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RNS Number:3458B
TransCanada Pipelines Ld
28 July 2004
TRANSCANADA PIPELINES LIMITED
SECOND QUARTER 2004
Quarterly Report
Management's Discussion and Analysis
Management's discussion and analysis (MD&A) dated July 22, 2004 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, 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.
Consolidated Results-at-a-Glance
(unaudited) Three months ended June 30 Six months ended June 30
(millions of dollars) 2004 2003 2004 2003
Net Income Applicable to Common Shares 388 202 602 410
Results of Operations
Consolidated
TCPL's net income applicable to common shares (net earnings) for second quarter
2004 was $388 million compared to $202 million for the same period in 2003. The
increase of $186 million was primarily due to significantly higher net earnings
from the Power business resulting from TCPL's proportionate gain of $15 million
after tax (gain of $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 the obligation, in 2017, of
Power LP to redeem units not owned by TCPL. TCPL was required to fund this
redemption, thus the removal of Power LP's obligation eliminates this
requirement. Higher net earnings of $2 million in the Gas Transmission business
for second quarter 2004 compared to the same period in the prior year were
primarily due to a $7 million gain on sale of the company's equity interest in
the Millennium Pipeline project (Millennium) offset by lower net earnings from
the Canadian Mainline and Alberta System.
Net expenses in the Corporate segment for second quarter 2004 were comparable to
the same period in the prior year.
TCPL's net earnings for the six months ended June 30, 2004 were $602 million
compared to $410 million for the comparable period in 2003. The increase of
$192 million in the first six months of 2004 compared to the same period in 2003
was primarily due to significantly higher net earnings in the Power business
mainly as a result of gains related to Power LP and lower net expenses in the
Corporate segment, partially offset by lower net earnings from the Gas
Transmission business.
Excluding the above-mentioned $187 million of combined gains included in net
earnings related to Power LP, Power business' net earnings for the six months
ended June 30, 2004 were consistent with the same period in 2003. Higher net
earnings from TCPL's investment in Bruce Power L.P. (Bruce Power) were primarily
offset by lower contributions from Eastern Operations and Western Operations and
the recognition in second quarter 2003 of the $19 million after-tax settlement
with a former counterparty.
The decrease in net expenses of $11 million in the Corporate segment for the six
months ended June 30, 2004 relates primarily to income tax refunds received in
first quarter 2004.
The lower net earnings of $7 million in the Gas Transmission business for the
six months ended June 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 the gain on sale of Millennium in 2004.
Segment Results-at-a-Glance
(unaudited) Three months ended June 30 Six months ended June 30
(millions of dollars) 2004 2003 2004 2003
Gas Transmission 146 144 295 302
Power 249 63 314 126
Corporate (7) (5) (7) (18)
Net Income Applicable to Common Shares
Funds generated from continuing operations of $390 million for the second
quarter decreased $44 million compared to second quarter 2003. Funds generated
from operations of $813 million for the six months ended June 30, 2004 decreased
$78 million compared to the same period in 2003.
Gas Transmission
The Gas Transmission business generated net earnings of $146 million and $295
million for the quarter and six months ended June 30, 2004, respectively,
compared to $144 million and $302 million for the same periods in 2003.
Gas Transmission Results-at-a-Glance
(unaudited) Three months ended June 30 Six months ended June 30
(millions of dollars) 2004 2003 2004 2003
Wholly-Owned Pipelines
Alberta System 39 44 79 86
Canadian Mainline 66 71 130 142
Foothills* 5 5 11 9
BC System 1 2 3 4
111 122 223 241
Other Gas Transmission
Great Lakes 14 11 31 28
Iroquois 3 4 11 11
TC PipeLines, LP 5 4 9 7
Portland** - - 6 7
Ventures LP 4 2 7 4
Trans Quebec & Maritimes 2 2 4 4
CrossAlta 1 1 2 4
TransGas de Occidente 3 3 6 7
Northern Development (1) - (2) (1)
General, administrative, support costs
and other 4 (5) (2) (10)
35 22 72 61
Net earnings
146 144 295 302
* 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 $39 million in second quarter 2004
decreased $5 million compared to $44 million in the same quarter of 2003. Net
earnings for the six months ended June 30, 2004 decreased $7 million compared to
the same period in 2003. The decrease was primarily due to lower earnings
resulting from the recently approved rate of return on deemed common equity in
2004 compared to earnings implicit in the 2003 negotiated settlement which
included a fixed revenue requirement component. Earnings in 2004 reflect a
return of 9.60 per cent on deemed common equity of 35 per cent as approved by
the Alberta Energy and Utilities Board (EUB) in its Generic Cost of Capital
(GCOC) decision released July 2, 2004.
The Canadian Mainline's net earnings decreased $5 million and $12 million for
the three and six months ended June 30, 2004, respectively, when compared to the
corresponding periods in 2003. The decrease 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. The common equity return of 9.56 per
cent is implicit in the interim tolls for 2004 which were approved by the
National Energy Board (NEB) in December 2003.
Foothills' net earnings of $11 million for the six months ended June 30, 2004
were $2 million higher than the same period in 2003 reflecting TCPL's August
2003 acquisition of the remaining ownership interests in Foothills not
previously held.
Operating Statistics
Six months ended June 30 Alberta Canadian BC
(unaudited) System* Mainline** Foothills*** System
2004 2003 2004 2003 2004 2003 2004 2003
Average investment base ($ 4,719 4,938 8,274 8,659 722 746 230 238
millions)
Delivery volumes (Bcf)
Total 1,925 1,971 1,355 1,419 552 522 162 126
Average per day 10.6 10.9 7.4 7.8 3.0 2.9 0.9 0.7
* Field receipt volumes for the Alberta System for the six months ended June 30, 2004 were 1,958 Bcf (2003 -
1,937 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 six months ended
June 30, 2004 were 1,016 Bcf (2003 - 1,093 Bcf); average per day was 5.6 Bcf (2003 - 6.0 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 $35 million for the three months ended June 30, 2004 compared to
$22 million for the same period in 2003. The 2004 results included a $7 million
gain on sale of Millennium which is reflected in general, administrative,
support costs and other. Excluding this gain, earnings for the quarter
increased $6 million compared to the same period in 2003. The increase was
primarily due to higher earnings from Great Lakes as a result of successful
marketing of short-term services and higher earnings from Ventures LP as a
result of the expansion completed in 2003.
Net earnings for the six months ended June 30, 2004 were $72 million compared to
$61 million for the same period in 2003. Excluding the $7 million gain on sale
of Millennium recognized in second quarter 2004, year-to-date earnings were $4
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 TC PipeLines, LP and Ventures
LP. These increases were partially offset by the impact of a weaker U.S. dollar
and lower earnings from CrossAlta as a result of less favourable market
conditions.
Power
Power Results-at-a-Glance
(unaudited) Three months ended June 30 Six months ended June 30
(millions of dollars) 2004 2003 2004 2003
Western operations 35 60 70 103
Eastern operations 22 36 56 61
Bruce Power investment 48 16 96 54
Power LP investment 6 7 16 18
General, administrative, support costs
and other (24) (22) (49) (43)
Operating and other income 87 97 189 193
Financial charges (3) (4) (5) (6)
Income taxes (22) (30) (57) (61)
62 63 127 126
Gains related to Power LP (after tax) 187 - 187 -
Net earnings 249 63 314 126
Power's net earnings in second quarter 2004 of $249 million increased $186
million compared to $63 million in second quarter 2003 primarily due to $187
million of gains related to Power LP. During second quarter 2004, TCPL
completed the sale of the ManChief and Curtis Palmer power facilities to Power
LP for US$402.6 million, before closing adjustments, 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 invested $20 million of the net proceeds of $286.8
million 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
partnership units and the units were issued at a market price in excess of
TCPL's carrying value per unit of the investment. Excluding these one-time
gains, Power's net earnings in second quarter 2004 of $62 million decreased $1
million compared to $63 million in second quarter 2003. Higher earnings from
Bruce Power were more than offset by lower contributions from Eastern Operations
and Western Operations, reflecting the sale of ManChief and Curtis Palmer to
Power LP, and the recognition in second quarter 2003 in Western Operations of a
$31 million pre-tax ($19 million after-tax) settlement with a former
counterparty.
Net earnings for the six months ended June 30, 2004 of $314 million increased
$188 million compared to $126 million in the same period in 2003 primarily due
to the $187 million of gains recorded related to Power LP. Excluding the Power
LP-related gains, Power's net earnings for the six months ended June 30, 2004 of
$127 million increased $1 million compared to $126 million in the same period in
2003. Higher earnings from Bruce Power were offset by lower contributions from
Eastern Operations and Western Operations, reflecting the impacts of selling
ManChief and Curtis Palmer to Power LP, the recognition in second quarter 2003
in Western Operations of the $31 million pre-tax settlement with a former
counterparty and higher general, administrative, support costs and other.
Western Operations
Operating and other income from Western Operations of $35 million and $70
million for the three and six months ended June 30, 2004 was $25 million and $33
million lower, respectively, compared to the same periods 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 and lower ManChief income in second quarter 2004
as a result of the sale of the plant to Power LP in April 2004. Partially
offsetting these decreases were fee revenues with respect to the sale of
ManChief and Curtis Palmer to Power LP and the impact of higher net margins
achieved on the overall portfolio of power in second quarter 2004.
Eastern Operations
Operating and other income from Eastern Operations of $22 million and $56
million for the three and six months ended June 30, 2004 was $14 million and $5
million lower, respectively, compared to the same periods in 2003. These
decreases were mainly due to reduced contributions from the Curtis Palmer
hydroelectric facilities as a result of the sale of these assets to Power LP in
April 2004 and the unfavourable impact of a weaker U.S. dollar in 2004.
Bruce Power Investment
Bruce Power Results-at-a-Glance
(unaudited) Three months ended June 30 Six months ended June 30
(millions of dollars) 2004 2003 2004 2003
Bruce Power (100 per cent basis)
Revenues
434 244 833 642
Operating expenses
(286) (210) (536) (403)
Operating income
148 34 297 239
Financial charges
(15) (15) (33) (32)
Income before income taxes
133 19 264 207
TCPL's interest in Bruce Power income before
income taxes* 42 6 83 40
Adjustments 6 10 13 14
TCPL's income from Bruce Power before income
taxes 48 16 96 54
* 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 June 30, 2003
was $126 million.
Bruce Power contributed $48 million of pre-tax equity income in second quarter
2004 compared to $16 million in second quarter 2003. TCPL's share of power
output for second quarter 2004 was 2,962 gigawatt hours (GWh) compared to 1,681
GWh in second quarter 2003. This increase primarily reflects higher output in
2004 as a result of the restart of Units 3 and 4 which have expanded capacity by
approximately 1,500 megawatts (MW) from second quarter 2003 and correspondingly
increased Bruce Power's operating expenses. Overall prices achieved during
second quarter 2004 were approximately $46 per megawatt hour (MWh) compared to
an average realized price of $45 per MWh in second quarter 2003. Approximately
55 per cent of the output was sold into Ontario's wholesale spot market in
second quarter 2004 with the remainder being sold under longer term contracts.
On a per unit basis, the Bruce operating cost decreased to $30 per MWh in second
quarter 2004 from $40 per MWh in second quarter 2003. This decrease was
primarily due to increased output in 2004 plus lower costs as a result of fewer
planned maintenance outages in 2004 as compared to 2003.
Pre-tax equity income for the six months ended June 30, 2004 was $96 million
compared to $54 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 Bruce A units as well as a full six months of earnings in 2004 compared to
earnings from February 14 to June 30 in 2003, reflecting TCPL's period of
ownership in 2003. Operating costs for the six months ended June 30, 2004 were
$31 per MWh compared to $36 per MWh for the period February 14 to June 30, 2003.
Average realized prices in the six months ended June 30, 2004 were $47 per MWh
compared to $52 per MWh during TCPL's period of ownership ended June 30, 2003.
The Bruce units ran at an average availability of 92 per cent in second quarter
2004, whereas average availability during second quarter 2003 was 77 per cent
reflecting higher planned maintenance outage hours in second quarter 2003.
Availability for the six months ended June 30, 2004 was 86 per cent compared to
84 per cent for the period from February 14 to June 30, 2003. A scheduled
maintenance outage on Unit 4 began on May 22, 2004 and the unit was returned to
service on July 2, 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 43 per cent of planned output for the remainder of 2004
is under fixed price sales contracts. There is a planned maintenance outage of
approximately two to three months at one of the Bruce B units commencing at the
same time as a planned Bruce B vacuum building outage where all four Bruce B
units will be out of operation for approximately one month, both beginning in
third quarter 2004.
Power LP Investment
Operating and other income of $6 million and $16 million for the three and six
months ended June 30, 2004 was $1 million and $2 million lower, respectively,
compared to the same periods in 2003. The decrease was primarily due to Power's
reduced ownership interest in Power LP in 2004 and the recognition of previously
deferred gains resulting from the removal of the Power LP redemption obligation.
Additional earnings from Power LP's acquisition of ManChief and Curtis Palmer
partially offset these decreases.
General, Administrative, Support Costs and Other
General, administrative, support costs and other increased $2 million and $6
million for the three and six months ended June 30, 2004 compared to the same
periods in 2003, mainly reflecting higher support costs as part of the company's
increased investment in the Power business. Partially offsetting these higher
support costs were lower business development expenditures.
Power Sales Volumes
(unaudited) Three months ended Six months ended June 30
June 30
(GWh) 2004 2003 2004 2003
Western operations (1) (3) 2,929 3,150 5,805 6,241
Eastern operations (3) 1,474 1,724 3,085 3,409
Bruce Power investment (2) 2,962 1,681 5,492 2,768
Power LP investment (3) 536 459 1,108 1,022
Total 7,901 7,014 15,490 13,440
(1) Sales volumes include TCPL's share of the Sundance B power purchase arrangement (50
per cent).
(2) Acquired on February 14, 2003. Sales volumes reflect TCPL's 31.6 per cent share of
Bruce Power output from the date of acquisition.
(3) ManChief and Curtis Palmer volumes are included in Power LP investment effective April
30, 2004.
Weighted Average Plant Three months ended June 30 Six months ended June 30
Availability (1)
(unaudited) 2004 2003 2004 2003
Western operations (3) 93% 92% 96% 94%
Eastern operations (3) 95% 92% 97% 88%
Bruce Power investment (2) 92% 77% 86% 84%
Power LP investment (3) 96% 90% 97% 94%
All plants 94% 86% 92% 89%
(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) Comparative 2003 percentage is calculated from the February 14, 2003 date of acquisition.
Bruce A Unit 3 is included effective March 1, 2004.
(3) ManChief and Curtis Palmer are included in Power LP investment effective April 30, 2004.
Corporate
Net expenses were $7 million and $5 million for the three months ended June 30,
2004 and 2003, respectively. Net expenses were $7 million for the six months
ended June 30, 2004 compared to $18 million for the same period in 2003. This
$11 million decrease was primarily due to income tax refunds and refund interest
received in first quarter 2004.
Liquidity and Capital Resources
Funds Generated from Operations
Funds generated from continuing operations were $390 million and $813 million
for the three and six months ended June 30, 2004, respectively, compared with
$434 million and $891 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 six months ended June 30, 2004, capital expenditures, excluding
acquisitions, totalled $93 million (2003 - $107 million) and $194 million (2003
- $183 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, 2004, disposition of assets totalled
$408 million (2003 - nil) and related primarily to the sale of ManChief and
Curtis Palmer to Power LP.
Acquisitions for the three and six months ended June 30, 2004 were $14 million
(2003 - $3 million) and $14 million (2003 - $412 million), respectively.
Financing Activities
TCPL retired long-term debt of $25 million and $501 million in the three and six
months ended June 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 six months ended June 30, 2004,
outstanding notes payable decreased by $301 million, while cash and short-term
investments increased by $638 million.
The increase in cash and short-term investments and decrease in outstanding
notes payable positions TCPL for the acquisition of Gas Transmission Northwest
Corporation (GTN) (see Other Recent Developments - Gas Transmission - Gas
Transmission Northwest Corporation).
Dividends
On July 22, 2004, TCPL's Board of Directors declared a dividend for the quarter
ending September 30, 2004 in an aggregate amount equal to the aggregate
quarterly dividend to be paid on October 29, 2004 by TransCanada Corporation on
the issued and outstanding common shares as at the close of business on
September 30, 2004. The Board also declared regular dividends on TCPL's
preferred shares.
Contractual Obligations
At June 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 each of
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) June 30, 2004 December 31, 2003
(millions of dollars) (unaudited)
Carrying Fair Carrying Fair
Amount Value Amount Value
Foreign Exchange
Cross-currency swaps (12) (12) (26) (26)
Interest Rate
Interest rate swaps
Canadian dollars 18 18 2 15
U.S. dollars 7 8
7 -
At June 30, 2004, the principal amount of cross-currency swaps was US$282
million (December 31, 2003 - US$282 million). Notional principal amounts for
interest rate swaps were $669 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) June 30, 2004 December 31, 2003
(millions of dollars) (unaudited)
Carrying Fair Carrying Fair
Amount Value Amount Value
Interest Rate
Interest rate swaps
Canadian dollars (6) (6) 1 (3)
U.S. dollars 28 28 2 37
Forward Foreign Exchange Contracts
U.S. dollars (2) (2)
- 1
At June 30, 2004, the notional principal amount for interest rate swaps was $200
million (December 31, 2003 - $150 million) and US$550 million (December 31, 2003
- US$500 million). The principal amount of forward foreign exchange contracts
was US$200 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 estimates from
December 31, 2003 continue to be depreciation expense and certain deferred
after-tax gains and remaining obligations related to the Gas Marketing business.
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 June 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 June 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 earnings in prior periods was nil while
the impact of this change in the three and six months ended June 30, 2004 was $1
million.
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 an increase in net
earnings of $4 million and $2 million for the three and six months ended June
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
earnings in the three and six months ended June 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 proposed acquisition of GTN and the gain on sale of
Millennium will have a positive impact, and the EUB's decision received in July
2004 on the GCOC decision for Alberta utilities will have a negative impact, on
the expected results of the Gas Transmission segment. For further information
on the proposed acquisition of GTN and the EUB's decision, 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 recognized on the
sale of ManChief and Curtis Palmer 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. Excluding these
impacts and the receipts of income tax refunds and refund interest in first
quarter 2004, 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 2003, TCPL, along with other utilities, filed evidence in the GCOC
Proceeding with the EUB. In July 2004, the company received the EUB's decision
on GCOC for Alberta utilities. The decision establishes a generic rate of
return on equity (ROE) of 9.60 per cent and a deemed common equity of 35 per
cent for 2004 on the Alberta System. This is less than the applied for ROE of
11 per cent on deemed common equity of 40 per cent, which the company considers
a fair return. Excluding the potential financial impact from the outcome of the
Phase I General Rate Application (GRA) currently before the EUB, TCPL estimates
this will result in 2004 net earnings from the Alberta System of approximately
$155 million compared to net earnings of $190 million in 2003.
The EUB's decision on GCOC sets a generic ROE for 2004 at 9.60 per cent for all
Alberta utilities. Beginning in 2005, the EUB will adjust the ROE from year to
year by 75 per cent of the change in long-term Canada bonds, consistent with the
approach used by the NEB. The EUB has indicated that a review of the ROE
adjustment mechanism will not occur prior to 2009, unless the ROE resulting from
the adjustment mechanism is less than 7.6 per cent or greater than 11.6 per
cent.
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 current depreciation rate of 4.00 per cent. The EUB hearing to consider
the GRA Phase I took place in Calgary in April 2004 with final arguments and
replies filed in May 2004. A decision is expected in third quarter 2004.
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 final argument filed on July 8, 2004 and reply
argument to be filed on July 29, 2004. An EUB decision is expected in fourth
quarter 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 based on the EUB decision on the 2004 GRA and will
incorporate the outcome from the EUB decisions in the GCOC proceeding.
Canadian Mainline
In April 2004, the Federal Court of Appeal dismissed TCPL's appeal of the NEB's
decision to deny TCPL's Fair Return Review and Variance Application, while
endorsing TCPL's view of the law relating to the determination of a fair return
by the NEB. The judgment has no impact on reported earnings for 2001, 2002 and
2003.
In December 2003, the NEB approved interim tolls effective January 1, 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 the Federal
Court of Appeal decision, TCPL informed the NEB that it will not contest the ROE
formula in its 2004 Tolls and Tariff Application and has revised the Application
to reflect the ROE formula of 9.56 per cent on 40 per cent deemed common equity.
Phase I of the hearing which considers all issues raised by the application,
with the exception of cost of capital, concluded June 25, 2004. A decision is
expected in the latter part of third quarter 2004. The proceedings for Phase II
of the hearing, which will address cost of capital, will take place in fourth
quarter 2004.
Other Gas Transmission
Northern Development
TCPL has been engaged in renewed discussions with Alaska North Slope producers
and the State of Alaska (the State) relating to the Alaskan portion of the
Alaska Highway Pipeline Project. In April 2004, TCPL announced that it had
signed a memorandum of understanding (MOU) with the State. In the MOU, TCPL
committed to file an application under the State's Stranded Gas Development Act,
and the State will resume processing of TCPL's long-pending application for a
right-of-way lease on State lands. TCPL holds the complementary rights-of-way
on federal lands in the State. In the MOU, the State and TCPL recognize the
critical importance of upstream fiscal negotiations between the State and the
North Slope producers.
In June 2004, TCPL filed an application under the Alaska Stranded Gas
Development Act. TCPL anticipates that fiscal negotiations between the State of
Alaska and the North Slope producers will continue at the same time as
right-of-way activities and review of TCPL's Stranded Gas Development Act
application are taking place. Discussion on each of these will help advance the
project.
Once the right-of-way lease application is approved, TCPL would be prepared to
convey the lease to another corporation or partnership if appropriate commercial
agreements are in place. The lease conveyance would also require an
interconnection agreement with TCPL at the Yukon/Alaska border. In the
meantime, TCPL will continue to play a leadership role in both Canada and Alaska
to advance the Alaska Highway pipeline project.
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 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 they believe are in the best
interests of the estate and its creditors. NEGT has further stated that it
believes that its plan will become effective no later than late third quarter or
early fourth quarter of this year. The parties expect to close the GTN
transaction promptly thereafter.
Power
MacKay River
The MacKay River 165 MW cogeneration plant, situated at Petro-Canada's MacKay
River oilsands development, was declared contractually in-service on February 1,
2004. Unresolved integration issues with the host site prevented normal
operations in first quarter and into second quarter 2004. Integration issues
with the host site still continue, however, the plant operated on a more
sustained basis late in second quarter 2004.
Becancour
The Becancour contract to develop a 550 MW natural gas-fired cogeneration power
plant in Becancour, Quebec was approved by the Regie de l'Energie in August
2003. The Bureau d'Audience Publique sur l'Environment reviewed the Becancour
project and in April 2004 concluded the proposed cogeneration facility meets or
exceeds all environmental regulations in Quebec. In July 2004, TCPL received
final approval for this project from the Quebec Government. Construction
activities began at the site in July 2004 and the construction cost of the
project is estimated at approximately $500 million.
Share Information
As at June 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 June 30, 2004.
Selected Quarterly Consolidated Financial Data (1)
(unaudited) 2004 2003 2002
(millions of dollars except per share Second First Fourth Third Second First Fourth Third
amounts)
Revenues 1,256 1,233 1,319 1,391 1,311 1,336 1,338 1,285
Net Income applicable to common shares
Continuing operations 388 214 193 198 202 208 180 175
Discontinued operations
- - - 50 - - - -
388 214 193 248 202 208 180 175
Share Statistics
Net income per share - Basic
Continuing operations $ 0.81 $ 0.44 $ 0.40 $ 0.41 $ 0.42 $ 0.43 $ 0.37 $ 0.37
Discontinued operations - - - 0.11 - - - -
$ 0.81 $ 0.44 $ 0.40 $ 0.52 $ 0.42 $ 0.43 $ 0.37 $ 0.37
Net income per share - Diluted $ 0.81 $ 0.44 $ 0.40 $ 0.52 $ 0.42 $ 0.43 $ 0.37 $ 0.36
(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 Note 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 first quarter 2003, 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 de Occidente
S.A.
* 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.
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 June 30 Six months ended June 30
(millions of dollars) 2004 2003 2004 2003
Revenues
1,256 1,311 2,489 2,647
Operating Expenses
Cost of sales 152 189 279 369
Other costs and expenses 400 382 774 809
Depreciation 232 217 464 432
784 788 1,517 1,610
Operating Income 472 523 972 1,037
Other Expenses/(Income)
Financial charges 199 205 394 409
Financial charges of joint ventures 16 23 30 45
Equity income (59) (26) (117) (84)
Interest and other income (17) (22) (32) (35)
Gains related to Power LP (197) - (197) -
(58) 180 78 335
Income from Continuing Operations before
Income Taxes and Non-Controlling Interests 530 343 894 702
Income Taxes
Current 131 74 238 136
Future (2) 53 21 127
Non-Controlling Interests - - 6 -
Net Income 401 216 629 439
Preferred Securities Charges 8 9 16 18
Preferred Share Dividends 5 5 11 11
Net Income Applicable to Common Shares 388 202 602 410
See accompanying Notes to the Consolidated Financial Statements.
Consolidated Cash Flows
(unaudited) Three months ended June 30 Six months ended June 30
(millions of dollars) 2004 2003 2004 2003
Cash Generated From Operations
Net income 401 216 629 439
Depreciation 232 217 464 432
Future income taxes (2) 53 21 127
Gains related to Power LP (197) - (197) -
Equity income in excess of distributions
received (39) (8) (90) (59)
Other (5) (44) (14) (48)
Funds generated from operations 390 434 813 891
(Increase)/Decrease in operating working
capital (30) 33 (72) 25
Net cash provided by continuing operations 360 467 741 916
Net cash used in discontinued operations (8) (88) (10) (84)
352 379 731 832
Investing Activities
Capital expenditures (93) (107) (194) (183)
Acquisitions, net of cash acquired (14) (3) (14) (412)
Disposition of assets 408 - 408 -
Deferred amounts and other 32 (47) (13) (65)
Net cash provided by/(used in) investing
activities 333 (157) 187 (660)
Financing Activities
Dividends and preferred securities charges (158) (149) (306) (288)
Notes payable repaid, net (72) (291) (301) (82)
Long-term debt issued - 475 665 475
Reduction of long-term debt (25) (50) (501) (59)
Non-recourse debt of joint ventures issued 81 29 87 46
Reduction of non-recourse debt of joint
ventures (3) (32) (12) (48)
Partnership units of joint ventures issued 88 - 88 -
Common shares issued - 2 - 18
Net cash (used in)/provided by financing
activities (89) (16) (280) 62
Increase in Cash and Short-Term Investments 596 206 638 234
Cash and Short-Term Investments
Beginning of period 379 240 337 212
Cash and Short-Term Investments
End of period 975 446 975 446
Supplementary Cash Flow Information
Income taxes paid 91 69 252 124
Interest paid 221 238 393 428
See accompanying Notes to the Consolidated Financial Statements.
Consolidated Balance Sheet
June 30, 2004 December 31,
(millions of dollars) (unaudited) 2003
ASSETS
Current Assets
Cash and short-term investments 975 337
Accounts receivable 586 603
Inventories 161 165
Other 143 88
1,865 1,193
Long-Term Investments 827 733
Plant, Property and Equipment 17,005 17,460
Other Assets 1,361 1,164
21,058 20,550
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Notes payable 66 367
Accounts payable 985 1,069
Accrued interest 215 208
Current portion of long-term debt 597 550
Current portion of non-recourse debt of joint
ventures 25 19
1,888 2,213
Deferred Amounts 540 475
Long-Term Debt 9,807 9,465
Future Income Taxes 436 427
Non-Recourse Debt of Joint Ventures 853 761
Junior Subordinated Debentures 20 22
13,544 13,363
Non-Controlling Interests 81 82
Shareholders' Equity
Preferred securities 671 672
Preferred shares
389 389
Common shares
4,632 4,632
Contributed surplus
269 267
Retained earnings
1,505 1,185
Foreign exchange adjustment
(33) (40)
7,433 7,105
21,058 20,550
See accompanying Notes to the Consolidated Financial Statements.
Consolidated Retained Earnings
(unaudited) Six months ended June 30
(millions of dollars) 2004 2003
Balance at beginning of period 1,185
854
Net income 629
439
Preferred securities charges (16) (18)
Preferred share dividends (11) (11)
Common share dividends (282) (259)
1,505 1,005
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 June 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 June 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 six months ended June 30, 2004 was $1
million.
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 an increase in net
income of $4 million and $2 million for the three and six months ended June 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 six months ended June 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 Transmission Power Corporate Total
Three months ended June 30 2004 2003 2004 2003 2004 2003 2004 2003
(unaudited - millions of
dollars)
Revenues 948 944 308 367 - - 1,256 1,311
Cost of sales - - (152) (189) - - (152) (189)
Other costs and expenses (298) (301) (101) (79) (1) (2) (400) (382)
Depreciation (215) (195) (17) (22) - - (232) (217)
Operating income/(loss) 435 448 38 77 (1) (2) 472 523
Financial and preferred equity
charges and non-controlling
interests (189) (194) (2) (3) (21) (22) (212) (219)
Financial charges of joint
ventures (15) (22) (1) (1) - - (16) (23)
Equity income 11 10 48 16 - - 59 26
Interest and other income 9 3 1 4 7 15 17 22
Gains related to Power LP - - 197 - - - 197 -
Income taxes (105) (101) (32) (30) 8 4 (129) (127)
Net Income Applicable to
Common Shares 146 144 249 63 (7) (5) 388 202
Gas Transmission Power Corporate Total
Six months ended June 30
(unaudited - millions of
dollars) 2004 2003 2004 2003 2004 2003 2004 2003
Revenues 1,897 1,904 592 743 - - 2,489 2,647
Cost of sales - - (279) (369) - - (279) (369)
Other costs and expenses (583) (605) (188) (200) (3) (4) (774) (809)
Depreciation (427) (389) (37) (43) - - (464) (432)
Operating income/(loss) 887 910 88 131 (3) (4) 972 1,037
Financial and preferred equity
charges and non-controlling
interests (381) (390) (4) (5) (42) (43) (427) (438)
Financial charges of joint
ventures (29) (44) (1) (1) - - (30) (45)
Equity income 21 30 96 54 - - 117 84
Interest and other income 12 8 5 8 15 19 32 35
Gains related to Power LP
- - 197 - - - 197 -
Income taxes (215) (212) (67) (61) 23 10 (259) (263)
Net Income Applicable to
Common Shares 295 302 314 126 (7) (18) 602 410
Total Assets
June 30, 2004 December 31,
(millions of dollars) (unaudited) 2003
Gas Transmission 16,814 16,974
Power 2,602 2,753
Corporate 1,637 812
Continuing Operations 21,053 20,539
Discontinued Operations 5 11
21,058 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) June 30, 2004 December 31, 2003
(millions of dollars) (unaudited)
Carrying Fair Carrying Fair
Amount Value Amount Value
Foreign Exchange
Cross-currency swaps (12) (12) (26) (26)
Interest Rate
Interest rate swaps
Canadian dollars 18 18 2 15
U.S. dollars 7 7 - 8
At June 30, 2004, the principal amounts of cross-currency swaps was US$282
million (December 31, 2003 - US$282 million). Notional principal amounts for
interest rate swaps were $669 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) June 30, 2004 December 31, 2003
(millions of dollars) (unaudited)
Carrying Fair Carrying Fair
Amount Value Amount Value
Interest Rate
Interest rate swaps
Canadian dollars (6) (6) 1 (3)
U.S. dollars 28 28 2 37
Forward Foreign Exchange Contracts
U.S. dollars (2) (2) - 1
At June 30, 2004, the notional principal amount for interest rate swaps was $200
million (December 31, 2003 - $150 million) and US$550 million (December 31, 2003
- US$500 million). The principal amount of forward foreign exchange contracts
was US$200 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 six months ended June 30
is as follows.
Three months ended June 30 Pension Benefit Plans Other Benefit Plans
(unaudited - millions of dollars) 2004 2003 2004 2003
Current service
cost 7 7 1 1
Interest cost 14 13 2 2
Expected return on plan assets (13) (13) - -
Amortization of net actuarial loss 3 2 - -
Net benefit cost recognized 11 9 3 3
Six months ended June 30 Pension Benefit Plans Other Benefit Plans
(unaudited - millions of dollars) 2004 2003 2004 2003
Current service
cost 14 13 1 1
Interest cost 28 26 3 3
Expected return on plan assets (27) (26) - -
Amortization of transitional
obligation related to regulated
business - - 1 1
Amortization of net actuarial loss 6 4 1 1
Amortization of past service cost 1 1 - -
Net benefit cost recognized 22 18 6 6
7. 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 late in third quarter or early
in fourth quarter of this year.
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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