EX-13.2 3 tcpl-09302017xfinstmts.htm THIRD QUARTER FINANCIAL STATEMENTS Exhibit
EXHIBIT 13.2

Condensed consolidated statement of income
 
 
three months ended
September 30
 
nine months ended
September 30
(unaudited - millions of Canadian $)
 
2017

 
2016

 
2017

 
2016

 
 
 
 
 
 
 
 
 
Revenues
 
 
 
 
 
 
 
 
Canadian Natural Gas Pipelines
 
921

 
951

 
2,725

 
2,677

U.S. Natural Gas Pipelines
 
811

 
812

 
2,684

 
1,585

Mexico Natural Gas Pipelines
 
139

 
121

 
432

 
249

Liquids Pipelines
 
437

 
440

 
1,410

 
1,292

Energy
 
934

 
1,308

 
2,599

 
3,083

 
 
3,242

 
3,632

 
9,850

 
8,886

Income from Equity Investments
 
156

 
154

 
527

 
355

Operating and Other Expenses
 
 

 
 

 
 

 
 

Plant operating costs and other
 
976

 
1,177

 
2,980

 
2,646

Commodity purchases resold
 
621

 
783

 
1,711

 
1,628

Property taxes
 
127

 
136

 
442

 
405

Depreciation and amortization
 
506

 
527

 
1,539

 
1,425

Goodwill and other asset impairment charges
 
—

 
1,085

 
—

 
1,296

 
 
2,230

 
3,708

 
6,672

 
7,400

(Loss)/Gain on Sale of Assets
 
(9
)
 
—

 
489

 
(4
)
Financial Charges
 
 

 
 

 
 

 
 

Interest expense
 
522

 
538

 
1,578

 
1,369

Allowance for funds used during construction
 
(145
)
 
(110
)
 
(367
)
 
(322
)
Interest income and other
 
(83
)
 
(18
)
 
(192
)
 
(128
)
 
 
294

 
410

 
1,019

 
919

Income/(Loss) before Income Taxes
 
865

 
(332
)
 
3,175

 
918

Income Tax Expense/(Recovery)
 
 

 
 

 
 

 
 

Current
 
7

 
15

 
129

 
104

Deferred
 
178

 
(281
)
 
640

 
(25
)
 
 
185

 
(266
)
 
769

 
79

Net Income/(Loss)
 
680

 
(66
)
 
2,406

 
839

Net income attributable to non-controlling interests
 
44

 
52

 
189

 
184

Net Income/(Loss)Attributable to Controlling Interests and to Common Shares
 
636

 
(118
)
 
2,217

 
655

 
See accompanying notes to the condensed consolidated financial statements.


TRANSCANADA PIPELINES LIMITED [51
THIRD QUARTER 2017


Condensed consolidated statement of comprehensive income
 
 
three months ended
September 30
 
nine months ended
September 30
(unaudited - millions of Canadian $)
 
2017

 
2016

 
2017

 
2016

 
 
 
 
 
 
 
 
 
Net Income/(Loss)
 
680

 
(66
)
 
2,406

 
839

Other Comprehensive (Loss)/Income, Net of Income Taxes
 
 

 
 

 
 

 
 

Foreign currency translation (losses)/gains on net investment in foreign operations
 
(370
)
 
55

 
(721
)
 
(152
)
Reclassification of foreign currency translation gains on net investment in foreign operations
 
—

 
—

 
(77
)
 
—

Change in fair value of net investment hedges
 
(1
)
 
(1
)
 
(3
)
 
(9
)
Change in fair value of cash flow hedges
 
1

 
5

 
4

 
21

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

 
—

 
(1
)
 
40

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

 
—

 
2

 
—

Reclassification of actuarial gains and losses on pension and other post-retirement benefit plans
 
4

 
4

 
11

 
12

Other comprehensive income on equity investments
 
3

 
4

 
6

 
11

Other comprehensive (loss)/income (Note 10)
 
(361
)
 
67

 
(779
)
 
(77
)
Comprehensive Income
 
319

 
1

 
1,627

 
762

Comprehensive (loss)/income attributable to non-controlling interests
 
(25
)
 
76

 
31

 
104

Comprehensive Income/(Loss) Attributable to Controlling Interests and to Common Shares
 
344

 
(75
)
 
1,596

 
658

See accompanying notes to the condensed consolidated financial statements.



TRANSCANADA PIPELINES LIMITED [52
THIRD QUARTER 2017


Condensed consolidated statement of cash flows
 
 
three months ended
September 30
 
nine months ended
September 30
(unaudited - millions of Canadian $)
 
2017

 
2016

 
2017

 
2016

 
 
 
 
 
 
 
 
 
Cash Generated from Operations
 
 
 
 
 
 
 
 
Net income/(loss)
 
680

 
(66
)
 
2,406

 
839

Depreciation and amortization
 
506

 
527

 
1,539

 
1,425

Goodwill and other asset impairment charges
 
—

 
1,085

 
—

 
1,296

Deferred income taxes
 
178

 
(281
)
 
640

 
(25
)
Income from equity investments
 
(156
)
 
(154
)
 
(527
)
 
(355
)
Distributions received from operating activities of equity investments
 
296

 
185

 
743

 
625

Employee post-retirement benefits funding, net of expense
 
(73
)
 
4

 
(64
)
 
(5
)
Loss/(gain) on sale of assets
 
9

 
—

 
(489
)
 
4

Equity allowance for funds used during construction
 
(107
)
 
(71
)
 
(249
)
 
(195
)
Unrealized (gains)/losses on financial instruments
 
(77
)
 
82

 
14

 
(71
)
Other
 
(5
)
 
1

 
(1
)
 
24

(Increase)/decrease in operating working capital
 
(83
)
 
(7
)
 
(223
)
 
28

Net cash provided by operations
 
1,168

 
1,305

 
3,789

 
3,590

Investing Activities
 
 

 
 

 
 

 
 

Capital expenditures
 
(2,031
)
 
(1,444
)
 
(5,383
)
 
(3,262
)
Capital projects in development
 
(37
)
 
(62
)
 
(135
)
 
(219
)
Contributions to equity investments
 
(475
)
 
(286
)
 
(1,140
)
 
(570
)
Restricted cash
 
—

 
12,987

 
—

 
—

Acquisitions, net of cash acquired
 
—

 
(12,609
)
 
—

 
(13,608
)
Proceeds from sales of assets, net of transaction costs
 
—

 
—

 
4,147

 
6

Other distributions from equity investments
 
—

 
—

 
362

 
725

Deferred amounts and other
 
164

 
(12
)
 
(87
)
 
20

Net cash used in investing activities
 
(2,379
)
 
(1,426
)
 
(2,236
)
 
(16,908
)
Financing Activities
 
 

 
 

 
 

 
 

Notes payable issued/(repaid), net
 
451

 
(423
)
 
1,232

 
(100
)
Long-term debt issued, net of issue costs
 
1,151

 
6

 
1,968

 
12,333

Long-term debt repaid
 
(46
)
 
(53
)
 
(5,515
)
 
(2,343
)
Junior subordinated notes issued, net of issue costs
 
(3
)
 
1,551

 
3,468

 
1,551

Advances (to)/from affiliate, net
 
(15
)
 
(5
)
 
(15
)
 
2,131

Dividends on common shares
 
(544
)
 
(397
)
 
(1,573
)
 
(1,159
)
Distributions paid to non-controlling interests
 
(66
)
 
(77
)
 
(215
)
 
(201
)
Common shares issued
 
190

 
—

 
591

 
2,471

Partnership units of TC PipeLines, LP issued, net of issue costs
 
43

 
45

 
162

 
151

Common units of Columbia Pipeline Partners LP acquired
 
—

 
—

 
(1,205
)
 
—

Net cash provided by/(used in) financing activities
 
1,161

 
647

 
(1,102
)
 
14,834

Effect of Foreign Exchange Rate Changes on Cash and Cash Equivalents
 
(16
)
 
3

 
(35
)
 
(127
)
(Decrease)/Increase in Cash and Cash Equivalents
 
(66
)
 
529

 
416

 
1,389

Cash and Cash Equivalents
 
 

 
 

 
 

 
 

Beginning of period
 
1,449

 
1,673

 
967

 
813

Cash and Cash Equivalents
 
 

 
 

 
 

 
 

End of period
 
1,383

 
2,202

 
1,383

 
2,202

See accompanying notes to the condensed consolidated financial statements.


TRANSCANADA PIPELINES LIMITED [53
THIRD QUARTER 2017


Condensed consolidated balance sheet
 
 
September 30,

 
December 31,

(unaudited - millions of Canadian $)
 
2017

 
2016

ASSETS
 
 
 
 
Current Assets
 
 
 
 
Cash and cash equivalents
 
1,383

 
967

Accounts receivable
 
2,822

 
2,093

Inventories
 
390

 
368

Assets held for sale
 
431

 
3,717

Other
 
743

 
908

 
 
5,769

 
8,053

Plant, Property and Equipment
net of accumulated depreciation of $23,257 and $22,263, respectively
 
55,842

 
54,475

Equity Investments
 
6,349

 
6,544

Regulatory Assets
 
1,309

 
1,322

Goodwill
 
13,076

 
13,958

Intangible and Other Assets
 
3,150

 
2,947

Restricted Investments
 
810

 
642

 
 
86,305

 
87,941

LIABILITIES
 
 

 
 

Current Liabilities
 
 

 
 

Notes payable
 
1,963

 
774

Accounts payable and other
 
4,086

 
3,876

Dividends payable
 
548

 
491

Due to affiliate
 
2,343

 
2,358

Accrued interest
 
541

 
595

Liabilities related to assets held for sale
 
18

 
86

Current portion of long-term debt
 
4,216

 
1,838

 
 
13,715

 
10,018

Regulatory Liabilities
 
2,512

 
2,121

Other Long-Term Liabilities
 
745

 
1,183

Deferred Income Tax Liabilities
 
8,069

 
7,662

Long-Term Debt
 
30,414

 
38,312

Junior Subordinated Notes
 
7,004

 
3,931

 
 
62,459

 
63,227

Common Units Subject to Rescission or Redemption
 
—

 
1,179

EQUITY
 
 

 
 

Common shares, no par value
 
21,572

 
20,981

Issued and outstanding:
September 30, 2017 - 868 million shares
 
 

 
 

 
December 31, 2016 - 859 million shares
 
 

 
 

Additional paid-in capital
 
—

 
211

Retained earnings
 
2,038

 
1,577

Accumulated other comprehensive loss
 
(1,581
)
 
(960
)
Controlling Interests
 
22,029

 
21,809

Non-controlling interests
 
1,817

 
1,726

 
 
23,846

 
23,535

 
 
86,305

 
87,941

 
Commitments, Contingencies and Guarantees (Note 14)
Variable Interest Entities (Note 16)
Subsequent Events (Note 17)
See accompanying notes to the condensed consolidated financial statements.


TRANSCANADA PIPELINES LIMITED [54
THIRD QUARTER 2017


Condensed consolidated statement of equity
 
nine months ended September 30
(unaudited - millions of Canadian $)
2017

 
2016

 
 
 
 
Common Shares
 
 
 
Balance at beginning of period
20,981

 
16,320

Shares issued
591

 
2,471

Balance at end of period
21,572

 
18,791

Additional Paid-In Capital
 

 
 

Balance at beginning of period
211

 
210

Issuance of stock options
9

 
12

Dilution impact from TC PipeLines, LP units issued
18

 
17

Impact of asset drop downs to TC PipeLines, LP
(202
)
 
(38
)
Impact of Columbia Pipeline Partners LP acquisition
(171
)
 
—

Reclassification of Additional Paid-In Capital deficit to Retained Earnings
135

 
—

Balance at end of period
—

 
201

Retained Earnings
 

 
 

Balance at beginning of period
1,577

 
2,989

Net income attributable to controlling interests
2,217

 
655

Common share dividends
(1,633
)
 
(1,246
)
Adjustment related to employee share-based payments (Note 2)
12

 
—

Reclassification of Additional Paid-In Capital deficit to Retained Earnings
(135
)
 
—

Balance at end of period
2,038

 
2,398

Accumulated Other Comprehensive Loss
 

 
 

Balance at beginning of period
(960
)
 
(939
)
Other comprehensive loss
(621
)
 
3

Balance at end of period
(1,581
)
 
(936
)
Equity Attributable to Controlling Interests
22,029

 
20,454

Equity Attributable to Non-Controlling Interests
 

 
 

Balance at beginning of period
1,726

 
1,717

Acquisition of non-controlling interests in Columbia Pipelines Partners LP
—

 
1,051

Net income attributable to non-controlling interests
189

 
184

Other comprehensive loss attributable to non-controlling interests
(158
)
 
(80
)
Issuance of TC PipeLines, LP units
 
 
 
Proceeds, net of issue costs
162

 
151

Decrease in TCPL's ownership of TC PipeLines, LP
(29
)
 
(28
)
Reclassification from/(to) common units of TC PipeLines, LP subject to rescission
106

 
(106
)
Distributions declared to non-controlling interests
(212
)
 
(200
)
Impact of Columbia Pipeline Partners LP acquisition
33

 
—

Balance at end of period
1,817

 
2,689

Total Equity
23,846

 
23,143

 
See accompanying notes to the condensed consolidated financial statements.


TRANSCANADA PIPELINES LIMITED [55
THIRD QUARTER 2017


Notes to condensed consolidated financial statements
(unaudited)
1. Basis of presentation
These condensed consolidated financial statements of TransCanada PipeLines Limited (TCPL or the Company) have been prepared by management in accordance with U.S. GAAP. The accounting policies applied are consistent with those outlined in TCPL’s annual audited consolidated financial statements for the year ended December 31, 2016, except as described in Note 2, Accounting changes. Capitalized and abbreviated terms that are used but not otherwise defined herein are identified in TCPL’s 2016 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 2016 audited consolidated financial statements included in TCPL’s 2016 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 segments 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, TCPL 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 annual audited consolidated financial statements for the year ended December 31, 2016, except as described in Note 2, Accounting changes.
2. Accounting changes
CHANGES IN ACCOUNTING POLICIES FOR 2017
Inventory
In July 2015, the FASB issued new guidance on simplifying the measurement of inventory. The new guidance specifies that an entity should measure inventory within the scope of this guidance at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. This new guidance was effective January 1, 2017, was applied prospectively and did not have a material impact on the Company's consolidated balance sheet.


TRANSCANADA PIPELINES LIMITED [56
THIRD QUARTER 2017


Derivatives and hedging
In March 2016, the FASB issued new guidance that clarifies the requirements for assessing whether contingent call or put options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. The new guidance requires only an assessment of the four-step decision sequence outlined in U.S. GAAP to determine whether the economic characteristics and risks of call or put options are clearly and closely related to the economic characteristics and risks of their debt hosts. This new guidance was effective January 1, 2017, was applied prospectively and has not resulted in any impact on the Company's consolidated financial statements.
Equity method investments
In March 2016, the FASB issued new guidance that simplifies the transition to equity method accounting. The new guidance eliminates the requirement to retroactively apply the equity method of accounting when an increase in ownership interest in an investment qualifies it for equity method accounting. This new guidance was effective January 1, 2017, was applied prospectively and has not resulted in any impact on the Company's consolidated financial statements.
Employee share-based payments
In March 2016, the FASB issued new guidance that simplifies several aspects of the accounting for employee share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. The new guidance also permits entities to make an accounting policy election either to continue to estimate the total number of awards for which the requisite service period will not be rendered or to account for forfeitures when they occur. The Company has elected to account for forfeitures when they occur. This new guidance was effective January 1, 2017 and resulted in a cumulative-effect adjustment of $12 million to opening retained earnings and the recognition of a deferred tax asset related to employee share-based payments that were made prior to the adoption of this guidance.
Consolidation
In October 2016, the FASB issued new guidance on consolidation relating to interests held through related parties that are under common control. The new guidance amends the consolidation requirements such that if a decision maker is required to evaluate whether it is the primary beneficiary of a VIE, it will need to consider only its proportionate indirect interest in the VIE held through a common control party. The new guidance was effective January 1, 2017, was applied retrospectively and did not result in any change to the Company's consolidation conclusions.
FUTURE ACCOUNTING CHANGES
Revenue from contracts with customers
In 2014, the FASB issued new guidance on revenue from contracts with customers. The new guidance requires that an entity recognize revenue in accordance with a prescribed model. This model is used to depict the transfer of promised goods or services to customers in an amount that reflects the total consideration to which it expects to be entitled during the term of the contract in exchange for those goods or services. The new guidance also requires additional disclosures about the nature, amount, timing and uncertainty of revenue and the related cash flows. The Company will adopt the new standard on the effective date of January 1, 2018. There are two methods in which the new standard can be adopted: (1) a full retrospective approach with restatement of all prior periods presented, or (2) a modified retrospective approach with a cumulative-effect adjustment as of the date of adoption. The Company will adopt the standard using the modified retrospective approach with the cumulative-effect of the adjustment recognized at the date of adoption, subject to allowable and elected practical expedients.
The Company has identified all existing customer contracts that are within the scope of the new guidance and is on schedule in the process of analyzing individual contracts or groups of contracts by operating segment to identify any significant changes in how revenues are recognized as a result of implementing the new guidance. The Company has completed its analysis of the Liquids Pipelines and Energy operating segments and has not identified any material


TRANSCANADA PIPELINES LIMITED [57
THIRD QUARTER 2017


differences in the amount and timing of revenue recognition. The Company is currently analyzing its Canadian, U.S. and Mexico Natural Gas Pipelines and has not yet concluded on the impact of the new guidance on these operating segments. The Company continues its contract analysis to obtain the information necessary to quantify the cumulative-effect adjustment, if any, on prior period revenues and revenue recognized going forward, and is monitoring additional authoritative or interpretive guidance related to the new standard as it becomes available.
Although consolidated revenues may not be materially impacted by the new guidance, the Company currently anticipates significant changes to disclosures based on the additional requirements prescribed. These new disclosures include information regarding the significant judgments used in evaluating when and how revenue is recognized and information related to contract assets and liabilities. In addition, the new guidance requires that the Company’s revenue recognition policy disclosure includes additional detail regarding the various performance obligations and the nature, amount, timing and estimates of revenue and cash flows generated from contracts with customers. The Company continues to develop and evaluate disclosures required with a particular focus on the scope of contracts subject to disclosure of remaining performance obligations. The Company also continues to address any system and process changes necessary to compile the information to meet the recognition and disclosure requirements of the new guidance.
Financial instruments
In January 2016, the FASB issued new guidance on the accounting for equity investments and financial liabilities. The new guidance will change the income statement effect of equity investments and the recognition of changes in the fair value of financial liabilities when the fair value option is elected. The new guidance also requires the Company to assess valuation allowances for deferred tax assets related to available for sale debt securities in combination with their other deferred tax assets. This new guidance is effective January 1, 2018 and a method of adoption is specified for each component of the guidance. The Company is currently evaluating the impact of the adoption of this guidance and has not yet determined the effect on its consolidated financial statements.
Leases
In February 2016, the FASB issued new guidance on the accounting for leases. The new guidance amends the definition of a lease requiring the customer to have both (1) the right to obtain substantially all of the economic benefits from the use of the asset and (2) the right to direct the use of the asset in order for an arrangement to qualify as a lease. The new guidance also establishes a right-of-use (ROU) model that requires a lessee to recognize a ROU asset and corresponding lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new guidance does not make extensive changes to lessor accounting.
The new guidance is effective on January 1, 2019, with early adoption permitted.  A modified retrospective transition approach is required for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is continuing to identify and analyze existing lease agreements to determine the effect of adoption of the new guidance on its consolidated financial statements. The Company is also addressing system and process changes necessary to compile the information to meet the recognition and disclosure requirements of the new guidance.
Measurement of credit losses on financial instruments
In June 2016, the FASB issued new guidance that significantly changes how entities measure credit losses for most financial assets and certain other financial instruments that are not measured at fair value through net income. The new guidance amends the impairment model of financial instruments basing it on expected losses rather than incurred losses. These expected credit losses will be recognized as an allowance rather than a direct write down of the amortized cost basis. The new guidance is effective January 1, 2020 and will be applied using a modified retrospective approach. The Company is currently evaluating the impact of the adoption of this guidance and has not yet determined the effect on its consolidated financial statements.


TRANSCANADA PIPELINES LIMITED [58
THIRD QUARTER 2017


Income taxes
In October 2016, the FASB issued new guidance on the income tax effects of intra-entity transfers of assets other than inventory. The new guidance requires the recognition of deferred and current income taxes for an intra-entity asset transfer when the transfer occurs. The new guidance is effective January 1, 2018 and will be applied using a modified retrospective approach. The Company is currently evaluating the impact of the adoption of this guidance and has not yet determined the effect on its consolidated financial statements.
Restricted cash
In November 2016, the FASB issued new guidance on restricted cash and cash equivalents on the statement of cash flows. The new guidance requires that the statement of cash flows explain the change during the period in the total cash and cash equivalents balance, and amounts generally described as restricted cash or restricted cash equivalents. Restricted cash and cash equivalents will be included with Cash and cash equivalents when reconciling the beginning of year and end of year total amounts on the statement of cash flows. This new guidance is effective January 1, 2018 and will be applied retrospectively.
Goodwill impairment
In January 2017, the FASB issued new guidance on simplifying the test for goodwill impairment by eliminating Step 2 of the impairment test, which is the requirement to calculate the implied fair value of goodwill to measure the impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value. This new guidance is effective January 1, 2020 and will be applied prospectively, however, early adoption is permitted.
Employee post-retirement benefits
In March 2017, the FASB issued new guidance that will require entities to disaggregate the current service cost component from the other components of net benefit cost and present it with other current compensation costs for related employees in the income statement. The new guidance also requires that the other components of net benefit cost be presented elsewhere in the income statement and excluded from income from operations if such a subtotal is presented. In addition, the new guidance makes changes to the components of net benefit cost that are eligible for capitalization. Entities must use a retrospective transition method to adopt the requirement for separate presentation in the income statement of the components of net benefit cost, and a prospective transition method to adopt the change to capitalization of benefit costs. This new guidance is effective January 1, 2018. The Company does not expect a material impact on its consolidated financial statements.
Amortization on purchased callable debt securities
In March 2017, the FASB issued new guidance that shortens the amortization period for the premium on certain purchased callable debt securities by requiring entities to amortize the premium to the earliest call date. This new guidance is effective January 1, 2019 and will be applied using a modified retrospective approach. The Company is currently evaluating the impact of the adoption of this guidance and has not yet determined the effect on its consolidated financial statements.
Hedge accounting
In August 2017, the FASB issued new guidance on hedge accounting, making more financial and non-financial hedging strategies eligible for hedge accounting. The new guidance also amends the presentation requirements relating to the change in fair value of a derivative and additional disclosure requirements include cumulative basis adjustments for fair value hedges and the effect of hedging on individual statement of income line items. This new guidance is effective January 1, 2019, with early adoption permitted, and will be applied prospectively with a cumulative-effect adjustment to opening retained earnings on adoption. The Company is currently evaluating the impact of the adoption of this guidance, however it does not anticipate a material impact on its consolidated financial statements.


TRANSCANADA PIPELINES LIMITED [59
THIRD QUARTER 2017


3. Segmented information
three months ended September 30, 2017
 
Canadian Natural Gas Pipelines

 
U.S. Natural Gas Pipelines

 
Mexico Natural Gas Pipelines

 
Liquids Pipelines

 
 
 
 
 
 
(unaudited - millions of Canadian $)
 
 
 
 
 
Energy

 
Corporate

 
Total

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenues
 
921

 
811

 
139

 
437

 
934

 
—

 
3,242

Income/(loss) from equity investments
 
4

 
53

 
(11
)
 
4

 
99

 
7

 
156

Plant operating costs and other
 
(318
)
 
(341
)
 
(10
)
 
(145
)
 
(126
)
 
(36
)
 
(976
)
Commodity purchases resold
 
—

 
—

 
—

 
—

 
(621
)
 
—

 
(621
)
Property taxes
 
(63
)
 
(41
)
 
—

 
(22
)
 
(1
)
 
—

 
(127
)
Depreciation and amortization
 
(228
)
 
(145
)
 
(23
)
 
(71
)
 
(39
)
 
—

 
(506
)
Loss on sale of assets
 
—

 
—

 
—

 
—

 
(9
)
 
—

 
(9
)
Segmented earnings/(loss)
 
316

 
337

 
95

 
203

 
237

 
(29
)
 
1,159

Interest expense
 
(522
)
Allowance for funds used during construction
 
145

Interest income and other
 
83

Income before income taxes
 
865

Income tax expense
 
(185
)
Net income
 
680

Net income attributable to non-controlling interests
 
(44
)
Net income attributable to controlling interests and to common shares
 
636

three months ended September 30, 2016
 
Canadian Natural Gas Pipelines

 
U.S. Natural Gas Pipelines

 
Mexico Natural Gas Pipelines

 
Liquids Pipelines

 
 
 
 
 
 
(unaudited - millions of Canadian $)
 
 
 
 
 
Energy

 
Corporate

 
Total

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenues
 
951

 
812

 
121

 
440

 
1,308

 
—

 
3,632

Income/(loss) from equity investments
 
3

 
65

 
(2
)
 
—

 
88

 
—

 
154

Plant operating costs and other
 
(340
)
 
(369
)
 
(8
)
 
(163
)
 
(261
)
 
(36
)
 
(1,177
)
Commodity purchases resold
 
—

 
—

 
—

 
—

 
(783
)
 
—

 
(783
)
Property taxes
 
(65
)
 
(38
)
 
—

 
(21
)
 
(12
)
 
—

 
(136
)
Depreciation and amortization
 
(220
)
 
(138
)
 
(13
)
 
(73
)
 
(83
)
 
—

 
(527
)
Asset impairment charges
 
—

 
—

 
—

 
—

 
(1,085
)
 
—

 
(1,085
)
Segmented earnings/(losses)
 
329

 
332

 
98

 
183

 
(828
)
 
(36
)
 
78

Interest expense
 
(538
)
Allowance for funds used during construction
 
110

Interest income and other
 
18

Loss before income taxes
 
(332
)
Income tax recovery
 
266

Net loss
 
(66
)
Net income attributable to non-controlling interests
 
(52
)
Net loss attributable to controlling interests and to common shares
 
(118
)


TRANSCANADA PIPELINES LIMITED [60
THIRD QUARTER 2017


nine months ended September 30, 2017
 
Canadian Natural Gas Pipelines

 
U.S. Natural Gas Pipelines

 
Mexico Natural Gas Pipelines

 
Liquids Pipelines

 
 
 
 
 
 
(unaudited - millions of Canadian $)
 
 
 
 
 
Energy

 
Corporate

 
Total

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenues
 
2,725

 
2,684

 
432

 
1,410

 
2,599

 
—

 
9,850

Income/(loss) from equity investments
 
9

 
175

 
—

 
3

 
341

 
(1
)
 
527

Plant operating costs and other
 
(958
)
 
(973
)
 
(29
)
 
(437
)
 
(482
)
 
(101
)
 
(2,980
)
Commodity purchases resold
 
—

 
—

 
—

 
—

 
(1,711
)
 
—

 
(1,711
)
Property taxes
 
(201
)
 
(136
)
 
—

 
(67
)
 
(38
)
 
—

 
(442
)
Depreciation and amortization
 
(672
)
 
(451
)
 
(70
)
 
(228
)
 
(118
)
 
—

 
(1,539
)
Gain on sale of assets

 
—

 
—

 
—

 
—

 
489

 
—

 
489

Segmented earnings/(loss)
 
903

 
1,299

 
333

 
681

 
1,080

 
(102
)
 
4,194

Interest expense
 
(1,578
)
Allowance for funds used during construction
 
367

Interest income and other
 
192

Income before income taxes
 
3,175

Income tax expense
 
(769
)
Net income
 
2,406

Net income attributable to non-controlling interests
 
(189
)
Net income attributable to controlling interests and to common shares
 
2,217

nine months ended September 30, 2016
 
Canadian Natural Gas Pipelines

 
U.S. Natural Gas Pipelines

 
Mexico Natural Gas Pipelines

 
Liquids Pipelines

 
 
 
 
 
 
(unaudited - millions of Canadian $)
 
 
 
 
 
Energy

 
Corporate

 
Total

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenues
 
2,677

 
1,585

 
249

 
1,292

 
3,083

 
—

 
8,886

Income/(loss) from equity investments
 
9

 
150

 
(2
)
 
(1
)
 
199

 
—

 
355

Plant operating costs and other
 
(886
)
 
(597
)
 
(34
)
 
(417
)
 
(625
)
 
(87
)
 
(2,646
)
Commodity purchases resold
 
—

 
—

 
—

 
—

 
(1,628
)
 
—

 
(1,628
)
Property taxes
 
(202
)
 
(78
)
 
—

 
(67
)
 
(58
)
 
—

 
(405
)
Depreciation and amortization
 
(655
)
 
(269
)
 
(29
)
 
(214
)
 
(258
)
 
—

 
(1,425
)
Asset impairment charges
 
—

 
—

 
—

 
—

 
(1,296
)
 
—

 
(1,296
)
Loss on sale of assets
 
—

 
(4
)
 
—

 
—

 
—

 
—

 
(4
)
Segmented earnings/(losses)
 
943

 
787

 
184

 
593

 
(583
)
 
(87
)
 
1,837

Interest expense
 
(1,369
)
Allowance for funds used during construction
 
322

Interest income and other
 
128

Income before income taxes
 
918

Income tax expense
 
(79
)
Net Income
 
839

Net income attributable to non-controlling interests
 
(184
)
Net Income attributable to controlling interests and to common shares
 
655



TRANSCANADA PIPELINES LIMITED [61
THIRD QUARTER 2017


TOTAL ASSETS 
(unaudited - millions of Canadian $)
 
September 30, 2017

 
December 31, 2016

 
 
 
 
 
Canadian Natural Gas Pipelines
 
17,010

 
15,816

U.S. Natural Gas Pipelines
 
34,897

 
34,422

Mexico Natural Gas Pipelines
 
5,470

 
5,013

Liquids Pipelines
 
16,436

 
16,896

Energy
 
8,979

 
13,169

Corporate
 
3,513

 
2,625

 
 
86,305

 
87,941

 
4.  Assets held for sale
Solar Assets
On October 24, 2017, the Company entered into an agreement to sell its Ontario Solar assets to a third party for approximately $540 million. The sale is expected to close by the end of 2017, subject to certain regulatory and other approvals, and will include customary closing adjustments. An estimated gain of $130 million ($100 million after-tax) is expected to be recognized upon closing of the transaction.
At September 30, 2017, the related assets and liabilities were classified as held for sale in the Energy segment as follows:
 
 
 
 
(unaudited - millions of Canadian $)
 
 
 
 
 
 
 
Assets held for sale
 
 
 
Accounts receivable
 
6

 
Inventories
 
1

 
Plant, property and equipment
 
424

 
Total assets held for sale
 
431

 
 
 
 
 
Liabilities related to assets held for sale
 
 
 
Accounts payable and other
 
1

 
Other long-term liabilities
 
17

 
Total liabilities related to assets held for sale
 
18

 
5. Income taxes
The effective tax rates for the nine-month periods ended September 30, 2017 and 2016 were 24 per cent and 9 per cent, respectively. The higher effective tax rate in 2017 was primarily the result of changes in the proportion of income earned between Canadian and foreign jurisdictions and the goodwill impairment charge in 2016.


TRANSCANADA PIPELINES LIMITED [62
THIRD QUARTER 2017


6. Long-term debt
LONG-TERM DEBT ISSUED
The Company issued long-term debt in the nine months ended September 30, 2017 as follows:
(unaudited - millions of Canadian $, unless noted otherwise)
Company
 
Issue date
 
Type
 
Maturity date
 
Amount

 
Interest rate

 
 
 
 
 
 
 
 
 
 
 
TRANSCANADA PIPELINES LIMITED
 
 
 
 
 
 
 
 
 
 
September 2017
 
Medium Term Notes
 
March 2028
 
300

 
3.39
%
 
 
September 2017
 
Medium Term Notes
 
September 2047
 
700

 
4.33
%
TUSCARORA GAS TRANSMISSION COMPANY

 
 
 
 
 
 
 
 
 
 
August 2017
 
Term Loan
 
August 2020
 
US 25

 
Floating

TC PIPELINES, LP
 
 
 
 
 
 
 
 
 
 
May 2017
 
Senior Unsecured Notes
 
May 2027
 
US 500

 
3.90
%
LONG-TERM DEBT RETIRED
The Company retired long-term debt in the nine months ended September 30, 2017 as follows:
(unaudited - millions of Canadian $, unless noted otherwise)
Company
 
Retirement date
 
Type
 
Amount

 
Interest rate

 
 
 
 
 
 
 
 
 
TUSCARORA GAS TRANSMISSION COMPANY

 
 
 
 
 
 
 
 
August 2017
 
Senior Secured Notes
 
US 12

 
3.82
%
TRANSCANADA PIPELINES LIMITED
 
 
 
 
 
 
 
 
June 2017
 
Acquisition Bridge Facility
 
US 1,513

 
Floating

 
 
February 2017
 
Acquisition Bridge Facility
 
US 500

 
Floating

 
 
January 2017
 
Medium Term Notes
 
300

 
5.10
%
TRANSCANADA PIPELINE USA LTD.
 
 
 
 
 
 
 
 
June 2017
 
Acquisition Bridge Facility
 
US 630

 
Floating

 
 
April 2017
 
Acquisition Bridge Facility
 
US 1,070

 
Floating

The acquisition bridge facilities were put into place to finance a portion of the Columbia acquisition. Proceeds from the sale of the U.S. Northeast power assets were used to fully retire the remaining acquisition bridge facilities in second quarter 2017.
In the three and nine months ended September 30, 2017, TCPL capitalized interest related to capital projects of $49 million and $150 million (2016 - $46 million and $133 million).


TRANSCANADA PIPELINES LIMITED [63
THIRD QUARTER 2017


7. Junior subordinated notes issued
(unaudited - millions of Canadian $, unless noted otherwise)
Company
 
Issue date
 
Type
 
Maturity date
 
Amount

 
Interest rate

 
 
 
 
 
 
 
 
 
 
 
TRANSCANADA PIPELINES LIMITED
 
 
 
 
 
 
 
 
 
 
 
 
May 2017
 
Junior Subordinated Notes1,2
 
May 2077
 
1,500

 
4.90
%
 
 
March 2017
 
Junior Subordinated Notes1,2
 
March 2077
 
US 1,500

 
5.55
%
1 
The Junior subordinated notes are subordinated in right of payment to existing and future senior indebtedness or other obligations of TCPL.
2 
The Junior subordinated notes were issued to TransCanada Trust (the Trust), a financing trust subsidiary wholly-owned by TCPL. While the obligations of the Trust are fully and unconditionally guaranteed by TCPL on a subordinated basis, the Trust is not consolidated in TCPL's financial statements because TCPL does not have a variable interest in the Trust and the only substantive assets of the Trust are junior subordinated notes of TCPL.
In May 2017, the Trust issued $1.5 billion of Trust Notes - Series 2017-B (Trust Notes) to third party investors with a fixed interest rate of 4.65 per cent for the first ten years converting to a floating rate thereafter. All of the proceeds of the issuance by the Trust were loaned to TCPL for $1.5 billion of junior subordinated notes of TCPL at an initial fixed rate of 4.90 per cent, including a 0.25 per cent administration charge. The rate will reset commencing May 2027 until May 2047 to the then three month Bankers' Acceptance rate plus 3.33 per cent per annum; from May 2047 until May 2077, the interest rate will reset to the then three month Bankers' Acceptance rate plus 4.08 per cent per annum. The junior subordinated notes are callable at TCPL's option at any time on or after May 18, 2027 at 100 per cent of the principal amount plus accrued and unpaid interest to the date of redemption.
In March 2017, the Trust issued US$1.5 billion of Trust Notes - Series 2017-A (Trust Notes) to third party investors with a fixed interest rate of 5.30 per cent for the first ten years converting to a floating rate thereafter. All of the proceeds of the issuance by the Trust were loaned to TCPL for US$1.5 billion of junior subordinated notes of TCPL at an initial fixed rate of 5.55 per cent, including a 0.25 per cent administration charge. The rate will reset commencing March 2027 until March 2047 to the then three month LIBOR plus 3.458 per cent per annum; from March 2047 until March 2077, the interest rate will reset to the then three month LIBOR plus 4.208 per cent per annum. The junior subordinated notes are callable at TCPL's option at any time on or after March 15, 2027 at 100 per cent of the principal amount plus accrued and unpaid interest to the date of redemption.
Pursuant to the terms of the Trust Notes and related agreements, in certain circumstances (1) TCPL may issue deferral preferred shares to holders of the Trust Notes in lieu of interest; and (2) TransCanada and TCPL would be prohibited from declaring or paying dividends on or redeeming their outstanding preferred shares (or, if none are outstanding, their respective common shares) until all deferral preferred shares are redeemed by TCPL. The Trust Notes may also be automatically exchanged for preferred shares of TCPL upon certain kinds of bankruptcy and insolvency events. All of these preferred shares would rank equally with any other outstanding first preferred shares of TCPL.


TRANSCANADA PIPELINES LIMITED [64
THIRD QUARTER 2017


8. Common Shares
On January 31, 2017, the Company issued 3.0 million common shares to TransCanada for proceeds of $187 million,
on April 28, 2017, the Company issued 3.3 million common shares to TransCanada for proceeds of $214 million and on July 31, 2017, the Company issued 3.0 million common shares to TransCanada for proceeds of $190 million. These share issuances resulted in 868 million shares outstanding at September 30, 2017 (December 31, 2016 - 859 million).
9. Common units subject to rescission or redemption
Columbia Pipeline Partners LP acquisition
On February 17, 2017, the Company acquired all outstanding publicly held common units of Columbia Pipeline Partners LP (CPPL) at a price of US$17.00 and a stub period distribution payment of US$0.10 per common unit for an aggregate transaction value of US$921 million. As this was a transaction between entities under common control, it was recognized in equity.
At December 31, 2016, the entire $1,073 million (US$799 million) of the Company's non-controlling interest in CPPL was recorded as Common units subject to rescission or redemption on the condensed consolidated balance sheet.
Common units of TC PipeLines, LP subject to rescission
In 2017, rescission rights on 1.6 million TC PipeLines, LP common units expired and $106 million (US$82 million) was reclassified to equity. At September 30, 2017, there were no outstanding Common units subject to rescission or redemption on the condensed consolidated balance sheet (December 31, 2016 - $106 million (US$82 million)).


TRANSCANADA PIPELINES LIMITED [65
THIRD QUARTER 2017


10. Other comprehensive (loss)/income and accumulated other comprehensive loss
Components of other comprehensive (loss)/income, including the portion attributable to non-controlling interests and related tax effects, are as follows: 
three months ended September 30, 2017
 
 
 
Income Tax

 
 
(unaudited - millions of Canadian $)
 
Before Tax Amount

 
Recovery/Expense

 
Net of Tax Amount

 
 
 
 
 
 
 
Foreign currency translation losses on net investment in foreign operations
 
(364
)
 
(6
)
 
(370
)
Change in fair value of net investment hedges
 
(1
)
 
—

 
(1
)
Change in fair value of cash flow hedges
 
1

 
—

 
1

Unrealized actuarial gains and losses on pension and other post-retirement benefit plans
 
5

 
(3
)
 
2

Reclassification of actuarial gains and losses on pension and other post-retirement benefit plans
 
6

 
(2
)
 
4

Other comprehensive income on equity investments
 
4

 
(1
)
 
3

Other comprehensive loss
 
(349
)
 
(12
)
 
(361
)
three months ended September 30, 2016
 
 
 
Income Tax

 
 
(unaudited - millions of Canadian $)
 
Before Tax Amount

 
Recovery/Expense

 
Net of Tax Amount

 
 
 
 
 
 
 
Foreign currency translation gains on net investment in foreign operations
 
55

 
—

 
55

Change in fair value of net investment hedges
 
(2
)
 
1

 
(1
)
Change in fair value of cash flow hedges
 
6

 
(1
)
 
5

Reclassification to net income of gains and losses on cash flow hedges
 
1

 
(1
)
 
—

Reclassification of actuarial gains and losses on pension and other post-retirement benefit plans

 
6

 
(2
)
 
4

Other comprehensive income on equity investments
 
5

 
(1
)
 
4

Other comprehensive income
 
71

 
(4
)
 
67

nine months ended September 30, 2017
 
 
 
Income Tax

 
 
(unaudited - millions of Canadian $)
 
Before Tax Amount

 
Recovery/Expense

 
Net of Tax Amount

 
 
 
 
 
 
 
Foreign currency translation losses on net investment in foreign operations
 
(717
)
 
(4
)
 
(721
)
Reclassification of foreign currency translation gains on net investment on disposal of foreign operations

 
(77
)
 
—

 
(77
)
Change in fair value of net investment hedges
 
(4
)
 
1

 
(3
)
Change in fair value of cash flow hedges
 
5

 
(1
)
 
4

Reclassification to net income of gains and losses on cash flow hedges
 
(2
)
 
1

 
(1
)
Unrealized actuarial gains and losses on pension and other post-retirement benefit plans
 
5

 
(3
)
 
2

Reclassification of actuarial gains and losses on pension and other post-retirement benefit plans
 
16

 
(5
)
 
11

Other comprehensive income on equity investments
 
8

 
(2
)
 
6

Other comprehensive loss
 
(766
)
 
(13
)
 
(779
)


TRANSCANADA PIPELINES LIMITED [66
THIRD QUARTER 2017


nine months ended September 30, 2016
 
 
 
Income Tax

 
 
(unaudited - millions of Canadian $)
 
Before Tax Amount

 
Recovery/Expense

 
Net of Tax Amount

 
 
 
 
 
 
 
Foreign currency translation losses on net investment in foreign operations
 
(150
)
 
(2
)
 
(152
)
Change in fair value of net investment hedges
 
(12
)
 
3

 
(9
)
Change in fair value of cash flow hedges
 
33

 
(12
)
 
21

Reclassification to net income of gains and losses on cash flow hedges
 
65

 
(25
)
 
40

Reclassification of actuarial gains and losses on pension and other post-retirement benefit plans

 
17

 
(5
)
 
12

Other comprehensive income on equity investments
 
14

 
(3
)
 
11

Other comprehensive loss
 
(33
)
 
(44
)
 
(77
)
The changes in AOCI by component are as follows:
three months ended September 30, 2017
 
Currency

 
 
 
Pension and

 
 
 
 
(unaudited - millions of Canadian $)
 
Translation Adjustments

 
Cash Flow Hedges

 
OPEB Plan Adjustments

 
Equity Investments

 
Total1

 
 
 
 
 
 
 
 
 
 
 
AOCI balance at July 1, 2017
 
(716
)
 
(27
)
 
(201
)
 
(345
)
 
(1,289
)
Other comprehensive (loss)/income before reclassifications2,3
 
(303
)
 
2

 
2

 
—

 
(299
)
Amounts reclassified from accumulated other comprehensive loss
 
—

 
—

 
4

 
3

 
7

Net current period other comprehensive (loss)/income
 
(303
)
 
2

 
6

 
3

 
(292
)
AOCI balance at September 30, 2017
 
(1,019
)
 
(25
)
 
(195
)
 
(342
)
 
(1,581
)
1 
All amounts are net of tax. Amounts in parentheses indicate losses recorded to OCI.
2 
Other comprehensive (loss)/income before reclassifications on currency translation adjustments and cash flow hedges is net of non-controlling interest losses of $68 million and losses of $1 million, respectively.
3 
Other comprehensive (loss)/income before reclassifications on pension and OPEB plan adjustments includes a $27 million reduction on settlements and curtailments.
nine months ended September 30, 2017
 
Currency

 
 
 
Pension and

 
 
 
 
(unaudited - millions of Canadian $)
 
Translation Adjustments

 
Cash Flow Hedges

 
OPEB Plan Adjustments

 
Equity Investments

 
Total1

 
 
 
 
 
 
 
 
 
 
 
AOCI balance at January 1, 2017
 
(376
)
 
(28
)
 
(208
)
 
(348
)
 
(960
)
Other comprehensive (loss)/income before reclassifications2,3
 
(566
)
 
4

 
2

 
—

 
(560
)
Amounts reclassified from accumulated other comprehensive loss
 
(77
)
 
(1
)
 
11

 
6

 
(61
)
Net current period other comprehensive (loss)/income4
 
(643
)
 
3

 
13


6

 
(621
)
AOCI balance at September 30, 2017
 
(1,019
)
 
(25
)
 
(195
)
 
(342
)
 
(1,581
)
1 
All amounts are net of tax. Amounts in parentheses indicate losses recorded to OCI.
2 
Other comprehensive (loss)/income before reclassifications on currency translation adjustments net of non-controlling interest losses of
$158 million.
3 
Other comprehensive (loss)/income before reclassifications on pension and OPEB plan adjustments includes a $27 million reduction on settlements and curtailments.
4 
Losses 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 $10 million ($7 million, net of tax) at September 30, 2017. 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.


TRANSCANADA PIPELINES LIMITED [67
THIRD QUARTER 2017


Details about reclassifications out of AOCI into the consolidated statement of income are as follows: 
 
 
Amounts reclassified from
accumulated other comprehensive loss1
 
Affected line item
in the condensed
consolidated statement of income
 
 
three months ended
September 30
 
nine months ended
September 30
 
(unaudited - millions of Canadian $)
 
2017

2016

 
2017

2016

 
 
 
 
 
 
 
 
 
 
Cash flow hedges
 
 
 
 
 
 
 
 
Commodities
 
4

7

 
15

(54
)
 
Revenues (Energy)
Foreign exchange
 
—

(5
)
 
—

—

 
Interest income and other
Interest rate
 
(4
)
(3
)
 
(13
)
(11
)
 
Interest expense
 
 
—

(1
)
 
2

(65
)
 
Total before tax
 
 
—

1

 
(1
)
25

 
Income tax expense
 
 
—

—

 
1

(40
)
 
Net of tax
Pension and other post-retirement benefit plan adjustments
 


 

 
 



 
 
Amortization of actuarial loss
 
(4
)
(6
)
 
(12
)
(17
)
 
Plant operating costs and other2
Settlement charge
 
(2
)
—

—

(2
)
—

 
Plant operating costs and other2
 
 
(6
)
(6
)
 
(14
)
(17
)
 
Total before tax
 
 
2

2

 
5

5

 
Income tax expense
 
 
(4
)
(4
)
 
(9
)
(12
)
 
Net of tax
Equity investments
 
 

 

 




 
 
  Equity income
 
(4
)
(5
)
 
(8
)
(14
)
 
Income from equity investments
 
 
1

1

 
2

3

 
Income tax expense
 
 
(3
)
(4
)
 
(6
)
(11
)
 
Net of tax
Currency translation adjustments
 
 
 
 
 
 
 
 
Realization of foreign currency translation gain on disposal of foreign operations
 
—

—

 
77

—

 
(Loss)/Gain on sale of assets
 
 
—

—

 
—

—

 
Income tax expense
 
 
—

—

 
77

—

 
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 11 for additional detail.
11. Employee post-retirement benefits
As a result of settlements and curtailments that occurred upon the completion of the U.S. Northeast power generation asset sales, remeasurements were performed in the third quarter on TCPL's U.S. defined benefit plan (DB plan) and other post-retirement benefit plans. The U.S. DB plan and other post-retirement benefit plan remeasurements used a weighted average discount rate of 4.10 per cent. All other assumptions were consistent with those employed at December 31, 2016. The impact of these remeasurements reduced the DB plan's unrealized actuarial losses by $3 million, which was included in Other comprehensive income, and resulted in a settlement charge of $2 million which was recorded in net benefit cost in third quarter 2017. These remeasurements had no impact on the other post-retirement benefit plan's unrealized actuarial losses.
In third quarter 2017, the year to date lump sum payouts exceeded service and interest costs for the Columbia's DB plan. As a result, remeasurements were performed on the Columbia DB plan using a discount rate of 3.70 per cent. All


TRANSCANADA PIPELINES LIMITED [68
THIRD QUARTER 2017


other assumptions were consistent with those employed at December 31, 2016. The remeasurement of the Columbia DB plan increased the Company’s unrealized actuarial gains by $16 million, of which $14 million was recorded in Regulatory assets and $2 million was recorded in Other comprehensive income.
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 $)
 
2017

 
2016

 
2017

 
2016

 
2017

 
2016

 
2017

 
2016

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Service cost
 
25

 
28

 
1

 
1

 
81

 
79

 
3

 
2

Interest cost
 
30

 
34

 
3

 
4

 
92

 
93

 
10

 
9

Expected return on plan assets
 
(45
)
 
(48
)
 
(5
)
 
(5
)
 
(134
)
 
(127
)
 
(16
)
 
(6
)
Amortization of actuarial loss
 
3

 
5

 
1

 
1

 
11

 
15

 
1

 
2

Amortization of regulatory asset
 
26

 
8

 
—

 
—

 
33

 
17

 
1

 
—

Amortization of transitional obligation related to regulated business
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
1

Settlement charge
 
2

 
—

 
—

 
—

 
2

 
—

 
—

 
—

Net benefit cost recognized
 
41

 
27

 
—

 
1

 
85

 
77

 
(1
)
 
8

 
Effective April 1, 2017, the Company closed its U.S. DB plan to non-union new entrants. As of April 1, 2017, all non-union hires will participate in the existing defined contribution plan (DC plan). Non-union U.S. employees who currently participate in the DC plan will have one final election opportunity to become a member of the U.S. DB plan as of January 1, 2018.
12. Risk management and financial instruments 
RISK MANAGEMENT OVERVIEW
TCPL has exposure to market risk and counterparty credit risk, and has strategies, policies and limits in place to manage the impact of these risks on earnings and cash flow.
COUNTERPARTY CREDIT RISK
TCPL’s maximum counterparty credit exposure with respect to financial instruments at September 30, 2017, without taking into account security held, consisted of cash and cash equivalents, accounts receivable, available for sale assets, derivative assets, loans and advances receivable. The Company regularly reviews its accounts receivable and records an allowance for doubtful accounts as necessary using the specific identification method. At September 30, 2017, there were no significant amounts past due or impaired, no significant credit risk concentration and no significant credit losses during the period.
LOAN RECEIVABLE FROM AFFILIATE
TCPL holds a 60 per cent equity interest in a joint venture with IEnova to build, own and operate the Sur de Texas pipeline. The Company accounts for the joint venture as an equity investment. On April 21, 2017, TCPL entered into a MXN$13.6 billion unsecured revolving credit facility with the joint venture, which bears interest at a floating rate and matures in March 2022. At September 30, 2017, Intangible and other assets on the Company’s condensed consolidated balance sheet included a $578 million loan receivable from the Sur de Texas joint venture.
This loan receivable represents TCPL’s proportionate share of the debt financing requirements related to the joint venture and is included in Contributions to equity investments on the Company's condensed consolidated statement of


TRANSCANADA PIPELINES LIMITED [69
THIRD QUARTER 2017


cash flows. Interest income and other included income of $11 million and $14 million for the three and nine months ended September 30, 2017. These amounts were offset by a corresponding expense recorded in Income from equity investments.
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 and foreign exchange forward contracts and options.
The fair values and notional or principal amounts for the derivatives designated as a net investment hedge were as follows:
 
 
September 30, 2017
 
December 31, 2016
(unaudited - millions of Canadian $, unless noted otherwise)

Fair value1


Notional or principal amount

Fair value1


Notional or principal amount
 
 
 
 
 
 
 
 
 
U.S. dollar cross-currency interest rate swaps (maturing 2017 to 2019)2

(222
)
 
US 1,400
 
(425
)
 
US 2,350
U.S. dollar foreign exchange forward contracts

—

 
—
 
(7
)
 
US 150
 

(222
)
 
US 1,400
 
(432
)
 
US 2,500
1 
Fair values equal carrying values.
2 
In the three and nine months ended September 30, 2017, Net income includes net realized gains of $1 million and $3 million, respectively, (2016 - gains of $1 million and $5 million, respectively) related to the interest component of cross-currency swap settlements which are reported within Interest expense.
The notional amounts and fair value of U.S. dollar-denominated debt designated as a net investment hedge were as follows:
(unaudited - millions of Canadian $, unless noted otherwise)
 
September 30, 2017
 
December 31, 2016
 
 
 
 
 
Notional amount
 
24,900 (US 19,900)
 
26,600 (US 19,800)
Fair value
 
28,300 (US 22,600)
 
29,400 (US 21,900)
FINANCIAL INSTRUMENTS
Non-derivative financial instruments
Fair value of non-derivative financial instruments
The fair value of Long-term debt and Junior subordinated notes is estimated using an income approach based on quoted market prices for the same or similar debt instruments from external data service providers.
Available for sale assets are recorded at fair value which is calculated using quoted market prices where available. Certain non-derivative financial instruments included in cash and cash equivalents, accounts receivable, intangible and other assets, notes payable, accounts payable and other, due to affiliate, accrued interest and other long-term liabilities have carrying amounts that approximate their fair value due to the nature of the item or the short time to maturity and would also be classified in Level II of the fair value hierarchy.
Credit risk has been taken into consideration when calculating the fair value of non-derivative instruments.


TRANSCANADA PIPELINES LIMITED [70
THIRD QUARTER 2017


Balance sheet presentation of non-derivative financial instruments
The following table details the fair value of the Company's non-derivative financial instruments, excluding those where carrying amounts approximate fair value, which would be classified in Level II of the fair value hierarchy: 
 
 
September 30, 2017
 
December 31, 2016
(unaudited - millions of Canadian $)
 
Carrying
amount

 
Fair
value

 
Carrying
amount

 
Fair
value

 
 
 
 
 
 
 
 
 
Long-term debt including current portion1,2
 
(34,630
)
 
(39,627
)
 
(40,150
)
 
(45,047
)
Junior subordinated notes
 
(7,004
)
 
(7,238
)
 
(3,931
)
 
(3,825
)
 
 
(41,634
)
 
(46,865
)
 
(44,081
)
 
(48,872
)
1 
Long-term debt is recorded at amortized cost except for US$850 million (December 31, 2016 - US$850 million) that is attributed to hedged risk and recorded at fair value.
2 
Net income for the three and nine months ended September 30, 2017 included unrealized gains of $1 million and $2 million, respectively, (2016 unrealized gains of $7 million and losses of $6 million, respectively) for fair value adjustments attributable to the hedged interest rate risk associated with interest rate swap fair value hedging relationships on US$850 million of long-term debt at September 30, 2017 (December 31, 2016 - US$850 million). There were no other unrealized gains or losses from fair value adjustments to the non-derivative financial instruments.
Available for sale assets summary
The following tables summarize additional information about the Company's restricted investments that are classified as available for sale assets:
 
September 30, 2017
 
December 31, 2016
(unaudited - millions of Canadian $)
LMCI restricted investments

 
Other restricted investments2

 
LMCI restricted investments

 
Other restricted investments2

 
 
 
 
 
 
 
 
Fair Values1
 
 
 
 
 
 
 
Fixed income securities (maturing within 1 year)
—

 
25

 
—

 
19

Fixed income securities (maturing within 1-5 years)
—

 
97

 
—

 
117

Fixed income securities (maturing within 5-10 years)
24

 
—

 
9

 
—

Fixed income securities (maturing after 10 years)
679

 
—

 
513

 
—

 
703

 
122

 
522

 
136

1 
Available for sale assets are recorded at fair value and included in Other current assets and Restricted investments on the condensed consolidated balance sheet.
2 
Other restricted investments have been set aside to fund insurance claim losses to be paid by the Company's wholly-owned captive insurance subsidiary.
 
 
September 30, 2017
 
September 30, 2016
(unaudited - millions of Canadian $)
 
LMCI restricted investments1

 
Other restricted investments2

 
LMCI restricted investments1

 
Other restricted investments2

 
 
 
 
 
 
 
 
 
Net unrealized (losses)/gains in the period
 
 

 
 

 
 

 
 

three months ended
 
(38
)
 
—

 
3

 
—

nine months ended
 
(23
)
 
—

 
25

 
1

Net realized (losses)/gains in the period
 
 

 
 

 
 

 
 

three months ended
 
—

 
—

 
1

 
—

nine months ended
 
(1
)
 
—

 
1

 
—

1 
Gains and losses arising from changes in the fair value of LMCI restricted investments impact the subsequent amounts to be collected through tolls to cover future pipeline abandonment costs. As a result, the Company records these gains and losses as regulatory assets or liabilities.
2 
Unrealized gains and losses on other restricted investments are included in OCI.


TRANSCANADA PIPELINES LIMITED [71
THIRD QUARTER 2017


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 period end market rates and applies a discounted cash flow valuation model. The fair value of commodity derivatives 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. The fair value of options has been calculated using the Black-Scholes pricing model. Credit risk has been taken into consideration when calculating the fair value of derivative instruments.
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 or are not designated as a hedge 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.
Balance sheet presentation of derivative instruments
The balance sheet classification of the fair value of the derivative instruments as at September 30, 2017 is as follows:
at September 30, 2017
Cash Flow Hedges

 
Fair Value Hedges

 
Net Investment Hedges

 
Held for Trading

 
Total Fair Value of Derivative Instruments1

(unaudited - millions of Canadian $)
 
 
 
 
 
 
 
 
 
 
Other current assets
 
 
 
 
 
 
 
 
 
Commodities2
4

 
—

 
—

 
196

 
200

Foreign exchange
—

 
—

 
2

 
81

 
83

Interest rate
2

 
—

 
—

 
1

 
3

 
6

 
—

 
2

 
278

 
286

Intangible and other assets
 
 
 
 
 
 
 
 
 
Commodities2
1

 
—

 
—

 
88

 
89

Foreign exchange
—

 
—

 
—

 
—

 
—

 
1

 
—

 
—

 
88

 
89

Total Derivative Assets
7

 
—

 
2

 
366

 
375

 
 
 
 
 
 
 
 
 
 
Accounts payable and other
 
 
 
 
 
 
 
 
 
Commodities2
(1
)
 
—

 
—

 
(249
)
 
(250
)
Foreign exchange
—

 
—

 
(181
)
 
(20
)
 
(201
)
Interest rate
—

 
(2
)
 
—

 
—

 
(2
)
 
(1
)
 
(2
)
 
(181
)
 
(269
)
 
(453
)
Other long-term liabilities
 
 
 
 
 
 
 
 
 
Commodities2
(1
)
 
—

 
—

 
(110
)
 
(111
)
Foreign exchange
—

 
—

 
(43
)
 
—

 
(43
)
Interest rate
—

 
(1
)
 
—

 
—

 
(1
)
 
(1
)
 
(1
)
 
(43
)
 
(110
)
 
(155
)
Total Derivative Liabilities
(2
)
 
(3
)
 
(224
)
 
(379
)
 
(608
)
 
 
 
 
 
 
 
 
 
 
Total Derivatives
5

 
(3
)
 
(222
)
 
(13
)
 
(233
)
1 
Fair value equals carrying value.
2 
Includes purchases and sales of power, natural gas and liquids.


TRANSCANADA PIPELINES LIMITED [72
THIRD QUARTER 2017


The balance sheet classification of the fair value of the derivative instruments as at December 31, 2016 is as follows:
at December 31, 2016
Cash Flow Hedges

 
Fair Value Hedges

 
Net Investment Hedges

 
Held for Trading

 
Total Fair Value of Derivative Instruments1

(unaudited - millions of Canadian $)
 
 
 
 
 
 
 
 
 
 
Other current assets
 
 
 
 
 
 
 
 
 
Commodities2
6

 
—

 
—

 
351

 
357

Foreign exchange
—

 
—

 
6

 
10

 
16

Interest rate
1

 
1

 
—

 
1

 
3

 
7

 
1

 
6

 
362

 
376

Intangible and other assets
 
 
 
 
 
 
 
 
 
Commodities2
4

 
—

 
—

 
118

 
122

Foreign exchange
—

 
—

 
10

 
—

 
10

Interest rate
1

 
—

 
—

 
—

 
1

 
5

 
—

 
10

 
118

 
133

Total Derivative Assets
12

 
1

 
16

 
480

 
509

 
 
 
 
 
 
 
 
 
 
Accounts payable and other
 
 
 
 
 
 
 
 
 
Commodities2
—

 
—

 
—

 
(330
)
 
(330
)
Foreign exchange
—

 
—

 
(237
)
 
(38
)
 
(275
)
Interest rate
(1
)
 
(1
)
 
—

 
—

 
(2
)
 
(1
)
 
(1
)
 
(237
)
 
(368
)
 
(607
)
Other long-term liabilities
 
 
 
 
 
 
 
 
 
Commodities2
—

 
—

 
—

 
(118
)
 
(118
)
Foreign exchange
—

 
—

 
(211
)
 
—

 
(211
)
Interest rate
—

 
(1
)
 
—

 
—

 
(1
)
 
—

 
(1
)
 
(211
)
 
(118
)
 
(330
)
Total Derivative Liabilities
(1
)
 
(2
)
 
(448
)
 
(486
)
 
(937
)
 
 
 
 
 
 
 
 
 
 
Total Derivatives
11

 
(1
)
 
(432
)
 
(6
)
 
(428
)
1 
Fair value equals carrying value.
2 
Includes purchases and sales of power, natural gas and liquids.
The majority of derivative instruments held for trading have been entered into for risk management purposes and all 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.


TRANSCANADA PIPELINES LIMITED [73
THIRD QUARTER 2017


Notional and Maturity Summary
The maturity and notional principal or quantity outstanding related to the Company's derivative instruments excluding hedges of the net investment in foreign operations is as follows:
at September 30, 2017
Power

 
Natural Gas

 
Liquids

 
Foreign Exchange

 
Interest

(unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Purchases1
83,491

 
159

 
8

 
—

 
—

Sales1
53,727

 
152

 
10

 
—

 
—

Millions of U.S. dollars
—

 
—

 
—

 
US 3,072

 
US 1,550

Millions of Mexican pesos
—

 
—

 
—

 
MXN 100

 
—

Maturity dates
2017-2022

 
2017-2020

 
2017

 
2017-2018

 
2017-2019

1 
Volumes for power, natural gas and liquids derivatives are in GWh, Bcf and MMBbls, respectively.
at December 31, 2016
Power

 
Natural Gas

 
Liquids

 
Foreign Exchange

 
Interest

(unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Purchases1
86,887

 
182

 
6

 
—

 
—

Sales1
58,561

 
147

 
6

 
—

 
—

Millions of U.S. dollars
—

 
—

 
—

 
US 2,394

 
US 1,550

Maturity dates
2017-2021

 
2017-2020

 
2017

 
2017

 
2017-2019

1 
Volumes for power, natural gas and liquids derivatives are in GWh, Bcf and MMBbls, respectively.
Unrealized and Realized Gains/(Losses) on Derivative Instruments
The following summary does not include hedges of the net investment in foreign operations.
 
 
three months ended September 30
 
nine months ended September 30
(unaudited - millions of Canadian $)
 
2017

 
2016

 
2017

 
2016

 
 
 
 
 
 
 
 
 
Derivative instruments held for trading1
 
 
 
 
 
 
 
 
Amount of unrealized gains/(losses) in the period
 
 
 
 
 
 
 
 
Commodities2
 
45

 
(97
)
 
(102
)
 
23

Foreign exchange
 
33

 
—

 
89

 
47

Interest rate
 
(1
)
 
—

 
(1
)
 
—

Amount of realized (losses)/gains in the period
 
 
 
 
 
 
 
 
Commodities
 
(82
)
 
(23
)
 
(167
)
 
(165
)
Foreign exchange
 
19

 
(5
)
 
10

 
52

Interest rate
 
1

 
—

 
1

 
—

Derivative instruments in hedging relationships
 
 
 
 
 
 
 
 
Amount of realized gains/(losses) in the period
 
 
 
 
 
 
 
 
Commodities
 
4

 
(15
)
 
17

 
(155
)
Foreign exchange
 
—

 
5

 
5

 
(101
)
Interest rate
 
—

 
1

 
1

 
4

1 
Realized and unrealized gains and losses on held for trading derivative instruments used to purchase and sell commodities are included net in Revenues. Realized and unrealized gains and losses on interest rate and foreign exchange derivative instruments held for trading are included net in Interest expense and Interest income and other, respectively.
2 
In the three and nine months ended September 30, 2017, there were no gains or losses included in Net Income relating to discontinued cash flow hedges where it was probable that the anticipated transaction would not occur (2016 - nil and a net loss of $42 million, respectively).


TRANSCANADA PIPELINES LIMITED [74
THIRD QUARTER 2017


Derivatives in cash flow hedging relationships
The components of OCI (Note 10) related to derivatives in cash flow hedging relationships including the portion attributable to non-controlling interests are as follows: 
 
 
three months ended September 30
 
nine months ended
September 30
(unaudited - millions of Canadian $, pre-tax)
 
2017

 
2016

 
2017

 
2016

 
 
 
 
 
 
 
 
 
Change in fair value of derivative instruments recognized in OCI (effective portion)1
 
 
 
 
 
 
 
 
Commodities
 
2

 
7

 
5

 
33

Foreign exchange
 
—

 
(5
)
 
—

 
—

Interest rate
 
(1
)
 
4

 
—

 
—

 
 
1

 
6

 
5

 
33

Reclassification of (losses)/gains on derivative instruments from AOCI to net income (effective portion)1
 
 
 
 
 
 
 
 
Commodities2
 
(4
)
 
(7
)
 
(15
)
 
54

Foreign exchange3
 
—

 
5

 
—

 
—

Interest rate4
 
4

 
3

 
13

 
11

 
 
—

 
1

 
(2
)
 
65

Gains/(losses) on derivative instruments recognized in net income (ineffective portion)
 
 
 
 
 
 
 
 
Commodities2
 
—

 
14

 
—

 
(1
)
 
 
—

 
14

 
—

 
(1
)
1 
No amounts have been excluded from the assessment of hedge effectiveness. Amounts in parentheses indicate losses recorded to OCI and AOCI.
2 
Reported within Revenues on the condensed consolidated statement of income.
3 
Reported within Interest income and other on the condensed consolidated statement of income.
4 
Reported within Interest expense on the condensed consolidated statement of income.
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. TCPL 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, 2017
 
Gross derivative instruments presented on the balance sheet

 
Amounts available for offset1

 
Net amounts

(unaudited - millions of Canadian $)
 
 
 
 
 
 
 
 
 
 
Derivative – Asset
 
 
 
 
 
 
Commodities
 
289

 
(220
)
 
69

Foreign exchange
 
83

 
(63
)
 
20

Interest rate
 
3

 
(1
)
 
2

Total
 
375

 
(284
)
 
91

Derivative – Liability
 
 

 
 

 
 

Commodities
 
(361
)
 
220

 
(141
)
Foreign exchange
 
(244
)
 
63

 
(181
)
Interest rate
 
(3
)
 
1

 
(2
)
Total
 
(608
)
 
284

 
(324
)
1 
Amounts available for offset do not include cash collateral pledged or received.


TRANSCANADA PIPELINES LIMITED [75
THIRD QUARTER 2017


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, 2016:
at December 31, 2016
 
Gross derivative instruments presented on the balance sheet

 
Amounts available for offset1

 
Net amounts

(unaudited - millions of Canadian $)
 
 
 
 
 
 
 
 
 
 
Derivative - Asset
 
 
 
 
 
 
Commodities
 
479

 
(362
)
 
117

Foreign exchange
 
26

 
(26
)
 
—

Interest rate
 
4

 
(1
)
 
3

Total
 
509

 
(389
)
 
120

Derivative - Liability
 
 

 
 

 
 

Commodities
 
(448
)
 
362

 
(86
)
Foreign exchange
 
(486
)
 
26

 
(460
)
Interest rate
 
(3
)
 
1

 
(2
)
Total
 
(937
)
 
389

 
(548
)
1 
Amounts available for offset do not include cash collateral pledged or received.
With respect to the derivative instruments presented above as at September 30, 2017, the Company provided cash collateral of $230 million (December 31, 2016 - $305 million) and letters of credit of $22 million (December 31, 2016 - $27 million) to its counterparties. The Company held nil (December 31, 2016 - nil) in cash collateral and $3 million (December 31, 2016 - $3 million) in letters of credit from counterparties on asset exposures at September 30, 2017. 
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, 2017, the aggregate fair value of all derivative instruments with credit-risk-related contingent features that were in a net liability position was $11 million (December 31, 2016 - $19 million), for which the Company had provided collateral in the normal course of business of nil (December 31, 2016 - nil). If the credit-risk-related contingent features in these agreements were triggered on September 30, 2017, the Company would have been required to provide additional collateral of $11 million (December 31, 2016 - $19 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 has sufficient liquidity in the form of cash and undrawn committed revolving credit facilities to meet these contingent obligations should they arise.


TRANSCANADA PIPELINES LIMITED [76
THIRD QUARTER 2017


FAIR VALUE HIERARCHY
The Company’s financial assets and liabilities recorded at fair value have been categorized into three categories based on a 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 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 are measured using a market approach based on extrapolation of inputs that are unobservable or where observable data does not support a significant portion of the derivative's fair value. This category mainly includes long-dated commodity transactions in certain markets where liquidity is low and the Company uses the most observable inputs available or, if not available, long-term broker quotes to estimate the fair value for these transactions. Valuation of options is based on the Black-Scholes pricing model.  
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 significant inputs are considered to be observable. As contracts near maturity and observable market data become available, they are transferred out of Level III and into Level II.
The fair value of the Company’s derivative assets and liabilities measured on a recurring basis, including both current and non-current portions for at September 30, 2017, are categorized as follows:
at September 30, 2017
 
Quoted prices in active markets


Significant other observable inputs


Significant unobservable inputs




(unaudited - millions of Canadian $)
 
(Level I)1


(Level II)1


(Level III)1


Total

 
 
 
 
 
 
 
 
 
Derivative instrument assets:
 
 
 
 
 
 
 
 
Commodities
 
30

 
240

 
19

 
289

Foreign exchange
 
—

 
83

 
—

 
83

Interest rate
 
—

 
3

 
—

 
3

Derivative instrument liabilities:
 
 

 
 

 
 

 
 

Commodities
 
(36
)
 
(304
)
 
(21
)
 
(361
)
Foreign exchange
 
—

 
(244
)
 
—

 
(244
)
Interest rate
 
—

 
(3
)
 
—

 
(3
)
 
 
(6
)
 
(225
)
 
(2
)
 
(233
)
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, 2017.


TRANSCANADA PIPELINES LIMITED [77
THIRD QUARTER 2017


The fair value of the Company’s derivative assets and liabilities measured on a recurring basis, including both current and non-current portions at December 31, 2016, were categorized as follows:
at December 31, 2016
 
Quoted prices in active markets (Level I)1

 
Significant other observable inputs (Level II)1

 
Significant unobservable inputs
(Level III)1

 
 
(unaudited - millions of Canadian $)
 
 
 
 
Total

 
 
 
 
 
 
 
 
 
Derivative instrument assets:
 
 
 
 
 
 
 
 
Commodities
 
134

 
326

 
19

 
479

Foreign exchange
 
—

 
26

 
—

 
26

Interest rate
 
—

 
4

 
—

 
4

Derivative instrument liabilities:
 
 
 
 
 
 
 
 
Commodities
 
(102
)
 
(343
)
 
(3
)
 
(448
)
Foreign exchange
 
—

 
(486
)
 
—

 
(486
)
Interest rate
 
—

 
(3
)
 
—

 
(3
)
 
 
32

 
(476
)
 
16

 
(428
)
1 
There were no transfers from Level I to Level II or from Level II to Level III for the year ended December 31, 2016.
The following table presents the net change in fair value of derivative assets and liabilities classified as Level III of the fair value hierarchy:
 
 
three months ended September 30
 
nine months ended
September 30
(unaudited - millions of Canadian $)
 
2017

 
2016

 
2017

 
2016

 
 
 
 
 
 
 
 
 
Balance at beginning of period
 
9

 
12

 
16

 
9

Total (losses)/gains included in net income
 
(10
)
 
2

 
(12
)
 
13

Settlements
 
(1
)
 
1

 
4

 
(1
)
Sales
 
—

 
—

 
(5
)
 
(2
)
Transfers out of Level III
 
—

 
(3
)
 
(5
)
 
(6
)
Total losses included in OCI
 
—

 
—

 
—

 
(1
)
Balance at end of period1
 
(2
)
 
12

 
(2
)
 
12

1 
For the three and nine months ended September 30, 2017, revenues include unrealized losses of $10 million and $14 million, respectively, attributed to derivatives in the Level III category that were still held at September 30, 2017 (2016 - gains of $1 million and $3 million, respectively).
A 10 per cent increase or decrease in commodity prices, with all other variables held constant, would result in a $2 million decrease or $1 million increase, respectively, in the fair value of outstanding derivative instruments included in Level III as at September 30, 2017. 


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13. Acquisitions & Dispositions
Mexico Natural Gas Pipelines
TransGas
In third quarter 2017, TCPL recognized an impairment charge of $12 million on its 46.5 per cent equity investment in TransGas de Occidente S.A. (TransGas). TransGas constructed and operated a natural gas pipeline in Colombia for a 20-year contract term. As per the terms of the agreement, upon completion of the 20-year contract in August 2017, TransGas transfered its pipeline assets to Transportadora de Gas Internacional S.A.. The impairment charge represents the write-down of the remaining carrying value of the equity investment. The non-cash impairment charge was recognized in Income from equity investments in the condensed consolidated statement of income.
Canadian Natural Gas Pipelines
Prince Rupert Gas Transmission
In July 2017, the Company was notified that PNW LNG would not be proceeding with their proposed LNG project and that Progress Energy (Progress) would be terminating their agreement with TCPL for development of the PRGT project effective August 10, 2017. In accordance with the terms of the agreement, all project costs incurred to advance the project, including carrying charges, are fully recoverable upon termination. At September 30, 2017, the expected reimbursement of project costs, previously recorded in Intangibles and other assets on the Company's condensed consolidated balance sheet, was included in Accounts receivable. In October 2017, the Company received full payment of the $0.6 billion reimbursement from Progress.
U.S. Natural Gas Pipelines
Iroquois Gas Transmission System and Portland Natural Gas Transmission System
On June 1, 2017, TCPL completed the sale of its 49.34 per cent interest in Iroquois and its remaining 11.81 per cent interest in PNGTS to TC PipeLines LP, valued at US$765 million. Proceeds were comprised of US$597 million in cash and US$168 million representing a proportionate share of Iroquois and PNGTS debt.
Columbia Pipeline Group
In second quarter 2017, the Company completed its procedures over measuring the volume of base gas acquired as part of the acquisition of Columbia. As a result, the Company decreased the fair value of base gas by $116 million (US$90 million). This impacted the purchase price equation by decreasing property, plant and equipment by
$116 million (US$90 million), decreasing deferred tax liabilities by $45 million (US$35 million) and increasing goodwill by $71 million (US$55 million). This adjustment did not impact the Company's net income.


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Energy
U.S. Northeast Power Assets
On June 2, 2017, TCPL completed the sale of Ravenswood, Ironwood, Kibby Wind and Ocean State Power for proceeds of approximately US$2.029 billion, subject to post-closing adjustments. In 2016, the Company recorded a loss of approximately $829 million ($863 million after tax) which included the impact of an estimated $70 million of foreign currency translation gains. The Company recorded an additional loss on sale of $226 million ($183 million after tax) in the nine months ended September 30, 2017, of which $7 million ($7 million after tax) was recorded in the third quarter. The 2017 loss included $2 million in foreign currency translation gains. These additional losses primarily related to adjustments to the purchase price and repair costs for an unplanned outage at Ravenswood prior to close. The actual foreign currency translation gains of $72 million were reclassified from AOCI to Net income on closing of the transaction.
On April 19, 2017, the Company completed the sale of TC Hydro for gross proceeds of US$1.07 billion, subject to post-closing adjustments. As a result, in the nine months ended September 30, 2017, the Company recorded a gain on sale of approximately $715 million ($440 million after tax) including the impact of an estimated $5 million of foreign currency translation gains which were reclassified from AOCI to net income. The gain on sale included an adjustment of $2 million ($1 million after tax) that was recorded in the third quarter.
Gains and losses from these sales are included in (Loss)/gain on sale of assets in the condensed consolidated statement of income. The proceeds received from the sale of the U.S. Northeast Power assets were used to fully repay the outstanding balances on the Company's acquisition bridge facilities that partially funded the acquisition of Columbia.
14. Commitments, contingencies and guarantees
COMMITMENTS
TCPL's operating lease commitments at December 31, 2016 included future payments related to our U.S. Northeast power assets. As a result of the completion of the thermal power asset sale on June 2, 2017, the remaining future obligations reported at December 31, 2016 have decreased by: $2 million in 2017, $52 million in 2018, $34 million in 2019 and $102 million in 2022 and beyond.
CONTINGENCIES
TCPL 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.
In March 2017, the U.S. Department of State issued a U.S. Presidential Permit authorizing construction of the U.S./Canada border crossing facilities of the Keystone XL pipeline. TCPL discontinued the claim under Chapter 11 of the North American Free Trade Agreement and has also withdrawn the U.S. Constitutional challenge.
GUARANTEES
TCPL and its partner on the Sur de Texas pipeline, IEnova, have jointly guaranteed the obligations for construction services during the construction of the pipeline.
TCPL and its joint venture partner on Bruce Power, BPC Generation Infrastructure Trust, have each severally guaranteed certain contingent financial obligations of Bruce Power related to a lease agreement and contractor and supplier services.
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. Such agreements include guarantees and letters of


TRANSCANADA PIPELINES LIMITED [80
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credit which are primarily related to delivery of natural gas, construction services and the payment of liabilities. For certain of these entities, any payments made by TCPL 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, 2017
 
at December 31, 2016
(unaudited - millions of Canadian $)
 
 
Term
 
Potential
exposure1

 
Carrying
value

 
Potential
exposure1

 
Carrying
value

 
 
 
 
 
 
 
 
 
 
 
Sur de Texas
 
ranging to 2020 
 
397

 
4

 
805

 
53

Bruce Power
 
ranging to 2018
 
88

 
1

 
88

 
1

Other jointly owned entities
 
ranging to 2059
 
105

 
14

 
87

 
28

 
 
 
 
590

 
19

 
980

 
82

1 
TCPL’s share of the potential estimated current or contingent exposure.
15. Related Party Transactions
Related party transactions are conducted in the normal course of business and are measured at the exchange amount, which is the amount of consideration established and agreed to by the related parties.
Interest income and other included nil, in the three and nine months ended September 30, 2017, related to inter-affiliate lending to TransCanada (September 30, 2016 - $5 million and $16 million).
Interest expense included $18 million and $50 million of interest charges, in the three and nine months ended September 30, 2017, as a result of inter-affiliate borrowing (September 30, 2016 - $16 million and $22 million).
The following amounts are included in Due to affiliate:
 
 
 
 
2017
 
2016
(unaudited millions of Canadian $)
 
Maturity Date
 
Outstanding
at September 30
 
 
Effective Interest Rate

 
Outstanding
at December 31
 
 
Effective Interest Rate

 
 
 
 
 
 
 
 
 
 
 
Credit Facility1
 
Demand
 
2,343
 
 
3.2
%
 
2,358
 
 
2.7
%
1 
TransCanada has an unsecured $3.0 billion credit facility with TCPL. Interest on this facility is charged at prime rate per annum.
At September 30, 2017, accounts payable and other included $3 million due to TransCanada (December 31, 2016 - $19 million).
The Company made interest payments of $17 million and $49 million to TransCanada in the three and nine months ended September 30, 2017 (September 30, 2016 - $14 million and $20 million).


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16. Variable interest entities
The Company consolidates a number of entities that are considered to be VIEs. A VIE is a legal entity that does not have sufficient equity at risk to finance its activities without additional subordinated financial support or is structured such that equity investors lack the ability to make significant decisions relating to the entity’s operations through voting rights or do not substantively participate in the gains and losses of the entity.
In the normal course of business, the Company consolidates VIEs in which it has a variable interest and for which it is considered to be the primary beneficiary. VIEs in which the Company has a variable interest but is not the primary beneficiary are considered non-consolidated VIEs and are accounted for as equity investments.
Consolidated VIEs
The Company's consolidated VIEs consist of legal entities where the Company has the power, through voting or similar rights, to direct the activities of the VIE that most significantly impact economic performance including purchasing or selling significant assets; maintenance and operations of assets; incurring additional indebtedness; or determining the strategic operating direction of the entity. In addition, the Company has the obligation to absorb losses or the right to receive benefits from the consolidated VIE that could potentially be significant to the VIE.
A significant portion of the Company’s assets are held through VIEs in which the Company holds a 100 per cent voting interest, the VIE meets the definition of a business and the VIE’s assets can be used for general corporate purposes. The assets and liabilities of the consolidated VIEs whose assets cannot be used for purposes other than the settlement of the VIE’s obligations are as follows:
 
 
September 30,

 
December 31,

(unaudited - millions of Canadian $)
 
2017

 
2016

 
 
 
 
 
ASSETS
 
 
 
 
Current Assets
 
 
 
 
Cash and cash equivalents
 
91

 
77

Accounts receivable
 
56

 
71

Inventories
 
22

 
25

Other
 
8

 
10

 
 
177

 
183

Plant, Property and Equipment
 
3,552

 
3,685

Equity Investments
 
923

 
606

Goodwill
 
489

 
525

Intangible and Other Assets
 
—

 
1

 
 
5,141

 
5,000

LIABILITIES
 
 
 
 
Current Liabilities
 
 
 
 
Accounts payable and other
 
80

 
80

Accrued interest
 
30

 
21

Current portion of long-term debt
 
87

 
76

 
 
197

 
177

Regulatory Liabilities
 
33

 
34

Other Long-Term Liabilities
 
3

 
4

Deferred Income Tax Liabilities
 
13

 
7

Long-Term Debt
 
3,349

 
2,827

 
 
3,595

 
3,049



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Non-Consolidated VIEs
The Company’s non-consolidated VIEs consist of legal entities where the Company does not have the power to direct the activities that most significantly impact the economic performance of these entities or where this power is shared with third parties. The Company contributes capital to these VIEs and receives ownership interests that provide it with residual claims on assets after liabilities are paid.
The carrying value of these VIEs and the maximum exposure to loss as a result of the Company's involvement with these VIEs are as follows:
 
 
September 30,

 
December 31,

(unaudited - millions of Canadian $)
 
2017

 
2016

 
 
 
 
 
Balance sheet
 
 
 
 
Equity investments
 
4,409

 
4,964

Off-balance sheet
 
 
 
 
Potential exposure to guarantees
 
171

 
163

Maximum exposure to loss
 
4,580

 
5,127

17. Subsequent events
Energy East and Related Projects
On October 5, 2017, the Company concluded a review process of the Energy East, Eastern Mainline and Upland projects and informed the NEB that it will not proceed with the projects. At September 30, 2017, approximately
$1.3 billion related to these projects, including AFUDC, was recorded in Intangible and other assets on the Company's condensed consolidated balance sheet. Due to the project's inability to reach a regulatory decision, no recoveries of costs from third parties are expected, and the Company will record an approximate $1.0 billion after-tax non-cash impairment charge in fourth quarter 2017.
Common Share Issuance
On October 31, 2017, the Company issued 3.1 million common shares to TransCanada for proceeds of $189 million.