RNS Number:1065F
TransCanada Pipelines Ld
10 November 2004
TRANSCANADA PIPELINES LIMITED
THIRD QUARTER 2004
Quarterly Report
Management's Discussion and Analysis
Management's discussion and analysis (MD&A) dated October 26, 2004 should be
read in conjunction with the accompanying unaudited consolidated financial
statements of TransCanada PipeLines Limited (TCPL or the company) for the nine
months ended September 30, 2004 and should also be read in conjunction with the
audited consolidated financial statements and MD&A contained in TCPL's 2003
Annual Report for the year ended December 31, 2003. 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.
Results of Operations
Consolidated
TCPL's net income applicable to common shares (net earnings) for third quarter
2004 was $244 million compared to $248 million for the same period in 2003. This
includes net income from discontinued operations of $52 million in third quarter
2004 and $50 million in third quarter 2003 reflecting income recognized on
releases of the initially deferred gains relating to the disposition in 2001 of
the company's Gas Marketing business.
Net earnings from continuing operations for third quarter 2004 of $192 million
decreased by $6 million compared to $198 million for third quarter 2003. This
decrease was primarily due to lower net earnings from the Gas Transmission
business, partially offset by lower net expenses in the Corporate segment.
Lower net earnings of $26 million in the Gas Transmission business for third
quarter 2004 compared to the same period in the prior year were primarily due to
a decline in the Alberta System's net earnings which reflect the impact of the
Generic Cost of Capital (GCOC) decision in July 2004 and the year-to-date impact
of the August 2004 decision from the Alberta Energy and Utilities Board (EUB) on
Phase I of the Alberta System 2004 General Rate Application (GRA). The GRA
decision disallowed the recovery of a significant amount of costs which reduced
the Alberta System's revenue requirement, including the impact of reductions to
forecasted rate base in 2004. Third quarter 2003 net earnings included TCPL's
$11 million share of future income tax benefits recognized by TransGas de
Occidente (TransGas). The decrease in net expenses in the Corporate segment was
mainly due to a $12 million after-tax adjustment as a result of the release in
third quarter 2004 of previously established restructuring provisions and the
recognition of an $8 million income tax benefit related to additional non-
capital loss carryforwards utilized. Earnings in the Power business for third
quarter 2004 were comparable to the same period in the prior year.
TCPL's net earnings for the nine months ended September 30, 2004 was $846
million including net income from discontinued operations of $52 million,
compared to $658 million for the comparable period in 2003 including net income
from discontinued operations of $50 million.
TCPL's net earnings from continuing operations for the nine months ended
September 30, 2004 were $794 million compared to $608 million for the comparable
period in 2003. The increase of $186 million in the first nine months of 2004
compared to the same period in 2003 was due to significantly higher net earnings
from the Power business. In addition, lower net earnings from the Gas
Transmission business were primarily offset by lower net expenses in the
Corporate segment.
The increased Power earnings are primarily due to the second quarter 2004 gain
of $15 million after tax ($25 million pre tax) on the sale of the ManChief and
Curtis Palmer assets to TransCanada Power, L.P. (Power LP) and the recognition
of $172 million of dilution and other gains resulting from a reduction in TCPL's
ownership interest in Power LP and the removal of Power LP's obligation, in
2017, to redeem units not owned by TCPL. TCPL was required to fund this
redemption, therefore the removal of Power LP's obligation eliminates this
requirement.
Excluding the above-mentioned $187 million of combined gains included in net
earnings related to Power LP and the recognition in second quarter 2003 of a $19
million after-tax settlement with a former counterparty, Power's net earnings
for the nine months ended September 30, 2004 were $21 million higher than the
same period in 2003. Higher net earnings from TCPL's investment in Bruce Power
L.P. (Bruce Power) were partially offset by lower contributions from Eastern
Operations.
The lower net earnings of $33 million in the Gas Transmission business for the
nine months ended September 30, 2004 compared to the same period in 2003 were
primarily due to lower earnings from the Canadian Mainline and Alberta System,
partially offset by a $7 million gain on sale of the company's equity interest
in the Millennium Pipeline project (Millennium) in second quarter 2004 and
higher earnings from certain Other Gas Transmission investments. The 2003 net
earnings included $11 million of future income tax benefits recognized by
TransGas.
The decrease in net expenses of $30 million in the Corporate segment for the
nine months ended September 30, 2004 was primarily due to the release in third
quarter of previously established restructuring provisions and income tax
related items, including refunds in first quarter 2004 and the recognition of
the benefit of additional loss carryforwards utilized. These positive variances
were partially offset by additional interest costs due to the issuance of new
debt in late 2003 and early 2004.
Segment Results-at-a-Glance
(unaudited) Three months ended Nine months ended
September 30 September 30
(millions of dollars) 2004 2003 2004 2003
Gas Transmission 134 160 429 462
Power 51 50 365 176
Corporate 7 (12) - (30)
Continuing operations 192 198 794 608
Discontinued operations 52 50 52 50
Net Income Applicable to 244 248 846 658
Common Shares
Funds generated from continuing operations of $393 million for third quarter
2004 decreased $123 million compared to third quarter 2003. Funds generated from
operations of $1,206 million for the nine months ended September 30, 2004
decreased $201 million compared to the same period in 2003. These decreases
mainly result from higher current income tax expense in 2004 compared to 2003.
Gas Transmission
The Gas Transmission business generated net earnings of $134 million and $429
million for the three and nine months ended September 30, 2004, respectively,
compared to $160 million and $462 million for the comparable periods in 2003.
Gas Transmission
Results-at-a-Glance
(unaudited) Three months ended Nine months ended
September 30 September 30
(millions of dollars) 2004 2003 2004 2003
Wholly-Owned Pipelines
Alberta System 31 50 110 136
Canadian Mainline 71 73 201 215
Foothills* 6 5 17 14
BC System 2 - 5 4
110 128 333 369
Other Gas Transmission
Great Lakes 12 10 43 38
Iroquois 3 4 14 15
TC PipeLines, LP 4 4 13 11
Portland** - - 6 7
Ventures LP 3 3 10 7
Trans Quebec & Maritimes 2 2 6 6
CrossAlta 4 - 6 4
TransGas de Occidente 3 13 9 20
Northern Development (1) (1) (3) (2)
General, administrative, (6) (3) (8) (13)
support costs and other
24 32 96 93
Net earnings 134 160 429 462
* The remaining ownership interests in Foothills, previously not held by TCPL,
were acquired on August 15, 2003.
** TCPL increased its ownership interest in Portland to 43.4 per cent from 33.3
per cent on September 29, 2003 and to 61.7 per cent from 43.4 per cent
on December 3, 2003.
Wholly-Owned Pipelines
The Alberta System's net earnings of $31 million in third quarter 2004 decreased
$19 million compared to $50 million in the same quarter of 2003. Net earnings
for the nine months ended September 30, 2004 decreased $26 million compared to
the same period in 2003. These decreases were primarily due to the year-to-date
impacts of the EUB decisions on Phase I of the 2004 GRA in August 2004 and on
the GCOC in July 2004. The GRA decision disallowed approximately $24 million pre
tax of operating costs associated with the operation of the pipeline and, as a
result, adjustments were made to third quarter 2004 earnings to reflect the
year-to-date impacts of this decision. The GCOC decision resulted in a lower
return on deemed common equity in 2004 compared to earnings implicit in the 2003
negotiated settlement which included a fixed revenue requirement component,
before non-routine adjustments, of $1.277 billion. Earnings in 2004 reflect a
return of 9.60 per cent on deemed common equity of 35 per cent as approved in
the GCOC decision.
The Canadian Mainline's net earnings decreased $2 million and $14 million for
the three and nine months ended September 30, 2004, respectively, when compared
to the corresponding periods in 2003. The decrease in net earnings was primarily
due to a lower rate of return on common equity of 9.56 per cent in 2004 compared
to 9.79 per cent in 2003, and a lower average investment base.
Foothills' net earnings of $17 million for the nine months ended September 30,
2004 were $3 million higher than the same period in 2003 reflecting TCPL's
acquisition in August 2003 of the remaining ownership interests in Foothills not
held previously.
Operating Statistics
Nine months ended Alberta Canadian BC
September 30 System* Mainline** Foothills*** System
(unaudited) 2004 2003 2004 2003 2004 2003 2004 2003
Average investment base 4,642 4,909 8,233 8,601 718 742 229 237
($ millions)
Delivery volumes (Bcf)
Total 2,872 2,893 1,947 1,990 844 813 255 227
Average per day 10.5 10.6 7.1 7.3 3.1 3.0 0.9 0.8
* Field receipt volumes for the Alberta System for the nine months ended
September 30, 2004 were 2,959 Bcf (2003 - 2,926 Bcf); average per day was 10.8
Bcf (2003 - 10.7 Bcf).
** Canadian Mainline deliveries originating at the Alberta border and in
Saskatchewan for the nine months ended September 30, 2004 were 1,503 Bcf (2003 -
1,572 Bcf); average per day was 5.5 Bcf (2003 - 5.8 Bcf).
*** The remaining interests in Foothills were acquired in August 2003. The
delivery volumes in the table represent 100 per cent of Foothills.
Other Gas Transmission
TCPL's proportionate share of net earnings from its Other Gas Transmission
businesses was $24 million for the three months ended September 30, 2004
compared to $32 million for the same period in 2003. The 2003 results included
TCPL's $11 million share of future income tax benefits recognized by TransGas.
Excluding this adjustment, net earnings for the quarter increased $3 million
compared to the same period in 2003. The increase was due to higher earnings
from Great Lakes as a result of successful marketing of short-term services and
higher earnings from CrossAlta as a result of favourable storage market
conditions, partially offset by higher general, administrative, support costs
and other.
Net earnings for the nine months ended September 30, 2004 were $96 million
compared to $93 million for the same period in 2003. Excluding the $7 million
gain on sale of Millennium recognized in 2004 and the $11 million of future
income tax benefits recognized by TransGas in 2003, year-to-date earnings were
$7 million higher compared to the same period in 2003. The increase was due to
higher earnings from Great Lakes as a result of successful marketing of
short-term services and increased earnings from Ventures LP, TC PipeLines LP and
CrossAlta. These increases were partially offset by the impact of a weaker U.S.
dollar and higher general, administrative, support costs and other.
Power
Power Results-at-a-Glance
(unaudited) Three months ended Nine months ended
September 30 September 30
(millions of dollars) 2004 2003 2004 2003
Western operations 43 26 113 129
Eastern operations 21 30 77 91
Bruce Power investment 29 38 125 92
Power LP investment 6 8 22 26
General, administrative, (21) (23) (70) (66)
support costs and other
Operating and other income 78 79 267 272
Financial charges (4) (2) (9) (8)
Income taxes (23) (27) (80) (88)
51 50 178 176
Gains related to Power LP - - 187 -
(after tax)
Net earnings 51 50 365 176
Power's net earnings in third quarter 2004 of $51 million increased $1 million
compared to $50 million in third quarter 2003. Higher earnings from Western
Operations were more than offset by lower contributions from Bruce Power and
Eastern Operations.
Net earnings for the nine months ended September 30, 2004 of $365 million
increased $189 million compared to $176 million in the same period in 2003
primarily due to the $187 million of gains related to Power LP recorded in
second quarter 2004. During second quarter 2004, TCPL completed the sale of the
ManChief and Curtis Palmer power facilities to Power LP for US$402.6 million
resulting in an after-tax gain on sale of $15 million (pre-tax gain of $25
million). At a meeting in April 2004, Power LP unitholders approved these
acquisitions and the removal of Power LP's obligation to redeem all units not
owned by TCPL in 2017. TCPL was required to fund this redemption, thus the
removal of Power LP's obligation eliminates this requirement. In addition, in
second quarter 2004, Power LP issued 8.1 million subscription receipts which
were subsequently converted into partnership units and TCPL contributed $20
million of the net proceeds of $286.8 million that Power LP realized from this
issue. The net impact of this issue reduced TCPL's ownership interest in Power
LP from 35.6 per cent to 30.6 per cent. As a result of these events, TCPL
recognized dilution and other gains of $172 million in second quarter 2004, $132
million of which were previously deferred and were being amortized into income
to 2017. Dilution gains arose when TCPL's ownership interest in Power LP was
decreased as a result of the Power LP issuing new partnership units at a market
price in excess of TCPL's per unit carrying value of the investment.
Excluding the $187 million of Power LP-related gains, Power's net earnings for
the nine months ended September 30, 2004 of $178 million increased $2 million
compared to $176 million in the same period in 2003. Earnings from Bruce Power
of $125 million increased by $33 million compared to $92 million for the same
period in 2003 and were mostly offset by lower contributions from other Power
operations.
Western Operations
Operating and other income in third quarter 2004 from Western Operations of $43
million was $17 million higher compared to $26 million earned in the same period
in 2003. The increase was mainly due to earnings from the newly constructed
MacKay River cogeneration plant, fees earned as a result of Power LP's third
quarter 2004 acquisition of hydroelectric facilities in British Columbia and
higher net margins achieved on the overall portfolio management. A higher than
expected quarterly contribution from the MacKay River plant arose due to the
recognition of revenues which were deferred in the first six months of 2004.
Operating and other income for the nine months ended September 30, 2004 of $113
million was $16 million lower compared to the same period in 2003. The decrease
was mainly due to recognition in second quarter 2003 of a $31 million ($19
million after-tax) settlement with a former counterparty which defaulted in 2001
under power forward contracts, as well as reduced ManChief income following the
sale of the plant to Power LP in April 2004. Partially offsetting these
decreases were contributions from the MacKay River plant, fees earned with
respect to Power LP's asset acquisitions in 2004 and the impact of higher net
margins achieved on the overall portfolio in second and third quarter 2004.
Eastern Operations
Operating and other income in third quarter 2004 from Eastern Operations of $21
million was $9 million lower compared to $30 million earned in the same period
in 2003. The decrease was primarily due to a reduction in income from the sale
of the Curtis Palmer hydroelectric facilities to Power LP in April 2004, the
unfavourable impact of higher natural gas fuel costs at Ocean State Power (OSP)
and a weaker U.S. dollar in 2004 compared to 2003. At the end of August 2004,
OSP concluded its third arbitration process with respect to its cost of fuel gas
and, as in previous decisions received in December 2002 and March 2003, the
decision substantially increased OSP's cost of fuel gas. This most recent
arbitration decision, effective September 1, 2004, established a pricing
mechanism for fuel gas which results in prices in excess of market price and, as
a result, impedes OSP's ability to economically and competitively produce power.
The potential impacts of this negative decision and related courses of action
are under review by management. OSP has commenced the process for the next
arbitration which would be expected to be completed in mid-2005.
Operating and other income for the nine months ended September 30, 2004 was $77
million or $14 million lower compared to the $91 million earned in the same
period in 2003. This decrease was mainly due to a reduction in income from the
sale of the Curtis Palmer hydroelectric facilities to Power LP in April 2004,
the unfavourable impact of higher natural gas fuel costs at OSP and a weaker
U.S. dollar in 2004.
Bruce Power Investment
Bruce Power Results-at-a-Glance
(unaudited) Three months ended Nine months ended
September 30 September 30
(millions of dollars) 2004 2003 2004 2003
Bruce Power (100 per cent basis)
Revenues 395 297 1,228 939
Operating expenses (297) (196) (833) (599)
Operating income 98 101 395 340
Financial charges (17) (17) (50) (49)
Income before income taxes 81 84 345 291
TCPL's interest in Bruce Power
income before income taxes* 26 27 109 66
Adjustments 3 11 16 26
TCPL's income from Bruce Power 29 38 125 92
before income taxes
* TCPL acquired its interest in Bruce Power on February 14, 2003. Bruce Power's 100
per cent income before income taxes from February 14, 2003 to September 30,
2003 was $210 million.
Bruce Power contributed $29 million of pre-tax equity income in third quarter
2004 compared to $38 million in third quarter 2003. TCPL's share of power output
for third quarter 2004 was 2,765 gigawatt hours (GWh) compared to 2,041 GWh in
third quarter 2003. This increase primarily reflects higher output in 2004 as a
result of the restart of Bruce A Units 3 and 4 which expanded Bruce Power's
capacity by approximately 1,500 megawatts (MW) compared to third quarter 2003
and correspondingly increased Bruce Power's operating expenses. The four Bruce B
units were offline during a vacuum building inspection which commenced on
September 18, 2004 and partially offset the increased output from Units 3 and 4.
Overall prices achieved during third quarter 2004 were approximately $45 per
megawatt hour (MWh), the same as in third quarter 2003. Approximately 55 per
cent of the output was sold into Ontario's wholesale spot market in third
quarter 2004 with the remainder being sold under longer term contracts. On a per
unit basis, the Bruce operating cost increased to $34 per MWh in third quarter
2004 from $30 per MWh in third quarter 2003. This increase in operating costs on
a per unit basis was primarily due to higher costs as a result of more planned
maintenance outages in third quarter 2004 as compared to 2003 and lost
generation as a result of the Bruce B vacuum building outage.
Adjustments to TCPL's interest in Bruce Power income before income taxes for the
three and nine months ended September 30, 2004 were lower than the comparable
periods in 2003 primarily due to no interest being capitalized upon the return
to service of the Bruce A units.
Pre-tax equity income for the nine months ended September 30, 2004 was $125
million compared to $92 million for the same period in 2003. This increase was
primarily due to higher output in 2004 as a result of the return to service of
the two Bruce A units as well as a full nine months of earnings in 2004 compared
to earnings from February 14 to September 30 in 2003, reflecting TCPL's period
of ownership in 2003. Operating costs for the nine months ended September 30,
2004 were $32 per MWh compared to $33 per MWh for the period February 14 to
September 30, 2003. Average realized prices in the nine months ended September
30, 2004 were $46 per MWh compared to $49 per MWh during TCPL's period of
ownership ended September 30, 2003.
The Bruce units ran at an average availability of 85 per cent in third quarter
2004, compared to an average availability during third quarter 2003 of 94 per
cent reflecting higher planned maintenance outage hours in third quarter 2004.
Availability for the nine months ended September 30, 2004 was 85 per cent
compared to 88 per cent for the period from February 14 to September 30, 2003. A
scheduled maintenance outage on Unit 6 began on September 11, 2004 and the unit
is expected to be returned to service in December 2004. The planned vacuum
building inspection that began for all of the Bruce B units on September 18,
2004 was completed ahead of schedule and Units 8 and 7 were returned to service
on October 11 and 13, 2004, respectively. Unit 5 will remain offline for
additional maintenance as a result of tests performed during the vacuum building
inspection and is expected back in service by mid-November 2004.
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. Approximately 40 per cent of planned output for the remainder of 2004
is under fixed price sales contracts.
Power LP Investment
Operating and other income of $6 million and $22 million for the three and nine
months ended September 30, 2004 was $2 million and $4 million lower,
respectively, compared to the same periods in 2003. The decrease was primarily
due to TCPL's reduced ownership interest in Power LP in 2004 (30.6 per cent
compared to 35.6 per cent) and 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, Power was
recognizing into income the amortization of these deferred gains over a period
through to 2017. Additional earnings from Power LP's second quarter acquisition
of the Curtis Palmer and ManChief facilities partially offset these decreases.
General, Administrative, Support Costs and Other
General, administrative, support costs and other decreased $2 million in third
quarter 2004 compared to third quarter 2003 primarily due to foreign exchange
unrealized gains recognized by Power LP on its U.S. dollar denominated debt,
partially offset by higher support costs. General, administrative, support costs
and other for the nine months ended September 30, 2004 of $70 million were $4
million higher compared to the same period in 2003 primarily due to higher
support costs resulting from the company's increased investment in the Power
business. Partially offsetting these higher support costs were the positive
impact of the recognition of Power LP's foreign exchange unrealized gains and
lower business development expenditures.
Power Sales Volumes
(unaudited) Three months ended Nine months ended September 30
September 30
(GWh) 2004 2003 2004 2003
Western operations (2) 2,754 3,070 8,559 9,310
Eastern operations (2) 1,631 1,717 4,716 5,126
Bruce Power investment (1) 2,765 2,041 8,257 4,809
Power LP investment (2) 642 582 1,750 1,604
Total 7,792 7,410 23,282 20,849
(1) Acquired on February 14, 2003. Sales volumes reflect TCPL's 31.6 per cent share
of Bruce Power output from the date of acquisition.
(2) ManChief and Curtis Palmer volumes are included in Power LP investment effective April 30,
2004.
Weighted Average Plant Three months ended Nine months ended
Availability (1) September 30 September 30
(unaudited) 2004 2003 2004 2003
Western operations (2) 94% 91% 96% 93%
Eastern operations (2) 98% 99% 97% 92%
Bruce Power investment (3) 85% 94% 85% 88%
Power LP investment (2) 97% 99% 97% 95%
All plants 92% 96% 92% 91%
(1) Plant availability represents the percentage of time in the year 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) Comparative 2003 percentage is calculated from the February 14, 2003 date of
acquisition. Bruce A Unit 3 is included effective March 1, 2004.
Corporate
Net earnings for the three and nine months ended September 30, 2004 were $7
million and nil, respectively, compared to net expenses of $12 million and $30
million for the corresponding periods in 2003.
The $19 million increase in Corporate net earnings for the three months ended
September 30, 2004 compared to the same period in 2003 was primarily due to a
$12 million after-tax adjustment as a result of the release in the quarter of
previously established restructuring provisions and the recognition of an $8
million income tax benefit relating to additional non-capital loss carryforwards
utilized.
The $30 million increase for the nine months ended September 30, 2004 compared
to the same period in 2003 was primarily due to the release in third quarter
2004 of previously established restructuring provisions and income tax related
items, including refunds in first quarter 2004 and the recognition of the
benefit of additional loss carryforwards utilized. These positive variances were
partially offset by additional interest costs due to the issuance of new debt in
late 2003 and early 2004.
Discontinued Operations
The Board of Directors approved a plan in July 2001 to dispose of the company's
Gas Marketing business. The company's exit from Gas Marketing was substantially
completed by December 31, 2001. At September 30, 2004, TCPL reviewed the
provision for loss on discontinued operations and the remaining deferred gain
with respect to the divested Gas Marketing business. As a result of this review,
it was determined that TCPL's contingent liability pursuant to guarantees and
obligations under certain contracts related to the divested Gas Marketing
business had decreased and, accordingly, the remaining $52 million after-tax
deferred gain was recognized in income in third quarter 2004. In addition, TCPL
concluded that the remaining provision for loss on discontinued operations was
adequate.
Liquidity and Capital Resources
Funds Generated from Operations
Funds generated from continuing operations were $393 million and $1,206 million
for the three and nine months ended September 30, 2004, respectively, compared
with $516 million and $1,407 million for the same periods in 2003.
TCPL expects that its ability to generate sufficient 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 is adequate and remains
substantially unchanged since December 31, 2003.
Investing Activities
In the three and nine months ended September 30, 2004, capital expenditures,
excluding acquisitions, totalled $97 million (2003 - $81 million) and $291
million (2003 - $264 million), respectively, and related primarily to
construction of new power plants, and maintenance and capacity capital in the
Gas Transmission business.
In the nine months ended September 30, 2004, disposition of assets totalled $408
million (2003 - nil) and related primarily to the sale of ManChief and Curtis
Palmer to Power LP in second quarter 2004.
Acquisitions for the three and nine months ended September 30, 2004 were $49
million (2003 - $135 million) and $63 million (2003 - $547 million),
respectively.
Financing Activities
TCPL retired long-term debt of $9 million and $510 million in the three and nine
months ended September 30, 2004, respectively. In February 2004, the company
issued $200 million of five year medium-term notes bearing interest at 4.1 per
cent. In March 2004, the company issued US$350 million of 30 year senior
unsecured notes bearing interest at 5.6 per cent. For the nine months ended
September 30, 2004, outstanding notes payable decreased by $367 million, while
cash and short-term investments increased by $767 million. The increase in cash
and short-term investments and decrease in outstanding notes payable positions
TCPL to complete the acquisition of Gas Transmission Northwest Corporation (GTN)
which is expected in fourth quarter 2004 (see Other Recent Developments - Gas
Transmission - Gas Transmission Northwest Corporation).
Dividends
On October 26, 2004, TCPL's Board of Directors declared a dividend for the
quarter ending December 31, 2004 in an aggregate amount equal to the aggregate
quarterly dividend to be paid on January 31, 2005 by TransCanada Corporation on
the issued and outstanding common shares as at the close of business on December
31, 2004. The Board also declared regular dividends on TCPL's preferred shares.
Contractual Obligations
At September 30, 2004, TCPL held a 30.6 per cent interest in Power LP which is a
publicly-held limited partnership. Until April 29, 2004, Power LP was required
to redeem all units outstanding at June 30, 2017, not held directly or
indirectly by TCPL and TCPL was required to fund the redemption in accordance
with the terms of the Power LP Partnership Agreement. At a special meeting held
on April 29, 2004, Power LP's unitholders approved the amendment of the terms of
the Power LP Partnership Agreement to remove Power LP's obligation to redeem all
units not owned by TCPL in 2017.
Excluding the removal of the Power LP obligation, there have been no material
changes to TCPL's contractual obligations, including payments due for the next
five years and thereafter, since December 31, 2003. For further information on
these contractual obligations, refer to the MD&A in TCPL's 2003 Annual Report.
Financial and Other Instruments
The following represents the material changes to the company's risk management
and financial instruments since December 31, 2003 and reflects the impacts of
the hedge accounting changes adopted prospectively, effective January 1, 2004,
as further discussed under Accounting Changes - Hedging Relationships.
Foreign Exchange and Interest Rate Management Activity
The company manages certain foreign exchange risks of U.S. dollar debt and
interest rate exposures of the Alberta System, the Canadian Mainline and the
Foothills System through the use of foreign currency and interest rate
derivatives. These derivatives are comprised of contracts for periods up to
eight years. Certain of the realized gains and losses on interest rate
derivatives are shared with shippers on predetermined terms.
Asset/(Liability) September 30, 2004 December 31, 2003
(millions of dollars) (unaudited)
Carrying Fair Carrying Fair
Amount Value Amount Value
Foreign Exchange
Cross-currency swaps (33) (33) (26) (26)
Interest Rate
Interest rate swaps
Canadian dollars 16 16 2 15
U.S. dollars 8 8 - 8
At September 30, 2004, the principal amount of cross-currency swaps was US$282
million (December 31, 2003 - US$282 million). In addition, at September 30,
2004, the company has associated interest rate swaps with cross-currency swaps
with notional principal amounts of $210 million (December 31, 2003 - $210
million) and US$162 million (December 31, 2003 - US$162 million). Notional
principal amounts for interest rate swaps were $569 million (December 31, 2003 -
$964 million) and US$100 million (December 31, 2003 - US$100 million).
The company manages the foreign exchange risk and interest rate exposures of its
other U.S. dollar debt through the use of foreign currency and interest rate
derivatives. These derivatives are comprised of contracts for periods up to nine
years. The fair values of the interest rate derivatives are shown in the table
below.
Asset/(Liability) September 30, 2004 December 31, 2003
(millions of dollars) (unaudited)
Carrying Fair Carrying Fair
Amount Value Amount Value
Interest Rate
Interest rate swaps
Canadian dollars (4) (4) 1 (3)
U.S. dollars 34 34 2 37
Foreign Exchange
Forward Foreign Exchange
Contracts
U.S. dollars (7) (6) - 1
At September 30, 2004, the notional principal amounts for interest rate swaps
were $225 million (December 31, 2003 - $150 million) and US$450 million
(December 31, 2003 - US$450 million). The principal amount of forward foreign
exchange contracts was US$148 million (December 31, 2003 - US$19 million).
Risk Management
With respect to continuing operations, TCPL's market, financial and counterparty
risks remain substantially unchanged since December 31, 2003. For further
information on risks, refer to the MD&A in TCPL's 2003 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 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,
2003, 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 2003 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, 2003 continues to be depreciation expense. In third quarter 2004,
TCPL recognized in income the critical accounting estimate with respect to the
remaining after-tax deferred gain related to the 2001 sale of the Gas Marketing
business as further discussed under Results of Operations - Discontinued
Operations. For further information on these critical accounting estimates,
refer to the MD&A in TCPL's 2003 Annual Report.
Accounting Changes
Asset Retirement Obligations
Effective January 1, 2004, the company adopted the new standard of the Canadian
Institute of Chartered Accountants (CICA) Handbook Section "Asset Retirement
Obligations", which addresses financial accounting and reporting for obligations
associated with asset retirement costs. This section requires that the fair
value of a liability for an asset retirement obligation be recognized in the
period in which it is incurred if a reasonable estimate of fair value can be
made. The fair value is added to the carrying amount of the associated asset.
The liability is accreted at the end of each period through charges to operating
expenses. This accounting change was applied retroactively with restatement of
prior periods.
The plant, property and equipment of the regulated natural gas transmission
operations consist primarily of underground pipelines and above ground
compression equipment and other facilities. No amount has been recorded for
asset retirement obligations relating to these assets as it is not possible to
make a reasonable estimate of the fair value of the liability due to the
indeterminate timing and scope of the asset retirements. Management believes it
is reasonable to assume that all retirement costs associated with the regulated
pipelines will be recovered through tolls in future periods.
The impact of this accounting change resulted in an increase of $2 million in
the estimated fair value of the liability for TCPL's Other Gas Transmission
assets as at January 1, 2003 and December 31, 2003. The estimated fair value of
this liability as at September 30, 2004 was $11 million.
The plant, property and equipment in the Power business consists primarily of
power plants in Canada and the United States. The impact of this accounting
change resulted in an increase of $6 million and $7 million in the estimated
fair value of the liability for the power plants and associated assets as at
January 1, 2003 and December 31, 2003, respectively. The asset retirement cost,
net of accumulated depreciation that would have been recorded if the cost had
been recorded in the period in which it arose, is recorded as an additional cost
of the assets as at January 1, 2003. The estimated fair value of the liability
as at September 30, 2004 was $23 million. The company has no legal liability for
asset retirement obligations with respect to its investment in Bruce Power and
the Sundance A and B power purchase arrangements.
The impact of this change on TCPL's net income in prior periods was nil while
the impact of this change in the three and nine months ended September 30, 2004
was nil and approximately $1 million, respectively.
Hedging Relationships
Effective January 1, 2004, the company adopted the provisions of the CICA's new
Accounting Guideline "Hedging Relationships" that specifies the circumstances in
which hedge accounting is appropriate, including the identification,
documentation, designation and effectiveness of hedges, and the discontinuance
of hedge accounting. In accordance with the provisions of this new guideline,
TCPL has recorded all derivatives on the Consolidated Balance Sheet at fair
value.
This new guideline was applied prospectively and resulted in a decrease in net
income of $2 million and nil for the three and nine months ended September 30,
2004, respectively. The significant impact of the accounting change on the
Consolidated Balance Sheet as at January 1, 2004 is as follows.
(unaudited - millions of dollars) Increase/
(Decrease)
Current Assets
Other 8
Other Assets 123
Total Assets 131
Current Liabilities
Accounts Payable 8
Deferred Amounts 132
Long-Term Debt (7)
Future Income Taxes (1)
Total Liabilities 132
Generally Accepted Accounting Principles
Effective January 1, 2004, the company adopted the new standard of the CICA
Handbook Section "Generally Accepted Accounting Principles" that defines primary
sources of generally accepted accounting principles (GAAP) and the other sources
that need to be considered in the application of GAAP. The new standard
eliminates the ability to rely on industry practice to support a particular
accounting policy.
This accounting change was applied prospectively and there was no impact on net
income in the three and nine months ended September 30, 2004. In prior periods,
in accordance with industry practice, certain assets and liabilities related to
the company's regulated activities, and offsetting deferral accounts, were not
recognized on the balance sheet. The impact of the change on the consolidated
balance sheet as at January 1, 2004 is as follows.
(unaudited - millions of dollars) Increase/
(Decrease)
Other Assets 153
Deferred Amounts 80
Long-Term Debt 76
Preferred Securities (3)
Total Liabilities 153
Outlook
In 2004, the closing of the pending acquisition of GTN and the gain on sale of
Millennium are expected to have a positive impact on the results of the Gas
Transmission segment. However, the EUB's decisions received in July 2004 and
August 2004 on the GCOC for Alberta utilities and on Phase I of the 2004 GRA for
Alberta System, respectively, will have a negative impact on the expected
results of the Gas Transmission segment. For further information on the pending
GTN acquisition and the EUB's and NEB's decisions, please refer to Other Recent
Developments. In addition, the company expects higher Power net earnings in 2004
than originally anticipated as a result of the gains related to Power LP. Power
earnings for the remainder of 2004 will be negatively impacted due to the
recognition of previously deferred gains related to Power LP in second quarter
2004 and OSP's August 2004 arbitration settlement. Income tax related items and
the release of the previously established restructuring provisions will have a
positive impact on the expected results of the Corporate segment. Excluding
these impacts, the company's outlook is relatively unchanged since December 31,
2003. For further information on outlook, refer to the MD&A in TCPL's 2003
Annual Report.
The company's net earnings 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
Alberta System
In July 2004, the EUB released its decision in the GCOC proceeding. The Alberta
System, as all other Alberta provincially regulated utilities, was given a rate
of return on equity (ROE) of 9.60 per cent for 2004. This generic ROE will be
adjusted annually by 75 per cent of the change in long-term Government of Canada
bonds from the previous year, consistent with the approach used by the NEB. The
EUB also established a deemed common equity of 35 per cent for the Alberta
System. This result is less than the applied for ROE of 11 per cent on deemed
common equity of 40 per cent. The EUB also indicated that a review of its ROE
adjustment mechanism would not occur prior to 2009, unless the ROE resulting
from its application is less than 7.6 per cent or greater than 11.6 per cent.
As for changes in capital structure, it expects changes would only be pursued if
there is a material change in investment risk.
In September 2003, TCPL filed Phase I of the 2004 GRA with the EUB, consisting
of evidence in support of the applied-for rate base and revenue requirement.
The company applied for a composite depreciation rate of 4.13 per cent compared
to the 2003 composite depreciation rate of 4.00 per cent. On August 24, 2004 the
EUB issued its decision and approved a composite depreciation rate of 4.06 per
cent, approved the purchase of the Simmons Pipeline System (Simmons) for
approximately $22 million and approved the Transportation by Others arrangements
that currently exist on the Foothills, Simmons and Ventures LP systems. However,
a significant amount of costs were disallowed for recovery, which reduced
revenue requirement and rate base.
In September 2004, TCPL filed with the Alberta Court of Appeal for leave to
appeal the EUB's decision on Phase I of the 2004 GRA with respect to the
disallowance of applied-for incentive compensation costs. In its decision, the
EUB disallowed approximately $24 million (pre tax) of operating costs, which
included $19 million of applied-for incentive compensation costs. TCPL believes
the EUB made errors of law in deciding to deny the inclusion of these costs in
the revenue requirement. The company believes these are necessary costs that it
will reasonably and prudently incur for the safe, reliable, and efficient
operation of the Alberta System. Subsequently, at the request of TCPL, the Court
of Appeal adjourned the appeal for an indefinite period of time while TCPL
considers the merits of a Review and Variance application to the EUB in respect
of 2004 costs, and works toward a negotiated settlement of future years' tolls
with its customers. The EUB has limited the term of a settlement to three years.
In October 2004, Simmons became part of TCPL's Alberta System. The assets
include 380 kilometres of pipeline and metering facilities and four compressor
units located in northern Alberta. Simmons delivers natural gas to the Fort
McMurray area from several connecting receipt points within the Alberta System,
along with production connected directly to the pipeline and has a capacity of
approximately 185 million cubic feet per day.
Phase II of the 2004 GRA, dealing primarily with rate design and services, was
filed in December 2003. The oral portion of the Phase II hearing began in
Calgary on June 9, 2004, with arguments filed in July 2004. An EUB decision is
expected on October 26, 2004.
In December 2003, the EUB approved TCPL's application to charge interim tolls
for transportation service, effective January 1, 2004. Final tolls for 2004
will be determined in fourth quarter based on the EUB decisions on the 2004 GRA
and will incorporate the outcome from the EUB decision in the GCOC proceeding.
Canadian Mainline
The NEB has approved interim tolls for 2004 for the Canadian Mainline. The 2004
Tolls and Tariff Application for the Canadian Mainline was filed in January
2004, and included a request for an 11 per cent return on a 40 per cent deemed
common equity component. In light of a Federal Court of Appeal decision, TCPL
informed the NEB that it would not contest the ROE formula in its 2004 Tolls and
Tariff Application and revised the Application to reflect the formula-based ROE
of 9.56 per cent on 40 per cent deemed common equity. Phase I of the hearing in
which the NEB considered all issues raised by the Application with the exception
of cost of capital, concluded June 25, 2004. The NEB issued its decision for
Phase I on September 10, 2004 and approved virtually all cost elements of the
Application as well as a new non-renewable firm transportation service. It
suspended the fuel gas incentive program for 2004. The proceedings for Phase II
of the hearing, which will address capital structure, will take place in fourth
quarter 2004. A decision is not expected until the end of first quarter 2005.
Other Gas Transmission
Gas Transmission Northwest Corporation
As described in the MD&A in TCPL's 2003 Annual Report, TCPL executed a Stock
Purchase Agreement with National Energy & Gas Transmission, Inc., (NEGT) and
certain of its subsidiaries to acquire GTN for US$1.7 billion, including US$0.5
billion of assumed debt, subject to closing adjustments. GTN owns and operates
two pipeline systems - the Gas Transmission Northwest Pipeline System and the
North Baja Pipeline System (North Baja). The acquisition of North Baja was
subject to a right of first refusal in favour of a third party. That third
party has now agreed to waive its right of first refusal in respect of the sale
of North Baja to TCPL and, accordingly, TCPL now expects to close on the Gas
Transmission Northwest Pipeline System and North Baja at the same time.
In second quarter 2004, NEGT's bankruptcy court approved both its Chapter 11
plan of reorganization and the sale of GTN to TCPL. TCPL has satisfied its
pre-closing conditions under the purchase agreement and is awaiting the
implementation of NEGT's Chapter 11 plan of reorganization, which is the only
remaining material closing condition in the transaction. NEGT has informed TCPL
that, prior to implementing its Chapter 11 plan of reorganization, it is
diligently pursuing the resolution of other issues in the reorganization that
are unrelated to GTN or the GTN transaction but nonetheless it believes are in
the best interests of the estate and its creditors. NEGT has further stated that
it believes that its plan will become effective in the fourth quarter of this
year. The parties expect to close the GTN transaction promptly thereafter.
Northern Development
In October 2004, Imperial Oil Resources announced that applications for the main
regulatory approvals required for the Mackenzie Gas Pipeline Project were
submitted to the boards, panels and agencies responsible for assessing and
regulating energy developments in the Northwest Territories. These filings mark
a significant milestone in the project definition phase. TCPL will continue both
to support the project through its position established under the various
project agreements and to facilitate the interconnection of Mackenzie gas into
TCPL's Alberta System.
Liquefied Natural Gas
In September 2004, TCPL and Petro-Canada signed a memorandum of understanding to
develop a liquefied natural gas (LNG) facility, Cacouna Energy, in Gros Cacouna,
Quebec. TCPL and Petro-Canada will equally share the costs to construct the LNG
receiving, storage and regasification facility and TCPL will operate the
facility, while Petro-Canada will supply the LNG. The proposed facility would be
capable of receiving, storing, and regasifying imported LNG with an average
annual send-out capacity of approximately 500 million cubic feet of natural gas
a day. The estimated cost of construction is $660 million. Construction of the
facility is subject to regulatory approval from federal, provincial and
municipal governments and is expected to take approximately two years. If
approval is received, the facility is expected to be in service towards the end
of the decade.
Gas Storage
In addition to the company's investment in the CrossAlta natural gas storage
facility, TransCanada has entered into long-term arrangements, commencing in
second quarter 2005, for 20 petajoules (PJ) of additional natural gas storage
capacity in Alberta. The capacity under contract increases to 30 PJ in 2006 and
40 PJ in 2007. TransCanada intends to utilize this capacity as part of its
Alberta gas storage services business. The company also continues to explore
other gas storage opportunities.
Power
USGen New England, Inc.
In September 2004, USGen New England, Inc. (USGen) and TCPL signed an Asset
Purchase Agreement for TCPL to purchase hydroelectric generation assets with a
total generating capacity of 567 MW for US$505 million. The assets include
generating systems on two rivers in New England: the 484 MW Connecticut River
system in New Hampshire and Vermont and the 83 MW Deerfield River system in
Massachusetts and Vermont. The output is not currently subject to long-term
contracts.
USGen is a subsidiary of NEGT and voluntarily filed for protection under Chapter
11 of the U.S. Bankruptcy Code in July 2003. The sale will be subject to
bankruptcy court approval. Through a court-sanctioned auction process in
accordance with customary bidding procedures, USGen will seek offers that are
higher or otherwise better than the TCPL agreement.
As part of its agreement, TCPL is granted certain protections, subject to court
approval, most notably a break fee and expense reimbursement if another bid is
accepted. TCPL also retains the right to amend its offer should USGen receive an
offer which is superior to its existing agreement with TCPL. The agreement
contemplates that final bankruptcy court approval of the sale will be obtained
approximately 75 days after signing of the agreement. The sale is also subject
to U.S. anti-trust and other regulatory reviews.
Hydro-Quebec
In October 2004, Hydro-Quebec Distribution awarded Cartier Wind Energy Inc.,
which is 50 per cent owned by TCPL, six projects representing a total of 739.5
MW. The projects are distributed in various communities of the administrative
region of Gaspesie, Iles-de-la-Madeleine and the Regional County Municipality of
Matane and will be commissioned between 2006 and 2012 at a total cost of
approximately $1.2 billion. Power purchase agreements are being negotiated with
Hydro-Quebec Distribution for each of the six facilities and are expected to be
completed in December 2004. Each agreement will be subject to approval by Le
Regie de L'Energie.
MacKay River
The MacKay River 165 MW cogeneration plant, situated at Petro-Canada's MacKay
River oilsands development, was declared contractually commercially in-service
on February 1, 2004. Operational issues with the host site in the first half of
2004 were resolved during third quarter 2004 and the plant is operating as
designed.
Other
In September 2004, TCPL announced it will exercise its right to redeem all of
its outstanding US$200 million 8.50 per cent Debentures due 2023 on November 1,
2004. Holders of the Debentures will be entitled to US$1,042.7806 per US$1,000
principal amount. This amount includes US$33.10 representing the redemption
premium and US$9.6806 representing accrued and unpaid interest to the redemption
date.
In October 2004, the company issued US$300 million of ten year senior unsecured
notes bearing interest at 4.875 per cent, thereby fully utilizing the remainder
of the debt shelf program in the U.S. At September 30, 2004, $1.35 billion of
debt securities could be issued under a debt shelf program in Canada. The
company expects to renew the debt shelf programs in the U.S. and Canada in
fourth quarter 2004.
Share Information
As at September 30, 2004, TCPL had 480,668,109 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 September 30,
2004.
Selected Quarterly Consolidated Financial Data (1)
2004 2003 2002
(unaudited)
(millions of dollars Third Second First Fourth Third Second First Fourth
except per share amounts)
Revenues 1,224 1,256 1,233 1,319 1,391 1,311 1,336 1,338
Net Income applicable to
common shares
Continuing operations 192 388 214 193 198 202 208 180
Discontinued operations 52 - - - 50 - - -
244 388 214 193 248 202 208 180
Share Statistics
Net income per share -
Basic and diluted
Continuing operations $ 0.40 $ 0.81 $0.44 $ 0.40 $ 0.41 $ 0.42 $ 0.43 $ 0.37
Discontinued operations 0.11 - - - 0.11 - - -
$ 0.51 $ 0.81 $0.44 $ 0.40 $ 0.52 $ 0.42 $ 0.43 $ 0.37
(1) The selected quarterly consolidated financial data has been prepared in
accordance with Canadian GAAP. Certain comparative figures have been
reclassified to conform with the current year's presentation. For a discussion
on the factors affecting the comparability of the financial data, including
discontinued operations, refer to Noe 1 and Note 18 of TCPL's 2003 audited
consolidated financial statements included in TCPL's 2003 Annual Report.
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 earnings fluctuate
over the long term based on regulators' decisions and negotiated settlements
with shippers. Generally, quarter over quarter revenues and earnings during any
particular fiscal year remain fairly 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.
* In first quarter 2003, TCPL completed the acquisition of a 31.6 per cent
interest in Bruce Power, resulting in increased earnings in the Power
business in 2004 and 2003 compared to 2002. In addition, TCPL reached a
one-year Alberta System Revenue Requirement Settlement for 2003 which
included a fixed revenue requirement component of $1.277 billion compared to
$1.347 billion in 2002, resulting in lower earnings in the Transmission
business in 2003 compared to 2002.
* Second quarter 2003 net earnings included a $19 million positive
after-tax earnings impact of a June 2003 settlement with a former
counterparty that had previously defaulted under power forward contracts.
* Third quarter 2003 net earnings included TCPL's $11 million share of a
future income tax benefit adjustment recognized by TransGas.
* First quarter 2004 net earnings included approximately $12 million of
income tax refunds and refund interest.
* Second quarter 2004 net earnings included 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 GCOC 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 carryforwards.
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.
Consolidated Income
(unaudited) Three months ended Nine months ended
September 30 September 30
(millions of dollars) 2004 2003 2004 2003
Revenues 1,224 1,391 3,713 4,038
Operating Expenses
Cost of sales 116 164 395 533
Other costs and expenses 395 439 1,169 1,248
Depreciation 236 260 700 692
747 863 2,264 2,473
Operating Income 477 528 1,449 1,565
Other Expenses/(Income)
Financial charges 208 210 602 619
Financial charges of joint ventures 15 18 45 63
Equity income (39) (67) (156) (151)
Interest and other income (33) (9) (65) (44)
Gains related to Power LP - - (197) -
151 152 229 487
Income from Continuing Operations
before
Income Taxes and Non-Controlling 326 376 1,220 1,078
Interests
Income Taxes
Current 104 43 342 179
Future 17 121 38 248
121 164 380 427
Non-Controlling Interests - - 6 -
Net Income from Continuing Operations 205 212 834 651
Net Income from Discontinued 52 50 52 50
Operations
Net Income 257 262 886 701
Preferred Securities Charges 7 8 23 26
Preferred Share Dividends 6 6 17 17
Net Income Applicable to Common Shares 244 248 846 658
Net Income Applicable to Common Shares
Continuing operations 192 198 794 608
Discontinued operations 52 50 52 50
244 248 846 658
See accompanying Notes to the Consolidated Financial Statements.
Consolidated Cash Flows
(unaudited) Three months ended Nine months ended
September 30 September 30
(millions of dollars) 2004 2003 2004 2003
Cash Generated From Operations
Net income from continuing operations 205 212 834 651
Depreciation 236 260 700 692
Future income taxes 17 121 38 248
Gains related to Power LP - - (197) -
Equity income in excess of (29) (66) (119) (125)
distributions received
Other (36) (11) (50) (59)
Funds generated from continuing 393 516 1,206 1,407
operations
Decrease in operating working capital 132 65 60 90
Net cash provided by continuing 525 581 1,266 1,497
operations
Net cash provided by/(used in) 1 67 (9) (17)
discontinued operations
526 648 1,257 1,480
Investing Activities
Capital expenditures (97) (81) (291) (264)
Acquisitions, net of cash acquired (49) (135) (63) (547)
Disposition of assets - - 408 -
Deferred amounts and other (11) (165) (27) (196)
Net cash (used in)/provided by (157) (381) 27 (1,007)
investing activities
Financing Activities
Dividends and preferred securities (159) (150) (465) (438)
charges
Notes payable (repaid)/issued, net (66) 361 (367) 279
Long-term debt issued - - 665 475
Reduction of long-term debt (9) (327) (510) (386)
Non-recourse debt of joint ventures 60 14 147 60
issued
Reduction of non-recourse debt of (8) (7) (20) (55)
joint ventures
Redemption of junior subordinated - (218) - (218)
debentures
Partnership units of joint ventures - - 88 -
issued
Common shares issued - - - 18
Net cash used in financing activities (182) (327) (462) (265)
Effect of Foreign Exchange Rate
Changes on Cash and
Short-Term Investments (58) (3) (55) (37)
Increase/(Decrease) in Cash and 129 (63) 767 171
Short-Term Investments
Cash and Short-Term Investments
Beginning of period 975 446 337 212
Cash and Short-Term Investments
End of period 1,104 383 1,104 383
Supplementary Cash Flow Information
Income taxes paid 77 68 329 192
Interest paid 193 186 586 618
See accompanying Notes to the
Consolidated Financial Statements.
Consolidated Balance Sheet
September 30, December 31,
2004 2003
(millions of dollars) (unaudited)
ASSETS
Current Assets
Cash and short-term investments 1,104 337
Accounts receivable 516 603
Inventories 167 165
Other 122 88
1,909 1,193
Long-Term Investments 846 733
Plant, Property and Equipment 16,796 17,460
Other Assets 1,286 1,164
20,837 20,550
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Notes payable - 367
Accounts payable 1,016 1,069
Accrued interest 230 208
Current portion of long-term debt 838 550
Current portion of non-recourse debt of 86 19
joint ventures
2,170 2,213
Deferred Amounts 478 475
Long-Term Debt 9,302 9,465
Future Income Taxes 457 427
Non-Recourse Debt of Joint Ventures 811 761
Preferred securities 19 22
13,237 13,363
Non-Controlling Interests 75 82
Shareholders' Equity
Preferred securities 671 672
Preferred shares 389 389
Common shares 4,632 4,632
Contributed surplus 269 267
Retained earnings 1,610 1,185
Foreign exchange adjustment (46) (40)
7,525 7,105
20,837 20,550
See accompanying Notes to the Consolidated Financial Statements.
Consolidated Retained Earnings
(unaudited) Nine months ended
September 30
(millions of dollars) 2004 2003
Balance at beginning of 1,185 854
period
Net income 886 701
Preferred securities charges (23) (26)
Preferred share dividends (17) (17)
Common share dividends (421) (389)
1,610 1,123
See accompanying Notes to the Consolidated Financial Statements.
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, 2003 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 annual financial statements included in
TCPL's 2003 Annual Report. 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 Changes
Asset Retirement Obligations
Effective January 1, 2004, the company adopted the new standard of the Canadian
Institute of Chartered Accountants (CICA) Handbook Section "Asset Retirement
Obligations", which addresses financial accounting and reporting for obligations
associated with asset retirement costs. This section requires that the fair
value of a liability for an asset retirement obligation be recognized in the
period in which it is incurred if a reasonable estimate of fair value can be
made. The fair value is added to the carrying amount of the associated asset.
The liability is accreted at the end of each period through charges to operating
expenses. This accounting change was applied retroactively with restatement of
prior periods.
The plant, property and equipment of the regulated natural gas transmission
operations consist primarily of underground pipelines and above ground
compression equipment and other facilities. No amount has been recorded for
asset retirement obligations relating to these assets as it is not possible to
make a reasonable estimate of the fair value of the liability due to the
indeterminate timing and scope of the asset retirements. Management believes it
is reasonable to assume that all retirement costs associated with the regulated
pipelines will be recovered through tolls in future periods.
The impact of this accounting change resulted in an increase of $2 million in
the estimated fair value of the liability for TCPL's Other Gas Transmission
assets as at January 1, 2003 and December 31, 2003. The estimated fair value of
this liability as at September 30, 2004 was $11 million.
The plant, property and equipment in the Power business consists primarily of
power plants in Canada and the United States. The impact of this accounting
change resulted in an increase of $6 million and $7 million in the estimated
fair value of the liability for the power plants and associated assets as at
January 1, 2003 and December 31, 2003, respectively. The asset retirement cost,
net of accumulated depreciation that would have been recorded if the cost had
been recorded in the period in which it arose, is recorded as an additional cost
of the assets as at January 1, 2003. The estimated fair value of the liability
as at September 30, 2004 was $23 million. The company has no legal liability for
asset retirement obligations with respect to its investment in Bruce Power and
the Sundance A and B power purchase arrangements.
The impact of this change on TCPL's net income in prior periods was nil while
the impact of this change in the three and nine months ended September 30, 2004
was nil and approximately $1 million, respectively.
Hedging Relationships
Effective January 1, 2004, the company adopted the provisions of the CICA's new
Accounting Guideline "Hedging Relationships" that specifies the circumstances in
which hedge accounting is appropriate, including the identification,
documentation, designation and effectiveness of hedges, and the discontinuance
of hedge accounting. In accordance with the provisions of this new guideline,
TCPL has recorded all derivatives on the Consolidated Balance Sheet at fair
value.
This new guideline was applied prospectively and resulted in a decrease in net
income of $2 million and nil for the three and nine months ended September 30,
2004, respectively. The significant impact of the accounting change on the
Consolidated Balance Sheet as at January 1, 2004 is as follows.
(unaudited - millions of dollars) Increase/
(Decrease)
Current Assets
Other 8
Other Assets 123
Total Assets 131
Current Liabilities
Accounts Payable 8
Deferred Amounts 132
Long-Term Debt (7)
Future Income Taxes (1)
Total Liabilities 132
Generally Accepted Accounting Principles
Effective January 1, 2004, the company adopted the new standard of the CICA
Handbook Section "Generally Accepted Accounting Principles" that defines primary
sources of GAAP and the other sources that need to be considered in the
application of GAAP. The new standard eliminates the ability to rely on industry
practice to support a particular accounting policy.
This accounting change was applied prospectively and there was no impact on net
income in the three and nine months ended September 30, 2004. In prior periods,
in accordance with industry practice, certain assets and liabilities related to
the company's regulated activities, and offsetting deferral accounts, were not
recognized on the balance sheet. The impact of the change on the consolidated
balance sheet as at January 1, 2004 is as follows.
(unaudited - millions of dollars) Increase/
(Decrease)
Other Assets 153
Deferred Amounts 80
Long-Term Debt 76
Preferred Securities (3)
Total Liabilities 153
3. Segmented Information
Gas Power Corporate Total
Transmission
Three months ended 2004 2003 2004 2003 2004 2003 2004 2003
September 30
(unaudited - millions
of dollars)
Revenues 945 1,070 279 321 - - 1,224 1,391
Cost of sales - - (116) (164) - - (116) (164)
Other costs and (293) (339) (102) (99) - (1) (395) (439)
expenses
Depreciation (218) (240) (18) (19) - (1) (236) (260)
Operating income/ 434 491 43 39 - (2) 477 528
(loss)
Financial and (193) (198) (3) (2) (25) (24) (221) (224)
preferred equity
charges and
non-controlling
interests
Financial charges of (14) (18) (1) - - - (15) (18)
joint ventures
Equity income 10 29 29 38 - - 39 67
Interest and other 1 3 6 2 26 4 33 9
income
Income taxes (104) (147) (23) (27) 6 10 (121) (164)
Continuing 134 160 51 50 7 (12) 192 198
operations
Discontinued 52 50
operations
Net Income 244 248
Applicable to Common
Shares
Gas Power Corporate Total
Transmission
Nine months ended 2004 2003 2004 2003 2004 2003 2004 2003
September 30
(unaudited -
millions of dollars)
Revenues 2,842 2,974 871 1,064 - - 3,713 4,038
Cost of sales - - (395) (533) - - (395) (533)
Other costs and (876) (944) (290) (299) (3) (5) (1,169) (1,248)
expenses
Depreciation (645) (629) (55) (62) - (1) (700) (692)
Operating income/ 1,321 1,401 131 170 (3) (6) 1,449 1,565
(loss)
Financial and (574) (588) (7) (7) (67) (67) (648) (662)
preferred equity
charges and
non-controlling
interests
Financial charges of (43) (62) (2) (1) - - (45) (63)
joint ventures
Equity income 31 59 125 92 - - 156 151
Interest and other 13 11 11 10 41 23 65 44
income
Gains related to - - 197 - - - 197 -
Power LP
Income taxes (319) (359) (90) (88) 29 20 (380) (427)
Continuing 429 462 365 176 - (30) 794 608
operations
Discontinued 52 50
operations
Net Income 846 658
Applicable to Common
Shares
Total Assets
September 30, December
2004 31,
(millions of dollars) (unaudited) 2003
Gas Transmission 16,356 16,974
Power 2,696 2,753
Corporate 1,775 812
Continuing 20,827 20,539
Operations
Discontinued 10 11
Operations
20,837 20,550
4. Risk Management and Financial Instruments
The following represents the material changes to the company's risk management
and financial instruments since December 31, 2003 and reflects the impacts of
the hedge accounting changes adopted prospectively, effective January 1, 2004,
as further discussed under Note 2, Accounting Changes - Hedging Relationships.
Foreign Exchange and Interest Rate Management Activity
The company manages certain foreign exchange risks of U.S. dollar debt and
interest rate exposures of the Alberta System, the Canadian Mainline and the
Foothills System through the use of foreign currency and interest rate
derivatives. These derivatives are comprised of contracts for periods up to
eight years. Certain of the realized gains and losses on interest rate
derivatives are shared with shippers on predetermined terms.
Asset/(Liability) September 30, 2004 December 31, 2003
(millions of dollars) (unaudited)
Carrying Fair Carrying Fair
Amount Value Amount Value
Foreign Exchange
Cross-currency swaps (33) (33) (26) (26)
Interest Rate
Interest rate swaps
Canadian dollars 16 16 2 15
U.S. dollars 8 8 - 8
At September 30, 2004, the principal amount of cross-currency swaps was US$282
million (December 31, 2003 - US$282 million). In addition, at September 30,
2004, the company has associated interest rate swaps with cross-currency swaps
with notional principal amounts of $210 million (December 31, 2003 - $210
million) and US$162 million (December 31, 2003 - US$162 million). Notional
principal amounts for interest rate swaps were $569 million (December 31, 2003 -
$964 million) and US$100 million (December 31, 2003 - US$100 million).
The company manages the foreign exchange risk and interest rate exposures of its
other U.S. dollar debt through the use of foreign currency and interest rate
derivatives. These derivatives are comprised of contracts for periods up to nine
years. The fair values of the interest rate derivatives are shown in the table
below.
At September 30, 2004, the notional principal amounts for interest rate swaps
were $225 million (December 31, 2003 - $150 million) and US$450 million
(December 31, 2003 - US$450 million). The principal amount of forward foreign
exchange contracts was US$148 million (December 31, 2003 - US$19 million).
5. Power LP
On April 30, 2004, TCPL sold the ManChief and Curtis Palmer power facilities for
US$402.6 million, before closing adjustments, to TransCanada Power, L.P. (Power
LP) and recognized a gain of $15 million after tax. Power LP funded the purchase
through an issue of 8.1 million subscription receipts, which closed April 15,
2004, and third party debt. As part of the subscription receipts offering, TCPL
purchased 540,000 subscription receipts for an aggregate purchase price of
approximately $20 million. The subscription receipts were subsequently converted
into partnership units. The net impact of this issue reduced TCPL's ownership
interest in Power LP from 35.6 per cent to 30.6 per cent.
At a special meeting held on April 29, 2004, Power LP's unitholders approved an
amendment to the terms of the Power LP Partnership Agreement to remove Power
LP's obligation to redeem all units not owned by TCPL at June 30, 2017. TCPL was
required to fund this redemption, thus the removal of Power LP's obligation
eliminates this requirement. The removal of the obligation and the reduction in
TCPL's ownership interest in Power LP resulted in a gain of $172 million. This
amount primarily reflects the recognition of unamortized gains on previous Power
LP transactions.
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 nine months ended
September 30 is as follows.
Three months ended September 30 Pension Benefit Other Benefit
Plans Plans
(unaudited - millions of dollars) 2004 2003 2004 2003
Current service 7 6 1 -
cost
Interest cost 14 13 1 1
Expected return on plan assets (14) (13) - -
Amortization of transitional obligation related to
regulated business - - 1 1
Amortization of net actuarial loss 3 2 1 -
Amortization of past service costs 1 1 - 1
Net benefit cost recognized 11 9 4 3
Nine months ended September 30 Pension Benefit Other Benefit
Plans Plans
(unaudited - millions of dollars) 2004 2003 2004 2003
Current service cost 21 19 2 1
Interest cost 42 39 4 4
Expected return on plan assets (41) (39) - -
Amortization of transitional obligation related to regulated - - 2 2
business
Amortization of net actuarial loss 9 6 2 1
Amortization of past service costs 2 2 - 1
Net benefit cost recognized 33 27 10 9
7. Long-Term Debt
In September 2004, TCPL announced it will exercise its right to redeem all of
its outstanding US$200 million 8.50 per cent Debentures due 2023 on November 1,
2004. Holders of the Debentures will be entitled to US$1,042.7806 per US$1,000
principal amount. This amount includes US$33.10 representing the redemption
premium and US$9.6806 representing accrued and unpaid interest to the redemption
date.
In October 2004, the company issued US$300 million of ten year senior unsecured
notes bearing interest at 4.875 per cent, thereby fully utilizing the remainder
of the debt shelf program in the U.S. At September 30, 2004 $1.35 billion of
debt securities could be issued under a debt shelf program in Canada. The
company expects to renew the debt shelf programs in the U.S. and Canada in
fourth quarter 2004.
8. Discontinued Operations
The Board of Directors approved a plan in July 2001 to dispose of the company's
Gas Marketing business. The company's exit from Gas Marketing was substantially
completed by December 31, 2001. At September 30, 2004, TCPL reviewed the
provision for loss on discontinued operations and the remaining deferred gain
with respect to the divested Gas Marketing business. As a result of this review,
it was determined that TCPL's contingent liability pursuant to guarantees and
obligations under certain contracts related to the divested Gas Marketing
business had decreased and, accordingly, the remaining $52 million after-tax
deferred gain was recognized in income in third quarter 2004. In addition, TCPL
concluded that the remaining provision for loss on discontinued operations was
adequate.
Net income from discontinued operations was $52 million, net of $27 million in
taxes, for the three and nine months ended September 30, 2004 compared to $50
million, net of $29 million in taxes, for the same periods in 2003. The
provision for loss on discontinued operations at September 30, 2004 was $47
million (December 31, 2003 - $41 million). The provision for loss on
discontinued operations is included in Accounts Payable.
9. Acquisition of Gas Transmission Northwest Corporation
On February 24, 2004, TCPL announced an agreement to acquire Gas Transmission
Northwest Corporation (GTN) from National Energy & Gas Transmission Inc. (NEGT)
for approximately US$1.7 billion, including US$0.5 billion of assumed debt and
subject to closing adjustments. GTN is a natural gas pipeline company that owns
and operates two pipeline systems. TCPL has satisfied its pre-closing conditions
under the purchase agreement and is awaiting the implementation of NEGT's plan
of reorganization, which is the only remaining material closing condition in the
transaction. The purchase is expected to close in fourth quarter 2004.
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/Debbie Stein at (403) 920-7911. The investor fax line is (403)
920-2457. Media Relations: Hejdi Feick/Kurt Kadatz at (403) 920-7859
Visit TCPL's Internet site at: http://www.transcanada.com
This information is provided by RNS
The company news service from the London Stock Exchange
END
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