005 (included in the registrant's
Second Quarter 2005 Quarterly Report).
13.3 U.S. GAAP reconciliation of the consolidated comparative interim unaudited
financial statements of the registrant contained in the registrant's Second
Quarter 2005 Quarterly Report.
31.1 Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer regarding Periodic Report
containing Financial Statements.
32.2 Certification of Chief Financial Officer regarding Periodic Report
containing Financial Statements.
99.1 Schedule of earnings coverage calculations at June 30, 2005.
99.2 Comfort letter of KPMG LLP dated July 29, 2005.
99.3 Consent letter of KPMG LLP dated July 29, 2005.
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Exhibit 13.1
SECOND QUARTER REPORT 2005
TRANSCANADA PIPELINES LIMITED - SECOND QUARTER 2005
Quarterly Report
Management's Discussion and Analysis
Management's discussion and analysis (MD&A) dated July 28, 2005 should be read
in conjunction with the accompanying unaudited consolidated financial statements
of TransCanada PipeLines Limited (TCPL or the company) for the six months ended
June 30, 2005. It should also be read in conjunction with the MD&A contained in
TCPL's 2004 Annual Report for the year ended December 31, 2004 as well as the
restated 2004 audited consolidated financial statements. Additional information
relating to TCPL, including the company's Annual Information Form and continuous
disclosure documents, is available on SEDAR at www.sedar.com under TransCanada
PipeLines Limited. Amounts are stated in Canadian dollars unless otherwise
indicated.
Results of Operations
Consolidated
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Segment Results-at-a-Glance
(unaudited) Three months ended June 30 Six months ended June 30
(millions of dollars except per share amounts) 2005 2004 2005 2004
GasTransmission Net Income
Excluding gains 164 139 327 288
Gain related to PipeLines LP 1 - 49 -
Gain related to Millennium - 7 - 7
165 146 376 295
Power Net Income
Excluding gains 42 62 72 127
Gains related to Power LP - 187 - 187
42 249 72 314
Corporate (8 ) (7 ) (17 ) (7 )
Net Income Applicable to Common Shares (1) 199 388 431 602
--------------------
(1) Net Income is comprised of:
Excluding gains 198 194 382 408
Gains related to PipeLines LP, Power LPand Millennium 1 194 49 194
199 388 431 602
TCPL's net income applicable to common shares (net earnings) for second quarter
2005 was $199 million compared to $388 million for the same period in 2004. The
decrease of $189 million was primarily due to the recording in second quarter
2004 of $187 million of after-tax gains relating to the sale of the ManChief and
Curtis Palmer assets to TransCanada Power, L.P. (Power LP) and the recognition
of dilution gains resulting from a reduction in TCPL's ownership interest in
Power LP and other previously deferred gains, as well as a $7 million after-tax
gain on sale of the company's equity interest in the Millennium Pipeline project
(Millennium).
Excluding the total gains of $194 million recorded in second quarter 2004
related to Power LP and Millennium and $1 million recorded in second quarter
2005 related to TC PipeLines, LP (PipeLines LP), earnings for second quarter
2005 increased $4 million to $198 million, compared to second quarter 2004.
This was mainly due to a $25 million increase in Gas Transmission's net income
for second quarter 2005, partially offset by a decrease of $20 million in
Power's net income. The increase in Gas Transmission's net income was primarily
due to net income of approximately $21 million ($13 million related to 2004 and
$8 million related to the first six months of 2005) recorded in second quarter
2005 as a result of the decision from the National Energy Board (NEB) on the
Canadian Mainline's 2004 Tolls and Tariff Application (Phase II) dealing with
capital structure which increased deemed equity thickness to 36 per cent from 33
per cent effective January 1, 2004. In addition, $16 million was generated from
the Gas Transmission Northwest System and the North Baja
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System (collectively GTN), which were acquired by TCPL on November 1, 2004. The
decrease in Power's net income was primarily due to lower equity income from
Bruce Power L.P. (Bruce Power) and lower operating and other income from Western
Operations, partially offset by higher operating and other income from Eastern
Operations as a result of the USGen New England, Inc. (USGen) acquisition.
Corporate net expenses for second quarter 2005 were consistent with the prior
year second quarter.
TCPL's net earnings for the six months ended June 30, 2005 was $431 million
compared to $602 million for the comparable period in 2004. The decrease of
$171 million in the first six months of 2005 compared to the same period in 2004
was primarily due to the 2004 gains related to Power LP and, in 2005, lower
Power net income and higher net expenses in the Corporate segment, partially
offset by higher net income from the Gas Transmission business.
Excluding the above-mentioned $187 million of gains related to Power LP in the
first six months of 2004, Power net income for the six months ended June 30,
2005 decreased $55 million as a result of lower equity income from Bruce Power
and reduced contributions from Eastern and Western Operations.
The increase in net expenses of $10 million in the Corporate segment in the six
months ended June 30, 2005 was primarily as a result of higher interest expense
compared to the same period in 2004. In second quarter 2005, this higher
interest expense was primarily offset by income tax refunds and certain positive
income tax adjustments.
Excluding the $49 million after-tax gain on sale of PipeLines LP units in 2005
and the $7 million after-tax gain on sale of the company's equity interest in
Millennium in 2004, the $39 million increase in net income in the Gas
Transmission business for the six months ended June 30, 2005 compared to the
same period in 2004 was primarily attributable to $39 million generated from
GTN.
Funds generated from operations of $478 million and $885 million for the three
and six months ended June 30, 2005 increased $96 million and $88 million,
respectively, when compared to the same periods in 2004.
Gas Transmission
The Gas Transmission business generated net income of $165 million and $376
million for the three and six months ended June 30, 2005, respectively, compared
to $146 million and $295 million for the same periods in 2004.
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GasTransmission Results-at-a-Glance
(unaudited) Three months ended June 30 Six months ended June 30
(millions of dollars) 2005 2004 2005 2004
Wholly-Owned Pipelines
Canadian Mainline 86 66 149 130
Alberta System 37 39 74 79
GTN (1) 16 39
Foothills System 6 5 11 11
BC System 1 1 3 3
146 111 276 223
Other Gas Transmission
Great Lakes 11 14 25 31
Iroquois 3 3 7 11
PipeLines LP 1 5 5 9
Portland - - 6 6
Ventures LP 3 4 6 7
TQM 1 2 3 4
CrossAlta 2 1 7 2
TransGas 3 3 6 6
Northern Development (1 ) (1 ) (2 ) (2 )
General, administrative, support costs and other (5 ) (3 ) (12 ) (9 )
18 28 51 65
Gain related to PipeLines LP 1 - 49 -
Gain related to Millenium - 7 - 7
19 35 100 72
Net Income 165 146 376 295
--------------------
(1) TCPL acquired GTN on November 1, 2004.
Wholly-Owned Pipelines
The Canadian Mainline's net income increased $20 million and $19 million for the
three and six months ended June 30, 2005, respectively, when compared to the
corresponding periods in 2004. This increase reflects the impact of the NEB's
decision on the Canadian Mainline's 2004 Tolls and Tariff Application (Phase II)
in April 2005, which included an increase in the deemed common equity ratio from
33 per cent to 36 per cent for 2004 and which is also effective for 2005 under
the 2005 tolls settlement with shippers, partially offset by a decrease in the
approved rate of return on common equity to 9.46 per cent in 2005 from 9.56 per
cent in 2004. As a result of the NEB decision, Canadian Mainline's net income
increased $21 million ($13 million related to 2004 and $8 million related to the
first six months of 2005) in second quarter 2005.
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The Alberta System's net income of $37 million in second quarter 2005 is $2
million lower than the same quarter in 2004. Net income for the six months
ended June 30, 2005 decreased $5 million compared to the same period in 2004.
These decreases were primarily due to a lower investment base in 2005 as well as
a lower approved rate of return in 2005. Net income in 2005 reflects a rate of
return of 9.50 per cent, as prescribed by the Alberta Energy and Utilities Board
(EUB), on deemed common equity of 35 per cent compared to a rate of return of
9.60 per cent in 2004.
GTN, which was acquired by TCPL in November 2004, generated net income of $16
million in second quarter 2005 and $39 million in the six months ended June 30,
2005. Net income for the Foothills System for the three and six months ended
June 30, 2005 is comparable to the same period in the prior year.
Operating Statistics
Gas
Transmission
Canadian Northwest
Six months ended June Mainline (1) Alberta System System (3) Foothills System BC System
30 (2)
(unaudited) 2005 2004 2005 2004 2005 2005 2004 2005 2004
Average investment 7,873 8,274 4,534 4,719 n/a (3) 687 722 219 230
base ($ millions)
Delivery volumes
(Bcf)
Total 1,437 1,355 1,936 1,925 383 520 552 162 162
Average per day 7.9 7.4 10.7 10.6 2.1 2.9 3.0 0.9 0.9
--------------------
(1) Canadian Mainline deliveries originating at the Alberta border and in
Saskatchewan for the six months ended June 30, 2005 were 1,044 Bcf (2004 - 1,016
Bcf); average per day was 5.8 Bcf (2004 - 5.6 Bcf).
(2) Field receipt volumes for the Alberta System for the six months ended June
30, 2005 were 1,979 Bcf (2004 - 1,958 Bcf); average per day was 10.9 Bcf (2004 -
10.8 Bcf).
(3) TCPL acquired the Gas Transmission Northwest System on November 1, 2004. The
system is currently operating under a fixed rate model approved by the United
States Federal Energy Regulatory Commission and, as a result, the system's
current results are not dependent on average investment base.
Other Gas Transmission
TCPL's proportionate share of net income from its Other Gas Transmission
businesses was $19 million for the three months ended June 30, 2005 compared to
$35 million for the same period in 2004. The second quarter 2004 results
include a $7 million after-tax gain on sale of the company's equity interest in
Millennium. Excluding this gain, and the $1 million after-tax gain on sale of
additional units of PipeLines LP recorded in second quarter 2005, income for
second quarter 2005 decreased $10 million compared to the same period in 2004.
The decrease was mainly due to lower earnings from PipeLines LP reflecting a
reduced ownership interest, lower earnings from Great Lakes as a result of lower
short-term revenues and higher operating and maintenance costs, as
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well as the negative impact of a weaker U.S. dollar on the company's U.S.
operations.
Net income for the six months ended June 30, 2005 was $100 million compared to
$72 million for the corresponding period in 2004. Excluding the $49 million
after-tax gain on sale of PipeLines LP units recorded in 2005, and the $7
million after-tax gain on sale of Millennium recorded in 2004, year-to-date
earnings are $14 million lower compared to the same period in 2004. The
decrease is due to lower earnings from Great Lakes, lower earnings from Iroquois
primarily due to a tax adjustment recorded in first quarter 2004 and lower
earnings from PipeLines LP reflecting a reduced ownership interest. Results
were also negatively impacted by a weaker U.S. dollar in 2005. These decreases
were partially offset by higher earnings from CrossAlta as a result of
favourable conditions in the natural gas storage market.
As at June 30, 2005, TCPL had capitalized $8 million of costs related to its
Broadwater liquified natural gas (LNG) project.
Power
Power Results-at-a-Glance
(unaudited) Three months ended June 30 Six months ended June 30
(millions of dollars) 2005 2004 2005 2004
Western operations 28 35 58 70
Eastern operations 39 22 44 56
Bruce Power investment 13 48 43 96
Power LP investment 8 6 17 16
General, administrative, support costs and other (26 ) (24 ) (51 ) (49 )
Operating and other income 62 87 111 189
Financial charges (3 ) (3 ) (7 ) (5 )
Income taxes (17 ) (22 ) (32 ) (57 )
42 62 72 127
Gains related to Power LP(after tax) - 187 - 187
Net Income 42 249 72 314
Power's net income in second quarter 2005 of $42 million decreased $207 million
compared to second quarter 2004, primarily due to $187 million of gains related
to Power LP in second quarter 2004. Excluding these gains, Power's net income
of $42 million for second quarter 2005 decreased $20 million compared to $62
million for the same period in 2004. Higher operating and other income from
Eastern Operations partially offset lower operating and other income from Bruce
Power and Western Operations.
Eastern Operations' operating and other income was $17 million higher in second
quarter 2005 compared to second quarter 2004
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primarily due to the acquisition of hydroelectric generation assets from USGen
on April 1, 2005.
Bruce Power's equity income was lower by $35 million in second quarter 2005
compared to second quarter 2004 primarily due to lower generation volumes and
higher costs resulting from a planned maintenance outage on Unit 7 (54 days) and
an unplanned maintenance outage on Unit 6 (27 days) as a result of a transformer
fire outside the generating facility. Higher realized power prices in second
quarter 2005 partially offset the impact of the lower generation volumes as well
as increased outage and operating costs.
Western Operations' operating and other income was $7 million lower in second
quarter 2005 compared to second quarter 2004 primarily due to fee revenues
earned in 2004 on the sale of ManChief and Curtis Palmer to Power LP and reduced
margins from lower market heat rates on uncontracted volumes of power generated.
Net income for the six months ended June 30, 2005 of $72 million decreased $242
million compared to $314 million in 2004. Excluding the $187 million of Power
LP-related gains in 2004, Power's net income for the six months ended June 30,
2005 of $72 million decreased $55 million compared to $127 million in 2004 as a
result of lower equity income from Bruce Power and reduced operating and other
income from Eastern and Western Operations.
Western Operations
Western Operations Results-at-a-Glance (1)
(unaudited) Three months ended June 30 Six months ended June 30
(millions of dollars) 2005 2004 2005 2004
Revenue
Power 151 167 315 314
Other (2) 37 30 79 63
188 197 394 377
Cost of sales
Power (102 ) (113 ) (217 ) (203 )
Other (2) (18 ) (14 ) (41 ) (38 )
(120 ) (127 ) (258 ) (241 )
Other costs and expenses (35 ) (30 ) (68 ) (54 )
Depreciation (5 ) (5 ) (10 ) (12 )
Operating and other income 28 35 58 70
--------------------
(1) ManChief is included until April 30, 2004.
(2) Other revenue includes Cancarb Thermax and natural gas sales. Other cost of
sales includes the cost of natural gas sold.
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Western Operations Sales Volumes (1)
(unaudited) Three months ended June 30 Six months ended June 30
(GWh) 2005 2004 2005 2004
Supply
Generation 511 390 1,147 752
Purchased
Sundance A & B PPAs 1,713 1,885 3,544 3,696
Other purchases (2) 614 654 1,345 1,357
2,838 2,929 6,036 5,805
Contracted vs. Spot
Contracted 2,462 2,677 5,147 5,355
Spot 376 252 889 450
2,838 2,929 6,036 5,805
--------------------
(1) ManChief is included until April 30, 2004.
(2) Includes Sheerness Power Purchase Arrangement (PPA) volumes.
Western Operations' operating and other income of $28 million and $58 million
for the three and six months ended June 30, 2005 was $7 million and $12 million
lower, respectively, compared to the same periods in 2004. The decreases were
mainly due to fee revenues earned in second quarter 2004 on the sale of ManChief
and Curtis Palmer to Power LP and reduced margins resulting from lower market
heat rates on uncontracted volumes of power generated. Lower market heat rates
were the result of weak spot market power prices in Alberta that averaged
approximately $9 per megawatt hour (MWh) less in second quarter 2005 and $6 per
MWh less for the six months ended June 30, 2005, compared to the same periods in
2004, while average natural gas prices were slightly higher. A significant
portion of plant generation in Western Operations is sold under long-term
contract to mitigate price risk. Some output is intentionally not committed
under long-term contract to assist in managing Power's overall portfolio of
generation. This approach to portfolio management assists in minimizing costs
in situations where TCPL would otherwise have to purchase electricity in the
open market to fulfill its contractual obligations.
Western Operations' power sales revenues and power cost of sales decreased in
second quarter 2005 primarily due to lower plant availability as a result of
maintenance outages at Sundance B. Power sales revenues also decreased as a
result of lower contracted and spot market prices realized in second quarter
2005. Partially offsetting this decrease were revenues from the 2004 start-up
of the MacKay River facility. Other costs and expenses were higher in second
quarter 2005 primarily due to operating costs associated with the MacKay River
facility. Generation volumes in second quarter 2005 increased 121 gigawatt
hours (GWh) to 511 GWh primarily due to the start-up of the MacKay River
facility, partially offset by a decrease in volumes associated with unplanned
outages at the Bear Creek cogeneration facility.
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In second quarter 2005, approximately 13 per cent of power sales volumes were
sold into the spot market compared to approximately nine per cent for the same
period in 2004. To reduce its exposure to spot market prices on uncontracted
volumes, as at June 30, 2005, Western Operations had fixed price sales contracts
to sell forward approximately 5,100 GWh for the remainder of 2005 and
approximately 8,000 GWh for 2006.
Eastern Operations
Eastern Operations Results-at-a-Glance (1)
(unaudited) Three months ended June 30 Six months ended June 30
(millions of dollars) 2005 2004 2005 2004
Revenue
Power 129 130 244 276
Other (2) 73 52 143 117
202 182 387 393
Cost of sales
Power (51 ) (66 ) (113 ) (145 )
Other (2) (74 ) (49 ) (139 ) (105 )
(125 ) (115 ) (252 ) (250 )
Other costs and expenses (32 ) (40 ) (81 ) (75 )
Depreciation (6 ) (5 ) (10 ) (12 )
Operating and other income 39 22 44 56
--------------------
(1) Curtis Palmer is included until April 30, 2004.
(2) Other includes natural gas.
Eastern Operations Sales Volumes (1)
(unaudited) Three months ended June 30 Six months ended June 30
(GWh) 2005 2004 2005 2004
Supply
Generation 962 423 1,406 800
Purchased 494 1,051 1,305 2,285
1,456 1,474 2,711 3,085
Contracted vs. Spot
Contracted 1,228 1,456 2,417 3,000
Spot 228 18 294 85
1,456 1,474 2,711 3,085
--------------------
(1) Curtis Palmer is included until April 30, 2004.
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Operating and other income in second quarter 2005 from Eastern Operations of $39
million was $17 million higher compared to $22 million earned in the same period
in 2004. The increase was due primarily to income from the acquisition of
hydroelectric generation assets (hydro assets) from USGen on April 1, 2005 and
from the Grandview cogeneration facility which was placed in service in January
2005. Partially offsetting these increases was the loss of income associated
with the sale of the Curtis Palmer hydroelectric facilities to Power LP in April
2004.
Operating and other income for the six months ended June 30, 2005 was $44
million or $12 million lower than the $56 million earned in 2004. Income from
the acquisition of the hydro assets and income from the Grandview cogeneration
facility were more than offset by a $16 million pre-tax ($10 million after-tax)
contract restructuring payment made by Ocean State Power (OSP) to its natural
gas fuel suppliers in first quarter 2005 and a $16 million pre-tax ($10 million
after-tax) reduction in income as a result of the sale of Curtis Palmer to Power
LP in April 2004. The contract restructuring at OSP reduced the term of the
long-term gas supply contracts with its suppliers by approximately three years
(now ending in October 2008) and adjusted the pricing to track spot pricing of
natural gas at the Niagara delivery point versus the previously arbitrated
pricing that had resulted in above-market cost of gas for OSP.
Generation volumes in second quarter 2005 increased 539 GWh to 962 GWh compared
to 423 GWh in 2004 primarily due to the acquisition of the hydro assets and the
placing in-service of the Grandview cogeneration facility. Partially offsetting
these increases were decreases in volumes associated with the sale of the Curtis
Palmer hydroelectric facility to Power LP in April 2004 and reduced generation
from the OSP facility.
Power sales revenues of $129 million and sales volumes of 1,456 GWh for second
quarter 2005 were consistent with the same period in 2004. Power sales revenues
and volumes sold from the new hydro assets and Grandview were offset by the loss
of revenues and volumes from the sale of Curtis Palmer, the expiration of
long-term sales contracts held at the end of 2004 which did not carry-over into
2005, and an unplanned outage at OSP. This outage is expected to continue into
third quarter 2005. Realized average power prices were consistent in second
quarter of 2004 and 2005. Power cost of sales of $51 million and purchased
volumes of 494 GWh were lower in second quarter 2005 due to the impact of the
purchase of the hydro assets. Volumes generated from the hydro assets reduced
some of the requirement to purchase power to fulfill contractual sales
obligations. Other revenue and cost of sales increased year-over-year primarily
as a result of gas purchased and resold from new gas supply contracts at OSP.
Other costs and expenses of $32 million, which includes fuel gas
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consumed in generation, decreased $8 million primarily due to lower fuel costs
from reduced dispatch at the OSP facility.
In second quarter 2005, approximately 16 per cent of power sales volumes were
sold into the spot market compared to approximately one per cent in 2004
reflecting the sale to the spot market of a portion of the generation of the the
hydro assets acquired on April 1, 2005. Eastern Operations is focused on
selling the majority of its power under contract to wholesale, commercial and
industrial customers while managing a portfolio of power supplies sourced from
its own generation, wholesale power purchases and power purchased from Power
LP's Castleton plant. To reduce its exposure to spot market prices, as at June
30, 2005, Eastern Operations had entered into fixed price sales contracts to
sell forward approximately 2,800 GWh of power for the remainder of 2005 and
approximately 3,300 GWh of power for 2006. Certain contracted volumes are
dependent on customer usage levels.
Bruce Power Investment
Bruce Power Results-at-a-Glance
(unaudited) Three months ended June 30 Six months ended June 30
(millions of dollars) 2005 2004 2005 2004
Bruce Power (100 per cent basis)
Revenues 393 434 811 833
Operating expenses
Cash costs (materials, labour, services and fuel) (287 ) (243 ) (552 ) (462 )
Non-cash costs (depreciation and amortization) (49 ) (43 ) (97 ) (74 )
(336 ) (286 ) (649 ) (536 )
Operating income 57 148 162 297
Financial charges (17 ) (15 ) (34 ) (33 )
Income before income taxes 40 133 128 264
TCPL's interest in Bruce Power income before income 12 42 40 83
taxes
Adjustments 1 6 3 13
TCPL's income from Bruce Power before income taxes 13 48 43 96
TCPL's share of Bruce Power's income before income taxes (equity income) was
lower by $35 million in second quarter 2005 compared to second quarter 2004
primarily due to lower generation volumes and higher costs resulting from a
planned maintenance outage on Unit 7 (54 days) and Unit 4 (27 days) and an
unplanned maintenance outage on Unit 6 (29 days) relating to a transformer fire
outside the generating facility. Higher realized power prices in second quarter
2005 partially offset the reduction in revenues from lower generation volumes
and an increase in outage and operating costs.
TCPL's share of power output from Bruce Power for second quarter 2005 was 2,306
GWh compared to 2,962 GWh in second quarter 2004. This decrease primarily
reflects lower output in 2005 as a result of an increase in planned maintenance
outages compared to second
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quarter 2004 as well as lost output as a result of the Unit 6 transformer fire
outage in second quarter 2005. On April 15, 2005, Bruce Power experienced a
transformer fire outside of the generating facility. As a result, Unit 6 went
offline and, after the successful replacement of its main output transformer,
was returned to service on May 14, 2005.
Approximately 81 reactor days of planned maintenance outages as well as 57
reactor days of unplanned outages (including the Unit 6 outage of 29 days)
occurred in second quarter 2005. In second quarter 2004, Bruce Power
experienced 36 reactor days of planned maintenance outages and four reactor days
of unplanned outages. The Bruce units ran at an average availability of 71 per
cent in second quarter 2005, compared to a 92 per cent average availability
during second quarter 2004. Unit 4 returned to service on April 28, 2005
following a planned maintenance inspection that began on March 12, 2005. Unit 7
was taken offline on May 7, 2005 to begin its planned maintenance outage,
including the completion of major Spacer Location and Relocation work and
turbine replacement, which is expected to last about three months.
Overall prices achieved during second quarter 2005 were $53 per MWh, compared to
$46 per MWh in second quarter 2004. Prices realized for the six months ending
June 30, 2005 were $51 per MWh compared to $47 per MWh for the same period in
2004. Approximately 49 per cent of the available output was sold into Ontario's
wholesale spot market during the first six months of 2005 with the remainder
being sold under longer term contracts. Bruce Power's operating expenses
increased to $46 per MWh in second quarter 2005 from $30 per MWh in second
quarter 2004. This $16 per MWh increase was due to reduced output and increased
outage costs, primarily related to the Unit 7 and Unit 4 planned maintenance
outages as well as the forced outage at Unit 6. Adjustments to TCPL's interest
in Bruce Power's income before income taxes for the three and six months ended
June 30, 2005 were lower than in 2004 primarily due to lower amortization of the
purchase price allocated to the fair value of sales contracts in place at the
time of acquisition. The six months ended June 30, 2005 adjustment was also
lower due to the cessation of interest capitalization upon the return to service
of Unit 3 in March 2004.
Pre-tax equity income for the six months ended June 30, 2005 was $43 million
compared to $96 million for the same period in 2004. Effective March 1, 2004,
Bruce Power moved from a five-unit operation to a six-unit operation with the
commercial startup of Unit 3. Planned maintenance outages, as well as the
forced outage due to the April 15, 2005 transformer fire at Unit 6 and other
minor forced outages, reduced the otherwise potential increase in total plant
output as a result of adding a sixth operating unit. This lower output
resulted in reduced sales revenue from that
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achieved in 2004 which was partially offset by higher realized sales prices for
the six months ended June 30, 2005. Bruce Power's operating expenses increased
to $42 per MWh for the six months ended June 30, 2005 from $31 per MWh for the
same period in 2004. This was the result of reduced output as well as higher
maintenance costs, higher depreciation and lower capitalization of labour and
other in-house costs following the restart of Unit 3.
Equity income from Bruce Power is directly impacted by fluctuations in wholesale
spot market prices for electricity as well as overall plant availability, which
in turn, is impacted by scheduled and unscheduled maintenance. To reduce its
exposure to spot market prices, Bruce Power has entered into fixed price sales
contracts for approximately 36 per cent of planned output for the balance of
2005. Bruce Power expects a two month planned maintenance outage on Unit 5 in
fourth quarter 2005. Overall plant availability for Bruce Power in 2005 is
expected to remain at 83 per cent.
In June 2005, Bruce Power made a $50 million cash distribution to its partners
(TCPL's share was $16 million). The partners have agreed that all excess cash
will be distributed on a monthly basis and that separate cash calls will be made
for major capital projects.
Bruce Power continues to negotiate an agreement with the Ontario government for
the potential restart of Units 1 and 2 at Bruce Power.
Power LP Investment
Power LP's operating and other income of $8 million and $17 million for the
three and six months ended June 30, 2005, was $2 million and $1 million higher,
respectively, compared to the same
periods in 2004. The increase was primarily due to additional earnings from
Power LP's 2004 acquisitions of the Curtis Palmer, ManChief, Mamquam and Queen
Charlotte facilities. Partially offsetting this increase was TCPL's reduced
ownership interest in Power LP in 2004 and the effect of the recognition in
second quarter 2004 of all previously deferred gains resulting from the removal
of the Power LP redemption obligation. Prior to the removal of the redemption
obligation, TCPL was recognizing the amortization of these deferred gains into
income over a period through to 2017.
General, Administrative, Support Costs and Other
General, administrative, support costs and other of $26 million in second
quarter 2005 and $51 million for the six months ended June 30, 2005 were both $2
million higher compared to the same periods
13
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in 2004 primarily due to the negative impact of TCPL's proportionate share of
Power LP's unrealized foreign exchange losses on its U.S. dollar denominated
debt.
Power Sales Volumes and Plant Availability
Power SalesVolumes
(unaudited) Three months ended June 30 Six months ended June 30
(GWh) 2005 2004 2005 2004
Western operations (1) 2,838 2,929 6,036 5,805
Eastern operations (1) 1,456 1,474 2,711 3,085
Bruce Power investment (2) 2,306 2,962 4,904 5,492
Power LPinvestment (1) (3) 723 536 1,420 1,108
Total 7,323 7,901 15,071 15,490
--------------------
(1) ManChief and Curtis Palmer volumes are included in Power LP investment
effective April 30, 2004.
(2) Sales volumes reflect TCPL's 31.6 per cent share of Bruce Power output.
(3) TCPL operates and manages Power LP. The volumes in the table represent
100 percent of Power LP's sales volumes.
Weighted Average Plant Availability (1) Three months ended June 30 Six months ended June 30
(unaudited) 2005 2004 2005 2004
Western operations (2) 83 % 93 % 88 % 96 %
Eastern operations (2) 80 % 95 % 79 % 97 %
Bruce Power investment (3) 71 % 92 % 76 % 86 %
Power LP investment (2) 87 % 96 % 92 % 97 %
All plants, excluding Bruce Power investment 83 % 95 % 86 % 97 %
All plants 79 % 94 % 82 % 92 %
--------------------
(1) Plant availability represents the percentage of time in the period that
the plant is available to generate power, whether actually running or not
and is reduced by planned and unplanned outages.
(2) ManChief and Curtis Palmer are included in Power LP investment effective
April 30, 2004.
(3) Unit 3 is included effective March 1, 2004.
Corporate
Net expenses for the three and six months ended June 30, 2005 were $8 million
and $17 million, respectively, compared to net expenses of $7 million for each
of the corresponding periods in 2004.
For the three months ended June 30, 2005, net expenses were comparable to the
same period in the prior year. Income tax refunds and positive tax adjustments
in second quarter 2005 were offset by tax adjustments recorded in second quarter
2004 and higher interest expense on long-term debt that was issued in late 2004
and on higher commercial paper balances in 2005.
The $10 million increase for the six months ended June 30, 2005 compared to the
same period in 2004 was primarily due to increased
14
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interest expense on long-term debt that was issued in 2004 as well as on higher
commercial paper balances in 2005. Income tax refunds and related interest in
the six months ended June 30, 2004 were comparable to income tax refunds and
positive tax adjustments recorded in the six months ended June 30, 2005.
Liquidity and Capital Resources
Funds Generated from Operations
Funds generated from operations were $478 million and $885 million for the three
and six months ended June 30, 2005, respectively, compared with $382 million and
$797 million for the same periods in 2004.
TCPL expects that its ability to generate adequate amounts of cash in the short
term and the long term, when needed, and to maintain financial capacity and
flexibility to provide for planned growth remains substantially unchanged since
December 31, 2004.
Investing Activities
In the three and six months ended June 30, 2005, capital expenditures, excluding
acquisitions, totalled $135 million (2004 - $93 million) and $243 million (2004
- $194 million), respectively, and related primarily to construction of new
power plants, and maintenance and capacity capital in the Gas Transmission
business.
In the three and six months ended June 30, 2005, disposition of assets generated
$2 million (2004 - $408 million) and $153 million (2004 - $408 million),
respectively. The disposition in 2005 related to the sale of PipeLines LP units
and the dispositions in 2004 related primarily to the sale of ManChief and
Curtis Palmer to Power LP.
Acquisitions for the three and six months ended June 30, 2005 were $632 million
(2004 - $14 million) and related to the purchase of USGen hydro assets and the
acquisition of an additional 3.52 per cent interest in Iroquois Gas Transmission
System L.P. (Iroquois).
Financing Activities
TCPL retired $615 million and $936 million of long-term debt in the three and
six months ended June 30, 2005, respectively. TCPL issued $499 million and $799
million of long-term debt in the three and six months ended June 30, 2005,
respectively. Please refer to Other Recent Developments - Other for further
information on long-term debt. For the six months ended June 30, 2005,
outstanding notes payable increased by $533 million, while cash and short-term
investments increased by $22 million.
15
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Dividends
On July 28, 2005, TCPL's Board of Directors declared a dividend for the quarter
ending September 30, 2005 in an aggregate amount equal to the aggregate
quarterly dividend to be paid on October 31, 2005 by TransCanada Corporation on
the issued and outstanding common shares as at the close of business on
September 30, 2005. The Board also declared regular dividends on TCPL's
preferred shares.
Contractual Obligations
Primarily as a result of new contracts in the six months ended June 30, 2005,
Power's future purchase obligations are estimated at June 30, 2005 to be as
follows.
Purchase Obligations
(unaudited - millions of dollars) 2005 (1) 2006 2007 2008 2009 2010+
Power
Commodity purchases (2) 393 632 627 556 278 2,658
Capital expenditures (3) 269 181 66 1 1 -
Other (4) 24 43 32 23 28 113
686 856 725 580 307 2,771
--------------------
(1) Includes purchase obligations for the six months ending December 31, 2005.
(2) Commodity purchases include fixed and variable components. The variable
components are estimates and are subject to variability in plant
production, market prices, and regulatory tariffs.
(3) Amounts are estimates and are subject to variability based on timing of
construction and project enhancements.
(4) Includes estimates of certain amounts which are subject to change depending
on plant fired hours, the consumer price index, actual plant maintenance
costs, plant salaries as well as changes in regulated rates for
transportation.
There have been no other material changes to TCPL's contractual obligations from
December 31, 2004 to June 30, 2005, including payments due for the next five
years and thereafter. For further information on these contractual obligations,
refer to the MD&A in TCPL's 2004 Annual Report.
Financial and Other Instruments
The following represents the material changes to the company's financial
instruments since December 31, 2004.
Energy Price Risk Management
The company executes power, natural gas and heat rate derivatives in order to
manage exposure and risks associated with its overall asset portfolio. Heat
rate contracts are contracts for the sale
16
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or purchase of power that are priced based on a natural gas index. The fair
values and notional volumes of the swap, option, future and heat rate contracts
are shown in the tables below. In accordance with the company's accounting
policy, each of the derivatives in the table below is recorded on the balance
sheet at its fair value at June 30, 2005 and December 31, 2004.
Power
June 30, 2005
(unaudited) December 31,
2004
Asset/(Liability) Accounting Fair Fair
(millions of dollars) Treatment Value Value
Power - swaps
(maturing 2005 to 2011) Hedge (60 ) 7
(maturing 2005 to 2010) Non-hedge 2 (2 )
Gas - swaps, futures and options
(maturing 2005 to 2016) Hedge (27 ) (39 )
(maturing 2005 to 2006) Non-hedge 1 (2 )
Heat rate contracts
(maturing 2005 to 2006) Hedge - (1 )
17
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Notional Volumes
June 30, 2005 Accounting Power (GWh) Gas (Bcf)
(unaudited) Treatment Purchases Sales Purchases Sales
Power - swaps
(maturing 2005 to 2011) Hedge 1,299 7,177 - -
(maturing 2005 to 2010) Non-hedge 878 - - -
Gas - swaps, futures and options
(maturing 2005 to 2016) Hedge - - 85 73
(maturing 2005 to 2006) Non-hedge - - 5 7
Heat rate contracts
(maturing 2005 to 2006) Hedge - 55 - -
Notional Volumes Accounting Power (GWh) Gas (Bcf)
December 31, 2004 Treatment Purchases Sales Purchases Sales
Power - swaps Hedge 3,314 7,029 - -
Non-hedge 438 - - -
Gas - swaps, futures and options Hedge - - 80 84
Non-hedge - - 5 8
Heat rate contracts Hedge - 229 2 -
Risk Management
TCPL's market, financial and counterparty risks remain substantially unchanged
since December 31, 2004. For further information on risks, refer to the MD&A in
TCPL's 2004 Annual Report.
Controls and Procedures
As of the end of the period covered by this quarterly report, TCPL's management,
together with TCPL's President and Chief Executive Officer and Chief Financial
Officer, evaluated the effectiveness of the design and operation of the
company's disclosure controls and procedures. Based on this evaluation, the
President and Chief Executive Officer and the Chief Financial
18
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Officer of TCPL have concluded that the disclosure controls and procedures are
effective.
There were no changes in TCPL's internal control over financial reporting during
the most recent fiscal quarter that have materially affected or are reasonably
likely to materially affect TCPL's internal control over financial reporting.
Critical Accounting Policy
TCPL's critical accounting policy, which remains unchanged since December 31,
2004, is the use of regulatory accounting for its regulated operations. For
further information on this critical accounting policy, refer to the MD&A in
TCPL's 2004 Annual Report.
Critical Accounting Estimates
Since a determination of many assets, liabilities, revenues and expenses is
dependent upon future events, the preparation of the company's consolidated
financial statements requires the use of estimates and assumptions which have
been made using careful judgment. TCPL's critical accounting estimate from
December 31, 2004 continues to be depreciation expense. For further information
on this critical accounting estimate, refer to the MD&A in TCPL's 2004 Annual
Report.
Accounting Change
Financial Instruments - Disclosure and Presentation
Effective January 1, 2005, the company adopted the provisions of the Canadian
Institute of Chartered Accountants' amendment to the existing Handbook Section "
Financial Instruments - Disclosure and Presentation" which provides guidance
for classifying certain financial instruments that embody obligations that may
be settled by issuance of the issuer's equity shares as debt when the instrument
does not establish an ownership relationship. In accordance with this
amendment, TCPL reclassified the non-controlling interest component of preferred
securities as long-term debt.
This accounting change was applied retroactively with restatement of prior
periods. The impact of this change on TCPL's net income in second quarter 2005
and prior periods was nil.
The impact of the accounting change on the company's consolidated balance sheet
as at December 31, 2004 is as follows.
19
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(unaudited - millions of dollars) Increase/
(Decrease)
Deferred Amounts (1) 135
Preferred Securities 535
Non-Controlling Interest Preferred securities of subsidiary (670 )
Total Liabilities and Shareholders' Equity -
--------------------
(1) Regulatory deferral
U.S. GAAP Restatement
In second quarter 2005, the company restated Note 23 (U.S. GAAP) to the 2004
consolidated financial statements. TCPL records its investment in Power LP using
the proportionate consolidation method for Canadian generally accepted
accounting principles (GAAP) purposes and as an equity investment for U.S. GAAP
purposes. During the period from 1997 to April 2004, the company was obligated
to fund the redemption of Power LP units in 2017. As a result, under both
Canadian and U.S. GAAP, TCPL accounted for the issuance of units by Power LP to
third parties as a sale of a future net revenue stream and the resulting gains
were deferred and amortized to income over the period to 2017. The redemption
obligation was removed in April 2004 and the unamortized gains were recognized
as income.
For U.S. GAAP purposes, under the provisions of the U.S. Securities and Exchange
Commission's Staff Accounting Bulletin Topic 5:H, certain transactions involving
Power LP, in the period 1997 to 2001, should have been accounted for as dilution
gains rather than as sales of a future net revenue stream. As the company was
committed to fund the redemption of the Power LP units, these gains should have
been recorded, on an after-tax basis, as equity transactions in shareholders'
equity. This has been corrected on a retroactive basis. The correction had no
impact on the accumulated shareholders' equity at December 31, 2004 for U.S.
GAAP purposes. The impact on previously reported income amounts for U.S. GAAP
purposes is as follows.
(millions of dollars) 2004 2003 2002
Decrease in:
Income from continuing operations 135 10 10
Net Income Applicable to Common Shares 135 10 10
TCPL's restated 2004 audited consolidated financial statements will be available
in Canada on SEDAR at www.sedar.com and in the U.S. on EDGAR at www.sec.gov.
under TransCanada PipeLines Limited and are available on the company's website
at www.transcanada.com.
20
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Outlook
In 2005, the company expects higher net income from the Gas Transmission segment
than originally anticipated as a result of the $49 million after-tax gain
related to the sale of PipeLines LP units. In addition, the company expects
higher Power net income in 2005 than originally anticipated as a result of the
expected gains on sale of the Power LP of approximately $200 million after tax
and the company's investment in PT Paiton Energy Company (Paiton Energy) of
approximately $115 million after tax. For further information on these
transactions, please refer to Other Recent Developments. Excluding these
impacts, the company's outlook is relatively unchanged since December 31, 2004.
For further information on outlook, refer to the MD&A in TCPL's 2004 Annual
Report.
In 2005, TCPL will continue to direct its resources towards long-term growth
opportunities that will strengthen its financial performance and create
long-term value for shareholders. The company's net income and cash flow
combined with a strong balance sheet continue to provide the financial
flexibility for TCPL to make disciplined investments in its core businesses of
Gas Transmission and Power.
Credit ratings on TransCanada PipeLines Limited's senior unsecured debt assigned
by Dominion Bond Rating Service Limited (DBRS), Moody's Investors Service
(Moody's) and Standard & Poor's are currently A, A2 and A-, respectively. DBRS
and Moody's both maintain a 'stable' outlook on their ratings and Standard &
Poor's maintains a 'negative' outlook on its rating.
Other Recent Developments
Gas Transmission
Wholly-Owned Pipelines
Canadian Mainline
In November 2004, the Canadian Association of Petroleum Producers (CAPP) filed
an application with the NEB to review and vary its decision on the Canadian
Mainline's 2004 Tolls and Tariff Application with respect to three items:
* non-renewable firm transportation (FT-NR) service;
* long-term incentive compensation; and
* regulatory and legal costs.
On February 18, 2005, the NEB decided to review its decision on the tolls to be
charged for FT-NR, not to review its decision on disputed regulatory and legal
costs and, at CAPP's request, to
21
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defer its consideration of a review of its decision regarding long-term
incentive compensation. On April 13, 2005, CAPP filed notice with the NEB to
withdraw the portion of its application dealing with long-term incentive
compensation. The NEB heard oral arguments in Calgary in late April 2005 to
consider tolling issues with respect to FT-NR. In a decision issued May 30,
2005, the NEB overturned its initial ruling that FT-NR be tolled on a biddable
basis with a floor price equal to the 100 per cent load factor toll for Firm
Transportation (FT) Service and determined that it should be offered at the same
toll as FT.
In April 2005, TCPL received the NEB's decision on the Canadian Mainline's 2004
Tolls and Tariff Application (Phase II). The NEB, in its decision, approved an
increase in the deemed common equity component of the Canadian Mainline's
capital structure from 33 per cent to 36 per cent for 2004 which is also
effective for 2005 under the 2005 tolls settlement with shippers. This increase
in the common equity component is expected to increase TCPL's 2005 net earnings
by approximately $29 million, of which $13 million relates to 2004 and $16
million relates to 2005.
The return on equity for the Canadian Mainline remains at 9.56 per cent for 2004
and 9.46 per cent for 2005.
On May 30, 2005, in compliance with the NEB's decision regarding TCPL's 2004
Mainline Tolls and Tariff Application(Phase II), TCPL filed a separate final
tolls application with the NEB for 2004 and 2005. On June 23, 2005, the NEB
issued its decision approving the 2004 and 2005 final tolls applications as
filed.
Alberta System
On June 7, 2005, the EUB granted approval of a negotiated settlement for the
Alberta System's 2005-2007 Revenue Requirement. As stipulated in the settlement,
following the approval of the settlement, TCPL withdrew its motion filed with
the Alberta Court of Appeal for leave to appeal Decision 2004-069 which dealt
with Phase I of the 2004 General Rate Application (GRA). TCPL also agreed that
it would not pursue a review and variance application on the EUB's findings
regarding incentive compensation and long-term incentive costs.
TCPL will continue to charge interim tolls for 2005 for transportation service
on the Alberta System. The interim tolls, approved by the EUB in December 2004,
will remain in effect until final tolls are established following the Phase II
proceeding of the Alberta System's 2005 GRA. In this second phase of the EUB's
rate making process, the allocation of 2005 approved costs among transportation
services and rate design are determined. The EUB has scheduled a hearing for
Phase II during fourth quarter 2005.
22
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Other Gas Transmission
Tamazunchale Pipeline Project
In June 2005, Mexico's Comision Federal de Eletricidad (CFE) awarded a contract
to TCPL to construct, own and operate a 36 inch, 125 kilometre natural gas
pipeline in east central Mexico. The Tamazunchale Pipeline will extend from the
facilities of Pemex Gas near Naranjos, Veracruz and transport natural gas under
a 26 year contract with the CFE to an electricity generation station near
Tamazunchale, San Luis Potosi. This approximately US$181 million project will
initially transport volumes of 170 million cubic feet per day (mmcf/d). Under
the terms of the contract, the capacity of the Tamazunchale Pipeline will be
expanded to 430 mmcf/d commencing in 2009 to meet additional requirements of two
additional proposed power plants near Tamazunchale. TCPL has commenced project
and construction activities with a planned in-service date of December 1, 2006.
Iroquois
In June 2005, TCPL closed the acquisition of a 3.52 per cent ownership interest
in Iroquois from a subsidiary of Goldman Sachs & Co. for US$13.6 million,
subject to post-closing adjustments. This acquisition increased TCPL's
ownership interest in Iroquois from 40.96 per cent to 44.48 per cent.
Power
USGen New England, Inc.
On April 1, 2005, TCPL closed its acquisition of hydroelectric generation
assets, with total generating capacity of 567 megawatts (MW), from USGen for
US$505 million, subject to closing adjustments.
There was an existing agreement in place between the Town of Rockingham (the
Town) and USGen which provided the Town with an option to purchase the 49MW
Bellows Falls facility for US$72 million. The option was exercised in December
2004 and the Town assigned its rights and obligations under the option agreement
to the Vermont Hydroelectric Power Authority (Vermont Hydroelectric). TCPL
assumed the obligations of USGen under the
23
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option on April 1, 2005. Although the option was exercised, closing remains
subject to certain regulatory approvals as well as other conditions specified in
the option agreement. The Vermont Public Service Board issued its approval in
June 2005, which approval was conditioned on a further vote of Town residents in
which at least a majority of the votes cast had to approve the transaction. On
July 12, 2005, the vote took place but did not achieve the requisite majority.
That rejection does not, of itself, terminate the option. The Town is scheduled
to have another vote on this matter in August 2005.
Power LP
In May 2005, TCPL announced that it had entered into an agreement with EPCOR
Utilities Inc. (EPCOR) whereby EPCOR will purchase TCPL's interest in Power LP
for $529 million. EPCOR's acquisition includes 14.5 million units of Power LP,
representing 30.6 per cent of the outstanding units; 100 per cent ownership of
the General Partner of Power LP; and management and operations' agreements
governing the ongoing operation of Power LP's generation assets.
The Boards of Directors of each of TCPL, EPCOR and Power LP have approved this
transaction. This transaction is expected to close in third quarter 2005 pending
receipt of regulatory approvals. TCPL expects to realize an after-tax gain of
approximately $200 million from this sale. TCPL will continue to operate and
maintain Power LP's power plants until closing.
Paiton Energy
In June 2005, TCPL reached an agreement to sell its approximate 11 per cent
interest in Paiton Energy to subsidiaries of The Tokyo Electric Power Company
for US$103 million ($127 million), subject to adjustments. TCPL originally
purchased its interest in Paiton Energy in 1996. Paiton Energy owns two 615
megawatt coal-fired plants in East Java, Indonesia. Pending various approvals,
this transaction is expected to close in third quarter 2005. Upon closing, TCPL
expects to realize an after-tax gain of approximately $115 million.
Other
On June 1, 2005, Gas Transmission Northwest Corporation (GTNC) redeemed all of
its outstanding US$150 million 7.80 per cent Senior Unsecured Debentures
(Debentures) and US$250 million 7.10 per cent Senior Unsecured Notes. As a
consequence, upon application by GTNC, the Debentures were de-listed from the
New York Stock Exchange and GTNC no longer has any securities registered under
U.S. securities laws.
24
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On June 1, 2005, GTNC completed a US$400 million multi-tranche private placement
of senior debt with a weighted average interest rate of 5.28 per cent and
weighted average life of approximately 18 years.
Share Information
As at June 30, 2005, TCPL had 483,344,109 issued and outstanding common shares.
In addition, there were 4,000,000 Series U and 4,000,000 Series Y Cumulative
First Preferred Shares issued and outstanding as at June 30, 2005.
25
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Exhibit 13.2
SECOND QUARTER REPORT 2005
Selected Quarterly Consolidated Financial Data (1)
(unaudited) 2005 2004 2003
(millions of dollars except per Second First Fourth Third Second First Fourth Third
share amounts)
Revenues 1,444 1,407 1,478 1,307 1,344 1,356 1,375 1,454
Net Income applicable to common
shares
Continuing operations 199 232 184 192 388 214 193 198
Discontinued operations - - - 52 - - - 50
199 232 184 244 388 214 193 248
Share Statistics
Net income per share - Basic
and diluted
Continuing operations $ 0.41 $ 0.48 $ 0.38 $ 0.40 $ 0.81 $ 0.44 $ 0.40 $ 0.41
Discontinued operations - - - 0.11 - - - 0.11
$ 0.41 $ 0.48 $ 0.38 $ 0.51 $ 0.81 $ 0.44 $ 0.40 $ 0.52
--------------------
(1) The selected quarterly consolidated financial data has been prepared in
accordance with Canadian GAAP. For a discussion on the factors affecting the
comparability of the financial data, including discontinued operations, refer to
Note 1 and Note 22 of TCPL's restated 2004 audited consolidated financial
statements.
Factors Impacting Quarterly Financial Information
In the Gas Transmission business, which consists primarily of the company's
investments in regulated pipelines, annual revenues and net income from
continuing operations (net earnings) fluctuate over the long term based on
regulators' decisions and negotiated settlements with shippers. Generally,
quarter over quarter revenues and net earnings during any particular fiscal year
remain relatively stable with fluctuations arising as a result of adjustments
being recorded due to regulatory decisions and negotiated settlements with
shippers and due to items outside of the normal course of operations.
In the Power business, which consists primarily of the company's investments in
electrical power generation plants, quarter over quarter revenues and net
earnings are affected by seasonal weather conditions, customer demand, market
prices, planned and unplanned plant outages as well as items outside of the
normal course of operations.
Significant items which impacted the last eight quarters' net earnings are as
follows.
* Third quarter 2003 net earnings included TCPL's $11 million share of a
positive future income tax benefit adjustment recognized by TransGas.
1
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* First quarter 2004 net earnings included approximately $12 million of
income tax refunds and related interest.
* Second quarter 2004 net earnings included after-tax gains related to Power
LP of $187 million, of which $132 million were previously deferred and were
being amortized into income to 2017.
* In third quarter 2004, the EUB's decisions on the Generic Cost of Capital
and Phase I of the 2004 GRA resulted in lower earnings for the Alberta
System compared to the previous quarters. In addition, third quarter 2004
included a $12 million after-tax adjustment related to the release of
previously established restructuring provisions and recognition of
$8 million of non-capital loss carry forwards.
* In fourth quarter 2004, TCPL completed the acquisition of GTN and recorded
$14 million of net earnings from the November 1, 2004 acquisition date.
Power recorded a $16 million pre-tax positive impact of a restructuring
transaction related to power purchase contracts between OSP and Boston
Edison in Eastern Operations.
* In first quarter 2005, net earnings included a $48 million after-tax gain
related to the sale of PipeLines LP units. Power earnings included a $10
million after-tax cost for the restructuring of natural gas supply
contracts by OSP. In addition, Bruce Power's equity income was lower
than previous quarters due to the impact of planned maintenance outages and
the increase in operating costs as a result of moving to a six-unit
operation.
* Second quarter 2005 net earnings included $21 million ($13 million related
to 2004 and $8 million related to the six months ended June 30, 2005) with
respect to the NEB's decision on TCPL's 2004 Mainline Tolls and Tariff
Application (Phase II). On April 1, 2005, TCPL completed the acquisition
of hydro assets from USGen. Bruce Power's equity income was lower than
previous quarters due to the continuing impact of planned maintenance
outages and an unplanned maintenance outage on Unit 6 relating to a
transformer fire.
2
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Forward-Looking Information
Certain information in this quarterly report is forward-looking and is subject
to important risks and uncertainties. The results or events predicted in this
information may differ from actual results or events. Factors which could cause
actual results or events to differ materially from current expectations include,
among other things, the ability of TCPL to successfully implement its strategic
initiatives and whether such strategic initiatives will yield the expected
benefits, the availability and price of energy commodities, regulatory
decisions, competitive factors in the pipeline and power industry sectors, and
the prevailing economic conditions in North America. For additional information
on these and other factors, see the reports filed by TCPL with Canadian
securities regulators and with the United States Securities and Exchange
Commission. TCPL disclaims any intention or obligation to update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
3
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Consolidated Income
(unaudited) Three months ended June 30 Six months ended June 30
(millions of dollars) 2005 2004 2005 2004
Revenues 1,444 1,344 2,851 2,700
Operating Expenses
Cost of sales 245 242 510 491
Other costs and expenses 423 398 844 773
Depreciation 253 232 503 464
921 872 1,857 1,728
Operating Income 523 472 994 972
Other Expenses/(Income)
Financial charges 209 211 416 418
Financial charges of joint ventures 16 16 32 30
Equity income (17 ) (59 ) (58 ) (117 )
Interest income and other (4 ) (10 ) (28 ) (25 )
Gain related to PipeLines LP (2 ) - (82 ) -
Gains related to Power LP - (197 ) - (197 )
Gain related to Millennium - (7 ) - (7 )
202 (46 ) 280 102
Income before Income Taxes and Non-Controlling 321 518 714 870
Interests
Income Taxes
Current 79 127 240 230
Future 38 (2 ) 26 21
117 125 266 251
Non-Controlling Interests - - 6 6
Net Income 204 393 442 613
Preferred Share Dividends 5 5 11 11
Net Income Applicable to Common Shares 199 388 431 602
See accompanying notes to the consolidated financial statements.
4
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Consolidated Cash Flows
(unaudited) Three months ended June 30 Six months ended June 30
(millions of dollars) 2005 2004 2005 2004
Cash Generated From Operations
Net income 204 393 442 613
Depreciation 253 232 503 464
Gain related to PipeLines LP, net of current tax (1 ) - (31 ) -
expense (Note 5)
Gains related to Power LP - (197 ) - (197 )
Gain related to Millennium - (7 ) - (7 )
Equity income lower than/(in excess of) distributions 8 (39 ) (26 ) (90 )
received
Pension funding (in excess of)/lower than expense (10 ) 13 (17 ) 1
Future income taxes 38 (2 ) 26 21
Non-controlling interests - - 6 -
Other (14 ) (11 ) (18 ) (8 )
Funds generated from operations 478 382 885 797
Increase in operating working capital (176 ) (38 ) (218 ) (82 )
Net cash provided by operations 302 344 667 715
Investing Activities
Capital expenditures (135 ) (93 ) (243 ) (194 )
Acquisitions, net of cash acquired (632 ) (14 ) (632 ) (14 )
Disposition of assets 2 408 153 408
Deferred amounts and other 5 33 (53 ) (16 )
Net cash (used in)/provided by investing activities (760 ) 334 (775 ) 184
Financing Activities
Dividends (154 ) (150 ) (300 ) (290 )
Advances from parent - - (75 ) -
Notes payable issued/(repaid), net 289 (72 ) 533 (301 )
Long-term debt issued 499 - 799 665
Reduction of long-term debt (615 ) (25 ) (936 ) (501 )
Non-recourse debt of joint ventures issued - 81 5 87
Reduction of non-recourse debt of joint ventures (14 ) (3 ) (21 ) (12 )
Partnership units of joint ventures issued - 88 - 88
Common shares issued - - 80 -
Net cash provided by/(used in) financing activities 5 (81 ) 85 (264 )
Effect of Foreign Exchange Rate Changes on Cash and 20 (1 ) 22 3
Short-Term Investments
(Decrease)/Increase in Cash and Short-Term Investments (433 ) 596 (1 ) 638
Cash and Short-Term Investments
Beginning of period 619 379 187 337
Cash and Short-Term Investments
End of period 186 975 186 975
Supplementary Cash Flow Information
Income taxes paid 115 91 307 252
Interest paid 238 221 428 393
See accompanying notes to the consolidated financial statements.
5
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Consolidated Balance Sheet
(millions of dollars) June 30, 2005 December 31,
(unaudited) 2004
ASSETS
Current Assets
Cash and short-term investments 186 187
Accounts receivable 537 627
Inventories 239 174
Other 153 120
1,115 1,108
Long-Term Investments 830 840
Plant, Property and Equipment 19,184 18,704
Other Assets 1,490 1,459
22,619 22,111
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Notes payable 1,079 546
Accounts payable 890 1,215
Accrued interest 220 214
Current portion of long-term debt 391 766
Current portion of non-recourse debt of joint ventures 73 83
2,653 2,824
Deferred Amounts 851 783
Long-Term Debt 10,014 9,713
Future Income Taxes 562 509
Non-Recourse Debt of Joint Ventures 798 779
Preferred Securities 564 554
15,442 15,162
Non-Controlling Interests 77 76
Shareholders' Equity
Preferred shares 389 389
Common shares 4,712 4,632
Contributed surplus 272 270
Retained earnings 1,788 1,653
Foreign exchange adjustment (61 ) (71 )
7,100 6,873
22,619 22,111
See accompanying notes to the consolidated financial statements.
6
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Consolidated Retained Earnings
Six months ended June 30
(unaudited)
(millions of dollars) 2005 2004
Balance at beginning of period 1,653 1,185
Net income 442 613
Preferred share dividends (11 ) (11 )
Common share dividends (296 ) (282 )
1,788 1,505
See accompanying notes to the consolidated financial statements.
7
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Notes to Consolidated Financial Statements
(Unaudited)
1. Significant Accounting Policies
The consolidated financial statements of TransCanada PipeLines Limited (TCPL 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 TCPL's annual financial statements for the year ended
December 31, 2004 except as stated below. 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 restated 2004 annual financial
statements. Amounts are stated in Canadian dollars unless otherwise indicated.
Certain comparative figures have been reclassified to conform with the current
period's presentation.
Since a determination of many assets, liabilities, revenues and expenses is
dependent upon future events, the preparation of these consolidated financial
statements requires the use of 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. Accounting Change
Financial Instruments - Disclosure and Presentation
Effective January 1, 2005, the company adopted the provisions of the Canadian
Institute of Chartered Accountants amendment to the existing Handbook Section "
Financial Instruments - Disclosure and Presentation" which provides guidance for
classifying certain financial instruments that embody obligations that may be
settled by issuance of the issuer's equity shares as debt when the instrument
does not establish an ownership relationship. In accordance with this
amendment, TCPL reclassified the non-controlling interest component of preferred
securities as long-term debt.
This accounting change was applied retroactively with restatement of prior
periods. The impact of this change on TCPL's net income in second quarter 2005
and prior periods was nil.
The impact of the accounting change on the company's consolidated balance sheet
as at December 31, 2004 is as follows.
8
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(unaudited - millions of dollars) Increase/
(Decrease)
Deferred Amounts (1) 135
Preferred Securities 535
Non-Controlling Interest Preferred securities of subsidiary (670 )
Total Liabilities and Shareholders' Equity -
--------------------
(1) Regulatory deferral
3. Segmented Information
Three months ended June GasTransmission Power Corporate Total
30
(unaudited - millions of 2005 2004 2005 2004 2005 2004 2005 2004
dollars)
Revenues 1,032 948 412 396 - - 1,444 1,344
Cost of sales - - (245 ) (242 ) - - (245 ) (242 )
Other costs and expenses (324 ) (298 ) (98 ) (99 ) (1 ) (1 ) (423 ) (398 )
Depreciation (233 ) (215 ) (20 ) (17 ) - - (253 ) (232 )
Operating income/(loss) 475 435 49 38 (1 ) (1 ) 523 472
Financial charges and (182 ) (193 ) - (2 ) (32 ) (21 ) (214 ) (216 )
non-controlling interests
Financial charges of (13 ) (15 ) (3 ) (1 ) - - (16 ) (16 )
joint ventures
Equity income 4 11 13 48 - - 17 59
Interest income and other (1 ) 2 - 1 5 7 4 10
Gain related to PipeLines 2 - - - - - 2 -
LP
Gains related to Power LP - - - 197 - - - 197
Gain related to - 7 - - - - - 7
Millennium
Income taxes (120 ) (101 ) (17 ) (32 ) 20 8 (117 ) (125 )
Net Income Applicable to 165 146 42 249 (8 ) (7 ) 199 388
Common Shares
Six months ended June 30 GasTransmission Power Corporate Total
(unaudited - millions of 2005 2004 2005 2004 2005 2004 2005 2004
dollars)
Revenues 2,027 1,897 824 803 - - 2,851 2,700
Cost of sales - - (510 ) (491 ) - - (510 ) (491 )
Other costs and expenses (630 ) (583 ) (211 ) (187 ) (3 ) (3 ) (844 ) (773 )
Depreciation (465 ) (427 ) (38 ) (37 ) - - (503 ) (464 )
Operating income/(loss) 932 887 65 88 (3 ) (3 ) 994 972
Financial charges and (369 ) (389 ) (2 ) (4 ) (62 ) (42 ) (433 ) (435 )
non-controlling interests
Financial charges of (27 ) (29 ) (5 ) (1 ) - - (32 ) (30 )
joint ventures
Equity income 15 21 43 96 - - 58 117
Interest income and other 13 5 3 5 12 15 28 25
Gain related to PipeLines 82 - - - - - 82 -
LP
Gains related to Power LP - - - 197 - - - 197
Gain related to - 7 - - - - - 7
Millennium
Income taxes (270 ) (207 ) (32 ) (67 ) 36 23 (266 ) (251 )
Net Income Applicable to 376 295 72 314 (17 ) (7 ) 431 602
Common Shares
9
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Total Assets
(millions of dollars) June 30, 2005 December 31,
(unaudited) 2004
Gas Transmission 18,140 18,409
Power 3,589 2,802
Corporate 890 900
22,619 22,111
4. Risk Management and Financial Instruments
The following represents the material changes to the company's financial
instruments since December 31, 2004.
Energy Price Risk Management
The company executes power, natural gas and heat rate derivatives for overall
management of its asset portfolio. Heat rate contracts are contracts for the
sale or purchase of power that are priced based on a natural gas index. The
fair values and notional volumes of the swap, option, future and heat rate
contracts are shown in the tables below. In accordance with the company's
accounting policy, each of the derivatives in the table below is recorded on the
balance sheet at its fair value at June 30, 2005 and December 31, 2004.
Power
June 30, 2005
(unaudited) December 31,
2004
Asset/(Liability) Accounting Fair Fair
(millions of dollars) Treatment Value Value
Power - swaps
(maturing 2005 to 2011) Hedge (60 ) 7
(maturing 2005 to 2010) Non-hedge 2 (2 )
Gas - swaps, futures and options
(maturing 2005 to 2016) Hedge (27 ) (39 )
(maturing 2005 to 2006) Non-hedge 1 (2 )
Heat rate contracts
(maturing 2005 to 2006) Hedge - (1 )
10
--------------------------------------------------------------------------------
Notional Volumes
June 30, 2005 Accounting Power (GWh) Gas (Bcf)
(unaudited) Treatment Purchases Sales Purchases Sales
Power - swaps
(maturing 2005 to 2011) Hedge 1,299 7,177 - -
(maturing 2005 to 2010) Non-hedge 878 - - -
Gas - swaps, futures and options
(maturing 2005 to 2016) Hedge - - 85 73
(maturing 2005 to 2006) Non-hedge - - 5 7
Heat rate contracts
(maturing 2005 to 2006) Hedge - 55 - -
Notional Volumes Accounting Power (GWh) Gas (Bcf)
December 31, 2004 Treatment Purchases Sales Purchases Sales
Power - swaps Hedge 3,314 7,029 - -
Non-hedge 438 - - -
Gas - swaps, futures and options Hedge - - 80 84
Non-hedge - - 5 8
Heat rate contracts Hedge - 229 2 -
5. Dispositions
PipeLines LP
In March 2005, TCPL sold 3.5 million common units of TC PipeLines, LP (PipeLines
LP) for US$37.04 per unit, resulting in net proceeds to the company of
approximately $151 million and an after-tax gain of approximately $48 million.
The net gain was recorded in the Gas Transmission segment and the company
recorded a $32 million tax charge, including $50 million of current income tax
expense, on this transaction. In April 2005, underwriters purchased an
additional 74,200 common units, exercising, in part, their option to purchase up
to 525,000 additional units on the same terms and conditions as the 3.5 million
common units already sold and an additional net after-tax gain of $1 million was
recorded in the Gas Transmission segment. Subsequent to these transactions,
TCPL continues to own a 13.4 per cent interest in PipeLines LP represented by
the general partner interest of 2.0 per cent as well as an 11.4 per cent limited
partner interest.
11
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Power LP
In May 2005, TCPL announced that it had entered into an agreement with EPCOR
Utilities Inc. (EPCOR) whereby EPCOR will purchase TCPL's interest in
TransCanada Power, L.P. (Power LP) for $529 million. EPCOR's acquisition
includes 14.5 million units of Power LP, representing 30.6 per cent of the
outstanding units; 100 per cent ownership of the General Partner of Power LP;
and management and operations' agreements governing the ongoing operation of
Power LP's generation assets.
The Boards of Directors of each of TCPL, EPCOR and Power LP have approved this
transaction. This transaction is expected to close in third quarter 2005 pending
receipt of regulatory approvals. TCPL expects to realize an after-tax gain of
approximately $200 million from this sale. TCPL will continue to operate and
maintain Power LP's power plants until closing.
Paiton Energy
In June 2005, TCPL reached an agreement to sell its approximate 11 per cent
interest in PT Paiton Energy Company (Paiton Energy) to subsidiaries of The
Tokyo Electric Power Company for US$103 million ($127 million), subject to
adjustments. TCPL originally purchased its interest in Paiton Energy in 1996.
Paiton Energy owns two 615 megawatt coal-fired plants in East Java, Indonesia.
Pending various approvals, this transaction is expected to close in third
quarter 2005. Upon closing, TCPL expects to realize an after-tax gain of
approximately $115 million.
6. Employee Future Benefits
The net benefit plan expense for the company's defined benefit pension plans and
other post-employment benefit plans for the three and six months ended June 30
is as follows.
Three months ended June 30 Pension Benefit Plans Other Benefit Plans
(unaudited - millions of dollars) 2005 2004 2005 2004
Current service cost 8 7 1 1
Interest cost 16 14 2 2
Expected return on plan assets (16 ) (13 ) - -
Amortization of transitional obligation related - - - -
to regulated business
Amortization of net actuarial loss 4 3 - -
Amortization of past service costs - - - -
Net benefit cost recognized 12 11 3 3
12
--------------------------------------------------------------------------------
Six months ended June 30 Pension Benefit Plans Other Benefit Plans
(unaudited - millions of dollars) 2005 2004 2005 2004
Current service cost 15 14 1 1
Interest cost 32 28 3 3
Expected return on plan assets (32 ) (27 ) - -
Amortization of transitional obligation related - - 1 1
to regulated business
Amortization of net actuarial loss 8 6 1 1
Amortization of past service costs 1 1 - -
Net benefit cost recognized 24 22 6 6
TCPL welcomes questions from shareholders and potential investors. Please
telephone:
Investor Relations, at 1-800-361-6522 (Canada and U.S. Mainland) or direct dial
David Moneta at (403) 920-7911. The investor fax line is (403) 920-2457. Media
Relations: Kurt Kadatz/Hejdi Feick at (403) 920-7859
Visit TCPL's Internet site at: http://www.transcanada.com
13
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Exhibit 13.3
TRANSCANADA PIPELINES LIMITED
U.S. GAAP CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Condensed Statement of Consolidated Income and Comprehensive Income in
Accordance with U.S. GAAP(1)
Three months Six months
ended ended
June 30 June 30
(millions of dollars) 2005 Restated 2005 Restated
2004 2004
Revenues 1,333 1,237 2,622 2,503
Cost of sales 226 212 462 438
Other costs and expenses 417 399 832 787
Depreciation 230 210 458 422
873 821 1,752 1,647
Operating income 460 416 870 856
Other (income)/expenses
Equity income(1) (57 ) (99 ) (145 ) (208 )
Other expenses(2)(3) 193 179 312 386
Dilution gain(3) - (40 ) - (40 )
Income taxes 118 126 264 252
254 166 431 390
Net Income in Accordance with U.S. GAAP 206 250 439 466
Adjustments affecting comprehensive income under U.S.
GAAP
Foreign currency translation adjustment, net of tax 5 4 10 7
Changes in minimum pension liability, net of tax - 25 - 50
Unrealized loss on derivatives, net of tax(4) (30 ) (16 ) (39 ) (29 )
Comprehensive Income in Accordance with U.S. GAAP 181 263 410 494
Reconciliation of Net Income
Three months Six months
ended ended
June 30 June 30
(millions of dollars) 2005 Restated 2005 Restated
2004 2004
Net Income in Accordance with Canadian GAAP 204 393 442 613
U.S. GAAP adjustments
Unrealized gain/(loss) on energy contracts(5) 1 (1 ) (9 ) 3
Tax impact of unrealized gain/(loss) on energy contracts (1 ) - 3 (1 )
Equity gain/(loss)(6) 1 (2 ) 3 (3 )
Tax impact of equity gain/(loss) - 1 (1 ) 1
Unrealized gain/(loss) on foreign exchange and interest 1 (7 ) 1 (11 )
rate derivatives(4)
Tax impact of gain/(loss) on foreign exchange and - 3 - 4
interest rate derivatives
Deferred income taxes(7) - (5 ) - (5 )
Amortization of deferred gains related to Power LP(3) - - - (3 )
Deferred gains related to Power LP(3) - (132 ) - (132 )
Net Income in Accordance with U.S. GAAP 206 250 439 466
1
--------------------------------------------------------------------------------
Condensed Statement of Consolidated Cash Flows in Accordance with U.S. GAAP(1)
Three months Six months
ended ended
June 30 June 30
(millions of dollars) 2005 2004 2005 2004
Cash Generated from Operations
Net cash provided by operating activities 262 301 611 641
Investing Activities
Net cash(used in)/provided by investing activities (736 ) 541 (746 ) 403
Financing Activities
Net cash provided by/(used in) financing activities 19 (247 ) 101 (427 )
Effect of Foreign Exchange Rate Changes on Cash and 20 (1 ) 22 3
Short-Term Investments
(Decrease)/Increase in Cash and Short-Term Investments (435 ) 594 (12 ) 620
Cash and Short-Term Investments
Beginning of period 546 308 123 282
Cash and Short-Term Investments
End of period 111 902 111 902
Condensed Consolidated Balance Sheet in Accordance with U.S. GAAP (1)
(millions of dollars) June 30, December
2005 31, 2004
Current assets 919 907
Long-term investments(6)(8) 1,853 1,887
Plant, property and equipment 17,543 17,083
Regulatory asset(9) 2,509 2,606
Other assets 1,222 1,217
24,046 23,700
Current liabilities(10) 2,529 2,653
Deferred amounts(4)(5)(8) 837 785
Long-term debt(4) 10,041 9,753
Deferred income taxes(9) 2,982 3,048
Preferred securities(11) 564 554
Non-controlling interests 77 76
Shareholders' equity 7,016 6,831
24,046 23,700
2
--------------------------------------------------------------------------------
Statement of Other Comprehensive Income in Accordance with U.S. GAAP
(millions of dollars) Cumulative Minimum Cash Flow Total
Translation Pension Hedges
Account Liability (SFAS No. 133)
(SFAS No. 87)
Balance at December 31, 2004 (71 ) (26 ) (4 ) (101 )
Unrealized loss on derivatives, net of tax of - - (39 ) (39 )
$20(4)
Foreign currency translation adjustment, net of 10 - - 10
tax of $18
Balance at June 30, 2005 (61 ) (26 ) (43 ) (130 )
Balance at December 31, 2003 (40 ) (98 ) (5 ) (143 )
Changes in minimum pension liability, net of tax - 50 - 50
of $26
Unrealized gain on derivatives, net of tax of - - (29 ) (29 )
$12(4)
Foreign currency translation adjustment, net of 7 - - 7
tax of $13
Balance at June 30, 2004 (33 ) (48 ) (34 ) (115 )
--------------------
(1) In accordance with U.S. GAAP, the condensed statement of consolidated
income, consolidated cash flows and consolidated balance sheet of
TransCanada PipeLines Limited (TCPL or the company) are prepared using the
equity method of accounting for joint ventures. Excluding the impact of
other U.S. GAAP adjustments, the use of the proportionate consolidation
method of accounting for joint ventures, as required under Canadian GAAP,
results in the same net income and shareholders' equity.
(2) Other expenses included an allowance for funds used during construction of
$1 million for the six months ended June 30, 2005 (June 30, 2004 -
$1 million).
(3) The company records its investment in TransCanada Power L.P. (Power LP)
using the proportionate consolidation method for Canadian GAAP purposes and
as an equity investment for U.S. GAAP purposes. During the period from
1997 to April 2004, the company was obligated to fund the redemption of
Power LP units in 2017. As a result, under Canadian GAAP, TCPL accounted
for the issuance of units by Power LP to third parties as a sale of a
future net revenue stream and the resulting gains were deferred and
amortized to income over the period to 2017. The redemption obligation was
removed in April 2004 and the unamortized gains were recognized as income.
Under U.S. GAAP, any such gains in the period from 1997 to April 2004 are
characterized as dilution gains and, because the company was committed to
fund the redemption of the units, the gains are recorded, on an after-tax
basis, as equity transactions in shareholders' equity.
The company's accounting policy for dilution gains is to record them as
income for both Canadian and U.S. GAAP purposes, however, U.S. GAAP
requires such gains to be recorded directly in equity if there is a
contemplation of reacquisition of units. With the removal of the
redemption obligation in April 2004, subsequent issuances of units by Power
LP are accounted for as dilution gains in
3
--------------------------------------------------------------------------------
income for both Canadian and U.S. GAAP purposes.
(4) All foreign exchange and interest rate derivatives are recorded in the
company's consolidated financial statements at fair value under Canadian
GAAP. Under the provisions of SFAS No. 133 "Accounting for Derivatives and
Hedging Activities", all derivatives are recognized as assets and
liabilities on the balance sheet and measured at fair value. For
derivatives designated as fair value hedges, changes in the fair value are
recognized in earnings together with an equal or lesser amount of changes
in the fair value of the hedged item attributable to the hedged risk. For
derivatives designated as cash flow hedges, changes in the fair value of
the derivatives that are effective in offsetting the hedged risk are
recognized in other comprehensive income until the hedged item is
recognized in earnings. Any ineffective portion of the change in fair value
is recognized in earnings each period. Substantially all of the amounts
recorded in the six months ended June 30, 2005 and 2004 as differences
between U.S. and Canadian GAAP, for net income, relate to the differences
in accounting treatment with respect to the hedged items and, for
comprehensive income, relate to cash flow hedges.
(5) Substantially all of the amounts recorded in the six months ended June 30,
2005 and 2004 as differences between U.S. and Canadian GAAP in respect of
energy contracts relate to gains and losses on derivative energy contracts
for periods before they were documented as hedges for purposes of U.S.
GAAP and to differences in accounting with respect to physical energy
trading contracts in the U.S. and Canada.
4
--------------------------------------------------------------------------------
(6) Under Canadian GAAP, pre-operating costs incurred during the commissioning
phase of a new project are deferred until commercial production levels are
achieved. After such time, those costs are amortized over the estimated
life of the project. Under U.S. GAAP, such costs are expensed as incurred.
Certain start-up costs incurred by Bruce Power L.P. (an equity investment)
are required to be expensed under U.S. GAAP. Under both Canadian GAAP and
U.S. GAAP, interest is capitalized on expenditures relating to construction
of development projects actively being prepared for their intended use. In
Bruce Power, L.P., under U.S. GAAP, the carrying value of development
projects against which interest is capitalized is lower due to the
expensing of pre-operating costs.
(7) Under U.S. GAAP, SFAS No. 109 "Accounting for Income Taxes" requires that a
deferred tax liability be recognized for an excess of the amount for
financial reporting over the tax basis of an investment in a 50 per cent or
less owned investee.
(8) Financial Interpretation (FIN) 45 requires the recognition of a liability
for the fair value of certain guarantees that require payments contingent
on specified types of future events. The measurement standards of FIN 45
are applicable to guarantees entered into after January 1, 2003. For U.S.
GAAP purposes, the fair value of guarantees recorded as a liability at June
30, 2005 was $9 million (December 31, 2004 - $9 million) and relates to the
company's equity interest in Bruce Power L.P.
(9) Under U.S. GAAP, the company is required to record a deferred income tax
liability for its cost-of-service regulated businesses. As these deferred
income taxes are recoverable through future revenues, a corresponding
regulatory asset is recorded for U.S. GAAP purposes.
(10) Current liabilities at June 30, 2005 include dividends payable of $154
million (December 31, 2004 - $146 million) and current taxes payable of
$194 million (December 31, 2004 - $260 million).
(11) The fair value of the preferred securities at June 30, 2005 was $589
million (December 31, 2004 - $572 million). The company made preferred
securities charges payments of $24 million for the six months ended June
30, 2005 (June 30, 2004 - $24 million).
Summarized Financial Information of Long-Term Investments
The following summarized financial information of long-term investments includes
those investments that are accounted for by the equity method under U.S. GAAP
(including those that are accounted for by the proportionate consolidation
method under Canadian GAAP).
Three months Six months ended
ended June 30
June 30
(millions of dollars) 2005 2004 2005 2004
Income
Revenues 278 304 569 579
Other costs and expenses (158 ) (148 ) (299 ) (267 )
Depreciation (36 ) (40 ) (76 ) (73 )
Financial charges and other (27 ) (17 ) (49 ) (31 )
57 99 145 208
(millions of dollars) June 30, December 31,
2005 2004
Balance sheet
Current assets 308 361
Plant, property and equipment 2,973 3,020
Current liabilities (173 ) (248 )
Deferred amounts (net) (245 ) (199 )
Non-recourse debt (991 ) (1,030 )
Deferred income taxes (19 ) (17 )
Proportionate share of net assets of long-term investments 1,853 1,887
5
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Exhibit 31.1
Certifications
I, Harold N. Kvisle, certify that:
1. I have reviewed this quarterly report on Form 6-K of TransCanada PipeLines
Limited;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15 (e)) for the registrant and
have:
(a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the
end of the period covered by this report based on such evaluation; and
(c) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
(a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Dated August 2, 2005
/s/ Harold N. Kvisle
______________________________________
Harold N. Kvisle
President and Chief Executive Officer
--------------------------------------------------------------------------------
Exhibit 31.2
Certifications
I, Russell K. Girling, certify that:
1. I have reviewed this quarterly report on Form 6-K of TransCanada PipeLines
Limited;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15 (e)) for the registrant and
have:
(a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the
end of the period covered by this report based on such evaluation; and
(c) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
(a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
/ s / Russell K. Girling
___________________________________________________
Dated August 2, 2005 Russell K. Girling
Executive Vice-President, Corporate Development and
Chief Financial Officer
--------------------------------------------------------------------------------
Exhibit 32.1
TRANSCANADA PIPELINES LIMITED
450 - 1st Street S.W.
Calgary, Alberta, Canada
T2P 5H1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
REGARDING PERIODIC REPORT CONTAINING
FINANCIAL STATEMENTS
I, Harold N. Kvisle, the Chief Executive Officer of TransCanada PipeLines
Limited (the "Company"), in compliance with 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, hereby certify, in
connection with the Company's Quarterly Report as filed on Form 6-K for the
period ended June 30, 2005 with the Securities and Exchange Commission (the "
Report"), that:
1. the Report fully complies with the requirements of Section 13 (a) or 15(d)
of the Securities Exchange Act of 1934; and
2. the information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
/s/ Harold N. Kvisle
___________________________
Harold N. Kvisle
Chief Executive Officer
August 2, 2005
--------------------------------------------------------------------------------
Exhibit 32.2
TRANSCANADA PIPELINES LIMITED
450 - 1st Street S.W.
Calgary, Alberta, Canada
T2P 5H1
CERTIFICATION OF CHIEF FINANCIAL OFFICER
REGARDING PERIODIC REPORT CONTAINING
FINANCIAL STATEMENTS
I, Russell K. Girling, the Chief Financial Officer of TransCanada PipeLines
Limited (the "Company"), in compliance with 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, hereby certify, in
connection with the Company's Quarterly Report as filed on Form 6-K for the
period ended June 30, 2005 with the Securities and Exchange Commission (the "
Report"), that:
1. the Report fully complies with the requirements of Section 13 (a) or 15(d)
of the Securities Exchange Act of 1934; and
2. the information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
/ s / Russell K. Girling
__________________________
Russell K. Girling
Chief Financial Officer
August 2, 2005
--------------------------------------------------------------------------------
Exhibit 99.1
TransCanada PipeLines Limited
EARNINGS COVERAGE
JUNE 30, 2005
The following financial ratios have been calculated on a consolidated basis for
the respective 12 month period ended June 30, 2005 and are based on unaudited
financial information. The financial ratios have been calculated based on
financial information prepared in accordance with Canadian generally accepted
accounting principles. The following ratios have been prepared based on net
income:
June 30, 2005
Earnings coverage on long-term debt 2.63 times
Earnings coverage on long-term debt and First Preferred Shares 2.53 times
The following ratios have been prepared based on net income from continuing
operations:
June 30, 2005
Earnings coverage on long-term debt 2.54 times
Earnings coverage on long-term debt and First Preferred Shares 2.44 times
--------------------------------------------------------------------------------
Exhibit 99.2
KPMG LLP
Chartered Accountants Telephone (403) 691-8000
1200 205 - 5th Avenue SW Fax (403) 691-8008
Calgary AB T2P 4B9 Internet www.kpmg.ca
The securities regulatory authorities in each of the provinces and territories
of Canada
July 29, 2005
Dear Sirs
TransCanada PipeLines Limited (the "Company")
We refer to the short-form base shelf prospectus of the Company dated December
21, 2004 relating to the sale of up to $1,500,000,000 Medium Term Note
Debentures of the Company (the "Prospectus").
We are the auditors of the Company and under date of February 28, 2005 except as
to note 23 which is as of July 28, 2005, we reported on the following revised
financial statements incorporated by reference in the Prospectus:
* Consolidated balance sheets as at December 31, 2004 and December 31, 2003;
and
* Consolidated statements of income, retained earnings and cash flows for
each of the years in the three-year period ended December 31, 2004.
Also incorporated by reference in the Prospectus are the following unaudited
interim financial statements, which have been filed with the securities
regulatory authorities:
* Consolidated balance sheet as at June 30, 2005;
* Consolidated statements of income and cash flows for the three-month and
six-month periods ended June 30, 2005 and 2004; and
* Consolidated statements of retained earnings for the six-months ended June
30, 2005 and 2004.
We have not audited any financial statements of the Company as at any date or
for any period subsequent to December 31, 2004. Although we have performed an
audit for the year ended December 31, 2004, the purpose and therefore the scope
of the audit was to enable us to express our opinion on the consolidated
financial statements as at December 31, 2004 and for the year then ended, but
not on the financial statements for any interim period within that year.
Therefore, we are unable to and do not express an opinion on the above-mentioned
unaudited interim consolidated financial statements or on the financial
position, results of operations or cash flows as at any date or for any period
subsequent to December 31, 2004.
--------------------------------------------------------------------------------
We have, however, performed a review of the unaudited interim consolidated
financial statements of the Company as at June 30, 2005 and for the three-month
and six-month periods ended June 30, 2005 and 2004. We performed our review in
accordance with Canadian generally accepted standards for a review of interim
financial statements by an entity's auditors. Such an interim review consists
principally of applying analytical procedures to financial data and making
inquiries of, and having discussions with, persons responsible for financial and
accounting matters. An interim review is substantially less in scope than an
audit, whose objective is the expression of an opinion regarding the financial
statements. An interim review does not provide assurance that we would become
aware of any, or all, significant matters that might be identified in an audit.
Based on our review, we are not aware of any material modification that needs to
be made for these interim consolidated financial statements to be in accordance
with Canadian generally accepted accounting principles.
This letter is provided solely for the purpose of assisting the securities
regulatory authority to which it is addressed in discharging its
responsibilities and should not be used for any other purpose. Any use that a
third party makes of this letter or any reliance or decisions based on it, are
the responsibility of such third parties. We accept no responsibility for loss
or damages, if any, suffered by any third party as a result of decisions made or
actions taken based on this letter.
Yours very truly
/s/ KPMG LLP
_____________________
Chartered Accountants
Calgary, Canada
2
--------------------------------------------------------------------------------
Exhibit 99.3
KPMG LLP
Chartered Accountants Telephone (403) 691-8000
1200 205 - 5th Avenue SW Fax (403) 691-8008
Calgary AB T2P 4B9 Internet www.kpmg.ca
The securities regulatory authorities in each of the provinces and territories
of Canada
July 29, 2005
Dear Sirs
TransCanada PipeLines Limited (the "Company")
We refer to the short-form base shelf prospectus of the Company dated December
21, 2004 relating to the sale of up to $1,500,000,000 Medium Term Note
Debentures of the Company (the "Prospectus").
We consent to the use through incorporation by reference in the prospectus of
our report dated February 28, 2005, except as to note 23 which is as of July 28,
2005, to the Shareholder of the Company on the following revised financial
statements:
* Consolidated balance sheets as at December 31, 2004 and 2003; and
* Consolidated statements of income, retained earnings and cash flows for
each of the years in the three-year period ended December 31, 2004.
This letter is provided solely for the purpose of assisting the securities
regulatory authority to which it is addressed in discharging its
responsibilities and should not be used for any other purpose. Any use that a
third party makes of this letter, or any reliance or decisions based on it, are
the responsibility of such third parties. We accept no responsibility for loss
or damages, if any, suffered by any third party as a result of decisions made or
actions taken based on this letter.
Yours very truly
/s/ KPMG LLP
_____________________
Chartered Accountants
Calgary, Canada
--------------------------------------------------------------------------------
This information is provided by RNS
The company news service from the London Stock Exchange
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