EX-13.2 3 trp-09302014xfinstmts.htm THIRD QUARTER FINANCIAL STATEMENTS TRP-09.30.2014-Fin Stmts
EXHIBIT 13.2


Condensed consolidated statement of income
 
 
 
three months ended September 30
 
nine months ended September 30
(unaudited - millions of Canadian $, except per share amounts)
 
2014

 
2013

 
2014

 
2013

 
 
 
 
 
 
 
 
 
Revenues
 
 
 
 
 
 
 
 
Natural gas pipelines
 
1,145

 
1,083

 
3,514

 
3,271

Liquids pipelines
 
387

 
281

 
1,112

 
830

Energy
 
919

 
840

 
2,943

 
2,364

 
 
2,451

 
2,204

 
7,569

 
6,465

Income from Equity Investments
 
159

 
177

 
362

 
423

Operating and Other Expenses
 
 

 
 

 
 

 
 

Plant operating costs and other
 
674

 
650

 
2,163

 
1,939

Commodity purchases resold
 
388

 
299

 
1,422

 
958

Property taxes
 
113

 
138

 
355

 
353

Depreciation and amortization
 
403

 
366

 
1,195

 
1,089

Gain on sale of assets
 
—

 
—

 
(108
)
 
—

 
 
1,578

 
1,453

 
5,027

 
4,339

Financial Charges/(Income)
 
 

 
 

 
 

 
 

Interest expense
 
304

 
235

 
875

 
745

Interest income and other
 
(17
)
 
(31
)
 
(63
)
 
(33
)
 
 
287

 
204

 
812

 
712

Income before Income Taxes
 
745

 
724

 
2,092

 
1,837

Income Tax Expense
 
 

 
 

 
 

 
 

Current
 
22

 
(3
)
 
104

 
40

Deferred
 
217

 
193

 
521

 
363

 
 
239

 
190

 
625

 
403

Net Income
 
506

 
534

 
1,467

 
1,434

Net income attributable to non-controlling interests
 
25

 
33

 
110

 
87

Net Income Attributable to Controlling Interests
 
481

 
501

 
1,357

 
1,347

Preferred share dividends
 
24

 
20

 
72

 
55

Net Income Attributable to Common Shares
 
457

 
481

 
1,285

 
1,292

 
 
 
 
 
 
 
 
 
Net Income per Common Share
 
 

 
 

 
 

 
 

Basic and diluted
 

$0.64

 

$0.68

 

$1.81

 

$1.83

Dividends Declared per Common Share
 

$0.48

 

$0.46

 

$1.44

 

$1.38

Weighted Average Number of Common Shares (millions)
 
 

 
 

 
 

 
 

Basic
 
708

 
707

 
708

 
707

Diluted
 
710

 
708

 
709

 
708

 
See accompanying notes to the condensed consolidated financial statements.


TRANSCANADA [ 41
THIRD QUARTER REPORT 2014


Condensed consolidated statement of comprehensive income
 
 
 
three months ended
September 30
 
nine months ended
September 30
(unaudited - millions of Canadian $)
 
2014

 
2013

 
2014

 
2013

 
 
 
 
 
 
 
 
 
Net Income
 
506

 
534

 
1,467

 
1,434

Other Comprehensive Income, Net of Income Taxes
 
 

 
 

 
 

 
 

Foreign currency translation gains and losses on net investment in foreign operations
 
287

 
(140
)
 
337

 
196

Change in fair value of net investment hedges
 
(121
)
 
62

 
(169
)
 
(122
)
Change in fair value of cash flow hedges
 
37

 
14

 
64

 
(9
)
Reclassification to Net Income of gains and losses on cash flow hedges
 
5

 
27

 
(55
)
 
34

Unrealized actuarial gains and losses on pension and other post-retirement benefit plans
 
—

 
1

 
—

 
1

Reclassification to Net Income of actuarial gains and losses and prior service costs on pension and other post-retirement benefit plans
 
5

 
5

 
14

 
17

Other comprehensive income/(loss) on equity investments
 
—

 
(1
)
 
2

 
(4
)
Other comprehensive income/(loss) (Note 8)
 
213

 
(32
)
 
193

 
113

Comprehensive Income
 
719

 
502

 
1,660

 
1,547

Comprehensive income attributable to non-controlling interests
 
97

 
5

 
187

 
116

Comprehensive Income Attributable to Controlling Interests
 
622

 
497

 
1,473

 
1,431

Preferred share dividends
 
24

 
20

 
72

 
55

Comprehensive Income Attributable to Common Shares
 
598

 
477

 
1,401

 
1,376

 
See accompanying notes to the condensed consolidated financial statements.



TRANSCANADA [ 42
THIRD QUARTER REPORT 2014


Condensed consolidated statement of cash flows
 
 
 
three months ended
September 30
 
nine months ended
September 30
(unaudited - millions of Canadian $)
 
2014

 
2013

 
2014

 
2013

 
 
 
 
 
 
 
 
 
Cash Generated from Operations
 
 
 
 
 
 
 
 
Net income
 
506

 
534

 
1,467

 
1,434

Depreciation and amortization
 
403

 
366

 
1,195

 
1,089

Deferred income taxes
 
217

 
193

 
521

 
363

Income from equity investments
 
(159
)
 
(177
)
 
(362
)
 
(423
)
Distributed earnings received from equity investments
 
161

 
163

 
415

 
427

Employee post-retirement benefits funding lower than expense
 
16

 
7

 
28

 
33

Gain on sale of assets
 
—

 
—

 
(108
)
 
—

Other
 
(73
)
 
(40
)
 
(66
)
 
(6
)
Decrease/(increase) in operating working capital
 
171

 
72

 
250

 
(252
)
Net cash provided by operations
 
1,242

 
1,118

 
3,340

 
2,665

Investing Activities
 
 

 
 

 
 

 
 

Capital expenditures
 
(853
)
 
(992
)
 
(2,598
)
 
(3,030
)
Equity investments
 
(66
)
 
(30
)
 
(195
)
 
(101
)
Acquisitions
 
(181
)
 
(99
)
 
(181
)
 
(154
)
Proceeds from sale of assets, net of transaction costs
 
—

 
—

 
187

 
—

Deferred amounts and other
 
(31
)
 
(103
)
 
(148
)
 
(267
)
Net cash used in investing activities
 
(1,131
)
 
(1,224
)
 
(2,935
)
 
(3,552
)
Financing Activities
 
 

 
 

 
 

 
 

Dividends on common and preferred shares
 
(364
)
 
(346
)
 
(1,074
)
 
(1,012
)
Distributions paid to non-controlling interests
 
(42
)
 
(44
)
 
(134
)
 
(114
)
Notes payable issued/(repaid), net
 
377

 
(1,177
)
 
(145
)
 
(618
)
Long-term debt issued, net of issue costs
 
—

 
2,173

 
1,380

 
2,917

Repayment of long-term debt
 
(38
)
 
(521
)
 
(1,020
)
 
(1,230
)
Common shares issued, net of issue costs
 
27

 
4

 
43

 
59

Partnership units of subsidiary issued, net of issue costs
 
79

 
—

 
79

 
384

Preferred shares issued, net of issue costs
 
—

 
—

 
440

 
585

Preferred shares of subsidiary redeemed
 
—

 
—

 
(200
)
 
—

Net cash provided by/(used in) financing activities
 
39

 
89

 
(631
)
 
971

Effect of Foreign Exchange Rate Changes on Cash and Cash Equivalents
 
(19
)
 
(12
)
 
(3
)
 
10

Increase/(decrease) in Cash and Cash Equivalents
 
131

 
(29
)
 
(229
)
 
94

Cash and Cash Equivalents
 
 

 
 

 
 

 
 

Beginning of period
 
567

 
674

 
927

 
551

Cash and Cash Equivalents
 
 

 
 

 
 

 
 

End of period
 
698

 
645

 
698

 
645

 
See accompanying notes to the condensed consolidated financial statements.



TRANSCANADA [ 43
THIRD QUARTER REPORT 2014


Condensed consolidated balance sheet
 
 
 
September 30,

 
December 31,

(unaudited - millions of Canadian $)
 
2014

 
2013

 
 
 
 
 
ASSETS
 
 
 
 
Current Assets
 
 
 
 
Cash and cash equivalents
 
698

 
927

Accounts receivable
 
1,288

 
1,122

Inventories
 
267

 
251

Other
 
1,102

 
847

 
 
3,355

 
3,147

Plant, Property and Equipment,
net of accumulated depreciation of $19,097 and $17,851, respectively
 
40,189

 
37,606

Equity Investments
 
5,789

 
5,759

Regulatory Assets
 
1,569

 
1,735

Goodwill
 
3,897

 
3,696

Intangible and Other Assets
 
2,357

 
1,955

 
 
57,156

 
53,898

LIABILITIES
 
 

 
 

Current Liabilities
 
 

 
 

Notes payable
 
1,749

 
1,842

Accounts payable and other
 
2,705

 
2,155

Accrued interest
 
381

 
388

Current portion of long-term debt
 
1,742

 
973

 
 
6,577

 
5,358

Regulatory Liabilities
 
218

 
229

Other Long-Term Liabilities
 
775

 
656

Deferred Income Tax Liabilities
 
5,141

 
4,564

Long-Term Debt
 
22,391

 
21,892

Junior Subordinated Notes
 
1,120

 
1,063

 
 
36,222

 
33,762

EQUITY
 
 

 
 

Common shares, no par value
 
12,197

 
12,149

Issued and outstanding:
September 30, 2014 - 709 million shares
 
 

 
 

 
December 31, 2013 - 707 million shares
 
 

 
 

Preferred shares
 
2,255

 
1,813

Additional paid-in capital
 
405

 
401

Retained earnings
 
5,360

 
5,096

Accumulated other comprehensive loss (Note 8)
 
(818
)
 
(934
)
Controlling Interests
 
19,399

 
18,525

Non-controlling interests
 
1,535

 
1,611

 
 
20,934

 
20,136

 
 
57,156

 
53,898

Contingencies and Guarantees (Note 11)
 
 

 
 

Subsequent Event (Note 12)
 
 

 
 

 
See accompanying notes to the condensed consolidated financial statements.



TRANSCANADA [ 44
THIRD QUARTER REPORT 2014


Condensed consolidated statement of equity
 
 
 
nine months ended
September 30
(unaudited - millions of Canadian $)
 
2014

 
2013

 
 
 
 
 
Common Shares
 
 
 
 
Balance at beginning of period
 
12,149

 
12,069

Shares issued on exercise of stock options
 
48

 
67

Balance at end of period
 
12,197

 
12,136

Preferred Shares
 
 

 
 

Balance at beginning of period
 
1,813

 
1,224

Shares issued under public offering, net of issue costs
 
442

 
589

Balance at end of period
 
2,255

 
1,813

Additional Paid-In Capital
 
 

 
 

Balance at beginning of period
 
401

 
379

Issuance of stock options, net of exercises
 
1

 
(2
)
Dilution impact from TC PipeLines, LP units issued
 
9

 
29

Redemption of subsidiary's preferred shares
 
(6
)
 
—

Balance at end of period
 
405

 
406

Retained Earnings
 
 

 
 

Balance at beginning of period
 
5,096

 
4,687

Net income attributable to controlling interests
 
1,357

 
1,347

Common share dividends
 
(1,019
)
 
(976
)
Preferred share dividends
 
(74
)
 
(57
)
Balance at end of period
 
5,360

 
5,001

Accumulated Other Comprehensive Loss
 
 

 
 

Balance at beginning of period
 
(934
)
 
(1,448
)
Other comprehensive income
 
116

 
84

Balance at end of period
 
(818
)
 
(1,364
)
Equity Attributable to Controlling Interests
 
19,399

 
17,992

Equity Attributable to Non-Controlling Interests
 
 

 
 

Balance at beginning of period
 
1,611

 
1,425

Net income attributable to non-controlling interests
 
 

 
 

TC PipeLines, LP
 
98

 
63

Preferred share dividends of TCPL
 
2

 
17

Portland
 
10

 
7

Other comprehensive income attributable to non-controlling interests
 
77

 
29

Issuance of TC PipeLines, LP units
 
 
 
 
Proceeds, net of issue costs
 
79

 
384

Decrease in TransCanada's ownership
 
(14
)
 
(47
)
Distributions to non-controlling interests
 
(134
)
 
(114
)
Redemption of subsidiary's preferred shares
 
(194
)
 
—

Foreign exchange and other
 
—

 
7

Balance at end of period
 
1,535

 
1,771

Total Equity
 
20,934

 
19,763

 
See accompanying notes to the condensed consolidated financial statements.



TRANSCANADA [ 45
THIRD QUARTER REPORT 2014


Notes to condensed consolidated financial statements
(unaudited)
 
1. Basis of presentation

These condensed consolidated financial statements of TransCanada Corporation (TransCanada or the Company) have been prepared by management in accordance with 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, 2013. Capitalized and abbreviated terms that are used but not otherwise defined herein are identified in TransCanada’s 2013 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 fairly 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 2013 audited consolidated financial statements included in TransCanada’s 2013 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 Pipelines 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, 2013, except as described in Note 2, Changes in accounting policies.

2. Changes in accounting policies

CHANGES IN ACCOUNTING POLICIES FOR 2014

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 new guidance was effective January 1, 2014. There was no material impact on the Company’s consolidated financial statements as a result of applying this new standard. 

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 new guidance was effective prospectively from January 1, 2014 and will be applied for all applicable transactions after that date.

Unrecognized tax benefit
In July 2013, the FASB issued amended guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. This new guidance was effective January 1, 2014. There was no material impact on the Company's consolidated financial statements as a result of applying this new standard.



TRANSCANADA [ 46
THIRD QUARTER REPORT 2014


FUTURE ACCOUNTING CHANGES

Reporting discontinued operations
In April 2014, the FASB issued amended guidance on the reporting of discontinued operations. The criteria of what will qualify as a discontinued operation has changed and there are expanded disclosures required. This new guidance is effective from January 1, 2015 and will be applied prospectively. The Company does not expect the adoption of this new standard to have a material impact on its consolidated financial statements.

Revenue from contracts with customers
In May 2014, the FASB issued new guidance on Revenue from Contracts with Customers. This guidance supersedes the current revenue recognition requirements and most industry-specific guidance. This new guidance requires that an entity recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. This new guidance is effective from January 1, 2017 with two methods in which the amendment can be applied: (1) retrospectively to each prior reporting period presented, or (2) retrospectively with the cumulative effect recognized at the date of initial application. Early application is not permitted. The Company is currently evaluating the impact of the adoption of this ASU and has not yet determined the effect on its consolidated financial statements.

3. Segmented information
 
three months ended September 30
 
Natural Gas Pipelines
 
Liquids Pipelines1
 
Energy
 
Corporate
 
Total
(unaudited - millions of Canadian $)
 
2014

 
2013

 
2014

 
2013

 
2014

 
2013

 
2014

 
2013

 
2014

 
2013

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenues
 
1,145

 
1,083

 
387

 
281

 
919

 
840

 
—

 
—

 
2,451

 
2,204

Income from equity investments
 
35

 
36

 
—

 
—

 
124

 
141

 
—

 
—

 
159

 
177

Plant operating costs and other
 
(349
)
 
(326
)
 
(92
)
 
(81
)
 
(202
)
 
(217
)
 
(31
)
 
(26
)
 
(674
)
 
(650
)
Commodity purchases resold
 
—

 
—

 
—

 
—

 
(388
)
 
(299
)
 
—

 
—

 
(388
)
 
(299
)
Property taxes
 
(81
)
 
(109
)
 
(14
)
 
(11
)
 
(18
)
 
(18
)
 
—

 
—

 
(113
)
 
(138
)
Depreciation and amortization
 
(266
)
 
(248
)
 
(55
)
 
(37
)
 
(76
)
 
(77
)
 
(6
)
 
(4
)
 
(403
)
 
(366
)
Segmented earnings
 
484

 
436

 
226

 
152

 
359

 
370

 
(37
)
 
(30
)
 
1,032

 
928

Interest expense
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
(304
)
 
(235
)
Interest income and other
 
17

 
31

Income before income taxes
 
745

 
724

Income tax expense
 
(239
)
 
(190
)
Net income
 
506

 
534

Net income attributable to non-controlling interests
 
(25
)
 
(33
)
Net income attributable to controlling interests
 
481

 
501

Preferred share dividends
 
(24
)
 
(20
)
Net income attributable to common shares
 
457

 
481


1
Previously Oil Pipelines.



TRANSCANADA [ 47
THIRD QUARTER REPORT 2014


nine months ended September 30
 
Natural Gas Pipelines
 
Liquids Pipelines1
 
Energy
 
Corporate
 
Total
(unaudited - millions of Canadian $)
 
2014

 
2013

 
2014

 
2013

 
2014

 
2013

 
2014

 
2013

 
2014

 
2013

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenues
 
3,514

 
3,271

 
1,112

 
830

 
2,943

 
2,364

 
—

 
—

 
7,569

 
6,465

Income from equity investments
 
124

 
105

 
—

 
—

 
238

 
318

 
—

 
—

 
362

 
423

Plant operating costs and other
 
(1,030
)
 
(983
)
 
(293
)
 
(242
)
 
(749
)
 
(637
)
 
(91
)
 
(77
)
 
(2,163
)
 
(1,939
)
Commodity purchases resold
 
—

 
—

 
—

 
—

 
(1,422
)
 
(958
)
 
—

 
—

 
(1,422
)
 
(958
)
Property taxes
 
(251
)
 
(264
)
 
(48
)
 
(34
)
 
(56
)
 
(55
)
 
—

 
—

 
(355
)
 
(353
)
Depreciation and amortization
 
(791
)
 
(746
)
 
(158
)
 
(111
)
 
(230
)
 
(220
)
 
(16
)
 
(12
)
 
(1,195
)
 
(1,089
)
Gain on sale of assets
 
—

 
—

 
—

 
—

 
108

 
—

 
—

 
—

 
108

 
—

Segmented earnings
 
1,566

 
1,383

 
613

 
443

 
832

 
812

 
(107
)
 
(89
)
 
2,904

 
2,549

Interest expense
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
(875
)
 
(745
)
Interest income and other
 
63

 
33

Income before income taxes
 
2,092

 
1,837

Income tax expense
 
(625
)
 
(403
)
Net income
 
1,467

 
1,434

Net income attributable to non-controlling interests
 
(110
)
 
(87
)
Net income attributable to controlling interests
 
1,357

 
1,347

Preferred share dividends
 
(72
)
 
(55
)
Net income attributable to common shares
 
1,285

 
1,292


1
Previously Oil Pipelines.

TOTAL ASSETS 
(unaudited - millions of Canadian $)
 
September 30, 2014

 
December 31, 2013

 
 
 
 
 
Natural Gas Pipelines
 
26,273

 
25,165

Liquids Pipelines1
 
15,266

 
13,253

Energy
 
13,939

 
13,747

Corporate
 
1,678

 
1,733

 
 
57,156

 
53,898

 

1
Previously Oil Pipelines.

4. Acquisitions and disposition

In September 2014, TransCanada acquired three additional Ontario solar power facilities from Canadian Solar Solutions Inc. for $181 million net of working capital adjustments. TransCanada measured the assets and liabilities acquired at fair value with substantially all of the purchase price allocated to Plant, Property and Equipment and no Goodwill was recorded.

On April 15, 2014, TransCanada sold Cancarb Limited and its related power generation for aggregate gross proceeds of $190 million. TransCanada recognized a gain on the sale of $108 million ($99 million after tax) which has been presented separately on the consolidated statement of income.

5. Income taxes
 
At September 30, 2014, the total unrecognized tax benefit of uncertain tax positions was approximately $20 million (December 31, 2013 - $23 million). TransCanada recognizes interest and penalties related to income tax uncertainties in income tax expense. Included in net tax expense for the three and nine months ended September 30, 2014 is nil of interest expense and nil for penalties (September 30, 2013 - nil of interest expense and nil for penalties). At September 30, 2014, the Company had $6 million accrued for interest expense and nil accrued for penalties (December 31, 2013 - $6 million accrued for interest expense and nil for penalties).
 


TRANSCANADA [ 48
THIRD QUARTER REPORT 2014


The effective tax rates for the nine-month periods ended September 30, 2014 and 2013 were 30 per cent and 22 per cent, respectively. The higher effective tax rate in 2014 compared to 2013 was primarily the result of the impact of the 2013 NEB decision (RH-003-2011), changes in the proportion of income earned between Canadian and foreign jurisdictions as well as higher flow-through taxes in 2014 on Canadian regulated pipelines, partially offset by the disposition of Cancarb Limited in 2014.

6. Long-term debt

In the three and nine months ended September 30, 2014, TransCanada capitalized interest related to capital projects of $57 million and $199 million, respectively (2013 - $80 million and $195 million, respectively).

LONG-TERM DEBT ISSUED
Amount
 
 
 
 
 
 
 
 
(unaudited - millions of $)
 
Type
 
Maturity date
 
Interest rate

 
Date issued
 
 
 
 
 
 
 
 
 
US$1,250
 
Senior unsecured notes
 
March 1, 2034
 
4.625
%
 
February 2014

LONG-TERM DEBT RETIRED
Amount
 
 
 
 
 
 
(unaudited - millions of Canadian $)
 
Type
 
Retirement date
 
Interest rate

 
 
 
 
 
 
 
$450
 
Medium term notes
 
January 2014
 
5.65
%
$300
 
Medium term notes
 
February 2014
 
5.05
%
$125
 
Debenture
 
June 2014
 
11.10
%
$53
 
Debenture
 
June 2014
 
11.20
%

7. Equity and share capital

PREFERRED SHARE ISSUANCE
In January 2014, TransCanada completed a public offering of 18 million Series 9 cumulative redeemable first preferred shares at $25 per share resulting in gross proceeds of $450 million. The holders of the Series 9 preferred shares are entitled to receive fixed cumulative dividends at an annual rate of $1.0625 per share, payable quarterly. The dividend rate will reset on October 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 2.35 per cent. The preferred shares are redeemable by TransCanada on or after October 30, 2019 and on October 30 of every fifth year thereafter at a price of $25 per share plus accrued and unpaid dividends.
 
The Series 9 preferred shareholders will have the right to convert their shares into Series 10 cumulative redeemable first preferred shares on October 30, 2019 and on October 30 of every fifth year thereafter. The holders of Series 10 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 2.35 per cent.

PREFERRED SHARE REDEMPTION
On March 5, 2014, TCPL redeemed all of the four million outstanding 5.60 per cent cumulative redeemable first preferred shares Series Y at a price of $50 per share plus $0.2455 representing accrued and unpaid dividends to the redemption date.



TRANSCANADA [ 49
THIRD QUARTER REPORT 2014


8. 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: 
three months ended September 30, 2014
 
Before tax


Income tax
recovery/


Net of tax

(unaudited - millions of Canadian $)
 
amount


(expense)


amount

 
 
 
 
 
 
 
Foreign currency translation gains and losses on net investment in foreign operations
 
234

 
53

 
287

Change in fair value of net investment hedges
 
(164
)
 
43

 
(121
)
Change in fair value of cash flow hedges
 
62

 
(25
)
 
37

Reclassification to net income of gains and losses on cash flow hedges
 
5

 
—

 
5

Reclassification to net income of actuarial gains and losses and prior service costs on pension and other post-retirement benefit plans
 
6

 
(1
)
 
5

Other comprehensive income/(loss) on equity investments
 
2

 
(2
)
 
—

Other comprehensive income
 
145

 
68

 
213

three months ended September 30, 2013
 
Before tax

 
Income tax
recovery/

 
Net of tax

(unaudited - millions of Canadian $)
 
amount

 
(expense)

 
amount

 
 
 
 
 
 
 
Foreign currency translation gains and losses on net investment in foreign operations
 
(104
)
 
(36
)
 
(140
)
Change in fair value of net investment hedges
 
83

 
(21
)
 
62

Change in fair value of cash flow hedges
 
27

 
(13
)
 
14

Reclassification to net income of gains and losses on cash flow hedges
 
38

 
(11
)
 
27

Unrealized actuarial gains and losses on pension and other post-retirement benefit plans
 
2

 
(1
)
 
1

Reclassification to net income of actuarial gains and losses and prior service costs on pension and other post-retirement benefit plans
 
9

 
(4
)
 
5

Other comprehensive loss on equity investments
 
(1
)
 
—

 
(1
)
Other comprehensive income/(loss)
 
54

 
(86
)
 
(32
)
nine months ended September 30, 2014
 
Before tax

 
Income tax
recovery/

 
Net of tax

(unaudited - millions of Canadian $)
 
amount

 
(expense)

 
amount

 
 
 
 
 
 
 
Foreign currency translation gains and losses on net investment in foreign operations
 
285

 
52

 
337

Change in fair value of net investment hedges
 
(228
)
 
59

 
(169
)
Change in fair value of cash flow hedges
 
104

 
(40
)
 
64

Reclassification to net income of gains and losses on cash flow hedges
 
(94
)
 
39

 
(55
)
Reclassification to net income of actuarial gains and losses and prior service costs on pension and other post-retirement benefit plans
 
19

 
(5
)
 
14

Other comprehensive income/(loss) on equity investments
 
3

 
(1
)
 
2

Other comprehensive income
 
89

 
104

 
193



TRANSCANADA [ 50
THIRD QUARTER REPORT 2014


nine months ended September 30, 2013
 
Before tax

 
Income tax
recovery/

 
Net of tax

(unaudited - millions of Canadian $)
 
amount

 
(expense)

 
amount

 
 
 
 
 
 
 
Foreign currency translation gains and losses on net investment in foreign operations
 
144

 
52

 
196

Change in fair value of net investment hedges
 
(165
)
 
43

 
(122
)
Change in fair value of cash flow hedges
 
(3
)
 
(6
)
 
(9
)
Reclassification to net income of gains and losses on cash flow hedges
 
49

 
(15
)
 
34

Unrealized actuarial gains and losses on pension and other post-retirement benefit plans
 
2

 
(1
)
 
1

Reclassification to net income of actuarial gains and losses and prior service costs on pension and other post-retirement benefit plans
 
26

 
(9
)
 
17

Other comprehensive (loss)/income on equity investments
 
(5
)
 
1

 
(4
)
Other comprehensive income
 
48

 
65

 
113


The changes in accumulated other comprehensive loss by component are as follows:
three months ended September 30, 2014
 
Currency
translation

 
Cash flow

 
Pension and
OPEB plan

 
Equity

 
 
(unaudited - millions of Canadian $)
 
adjustments

 
hedges

 
adjustments

 
Investments

 
Total1

 
 
 
 
 
 
 
 
 
 
 
AOCI balance at July 1, 2014
 
(632
)
 
(37
)
 
(188
)
 
(102
)
 
(959
)
Other comprehensive income before reclassifications2
 
94

 
37

 
—

 
—

 
131

Amounts reclassified from accumulated other comprehensive loss3
 
—

 
5

 
5

 
—

 
10

Net current period other comprehensive income
 
94

 
42

 
5

 
—

 
141

AOCI balance at September 30, 2014
 
(538
)
 
5

 
(183
)
 
(102
)
 
(818
)

1
All amounts are net of tax. Amounts in parentheses indicate losses recorded to OCI.
2
Other comprehensive income before reclassifications on currency translation adjustments is net of non-controlling interest gains of $72 million.
3
Gains related to cash flow hedges reported in AOCI and expected to be reclassified to net income in the next 12 months are estimated to be $65 million ($39 million, net of tax) at September 30, 2014. These estimates assume constant commodity prices, interest rates and foreign exchange rates over time, however, the amounts reclassified will vary based on the actual value of these factors at the date of settlement.

nine months ended September 30, 2014
 
Currency
translation

 
Cash flow

 
Pension and
OPEB plan

 
Equity

 
 
(unaudited - millions of Canadian $)
 
adjustments

 
hedges

 
adjustments

 
Investments

 
Total1

 
 
 
 
 
 
 
 
 
 
 
AOCI balance at January 1, 2014
 
(629
)
 
(4
)
 
(197
)
 
(104
)
 
(934
)
Other comprehensive income before reclassifications2
 
91

 
64

 
—

 
—

 
155

Amounts reclassified from accumulated other comprehensive loss3
 
—

 
(55
)
 
14

 
2

 
(39
)
Net current period other comprehensive income
 
91

 
9

 
14

 
2

 
116

AOCI balance at September 30, 2014
 
(538
)
 
5

 
(183
)
 
(102
)
 
(818
)

1
All amounts are net of tax. Amounts in parentheses indicate losses recorded to OCI.
2
Other comprehensive income before reclassifications on currency translation adjustments is net of non-controlling interest gains of $77 million.
3
Gains related to cash flow hedges reported in AOCI and expected to be reclassified to net income in the next 12 months are estimated to be $65 million ($39 million, net of tax) at September 30, 2014. These estimates assume constant commodity prices, interest rates and foreign exchange rates over time, however, the amounts reclassified will vary based on the actual value of these factors at the date of settlement.

Details about reclassifications out of accumulated other comprehensive loss are as follows: 


TRANSCANADA [ 51
THIRD QUARTER REPORT 2014


 
 
Amounts reclassified from
accumulated other comprehensive loss1
 
Affected line item
in the condensed
consolidated statement of income
(unaudited - millions of Canadian $)
 
three months ended September 30, 2014
 
nine months ended September 30, 2014
 
 
 
 
 
 
 
 
Cash flow hedges
 
 
 
 
 
 
Power and natural gas
 
(1
)
 
106

 
Revenue (Energy)
Interest
 
(4
)
 
(12
)
 
Interest expense
 
 
(5
)
 
94

 
Total before tax
 
 
—

 
(39
)
 
Income tax expense
 
 
(5
)
 
55

 
Net of tax
Pension and other post-retirement plan adjustments
 
 

 
 

 
 
Amortization of actuarial loss and past service cost
 
(6
)
 
(19
)
 
2 
 
 
1

 
5

 
Income tax expense
 
 
(5
)
 
(14
)
 
Net of tax
Equity Investments
 
 

 
 

 
 
Equity income
 
(2
)
 
(3
)
 
Income from Equity Investments
 
 
2

 
1

 
Income tax expense
 
 
—

 
(2
)
 
Net of tax

1
All amounts in parentheses indicate expenses to the condensed consolidated statement of income.
2
These accumulated other comprehensive loss components are included in the computation of net benefit cost. Refer to Note 9 for additional detail.

9. 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:
 
 
three months ended September 30
 
nine months ended September 30
 
 
Pension benefit plans
 
Other post-retirement benefit plans
 
Pension benefit plans
 
Other post-retirement benefit plans
(unaudited - millions of Canadian $)
 
2014

 
2013

 
2014

 
2013

 
2014

 
2013

 
2014

 
2013

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Service cost
 
21

 
21

 
1

 
1

 
64

 
62

 
2

 
2

Interest cost
 
28

 
24

 
2

 
2

 
84

 
71

 
7

 
6

Expected return on plan assets
 
(35
)
 
(31
)
 
—

 
—

 
(104
)
 
(89
)
 
(1
)
 
(1
)
Amortization of actuarial loss
 
5

 
8

 
—

 
1

 
16

 
23

 
1

 
2

Amortization of past service cost
 
1

 
—

 
—

 
—

 
2

 
1

 
—

 
—

Amortization of regulatory asset
 
4

 
7

 
1

 
—

 
13

 
22

 
1

 
1

Amortization of transitional obligation related to regulated business
 
—

 
—

 
—

 
—

 
—

 
—

 
1

 
1

Net benefit cost recognized
 
24

 
29

 
4

 
4

 
75

 
90

 
11

 
11

 

10. Risk management and financial instruments
 
RISK MANAGEMENT OVERVIEW
TransCanada has exposure to counterparty credit risk and market risk, and has strategies, policies and limits in place to manage the impact of these risks on earnings, cash flow and, ultimately, shareholder value.

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


TRANSCANADA [ 52
THIRD QUARTER REPORT 2014


fair value, the fair value of derivative assets and notes, and loans and advances receivable. 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 September 30, 2014, there were no significant amounts past due or impaired, and there were no significant credit losses during the period.
 
At September 30, 2014, the Company had a credit risk concentration of $224 million (December 31, 2013 - $240 million) due from one counterparty. This amount is expected to be fully collectible and is secured by a guarantee from the counterparty’s investment grade 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, foreign exchange forward contracts and foreign exchange options.
 
U.S. dollar-denominated debt designated as a net investment hedge
(unaudited - millions of Canadian $)

September 30, 2014

December 31, 2013
 
 
 
 
 
Carrying value

16,400 (US 14,600)
 
14,200 (US 13,400)
Fair value

18,700 (US 16,700)
 
16,000 (US 15,000)
 
Derivatives designated as a net investment hedge
 
 
September 30, 2014
 
December 31, 2013
(unaudited - millions of Canadian $)

Fair Value1


Notional or principal amount

Fair value1


Notional or principal amount
 
 
 
 
 
 
 
 
 
Asset/(liability)








U.S. dollar cross-currency interest rate swaps

 

 

 

 
(maturing 2014 to 2019)2

(342
)
 
US 3,050
 
(201
)
 
US 3,800
U.S. dollar foreign exchange forward contracts

 

 
 
 
 

 
 
(maturing 2014)

(8
)
 
US 450
 
(11
)
 
US 850
 

(350
)
 
US 3,500
 
(212
)
 
US 4,650

1
Fair values equal carrying values.
2
Net income in the three and nine months ended September 30, 2014 included net realized gains of $5 million and $16 million, respectively, (2013 - gains of $8 million and $22 million, respectively) related to the interest component of cross-currency swaps which is included in interest expense.

Balance sheet presentation of net investment hedges

The balance sheet classification of the fair value of derivatives used to hedge the Company's net investment in foreign operations is as follows: 
(unaudited - millions of Canadian $)
 
September 30, 2014

 
December 31, 2013

 
 
 
 
 
Other current assets
 
5

 
5

Intangible and other assets
 
1

 
—

Accounts payable and other
 
(110
)
 
(50
)
Other long-term liabilities
 
(246
)
 
(167
)
 
 
(350
)
 
(212
)



TRANSCANADA [ 53
THIRD QUARTER REPORT 2014


FINANCIAL INSTRUMENTS

Non-derivative financial instruments

Fair value of non-derivative financial instruments
The fair value of the Company's notes receivables is calculated by discounting future payments of interest and principal using forward interest rates. The fair value of long-term debt is estimated using an income approach based on quoted market prices for the same or similar debt instruments from external data service providers. The fair value of available for sale assets has been calculated using quoted market prices where available. Credit risk has been taken into consideration when calculating the fair value of non-derivative instruments.

Certain non-derivative financial instruments included in cash and cash equivalents, accounts receivable, intangible and other assets, notes payable, accounts payable and other, accrued interest and other long-term liabilities have carrying amounts that equal their fair value due to the nature of the item or the short time to maturity and would be classified in Level II of the fair value hierarchy.

Balance sheet presentation of non-derivative financial instruments
The following table details the fair value of the non-derivative financial instruments, excluding those where carrying amounts equal fair value, and would be classified in Level II of the fair value hierarchy: 
 
 
September 30, 2014
 
December 31, 2013
(unaudited - millions of Canadian $)
 
Carrying
amount1

 
Fair
value

 
Carrying
amount1

 
Fair
value

 
 
 
 
 
 
 
 
 
Notes receivable and other1
 
203

 
249

 
226

 
269

Available for sale assets2
 
60

 
60

 
47

 
47

Current and long-term debt3,4
 
(24,133
)
 
(28,280
)
 
(22,865
)
 
(26,134
)
Junior subordinated notes
 
(1,120
)
 
(1,148
)
 
(1,063
)
 
(1,093
)
 
 
(24,990
)
 
(29,119
)
 
(23,655
)
 
(26,911
)

1
Notes receivable are included in other current assets and intangible and other assets on the condensed consolidated balance sheet.
2
Available for sale assets are included in intangible and other assets on the condensed consolidated balance sheet.
3
Long-term debt is recorded at amortized cost, except for US$400 million (December 31, 2013 - US$200 million) that is attributed to hedged risk and recorded at fair value.
4
Consolidated net income for the three and nine months ended September 30, 2014 included gains of $2 million and losses of $3 million, respectively, (2013 - losses of nil and $7 million, respectively) for fair value adjustments attributable to the hedged interest rate risk associated with interest rate swap fair value hedging relationships on US$400 million of long-term debt at September 30, 2014 (December 31, 2013 - US$200 million). There were no other unrealized gains or losses from fair value adjustments to the non-derivative financial instruments.

Derivative instruments

Fair value of derivative instruments
The fair value of foreign exchange and interest rate derivatives has been calculated using the income approach which uses current market rates and applies a discounted cash flow valuation model. The fair value of power and natural gas derivatives and available for sale assets has been calculated using quoted market prices where available. In the absence of quoted market prices, third-party broker quotes or other valuation techniques have been used. Credit risk has been taken into consideration when calculating the fair value of derivative instruments.

Where possible, derivative instruments are designated as hedges, but in some cases, even though the derivatives are considered to be effective economic hedges, they do not meet the specific criteria for hedge accounting treatment and are accounted for at fair value with changes in fair value recorded in net income in the period of change. This may expose the Company to increased variability in reported earnings because the fair value of the derivative instruments can fluctuate significantly from period to period.



TRANSCANADA [ 54
THIRD QUARTER REPORT 2014


Balance sheet presentation of derivative instruments
The balance sheet classification of the fair value of the derivative instruments is as follows:
(unaudited - millions of Canadian $)
 
September 30, 2014

 
December 31, 2013

 
 
 
 
 
Other current assets
 
463

 
395

Intangible and other assets
 
144

 
112

Accounts payable and other
 
(495
)
 
(357
)
Other long-term liabilities
 
(339
)
 
(255
)
 
 
(227
)
 
(105
)

2014 derivative instruments summary
The following summary does not include hedges of the Company's net investment in foreign operations.
(unaudited - millions of Canadian $ unless noted otherwise)
 
Power

 
Natural
gas

 
Foreign
exchange

 
Interest

 
 
 
 
 
 
 
 
 
Derivative instruments held for trading1
 
 
 
 
 
 
 
 
Fair values2,3
 
 
 
 
 
 
 
 
Assets
 

$392

 

$46

 

$1

 

$5

Liabilities
 

($378
)
 

($57
)
 

($21
)
 

($5
)
Notional values3
 
 

 
 

 
 

 
 

Volumes4
 
 

 
 

 
 

 
 

Purchases
 
39,310

 
72

 
—

 
—

Sales
 
36,493

 
44

 
—

 
—

U.S. dollars
 
—

 
—

 
US 1,921

 
US 100

Net unrealized gains/(losses) in the period5
 
 

 
 

 
 

 
 

three months ended September 30, 2014
 

$20

 

$7

 

($32
)
 

$—

nine months ended September 30, 2014
 

$35

 

($14
)
 

($9
)
 

$—

Net realized gains/(losses) in the period5
 
 

 
 

 
 

 
 

three months ended September 30, 2014
 

$8

 

($27
)
 

($1
)
 

$—

nine months ended September 30, 2014
 

($23
)
 

$19

 

($19
)
 

$—

Maturity dates3
 
2014-2018

 
2014-2020

 
2014-2015

 
2016

Derivative instruments in hedging relationships6,7
 
 

 
 

 
 

 
 

Fair values2,3
 
 

 
 

 
 

 
 

Assets
 

$154

 

$—

 

$—

 

$3

Liabilities
 

($16
)
 

$—

 

$—

 

($1
)
Notional values3
 
 

 
 

 
 

 
 

Volumes4
 
 

 
 

 
 

 
 

Purchases
 
10,151

 
—

 
—

 
—

Sales
 
5,216

 
—

 
—

 
—

U.S. dollars
 
—

 
—

 
—

 
US 550

Net realized (losses)/gains in the period5
 
 

 
 

 
 

 
 

three months ended September 30, 2014
 

($50
)
 

$—

 

$—

 

$1

nine months ended September 30, 2014
 

$138

 

$—

 

$—

 

$3

Maturity dates3
 
2014-2019

 
—

 
—

 
2015-2018


1
All derivative instruments held for trading have been entered into for risk management purposes and are subject to the Company’s risk management strategies, policies and limits. These include derivatives that have not been designated as hedges or do not qualify for hedge accounting treatment but have been entered into as economic hedges to manage the Company’s exposures to market risk.
2
Fair values equal carrying values.
3
As at September 30, 2014.
4
Volumes for power and natural gas derivatives are in GWh and Bcf, respectively.
5
Realized and unrealized gains and losses on held for trading derivative instruments used to purchase and sell power and natural gas are included net in revenues. Realized and unrealized gains and losses on interest rate and foreign exchange derivative financial instruments held for trading are included in interest expense and interest income and other, respectively. The effective portion of the


TRANSCANADA [ 55
THIRD QUARTER REPORT 2014


change in fair value of derivative instruments in hedging relationships is initially recognized in OCI and reclassified to revenues, interest expense and interest income and other, as appropriate, as the original hedged item settles.
6
All hedging relationships are designated as cash flow hedges except for interest rate derivative financial instruments designated as fair value hedges with a fair value of $3 million and a notional amount of US$400 million as at September 30, 2014. For the three and nine months ended September 30, 2014, net realized gains on fair value hedges were $2 million and $5 million, respectively, and were included in interest expense. For the three and nine months ended September 30, 2014, the Company did not record any amounts in net income related to ineffectiveness for fair value hedges.
7
For the three and nine months ended September 30, 2014, there were no gains or losses included in net income for discontinued cash flow hedges where it was probable that the anticipated transaction would not occur.

2013 derivative instruments summary
The following summary does not include hedges of the Company's net investment in foreign operations.
(unaudited - millions of Canadian $ unless noted otherwise)
 
Power

 
Natural
gas

 
Foreign
exchange

 
 Interest

 
 
 
 
 
 
 
 
 
Derivative instruments held for trading1
 
 
 
 
 
 
 
 
Fair values2,3
 
 
 
 
 
 
 
 
Assets
 

$265

 

$73

 

$—

 

$8

Liabilities
 

($280
)
 

($72
)
 

($12
)
 

($7
)
Notional values3
 
 

 
 

 
 

 
 
Volumes4
 
 

 
 

 
 

 
 
Purchases
 
29,301

 
88

 
—

 
—

Sales
 
28,534

 
60

 
—

 
—

Canadian dollars
 
—

 
—

 
—

 
400

U.S. dollars
 
—

 
—

 
US 1,015

 
US 100

Net unrealized gains/(losses) in the period5
 
 

 
 

 
 

 
 
three months ended September 30, 2013
 

$18

 

$13

 

$16

 

$—

nine months ended September 30, 2013
 

$15

 

$1

 

($1
)
 

$—

Net realized (losses)/gains in the period5
 
 

 
 

 
 

 
 
three months ended September 30, 2013
 

($10
)
 

($14
)
 

$3

 

$—

nine months ended September 30, 2013
 

($46
)
 

($21
)
 

($5
)
 

$—

Maturity dates3
 
2014-2017

 
2014-2016

 
2014

 
2014-2016

Derivative instruments in hedging relationships 6,7
 
 

 
 

 
 
 
 

Fair values2,3
 
 

 
 

 
 
 
 

Assets
 

$150

 

$—

 

$—

 

$6

Liabilities
 

($22
)
 

$—

 

($1
)
 

($1
)
Notional values3
 
 

 
 

 
 
 
 

Volumes4
 
 

 
 

 
 
 
 

Purchases
 
9,758

 
—

 
—

 
—

Sales
 
6,906

 
—

 
—

 
—

U.S. dollars
 
—

 
—

 
US 16

 
US 350

Net realized (losses)/gains in the period5
 
 

 
 

 
 

 
 
three months ended September 30, 2013
 

($18
)
 

$—

 

$—

 

$1

nine months ended September 30, 2013
 

($29
)
 

($1
)
 

$—

 

$5

Maturity dates3
 
2014-2018

 
—

 
2014

 
2015-2018

 
1
All derivative instruments held for trading have been entered into for risk management purposes and are subject to the Company’s risk management strategies, policies and limits. These include derivatives that have not been designated as hedges or do not qualify for hedge accounting treatment but have been entered into as economic hedges to manage the Company’s exposures to market risk.
2
Fair values equal carrying values.
3
As at December 31, 2013.
4
Volumes for power and natural gas derivatives are in GWh and Bcf, respectively.
5
Realized and unrealized gains and losses on held for trading derivative instruments used to purchase and sell power and natural gas are included net in revenues. Realized and unrealized gains and losses on interest rate and foreign exchange derivative financial instruments held for trading are included in interest expense and interest income and other, respectively. The effective portion of change in fair value of derivative instruments in hedging relationships is initially recognized in OCI and reclassified to revenues, interest expense and interest income and other, as appropriate, as the original hedged item settles.
6
All hedging relationships are designated as cash flow hedges except for interest rate derivative financial instruments designated as fair value hedges with a fair value of $5 million and a notional amount of US$200 million as at December 31, 2013. Net realized gains on


TRANSCANADA [ 56
THIRD QUARTER REPORT 2014


fair value hedges for the three and nine months ended September 30, 2013 were $1 million and $5 million, respectively, and were included in interest expense. For the three and nine months ended September 30, 2013, the Company did not record any amounts in net income related to ineffectiveness for fair value hedges.
7
For the three and nine months ended September 30, 2013, there were no gains or losses included in net income for discontinued cash flow hedges where it was probable that the anticipated transaction would not occur.

Derivatives in cash flow hedging relationships
The components of OCI (Note 8) related to derivatives in cash flow hedging relationships are as follows: 
 
 
three months ended
September 30
 
nine months ended
September 30
(unaudited - millions of Canadian $, pre-tax)
 
2014

 
2013

 
2014

 
2013

 
 
 
 
 
 
 
 
 
Change in fair value of derivative instruments recognized in OCI (effective portion)
 
 
 
 
 
 
 
 
Power
 
62

 
28

 
96

 
(6
)
Natural gas
 
(1
)
 
(1
)
 
(2
)
 
(1
)
Foreign exchange
 
—

 
1

 
10

 
5

Interest
 
1

 
(1
)
 
—

 
(1
)
 
 
62

 
27

 
104

 
(3
)
Reclassification of gains/(losses) on derivative instruments from AOCI to net income (effective portion)1
 
 
 
 
 
 
 
 
Power
 
—

 
33

 
(109
)
 
34

Natural gas
 
1

 
1

 
3

 
3

Interest
 
4

 
4

 
12

 
12

 
 
5

 
38

 
(94
)
 
49

Gains/(losses) on derivative instruments recognized in earnings (ineffective portion)
 
 
 
 
 
 
 
 
Power
 
23

 
6

 
13

 
(1
)
 
 
23

 
6

 
13

 
(1
)

1
No amounts have been excluded from the assessment of hedge effectiveness. Amounts in parentheses indicate losses recorded to OCI.
 
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 to 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:
at September 30, 2014
 
Gross derivative instruments presented on the balance sheet

 
Amounts available for offset1

 
Net amounts

(unaudited - millions of Canadian $)
 
 
 
 
 
 
 
 
 
 
Derivative - Asset
 
 
 
 
 
 
Power
 
546

 
(356
)
 
190

Natural gas
 
46

 
(45
)
 
1

Foreign exchange
 
7

 
(7
)
 
—

Interest
 
8

 
—

 
8

Total
 
607

 
(408
)
 
199

Derivative - Liability
 
 

 
 

 
 

Power
 
(394
)
 
356

 
(38
)
Natural gas
 
(57
)
 
45

 
(12
)
Foreign exchange
 
(377
)
 
7

 
(370
)
Interest
 
(6
)
 
—

 
(6
)
Total
 
(834
)
 
408

 
(426
)
 
1
Amounts available for offset do not include cash collateral pledged or received.



TRANSCANADA [ 57
THIRD QUARTER REPORT 2014


With respect to all financial arrangements, including the derivative instruments presented above, as at September 30, 2014, the Company had provided cash collateral of $102 million and letters of credit of $33 million to its counterparties. The Company held $8 million in cash collateral and $6 million in letters of credit on asset exposures at September 30, 2014. 

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, 2013:
at December 31, 2013
 
Gross derivative instruments presented on the balance sheet

 
Amounts available for offset1

 
Net amounts

(unaudited - millions of Canadian $)
 
 
 
 
 
 
 
 
 
 
Derivative - Asset
 
 
 
 
 
 
Power
 
415

 
(277
)
 
138

Natural gas
 
73

 
(61
)
 
12

Foreign exchange
 
5

 
(5
)
 
—

Interest
 
14

 
(2
)
 
12

Total
 
507

 
(345
)
 
162

Derivative - Liability
 
 

 
 

 
 

Power
 
(302
)
 
277

 
(25
)
Natural gas
 
(72
)
 
61

 
(11
)
Foreign exchange
 
(230
)
 
5

 
(225
)
Interest
 
(8
)
 
2

 
(6
)
Total
 
(612
)
 
345

 
(267
)
 
1
Amounts available for offset do not include cash collateral pledged or received.

With respect to all financial arrangements, including the derivative instruments presented above as at December 31, 2013, the Company had provided cash collateral of $67 million and letters of credit of $85 million to its counterparties. The Company held $11 million in cash collateral and $32 million in letters of credit on asset exposures at December 31, 2013.
 
Credit risk related contingent features of derivative instruments
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 September 30, 2014, the aggregate fair value of all derivative instruments with credit risk related contingent features that were in a net liability position was $13 million (December 31, 2013 - $16 million), for which the Company had provided collateral in the normal course of business of nil (December 31, 2013 - nil). If the credit risk related contingent features in these agreements were triggered on September 30, 2014, the Company would have been required to provide collateral of $13 million (December 31, 2013 - $16 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.
 


TRANSCANADA [ 58
THIRD QUARTER REPORT 2014


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.
Levels
How fair value has been determined
Level I
Quoted prices in active markets for identical assets and liabilities that the Company has the ability to access at the measurement date.
Level II
Valuation based on the extrapolation of inputs, other than quoted prices included within Level I, for which all significant inputs are observable directly or indirectly.
 
Inputs include published exchange rates, interest rates, interest rate swap curves, yield curves and broker quotes from external data service providers.
 
This category includes interest rate and foreign exchange derivative assets and liabilities where fair value is determined using the income approach and power and natural gas commodity derivatives where fair value is determined using the market approach.
 
Transfers between Level I and Level II would occur when there is a change in market circumstances.
Level III
Valuation of assets and liabilities measured on a recurring basis using a market approach based on inputs that are unobservable and significant to the overall fair value measurement. This category includes long-dated commodity transactions in certain markets where liquidity is low. 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 we operate.
 
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 prices are based on a view of future natural gas supply and demand, as well as exploration and development costs. Significant decreases in fuel prices or demand for electricity or natural gas, or increases in the supply of electricity or natural gas is expected to or may result in a lower fair value measurement of contracts included in Level III.
 
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.
 
The fair value of the Company’s assets and liabilities measured on a recurring basis, including both current and non-current portions, are categorized as follows:
at September 30, 2014
 
Quoted prices in active markets


Significant other observable inputs


Significant unobservable inputs




(unaudited - millions of Canadian $, pre-tax)
 
(Level I)1


(Level II)1


(Level III)1


Total

 
 
 
 
 
 
 
 
 
Derivative instrument assets:
 
 
 
 
 
 
 
 
Power commodity contracts
 
—

 
543

 
3

 
546

Natural gas commodity contracts
 
21

 
23

 
2

 
46

Foreign exchange contracts
 
—

 
7

 
—

 
7

Interest rate contracts
 
—

 
8

 
—

 
8

Derivative instrument liabilities:
 
 

 
 

 
 

 
 

Power commodity contracts
 
—

 
(391
)
 
(3
)
 
(394
)
Natural gas commodity contracts
 
(35
)
 
(20
)
 
(2
)
 
(57
)
Foreign exchange contracts
 
—

 
(377
)
 
—

 
(377
)
Interest rate contracts
 
—

 
(6
)
 
—

 
(6
)
Non-derivative financial instruments:
 
 
 
 
 
 
 
 
Available for sale assets
 
—

 
60

 
—

 
60

 
 
(14
)
 
(153
)
 
—

 
(167
)

1
There were no transfers from Level I to Level II or from Level II to Level III for the nine months ended September 30, 2014.



TRANSCANADA [ 59
THIRD QUARTER REPORT 2014


The fair value of the Company’s assets and liabilities measured on a recurring basis, including both current and non-current portions for 2013, are categorized as follows:
at December 31, 2013
 
Quoted prices in active markets

 
Significant other observable inputs

 
Significant unobservable inputs

 
 
(unaudited - millions of Canadian $, pre-tax)
 
(Level I)1

 
(Level II)1

 
(Level III)1

 
Total

 
 
 
 
 
 
 
 
 
Derivative instrument assets:
 
 
 
 
 
 
 
 
Power commodity contracts
 
—

 
411

 
4

 
415

Natural gas commodity contracts
 
48

 
25

 
—

 
73

Foreign exchange contracts
 
—

 
5

 
—

 
5

Interest rate contracts
 
—

 
14

 
—

 
14

Derivative instrument liabilities:
 
 

 
 

 
 

 
 

Power commodity contracts
 
—

 
(299
)
 
(3
)
 
(302
)
Natural gas commodity contracts
 
(50
)
 
(22
)
 
—

 
(72
)
Foreign exchange contracts
 
—

 
(230
)
 
—

 
(230
)
Interest rate contracts
 
—

 
(8
)
 
—

 
(8
)
Non-derivative financial instruments:
 
 
 
 
 
 
 
 
Available for sale assets
 
—

 
47

 
—

 
47

 
 
(2
)
 
(57
)
 
1

 
(58
)

1
There were no transfers from Level I to Level II or from Level II to Level III for the year ended December 31, 2013.

The following table presents the net change in fair value of derivative assets and liabilities classified as Level III of the fair value hierarchy:
 
 
Derivatives1
 
 
three months ended
September 30
 
nine months ended
September 30
(unaudited - millions of Canadian $, pre-tax)
 
2014

 
2013

 
2014

 
2013

 
 
 
 
 
 
 
 
 
Balance at beginning of period
 
(1
)
 
—

 
1

 
(2
)
Settlements
 
—

 
—

 
—

 
1

Transfers out of Level III
 
(1
)
 
—

 
(1
)
 
(1
)
Total gains/(losses) included in net income
 
2

 
(1
)
 
—

 
(1
)
Total gains included in OCI
 
—

 
—

 
—

 
2

Balance at end of period
 
—

 
(1
)
 
—

 
(1
)

1
For the three and nine months ended September 30, 2014, Energy revenues include unrealized gains attributed to derivatives in the Level III category that were still held at the reporting date of $2 million and nil, respectively (2013 - nil).

A 10 per cent increase or decrease in commodity prices, with all other variables held constant, would result in a $2 million decrease or increase, respectively, in the fair value of outstanding derivative instruments included in Level III as at September 30, 2014. 

11. Contingencies and guarantees
 
TransCanada and its subsidiaries are subject to various legal proceedings, arbitrations and actions arising in the normal course of business.  While the final outcome of such legal proceedings and actions cannot be predicted with certainty, it is the opinion of management that the resolution of such proceedings and actions will not have a material impact on the Company’s consolidated financial position or results of operations.

GUARANTEES
TransCanada and its joint venture partner on Bruce Power, BPC Generation Infrastructure Trust (BPC), have each severally guaranteed certain contingent financial obligations of Bruce B related to a lease agreement and contractor and supplier services. In addition, TransCanada and BPC have each severally guaranteed one-half of certain


TRANSCANADA [ 60
THIRD QUARTER REPORT 2014


contingent financial obligations of Bruce A related to a sublease agreement and certain other financial obligations. The Company’s exposure under certain of these guarantees is unlimited.
 
In addition to the guarantees for Bruce Power, the Company and its partners in certain other jointly owned entities have either (i) jointly and severally, (ii) jointly or (iii) severally guaranteed the financial performance of these entities related primarily to delivery of natural gas, PPA payments and the payment of liabilities. For certain of these entities, any payments made by TransCanada under these guarantees in excess of its ownership interest are to be reimbursed by its partners.
 
The carrying value of these guarantees has been included in other long-term liabilities. Information regarding the Company’s guarantees is as follows:
 
 
 
 
at September 30, 2014
 
at December 31, 2013
(unaudited - millions of Canadian $)
 
 
Term
 
Potential
Exposure1

 
Carrying
Value

 
Potential
Exposure1

 
Carrying
Value

 
 
 
 
 
 
 
 
 
 
 
Bruce Power
 
ranging to 20192
 
639

 
7

 
740

 
8

Other jointly owned entities
 
ranging to 2040 
 
60

 
10

 
51

 
10

 
 
 
 
699

 
17

 
791

 
18


1
TransCanada’s share of the potential estimated current or contingent exposure.
2
Except for one guarantee with no termination date.

12. Subsequent event
 
Bison Pipeline LLC
On October 1, 2014, TransCanada completed the sale of its remaining 30 per cent interest in Bison Pipeline LLC (Bison LLC) to TC PipeLines, LP for an aggregate purchase price of US$215 million.