CALGARY, ALBERTA — (Marketwired) — 04/26/13 — TransCanada Corporation (TSX: TRP) (NYSE: TRP) (TransCanada or the Company) today announced net income attributable to common shares for first quarter 2013 of $446 million or $0.63 per share. The first quarter financial results include the impact of the National Energy Board (NEB) decision received in the period on our Canadian Restructuring Proposal. In the decision, among other items, the NEB approved a return on equity for the Canadian Mainline of 11.50 per cent for the years 2012 to 2017 compared to the last approved return on equity of 8.08 per cent. As a result, net income includes $84 million or $0.12 per share related to 2012. Excluding this and certain other minor amounts, comparable earnings were $370 million or $0.52 per share. Our Board of Directors also declared a quarterly dividend of $0.46 per common share for the quarter ending June 30, 2013, equivalent to $1.84 per share on an annualized basis.
“Our three business segments performed well during the first quarter,” said Russ Girling, TransCanada–s president and chief executive officer. “The restart of Bruce Power Units 1 and 2, the completion of the Bruce Power Unit 4 life extension outage in April, the return to service of Sundance A this fall and a higher Canadian Mainline return on equity are all expected to have a positive impact on earnings in 2013. At the same time, we continue to progress our $25 billion portfolio of commercially secured projects and advance other value creating opportunities including the Energy East Pipeline Project which would transport crude oil from western receipt points to eastern Canadian markets.”
Over the next three years, subject to required approvals, we expect to complete $12 billion of projects that are currently in advanced stages of development. They include the Gulf Coast Project, Keystone XL, the Keystone Hardisty Terminal, the initial phase of the Grand Rapids Pipeline, the Tamazunchale Pipeline Extension, the acquisition of nine Ontario Solar projects, and the ongoing expansion of the NGTL System.
We have also commercially secured an additional $13 billion of long-life, contracted energy infrastructure projects that are expected to be placed into service in 2016 and beyond. They include the Coastal GasLink and Prince Rupert Gas Transmission projects that would move natural gas to Canada–s West Coast for liquefaction and shipment to Asian markets, the Topolobampo and Mazatlan Gas Pipeline projects in Mexico, completion of the Grand Rapids and Northern Courier oil pipeline projects in Northern Alberta, and the Napanee Generating Station in Eastern Ontario. TransCanada expects these projects to generate predictable, sustained earnings and cash flow.
Highlights
(All financial figures are unaudited and in Canadian dollars unless noted otherwise)
Comparable earnings for first quarter 2013 were $370 million or $0.52 per share compared to $363 million or $0.52 per share for the same period in 2012. Higher earnings contributions from the Canadian Mainline in the first quarter 2013 as a result of the NEB decision on its Restructuring Proposal, Bruce Power and U.S. Power, were offset by lower contributions from U.S. Natural Gas Pipelines and Western Power.
Net income attributable to common shares for first quarter 2013 was $446 million or $0.63 per share compared to $352 million or $0.50 per share in first quarter 2012.
Notable recent developments in Oil Pipelines, Natural Gas Pipelines, Energy and Corporate include:
Oil Pipelines:
Natural Gas Pipelines:
Energy:
Corporate:
Teleconference – Audio and Slide Presentation:
We will hold a teleconference and webcast on Friday, April 26, 2013 to discuss our first quarter 2013 financial results. Russ Girling, TransCanada president and chief executive officer and Don Marchand, executive vice-president and chief financial officer, along with other members of the TransCanada executive leadership team, will discuss the financial results and Company developments at 1:00 p.m. (MDT) / 3:00 p.m. (EDT).
Analysts, members of the media and other interested parties are invited to participate by calling 866.226.1793 or 416.340.2218 (Toronto area). Please dial in 10 minutes prior to the start of the call. No pass code is required. A live webcast of the teleconference will be available at .
A replay of the teleconference will be available two hours after the conclusion of the call until midnight (EDT) May 3, 2013. Please call 800.408.3053 or 905.694.9451 and enter pass code 6260206.
The unaudited interim Consolidated Financial Statements and Management–s Discussion and Analysis (MD&A) are available on SEDAR at , with the U.S. Securities and Exchange Commission on EDGAR at and on the TransCanada website at .
With more than 60 years– experience, TransCanada is a leader in the responsible development and reliable operation of North American energy infrastructure including natural gas and oil pipelines, power generation and gas storage facilities. TransCanada operates a network of natural gas pipelines that extends more than 68,500 kilometres (42,500 miles), tapping into virtually all major gas supply basins in North America. TransCanada is one of the continent–s largest providers of gas storage and related services with more than 400 billion cubic feet of storage capacity. A growing independent power producer, TransCanada owns or has interests in over 11,800 megawatts of power generation in Canada and the United States. TransCanada is developing one of North America–s largest oil delivery systems. TransCanada–s common shares trade on the Toronto and New York stock exchanges under the symbol TRP. For more information visit: or check us out on Twitter @TransCanada or .
Forward Looking Information
This news release contains certain information that is forward-looking and is subject to important risks and uncertainties (such statements are usually accompanied by words such as “anticipate”, “expect”, “would”, “believe”, “may”, “will”, “plan”, “intend” or other similar words). Forward-looking statements in this document are intended to provide TransCanada security holders and potential investors with information regarding TransCanada and its subsidiaries, including management–s assessment of TransCanada–s and its subsidiaries– future financial and operational plans and outlook. All forward-looking statements reflect TransCanada–s beliefs and assumptions based on information available at the time the statements were made and as such are not guarantees of future performance. Readers are cautioned not to place undue reliance on this forward-looking information, which is given as of the date it is expressed in this news release, and not to use future-oriented information or financial outlooks for anything other than their intended purpose. TransCanada undertakes no obligation to update or revise any forward-looking information except as required by law. For additional information on the assumptions made, and the risks and uncertainties which could cause actual results to differ from the anticipated results, refer to TransCanada–s Quarterly Report to Shareholders dated April 25, 2013 and 2012 Annual Report on our website at or filed under TransCanada–s profile on SEDAR at and with the U.S. Securities and Exchange Commission at .
Non-GAAP Measures
This news release contains references to non-GAAP measures, including comparable earnings, EBITDA, funds generated from operations and comparable earnings per share, that do not have any standardized meaning as prescribed by U.S. GAAP and may therefore not be comparable to similar measures presented by other companies. These non-GAAP measures are calculated on a consistent basis from period to period and are adjusted for specific items in each period, as applicable. For more information on non-GAAP measures, refer to TransCanada–s Quarterly Report to Shareholders dated April 25, 2013.
Quarterly report to shareholders
First quarter 2013
Financial highlights
Comparable EBITDA, comparable earnings per common share and funds generated from operations are all non-GAAP measures. See non-GAAP measures section for more information.
Management–s discussion and analysis
April 25, 2013
This management–s discussion and analysis (MD&A) contains information to help the reader make investment decisions about TransCanada Corporation. It discusses our business, operations, financial position, risks and other factors for the quarter ended March 31, 2013, and should be read with the accompanying unaudited condensed consolidated financial statements for the quarter ended March 31, 2013 which have been prepared in accordance with U.S. GAAP.
This MD&A should also be read in conjunction with our December 31, 2012 audited comparative consolidated financial statements and notes and the MD&A in our 2012 Annual Report, which have been prepared in accordance with U.S. GAAP.
About this document
Throughout this MD&A, the terms, we, us, our and TransCanada mean TransCanada Corporation and its subsidiaries.
Abbreviations and acronyms that are not defined in this MD&A are defined in the glossary in our 2012 Annual Report.
All information is as of April 25, 2013 and all amounts are in Canadian dollars, unless noted otherwise.
FORWARD-LOOKING INFORMATION
We disclose forward-looking information to help current and potential investors understand management–s assessment of our future plans and financial outlook, and our future prospects overall.
Statements that are forward-looking are based on certain assumptions and on what we know and expect today and generally include words like anticipate, expect, believe, may, will, should, estimate or other similar words.
Forward-looking statements do not guarantee future performance. Actual events and results could be significantly different because of assumptions, risks or uncertainties related to our business or events that happen after the date of this MD&A.
Our forward-looking information is based on the following key assumptions, and subject to the following risks and uncertainties:
You can read more about these factors and others in reports we have filed with Canadian securities regulators and the U.S. Securities and Exchange Commission (SEC), including the MD&A in our 2012 Annual Report.
You should not put undue reliance on forward-looking information and should not use future-oriented information or financial outlooks for anything other than their intended purpose. We do not update our forward-looking statements due to new information or future events, unless we are required to by law.
FOR MORE INFORMATION
You can find more information about TransCanada in our annual information form and other disclosure documents, which are available on SEDAR ().
These measures do not have any standardized meaning as prescribed by U.S. GAAP and therefore may not be comparable to similar measures presented by other entities.
EBITDA and EBIT
We use EBITDA as an approximate measure of our pre-tax operating cash flow. It measures our earnings before deducting interest and other financial charges, income taxes, depreciation and amortization, net income attributable to non-controlling interests and preferred share dividends, and includes income from equity investments. EBIT measures our earnings from ongoing operations and is an effective measure of our performance and an effective tool for evaluating trends in each segment. It is calculated in the same way as EBITDA, less depreciation and amortization.
Funds generated from operations
Funds generated from operations includes net cash provided by operations before changes in operating working capital. We believe it is an effective measure of our consolidated operating cashflow because it does not include fluctuations from working capital balances, which do not necessarily reflect underlying operations in the same period. See Financial condition section for a reconciliation to net cash provided by operations.
Comparable measures
We calculate the comparable measures by adjusting certain GAAP and non-GAAP measures for specific items we believe are significant but not reflective of our underlying operations in the period. These comparable measures are calculated on a consistent basis from period to period and are adjusted for specific items in each period, as applicable.
We calculate comparable earnings by excluding the unrealized gains and losses from changes in the fair value of certain derivatives used to reduce our exposure to certain financial and commodity price risks. These derivatives provide effective economic hedges, but do not meet the criteria for hedge accounting. As a result, the changes in fair value are recorded in net income. As these amounts do not accurately reflect the gains and losses that will be realized at settlement, we do not consider them part of our underlying operations.
Reconciliation of non-GAAP measures
Results – first quarter 2013
Net income attributable to common shares was $446 million this quarter compared to $352 million in first quarter 2012. This included $104 million of net income resulting from the National Energy Board–s (NEB) decision on the Canadian Mainline Business and Services Restructuring Proposal and 2012 and 2013 Mainline Final Tolls Application (Canadian Restructuring Proposal). Of this amount, $84 million is excluded from comparable earnings as it relates to 2012.
Comparable earnings this quarter were $370 million or $0.52 per share, $7 million higher than first quarter 2012.
Outlook
While the NEB–s March 27, 2013 decision on the Canadian Restructuring Proposal for tolls and services on the Canadian Mainline may result in increased variability and seasonality of cash flow, we expect it to have a positive impact on the earnings outlook for 2013 we included in our 2012 Annual Report. The NEB approved a return on equity (ROE) of 11.50 per cent on 40 per cent deemed common equity ratio, multi year tolls until 2017 and a new incentive mechanism. See the MD&A in our 2012 Annual Report for further information about our outlook.
Natural Gas Pipelines
Comparable EBITDA and comparable EBIT are non-GAAP measures. See non-GAAP measures section for more information.
CANADIAN PIPELINES
Comparable EBITDA and net income for our rate-regulated Canadian Pipelines are affected by our approved ROE, our investment base, the level of deemed common equity and incentive earnings. Changes in depreciation, financial charges and taxes also impact comparable EBITDA and EBIT but do not impact net income as they are recovered in revenue on a flow-through basis.
Net income for the Canadian Mainline this quarter was $104 million higher than first quarter 2012 because of the impact of the NEB–s March 27, 2013 decision on the Canadian Restructuring Proposal. Among other things, the NEB approved an ROE of 11.50 per cent on a 40 per cent deemed common equity effective for the years 2012 to 2017 compared to the last approved ROE of 8.08 per cent on a 40 per cent deemed common equity which was used to record earnings in 2012. Comparable earnings in first quarter 2013 excludes $84 million related to the 2012 impact of the NEB decision.
Net income for the NGTL System (formerly known as the Alberta System) was $8 million higher than first quarter 2012 because of a higher average investment base and termination of the annual fixed operating, maintenance and administration (OM&A) costs component included in the 2010 – 2012 Revenue Requirement which expired at the end of 2012. The NGTL System–s results this quarter reflected the last approved ROE of 9.70 per cent on deemed common equity of 40 per cent and no incentive earnings.
U.S. PIPELINES AND INTERNATIONAL
EBITDA for our U.S. operations is generally affected by contracted volume levels, volumes delivered and the rates charged, as well as by the cost of providing services, including OM&A and property taxes. ANR is also affected by the contracting and pricing of its storage capacity and incidental commodity sales.
COMPARABLE DEPRECIATION AND AMORTIZATION
Comparable depreciation and amortization was $8 million higher this quarter than in first quarter 2012 mainly because of the higher rate base on the NGTL System.
Oil Pipelines
Comparable EBITDA and comparable EBIT are non-GAAP measures. See non-GAAP measures section for more information.
BUSINESS DEVELOPMENT
Business development expenses this quarter were $6 million higher than in first quarter 2012 because of increased activity on various development projects.
Energy
Comparable EBITDA and comparable EBIT are non-GAAP measures. See non-GAAP measures section for more information.
CANADIAN POWER
Western and Eastern Power(1)
Comparable EBITDA and comparable EBIT are non-GAAP measures. See non-GAAP measures section for more information.
Sales volumes and plant availability
Includes our share of volumes from our equity investments.
In first quarter 2012, we recorded revenues and costs related to the Sundance A PPA as though the outages of Units 1 and 2 were interruptions of supply in accordance with the terms of the PPA. In July 2012, we received the Sundance A PPA arbitration decision which determined the units were in force majeure in first quarter 2012. In response, we recorded a charge of $30 million in second quarter 2012 equivalent to the pre-tax income we had recorded in first quarter 2012. Because the plant continues to be in force majeure, we will not record further revenues and costs until the units are returned to service. See Energy – Significant Events in the MD&A in our 2012 Annual Report for more information about the Sundance A PPA arbitration decision.
Average spot market power prices in Alberta were $64 per MWh this quarter, compared to $60 per MWh in first quarter 2012. This increase was mainly the result of high spot market prices in the month of March driven by plant outages and increased demand. Western Power–s average realized power price this quarter was lower than first quarter 2012 because of contracting activities. Purchased volumes were lower than first quarter 2012 mainly because of lower utilization of the Sheerness and Sundance B PPAs and higher Sundance B plant outage days.
Western Power–s commodity purchases resold were $65 million this quarter, or $29 million lower than first quarter 2012, because of the Sundance A PPA force majeure and lower purchased volumes during periods of lower spot prices.
Eastern Power–s comparable EBITDA of $95 million was $2 million higher than first quarter 2012 because of the start up of phase two of Cartier Gros-Morne in November 2012, partially offset by lower contractual earnings at Becancour.
Plant operating costs and other, which includes natural gas fuel consumed in power generation, were $63 million this quarter, or $8 million higher than first quarter 2012, mainly due to higher natural gas fuel prices in 2013.
Approximately 72 per cent of Western Power sales volumes were sold under contract this quarter, compared to 83 per cent in first quarter 2012. To reduce exposure to spot market prices in Alberta, Western Power has entered into fixed-price power sales contracts to sell approximately 5,300 GWh for the remainder of 2013 and approximately 5,200 GWh in 2014.
BRUCE POWER
Our proportionate share
These increases were partially offset by the impact of the Unit 4 planned outage which began in August 2012 and was completed April 13, 2013.
The availability percentage for Units 1 and 2 increased through first quarter 2013 with an average availability in the mid 80s. These units are now able to operate at full power; however, as Units 1 and 2 have not operated for an extended period of time they may experience slightly higher forced outage rates and reduced availability percentages in 2013.
Equity loss from Bruce B was $5 million this quarter, compared to equity income of $20 million in first quarter 2012. The decrease was mainly due to lower volumes and higher operating costs resulting from higher planned outage days.
Under the contract with the Ontario Power Authority (OPA), all of the output from Bruce A is sold at a fixed price per MWh, adjusted annually for inflation on April 1. Bruce A also recovers fuel costs from the OPA.
Under the same contract, all output from Bruce B is subject to a floor price adjusted annually for inflation on April 1.
Amounts received under the Bruce B floor price mechanism within a calendar year are subject to repayment if the monthly average spot price exceeds the floor price. We currently expect 2013 spot prices to be less than the floor price for the year and therefore no amounts recorded in revenues in first quarter 2013 are expected to be repaid.
Bruce B also enters into fixed-price contracts under which it receives or pays the difference between the contract price and the spot price.
The overall plant availability percentage in 2013 is expected to be in the mid 80s for Bruce A and the high 80s for Bruce B. Planned maintenance on two of the Bruce B units and one of the Bruce A units is expected to be completed in second quarter 2013.
U.S. POWER
Comparable EBITDA and comparable EBIT are non-GAAP measures. See non-GAAP measures section for more information.
Commodity prices in both New York and New England were significantly higher this quarter than first quarter 2012. The combination of higher natural gas prices, pipeline constraints and an increase in demand for natural gas resulted in higher spot power prices this quarter.
Physical sales volumes this quarter were higher than the same period in 2012 due to higher purchased volumes to serve increased sales to wholesale, commercial and industrial customers in the New England and PJM markets. Generation volumes were lower, mainly due to lower generation in New England partly offset by higher Ravenswood generation.
Power revenue was US$433 million this quarter, or US$238 million higher than first quarter 2012. This was mainly because of the combination of higher realized power prices and higher sales volumes to wholesale, commercial and industrial customers.
Capacity revenue was US$47 million this quarter, or US$7 million higher than first quarter 2012. A two per cent increase in New York Zone J spot capacity prices and the impact of hedging activities resulted in higher realized prices in New York, partially offset by lower capacity prices in New England.
Commodity purchases resold were US$306 million this quarter, or US$189 million higher than first quarter 2012 because we purchased higher volumes of power at higher prices to fulfill increased power sales commitments to wholesale, commercial and industrial customers.
Plant operating costs and other, which includes fuel gas consumed in generation, was US$126 million this quarter, or US$35 million higher than first quarter 2012 because of higher natural gas fuel prices.
As at March 31, 2013, approximately 2,600 GWh or 41 per cent of U.S. Power–s planned generation is contracted for 2013, and 2,400 GWh or 27 per cent for 2014. Planned generation fluctuates depending on hydrology, wind conditions, commodity prices and the resulting dispatch of the assets. Power sales fluctuate based on customer usage.
NATURAL GAS STORAGE
Comparable EBITDA and comparable EBIT are non-GAAP measures. See non-GAAP measures section for more information.
Comparable EBITDA was $18 million this quarter, or $5 million higher than first quarter 2012, mainly due to higher earnings from CrossAlta resulting from the acquisition of the remaining 40 per cent interest in December 2012. The seasonal nature of natural gas storage generally results in higher revenues in the winter season.
Recent developments
NATURAL GAS PIPELINES
NEB decision on the Canadian Restructuring Proposal
On March 27, 2013, the NEB issued its decision on our application to change the business structure and the terms and conditions of service for the Canadian Mainline, including tolls for 2012 and 2013.
The NEB approved several of our proposed changes, including the Canadian Mainline–s revenue requirement for 2011 and 2012. At the same time, the NEB agreed with us that the Canadian Mainline has been significantly affected by market forces with the result that throughput has decreased significantly, and as a result, the Canadian Mainline tolls have increased over a short period of time eroding the Canadian Mainline–s competitiveness. The response of the NEB was to adopt a multi-year fixed tolls approach which it believes will provide shippers with greater toll certainty and stability. Under the decision, long-term firm tolls are fixed through 2017 (subject to being re-opened under certain circumstances) at what the NEB determined is a competitive level. Although long-term firm tolls are fixed, the Canadian Mainline has been given pricing discretion for interruptible and short-term firm services. The NEB concluded in the decision that this framework will provide us with reasonable opportunity to recover our costs, over a reasonable period of time. Under or over collection variances to the revenue requirement inclusive of the return on and of capital will be carried over in deferral accounts to be dealt with in future NEB proceedings in 2017 (or earlier under certain circumstances). At that time, the NEB will determine how any variances contained in the deferral accounts will be addressed and the extent of cost disallowances, if any. As a result of the multi-year fixed tolls and increased risk associated with fluctuations in cash flow, the NEB increased the allowed return to 11.50 per cent on 40 per cent equity ratio.
The decision significantly alters the regulatory framework that has formed the basis for more than $10 billion of regulated pipeline investment over the last sixty years. We have determined that we will seek regulatory and potentially legal review and variance of certain aspects of the decision.
NGTL System
The Alberta System is now known as the NGTL System to better reflect the service provided and continued growth in British Columbia.
Our application to contract for capacity on the Canadian Mainline and Foothills Pipelines was denied as part of the NEB–s decision regarding the Canadian Restructuring Proposal. Therefore, the location of our export delivery will remain at Empress and the Alberta/BC border.
NGTL System expansion projects
We have been continuing our expansion of the NGTL System and have placed approximately $340 million of new facilities into service to date in 2013. We have applied and received approval from the NEB for an additional $300 million of new facilities with in-service dates planned for later in 2013. The NEB has also recommended approval for the Chinchaga lateral, an approximate $100 million project, that is planned to be placed in service in early 2014. To date in 2013, we have applied for an additional $60 million of facilities and are planning regulatory applications for further expansion into B.C. which we estimate will cost between $1.0 billion and $1.5 billion to accommodate the Prince Rupert Gas Transmission Project.
Prince Rupert Gas Transmission Project
We signed the project development agreement for the Prince Rupert Gas Transmission Project with Progress Energy Canada Ltd. in February 2013 and are now working to initiate the environmental assessment process, including developing and filing the project description that we plan to submit to the B.C. Environmental Assessment Office and the Canadian Environmental Assessment Agency (CEAA) in second quarter 2013.
Coastal GasLink Pipeline Project
We are currently focused on community, landowner, government and First Nations engagement as the Coastal GasLink pipeline project advances through the regulatory process with the B.C. Environmental Assessment Office and the CEAA. We expect to begin an NGTL open season to provide delivery service to Vanderhoof, B.C. on Coastal GasLink in second quarter 2013.
Portland
We are holding a 45-day binding open season from April to May 2013 to determine the demand for new natural gas supply options for the New England and Atlantic Canada markets. The results could support an increase in our capacity from 168 MMcf/d to between 300 MMcf/d and 350 MMcf/d. The project will require upstream expansion on the Canadian Mainline that will be subject to an assessment of the implications of the recent NEB decision on the Canadian Restructuring Proposal.
Tamazunchale
A variety of construction activities are underway on the Tamazunchale Extension and the project remains on schedule to meet the planned in-service date of first quarter 2014.
OIL PIPELINES
Gulf Coast Project
We are constructing a 36-inch pipeline from Cushing, Oklahoma to the U.S. Gulf Coast and expect to begin delivering crude oil to Port Arthur, Texas at the end of 2013. Construction is approximately 70 per cent complete and we estimate the total cost of the Cushing to Port Arthur facilities to be US$2.3 billion.
Construction of the 76 km (47 mile) Houston Lateral pipeline to transport crude oil to Houston refineries is expected to begin in mid 2013 and be complete by mid 2014 at a total cost of approximately US$300 million.
The Gulf Coast Project will have an initial capacity of up to 700,000 barrels per day.
Keystone XL Pipeline
In January 2013, the Governor of Nebraska approved our proposed re-route after the Nebraska Department of Environmental Quality issued its final evaluation report noting that construction and operation of Keystone XL is expected to have minimal environmental impacts in Nebraska.
On March 1, 2013, the U.S. Department of State (DOS) released its Draft Supplemental Environmental Impact Statement for the Keystone XL Pipeline. The impact statement reaffirmed that construction of the proposed pipeline from the U.S./Canada border in Montana to Steele City, Nebraska would not result in any significant impact to the environment. The DOS is in the process of reviewing comments on the impact statement that it received during a public comment period that ended on April 22, 2013. Once the DOS has completed its review, it is anticipated it will issue a Final Supplemental Environmental Impact Statement and then consult with other governmental agencies during a National Interest Determination period of up to 90 days, before making a decision on our Presidential Permit application.
Due to ongoing delays in the issuance of a Presidential Permit for Keystone XL, we now expect the pipeline to be in service in the second half of 2015 and, based on our pipeline construction experience, the US$5.3 billion cost estimate will increase depending on the timing of the permit. As of March 31, 2013, we had invested $1.8 billion in the project.
Energy East Pipeline
We announced in April 2013 that we are holding an open season to obtain firm commitments for a pipeline to transport crude oil from western receipt points to eastern Canadian markets. The open season, which follows a successful expression of interest phase and discussions with prospective shippers, began in April 2013 and closes in June 2013.
The Energy East Pipeline project involves converting natural gas pipeline capacity in approximately 3,000 kilometres of our existing Canadian Mainline to crude oil service and constructing up to approximately 1,400 kilometres of new pipeline. Subject to the results of the open season, the project will have the capacity to transport as much as 850,000 barrels of crude oil per day, increasing access to eastern Canadian markets.
We have begun Aboriginal and stakeholder engagement and field work as part of our initial design and planning. If the open season is successful, we will apply for regulatory approval to build and operate the facilities, with a potential in-service date of late 2017.
Northern Courier Pipeline
The Fort Hills Energy Limited Partnership has not indicated that their recent decision to cancel the Voyageur upgrader project has changed their current plans for Northern Courier. We have nearly completed the field work and Aboriginal and stakeholder engagement necessary to allow us to file the permit application with the Energy Resources Conservation Board and expect to file the application in second quarter 2013.
ENERGY
Ontario Solar
In late 2011, we agreed to buy nine Ontario solar projects (combined capacity of 86 MW) from Canadian Solar Solutions Inc. We expect to close the acquisition of the first three projects (combined capacity of 29 MW) by mid 2013 for a total cost of approximately $175 million. We expect to acquire the remaining six projects later in 2013 and 2014, subject to regulatory approvals.
Bruce Power
Bruce Power returned Unit 4 to service on April 13, 2013 after completing an expanded life extension outage investment program which began in August 2012. It is anticipated that this investment will allow Unit 4 to operate until at least 2021.
On April 5, 2013, Bruce Power announced that it had reached an agreement with the OPA to extend the Bruce B floor price through to the end of the decade which is expected to coincide with the 2019 and 2020 end of life dates for the Bruce B units.
Other income statement items
Comparable interest income and other this quarter was $7 million lower than first quarter 2012 because we had realized losses in 2013 compared to realized gains in 2012 on derivatives used to manage our net exposure to foreign exchange rate fluctuations on U.S. dollar-denominated income.
Comparable income taxes were $159 million this quarter compared to $140 million in first quarter 2012. The increase was mainly the result of higher pre-tax earnings in 2013 compared to 2012 and changes in the proportion of income earned between Canadian and foreign jurisdictions.
Financial condition
We strive to maintain financial strength and flexibility in all parts of an economic cycle, and rely on our operating cash flows to sustain our business, pay dividends and fund a portion of our growth.
We access capital markets to meet our financing needs, manage our capital structure and preserve our credit ratings.
We believe we have the capacity to fund our existing capital program through predictable cash flow from our operations, access to capital markets, cash on hand and substantial committed credit facilities.
CASH FROM OPERATING ACTIVITIES
Net cash provided by operations this quarter was $4 million higher than first quarter 2012, mainly because of an increase in funds generated from our operations which is consistent with our increase in earnings, partly offset by changes in operating working capital.
Our current assets were $2.5 billion and current liabilities were $5.5 billion, leaving us with a working capital deficit of $3.0 billion at March 31, 2013 compared to $3.1 billion at the end of 2012. This working capital deficiency is considered to be in the normal course of business and any funding of working capital is managed through our ability to generate cash flow and our ongoing access to capital markets.
CASH USED IN INVESTING ACTIVITIES
Our capital expenditures this quarter were primarily related to the Gulf Coast Project and expansion of the NGTL System.
CASH PROVIDED BY/(USED IN) FINANCING ACTIVITIES
In January 2013, we issued US$750 million of senior notes, maturing on January 15, 2016 and bearing interest at 0.75 per cent. These notes were issued under the US$4.0 billion debt shelf prospectus filed in November 2011.
In March 2013, we completed a public offering of 24 million Series 7 cumulative redeemable first preferred shares at a price of $25 per share for aggregate gross proceeds of $600 million. Investors will be entitled to receive fixed cumulative dividends at an annual rate of $1.00 per share, payable quarterly. Investors will have the right to convert their shares into cumulative redeemable first preferred shares, Series 8, every fifth year beginning on April 30, 2019. The holders of Series 8 will be entitled to receive quarterly floating rate cumulative dividends at an annualized rate equal to the then 90-day Government of Canada treasury bill rate plus 2.38 per cent.
The net proceeds of the two offerings will be used to fund our capital program, for general corporate purposes and to reduce short term indebtedness.
DIVIDENDS
On April 25, 2013 we declared quarterly dividends as follows:
CREDIT FACILITIES
We use committed, revolving credit facilities to support our commercial paper programs, along with additional demand facilities, for general corporate purposes including issuing letters of credit and providing additional liquidity.
At March 31, 2013, we had $5 billion in unsecured credit facilities, including:
See Risks and financial instruments for more information about liquidity, market and other risks.
CONTRACTUAL OBLIGATIONS
Other than a decrease of $560 million to our capital commitments and $190 million to other purchase commitments, there were no material changes to our contractual obligations in first quarter 2013 or to payments due in the next five years or after. See the MD&A in our 2012 Annual Report for more information about our contractual obligations.
Financial risks and financial instruments
We are exposed to liquidity risk, counterparty credit risk and market risk, and have strategies, policies and limits in place to mitigate their impact on our earnings, cash flow and ultimately shareholder value. These are designed to ensure our risks and related exposures are in line with our business objectives and risk tolerance.
Please see our 2012 Annual Report for more information about the risks we face in our business. In addition to those disclosed risks, in the NEB–s March 2013 decision on our Canadian Restructuring Proposal, the NEB found that the fundamental business risk facing the Canadian Mainline has increased. The tolling framework created by the NEB decision results in higher variability in cash flows and greater uncertainty about the ultimate recovery of the Canadian Mainline–s cost of service. Otherwise, our risks have not changed substantially since December 31, 2012.
LIQUIDITY RISK
We manage our liquidity by continuously forecasting our cash flow for a 12 month period and making sure we have adequate cash balances, cash flow from operations, committed and demand credit facilities and access to capital markets to meet our operating, financing and capital expenditure obligations under both normal and stressed economic conditions.
We review our accounts receivable regularly and record allowances for doubtful accounts using the specific identification method. At March 31, 2013, we had not incurred any significant credit losses and had no significant amounts past due or impaired. We had a credit risk concentration of $256 million with one counterparty at March 31, 2013 (December 31, 2012 – $259 million). This amount is secured by a guarantee from the counterparty–s parent company and we anticipate collecting the full amount.
We have significant credit and performance exposure to financial institutions because they hold cash deposits and provide committed credit lines and letters of credit that help manage our exposure to counterparties and provide liquidity in commodity, foreign exchange and interest rate derivative markets.
FOREIGN EXCHANGE RISK
Certain of our businesses generate income in U.S. dollars, but since we report in Canadian dollars, changes in the value of the U.S. dollar against the Canadian dollar can affect our net income. As our U.S. operations continue to grow, our exposure to changes in currency rates increases. Some of this risk is offset by interest expense on U.S. dollar-denominated debt and by using foreign exchange derivatives.
We use foreign exchange derivatives to manage other foreign exchange transactions, including foreign exchange exposures that arise on some of our regulated assets. We defer some of the realized gains and losses on these derivatives as regulatory assets and liabilities until we recover or pay them to shippers according to the terms of the shipping agreements.
AVERAGE EXCHANGE RATE – U.S. TO CANADIAN DOLLARS
The impact of changes in the value of the U.S. dollar on our U.S. operations is significantly offset by other U.S. dollar-denominated items, as set out in the table below. Comparable EBIT is a non-GAAP measure.
SIGNIFICANT U.S. DOLLAR-DENOMINATED AMOUNTS
NET INVESTMENT IN FOREIGN OPERATIONS
We hedge our net investment in foreign operations (on an after-tax basis) with U.S. dollar-denominated debt, cross-currency interest rate swaps, forward foreign exchange contracts and foreign exchange options. The fair values and notional amounts for the derivatives designated as a net investment hedge were as follows:
CREDIT RISK RELATED CONTINGENT FEATURES
Derivatives contracts often contain financial assurance provisions that may require us to provide collateral if a credit risk-related contingent event occurs (for example, if our credit rating is downgraded to non-investment grade).
Based on contracts in place and market prices at March 31, 2013, the aggregate fair value of all derivative contracts with credit-risk-related contingent features that were in a net liability position was $34 million (December 31, 2012 – $37 million), with collateral provided in the normal course of business of nil (December 31, 2012 – nil). If the credit-risk-related contingent features in these agreements had been triggered on March 31, 2013, we would have been required to provide collateral of $34 million (December 31, 2012 – $37 million) to our counterparties. Collateral may also need to be provided should the fair value of derivative instruments exceed pre-defined contractual exposure limit thresholds.
We feel we have sufficient liquidity in the form of cash and undrawn committed revolving bank lines to meet these contingent obligations should they arise.
FAIR VALUE HIERARCHY
Assets and liabilities that are recorded at fair value are required to be categorized into three levels based on the fair value hierarchy.
A 10 per cent increase or decrease in commodity prices, with all other variables held constant, would result in a $3 million decrease or increase, respectively, in the fair value of outstanding derivative instruments included in Level III at March 31, 2013.
Other information
CONTROLS AND PROCEDURES
Management, including our President and CEO and our CFO, evaluated the effectiveness of our disclosure controls and procedures as at March 31, 2013, as required by the Canadian securities regulatory authorities and by the SEC, and concluded that our disclosure controls and procedures are effective at a reasonable assurance level.
There were no changes in first quarter 2013 that had or are likely to have a material impact on our internal control over financial reporting.
Management is in the process of implementing an Enterprise Resource Planning (ERP) system that will likely affect some processes supporting internal control over financial reporting in subsequent quarters of 2013. The phased implementation period is planned to begin July 1, 2013.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES, AND ACCOUNTING CHANGES
When we prepare financial statements that conform with U.S. GAAP, we are required to make estimates and assumptions that affect the timing and amount we record for our assets, liabilities, revenues and expenses because these items may be affected by future events. We base the estimates and assumptions on the most current information available, using our best judgment. We also regularly assess the assets and liabilities themselves.
Our significant accounting policies and critical accounting estimates have remained unchanged since December 31, 2012. You can find a summary of our significant accounting policies and critical accounting estimates in our 2012 Annual Report.
Changes in accounting policies for 2013
Balance sheet offsetting
Effective January 1, 2013, we adopted the Accounting Standards Update (ASU) on disclosures about balance sheet offsetting as issued by the Financial Accounting Standards Board (FASB) to enable understanding of the effects of netting arrangements on our financial position. Adoption of the ASU has resulted in increased qualitative and quantitative disclosures about certain derivative instruments that are either offset in accordance with current U.S. GAAP or are subject to a master netting arrangement or similar agreement.
Accumulated other comprehensive income
Effective January 1, 2013, we adopted the ASU on reporting of amounts reclassified out of accumulated other comprehensive income (AOCI) as issued by the FASB. Adoption of the ASU has resulted in providing additional qualitative and quantitative disclosures about significant amounts reclassified out of AOCI into net income.
Future accounting changes
Obligations resulting from joint and several liability arrangements
In February 2013, the FASB issued guidance for recognizing, measuring, and disclosing obligations resulting from joint and several liability arrangements when the total amount of the obligation is fixed at the reporting date. Debt arrangements, other contractual obligations, and settled litigation and judicial rulings are examples of these obligations. This ASU is effective retrospectively for fiscal years, and interim periods within those years, beginning after December 15, 2013. We are evaluating the impact that adopting the ASU would have on our consolidated financial statements, but do not expect it to be material.
Foreign currency matters – cumulative translation adjustment
In March 2013, the FASB issued amended guidance related to the release of the cumulative translation adjustment into net income when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a business. This ASU is effective prospectively for fiscal years, and interim reporting periods within those years, beginning after December 15, 2013. Early adoption is allowed as of the beginning of the entity–s fiscal year. We are evaluating the impact that adopting this ASU would have on our consolidated financial statements, but do not expect it to be material.
QUARTERLY RESULTS
FACTORS AFFECTING QUARTERLY FINANCIAL INFORMATION BY BUSINESS SEGMENT
Quarter-over-quarter revenues and net incomes sometimes fluctuate. The causes of this fluctuation vary across our business segments.
In Oil Pipelines, annual revenues and net income are based on contracted crude oil transportation and uncommitted spot transportation. Quarter-over-quarter revenues and net income during any particular fiscal year remain relatively stable.
FACTORS AFFECTING FINANCIAL INFORMATION BY QUARTER
Condensed consolidated statement of income
1. Basis of Presentation
These condensed consolidated financial statements of TransCanada Corporation (TransCanada or the Company) have been prepared by management in accordance with United States generally accepted accounting principles (U.S. GAAP). The accounting policies applied are consistent with those outlined in TransCanada–s annual audited consolidated financial statements for the year ended December 31, 2012. Capitalized and abbreviated terms that are used but not otherwise defined herein are identified in TransCanada–s 2012 Annual Report.
These condensed consolidated financial statements reflect adjustments, all of which are normal recurring adjustments that are, in the opinion of management, necessary to reflect the financial position and results of operations for the respective periods. These condensed consolidated financial statements do not include all disclosures required in the annual financial statements and should be read in conjunction with the 2012 audited Consolidated Financial Statements included in TransCanada–s 2012 Annual Report. Certain comparative figures have been reclassified to conform with the current period–s presentation.
Earnings for interim periods may not be indicative of results for the fiscal year in the Company–s Natural Gas Pipeline segment due to the timing of regulatory decisions and seasonal fluctuations in short-term throughput volumes on U.S. pipelines. Earnings for interim periods may also not be indicative of results for the fiscal year in the Company–s Energy segment due to the impact of seasonal weather conditions on customer demand and market pricing in certain of the Company–s investments in electrical power generation plants and non-regulated gas storage facilities.
USE OF ESTIMATES AND JUDGEMENTS
In preparing these financial statements, TransCanada is required to make estimates and assumptions that affect both the amount and timing of recording assets, liabilities, revenues and expenses since the determination of these items may be dependent on future events. The Company uses the most current information available and exercises careful judgement in making these estimates and assumptions. In the opinion of management, these condensed consolidated financial statements have been properly prepared within reasonable limits of materiality and within the framework of the Company–s significant accounting policies included in the consolidated financial statements for the year ended December 31, 2012, except as described in Note 2, Changes in accounting policies.
2. Changes in Accounting Policies
CHANGES IN ACCOUNTING POLICIES FOR 2013
Balance Sheet Offsetting/Netting
Effective January 1, 2013, the Company adopted the Accounting Standards Update (ASU) on disclosures about balance sheet offsetting as issued by the Financial Accounting Standards Board (FASB) to enable understanding of the effects of netting arrangements on the Company–s financial position. Adoption of the ASU has resulted in increased qualitative and quantitative disclosures regarding certain derivative instruments that are either offset in accordance with current U.S. GAAP or are subject to a master netting arrangement or similar agreement.
Accumulated Other Comprehensive Income
Effective January 1, 2013, the Company adopted the ASU on reporting of amounts reclassified out of accumulated other comprehensive income (AOCI) as issued by the FASB. Adoption of the ASU has resulted in providing additional qualitative and quantitative disclosures regarding significant amounts reclassified out of accumulated other comprehensive income into net income.
FUTURE ACCOUNTING CHANGES
Obligations Resulting from Joint and Several Liability Arrangements
In February 2013, the FASB issued guidance for the recognition, measurement and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation is fixed at the reporting date. Examples of obligations within the scope of this ASU include debt arrangements, other contractual obligations, and settled litigation and judicial rulings. This ASU is effective retrospectively for fiscal years, and interim periods within those years, beginning after December 15, 2013. The Company is currently evaluating the impact of the adoption of this ASU on its consolidated financial statements, but does not expect it to have a material impact.
Foreign Currency Matters – Cumulative Translation Adjustment
In March 2013, the FASB issued amended guidance related to the release of the cumulative translation adjustment into net income when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a business. This ASU is effective prospectively for fiscal years, and interim reporting periods within those years, beginning after December 15, 2013. Early adoption is permitted as of the beginning of the entity–s fiscal year. The Company is currently evaluating the impact of the adoption of this ASU on its consolidated financial statements, but does not expect it to have a material impact.
3. Segmented Information
4. Income Taxes
At March 31, 2013, the total unrecognized tax benefit of uncertain tax positions is approximately $50 million (December 31, 2012 – $49 million). TransCanada recognizes interest and penalties related to income tax uncertainties in income tax expense. Included in net tax expense for the three months ended March 31, 2013 is $1 million of interest expense and nil for penalties (March 31, 2012 – $1 million for interest expense and nil for penalties). At March 31, 2013, the Company had $6 million accrued for interest expense and nil accrued for penalties (December 31, 2012 – $5 million accrued for interest expense and nil for penalties).
The effective tax rates for the three-month periods ended March 31, 2013 and 2012 were 19 per cent and 24 per cent, respectively. The lower effective tax rate in 2013 was a result of the impact of the NEB–s decision on the Canadian Restructuring Proposal.
TransCanada expects the enactment of certain Canadian Federal tax legislation in the next twelve months which is expected to result in a favourable income tax adjustment of approximately $25 million. Otherwise, subject to the results of audit examinations by taxing authorities and other legislative amendments, TransCanada does not anticipate further adjustments to the unrecognized tax benefits during the next twelve months that would have a material impact on its financial statements.
5. Long-Term Debt
In the three months ended March 31, 2013, the Company capitalized interest related to capital projects of $55 million (March 31, 2012 – $74 million).
In January 2013, TransCanada PipeLines Limited issued US$750 million of 0.75 per cent senior notes due in 2016.
6. Share Capital
PREFERRED SHARE ISSUE
In March 2013, TransCanada completed a public offering of 24 million Series 7 cumulative redeemable first preferred shares under its November 2011 base shelf prospectus. The Series 7 preferred shares were issued at $25 per share resulting in gross proceeds of $600 million. The holders of the Series 7 preferred shares are entitled to receive fixed cumulative dividends at an annual rate of $1.00 per share, payable quarterly for the initial period ending April 30, 2019, with the first dividend payment scheduled for April 30, 2013. The dividend rate will reset on April 30, 2019 and every five years thereafter to a yield per annum equal to the sum of the then five year Government of Canada bond yield and 2.38 per cent. The preferred shares are redeemable by TransCanada on or after April 30, 2019 and on April 30 of every fifth year thereafter at a price of $25 per share plus accrued and unpaid dividends. The net proceeds of this offering are expected to be used to partially fund capital projects, for general corporate purposes and to repay short-term debt.
The Series 7 preferred shareholders will have the right to convert their shares into Series 8 cumulative redeemable first preferred shares on April 30, 2019 and on April 30 of every fifth year thereafter. The holders of Series 8 preferred shares will be entitled to receive quarterly floating rate cumulative dividends at a yield per annum equal to the sum of the then 90 day Government of Canada treasury bill rate and 2.38 per cent.
7. Other Comprehensive Income/(Loss) And Accumulated Other Comprehensive Loss
Components of other comprehensive income/(loss) including non-controlling interests and the related tax effects are as follows:
8. Employee Post-Retirement Benefits
The net benefit cost recognized for the Company–s defined benefit pension plans and other post-retirement benefit plans is as follows:
9. Risk Management and Financial Instruments
COUNTERPARTY CREDIT RISK
TransCanada–s maximum counterparty credit exposure with respect to financial instruments at the balance sheet date, without taking into account security held, consisted of accounts receivable, portfolio investments recorded at fair value, the fair value of derivative assets and notes, and loans and advances receivable. The carrying amounts and fair values of these financial assets, except amounts for derivative assets, are included in accounts receivable and other, and available for sale assets in the Non-Derivative Financial Instruments Summary table below. The majority of counterparty credit exposure is with counterparties that are investment grade or the exposure is supported by financial assurances provided by investment grade parties. The Company regularly reviews its accounts receivable and records an allowance for doubtful accounts as necessary using the specific identification method. At March 31, 2013, there were no significant amounts past due or impaired, and there were no significant credit losses during the year.
At March 31, 2013, the Company had a credit risk concentration of $256 million (December 31, 2012 – $259 million) due from a counterparty. This amount is expected to be fully collectible and is secured by a guarantee from the counterparty–s parent company.
NET INVESTMENT IN FOREIGN OPERATIONS
The Company hedges its net investment in foreign operations (on an after-tax basis) with U.S. dollar-denominated debt, cross-currency interest rate swaps, forward foreign exchange contracts and foreign exchange options.
U.S. DOLLAR-DENOMINATED DEBT DESIGNATED AS A NET INVESTMENT HEDGE
OFFSETTING OF DERIVATIVE INSTRUMENTS
The Company enters into derivative contracts with the right to offset in the normal course of business as well as in the event of default. TransCanada has no master netting agreements, however; similar contracts are entered into containing rights of offset. The Company has elected to present the fair value of derivative instruments with the right to offset on a gross basis in the balance sheet. The following table shows the impact on the presentation of the fair value of derivative instrument assets and liabilities had the Company elected to present these contracts on a net basis:
With respect to all financial arrangements, including the derivative instruments presented above, as at March 31, 2013, the Company had provided cash collateral of $166 million and letters of credit of $45 million to its counterparties. The Company held $1 million in cash collateral and $6 million in letters of credit on asset exposures at March 31, 2013.
The following table shows the impact on the presentation of the fair value of derivative instrument assets and liabilities had the Company elected to present these contracts on a net basis as at December 31, 2012:
With respect to all financial arrangements, including the derivative instruments presented above as at December 31, 2012, the Company had provided cash collateral of $189 million and letters of credit of $45 million to its counterparties. The Company held $2 million in cash collateral and $5 million in letters of credit on asset exposures at December 31, 2012.
CREDIT RISK RELATED CONTINGENT FEATURES
Derivative contracts entered into to manage market risk often contain financial assurance provisions that allow parties to the contracts to manage credit risk. These provisions may require collateral to be provided if a credit-risk-related contingent event occurs, such as a downgrade in the Company–s credit rating to non-investment grade.
Based on contracts in place and market prices at March 31, 2013, the aggregate fair value of all derivative instruments with credit-risk-related contingent features that were in a net liability position was $34 million (December 31, 2012 – $37 million), for which the Company had provided collateral in the normal course of business of nil (December 31, 2012 – nil). If the credit-risk-related contingent features in these agreements were triggered on March 31, 2013, the Company would have been required to provide collateral of $34 million (December 31, 2012 – $37 million) to its counterparties. Collateral may also need to be provided should the fair value of derivative instruments exceed pre-defined contractual exposure limit thresholds.
The Company feels it has sufficient liquidity in the form of cash and undrawn committed revolving bank lines to meet these contingent obligations should they arise.
FAIR VALUE HIERARCHY
The Company–s assets and liabilities recorded at fair value have been classified into three categories based on the fair value hierarchy.
In Level I, the fair value of assets and liabilities is determined by reference to quoted prices in active markets for identical assets and liabilities that the Company has the ability to access at the measurement date.
In Level II, the fair value of interest rate and foreign exchange derivative assets and liabilities is determined using the income approach. The fair value of power and gas commodity assets and liabilities is determined using the market approach. Under both approaches, the valuation is based on the extrapolation of inputs, other than quoted prices included within Level I, for which all significant inputs are observable directly or indirectly. Such inputs include published exchange rates, interest rates, interest rate swap curves, yield curves, and broker quotes from external data service providers. Transfers between Level I and Level II would occur when there is a change in market circumstances. There were no transfers between Level I and Level II in first quarter 2013 and 2012.
In Level III, the fair value of assets and liabilities measured on a recurring basis is determined using a market approach based on inputs that are unobservable and significant to the overall fair value measurement. Assets and liabilities measured at fair value can fluctuate between Level II and Level III depending on the proportion of the value of the contract that extends beyond the time frame for which inputs are considered to be observable. As contracts near maturity and observable market data becomes available, they are transferred out of Level III and into Level II. There were no transfers between Level II and Level III in first quarter 2013 and 2012.
Long-dated commodity transactions in certain markets where liquidity is low are included in Level III of the fair value hierarchy, as the related commodity prices are not readily observable. Long-term electricity prices are estimated using a third-party modeling tool which takes into account physical operating characteristics of generation facilities in the markets in which the Company operates. Model inputs include market fundamentals such as fuel prices, power supply additions and retirements, power demand, seasonal hydro conditions and transmission constraints. Long-term North American natural gas pr