EX-2 3 a2134694zex-2.txt EXHIBIT 2 EXHIBIT 2 FIRST QUARTER REPORT 2004 TCPL [17 CONSOLIDATED INCOME Three months ended March 31 (unaudited)
(millions of dollars) 2004 2003 ------------------------------------------------------- ----- ----- REVENUES 1,233 1,336 OPERATING EXPENSES Cost of sales 127 180 Other costs and expenses 374 427 Depreciation 232 215 ----- ----- 733 822 ----- ----- OPERATING INCOME 500 514 OTHER EXPENSES/(INCOME) Financial charges 195 204 Financial charges of joint ventures 14 22 Equity income (58) (58) Interest and other income (15) (13) ----- ----- 136 155 ----- ----- INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND NON-CONTROLLING INTERESTS 364 359 INCOME TAXES Current 107 62 Future 23 74 NON-CONTROLLING INTERESTS 6 - ----- ----- NET INCOME 228 223 PREFERRED SECURITIES CHARGES 8 9 PREFERRED SHARE DIVIDENDS 6 6 ----- ----- NET INCOME APPLICABLE TO COMMON SHARES 214 208 ----- ----- ----- -----
See accompanying Notes to the Consolidated Financial Statements. FIRST QUARTER REPORT 2004 TCPL [18 CONSOLIDATED CASH FLOWS Three months ended March 31 (unaudited)
(millions of dollars) 2004 2003 ------------------------------------------------------- ----- ----- CASH GENERATED FROM OPERATIONS Net income 228 223 Depreciation 232 215 Future income taxes 23 74 Equity income in excess of distributions received (51) (51) Other (9) (4) ----- ----- Funds generated from operations 423 457 Increase in operating working capital (42) (8) ----- ----- Net cash provided by continuing operations 381 449 Net cash (used in)/provided by discontinued operations (2) 4 ----- ----- 379 453 ----- ----- INVESTING ACTIVITIES Capital expenditures (101) (76) Acquisitions, net of cash acquired - (409) Deferred amounts and other (45) (18) ----- ----- Net cash used in investing activities (146) (503) ----- ----- FINANCING ACTIVITIES Dividends and preferred securities charges (148) (139) Notes payable (repaid)/issued, net (229) 209 Long-term debt issued 665 - Reduction of long-term debt (476) (9) Non-recourse debt of joint ventures issued 6 17 Reduction of non-recourse debt of joint ventures (9) (16) Common shares issued - 16 ----- ----- Net cash (used in)/provided by financing activities (191) 78 ----- ----- INCREASE IN CASH AND SHORT-TERM INVESTMENTS 42 28 CASH AND SHORT-TERM INVESTMENTS Beginning of period 337 212 ----- ----- CASH AND SHORT-TERM INVESTMENTS End of period 379 240 ----- ----- ----- ----- SUPPLEMENTARY CASH FLOW INFORMATION Income taxes paid 161 55 Interest paid 172 190 ----- ----- ----- -----
See accompanying Notes to the Consolidated Financial Statements. FIRST QUARTER REPORT 2004 TCPL [19 CONSOLIDATED BALANCE SHEET
March 31, 2004 December 31, (millions of dollars) (unaudited) 2003 ------------------------------------------------------------ -------------- ------------ ASSETS CURRENT ASSETS Cash and short-term investments 379 337 Accounts receivable 555 603 Inventories 161 165 Other 110 88 -------------- ------------ 1,205 1,193 LONG-TERM INVESTMENTS 782 733 PLANT, PROPERTY AND EQUIPMENT 17,336 17,460 OTHER ASSETS 1,483 1,164 -------------- ------------ 20,806 20,550 -------------- ------------ -------------- ------------ LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Notes payable 138 367 Accounts payable 955 1,069 Accrued interest 241 208 Current portion of long-term debt 489 550 Current portion of non-recourse debt of joint ventures 25 19 -------------- ------------ 1,848 2,213 DEFERRED AMOUNTS 642 475 LONG-TERM DEBT 9,835 9,465 FUTURE INCOME TAXES 434 427 NON-RECOURSE DEBT OF JOINT VENTURES 760 761 JUNIOR SUBORDINATED DEBENTURES 19 22 -------------- ------------ 13,538 13,363 -------------- ------------ NON-CONTROLLING INTERESTS 85 82 -------------- ------------ SHAREHOLDERS' EQUITY Preferred securities 672 672 Preferred shares 389 389 Common shares 4,632 4,632 Contributed surplus 268 267 Retained earnings 1,259 1,185 Foreign exchange adjustment (37) (40) -------------- ------------ 7,183 7,105 -------------- ------------ 20,806 20,550 -------------- ------------ -------------- ------------
See accompanying Notes to the Consolidated Financial Statements. FIRST QUARTER REPORT 2004 TCPL [20 CONSOLIDATED RETAINED EARNINGS Three months ended March 31 (unaudited)
(millions of dollars) 2004 2003 ------------------------------------------------------------ ----- ---- Balance at beginning of period 1,185 854 Net income 228 223 Preferred securities charges (8) (9) Preferred share dividends (6) (6) Common share dividends (140) (129) ----- ---- 1,259 933 ----- ---- ----- ----
See accompanying Notes to the Consolidated Financial Statements. FIRST QUARTER REPORT 2004 TCPL [21 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. SIGNIFICANT ACCOUNTING POLICIES The consolidated financial statements of TransCanada PipeLines Limited (TCPL or the company) have been prepared in accordance with Canadian generally accepted accounting principles (GAAP). The accounting policies applied are consistent with those outlined in TCPL's annual financial statements for the year ended December 31, 2003 except as stated below. These consolidated financial statements reflect all normal recurring adjustments that are, in the opinion of management, necessary to present fairly the financial position and results of operations for the respective periods. These consolidated financial statements do not include all disclosures required in the annual financial statements and should be read in conjunction with the annual financial statements included in TCPL's 2003 Annual Report. Amounts are stated in Canadian dollars unless otherwise indicated. Certain comparative figures have been reclassified to conform with the current period's presentation. Since a determination of many assets, liabilities, revenues and expenses is dependent upon future events, the preparation of these consolidated financial statements requires the use of estimates and assumptions. In the opinion of Management, these consolidated financial statements have been properly prepared within reasonable limits of materiality and within the framework of the company's significant accounting policies. 2. ACCOUNTING CHANGES ASSET RETIREMENT OBLIGATIONS Effective January 1, 2004, the company adopted the new standard of the Canadian Institute of Chartered Accountants (CICA) Handbook Section "Asset Retirement Obligations", which addresses financial accounting and reporting for obligations associated with asset retirement costs. This section requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The fair value is added to the carrying amount of the associated asset. The liability is accreted at the end of each period through charges to operating expenses. This accounting change was applied retroactively with restatement of prior periods. FIRST QUARTER REPORT 2004 TCPL [22 The plant, property and equipment of the regulated natural gas transmission operations consist primarily of underground pipelines and above ground compression equipment and other facilities. No amount has been recorded for asset retirement obligations relating to these assets as it is not possible to make a reasonable estimate of the fair value of the liability due to the indeterminate timing and scope of the asset retirements. Management believes that it is reasonable to assume all retirement costs associated with the regulated pipelines will be recovered through tolls in future periods. The plant, property and equipment in the power business consists primarily of power plants in Canada and the United States. The impact of this accounting change resulted in an increase of $6 million and $7 million in the estimated fair value of the liability for the power plants and associated assets as at January 1, 2003 and December 31, 2003, respectively. The asset retirement cost, net of accumulated depreciation that would have been recorded if the cost had been recorded in the period in which it arose, is recorded as an additional cost of the assets as at January 1, 2003. The estimated fair value of the liability as at March 31, 2004 was $9 million. The company has no legal liability for asset retirement obligations with respect to its investment in Bruce Power and the Sundance A and B power purchase arrangements. The impact of this accounting change resulted in an increase of $2 million in the estimated fair value of the liability for TCPL's Other Gas Transmission assets as at January 1, 2003 and December 31, 2003. The estimated fair value of this liability as at March 31, 2004 was $2 million. The impact of this change on TCPL's net income in first quarter 2004 and prior periods was nil. HEDGING RELATIONSHIPS Effective January 1, 2004, the company adopted the provisions of the CICA's new Accounting Guideline "Hedging Relationships" that specifies the circumstances in which hedge accounting is appropriate, including the identification, documentation, designation and effectiveness of hedges, and the discontinuance of hedge accounting. In accordance with the provisions of this new guideline, TCPL has recorded all derivatives on the Consolidated Balance Sheet at fair value. This new guideline was applied prospectively and resulted in a decrease to first quarter 2004 net income of $2 million. The significant impact of the accounting change on the Consolidated Balance Sheet as at January 1, 2004 is as follows. FIRST QUARTER REPORT 2004 TCPL [23
(unaudited - millions of dollars) Increase/(Decrease) --------------------------------------------------------- ------------------- Current Assets Other 8 Other Assets 123 ------------------- Total Assets 131 ------------------- Current Liabilities Accounts Payable 8 Deferred Amounts 132 Long-Term Debt (7) Future Income Taxes (1) ------------------- Total Liabilities 132 -------------------
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES Effective January 1, 2004, the company adopted the new standard of the CICA Handbook Section "Generally Accepted Accounting Principles" that defines primary sources of generally accepted accounting principles (GAAP) and the other sources that need to be considered in the application of GAAP. The new standard eliminates the ability to rely on industry practice to support a particular accounting policy. This accounting change was applied prospectively and there was no impact on net income in first quarter 2004. In prior periods, in accordance with industry practice, certain assets and liabilities related to the company's regulated activities, and offsetting deferral accounts, were not recorded on the balance sheet. The impact of the change on the consolidated balance sheet as at January 1, 2004 is as follows.
(unaudited - millions of dollars) Increase/(Decrease) --------------------------------------------------------- ------------------- Other Assets 153 ------------------- Deferred Amounts 80 Long-Term Debt 76 Preferred Securities (3) ------------------- Total Liabilities 153 -------------------
FIRST QUARTER REPORT 2004 TCPL [24 3. SEGMENTED INFORMATION
GAS TRANSMISSION POWER CORPORATE TOTAL Three months ended March 31 ---------------- ------------ ------------ ------------- (unaudited - millions of dollars) 2004 2003 2004 2003 2004 2003 2004 2003 --------------------------------------- ----- ---- ---- ---- ---- ---- ----- ----- Revenues 949 960 284 376 - - 1,233 1,336 Cost of sales - - (127) (180) - - (127) (180) Other costs and expenses (285) (304) (87) (121) (2) (2) (374) (427) Depreciation (212) (194) (20) (21) - - (232) (215) ----- ---- ---- ---- ---- ---- ----- ----- Operating income/(loss) 452 462 50 54 (2) (2) 500 514 Financial charges and non-controlling interests (192) (196) (2) (2) (21) (21) (215) (219) Financial charges of joint ventures (14) (22) - - - - (14) (22) Equity income 10 20 48 38 - - 58 58 Interest and other income 3 5 4 4 8 4 15 13 Income taxes (110) (111) (35) (31) 15 6 (130) (136) ----- ---- ---- ---- ---- ---- ----- ----- NET INCOME APPLICABLE TO COMMON SHARES 149 158 65 63 - (13) 214 208 ----- ---- ---- ---- ---- ---- ----- ----- ----- ---- ---- ---- ---- ---- ----- -----
March 31, 2004 December 31, (millions of dollars) (unaudited) 2003 -------------------------------------------- -------------- ------------ Gas Transmission 16,908 16,974 Power 2,830 2,753 Corporate 1,058 812 -------------- ------------ Continuing Operations 20,796 20,539 Discontinued Operations 10 11 -------------- ------------ 20,806 20,550 -------------- ------------ -------------- ------------
4. RISK MANAGEMENT AND FINANCIAL INSTRUMENTS The following represents the material changes to the company's risk management and financial instruments since December 31, 2003. The tables reflect the impact of hedge accounting changes adopted prospectively, effective January 1, 2004, as further discussed under Note 2, Accounting Changes - Hedging Relationships. FOREIGN EXCHANGE AND INTEREST RATE MANAGEMENT ACTIVITY The company manages 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 eight years. Certain of the realized gains and losses on interest rate derivatives are shared with shippers on predetermined terms. FIRST QUARTER REPORT 2004 TCPL [25
Asset/(Liability) March 31, 2004 (millions of dollars) (unaudited) December 31, 2003 ------------------------------------ -------------------- -------------------- Carrying Fair Carrying Fair Amount Value Amount Value -------- ----- -------- ----- FOREIGN EXCHANGE Cross-currency swaps (21) (21) (26) (26) INTEREST RATE Interest rate swaps Canadian dollars 23 23 2 15 U.S. dollars 9 9 - 8 ---------------------------------------------------------------------------------------
At March 31, 2004, the principal amounts of cross-currency swaps was US$282 million (December 31, 2003 - US$282 million). Notional principal amounts for interest rate swaps were $769 million (December 31, 2003 - $964 million) and US$100 million (December 31, 2003 - US$100 million). The company manages the foreign exchange risk and interest rate exposures of its other U.S. dollar debt through the use of foreign currency and interest rate derivatives. These derivatives are comprised of contracts for periods up to nine years. The fair values of the interest rate derivatives are shown in the table below.
Asset/(Liability) March 31, 2004 (millions of dollars) (unaudited) December 31, 2003 ------------------------------------ -------------------- -------------------- Carrying Fair Carrying Fair Amount Value Amount Value -------- ----- -------- ----- INTEREST RATE Interest rate swaps U.S. dollars 44 44 2 37 FORWARD FOREIGN EXCHANGE CONTRACTS U.S. dollars (4) (4) - - ---------------------------------------------------------------------------------------
At March 31, 2004, the notional principal amount for interest rate swaps was US$550 million (December 31, 2003 - US$500 million) and the principal amount of forward foreign exchange contracts was US$200 million (December 31, 2003 - nil). 5. ACQUISITION On February 24, 2004, TCPL announced an agreement to acquire Gas Transmission Northwest Corporation (GTN) from National Energy & Gas Transmission Inc. for approximately US$1.7 billion, including US$0.5 billion of assumed debt and subject to closing adjustments. GTN is a natural gas pipeline company that owns and operates two pipeline systems. The acquisition is subject to bankruptcy court approval, including completion of a court-sanctioned auction process, regulatory approval and an anti-trust review. FIRST QUARTER REPORT 2004 TCPL [26 6. SALE OF ASSETS On March 29, 2004, TCPL entered into an agreement to sell the ManChief and Curtis Palmer power facilities for US$402.6 million to Power LP. TCPL expects to recognize a gain of approximately $10 million after tax on the sale of these assets. The sale is subject to certain post closing adjustments, approval by Power LP's unitholders and applicable regulatory approvals. TCPL expects to complete the sale of these assets on or about May 5, 2004. Power LP's unitholders will be asked at a special meeting to be held on April 29, 2004 to approve the acquisition and to remove Power LP's obligation to redeem all units not owned by TCPL in 2017. Power LP expects to fund the transaction through an offering of 8.11 million subscription receipts which closed April 15, 2004 and a bridge loan facility from a Canadian chartered bank. As part of the subscription receipts offering, TCPL purchased 540,000 subscription receipts for an aggregate purchase price of approximately $20 million. Subsequent to the transaction being completed, TCPL's ownership interest in Power LP will be reduced from 35.6 per cent to approximately 30.6 per cent. TCPL expects the removal of the redemption obligation and the reduction in ownership interest will result in a gain of approximately $165 million after tax. This amount primarily reflects the recognition of unamortized gains on previous Power LP transactions. ------------------------------------------------------------------------------- TCPL welcomes questions from shareholders and potential investors. Please telephone: Investor Relations, at 1-800-361-6522 (Canada and U.S. Mainland) or direct dial David Moneta/Debbie Stein at (403) 920-7911. The investor fax line is (403) 920-2457. Media Relations: Hejdi Feick/Kurt Kadatz at (403) 920-7859 Visit TCPL's Internet site at: http://www.transcanada.com -------------------------------------------------------------------------------