EX-2 4 a2121181zex-2.txt EXHIBIT 2 EXHIBIT 2 THIRD QUARTER REPORT 2003 TCPL [18 CONSOLIDATED INCOME
(unaudited) Three months ended September 30 Nine months ended September 30 (millions of dollars) 2003 2002 2003 2002 --------------------------------------------------------------------------- --------------- --------------- --------------- REVENUES 1,391 1,285 4,038 3,876 OPERATING EXPENSES Cost of sales 164 163 533 466 Other costs and expenses 439 386 1,248 1,123 Depreciation 260 211 692 631 ------ ------ ------ ------ 863 760 2,473 2,220 ------ ------ ------ ------ OPERATING INCOME 528 525 1,565 1,656 OTHER EXPENSES/(INCOME) Financial charges 210 213 619 652 Financial charges of joint ventures 18 22 63 67 Equity income (67) (8) (151) (26) Interest and other income (9) (14) (44) (36) ------ ------ ------ ------ 152 213 487 657 ------ ------ ------ ------ INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 376 312 1,078 999 INCOME TAXES - CURRENT AND FUTURE 164 123 427 389 ------ ------ ------ ------ NET INCOME FROM CONTINUING OPERATIONS 212 189 651 610 NET INCOME FROM DISCONTINUED OPERATIONS 50 -- 50 -- ------ ------ ------ ------ NET INCOME 262 189 701 610 PREFERRED SECURITIES CHARGES 8 8 26 26 PREFERRED SHARE DIVIDENDS 6 6 17 17 ------ ------ ------ ------ NET INCOME APPLICABLE TO COMMON SHARES 248 175 658 567 ------ ------ ------ ------ ------ ------ ------ ------ NET INCOME APPLICABLE TO COMMON SHARES Continuing operations 198 175 608 567 Discontinued operations 50 -- 50 -- ------ ------ ------ ------ 248 175 658 567 ------ ------ ------ ------ ------ ------ ------ ------
See accompanying Notes to the Consolidated Financial Statements. THIRD QUARTER REPORT 2003 TCPL [19 CONSOLIDATED CASH FLOWS
(unaudited) Three months ended September 30 Nine months ended September 30 (millions of dollars) 2003 2002 2003 2002 --------------------------------------------------------------------------- --------------- ----------------- --------------- CASH GENERATED FROM OPERATIONS Net income from continuing operations 212 189 651 610 Depreciation 260 211 692 631 Future income taxes 121 71 248 180 Equity income in excess of distributions received (66) (1) (125) (6) Other (11) (3) (59) (55) --------------- --------------- ----------------- --------------- Funds generated from continuing operations 516 467 1,407 1,360 Decrease/(Increase) in operating working capital 65 (12) 90 (68) --------------- --------------- ----------------- --------------- Net cash provided by continuing operations 581 455 1,497 1,292 Net cash (used in)/provided by discontinued operations 67 (21) (17) 30 --------------- --------------- ----------------- --------------- 648 434 1,480 1,322 --------------- --------------- ----------------- --------------- INVESTING ACTIVITIES Capital expenditures (81) (182) (264) (397) Acquisitions, net of cash acquired (135) (19) (547) (19) Disposition of assets - - 5 - Deferred amounts and other (168) 62 (238) (12) --------------- --------------- ----------------- --------------- Net cash used in investing activities (384) (139) (1,044) (428) --------------- --------------- ----------------- --------------- FINANCING ACTIVITIES Dividends and preferred securities charges (150) (140) (438) (407) Notes payable issued/(repaid), net 361 12 279 (228) Long-term debt issued - - 475 - Reduction of long-term debt (327) (114) (386) (230) Non-recourse debt of joint ventures issued 14 19 60 24 Reduction of non-recourse debt of joint ventures (7) (9) (55) (51) Redemption of junior subordinated debentures (218) - (218) - Common shares issued - 12 18 43 --------------- --------------- ----------------- --------------- Net cash (used in)/provided by financing activities (327) (220) (265) (849) --------------- --------------- ----------------- --------------- (DECREASE)/INCREASE IN CASH AND SHORT-TERM INVESTMENTS (63) 75 171 45 CASH AND SHORT-TERM INVESTMENTS Beginning of period 446 269 212 299 --------------- --------------- ----------------- --------------- CASH AND SHORT-TERM INVESTMENTS End of period 383 344 383 344 --------------- --------------- ----------------- --------------- --------------- --------------- ----------------- --------------- SUPPLEMENTARY CASH FLOW INFORMATION Income taxes paid 68 50 192 205 Interest paid 186 217 618 639 --------------- --------------- ----------------- --------------- --------------- --------------- ----------------- ---------------
See accompanying Notes to the Consolidated Financial Statements. THIRD QUARTER REPORT 2003 TCPL [20 CONSOLIDATED BALANCE SHEET
September 30, 2003 December 31, (millions of dollars) (unaudited) 2002 ------------------------------------------------------------------------------------------------ ----------------------- ASSETS CURRENT ASSETS Cash and short-term investments 383 212 Accounts receivable 548 691 Inventories 174 178 Other 83 102 ----------------------- ----------------------- 1,188 1,183 LONG-TERM INVESTMENTS 792 291 PLANT, PROPERTY AND EQUIPMENT 17,076 17,496 OTHER ASSETS 1,246 946 ----------------------- ----------------------- 20,302 19,916 ----------------------- ----------------------- ----------------------- ----------------------- ------------------------------------------------------------------------------------------------ ----------------------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Notes payable 576 297 Accounts payable 813 902 Accrued interest 229 227 Current portion of long-term debt 526 517 Current portion of non-recourse debt of joint ventures 20 75 Provision for loss on discontinued operations 168 234 ----------------------- ----------------------- 2,332 2,252 DEFERRED AMOUNTS 424 353 LONG-TERM DEBT 9,233 8,815 FUTURE INCOME TAXES 434 226 NON-RECOURSE DEBT OF JOINT VENTURES 803 1,222 JUNIOR SUBORDINATED DEBENTURES 21 238 ----------------------- ----------------------- 13,247 13,106 ----------------------- ----------------------- SHAREHOLDERS' EQUITY Preferred securities 673 674 Preferred shares 389 389 Common shares 4,632 4,614 Contributed surplus 267 265 Retained earnings 1,123 854 Foreign exchange adjustment (29) 14 ----------------------- ----------------------- 7,055 6,810 ----------------------- ----------------------- 20,302 19,916 ----------------------- ----------------------- ----------------------- -----------------------
See accompanying Notes to the Consolidated Financial Statements. THIRD QUARTER REPORT 2003 TCPL [21 CONSOLIDATED RETAINED EARNINGS
(unaudited) Nine months ended September 30 (millions of dollars) 2003 2002 ------------------------------------------------------------------------------------------------------------ --------------- Balance at beginning of period 854 586 Net income 701 610 Preferred securities charges (26) (26) Preferred share dividends (17) (17) Common share dividends (389) (359) --------------- --------------- 1,123 794 --------------- --------------- --------------- ---------------
See accompanying Notes to the Consolidated Financial Statements. THIRD QUARTER REPORT 2003 TCPL [22 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 nine months ended September 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 TCPL'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. THIRD QUARTER REPORT 2003 TCPL [23 3. SEGMENTED INFORMATION
TRANSMISSION POWER CORPORATE TOTAL ------------------------------------------------------------------ -------------------- ------------------ ------------------- Three months ended September 30 (unaudited - millions of dollars) 2003 2002 2003 2002 2003 2002 2003 2002 ------------------------------------------------------- ---------- --------- ---------- ------- ---------- --------- --------- Revenues 1,070 971 321 314 - - 1,391 1,285 Cost of sales - - (164) (163) - - (164) (163) Other costs and expenses (339) (301) (99) (81) (1) (4) (439) (386) Depreciation (240) (196) (19) (15) (1) - (260) (211) ---------- ---------- --------- ---------- ------- ---------- --------- --------- Operating income/(loss) 491 474 39 55 (2) (4) 528 525 Financial and preferred equity charges (198) (202) (2) (3) (24) (22) (224) (227) Financial charges of joint ventures (18) (22) - - - - (18) (22) Equity income 29 8 38 - - - 67 8 Interest and other income 3 6 2 4 4 4 9 14 Income taxes (147) (110) (27) (21) 10 8 (164) (123) ---------- ---------- --------- ---------- ------- ---------- --------- --------- Continuing operations 160 154 50 35 (12) (14) 198 175 ---------- ---------- --------- ---------- ------- ---------- ---------- ---------- --------- ---------- ------- ---------- Discontinued operations 50 - --------- --------- NET INCOME APPLICABLE TO COMMON SHARES 248 175 --------- --------- --------- ---------
TRANSMISSION POWER CORPORATE TOTAL ------------------------------------------------------------------ -------------------- ------------------ ------------------- Nine months ended September 30 (unaudited - millions of dollars) 2003 2002 2003 2002 2003 2002 2003 2002 ------------------------------------------------------- ---------- --------- ---------- ------- ---------- --------- --------- Revenues 2,974 2,914 1,064 962 - - 4,038 3,876 Cost of sales - - (533) (466) - - (533) (466) Other costs and expenses (944) (847) (299) (268) (5) (8) (1,248) (1,123) Depreciation (629) (586) (62) (45) (1) - (692) (631) ---------- ---------- --------- ---------- ------- ---------- --------- --------- Operating income/(loss) 1,401 1,481 170 183 (6) (8) 1,565 1,656 Financial and preferred equity charges (588) (616) (7) (9) (67) (70) (662) (695) Financial charges of joint ventures (62) (67) (1) - - - (63) (67) Equity income 59 26 92 - - - 151 26 Interest and other income 11 12 10 11 23 13 44 36 Income taxes (359) (345) (88) (69) 20 25 (427) (389) ---------- ---------- --------- ---------- ------- ---------- --------- --------- Continuing operations 462 491 176 116 (30) (40) 608 567 ---------- ---------- --------- ---------- ------- ---------- ---------- ---------- --------- ---------- ------- ---------- Discontinued operations 50 - --------- --------- NET INCOME APPLICABLE TO COMMON SHARES 658 567 --------- --------- --------- ---------
THIRD QUARTER REPORT 2003 TCPL [24
TOTAL ASSETS September 30, 2003 December 31, (millions of dollars) (unaudited) 2002 -------------------------------------------------------------------------------- ------------------ Transmission 16,667 16,979 Power 2,675 2,292 Corporate 830 457 ------------------ ------------------ Continuing operations 20,172 19,728 Discontinued operations 130 188 ------------------ ------------------ 20,302 19,916 ------------------ ------------------ ------------------ ------------------
4. JUNIOR SUBORDINATED DEBENTURES 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 September 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 net exposure on an after-tax basis. 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) September 30, 2003 (millions of dollars) (unaudited) December 31, 2002 --------------------------------------------- ------------------------------ ----------------------------- Carrying Fair Carrying Fair Amount Value Amount Value ------------------------------ ----------------------------- FOREIGN EXCHANGE VALUE Cross-currency swaps U.S. dollars 51 51 (8) (8) -----------------------------------------------------------------------------------------------------------------
At September 30, 2003, the notional principal amount of cross-currency swaps was US$250 million (December 31, 2002 - US$350 million). THIRD QUARTER REPORT 2003 TCPL [25
RECONCILIATION OF FOREIGN EXCHANGE ADJUSTMENT September 30, 2003 December 31, (millions of dollars) (unaudited) 2002 --------------------------------------------------------------------------- -------------------- -------------- Balance at beginning of period 14 13 Translation (losses)/gains on foreign currency denominated net assets (115) 3 Foreign exchange gains/(losses) on derivatives, and other 72 (2) -------------------- -------------- Balance at end of period (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 from a subsidiary of Mirant Corporation (Mirant) certain remaining contracts in June and July 2003, and simultaneously hedging the market price exposures of these contracts. The company remains contingently liable for certain residual obligations. At September 30, 2003, TCPL reviewed the provision for loss on discontinued operations and the deferred gain, taking into consideration the impacts of Mirant's filing for bankruptcy protection in July 2003 and the mitigation of the contingent liabilities referred to above. As a result of this review, $50 million of the original approximately $100 million after-tax deferred gain was recognized in income in third quarter 2003. In addition, TCPL concluded that the remaining provision was adequate, and the deferral of the remaining approximately $50 million of deferred after-tax gains related to the Gas Marketing business was appropriate. Net income from discontinued operations was $50 million, net of $29 million in taxes, for the three and nine months ended September 30, 2003 compared to nil for the same periods in 2002. The provision for loss on discontinued operations at September 30, 2003 was $168 million (December 31, 2002 - $234 million). The net assets of discontinued operations included in the consolidated balance sheet at September 30, 2003 were $94 million (December 31, 2002 - $90 million). THIRD QUARTER REPORT 2003 TCPL [26 7. INVESTMENT IN BRUCE POWER L.P. On February 14, 2003, TCPL acquired a 31.6 per cent interest in Bruce Power L.P. (Bruce Power) for approximately $409 million, including closing adjustments. As part of the acquisition, TCPL also funded a one-third share ($75 million) of a $225 million accelerated deferred rent payment to Ontario Power Generation, which is recorded in Other Assets. The purchase price of TCPL's 31.6 per cent interest in Bruce Power has been allocated as follows.
PURCHASE PRICE ALLOCATION (unaudited) (millions of dollars) ---------------------------------------------------------------------------------------------- Net book value of assets acquired 281 Valuation of Bruce Power sales agreements (131) Excess of fair value over book value of other net assets acquired 259 ------------- 409 ------------- -------------
The amount allocated to the investment in Bruce Power includes an excess purchase price of approximately $259 million over TCPL's share of the book value of the underlying net assets, other than the Bruce Power sales agreements. This amount will be primarily assigned to the capital lease of the Bruce plant and will be amortized on a straight-line basis over the lease term which extends to 2018, resulting in an annual amortization expense of approximately $16 million. The value, being $131 million, allocated to the Bruce Power sales agreements will be amortized to income over the remaining term of the underlying sales contracts. The approximate amount of income relating to the amortization of the fair value allocated to these contracts is: 2003 - $38 million; 2004 - $37 million; 2005 - $25 million; 2006 - $29 million and 2007 - $2 million. The investment in Bruce Power L.P. is recorded in Long-Term Investments. 8. 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 result in a natural gas pipeline being constructed from Inuvik, Northwest Territories to THIRD QUARTER REPORT 2003 TCPL [27 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 definition phase costs; this share is 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 shareholders and potential investors. Pleasetelephone: 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: Glenn Herchak/Hejdi Feick at (403) 920-7877. Visit TransCanada's Internet site at: http://www.transcanada.com --------------------------------------------------------------------------------