EX-2 4 a2127432zex-2.txt EXHIBIT 2 FOURTH QUARTER REPORT 2003 TCPL [18 EXHIBIT 2 CONSOLIDATED INCOME
Three months ended Year ended (unaudited) December 31 December 31 (millions of dollars) 2003 2002 2003 2002 --------------------------------------------------------- --------- --------- --------- REVENUES 1,319 1,338 5,357 5,214 OPERATING EXPENSES Cost of sales 159 161 692 627 Other costs and expenses 434 423 1,682 1,546 Depreciation 222 217 914 848 --------- --------- --------- --------- 815 801 3,288 3,021 --------- --------- --------- --------- OPERATING INCOME 504 537 2,069 2,193 OTHER EXPENSES/(INCOME) Financial charges 202 215 821 867 Financial charges of joint ventures 14 23 77 90 Equity income (14) (7) (165) (33) Interest and other income (16) (17) (60) (53) --------- --------- --------- --------- 186 214 673 871 --------- --------- --------- --------- INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND NON-CONTROLLING INTERESTS 318 323 1,396 1,322 INCOME TAXES - CURRENT AND FUTURE 108 128 535 517 NON-CONTROLLING INTERESTS 2 - 2 - --------- --------- --------- --------- NET INCOME FROM CONTINUING OPERATIONS 208 195 859 805 NET INCOME FROM DISCONTINUED OPERATIONS - - 50 - --------- --------- --------- --------- NET INCOME 208 195 909 805 PREFERRED SECURITIES CHARGES 10 10 36 36 PREFERRED SHARE DIVIDENDS 5 5 22 22 --------- --------- --------- --------- NET INCOME APPLICABLE TO COMMON SHARES 193 180 851 747 ========= ========= ========= ========= NET INCOME APPLICABLE TO COMMON SHARES Continuing operations 193 180 801 747 Discontinued operations - - 50 - --------- --------- --------- --------- 193 180 851 747 ========= ========= ========= =========
See accompanying Notes to the Consolidated Financial Statements. FOURTH QUARTER REPORT 2003 TCPL [19 CONSOLIDATED CASH FLOWS
Three months ended Year ended (unaudited) December 31 December 31 (millions of dollars) 2003 2002 2003 2002 ------------------------------------------------------------------ --------- --------- --------- CASH GENERATED FROM OPERATIONS Net income from continuing operations 208 195 859 805 Depreciation 222 217 914 848 Future income taxes (18) 67 230 247 Equity income in excess of distributions received (3) - (128) (6) Other (6) (12) (65) (67) --------- --------- --------- --------- Funds generated from continuing operations 403 467 1,810 1,827 Decrease in operating working capital 29 101 112 33 --------- --------- --------- --------- Net cash provided by continuing operations 432 568 1,922 1,860 Net cash provided by/(used in) discontinued operations - 29 (17) 59 --------- --------- --------- --------- 432 597 1,905 1,919 --------- --------- --------- --------- INVESTING ACTIVITIES Capital expenditures (127) (202) (391) (599) Acquisitions, net of cash acquired (23) (209) (570) (228) Deferred amounts and other 43 (103) (190) (115) --------- --------- --------- --------- Net cash used in investing activities (107) (514) (1,151) (942) --------- --------- --------- --------- FINANCING ACTIVITIES Dividends and preferred securities charges (150) (139) (588) (546) Advances from parent 39 - 46 - Notes payable (repaid)/issued, net (341) 182 (62) (46) Long-term debt issued 455 - 930 - Reduction of long-term debt (358) (256) (744) (486) Non-recourse debt of joint ventures issued - 20 60 44 Reduction of non-recourse debt of joint ventures (16) (29) (71) (80) Redemption of junior subordinated debentures - - (218) - Common shares issued - 7 18 50 --------- --------- --------- --------- Net cash used in financing activities (371) (215) (629) (1,064) --------- --------- --------- --------- (DECREASE)/INCREASE IN CASH AND SHORT-TERM INVESTMENTS (46) (132) 125 (87) CASH AND SHORT-TERM INVESTMENTS Beginning of period 383 344 212 299 --------- --------- --------- --------- CASH AND SHORT-TERM INVESTMENTS End of period 337 212 337 212 ========= ========= ========= ========= SUPPLEMENTARY CASH FLOW INFORMATION Income taxes paid 28 52 220 257 Interest paid 222 227 846 866 ========= ========= ========= =========
See accompanying Notes to the Consolidated Financial Statements. FOURTH QUARTER REPORT 2003 TCPL [20 CONSOLIDATED BALANCE SHEET
(unaudited) December 31 (millions of dollars) 2003 2002 --------------------------------------------------------------------------------- ----------------- ASSETS CURRENT ASSETS Cash and short-term investments 337 212 Accounts receivable 603 691 Inventories 165 178 Other 88 107 ------------------ ----------------- 1,193 1,188 LONG-TERM INVESTMENTS 733 345 PLANT, PROPERTY AND EQUIPMENT 17,451 17,496 OTHER ASSETS 1,164 937 ------------------ ----------------- 20,541 19,966 ================== ================= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Notes payable 367 297 Accounts payable 1,069 990 Accrued interest 208 227 Current portion of long-term debt 550 517 Current portion of non-recourse debt of joint ventures 19 75 ------------------ ----------------- 2,213 2,106 DEFERRED AMOUNTS 466 549 LONG-TERM DEBT 9,465 8,815 FUTURE INCOME TAXES 427 226 NON-RECOURSE DEBT OF JOINT VENTURES 761 1,222 JUNIOR SUBORDINATED DEBENTURES 22 238 ------------------ ----------------- 13,354 13,156 ------------------ ----------------- ------------------ ----------------- NON-CONTROLLING INTERESTS 82 - ------------------ ----------------- SHAREHOLDERS' EQUITY Preferred securities 672 674 Preferred shares 389 389 Common shares 4,632 4,614 Contributed surplus 267 265 Retained earnings 1,185 854 Foreign exchange adjustment (40) 14 ------------------ ----------------- 7,105 6,810 ------------------ ----------------- 20,541 19,966 ================== =================
See accompanying Notes to the Consolidated Financial Statements. FOURTH QUARTER REPORT 2003 TCPL [21 CONSOLIDATED RETAINED EARNINGS
(unaudited) Year ended December 31 (millions of dollars) 2003 2002 ---------------------------------------------------------- --------------- Balance at beginning of year 854 586 Net income 909 805 Preferred securities charges (36) (36) Preferred share dividends (22) (22) Common share dividends (520) (479) --------------- --------------- 1,185 854 =============== ===============
See accompanying Notes to the Consolidated Financial Statements. FOURTH 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 year ended December 31, 2003 include the accounts of TCPL and the consolidated accounts of all its subsidiaries. On December 3, 2003, TCPL increased its ownership interest in Portland Natural Gas Transmission System Partnership (Portland) from 43.4 per cent to 61.7 per cent. Subsequent to the acquisition, Portland was fully consolidated in the company's financial statements, with 38.3 per cent reflected in non-controlling interests. 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. REGULATION In December 2002, the National Energy Board (NEB) approved TCPL's application for the Canadian Mainline to charge interim tolls for transportation service, effective January 1, 2003. In August 2003, subsequent to the NEB's decision on the 2003 Tolls and Tariff Application, it approved interim tolls for the period September 1, 2003 to December 31, 2003. The NEB determined that tolls will remain interim pending a decision from the Federal Court of Appeal on TCPL's Fair Return Review and Variance Application. Any adjustments to the interim tolls will be recorded in accordance with the final NEB decision. FOURTH QUARTER REPORT 2003 TCPL [23 3. SEGMENTED INFORMATION
GAS TRANSMISSION POWER CORPORATE TOTAL -------------------- -------------------- -------------------- -------------------- Three months ended December 31 (unaudited - millions of dollars) 2003 2002 2003 2002 2003 2002 2003 2002 ---------------------------------------- ---------- --------- ---------- --------- --------- --------- ---------- --------- Revenues 982 1,007 337 331 - - 1,319 1,338 Cost of sales - - (159) (161) - - (159) (161) Other costs and expenses (326) (319) (106) (103) (2) (1) (434) (423) Depreciation (202) (197) (20) (20) - - (222) (217) ---------- --------- ---------- --------- --------- --------- ---------- --------- Operating income/(loss) 454 491 52 47 (2) (1) 504 537 Financial and preferred equity charges and non-controlling interests (193) (205) (4) (4) (22) (21) (219) (230) Financial charges of joint ventures (14) (23) - - - - (14) (23) Equity income 7 7 7 - - - 14 7 Interest and other income 6 5 4 2 6 10 16 17 Income taxes (100) (113) (15) (15) 7 - (108) (128) ---------- --------- ---------- --------- --------- --------- ---------- --------- Continuing operations 160 162 44 30 (11) (12) 193 180 ========== ========= ========== ========= ========= ========= Discontinued operations - - ---------- --------- NET INCOME APPLICABLE TO COMMON SHARES 193 180 ========== =========
GAS TRANSMISSION POWER CORPORATE TOTAL -------------------- -------------------- -------------------- -------------------- Year ended December 31 (unaudited - millions of dollars) 2003 2002 2003 2002 2003 2002 2003 2002 ---------------------------------------- ---------- --------- ---------- --------- --------- --------- ---------- --------- Revenues 3,956 3,921 1,401 1,293 - - 5,357 5,214 Cost of sales - - (692) (627) - - (692) (627) Other costs and expenses (1,270) (1,166) (405) (371) (7) (9) (1,682) (1,546) Depreciation (831) (783) (82) (65) (1) - (914) (848) ---------- --------- ---------- --------- --------- --------- ---------- --------- Operating income/(loss) 1,855 1,972 222 230 (8) (9) 2,069 2,193 Financial and preferred equity charges and non-controlling interests (781) (821) (11) (13) (89) (91) (881) (925) Financial charges of joint ventures (76) (90) (1) - - - (77) (90) Equity income 66 33 99 - - - 165 33 Interest and other income 17 17 14 13 29 23 60 53 Income taxes (459) (458) (103) (84) 27 25 (535) (517) ---------- --------- ---------- --------- --------- --------- ---------- --------- Continuing operations 622 653 220 146 (41) (52) 801 747 ========== ========= ========== ========= ========= ========= Discontinued operations 50 - ---------- --------- NET INCOME APPLICABLE TO COMMON SHARES 851 747 ========== =========
TOTAL ASSETS December 31 2003 2002 (millions of dollars) (unaudited) ---------------------------------------------------------- ------------------ Gas Transmission 16,972 16,979 Power 2,746 2,391 Corporate 812 457 ------------------ ------------------ Continuing Operations 20,530 19,827 Discontinued Operations 11 139 ------------------ ------------------ 20,541 19,966 ================== ==================
FOURTH QUARTER REPORT 2003 TCPL [24 4. LONG-TERM DEBT
December 31 2003 2002 (millions of dollars) (unaudited) -------------------------------------------------------------------------------- ---------------- Alberta System 2,341 2,892 Foreign exchange differential recoverable through the tollmaking process (16) (271) ----------------- ---------------- 2,325 2,621 ----------------- ---------------- Canadian Mainline 4,913 5,277 Foreign exchange differential recoverable through the tollmaking process (60) (330) ----------------- ---------------- 4,853 4,947 ----------------- ---------------- Other 2,837 1,764 ----------------- ---------------- 10,015 9,332 Less: current portion of long-term debt 550 517 ----------------- ---------------- 9,465 8,815 ================= ================
On June 9, 2003, the company issued US$350 million of unsecured 4.00 per cent notes maturing on June 15, 2013. On November 18, 2003, the company issued $450 million of unsecured 5.65 per cent notes maturing on January 15, 2014. 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 December 31, 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 account in Shareholders' Equity. FOURTH QUARTER REPORT 2003 TCPL [25
ASSET/(LIABILITY) December 31 2003 2002 (millions of dollars) (unaudited) -------------------------------- ----------------------------- ------------------------------ Carrying Fair Carrying Fair Amount Value Amount Value ----------------------------- ------------------------------ FOREIGN EXCHANGE Cross-currency swaps U.S. dollars 65 65 (8) (8) ----------------------------------------------------------------------------------------------------
At December 31, 2003, the notional principal amounts of cross-currency swaps were US$250 million (2002 - US$350 million).
RECONCILIATION OF FOREIGN EXCHANGE ADJUSTMENT December 31 2003 2002 (millions of dollars) (unaudited) --------------------------------------------------------------------- --------------------- -------------- Balance at beginning of year 14 13 Translation (losses)/gains on foreign currency denominated net assets (136) 3 Foreign exchange gains/(losses) on derivatives, and other 82 (2) --------------------- -------------- (40) 14 ----------------------------------------------------------------------------------------------------------------
FOREIGN EXCHANGE AND INTEREST RATE MANAGEMENT ACTIVITY The company manages the foreign exchange risk of U.S. dollar debt, U.S. dollar expenses and the interest rate exposures of the Alberta System, the Canadian Mainline and the Foothills System through the use of foreign currency and interest rate derivatives. These derivatives are comprised of contracts for periods up to nine years. Certain of the realized gains and losses on these derivatives are shared with shippers on predetermined terms.
ASSET/(LIABILITY) December 31 2003 2002 (millions of dollars) (unaudited) -------------------------------- ----------------------------- ------------------------------ Carrying Fair Carrying Fair Amount Value Amount Value ----------------------------- ------------------------------ FOREIGN EXCHANGE Cross-currency swaps (26) (26) 56 56 INTEREST RATE Interest rate swaps Canadian dollars 2 15 4 56 U.S. dollars - 8 (1) 4 ----------------------------------------------------------------------------------------------------
At December 31, 2003, the notional principal amounts of cross-currency swaps were US$282 million (2002 - US$282 million). Notional principal amounts for interest rate swaps were $964 million (2002 - $874 million) and US$100 million (2002 - US$175 million). FOURTH QUARTER REPORT 2003 TCPL [26 6. DISCONTINUED OPERATIONS The Board of Directors approved plans to dispose of the company's International, Canadian Midstream, and certain other businesses (December Plan) and the Gas Marketing business in December 1999 and July 2001, respectively. The company's disposals under both plans were substantially completed at December 31, 2001. TCPL's investments in Gasoducto del Pacifico, INNERGY Holdings S.A. and P.T. Paiton Energy Company approved for disposal under the December Plan will be accounted for as part of continuing operations as of December 31, 2003, due to the length of time it has taken the company to dispose of these assets. It is the intention of the company to continue with its plan to dispose of these investments. The company mitigated certain of its remaining exposures associated with the contingent liabilities related to the divested Gas Marketing operations by acquiring from a subsidiary of Mirant Corporation certain contracts under which it still had exposure in 2003, and simultaneously hedging the market price exposures of these contracts. The company remains contingently liable for certain residual obligations. In 2003, $50 million of the original approximately $100 million after-tax deferred gain was recognized in income. The after-tax deferred gain is included in Deferred Amounts. At December 31, 2003, TCPL reviewed the provision for loss on discontinued operations and the deferred gain and concluded that the remaining provision was adequate and the deferral of the remaining approximately $50 million of after-tax deferred gain related to the Gas Marketing business was appropriate. Revenues from discontinued operations for the year ended December 31, 2003 were $2 million (2002 - $36 million). Net income/(loss) from discontinued operations for the year ended December 31, 2003 was $50 million, net of $29 million income taxes (2002 - nil). The provision for loss on discontinued operations at December 31, 2003 was $41 million (2002 - $83 million). The provision for loss on discontinued operations is included in Accounts Payable. 7. INVESTMENT IN BRUCE POWER L.P. On February 14, 2003, the company acquired a 31.6 per cent interest in Bruce Power L.P. (Bruce Power) for $409 million, including closing adjustments. As part of the acquisition, the company also funded a one-third share ($75 million) of a $225 million accelerated deferred rent payment made by Bruce Power to Ontario Power Generation. The resulting note receivable from Bruce Power is recorded in Other Assets. FOURTH QUARTER REPORT 2003 TCPL [27 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 Capital lease 301 Power sales agreements (131) Pension liability and other (42) ---------- 409 ==========
The amount allocated to the investment in Bruce Power includes a purchase price allocation of $301 million to the capital lease of the Bruce Power plant which will be amortized on a straight-line basis over the lease term which extends to 2018, resulting in an annual amortization expense of $19 million. The amount allocated to the power sales agreements will be amortized to income over the remaining term of the underlying sales contracts. 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 amount allocated to the pension liability will be amortized to income over the 11 year expected average remaining service life of Bruce Power employees, resulting in an annual amortization of $3 million. 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 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, which is estimated to be approximately $90 million over three years. In the year ended December 31, 2003, TCPL funded $34 million of this loan which is included in Other Assets. The ability to recover this investment is contingent upon the outcome of the project. ------------------------------------------------------------------------------- TransCanada welcomes questions from shareholders and potential investors. Please telephone: Investor Relations, at 1-800-361-6522 (Canada and U.S. Mainland) or direct dial David Moneta/Debbie Stein at (403) 920-7911. The investor fax line is (403) 920-2457. Media Relations: Hejdi Feick/Anita Perry at (403) 920-7859. Visit TransCanada's Internet site at: http://www.transcanada.com -------------------------------------------------------------------------------