EX-13.2 3 a2145425zex-13_2.htm EXHIBIT 13.2
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Exhibit 13.2

Consolidated Income

 
   Three months ended September 30
   Nine months ended September 30
  
 
   2004
   2003
   2004
   2003
  
 
   (unaudited)
(millions of dollars except per share amounts)
  
Revenues     1,224     1,391     3,713     4,038  

Operating Expenses
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of sales     116     164     395     533  
Other costs and expenses     395     439     1,169     1,248  
Depreciation     236     260     700     692  
   
 
 
 
 
      747     863     2,264     2,473  
   
 
 
 
 
Operating Income     477     528     1,449     1,565  

Other Expenses/(Income)
 
 
 
 
 
 
 
 
 
 
 
 
 
Financial charges     208     210     601     619  
Financial charges of joint ventures     15     18     45     63  
Equity income     (39 )   (67 )   (156 )   (151 )
Interest and other income     (34 )   (9 )   (65 )   (44 )
Gains related to Power LP     —     —     (197 )   —  
   
 
 
 
 
      150     152     228     487  
   
 
 
 
 

Income from Continuing Operations before Income Taxes and Non-Controlling Interests
 
 
327
 
 
376
 
 
1,221
 
 
1,078
 

Income Taxes
 
 
 
 
 
 
 
 
 
 
 
 
 
Current     104     43     342     179  
Future     17     121     38     248  
   
 
 
 
 
      121     164     380     427  
   
 
 
 
 

Non-Controlling Interests
 
 
 
 
 
 
 
 
 
 
 
 
 
Preferred securities charges     7     8     23     26  
Preferred share dividends     6     6     17     17  
Other     —     —     6     —  
   
 
 
 
 
Net Income from Continuing Operations     193     198     795     608  
Net Income from Discontinued Operations     52     50     52     50  
   
 
 
 
 
Net Income     245     248     847     658  
   
 
 
 
 

Net Income Per Share
 
 
 
 
 
 
 
 
 
 
 
 
 
Continuing operations   $ 0.40   $ 0.41   $ 1.64   $ 1.26  
Discontinued operations     0.11     0.10     0.11     0.10  
   
 
 
 
 
Basic   $ 0.51   $ 0.51   $ 1.75   $ 1.36  
   
 
 
 
 
Diluted   $ 0.50   $ 0.51   $ 1.74   $ 1.36  
   
 
 
 
 
Average Shares Outstanding — Basic (millions)     484.4     482.1     484.0     481.1  
   
 
 
 
 
Average Shares Outstanding — Diluted (millions)     486.9     484.4     486.5     483.2  
   
 
 
 
 

See accompanying Notes to the Consolidated Financial Statements.

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Consolidated Cash Flows

 
   Three months ended September 30
   Nine months ended September 30
  
 
   2004
   2003
   2004
   2003
  
 
   (unaudited)
(millions of dollars except per share amounts)
  
Cash Generated From Operations                  
Net income from continuing operations   193   198   795   608  
Depreciation   236   260   700   692  
Future income taxes   17   121   38   248  
Gains related to Power LP   —   —   (197 ) —  
Equity income in excess of distributions received   (29 ) (66 ) (119 ) (125 )
Non-controlling interests   13   14   46   43  
Other   (36 ) (11 ) (56 ) (59 )
   
 
 
 
 
Funds generated from continuing operations   394   516   1,207   1,407  
Decrease in operating working capital   132   67   60   83  
   
 
 
 
 
Net cash provided by continuing operations   526   583   1,267   1,490  
Net cash provided by/(used in) discontinued operations   1   67   (9 ) (17 )
   
 
 
 
 
    527   650   1,258   1,473  
   
 
 
 
 

Investing Activities
 
 
 
 
 
 
 
 
 
Capital expenditures   (97 ) (81 ) (291 ) (264 )
Acquisitions, net of cash acquired   (49 ) (135 ) (63 ) (547 )
Disposition of assets   —   —   408   —  
Deferred amounts and other   (12 ) (165 ) (26 ) (196 )
   
 
 
 
 
Net cash (used in)/provided by investing activities   (158 ) (381 ) 28   (1,007 )
   
 
 
 
 

Financing Activities
 
 
 
 
 
 
 
 
 
Dividends and preferred securities charges   (159 ) (150 ) (465 ) (438 )
Notes payable (repaid)/issued, net   (66 ) 361   (367 ) 279  
Long-term debt issued   —   —   665   475  
Reduction of long-term debt   (9 ) (327 ) (510 ) (386 )
Non-recourse debt of joint ventures issued   60   14   147   60  
Reduction of non-recourse debt of joint ventures   (8 ) (7 ) (20 ) (55 )
Partnership units of joint ventures issued   —   —   88   —  
Redemption of junior subordinated debentures   —   (218 ) —   (218 )
Common shares issued   8   11   25   49  
   
 
 
 
 
Net cash used in financing activities   (174 ) (316 ) (437 ) (234 )
   
 
 
 
 

Effect of Foreign Exchange Rate Changes on Cash and
 
 
 
 
 
 
 
 
 
  Short-Term Investments   (58 ) (3 ) (55 ) (37 )
   
 
 
 
 
Increase/(Decrease) in Cash and Short-Term Investments   137   (50 ) 794   195  

Cash and Short-Term Investments
 
 
 
 
 
 
 
 
 
Beginning of period   995   457   338   212  
   
 
 
 
 

Cash and Short-Term Investments
 
 
 
 
 
 
 
 
 
End of period   1,132   407   1,132   407  
   
 
 
 
 

Supplementary Cash Flow Information
 
 
 
 
 
 
 
 
 
Income taxes paid   77   68   329   192  
Interest paid   193   186   586   618  
   
 
 
 
 

See accompanying Notes to the Consolidated Financial Statements.

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Consolidated Balance Sheet

 
   September 30,
2004
   December 31, 2003
  
 
   (unaudited)
    
  
 
   (millions of dollars)
  
ASSETS          

Current Assets
 
 
 
 
 
Cash and short-term investments   1,132   338  
Accounts receivable   516   605  
Inventories   167   165  
Other   122   88  
   
 
 
    1,937   1,196  
Long-Term Investments   846   733  
Plant, Property and Equipment   16,796   17,460  
Other Assets   1,286   1,164  
   
 
 
    20,865   20,553  
   
 
 

LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 
 
 

Current Liabilities
 
 
 
 
 
Notes payable   —   367  
Accounts payable   972   1,025  
Accrued interest   230   208  
Current portion of long-term debt   838   550  
Current portion of non-recourse debt of joint ventures   86   19  
   
 
 
    2,126   2,169  
Deferred Amounts   478   475  
Long-Term Debt   9,302   9,465  
Future Income Taxes   457   427  
Non-Recourse Debt of Joint Ventures   811   761  
Preferred Securities   19   22  
   
 
 
    13,193   13,319  
   
 
 

Non-Controlling Interests
 
 
 
 
 
Preferred securities of subsidiary   671   672  
Preferred shares of subsidiary   389   389  
Other   75   82  
   
 
 
    1,135   1,143  
   
 
 

Shareholders' Equity
 
 
 
 
 
Common shares   4,704   4,679  
Contributed surplus   269   267  
Retained earnings   1,610   1,185  
Foreign exchange adjustment   (46 ) (40 )
   
 
 
    6,537   6,091  
   
 
 
    20,865   20,553  
   
 
 

See accompanying Notes to the Consolidated Financial Statements.

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Consolidated Retained Earnings

 
   Nine months ended September 30
  
 
   2004
   2003
  
 
   (unaudited)
(millions of dollars)
  
Balance at beginning of period   1,185   854  
Net income   847   658  
Common share dividends   (422 ) (389 )
   
 
 
    1,610   1,123  
   
 
 

See accompanying Notes to the Consolidated Financial Statements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.     Significant Accounting Policies

        The consolidated financial statements of TransCanada Corporation (TransCanada or the company) have been prepared in accordance with Canadian generally accepted accounting principles (GAAP). The accounting policies applied are consistent with those outlined in TransCanada's annual financial statements for the year ended December 31, 2003 except as stated below. These consolidated financial statements reflect all normal recurring adjustments that are, in the opinion of management, necessary to present fairly the financial position and results of operations for the respective periods. These consolidated financial statements do not include all disclosures required in the annual financial statements and should be read in conjunction with the annual financial statements included in TransCanada's 2003 Annual Report. Amounts are stated in Canadian dollars unless otherwise indicated. Certain comparative figures have been reclassified to conform with the current period's presentation.

        Since a determination of many assets, liabilities, revenues and expenses is dependent upon future events, the preparation of these consolidated financial statements requires the use of estimates and assumptions. In the opinion of Management, these consolidated financial statements have been properly prepared within reasonable limits of materiality and within the framework of the company's significant accounting policies.

2.     Accounting Changes

Asset Retirement Obligations

        Effective January 1, 2004, the company adopted the new standard of the Canadian Institute of Chartered Accountants (CICA) Handbook Section "Asset Retirement Obligations", which addresses financial accounting and reporting for obligations associated with asset retirement costs. This section requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The fair value is added to the carrying amount of the associated asset. The liability is accreted at the end of each period through charges to operating expenses. This accounting change was applied retroactively with restatement of prior periods.

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        The plant, property and equipment of the regulated natural gas transmission operations consist primarily of underground pipelines and above ground compression equipment and other facilities. No amount has been recorded for asset retirement obligations relating to these assets as it is not possible to make a reasonable estimate of the fair value of the liability due to the indeterminate timing and scope of the asset retirements. Management believes it is reasonable to assume that all retirement costs associated with the regulated pipelines will be recovered through tolls in future periods.

        The impact of this accounting change resulted in an increase of $2 million in the estimated fair value of the liability for TransCanada's Other Gas Transmission assets as at January 1, 2003 and December 31, 2003. The estimated fair value of this liability as at September 30, 2004 was $11 million.

        The plant, property and equipment in the Power business consists primarily of power plants in Canada and the United States. The impact of this accounting change resulted in an increase of $6 million and $7 million in the estimated fair value of the liability for the power plants and associated assets as at January 1, 2003 and December 31, 2003, respectively. The asset retirement cost, net of accumulated depreciation that would have been recorded if the cost had been recorded in the period in which it arose, is recorded as an additional cost of the assets as at January 1, 2003. The estimated fair value of the liability as at September 30, 2004 was $23 million. The company has no legal liability for asset retirement obligations with respect to its investment in Bruce Power and the Sundance A and B power purchase arrangements.

        The impact of this change on TransCanada's net income in prior periods was nil while the impact of this change in the three and nine months ended September 30, 2004 was nil and approximately $1 million, respectively.

Hedging Relationships

        Effective January 1, 2004, the company adopted the provisions of the CICA's new Accounting Guideline "Hedging Relationships" that specifies the circumstances in which hedge accounting is appropriate, including the identification, documentation, designation and effectiveness of hedges, and the discontinuance of hedge accounting. In accordance with the provisions of this new guideline, TransCanada has recorded all derivatives on the Consolidated Balance Sheet at fair value.

        This new guideline was applied prospectively and resulted in a decrease in net income of $2 million and nil for the three and nine months ended September 30, 2004, respectively. The significant impact of the accounting change on the Consolidated Balance Sheet as at January 1, 2004 is as follows.

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   Increase/(Decrease)
  
 
   (unaudited — millions of dollars)
  
Current Assets      
  Other   8  
Other Assets   123  
   
 
Total Assets   131  
   
 
Current Liabilities      
  Accounts Payable   8  
Deferred Amounts   132  
Long-Term Debt   (7 )
Future Income Taxes   (1 )
   
 
Total Liabilities   132  
   
 

Generally Accepted Accounting Principles

        Effective January 1, 2004, the company adopted the new standard of the CICA Handbook Section "Generally Accepted Accounting Principles" that defines primary sources of GAAP and the other sources that need to be considered in the application of GAAP. The new standard eliminates the ability to rely on industry practice to support a particular accounting policy.

        This accounting change was applied prospectively and there was no impact on net income in the three and nine months ended September 30, 2004. In prior periods, in accordance with industry practice, certain assets and liabilities related to the company's regulated activities, and offsetting deferral accounts, were not recognized on the balance sheet. The impact of the change on the consolidated balance sheet as at January 1, 2004 is as follows.

 
   Increase/(Decrease)
  
 
   (unaudited — millions of dollars)
  
Other Assets   153  
   
 
Deferred Amounts   80  
Long-Term Debt   76  
Preferred Securities   (3 )
   
 
Total Liabilities   153  
   
 

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3.     Segmented Information

 
   Three months ended September 30
  
 
   Gas Transmission
   Power
   Corporate
   Total
  
 
   2004
   2003
   2004
   2003
   2004
   2003
   2004
   2003
  
 
   (unaudited — millions of dollars)
  
Revenues   945   1,070   279   321   —   —   1,224   1,391  
Cost of sales   —   —   (116 ) (164 ) —   —   (116 ) (164 )
Other costs and expenses   (293 ) (339 ) (102 ) (99 ) —   (1 ) (395 ) (439 )
Depreciation   (218 ) (240 ) (18 ) (19 ) —   (1 ) (236 ) (260 )
   
 
 
 
 
 
 
 
 
Operating income/(loss)   434   491   43   39   —   (2 ) 477   528  
Financial charges and non-controlling interests   (193 ) (198 ) (3 ) (2 ) (25 ) (24 ) (221 ) (224 )
Financial charges of joint ventures   (14 ) (18 ) (1 ) —   —   —   (15 ) (18 )
Equity income   10   29   29   38   —   —   39   67  
Interest and other income   1   3   6   2   27   4   34   9  
Income taxes   (104 ) (147 ) (23 ) (27 ) 6   10   (121 ) (164 )
   
 
 
 
 
 
 
 
 
  Continuing Operations   134   160   51   50   8   (12 ) 193   198  
   
 
 
 
 
 
         
  Discontinued Operations                           52   50  
                           
 
 
Net Income                           245   248  
                           
 
 
 
   Nine months ended September 30
  
 
   Gas Transmission
   Power
   Corporate
   Total
  
 
   2004
   2003
   2004
   2003
   2004
   2003
   2004
   2003
  
 
   (unaudited — millions of dollars)
  
Revenues   2,842   2,974   871   1,064   —   —   3,713   4,038  
Cost of sales   —   —   (395 ) (533 ) —   —   (395 ) (533 )
Other costs and expenses   (876 ) (944 ) (290 ) (299 ) (3 ) (5 ) (1,169 ) (1,248 )
Depreciation   (645 ) (629 ) (55 ) (62 ) —   (1 ) (700 ) (692 )
   
 
 
 
 
 
 
 
 
Operating income/(loss)   1,321   1,401   131   170   (3 ) (6 ) 1,449   1,565  
Financial charges and non-controlling interests   (574 ) (588 ) (7 ) (7 ) (66 ) (67 ) (647 ) (662 )
Financial charges of joint ventures   (43 ) (62 ) (2 ) (1 ) —   —   (45 ) (63 )
Equity income   31   59   125   92   —   —   156   151  
Interest and other income   13   11   11   10   41   23   65   44  
Gains related to Power LP   —   —   197   —   —   —   197   —  
Income taxes   (319 ) (359 ) (90 ) (88 ) 29   20   (380 ) (427 )
   
 
 
 
 
 
 
 
 
  Continuing Operations   429   462   365   176   1   (30 ) 795   608  
   
 
 
 
 
 
         
  Discontinued Operations                           52   50  
                           
 
 
Net Income                           847   658  
                           
 
 

Total Assets

 
   September 30, 2004
   December 31, 2003
 
   (unaudited)
    
 
   (millions of dollars)
Gas Transmission   16,356   16,974
Power   2,696   2,753
Corporate   1,803   815
   
 
Continuing Operations   20,855   20,542
Discontinued Operations   10   11
   
 
    20,865   20,553
   
 

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4.     Risk Management and Financial Instruments

        The following represents the material changes to the company's risk management and financial instruments since December 31, 2003 and reflects the impacts of the hedge accounting changes adopted prospectively, effective January 1, 2004, as further discussed under Note 2, Accounting Changes — Hedging Relationships.

Foreign Exchange and Interest Rate Management Activity

        The company manages certain foreign exchange risks of U.S. dollar debt and interest rate exposures of the Alberta System, the Canadian Mainline and the Foothills System through the use of foreign currency and interest rate derivatives. These derivatives are comprised of contracts for periods up to eight years. Certain of the realized gains and losses on interest rate derivatives are shared with shippers on predetermined terms.

 
   September 30, 2004
   December 31, 2003
  
 
   Carrying Amount
   Fair Value
   Carrying Amount
   Fair Value
  
 
   (unaudited)
    
    
  
 
   (millions of dollars)
  
Asset/(Liability)                  
Foreign Exchange                  
Cross-currency swaps   (33 ) (33 ) (26 ) (26 )

Interest Rate
 
 
 
 
 
 
 
 
 
Interest rate swaps                  
  Canadian dollars   16   16   2   15  
  U.S. dollars   8   8   —   8  
   
 
 
 
 

        At September 30, 2004, the principal amount of cross-currency swaps was US$282 million (December 31, 2003 — US$282 million). In addition, at September 30, 2004, the company has associated interest rate swaps with cross-currency swaps with notional principal amounts of $210 million (December 31, 2003 — $210 million) and US$162 million (December 31, 2003 — US$162 million). Notional principal amounts for interest rate swaps were $569 million (December 31, 2003 — $964 million) and US$100 million (December 31, 2003 — US$100 million).

        The company manages the foreign exchange risk and interest rate exposures of its other U.S. dollar debt through the use of foreign currency and interest rate derivatives. These derivatives are comprised of contracts for periods up to nine years. The fair values of the interest rate derivatives are shown in the table below.

 
   September 30, 2004
   December 31, 2003
  
 
   Carrying Amount
   Fair Value
   Carrying Amount
   Fair Value
  
 
   (unaudited)
    
    
  
 
   (millions of dollars)
  
Asset/(Liability)                  
Interest Rate                  
Interest rate swaps                  
  Canadian dollars   (4 ) (4 ) 1   (3 )
  U.S. dollars   34   34   2   37  

Foreign Exchange
 
 
 
 
 
 
 
 
 
Forward Foreign Exchange Contracts                  
  U.S. dollars   (7 ) (6 ) —   1  
   
 
 
 
 

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        At September 30, 2004, the notional principal amounts for interest rate swaps were $225 million (December 31, 2003 — $150 million) and US$450 million (December 31, 2003 — US$450 million). The principal amount of forward foreign exchange contracts was US$148 million (December 31, 2003 — US$19 million).

5.     Power LP

        On April 30, 2004, TransCanada sold the ManChief and Curtis Palmer power facilities for US$402.6 million, before closing adjustments, to TransCanada Power, L.P. (Power LP) and recognized a gain of $15 million after tax. Power LP funded the purchase through an issue of 8.1 million subscription receipts, which closed April 15, 2004, and third party debt. As part of the subscription receipts offering, TransCanada purchased 540,000 subscription receipts for an aggregate purchase price of approximately $20 million. The subscription receipts were subsequently converted into partnership units. The net impact of this issue reduced TransCanada's ownership interest in Power LP from 35.6 per cent to 30.6 per cent.

        At a special meeting held on April 29, 2004, Power LP's unitholders approved an amendment to the terms of the Power LP Partnership Agreement to remove Power LP's obligation to redeem all units not owned by TransCanada at June 30, 2017. TransCanada was required to fund this redemption, thus the removal of Power LP's obligation eliminates this requirement. The removal of the obligation and the reduction in TransCanada's ownership interest in Power LP resulted in a gain of $172 million. This amount primarily reflects the recognition of unamortized gains on previous Power LP transactions.

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6.     Employee Future Benefits

        The net benefit plan expense for the company's defined benefit pension plans and other post-employment benefit plans for the three and nine months ended September 30 is as follows.

 
   Three months ended September 30
 
   Pension Benefit Plans
   Other Benefit Plans
 
   2004
   2003
   2004
   2003
 
   (unaudited — millions of dollars)
Current service cost   7   6   1   —
Interest cost   14   13   1   1
Expected return on plan assets   (14 ) (13 ) —   —
Amortization of transitional obligation related to regulated business   —   —   1   1
Amortization of net actuarial loss   3   2   1   —
Amortization of past service costs   1   1   —   1
   
 
 
 
Net benefit cost recognized   11   9   4   3
   
 
 
 

 
 
Nine months ended September 30
 
   Pension Benefit Plans
   Other Benefit Plans
 
   2004
   2003
   2004
   2003
 
   (unaudited — millions of dollars)
Current service cost   21   19   2   1
Interest cost   42   39   4   4
Expected return on plan assets   (41 ) (39 ) —   —
Amortization of transitional obligation related to regulated business   —   —   2   2
Amortization of net actuarial loss   9   6   2   1
Amortization of past service costs   2   2   —   1
   
 
 
 
Net benefit cost recognized   33   27   10   9
   
 
 
 

7.     Long-Term Debt

        In September 2004, TransCanada announced it will exercise its right to redeem all of its outstanding US$200 million 8.50 per cent Debentures due 2023 on November 1, 2004. Holders of the Debentures will be entitled to US$1,042.7806 per US$1,000 principal amount. This amount includes US$33.10 representing the redemption premium and US$9.6806 representing accrued and unpaid interest to the redemption date.

        In October 2004, the company issued US$300 million of ten year senior unsecured notes bearing interest at 4.875 per cent, thereby fully utilizing the remainder of the debt shelf program in the U.S. At September 30, 2004, $1.35 billion of debt securities could be issued under a debt shelf program in Canada. The company expects to renew the debt shelf programs in the U.S. and Canada in fourth quarter 2004.

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8.     Diluted Net Income Per Share

        Diluted net income per share for the three and nine months ended September 30, 2004 consists of continuing operations — $0.39 per share and $1.63 per share (2003 — $0.41 per share and $1.26 per share), respectively, and discontinued operations — $0.11 per share and $0.11 per share (2003 — $0.10 per share and $0.10 per share), respectively.

9.     Discontinued Operations

        The Board of Directors approved a plan in July 2001 to dispose of the company's Gas Marketing business. The company's exit from Gas Marketing was substantially completed by December 31, 2001. At September 30, 2004, TransCanada reviewed the provision for loss on discontinued operations and the remaining deferred gain with respect to the divested Gas Marketing business. As a result of this review, it was determined that TransCanada's contingent liability pursuant to guarantees and obligations under certain contracts related to the divested Gas Marketing business had decreased and, accordingly, the remaining $52 million after-tax deferred gain was recognized in income in third quarter 2004. In addition, TransCanada concluded that the remaining provision for loss on discontinued operations was adequate.

        Net income from discontinued operations was $52 million, net of $27 million in taxes, for the three and nine months ended September 30, 2004 compared to $50 million, net of $29 million in taxes, for the same periods in 2003. The provision for loss on discontinued operations at September 30, 2004 was $47 million (December 31, 2003 — $41 million). The provision for loss on discontinued operations is included in Accounts Payable.

10.   Acquisition of Gas Transmission Northwest Corporation

        On February 24, 2004, TransCanada announced an agreement to acquire Gas Transmission Northwest Corporation (GTN) from National Energy & Gas Transmission Inc. (NEGT) for approximately US$1.7 billion, including US$0.5 billion of assumed debt and subject to closing adjustments. GTN is a natural gas pipeline company that owns and operates two pipeline systems. TransCanada has satisfied its pre-closing conditions under the purchase agreement and is awaiting the implementation of NEGT's plan of reorganization, which is the only remaining material closing condition in the transaction. The purchase is expected to close in fourth quarter 2004.

TransCanada welcomes questions from shareholders and potential investors. Please telephone:

Investor Relations, at 1-800-361-6522 (Canada and U.S. Mainland) or direct dial David Moneta/Debbie Stein at (403) 920-7911. The investor fax line is (403) 920-2457. Media Relations: Hejdi Feick/Kurt Kadatz at (403) 920-7859

Visit TransCanada's Internet site at: http://www.transcanada.com

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)