-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IHO0AfLcfxHpYFkSS0a6KITRMBi5esZA+lGJ1IxyzjUtFIxkw1CJDzMJnZT/txur +I9x6iAtYxVSOiCvkcLzaA== 0001047469-03-025541.txt : 20030730 0001047469-03-025541.hdr.sgml : 20030730 20030730145544 ACCESSION NUMBER: 0001047469-03-025541 CONFORMED SUBMISSION TYPE: 6-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 20030730 FILED AS OF DATE: 20030730 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TRANSCANADA PIPELINES LTD CENTRAL INDEX KEY: 0000099070 STANDARD INDUSTRIAL CLASSIFICATION: NATURAL GAS TRANSMISSION [4922] IRS NUMBER: 522179728 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 6-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-08887 FILM NUMBER: 03811268 BUSINESS ADDRESS: STREET 1: 450 I STREET SW STREET 2: P O BOX 1000 STATION M CITY: CALGARY ALBERTA STATE: A0 ZIP: T2P 5H1 BUSINESS PHONE: 4039207669 MAIL ADDRESS: STREET 1: 450 I STREET SW CITY: CALGARY ALBERTA STATE: A0 ZIP: T2P 5H1 6-K 1 a2115536z6-k.txt FORM 6-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 6-K REPORT OF FOREIGN PRIVATE ISSUER PURSUANT TO RULE 13a-16 OR 15d-16 OF THE SECURITIES EXCHANGE ACT OF 1934 For the month of July 2003 COMMISSION FILE No. 1-8887 TRANSCANADA PIPELINES LIMITED (TRANSLATION OF REGISTRANT'S NAME INTO ENGLISH) 450 - 1 STREET S.W., CALGARY, ALBERTA, T2P 5H1, CANADA (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F) Form 20-F Form 40-F X ----- ----- (Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.) Yes No X ----- ----- I The documents listed below in this Section and in the Exhibit Index to this Form 6-K are hereby filed with the Securities and Exchange Commission for the purpose of being (and hereby are) incorporated by reference in the Registration Statement on Form F-9 under the Securities Act of 1933 (Reg. No. 333-101140) of TransCanada PipeLines Limited. 1 Management's Discussion and Analysis of Financial Condition and Results of Operations of the registrant as at and for the period ended June 30, 2003. 2 Consolidated comparative interim unaudited financial statements of the registrant for the period ended June 30, 2003 (included in the registrant's Second Quarter 2003 Report to Shareholders). 3 Schedule of earnings coverage calculations at June 30, 2003. 4 U.S. GAAP reconciliation of the consolidated comparative interim unaudited financial statements of the registrant contained in the registrant's Second Quarter 2003 Report to Shareholders. II The document listed below in this Section and in the Exhibit Index to this Form 6-K is hereby filed with the Securities and Exchange Commission. 5 Comfort letter of KPMG LLP dated July 30, 2003. 2 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. TRANSCANADA PIPELINES LIMITED By: "Russell K. Girling" -------------------------------------- Russell K. Girling Executive Vice-President, Corporate Development and Chief Financial Officer By: "Lee G. Hobbs" -------------------------------------- Lee G. Hobbs Controller July 30, 2003 3 EXHIBIT INDEX 1 Management's Discussion and Analysis of Financial Condition and Results of Operations of the registrant as at and for the period ended June 30, 2003. 2 Consolidated comparative interim unaudited financial statements of the registrant for the period ended June 30, 2003 (included in the registrant's Second Quarter 2003 Report to Shareholders). 3 Schedule of earnings coverage calculations at June 30, 2003. 4 U.S. GAAP reconciliation of the consolidated comparative interim unaudited financial statements of the registrant contained in the registrant's Second Quarter 2003 Report to Shareholders. 5 Comfort letter of KPMG LLP dated July 30, 2003. 6 Certification of Chief Executive Officer regarding Periodic Report containing Financial Statements. 7 Certification of Chief Financial Officer regarding Periodic Report containing Financial Statements. 8 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act. 9 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act. 4 EX-1 3 a2115536zex-1.txt EXHIBIT 1 EXHIBIT 1 [TRANSCANADA LOGO] K TRANSCANADA PIPELINES LIMITED - -------------------------------------------------------------------------------- SECOND QUARTER 2003 Quarterly Report CONSOLIDATED RESULTS-AT-A-GLANCE
(unaudited) Three months ended June 30 Six months ended June 30 (millions of dollars) 2003 2002 2003 2002 - ------------------------------------------------------------------- ----------------- ---------------- ---------------- NET INCOME APPLICABLE TO COMMON SHARES 202 205 410 392 ----------------- ----------------- ---------------- ---------------- ----------------- ----------------- ---------------- ----------------
MANAGEMENT'S DISCUSSION AND ANALYSIS The following discussion and analysis should be read in conjunction with the accompanying unaudited consolidated financial statements of TransCanada PipeLines Limited (TCPL or the company) for the six months ended June 30, 2003 and the notes thereto. The company's plan of arrangement to establish TransCanada Corporation (TransCanada) as the parent company of TCPL became effective on May 15, 2003. Common shareholders of TCPL automatically became common shareholders of TransCanada with each TCPL common share being automatically exchanged for one TransCanada common share. The establishment of TransCanada has no impact on TCPL's day to day operations, services or obligations. The assets and liabilities of TCPL remain with TCPL. Debt holders and preferred shareholders of TCPL continue to hold these securities in TCPL. TransCanada owns all of the outstanding common shares of TCPL. SECOND QUARTER REPORT 2003 TCPL - 2 RESULTS OF OPERATIONS CONSOLIDATED TCPL's net income applicable to common shares for the six months ended June 30, 2003 was $410 million compared to $392 million for the comparable period in 2002. The increase of $18 million in the first six months of 2003 compared to the same period in 2002 was primarily due to higher earnings from the Power business and lower net expenses in the Corporate segment, partially offset by lower earnings from the Transmission segment. The Power segment earnings for the six months ended June 30, 2003 included $40 million after tax related to TCPL's earnings from its investment in Bruce Power L.P. (Bruce) which was acquired in February 2003 and a $19 million positive after-tax earnings impact of a June 2003 settlement with a former counterparty which defaulted in 2001 under power forward contracts. This amount represents the value of power forward contracts terminated at the time of default. The lower earnings in the Transmission segment were primarily due to the decline in the Alberta System's 2003 net earnings reflecting the one-year fixed revenue requirement settlement reached between TCPL and its stakeholders in February 2003. In June 2002, TCPL received the National Energy Board (NEB) decision on its Fair Return application (Fair Return decision) to determine the cost of capital to be included in the calculation of 2001 and 2002 final tolls on its Canadian Mainline. The results for the six months ending June 30, 2002 included after-tax income of $25 million representing the impact of the Fair Return decision for 2001 ($16 million) and six months ending June 30, 2002 ($9 million). The results for the six months ending June 30, 2002 also included TCPL's $7 million share of a favourable ruling for Great Lakes related to Minnesota use tax paid in prior years. TCPL's net income applicable to common shares for second quarter 2003 was $202 million compared to $205 million for second quarter 2002. Second quarter 2003 results included $13 million after tax of TCPL's share of earnings from Bruce and the $19 million after tax settlement with a former counterparty. Second quarter 2002 results include $25 million of net income for the period January 1, 2001 to June 30, 2002 related to the Fair Return decision. Funds generated from operations of $891 million for the six months ended June 30, 2003 were consistent with the same period in the prior year. SECOND QUARTER REPORT 2003 TCPL - 3 SEGMENT RESULTS-AT-A-GLANCE
(unaudited) Three months ended June 30 Six months ended June 30 (millions of dollars) 2003 2002 2003 2002 - --------------------------------------------------------------- ------------- -------------- ------------- Transmission 144 174 302 337 Power 63 40 126 81 Corporate (5) (9) (18) (26) ------------- ------------- -------------- ------------- NET INCOME APPLICABLE TO COMMON SHARES 202 205 410 392 ------------- ------------- -------------- ------------- ------------- ------------- -------------- -------------
TRANSMISSION The Transmission business generated net earnings of $144 million and $302 million for the three and six months ended June 30, 2003, respectively, compared to $174 million and $337 million for the same periods in 2002. TRANSMISSION RESULTS-AT-A-GLANCE
(unaudited) Three months ended June 30 Six months ended June 30 (millions of dollars) 2003 2002 2003 2002 - --------------------------------------------------------------- ------------- -------------- ------------- WHOLLY-OWNED PIPELINES Alberta System 44 52 86 102 Canadian Mainline 71 92 142 160 BC System 2 1 4 3 ------------- ------------- -------------- ------------- 117 145 232 265 ------------- ------------- -------------- ------------- NORTH AMERICAN PIPELINE VENTURES Great Lakes 11 14 28 36 TC PipeLines, LP 4 4 7 8 Iroquois 4 6 11 11 Portland - 1 7 2 Foothills 5 4 9 9 Trans Quebec & Maritimes 2 2 4 4 CrossAlta 1 2 4 7 Northern Development - (1) (1) (2) Other - (3) 1 (3) ------------- ------------- -------------- ------------- 27 29 70 72 ------------- ------------- -------------- ------------- Net earnings 144 174 302 337 ------------- ------------- -------------- ------------- ------------- ------------- -------------- -------------
SECOND QUARTER REPORT 2003 TCPL - 4 WHOLLY-OWNED PIPELINES The Alberta System's net earnings of $44 million in second quarter 2003 decreased $8 million compared to $52 million in the same quarter of 2002. Net earnings for the six months ended June 30, 2003 decreased $16 million compared to the same period in 2002. The decrease is primarily due to lower earnings from the one-year 2003 Alberta System Revenue Requirement Settlement (the 2003 Settlement) reached in February 2003. The 2003 Settlement includes a fixed revenue requirement component, before non-routine adjustments, of $1.277 billion compared to $1.347 billion in 2002. The Alberta System's annual net earnings in 2003 are expected to be lower by approximately $40 million compared to annual 2002 net earnings of $214 million. The Canadian Mainline's net earnings have decreased $21 million and $18 million for the three and six months ended June 30, 2003, respectively, when compared to the corresponding periods in 2002. The decrease in 2003 net earnings as compared to the 2002 net earnings is mainly due to the NEB's Fair Return decision, which included an increase in the deemed common equity ratio from 30 to 33 per cent effective January 1, 2001 and resulted in recognition in June 2002 of $16 million of net earnings for the year ended December 31, 2001. Earnings in 2003 also reflect an increase in the approved rate of return on common equity from 9.53 per cent in 2002 to 9.79 per cent in 2003, partially offset by a lower average investment base. The NEB hearing to consider the Canadian Mainline 2003 Tolls and Tariff Application concluded in May 2003. In this application, TCPL requested approval of a higher composite depreciation rate, introduction of a new tolling zone in Southwestern Ontario, an increase to the Interruptible Transportation bid floor price, and certain cost/efficiency incentive mechanisms. The NEB decision is anticipated in the third quarter of 2003.
OPERATING STATISTICS Alberta Canadian BC Six months ended June 30 (unaudited) System* Mainline** System - ---------------------------------------------------------------------- ------------------- ------------------ 2003 2002 2003 2002 2003 2002 ------------------- ------------------- ------------------ Average investment base ($ millions) 4,938 5,074 8,659 8,937 238 199 Delivery volumes (Bcf) Total 1,971 2,054 1,419 1,303 126 181 Average per day 10.9 11.3 7.8 7.2 0.7 1.0 - -------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------
* Field receipt volumes for the Alberta System for the six months ended June 30, 2003 were 1,937 Bcf (2002 - 2,049 Bcf); average per day was 10.7 Bcf (2002 - 11.3 Bcf). ** Canadian Mainline deliveries originating at the Alberta border and in Saskatchewan for the six months ended June 30, 2003 were 1,093 Bcf (2002 - 1,101 Bcf); average per day was 6.0 Bcf (2002 - 6.1 Bcf). SECOND QUARTER REPORT 2003 TCPL - 5 NORTH AMERICAN PIPELINE VENTURES TCPL's proportionate share of net earnings from its other Transmission businesses was $27 million and $70 million for the three and six months ended June 30, 2003, respectively. Net earnings were $2 million lower for each of the second quarter 2003 and six months ended June 30, 2003 compared to the same periods in 2002. Earnings for second quarter 2003 were slightly lower than the same quarter in 2002 as a result of a weaker U.S. dollar and higher operating costs in Great Lakes, partially offset by higher earnings from TransGas de Occidente which is reported in Other. The 2002 year-to-date results included TCPL's $7 million share of a favourable ruling for Great Lakes related to Minnesota use tax paid in prior years. Excluding the impact of the Great Lakes ruling in 2002, net earnings for the six months ended June 30, 2003 increased $5 million compared to the same period in 2002. Portland's net earnings have increased $5 million for the six months ended June 30, 2003 compared to the same period in 2002, primarily as a result of a rate settlement in early 2003 and a subsequent positive depreciation adjustment related to 2002 and recorded by TCPL in 2003. These increased earnings were partially offset by lower earnings from CrossAlta and a weaker U.S. dollar. SECOND QUARTER REPORT 2003 TCPL - 6 POWER POWER RESULTS-AT-A-GLANCE
(unaudited) Three months ended June 30 Six months ended June 30 (millions of dollars) 2003 2002 2003 2002 - -------------------------------------------------------------------- ------------- -------------- ------------- Western operations 60 27 103 61 Northeastern U.S. operations 36 46 61 87 Bruce Power L.P. investment 16 - 54 - Power LP investment 7 8 18 18 General, administrative and support costs (22) (14) (43) (31) ------------- ------------- -------------- ------------- Operating and other income 97 67 193 135 Financial charges (4) (3) (6) (6) Income taxes (30) (24) (61) (48) ------------- ------------- -------------- ------------- Net earnings 63 40 126 81 ------------- ------------- -------------- ------------- ------------- ------------- -------------- -------------
Power's net earnings of $63 million in second quarter 2003 increased $23 million compared to $40 million in second quarter 2002. Net earnings of $126 million for the six months ended June 30, 2003 were $45 million higher when compared to the same period in 2002. Strong earnings from the recently acquired interest in Bruce, a settlement in Western Operations for the value of power forward contracts terminated with a former counterparty and the addition of the ManChief plant in late 2002 were the primary reasons for the increases. Partially offsetting these increases were lower earnings from the Northeastern U.S. Operations and higher general, administrative and support costs. Operating and other income from Western Operations of $60 million and $103 million for the three and six months ended June 30, 2003 was $33 million and $42 million higher, respectively, compared to the same periods in 2002. The increase was mainly due to a $31 million pre-tax ($19 million after tax) positive earnings impact related to a June 2003 settlement with a former counterparty. This amount reflects the settlement value of the outstanding power forward contracts that were entered into in the normal course of business, but were terminated by TCPL as a result of a former counterparty defaulting in 2001 under power forward contracts. The ManChief acquisition in 2002 also contributed to higher operating income. Operating and other income from the Northeastern U.S. Operations of $36 million and $61 million for the three and six months ended June 30, 2003, decreased $10 million and $26 million, respectively, compared to the same periods in 2002. The decreases were primarily due to the higher cost of fuel gas at Ocean State Power, fewer market opportunities in the first half of 2003 than in 2002 and the unfavourable impact of a weaker U.S. dollar. SECOND QUARTER REPORT 2003 TCPL - 7 Bruce contributed $16 million of pre-tax equity income in second quarter 2003 compared to $38 million in the first quarter 2003. The decrease reflected lower output as a result of a planned maintenance outage on one of the four Bruce B reactors and seasonally lower wholesale spot market prices. Overall prices achieved during the second quarter were $45 per megawatt hour (MWh) compared to $63 per MWh in the last six weeks in first quarter 2003. A Bruce B unit reactor returned to service slightly ahead of schedule on June 26, 2003 while the remaining three Bruce B reactors ran at 100 per cent availability during the second quarter 2003. TCPL's share of power output for the second quarter 2003 was 1,681 gigawatt hours (GWh) compared to 1,087 GWh for the six week period ended March 31, 2003. Excluding the planned outage of the Bruce B unit in second quarter 2003, the Bruce B units have operated at 100 per cent availability during the entire first half of 2003, the best performance in the plant's history. Approximately 38 per cent of the output was sold into Ontario's wholesale spot market with the remainder being sold under longer term contracts. The restart of the two Bruce A units has been delayed primarily as a result of additional safety modifications, documentation and testing necessary to meet Canadian Nuclear Safety Commission (CNSC) requirements. Once CNSC approval has been received on the first unit, the reactor will slowly ramp up to full power and synchronize to the Ontario power grid. The second unit is expected to return approximately one month later. The cumulative restart cost increased by Bruce to the end of June 2003 for the two Bruce A units was approximately $610 million. Bruce has incurred approximately $235 million on the two unit restart program in the first six months of 2003, being an average of approximately $20 million per unit per month. TCPL has a 31.6 per cent interest in Bruce. Equity income from Bruce is directly impacted by fluctuations in wholesale spot market prices for electricity as well as overall plant availability, which in turn, is impacted by scheduled and unscheduled maintenance. To reduce its exposure to spot market prices, Bruce has entered into fixed price sales contracts for approximately 1,800 megawatts (MW) of output for the remainder of 2003. This represents approximately 57 per cent of the average 3,140 MW of Bruce B capacity or approximately 38 per cent of the total 4,678 MW capacity including two Bruce A reactors. Operating and other income from the investment in TransCanada Power, L.P. for the three and six months ended June 30, 2003 was consistent with the same periods in 2002. SECOND QUARTER REPORT 2003 TCPL - 8 General, administrative and support costs for the three and six months ended June 30, 2003 increased $8 million and $12 million, respectively, compared to the same periods in 2002, mainly reflecting higher project development costs as part of the continued investment in Power. POWER SALES VOLUMES*
(unaudited) Three months ended June 30 Six months ended June 30 (GWh) 2003 2002 2003 2002 - --------------------------------------------------------------------- ------------- ------------- ------------- Western operations 2,868 2,973 5,693 5,801 Northeastern U.S. operations 1,724 1,423 3,393 2,575 Bruce Power L.P. investment 1,681 - 2,768 - Power LP investment 457 557 1,022 1,128 ------------- ------------- ------------- ------------- Total 6,730 4,953 12,876 9,504 ------------- ------------- ------------- ------------- ------------- ------------- ------------- -------------
* Power sales volumes include TCPL's share of Bruce Power L.P. output (31.6 per cent) and the Sundance B power purchase arrangement (50 per cent).
WEIGHTED AVERAGE PLANT AVAILABILITY* Three months ended June 30 Six months ended June 30 (unaudited) 2003 2002 2003 2002 - --------------------------------------------------------------------- ------------- ------------- ------------- Western operations 92% 94% 94% 96% Northeastern U.S. operations 92% 99% 88% 99% Bruce Power L.P. investment 77% ** 84% ** Power LP investment 90% 92% 94% 93% All plants 86% 97% 89% 97% - ----------------------------------------------------------------------------------- ---------------------------
* Plant availability is reduced by planned and unplanned outages. ** Acquired in February 2003. CORPORATE Net expenses were $5 million and $9 million for the three months ended June 30, 2003 and 2002, respectively. This $4 million decrease in net expenses for second quarter 2003 is mainly due to the positive impact of foreign exchange rates. Net expenses were $18 million for the six months ended June 30, 2003 compared to $26 million for the same period in 2002. This $8 million decrease is primarily due to lower interest costs and the positive impact of foreign exchange rates compared to the same period in the prior year. 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. The company mitigated its exposure associated with the contingent liabilities related to the divested gas marketing operations by obtaining from Mirant Corporation (Mirant) certain remaining SECOND QUARTER REPORT 2003 TCPL - 9 contracts in June and early July 2003 and simultaneously fully hedging the market price exposures of these contracts. The company remains contingently liable for certain of the residual obligations. At June 30, 2003, TCPL reviewed the provision for loss on discontinued operations, taking into consideration the potential impacts arising from Mirant filing for bankruptcy protection in July 2003. As a result of this review, TCPL concluded that the provision was adequate, and the continued deferral of the approximately $100 million of deferred after-tax gains related to the Gas Marketing business was appropriate. Accordingly, there was no earnings impact related to discontinued operations in second quarter 2003. LIQUIDITY AND CAPITAL RESOURCES FUNDS GENERATED FROM OPERATIONS Funds generated from operations were $891 million for the six months ended June 30, 2003, compared with $893 million for the same period in 2002. Funds generated from operations of $434 million for second quarter 2003 were comparable to second quarter 2002. TCPL expects that its ability to generate sufficient amounts of cash in the short term and the long term when needed, and to maintain financial capacity and flexibility to provide for planned growth is adequate, and remains substantially unchanged since December 31, 2002. INVESTING ACTIVITIES In the three and six months ended June 30, 2003, capital expenditures, excluding acquisitions, totalled $107 million (2002 - $98 million) and $183 million (2002 - - $215 million), respectively, and related primarily to Iroquois' ongoing Eastchester Expansion project into New York City, maintenance and capacity capital in wholly-owned pipelines and ongoing construction of the MacKay River power plant in Alberta. Acquisitions for the six months ended June 30, 2003 totalled $412 million (2002 - nil) and were almost entirely comprised of the acquisition of a 31.6 per cent interest in Bruce for $376 million plus closing adjustments. FINANCING ACTIVITIES TCPL used a portion of its cash resources to fund long-term debt maturities of $59 million and reduce notes payable by $82 million SECOND QUARTER REPORT 2003 TCPL - 10 in the six months ended June 30, 2003. In June 2003, the company issued US$350 million of ten year notes bearing interest at 4.00 per cent. In July 2003, TCPL redeemed all of its outstanding US$160 million, 8.75 per cent Junior Subordinated Debentures, also known as Cumulative Trust Originated Preferred Securities. Holders of these debentures received US$25.0122 per US$25.00 of the principal amount, which included accrued and unpaid interest to the redemption date. DIVIDENDS On July 25, 2003, TCPL's Board of Directors declared an aggregate quarterly dividend of $130 million for the quarter ending September 30, 2003 on the outstanding common shares. This is the 159th consecutive quarterly dividend paid by TCPL on its common shares, and is payable on October 31, 2003. The Board also declared regular dividends on TCPL's preferred shares. RISK MANAGEMENT With respect to continuing operations, TCPL's market, financial and counterparty risks remain substantially unchanged since December 31, 2002. See explanation for discontinued operations' risk management activity under Results of Operations - Discontinued Operations. For further information on risks, refer to Management's Discussion and Analysis in TransCanada PipeLines Limited's 2002 Annual Report. The processes within TCPL's risk management function are designed to ensure that risks are properly identified, quantified, reported and managed. Risk management strategies, policies and limits are designed to ensure TCPL's risk-taking is consistent with its business objectives and risk tolerance. Risks are managed within limits ultimately established by the Board of Directors and implemented by senior management, monitored by risk management personnel and audited by internal audit personnel. TCPL manages market and financial risk exposures in accordance with its corporate market risk policy and position limits. The company's primary market risks result from volatility in commodity prices, interest rates and foreign currency exchange rates. TCPL's counterparty risk exposure results from the failure of a counterparty to meet its contractual financial obligations, and is managed in accordance with its corporate counterparty risk policy. SECOND QUARTER REPORT 2003 TCPL - 11 CONTROLS AND PROCEDURES Within 90 days prior to the filing of this quarterly report, TCPL's management evaluated the effectiveness of the design and operation of the company's disclosure controls and procedures (disclosure controls) and internal controls for financial reporting purposes (internal controls). Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that: o TCPL's disclosure controls are effective in ensuring that material information relating to TCPL is made known to management on a timely basis, and is included in this quarterly report; and o TCPL's internal controls are effective in providing assurance that the financial statements for this quarter are fairly presented in accordance with Canadian generally accepted accounting principles. To the best of these officers' knowledge and belief, there have been no significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date on which such evaluation was completed in connection with this quarterly report. CRITICAL ACCOUNTING POLICY TCPL's critical accounting policy, which remains unchanged since December 31, 2002, is the use of regulatory accounting for its regulated operations. For further information on this critical accounting policy, refer to Management's Discussion and Analysis in TransCanada PipeLines Limited's 2002 Annual Report. CRITICAL ACCOUNTING ESTIMATES Since a determination of many assets, liabilities, revenues and expenses is dependent upon future events, the preparation of the company's consolidated financial statements requires the use of estimates and assumptions which have been made using careful judgment. TCPL's critical accounting estimates, which remain unchanged since December 31, 2002, are depreciation expense and certain deferred after-tax gains and remaining obligations related to the Gas Marketing business. For further information on these critical accounting estimates, refer to Results of Operations - Discontinued Operations and to Management's Discussion and Analysis in TransCanada PipeLines Limited's 2002 Annual Report. SECOND QUARTER REPORT 2003 TCPL - 12 OUTLOOK The company expects higher Power net earnings in 2003 than originally anticipated as a result of the contribution from Bruce and the settlement with a former counterparty. The outlook for the company's other segments remains relatively unchanged since December 31, 2002. For further information on outlook, refer to Management's Discussion and Analysis in TransCanada PipeLines Limited's 2002 Annual Report. The company's earnings and cash flow combined with a strong balance sheet continue to provide the financial flexibility for TCPL to make disciplined investments in its core businesses of Transmission and Power. The strengthening of the Canadian dollar compared to the U.S. dollar in 2003 has not and is not expected to significantly impact TCPL's consolidated financial results. Credit ratings on TCPL's senior unsecured debt assigned by Dominion Bond Rating Service Limited (DBRS), Moody's Investors Service (Moody's) and Standard & Poor's are currently A, A2 and A-, respectively. On May 9, 2003, Standard & Poor's resolved its `Credit Watch' on TCPL by reaffirming it's A- rating of TCPL's senior unsecured debt and changing the outlook to `negative'. DBRS and Moody's both maintain a `stable' outlook on their ratings. OTHER RECENT DEVELOPMENTS TRANSMISSION WHOLLY-OWNED PIPELINES ALBERTA SYSTEM On June 24, 2003, the Alberta Energy and Utilities Board (EUB) approved the 2003 Revenue Requirement Settlement and 2003 Tariff Settlement for the Alberta System. These settlements will form the basis of the Alberta System tolls for 2003. TCPL is committed to filing a 2004 Alberta System General Rate Application with the EUB by September 30, 2003. In July 2003, TCPL along with other utilities filed evidence in the EUB's Generic Cost of Capital Proceeding. The EUB expects to adopt a standardized approach to determining the rate of return and capital structure for all utilities under its jurisdiction at the conclusion of this proceeding. SECOND QUARTER REPORT 2003 TCPL - 13 CANADIAN MAINLINE In May 2003, the Federal Court of Appeal granted TCPL leave to appeal the NEB's decision, issued February 2003, to dismiss TCPL's request for a Review and Variance of the NEB's June 2002 decision on the company's Fair Return application. TCPL based its application for leave to appeal on two questions of law. TCPL is concerned about its ability to obtain a fair return on its investment in the Canadian Mainline as a result of the NEB's decisions. NORTH AMERICAN PIPELINE VENTURES FOOTHILLS In May 2003, TCPL signed an agreement to purchase the remaining 50 per cent of Foothills Pipe Lines Ltd. (Foothills) from Duke Energy Gas Transmission for $257 million, including $152 million of Duke's proportionate share of Foothill's corporate debt. As a result, TCPL will own 100 per cent of Foothills and its subsidiaries, subject to regulatory approvals prior to the final closing of this transaction. Foothills and its subsidiaries hold the certificates to build the Canadian portion of the Alaska Highway Project which would bring Prudhoe Bay natural gas from Alaska to markets in Canada and the U.S. The "Prebuild" portion of this project has been operating for more than 20 years, moving Alberta gas to U.S. markets in advance of flows from Alaska. Subsidiaries of Foothills and TCPL also hold certificates to build the Alaskan part of this project. It is anticipated the purchase will close in third quarter 2003. SECOND QUARTER REPORT 2003 TCPL - 14 NORTHERN DEVELOPMENT In June 2003, TCPL reached funding and participation agreements with the Mackenzie Delta gas producers and the Aboriginal Pipeline Group (APG) for the Mackenzie Gas Pipeline Project. The Preliminary Information Package for the Mackenzie Gas Project has been submitted to relevant regulatory authorities and regulatory applications are expected to be filed in 2004. Under the agreement, TCPL has agreed to finance the APG for its one-third share of project definition phase costs which are currently estimated to be $80 million over three years. If the pipeline is approved and becomes operational, this loan will be repaid from APG's share of pipeline revenues. The producers have agreed to potentially reduce their ownership share of the pipeline by five per cent, by providing TCPL the option to obtain this interest at the decision to construct. TCPL will apply for an extension of its Alberta pipeline system to connect with a Mackenzie Valley Pipeline south of the Alberta-Northwest Territories Border. TCPL also gains certain rights of first refusal if any of the producers choose to sell their equity. TCPL would be entitled to acquire 50 per cent of any opportunities, with the producers and APG sharing in the other 50 per cent. Should the pipeline expand beyond its original capacity, and once the APG has achieved a one-third ownership share, TCPL, the APG and the other owners will each have the opportunity to obtain a one-third interest in additional expansions. POWER In June 2003, TCPL agreed to develop the Becancour Cogeneration Project, a 550 megawatt natural gas-fired cogeneration plant near Trois-Rivieres, Quebec. Subject to regulatory approvals, construction of the estimated $500 million facility is expected to begin next year with an in-service date late in 2006. This plant will supply its entire power output to Hydro-Quebec Distribution under a 20-year power purchase contract. The plant will also supply steam to certain major businesses located within the Becancour Industrial Park. SECOND QUARTER REPORT 2003 TCPL - 15 FORWARD-LOOKING INFORMATION Certain information in this quarterly report is forward-looking and is subject to important risks and uncertainties. The results or events predicted in this information may differ from actual results or events. Factors which could cause actual results or events to differ materially from current expectations include, among other things, the ability of TCPL to successfully implement its strategic initiatives and whether such strategic initiatives will yield the expected benefits, the availability and price of energy commodities, regulatory decisions, competitive factors in the pipeline and power industry sectors, and the prevailing economic conditions in North America. For additional information on these and other factors, see the reports filed by TCPL with Canadian securities regulators and with the United States Securities and Exchange Commission. TCPL disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. EX-2 4 a2115536zex-2.txt EXHIBIT 2 EXHIBIT 2 SECOND QUARTER REPORT 2003 TCPL - 16 CONSOLIDATED INCOME
(unaudited) Three months ended June 30 Six months ended June 30 (millions of dollars) 2003 2002 2003 2002 - ----------------------------------------------------------------- -------------- --------------- --------------- REVENUES 1,311 1,345 2,647 2,591 OPERATING EXPENSES Cost of sales 189 170 369 303 Other costs and expenses 382 383 809 737 Depreciation 217 213 432 420 ----------------- -------------- --------------- --------------- 788 766 1,610 1,460 ----------------- -------------- --------------- --------------- OPERATING INCOME 523 579 1,037 1,131 OTHER EXPENSES/(INCOME) Financial charges 205 218 409 439 Financial charges of joint ventures 23 22 45 45 Equity income (26) (8) (84) (18) Interest and other income (22) (11) (35) (22) ----------------- -------------- --------------- --------------- 180 221 335 444 ----------------- -------------- --------------- --------------- INCOME BEFORE INCOME TAXES 343 358 702 687 INCOME TAXES - CURRENT AND FUTURE 127 138 263 266 ----------------- -------------- --------------- --------------- NET INCOME 216 220 439 421 PREFERRED SECURITIES CHARGES 9 9 18 18 PREFERRED SHARE DIVIDENDS 5 6 11 11 ----------------- -------------- --------------- --------------- NET INCOME APPLICABLE TO COMMON SHARES 202 205 410 392 ----------------- -------------- --------------- --------------- ----------------- -------------- --------------- ---------------
See accompanying Notes to the Consolidated Financial Statements. SECOND QUARTER REPORT 2003 TCPL - 17 CONSOLIDATED CASH FLOWS
(unaudited) Three months ended June 30 Six months ended June 30 (millions of dollars) 2003 2002 2003 2002 - --------------------------------------------------------------------------- -------------- --------------- --------------- CASH GENERATED FROM OPERATIONS Net income 216 220 439 421 Depreciation 217 213 432 420 Future income taxes 53 56 127 109 Equity income in excess of distributions received (8) (1) (59) (5) Other (44) (50) (48) (52) -------------- -------------- --------------- --------------- Funds generated from operations 434 438 891 893 Decrease/(Increase) in operating working capital 33 (2) 25 (56) -------------- -------------- --------------- --------------- Net cash provided by continuing operations 467 436 916 837 Net cash (used in)/provided by discontinued operations (88) (7) (84) 51 -------------- -------------- --------------- --------------- 379 429 832 888 -------------- -------------- --------------- --------------- INVESTING ACTIVITIES Capital expenditures (107) (98) (183) (215) Acquisitions, net of cash acquired (3) - (412) - Disposition of assets - - 5 - Deferred amounts and other (47) (91) (70) (74) -------------- -------------- --------------- --------------- Net cash used in investing activities (157) (189) (660) (289) -------------- -------------- --------------- --------------- FINANCING ACTIVITIES Dividends and preferred securities charges (149) (140) (288) (267) Notes payable repaid, net (291) (69) (82) (240) Long-term debt issued 475 - 475 - Reduction of long-term debt (50) (24) (59) (116) Non-recourse debt of joint ventures issued 29 4 46 5 Reduction of non-recourse debt of joint ventures (32) (29) (48) (42) Common shares issued 2 16 18 31 -------------- -------------- --------------- --------------- Net cash (used in)/provided by financing activities (16) (242) 62 (629) -------------- -------------- --------------- --------------- INCREASE/(DECREASE) IN CASH AND SHORT-TERM INVESTMENTS 206 (2) 234 (30) CASH AND SHORT-TERM INVESTMENTS Beginning of period 240 271 212 299 -------------- -------------- --------------- --------------- CASH AND SHORT-TERM INVESTMENTS End of period 446 269 446 269 -------------- -------------- --------------- --------------- -------------- -------------- --------------- ---------------
See accompanying Notes to the Consolidated Financial Statements. SECOND QUARTER REPORT 2003 TCPL - 18 CONSOLIDATED BALANCE SHEET
JUNE 30, 2003 December 31, (millions of dollars) (unaudited) 2002 - ------------------------------------------------------------------------------------------------ ----------------------- ASSETS CURRENT ASSETS Cash and short-term investments 446 212 Accounts receivable 604 691 Inventories 168 178 Other 101 102 ----------------------- ----------------------- 1,319 1,183 LONG-TERM INVESTMENTS 713 291 PLANT, PROPERTY AND EQUIPMENT 16,975 17,496 OTHER ASSETS 996 946 ----------------------- ----------------------- 20,003 19,916 ----------------------- ----------------------- ----------------------- ----------------------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Notes payable 215 297 Accounts payable 789 902 Accrued interest 206 227 Current portion of long-term debt 580 517 Current portion of non-recourse debt of joint ventures 20 75 Provision for loss on discontinued operations 217 234 ----------------------- ----------------------- 2,027 2,252 DEFERRED AMOUNTS 326 353 LONG-TERM DEBT 8,983 8,815 FUTURE INCOME TAXES 318 226 NON-RECOURSE DEBT OF JOINT VENTURES 1,174 1,222 JUNIOR SUBORDINATED DEBENTURES 239 238 ----------------------- ----------------------- 13,067 13,106 ----------------------- ----------------------- SHAREHOLDERS' EQUITY Preferred securities 673 674 Preferred shares 389 389 Common shares 4,632 4,614 Contributed surplus 266 265 Retained earnings 1,005 854 Foreign exchange adjustment (29) 14 ----------------------- ----------------------- ----------------------- ----------------------- 6,936 6,810 ----------------------- ----------------------- 20,003 19,916 ----------------------- ----------------------- ----------------------- -----------------------
See accompanying Notes to the Consolidated Financial Statements. SECOND QUARTER REPORT 2003 TCPL - 19 CONSOLIDATED RETAINED EARNINGS
(unaudited) Six months ended June 30 (millions of dollars) 2003 2002 - ------------------------------------------------------------------------------------------------------------ --------------- Balance at beginning of period 854 586 Net income 439 421 Preferred securities charges (18) (18) Preferred share dividends (11) (11) Common share dividends (259) (239) --------------- --------------- 1,005 739 --------------- --------------- --------------- ---------------
See accompanying Notes to the Consolidated Financial Statements. SECOND QUARTER REPORT 2003 TCPL - 20 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION Pursuant to a plan of arrangement, effective May 15, 2003, common shares of TransCanada PipeLines Limited (TCPL or the company) were exchanged on a one-to-one basis for common shares of TransCanada Corporation (TransCanada). As a result, TCPL became a wholly-owned subsidiary of TransCanada. The consolidated financial statements for the six months ended June 30, 2003 include the accounts of TCPL and the consolidated accounts of all its subsidiaries. 2. SIGNIFICANT ACCOUNTING POLICIES The consolidated financial statements of TCPL have been prepared in accordance with Canadian generally accepted accounting principles. The accounting policies applied are consistent with those outlined in the company's annual financial statements for the year ended December 31, 2002. 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 PipeLines Limited's 2002 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. SECOND QUARTER REPORT 2003 TCPL - 21 3. SEGMENTED INFORMATION
TRANSMISSION POWER CORPORATE TOTAL Three months ended June 30 ------------------- ------------------- ------------------- -------------------- (unaudited - millions of dollars) 2003 2002 2003 2002 2003 2002 2003 2002 - --------------------------------------------- --------- -------- --------- --------- --------- --------- ---------- --------- Revenues 944 1,002 367 343 - - 1,311 1,345 Cost of sales - - (189) (170) - - (189) (170) Other costs and expenses (301) (286) (79) (95) (2) (2) (382) (383) Depreciation (195) (198) (22) (15) - - (217) (213) --------- -------- --------- --------- --------- --------- ---------- --------- Operating income/(loss) 448 518 77 63 (2) (2) 523 579 Financial and preferred equity charges (194) (208) (3) (3) (22) (22) (219) (233) Financial charges of joint ventures (22) (22) (1) - - - (23) (22) Equity income 10 8 16 - - - 26 8 Interest and other income 3 - 4 4 15 7 22 11 Income taxes (101) (122) (30) (24) 4 8 (127) (138) --------- -------- --------- --------- --------- --------- ---------- --------- NET INCOME APPLICABLE TO COMMON SHARES 144 174 63 40 (5) (9) 202 205 --------- -------- --------- --------- --------- --------- ---------- --------- --------- -------- --------- --------- --------- --------- ---------- ---------
TRANSMISSION POWER CORPORATE TOTAL Six months ended June 30 ------------------- ------------------- ------------------- -------------------- (unaudited - millions of dollars) 2003 2002 2003 2002 2003 2002 2003 2002 - --------------------------------------------- --------- -------- --------- --------- --------- --------- ---------- --------- Revenues 1,904 1,943 743 648 - - 2,647 2,591 Cost of sales - - (369) (303) - - (369) (303) Other costs and expenses (605) (546) (200) (187) (4) (4) (809) (737) Depreciation (389) (390) (43) (30) - - (432) (420) --------- -------- --------- --------- --------- --------- ---------- --------- Operating income/(loss) 910 1,007 131 128 (4) (4) 1,037 1,131 Financial and preferred equity charges (390) (414) (5) (6) (43) (48) (438) (468) Financial charges of joint ventures (44) (45) (1) - - - (45) (45) Equity income 30 18 54 - - - 84 18 Interest and other income 8 6 8 7 19 9 35 22 Income taxes (212) (235) (61) (48) 10 17 (263) (266) --------- -------- --------- --------- --------- --------- ---------- --------- NET INCOME APPLICABLE TO COMMON SHARES 302 337 126 81 (18) (26) 410 392 --------- -------- --------- --------- --------- --------- ---------- --------- --------- -------- --------- --------- --------- --------- ---------- ---------
TOTAL ASSETS JUNE 30, 2003 December 31, (millions of dollars) (unaudited) 2002 - ---------------------------------------------------------------------------------- ------------------ Transmission 16,363 16,979 Power 2,608 2,292 Corporate 853 457 -------------------- ------------------ Continuing Operations 19,824 19,728 Discontinued Operations 179 188 -------------------- ------------------ 20,003 19,916 -------------------- ------------------ -------------------- ------------------
SECOND QUARTER REPORT 2003 TCPL - 22 4. LONG-TERM DEBT On June 9, 2003, the company issued US$350 million of unsecured 4.00 per cent notes maturing on June 15, 2013. On July 3, 2003, the company redeemed the US$160 million 8.75 per cent Junior Subordinated Debentures. Holders of these debentures received US$25.0122 per US$25.00 of the principal amount, which included accrued and unpaid interest to the redemption date, without premium or penalty. 5. RISK MANAGEMENT AND FINANCIAL INSTRUMENTS The following represents the significant changes to the company's risk management and financial instruments since December 31, 2002. FOREIGN INVESTMENTS At June 30, 2003 and December 31, 2002, the company had foreign currency denominated assets and liabilities which created an exposure to changes in exchange rates. The company uses foreign currency derivatives to hedge this exposure on an after-tax basis. The cross-currency swaps have a floating interest rate which the company partially hedges by entering into interest rate swaps and forward rate agreements. The company's portfolio of foreign investment derivatives is comprised of contracts for periods up to four years. The fair values shown in the table below for foreign exchange risk are offset by translation gains or losses on the net assets and are recorded in the foreign exchange adjustment in Shareholders' Equity.
ASSET/(LIABILITY) JUNE 30, 2003 (millions of dollars) (unaudited) December 31, 2002 - -------------------------------------------------------------------------------------- ------------------------------ Carrying Fair Carrying Fair Amount Value Amount Value ------------------------------ ------------------------------ FOREIGN EXCHANGE RISK Cross-currency swaps U.S. dollars 50 50 (8) (8) Forward foreign exchange contracts U.S. dollars - - (4) (4) - ------------------------------------------------------------------------------------------------------------------------
At June 30, 2003, the notional principal amounts of cross-currency swaps were US$250 million (December 31, 2002 - US$350 million) and the notional principal amounts of forward foreign exchange contracts were nil (December 31, 2002 - US$225 million). SECOND QUARTER REPORT 2003 TCPL - 23
JUNE 30, RECONCILIATION OF FOREIGN EXCHANGE ADJUSTMENT 2003 December 31, (millions of dollars) (unaudited) 2002 - ----------------------------------------------------------------------------------------------------- -------------- Balance at beginning of year 14 13 Translation (losses)/gains on foreign currency denominated net assets (115) 3 Foreign exchange gains/(losses) on derivatives, and other 72 (2) -------------- -------------- (29) 14 - ----------------------------------------------------------------------------------------------------------------------
6. DISCONTINUED OPERATIONS In July 2001, the Board of Directors approved a plan to dispose of the company's Gas Marketing business. In December 1999, the Board of Directors approved a plan (December Plan) to dispose of the company's International, Canadian Midstream and certain other businesses. The company's disposals under both plans were substantially completed at December 31, 2001. The company mitigated its exposures associated with the contingent liabilities related to the divested gas marketing operations by obtaining certain remaining contracts in June and early July 2003 and simultaneously fully hedging the market price exposures of these contracts. The company remains contingently liable for certain of the residual obligations. At June 30, 2003, TCPL reviewed the provision for loss on discontinued operations and concluded that the provision was adequate and the continued deferral of the approximately $100 million of deferred after-tax gains related to the Gas Marketing business was appropriate. Accordingly, there was no earnings impact related to discontinued operations in second quarter 2003. Net income from discontinued operations was nil for the three and six months ended June 30, 2003 and 2002. The provision for loss on discontinued operations at June 30, 2003 was $217 million (December 31, 2002 - $234 million). The net assets of discontinued operations included in the consolidated balance sheet at June 30, 2003 were $142 million (December 31, 2002 - $90 million). 7. COMMITMENT On June 18, 2003, an agreement was reached among the Mackenzie Delta gas producers, the Aboriginal Pipeline Group (APG) and TCPL which governs TCPL's role in the Mackenzie Gas Pipeline Project. The Mackenzie Gas Pipeline Project would, if approved, result in a natural gas pipeline being constructed from Inuvik, Northwest Territories to the northern border of Alberta, where it would then connect with the Alberta System. Under the agreement, TCPL has agreed to finance the APG for its one-third share of project SECOND QUARTER REPORT 2003 TCPL - 24 definition phase costs which are currently estimated to be $80 million over three years. If the pipeline is approved and becomes operational, this loan will be repaid from APG's share of pipeline revenues. - -------------------------------------------------------------------------------- TransCanada welcomes questions from preferred shareholders and potential investors. Please telephone: Investor Relations, at 1-800-361-6522 (Canada and U.S. Mainland) or direct dial David Moneta/Debbie Persad at (403) 920-7911. The investor fax line is (403) 920-2457. Media Relations: Glenn Herchak/Hejdi Feick at (403) 920-7877. Visit TransCanada's Internet site at: http://www.transcanada.com - -------------------------------------------------------------------------------- EX-3 5 a2115536zex-3.txt EXHIBIT 3 EXHIBIT 3 TransCanada PipeLines Limited EARNINGS COVERAGE JUNE 30, 2003 The following financial ratios have been calculated on a consolidated basis for the 12 month period ended June 30, 2003 and are based on unaudited financial information. The financial ratios have been calculated based on financial information prepared in accordance with Canadian generally accepted accounting principles. The following ratios have been prepared based on net income:
JUNE 30, 2003 ------------- Earnings coverage on long-term debt(1)............. 2.58 times Earnings coverage on long-term debt and First Preferred Shares(1).......................... 2.48 times
(1) The above ratios have been calculated without including the annual carrying charges relating to the equity component of TransCanada's outstanding preferred securities. If the equity component of the preferred securities were classified as debt, the entire carrying charges of the preferred securities would be included in interest expense. If these annual carrying charges had been included in the calculations, the earnings coverage on long-term debt would have been 2.44 times for the 12 month period ended June 30, 2003 and the earnings coverage on long-term debt and First Preferred Shares would have been 2.35 times for the 12 month period ended June 30, 2003. EX-4 6 a2115536zex-4.txt EXHIBIT 4 EXHIBIT 4 TRANSCANADA PIPELINES LIMITED SIGNIFICANT DIFFERENCES BETWEEN CANADIAN AND U.S. GAAP (UNAUDITED) NET INCOME RECONCILIATION
SIX MONTHS ENDED JUNE 30 (MILLIONS OF DOLLARS) 2003 2002 - ---------------------------------------------------------------------------------------------------------- -------------- Net income in accordance with Canadian GAAP 439 421 U.S. GAAP adjustments Preferred securities charges(1) (28) (29) Tax impact of preferred securities charges 10 11 Unrealized (loss)/gain on foreign exchange and interest rate derivatives(2) (3) 17 Tax impact of (loss)/gain on foreign exchange and interest rate derivatives 1 (7) Unrealized loss on energy trading contracts(3) (2) (6) Tax impact of unrealized loss on energy trading contracts 1 2 Equity income(4) (9) - Tax impact of equity income 3 - ---------------- -------------- Income before cumulative effect of the application of EITF 02-3 in accordance with U.S. GAAP 412 409 Cumulative effect of the application of EITF 02-3, net of tax(3) (13) - ---------------- -------------- Net income in accordance with U.S. GAAP 399 409 ---------------- -------------- ---------------- --------------
(1) Under U.S. GAAP, the financial charges related to preferred securities are recognized as an expense, rather than dividends. (2) Under the provisions of Statement of Financial Accounting Standards (SFAS) No. 133 "Accounting for Derivatives and Hedging Activities", all derivatives are recognized as assets and liabilities on the balance sheet and measured at fair value. For derivatives designated as fair value hedges, changes in the fair value are recognized in earnings together with an equal or lesser amount of changes in the fair value of the hedged item attributable to the hedged risk. For derivatives designated as cash flow hedges, changes in the fair value of the derivative that are effective in offsetting the hedged risk are recognized in other comprehensive income until the hedged item is recognized in earnings. Any ineffective portion of the change in fair value is recognized in earnings each period. (3) Under U.S. GAAP, energy trading contracts are measured at fair value determined as at the balance sheet date. In 2002, TransCanada PipeLines Limited (TCPL or the Company) adopted the transitional provisions of FASB Emerging Issues Task Force (EITF) 02-3, "Accounting for Contracts Involved in Energy Trading and Risk Management Activities" whereby the Company is netting all revenues and expenses related to derivative energy trading contracts. This accounting change was applied retroactively with reclassification of prior periods. Effective January 1, 2003, the Company fully adopted EITF 02-3. Certain of the energy trading derivatives are accounted for as hedges under Canadian GAAP but not under U.S. GAAP. These derivatives as well as other derivatives held for trading purposes are measured at fair value and accounted for under the provisions of SFAS No. 133. The Company's energy trading contracts that are not derivatives are not subject to mark-to-market accounting. This accounting change was effected through a cumulative adjustment in the current period income with no restatement of prior periods. (4) Under Canadian GAAP, pre-operating costs incurred during the commissioning phase of a new project are deferred until commercial production levels are achieved. After such time, those costs are amortized over the estimated life of the project. Under U.S. GAAP, such costs are expensed as incurred. Certain start-up costs related to the Company's equity investment in Bruce Power L.P. are required to be expensed under U.S. GAAP. Page 1 of 5 CONDENSED STATEMENT OF CONSOLIDATED INCOME IN ACCORDANCE WITH U.S. GAAP(6)
SIX MONTHS ENDED JUNE 30 (MILLIONS OF DOLLARS) 2003 2002 - -------------------------------------------------------------------------------------------------------- ----------- Revenues(3) 2,375 2,561 -------------- ----------- Cost of sales(3) 310 41 Other costs and expenses 805 987 Depreciation 371 419 -------------- ----------- 1,486 1,447 -------------- ----------- Operating income 889 1,114 Other (income)/expenses Equity income(4)(6) (182) (142) Other expenses(1)(2)(5) 411 587 Income taxes 248 260 -------------- ----------- 477 705 -------------- ----------- Income before cumulative effect of the application of EITF 02-3 in accordance with U.S. GAAP 412 409 Cumulative effect of the application of EITF 02-3, net of tax(3) (13) - -------------- ----------- Net income in accordance with U.S. GAAP 399 409 -------------- ----------- -------------- -----------
COMPREHENSIVE INCOME IN ACCORDANCE WITH U.S. GAAP SIX MONTHS ENDED JUNE 30 (MILLIONS OF DOLLARS) 2003 2002 - ---------------------------------------------------------------------------------------------------------- -------------- Net income in accordance with U.S. GAAP 399 409 Adjustments affecting comprehensive income under U.S. GAAP Additional minimum liability for employee future benefits (SFAS No. 87)(12) 9 - Tax impact of additional minimum liability for employee future benefits (3) - Unrealized gain on derivatives(2) 13 3 Tax impact of gain on derivatives (2) - Foreign currency translation adjustment (43) (3) ---------------- -------------- Comprehensive income in accordance with U.S. GAAP 373 409 ---------------- -------------- ---------------- --------------
Page 2 of 5 CONDENSED BALANCE SHEET IN ACCORDANCE WITH U.S. GAAP(6)
June 30, December 31, (MILLIONS OF DOLLARS) 2003 2002 - --------------------------------------------------------------------------------------------------------- ---------------- Current assets 1,138 1,074 Long-term energy trading assets(3) - 218 Long-term investments(4)(7) 1,954 1,629 Plant, property and equipment(8) 14,679 14,992 Regulatory asset(9) 2,578 2,578 Other assets(2) 1,061 893 ----------------- --------------- 21,410 21,384 ----------------- --------------- ----------------- --------------- Current liabilities(10) 1,723 1,918 Provision for loss on discontinued operations 217 234 Long-term energy trading liabilities(3) - 41 Deferred amounts(7)(8) 544 593 Long-term debt(2) 9,076 8,963 Deferred income taxes(9) 2,785 2,692 Preferred securities(11) 694 694 Trust originated preferred securities 218 218 Shareholders' equity 6,153 6,031 ----------------- --------------- 21,410 21,384 ----------------- --------------- ----------------- ---------------
Page 3 of 5 STATEMENT OF OTHER COMPREHENSIVE INCOME IN ACCORDANCE WITH U.S. GAAP
Cumulative Minimum Cash Flow Translation Pension Liability Hedges (MILLIONS OF DOLLARS) Account (SFAS No. 87) (SFAS No. 133) Total --------------------------------------------------------------------------- ----------------- ----------------- ------ Balance at January 1, 2002 13 (56) (9) (52) Additional minimum liability for employee future benefits, net of tax(12) - (40) - (40) Unrealized loss on derivatives, net of tax(2) - - (4) (4) Foreign currency translation adjustment 1 - - 1 ------------------ ----------------- ----------------- ------ Balance at December 31, 2002 14 (96) (13) (95) ADDITIONAL MINIMUM LIABILITY FOR EMPLOYEE FUTURE BENEFITS, NET OF TAX(12) - 6 - 6 UNREALIZED LOSS ON DERIVATIVES, NET OF TAX(2) - - 11 11 FOREIGN CURRENCY TRANSLATION ADJUSTMENT (43) - - (43) ------------------ ----------------- ------------------ ----- BALANCE AT JUNE 30, 2003 (29) (90) (2) (121) ------------------ ----------------- ------------------ ----- ------------------ ----------------- ------------------ -----
(5) Other expenses included an allowance for funds used during construction of $1 million for the six months ended June 30, 2003 (June 30, 2002 - $4 million). (6) In accordance with U.S. GAAP, the condensed Statement of Consolidated Income and Balance Sheet are prepared using the equity method of accounting for joint ventures. Excluding the impact of other U.S. GAAP adjustments, the use of the proportionate consolidation method of accounting for joint ventures, as required under Canadian GAAP, results in the same net income and Shareholders' Equity. (7) Effective January 1, 2003, the Company adopted the provisions of Financial Interpretation (FIN) 45 that require the recognition of a liability for the fair value of certain guarantees that require payments contingent on specified types of future events. The measurement standards of FIN 45 are applicable to guarantees entered into after January 1, 2003. For U.S. GAAP, the Company has recorded the fair value of the guarantees ($4 million) arising on the acquisition of the interest in Bruce Power L.P. as a liability and an increase in the cost of the investment. (8) Effective January 1, 2003, the Company adopted the provisions of SFAS No. 143 "Accounting for Asset Retirement Obligations", which addresses financial accounting and reporting for obligations associated with asset retirement costs. SFAS No. 143 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. The property, plant 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 that all retirement costs associated with the regulated pipelines will be recovered through tolls in future periods. The property, plant and equipment in the power business consists primarily of power plants in Canada and the United States. The estimated fair value of the liability for the power plants and associated assets as at January 1, 2003 was $6 million. 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. There were no material changes in the estimated fair value of the liability during the six months ended June 30, 2003. The Company has no legal liability for asset retirement obligations with respect to its investment in Bruce Power L.P. and the Sundance A and B power purchase arrangements. Page 4 of 5 (9) Under U.S. GAAP, the Company is required to record a deferred income tax liability for its cost-of-service regulated businesses. As these deferred income taxes are recoverable through future revenues, a corresponding regulatory asset is recorded for U.S. GAAP purposes. (10) Current liabilities at June 30, 2003 include dividends payable of $135 million (December 31, 2002 - $125 million) and current taxes payable of $179 million (December 31, 2002 - $150 million). (11) Under U.S. GAAP, the preferred securities are classified as a liability. The fair value of the preferred securities at June 30, 2003 was $631 million (December 31, 2002 - $743 million). The Company made preferred securities charges payments of $28 million for the six months ended June 30, 2003 (June 30, 2002 - $29 million). (12) Under U.S. GAAP, a net loss recognized pursuant to SFAS No. 87 "Employers' Accounting for Pensions" as an additional pension liability not yet recognized as net period pension cost, must be recorded as a component of comprehensive income. SUMMARIZED FINANCIAL INFORMATION OF LONG-TERM INVESTMENTS(13)
SIX MONTHS ENDED JUNE 30 (MILLIONS OF DOLLARS) 2003 2002 - ---------------------------------------------------------------------------------------------------------- ----- INCOME Revenues 544 398 Other costs and expenses (241) (127) Depreciation (80) (71) Financial charges and other (41) (56) ------------------- ----- Proportionate share of income before income taxes of long-term investments 182 144 ------------------- ----- ------------------- -----
June 30, December 31, (MILLIONS OF DOLLARS) 2003 2002 - -------------------------------------------------------------------------------------------------------- ------------- BALANCE SHEET Current assets 375 246 Plant, property and equipment 3,638 3,197 Other assets (net) - 112 Current liabilities (177) (216) Deferred amounts (net) (247) - Non-recourse debt (1,611) (1,646) Deferred income taxes (24) (64) ------------------- ------------- Proportionate share of net assets of long-term investments 1,954 1,629 ------------------- ------------- ------------------- -------------
(13) This includes those investments that are accounted for by the equity method under U.S. GAAP (including those that are accounted for by the proportionate consolidation method under Canadian GAAP). Page 5 of 5 EX-5 7 a2115536zex-5.txt EXHIBIT 5 EXHIBIT 5 [KPMG LOGO] KPMG LLP CHARTERED ACCOUNTANTS Telephone (403) 691-8000 1200-205 5 Avenue SW Telefax (403) 691-8008 Calgary AB T2P 4B9 www.kpmg.ca Alberta Securities Commission British Columbia Securities Commission The Manitoba Securities Commission Office of the Administrator, New Brunswick Securities Commission of Newfoundland Registrar of Securities, Northwest Territories Nova Scotia Securities Commission Registrar of Securities, Nunavut Ontario Securities Commission Registrar of Securities, Prince Edward Island Commission des valeurs mobilieres du Quebec Saskatchewan Securities Commission Registrar of Securities, Government of the Yukon Territory July 30, 2003 Dear Sirs TRANSCANADA PIPELINES LIMITED (THE "COMPANY") We refer to the short form prospectus of the Company dated November 20, 2002 relating to the sale and issue of $2,000,000,000 Common Shares, Preferred Shares or Debt Securities of the Company as supplemented by a prospectus supplement dated November 29, 2002 relating to the sale and issue of Medium Term Note Debentures (Unsecured), collectively the "Prospectus". We are the auditors of the Company and under date of February 25, 2003, we reported on the following financial statements incorporated by reference in the Prospectus: - Consolidated balance sheets as at December 31, 2002 and December 31, 2001; and - Consolidated statements of income, retained earnings and cash flows for each of the years in the three-year period ended December 31, 2002. Also incorporated by reference in the Prospectus are the following unaudited interim financial statements which have been filed with the securities regulatory authorities: - Consolidated balance sheet as at June 30, 2003; - Consolidated statements of income and cash flows for the three-month and the six-month periods ended June 30, 2003 and 2002; and - Consolidated statements of retained earnings for the three-month and the six-month periods ended June 30, 2003 and 2002. [[[[ KPMG LLP, a Canadian owned limited liability partnership established under the laws of Ontario, is a member firm of KPMG International, a Swiss association Page 2 We have not audited any financial statements of the Company as at any date or for any period subsequent to December 31, 2002. Although we have performed an audit for the year ended December 31, 2002, the purpose and therefore the scope of the audit was to enable us to express our opinion on the consolidated financial statements as at December 31, 2002 and for the year then ended, but not on the financial statements for any interim period within that year. Therefore, we are unable to and do not express an opinion on the above-mentioned unaudited interim consolidated financial statements or on the financial position, results of operations or cash flows as at any date or for any period subsequent to December 31, 2002. We have, however, performed a review of the unaudited interim consolidated financial statements of the Company as at June 30, 2003 and for the three-month and the six[cad 220]month periods ended June 30, 2003 and 2002. We performed our review in accordance with Canadian generally accepted standards for a review of interim financial statements by an entity's auditors. Such an interim review consists principally of applying analytical procedures to financial data and making inquiries of, and having discussions with, persons responsible for financial and accounting matters. An interim review is substantially less in scope than an audit, whose objective is the expression of an opinion regarding the financial statements. An interim review does not provide assurance that we would become aware of any, or all, significant matters that might be identified in an audit. Based on our review, we are not aware of any material modification that needs to be made for these interim consolidated financial statements to be in accordance with Canadian generally accepted accounting principles. This letter is provided solely for the purpose of assisting the securities regulatory authorities to which it is addressed in discharging their responsibilities and should not be used for any other purpose. Any use that a third party makes of this letter or any reliance or decisions based on it, are the responsibility of such third parties. We accept no responsibility for loss or damages, if any, suffered by any third party as a result of decisions made or actions taken based on this letter. Yours very truly /signed/ KPMG LLP Chartered Accountants Calgary, Canada July 30, 2003 EX-6 8 a2115536zex-6.txt EXHIBIT 6 EXHIBIT 6 TRANSCANADA PIPELINES LIMITED 450 - 1st Street S.W. Calgary, Alberta, Canada T2P 5H1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER REGARDING PERIODIC REPORT CONTAINING FINANCIAL STATEMENTS I, Harold N. Kvisle, the Chief Executive Officer of TransCanada PipeLines Limited (the "Company"), in compliance with 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, hereby certify, in connection with the Company's Quarterly Report as filed on Form 6-K for the period ended June 30, 2003 with the Securities and Exchange Commission (the "Report"), that: 1. the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Harold N. Kvisle ---------------------------------------- Harold N. Kvisle Chief Executive Officer July 30, 2003 EX-7 9 a2115536zex-7.txt EXHIBIT 7 EXHIBIT 7 TRANSCANADA PIPELINES LIMITED 450 - 1st Street S.W. Calgary, Alberta, Canada T2P 5H1 CERTIFICATION OF CHIEF FINANCIAL OFFICER REGARDING PERIODIC REPORT CONTAINING FINANCIAL STATEMENTS I, Russell K. Girling, the Chief Financial Officer of TransCanada PipeLines Limited (the "Company"), in compliance with 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, hereby certify, in connection with the Company's Quarterly Report as filed on Form 6-K for the period ended June 30, 2003 with the Securities and Exchange Commission (the "Report"), that: 1. the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Russell K. Girling --------------------------------------- Russell K. Girling Chief Financial Officer July 30, 2003 EX-8 10 a2115536zex-8.txt EXHIBIT 8 EXHIBIT 8 CERTIFICATE PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT I, Harold N. Kvisle, certify that: 1. I have reviewed this quarterly report on Form 6-K of TransCanada PipeLines Limited; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Dated July 30, 2003 /s/ Harold N. Kvisle --------------------------------------- Harold N. Kvisle President and Chief Executive Officer EX-9 11 a2115536zex-9.txt EXHIBIT 9 EXHIBIT 9 CERTIFICATE PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT I, Russell K. Girling, certify that: 1. I have reviewed this quarterly report on Form 6-K of TransCanada PipeLines Limited; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /s/ Russell K. Girling --------------------------------------- Dated July 30, 2003 Russell K. Girling Executive Vice-President, Corporate Development and Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----