TransCanada Reports Solid First Quarter 2015 Financial Results
(firmenpresse) - CALGARY, ALBERTA -- (Marketwired) -- 05/01/15 -- TransCanada Corporation (TSX: TRP) (NYSE: TRP) (TransCanada) today announced net income attributable to common shares for first quarter 2015 of $387 million or $0.55 per share compared to $412 million or $0.58 per share for the same period in 2014. Comparable earnings for first quarter 2015 were $465 million or $0.66 per share compared to $422 million or $0.60 per share for the same period last year. TransCanada's Board of Directors also declared a quarterly dividend of $0.52 per common share for the quarter ending June 30, 2015, equivalent to $2.08 per common share on an annualized basis.
"Solid performance in the first quarter from each of our core business segments contributed to an increase in comparable earnings and funds generated from operations of ten and five per cent, respectively, compared to the same period last year," said Russ Girling, TransCanada's president and chief executive officer. "Strong performance from our Keystone System, Eastern Canadian Power and U.S. Power segments helped to offset depressed power prices in Western Power and clearly demonstrates the strength of our diverse portfolio of critical energy infrastructure assets. Looking forward, we remain well positioned to grow earnings, cash flow and dividends over the next three years as we work to bring $12 billion of small to medium-sized growth projects into service."
We also continue to advance a number of other growth initiatives, including $34 billion of commercially secured projects, which would extend and possibly augment the future growth rate in earnings, cash flow and dividends through the end of the decade. With our high-quality asset base and a strong balance sheet, we remain well positioned to create long-term shareholder value throughout various market conditions.
Highlights
(All financial figures are unaudited and in Canadian dollars unless noted otherwise)
Net income attributable to common shares decreased by $25 million to $387 million or $0.55 per share for the three months ended March 31, 2015 compared to the same period in 2014. Both periods included unrealized gains and losses from changes in risk management activities which are excluded from comparable earnings.
Comparable earnings for first quarter 2015 were $465 million or $0.66 per share compared to $422 million or $0.60 per share for the same period in 2014. Higher earnings from Keystone, Mexican Pipelines, U.S. Power and Eastern Power were offset by lower contributions from Western Power, the Canadian Mainline and Natural Gas Storage.
Notable recent developments in Natural Gas Pipelines, Liquids Pipelines, Energy and Corporate include:
Teleconference - Audio and Slide Presentation:
We will hold a teleconference and webcast on Friday, May 1, 2015 to discuss our first quarter 2015 financial results. Russ Girling, TransCanada president and chief executive officer, and Don Marchand, executive vice-president and chief financial officer, along with other members of the TransCanada executive leadership team, will discuss the financial results and Company developments at 1 p.m. (MT) / 3 p.m. (ET).
Analysts, members of the media and other interested parties are invited to participate by calling 800.396.7098 or 416.340.2218 (Toronto area). Please dial in 10 minutes prior to the start of the call. No pass code is required. A live webcast of the teleconference will be available at .
A replay of the teleconference will be available two hours after the conclusion of the call until midnight (ET) on May 8, 2015. Please call 800.408.3053 or 905.694.9451 and enter pass code 8512000.
The unaudited interim Consolidated Financial Statements and Management's Discussion and Analysis (MD&A) are available under TransCanada's profile on SEDAR at , with the U.S. Securities and Exchange Commission on EDGAR at and on the TransCanada website at .
With more than 60 years' experience, TransCanada is a leader in the responsible development and reliable operation of North American energy infrastructure including natural gas and oil pipelines, power generation and gas storage facilities. TransCanada operates a network of natural gas pipelines that extends more than 68,000 kilometres (42,100 miles), tapping into virtually all major gas supply basins in North America. TransCanada is one of the continent's largest providers of gas storage and related services with more than 368 billion cubic feet of storage capacity. A growing independent power producer, TransCanada owns or has interests in over 10,900 megawatts of power generation in Canada and the United States. TransCanada is developing one of North America's largest oil delivery systems. TransCanada's common shares trade on the Toronto and New York stock exchanges under the symbol TRP. For more information visit: or check us out on Twitter (at)TransCanada or .
Forward Looking Information
This news release contains certain information that is forward-looking and is subject to important risks and uncertainties (such statements are usually accompanied by words such as "anticipate", "expect", "believe", "may", "will", "should", "estimate", "intend" or other similar words). Forward-looking statements in this document are intended to provide TransCanada security holders and potential investors with information regarding TransCanada and its subsidiaries, including management's assessment of TransCanada's and its subsidiaries' future plans and financial outlook. All forward-looking statements reflect TransCanada's beliefs and assumptions based on information available at the time the statements were made and as such are not guarantees of future performance. Readers are cautioned not to place undue reliance on this forward-looking information, which is given as of the date it is expressed in this news release, and not to use future-oriented information or financial outlooks for anything other than their intended purpose. TransCanada undertakes no obligation to update or revise any forward-looking information except as required by law. For additional information on the assumptions made, and the risks and uncertainties which could cause actual results to differ from the anticipated results, refer to TransCanada's Quarterly Report to Shareholders dated April 30, 2015 and 2014 Annual Report on our website at or filed under TransCanada's profile on SEDAR at and with the U.S. Securities and Exchange Commission at .
Non-GAAP Measures
This news release contains references to non-GAAP measures, including comparable earnings, comparable EBITDA, funds generated from operations and comparable earnings per share, that do not have any standardized meaning as prescribed by U.S. GAAP and therefore are unlikely to be comparable to similar measures presented by other companies. These non-GAAP measures are calculated on a consistent basis from period to period and are adjusted for specific items in each period, as applicable. For more information on non-GAAP measures, refer to TransCanada's Quarterly Report to Shareholders dated April 30, 2015.
Quarterly report to shareholders
First quarter 2015
Financial highlights
Management's discussion and analysis
April 30, 2015
This management's discussion and analysis (MD&A) contains information to help the reader make investment decisions about TransCanada Corporation. It discusses our business, operations, financial position, risks and other factors for the three months ended March 31, 2015, and should be read with the accompanying unaudited condensed consolidated financial statements for the three months ended March 31, 2015 which have been prepared in accordance with U.S. GAAP.
This MD&A should also be read in conjunction with our December 31, 2014 audited consolidated financial statements and notes and the MD&A in our 2014 Annual Report, which have been prepared in accordance with U.S. GAAP.
About this document
Throughout this MD&A, the terms, we, us, our and TransCanada mean TransCanada Corporation and its subsidiaries.
Abbreviations and acronyms that are not defined in this MD&A are defined in the glossary in our 2014 Annual Report.
All information is as of April 30, 2015 and all amounts are in Canadian dollars, unless noted otherwise.
FORWARD-LOOKING INFORMATION
We disclose forward-looking information to help current and potential investors understand management's assessment of our future plans and financial outlook, and our future prospects overall.
Statements that are forward-looking are based on certain assumptions and on what we know and expect today and generally include words like anticipate, expect, believe, may, will, should, estimate or other similar words.
Forward-looking statements in this MD&A may include information about the following, among other things:
Forward-looking statements do not guarantee future performance. Actual events and results could be significantly different because of assumptions, risks or uncertainties related to our business or events that happen after the date of this MD&A.
Our forward-looking information is based on the following key assumptions, and subject to the following risks and uncertainties:
Assumptions
Risks and uncertainties
You can read more about these factors and others in reports we have filed with Canadian securities regulators and the SEC, including the MD&A in our 2014 Annual Report.
You should not put undue reliance on forward-looking information and should not use future-oriented information or financial outlooks for anything other than their intended purpose. We do not update our forward-looking statements due to new information or future events, unless we are required to by law.
FOR MORE INFORMATION
You can find more information about TransCanada in our annual information form and other disclosure documents, which are available on SEDAR ().
NON-GAAP MEASURES
We use the following non-GAAP measures:
These measures do not have any standardized meaning as prescribed by U.S. GAAP and therefore may not be comparable to similar measures presented by other entities. Please see the Non-GAAP Reconciliation section in this MD&A for a reconciliation of the GAAP measures to the non-GAAP measures.
EBITDA and EBIT
We use EBITDA as an approximate measure of our pre-tax operating cash flow. It measures our earnings before deducting financial charges, income tax, depreciation and amortization, net income attributable to non-controlling interests and preferred share dividends, and includes income from equity investments. EBIT measures our earnings from ongoing operations and is a useful measure of our performance and an effective tool for evaluating trends in each segment as it is equivalent to our segmented earnings. It is calculated in the same way as EBITDA, less depreciation and amortization.
Funds generated from operations
Funds generated from operations includes net cash provided by operations before changes in operating working capital. We believe it is a useful measure of our consolidated operating cash flow because it does not include fluctuations from working capital balances, which do not necessarily reflect underlying operations in the same period and is used to provide a consistent measure of the cash generating performance of our assets. See the Financial condition section for a reconciliation to net cash provided by operations.
Comparable measures
We calculate the comparable measures by adjusting certain GAAP and non-GAAP measures for specific items we believe are significant but not reflective of our underlying operations in the period. These comparable measures are calculated on a consistent basis from period to period and are adjusted for specific items in each period, as applicable.
Our decision not to include a specific item is subjective and made after careful consideration. Specific items may include:
We calculate comparable earnings by excluding the unrealized gains and losses from changes in the fair value of derivatives used to reduce our exposure to certain financial and commodity price risks. These derivatives generally provide effective economic hedges, but do not meet the criteria for hedge accounting. As a result, the changes in fair value are recorded in net income. As these amounts do not accurately reflect the gains and losses that will be realized at settlement, we do not consider them reflective of our underlying operations.
Consolidated results - first quarter 2015
Net income attributable to common shares decreased by $25 million for the three months ended March 31, 2015 compared to the same period in 2014. Net income in both periods included unrealized gains and losses from changes in risk management activities and we exclude these unrealized gains and losses to arrive at comparable earnings. For the three months ended March 31, 2015, comparable earnings increased by $43 million compared to the same period in 2014, as discussed below in the reconciliation of net income to comparable earnings.
RECONCILIATION OF NET INCOME TO COMPARABLE EARNINGS
Comparable earnings increased by $43 million for the three months ended March 31, 2015 compared to the same period in 2014. This was primarily the net effect of:
The stronger U.S. dollar this quarter compared to the same period in 2014 positively impacted the translated results in our U.S. businesses, however, this impact was mostly offset by a corresponding increase in interest expense on U.S. dollar-denominated debt as well as realized losses on foreign exchange hedges used to manage our net exposure through our hedging program.
CAPITAL PROGRAM
We are developing quality projects under our long-term capital program. These long-life infrastructure assets are supported by long-term commercial arrangements with creditworthy counterparties or regulated business models and are expected to generate significant growth in earnings and cash flow.
Our capital program is comprised of $12 billion of small to medium-sized, shorter-term projects and $34 billion of commercially secured large-scale, medium and longer-term projects. Amounts presented exclude the impact of foreign exchange and capitalized interest.
Estimated project costs are based on the last announced project estimates and are subject to cost adjustments due to market conditions, route refinement, permitting conditions, scheduling and timing of regulatory permits.
Outlook
The earnings outlook for 2015 is expected to be consistent with what was previously included in the 2014 Annual Report. See the MD&A in our 2014 Annual Report for further information about our outlook.
Natural Gas Pipelines
The following is a reconciliation of comparable EBITDA and comparable EBIT (our non-GAAP measures) to segmented earnings (the equivalent GAAP measure).
Natural Gas Pipelines segmented earnings increased by $9 million for the three months ended March 31, 2015 compared to the same period in 2014 and are equivalent to comparable EBIT which, along with comparable EBITDA, are discussed below.
CANADIAN PIPELINES
Net income and comparable EBITDA for our rate-regulated Canadian pipelines are generally affected by the approved ROE, investment base, level of deemed common equity, incentive earnings or losses and certain carrying charges. Changes in depreciation, financial charges and taxes also impact comparable EBITDA and comparable EBIT but do not impact net income as they are recovered in revenue on a flow-through basis.
NET INCOME - WHOLLY OWNED CANADIAN PIPELINES
Net income for the Canadian Mainline decreased by $19 million for the three months ended March 31, 2015 compared to the same period in 2014. In 2015, the Canadian Mainline began operating under the 2015 - 2030 Tolls and Tariff Application approved by the NEB in November 2014. The decrease in net income was due to a lower ROE of 10.10 per cent in 2015 compared to 11.50 per cent in 2014 on deemed common equity of 40 per cent as well as lower incentive earnings and a lower average investment base in 2015.
Net income for the NGTL System increased by $1 million for the three months ended March 31, 2015 compared to the same period in 2014 mainly due to a higher average investment base.
U.S. AND INTERNATIONAL PIPELINES
Earnings for our U.S. natural gas pipelines operations are generally affected by contracted volume levels, volumes delivered and the rates charged as well as by the cost of providing services, including OM&A and property taxes. ANR is also affected by the contracting and pricing of its storage capacity and incidental commodity sales.
Comparable EBITDA for U.S. and International Pipelines increased by US$33 million for the three months ended March 31, 2015 compared to the same period in 2014. This was the net effect of:
A stronger U.S. dollar had a positive impact on the Canadian dollar equivalent comparable earnings from our U.S. and International operations.
COMPARABLE DEPRECIATION AND AMORTIZATION
Comparable depreciation and amortization increased by $17 million for the three months ended March 31, 2015 compared to the same period in 2014 mainly because of depreciation for the Tamazunchale Extension, a higher investment base on the NGTL System and the effect of a stronger U.S. dollar.
BUSINESS DEVELOPMENT
Business development expenses were higher by $9 million for the three months ended March 31, 2015 compared to the same period in 2014 mainly due to increased business development activity.
OPERATING STATISTICS - WHOLLY OWNED PIPELINES
Liquids Pipelines
The following is a reconciliation of comparable EBITDA and comparable EBIT (our non-GAAP measures) to segmented earnings (the equivalent GAAP measure).
Liquids Pipelines segmented earnings increased by $54 million for the three months ended March 31, 2015 compared to the same period in 2014 and are equivalent to comparable EBIT, which, along with comparable EBITDA, are discussed below.
Comparable EBITDA for the Keystone Pipeline System is generated primarily by providing pipeline capacity to shippers for fixed monthly payments that are not linked to actual throughput volumes. Uncontracted capacity is offered to the market on a spot basis and provides opportunities to generate incremental earnings.
Comparable EBITDA for the Keystone Pipeline System increased by $66 million for the three months ended March 31, 2015 compared to the same period in 2014. This increase was primarily due to:
COMPARABLE DEPRECIATION AND AMORTIZATION
Comparable depreciation and amortization increased by $14 million for the three months ended March 31, 2015 compared to the same period in 2014 due to the Gulf Coast extension being placed in service and the effect of a stronger U.S. dollar.
Energy
The following is a reconciliation of comparable EBITDA and comparable EBIT (our non-GAAP measures) to segmented earnings (the equivalent GAAP measure).
Energy segmented earnings decreased by $43 million for the three months ended March 31, 2015 compared to the same period in 2014 and included the following unrealized gains and losses from changes in the fair value of derivatives:
The period over period variances in these unrealized gains and losses reflect the impact of changes in forward natural gas and power prices and the volume of our positions for these particular derivatives over a certain period of time; however, they do not accurately reflect the gains and losses that will be realized on settlement, or the offsetting impact of other derivative and non-derivative transactions that make up our business as a whole. As a result, we do not consider them reflective of our underlying operations.
A significant portion of the unrealized risk management activity losses in U.S. Power for first quarter 2015 are due to the timing of recognizing certain earnings from our power marketing business. The majority of these unrealized losses will be realized in second quarter 2015. Please see the U.S. Power section of this MD&A for further discussion on these timing differences.
Canadian Power losses from risk management activities are a result of declining Alberta power prices, as discussed in the Western Power section.
The remainder of the Energy segmented earnings are equivalent to comparable EBIT, which along with EBITDA, are discussed below.
Comparable EBITDA for Energy increased by $43 million for the three months ended March 31, 2015 compared to the same period in 2014 due to the net effect of:
CANADIAN POWER
Western and Eastern Power
Sales volumes and plant availability
Includes our share of volumes from our equity investments.
Western Power
Comparable EBITDA for Western Power decreased by $57 million for the three months ended March 31, 2015 compared to the same period in 2014 due to lower realized power prices and the sale of Cancarb in April 2014.
Average spot market power prices in Alberta decreased by 53 per cent from $62/MWh to $29/MWh for the three months ended March 31, 2015 compared to the same period in 2014. The Alberta power market remained well supplied in first quarter 2015, with strong thermal fleet availability, robust wind output and new capacity from a large gas-fired power plant that entered commercial service in March 2015. Mild winter weather conditions also contributed to the lower power prices.
Lower Alberta spot power prices experienced in first quarter 2015 are expected to continue in the near term and 2015 Western Power earnings are anticipated to be lower compared to 2014. Longer-term, we expect prices to return to higher levels as excess supply is absorbed by growth in power demand and aging generation infrastructure is retired.
Fifty-four per cent of Western Power sales volumes were sold under contract in first quarter 2015 compared to 72 per cent in first quarter 2014.
Eastern Power
Comparable EBITDA for Eastern Power increased by $38 million for the three months ended March 31, 2015 compared to the same period in 2014 mainly due to the sale of unused natural gas transportation, higher contractual earnings at Becancour and incremental earnings from solar facilities acquired in 2014.
BRUCE POWER
Our proportionate share
Equity income from Bruce A increased by $7 million for the three months ended March 31, 2015 compared to the same period in 2014. The increase was mainly due to higher volumes resulting from fewer outage days partially offset by higher operating expenses.
Equity income from Bruce B increased $8 million for the three months ended March 31, 2015 compared to the same period in 2014 mainly due to higher volumes resulting from fewer outage days.
Under a contract with the IESO, all of the output from Bruce A is sold at a fixed price/MWh which is adjusted annually on April 1 for inflation.
Under the same contract, all output from Bruce B is subject to a floor price adjusted annually for inflation on April 1.
Amounts received under the Bruce B floor price mechanism within a calendar year are subject to repayment if the average spot price in a month exceeds the floor price. We expect 2015 spot power prices to be less than the floor price throughout 2015 and therefore no amounts received under the floor price mechanism in 2015 are expected to be repaid. Amounts received above the floor price in first quarter 2014 were repaid to the IESO in January 2015.
Bruce B also enters into fixed-price contracts under which it receives or pays the difference between the contract price and the spot price.
The contract also provides for payment if the IESO reduces Bruce Power's generation to balance the supply of and demand for electricity and/or manage other operating conditions of the Ontario power grid. The amount of the reduction is considered "deemed generation", for which Bruce Power is paid the fixed price, floor price or spot price as applicable under the contract.
Overall plant availability percentages in 2015 are expected to be in the mid 80s for Bruce A and Bruce B. In April 2015, all Bruce B units were removed from service for approximately one month to allow for inspection of the Bruce B vacuum building as mandated by the Canadian Nuclear Safety Commission to occur approximately once every decade. Additional planned maintenance on Unit 6 will continue during second quarter 2015. Planned maintenance at Bruce A is scheduled for third quarter 2015.
U.S. POWER
Sales volumes and plant availability
U.S. Power - other information
Comparable EBITDA for U.S. Power increased US$47 million for the three months ended March 31, 2015 compared to the same period in 2014 and was primarily due to the net effect of:
The timing of recognizing earnings on certain contracts in our U.S. power marketing business is impacted by different power pricing profiles between the prices we charge our customers and the prices we pay for volumes purchased to fulfill our sales obligations over the term of the contracts. The costs on volumes purchased to fulfill power sales commitments to wholesale, commercial and industrial customers include the impact of certain contracts to purchase power over multiple periods at a flat price. Because the price we charge our customers is typically shaped to the market, the impact of these two contract pricing profiles has generally resulted in higher earnings in January to March, offset by lower earnings between April and December with overall positive margins realized over the term of the contracts. Due to increased natural gas and power prices experienced during winter 2013/2014 and the impact on the pricing of our 2015 contracts in the New England market, these timing differences will be more significant in 2015. The majority of these higher earnings will be offset by lower earnings in second quarter.
Wholesale electricity prices in New York and New England were significantly lower for the three months ended March 31, 2015 compared to the same period in 2014 despite colder temperatures in the northeast U.S. in 2015. Spot power prices for the three months ended March 31, 2015 were 41 per cent lower in New England and 45 per cent lower in New York City compared to the same period in 2014. Spot capacity prices in New York City were, on average, 13 per cent lower for the three months ended March 31, 2015 compared to the same period in 2014. Reductions in fuel oil prices and increased availability of liquefied natural gas in winter 2015 helped to mitigate the impact of pipeline constraints and keep peak price excursions limited compared to winter 2014. Lower commodity prices and reduced price volatility in first quarter 2015 contributed to higher margins on sales to wholesale, commercial and industrial customers by reducing the costs on volumes purchased to fulfill power sales commitments to these customers.
Physical sales volumes for the three months ended March 31, 2015 were higher compared to the same period in 2014. For the three months ended March 31, 2015, purchased volumes sold to wholesale, commercial and industrial customers were higher than the same period in 2014 offset by lower generation volumes primarily at our Ravenswood and hydro facilities.
As at March 31, 2015, approximately 3,900 GWh or 44 per cent of U.S. Power's planned generation was contracted for the remainder of 2015, and 3,500 GWh or 31 per cent for 2016. Planned generation fluctuates depending on hydrology, wind conditions, commodity prices and the resulting dispatch of the assets. Power sales fluctuate based on customer usage.
NATURAL GAS STORAGE AND OTHER
Comparable EBITDA decreased $24 million for the three months ended March 31, 2015 compared to the same period in 2014 and was due to decreased storage revenues as a result of lower realized natural gas price spreads. Extreme natural gas price volatility experienced in first quarter 2014 did not repeat in first quarter 2015.
Recent developments
NATURAL GAS PIPELINES
Canadian Regulated Pipelines
NGTL System
The NGTL System has approximately $6.7 billion of new supply and demand facilities under development. In first quarter 2015, we continued to advance several of these capital expansion projects by filing the regulatory applications with the NEB and plan to file additional facilities applications for this program throughout 2015. We have also received additional requests for firm receipt service that we anticipate will increase the overall capital spend on the NGTL System beyond the previously announced program and continue to work with our customers to best match their requirements for 2016, 2017 and 2018 in-service dates.
North Montney Mainline
On April 15, 2015, the NEB issued its report recommending the federal government approve the $1.7 billion North Montney Mainline project which will provide substantial new capacity on the NGTL System to meet the transportation requirements associated with rapidly increasing development of natural gas resources in the Montney supply basin in northeastern B.C. The project will connect Montney and other Western Canada Sedimentary Basin supply to both existing and new natural gas markets, including LNG markets.
The North Montney Mainline project will consist of two large diameter, 42-inch pipeline sections, Aitken Creek and Kahta, totaling approximately 301 km (187 miles) in length, and associated metering facilities, valve sites and compression facilities. The project will also include an interconnection with our proposed Prince Rupert Gas Transmission Project to provide natural gas supply to the proposed Pacific NorthWest (PNW) LNG liquefaction and export facility near Prince Rupert, B.C. Subject to certain conditions, including a positive final investment decision on the proposed PNW LNG project, we expect to have the Aitken Creek Section in service in 2016 and the Kahta Section in service in 2017.
The NEB also approved the applied-for rolled-in tolling design for the project costs during a transition period, subject to certain conditions which we are reviewing. Following the transition period, we will have the option of applying to the NEB for a revised tolling methodology, or the ability to implement stand-alone tolling on the project. We will engage shippers to determine an appropriate approach that best meets market requirements.
Canadian Mainline
TransCanada Mainline - 2013-2030 Mainline Settlement Application Compliance Filing
On March 31, 2015, we submitted a compliance filing in response to direction from the NEB's RH-001-2014 Decision issued in November 2014. We are currently operating under interim tolls set out at the level proposed in the initial application and will continue until final tolls are approved through this compliance filing.
U.S. Pipelines
Sale of GTN Pipeline to TC PipeLines, LP
On April 1, 2015, we closed the sale of our remaining 30 per cent interest in Gas Transmission Northwest LLC (GTN) to our master limited partnership, TC PipeLines, LP. The US$446 million sale is comprised of US$253 million in cash, the assumption of US$98 million in proportional GTN debt and the issuance of US$95 million of new Class B units. The Class B units entitle us to a cash distribution based on 30 per cent of GTN's annual cash distribution after certain thresholds are achieved, namely, 100 per cent of distributions above US$20 million in the first five years and 25 per cent of distributions above US$20 million in subsequent years.
LNG Pipeline Projects
Prince Rupert Gas Transmission
We anticipate decisions in second quarter 2015 from the B.C. Oil and Gas Commission (BC OGC) on the permits to build and operate the Prince Rupert Gas Transmission pipeline project.
Coastal GasLink
We anticipate decisions in second quarter 2015 from the BC OGC on the permits to build and operate the Coastal GasLink pipeline project.
LIQUIDS PIPELINES
Houston Lateral and Terminal
Construction continues on the 77 km (48 mile) Houston Lateral pipeline and tank terminal which will extend the Keystone Pipeline System to Houston, Texas refineries. The terminal is expected to have initial storage capacity for 700,000 barrels of crude oil. The pipeline and terminal are expected to be completed in fourth quarter 2015.
On April 14, 2015, we, along with Magellan Midstream Partners L.P. (Magellan), announced a joint development agreement to connect our Houston Terminal to Magellan's East Houston Terminal. We will own 50 per cent of the US$50 million pipeline project which will enhance connections to the Houston market for our Keystone Pipeline System. Subject to definitive agreements and receipt of necessary permits and approvals, the pipeline is expected to be operational in late 2016.
Keystone XL
In January 2015, the DOS re-initiated the national interest review and requested the eight federal agencies with a role in the review to complete their consideration of whether Keystone XL serves the national interest. All of the agency comments have been received.
On February 2, 2015, the U.S. Environmental Protection Agency (EPA) posted a comment letter to its website suggesting that, among other things, the FSEIS issued by the DOS has not fully and completely assessed the environmental impacts of Keystone XL and that, at lower oil prices, Keystone XL may increase the rates of oil sands production and greenhouse gas emissions. On February 10, 2015, we sent a letter to the DOS refuting these and other comments in the EPA letter but also offering to work with the DOS to ensure it has all the relevant information to allow it to reach a decision to approve Keystone XL.
On February 12, 2015, Nebraska county courts granted temporary injunctions that were negotiated between us and landowners' counsel which prevent Keystone from proceeding with condemnation cases until the underlying constitutional litigation is resolved. A renewed challenge to the constitutionality of the statute under which the Governor approved the re-route in the state is pending in a Nebraska District Court.
On February 24, 2015, U.S. President Obama vetoed Congressional legislation that would have granted us authority to construct Keystone XL across the international border. The U.S. President stated that the legislation circumvented a final DOS assessment. The timing and ultimate resolution of Keystone XL's pending application for a Presidential Permit remains uncertain.
The South Dakota Public Utility Commission has scheduled a hearing in third quarter 2015 on our request to certify our existing permit authority in that state.
The estimated capital cost for Keystone XL is expected to be approximately US$8.0 billion. As of March 31, 2015, we have invested US$2.4 billion in the project and have also capitalized interest in the amount of US$0.4 billion.
Energy East Pipeline
On April 2, 2015, we announced that the marine and associated tank terminal in Cacouna, Quebec will not be built as a result of the potential reclassification of beluga whales as an endangered species. We are currently evaluating other options and discussing those options with our shippers. Amendments to the project are expected to be submitted to the NEB in fourth quarter 2015. The alteration to the project scope and further refinement of the project schedule is expected to result in an in-service date of 2020.
Binding long term contracts of approximately one million Bbl/d for the 1.1 million Bbl/d pipeline have been secured. The project is estimated to cost approximately $12 billion, excluding the transfer value of Canadian Mainline natural gas assets.
Upland Pipeline
On April 22, 2015, we filed an application to obtain a U.S. Presidential Permit for the Upland Pipeline. The $600 million Upland Pipeline is a 400 km (240 mile) crude oil pipeline which will provide transportation from, and between, multiple points in North Dakota and interconnect with the Energy East Pipeline at Moosomin, Saskatchewan.
Subject to regulatory approvals, we anticipate the Upland Pipeline to be in service in 2020. The commercial contracts we have executed for Upland Pipeline are conditioned on Energy East proceeding.
Other income statement items
The following are reconciliations and related analyses of our non-GAAP measures to the equivalent GAAP measures for other income statement items.
Comparable interest expense increased by $44 million for the three months ended March 31, 2015 compared to the same period in 2014 because of the following:
Comparable interest income and other expense increased by $21 million for the three months ended March 31, 2015 compared to the same period in 2014. This is the net result of:
Comparable income tax expense increased by $23 million for the three months ended March 31, 2015 compared to the same period in 2014. The increase was mainly the result of higher pre-tax earnings in 2015 compared to 2014 and changes in the proportion of income earned between Canadian and foreign jurisdictions partially offset by lower flow-through taxes in 2015 on Canadian regulated pipelines.
Net income attributable to non-controlling interests increased by $5 million for the three months ended March 31, 2015 compared to the same period in 2014 primarily due to the sale of our remaining 30 per cent direct interest in Bison to TC PipeLines, LP in October 2014 and the positive impact of a strong U.S. dollar on the Canadian dollar equivalent earnings from TC PipeLines, LP.
Financial condition
We strive to maintain strong financial capacity and flexibility in all parts of the economic cycle. We rely on our operating cash flow to sustain our business, pay dividends and fund a portion of our growth. In addition, we access capital markets to meet our financing needs, manage our capital structure and to preserve our credit ratings.
We believe we have the financial capacity to fund our existing capital program through our predictable cash flow from our operations, access to capital markets, proceeds from the sale of U.S. natural gas pipeline assets to TC PipeLines, LP, cash on hand and substantial committed credit facilities.
CASH PROVIDED BY OPERATING ACTIVITIES
At March 31, 2015, our current assets were $5.1 billion and current liabilities were $8.2 billion, leaving us with a working capital deficit of $3.1 billion compared to $4.0 billion at December 31, 2014. This working capital deficiency is considered to be in the normal course of business and is managed through:
CASH USED IN INVESTING ACTIVITIES
Capital expenditures in 2015 were primarily related to:
Costs incurred on capital projects under development primarily relate to LNG projects and the Energy East Pipeline.
CASH PROVIDED BY/(USED IN) FINANCING ACTIVITIES
LONG-TERM DEBT ISSUED
LONG-TERM DEBT RETIRED
PREFERRED SHARE ISSUANCE
In March 2015, we completed a public offering of 10 million Series 11 cumulative redeemable first preferred shares at $25 per share resulting in gross proceeds of $250 million. Investors are entitled to receive fixed cumulative dividends at an annual rate of $0.95 per share, payable quarterly. The dividend rate will reset on November 30, 2020 and every five years thereafter to a yield per annum equal to the sum of the then five-year Government of Canada bond yield and 2.96 per cent. The preferred shares are redeemable by us on November 30, 2020 and on the last business day in November of every fifth year thereafter at a price of $25 per share plus accrued and unpaid dividends. The Series 11 preferred shareholders will have the right to convert their shares into Series 12 cumulative redeemable first preferred shares on November 30, 2020 and on the last business day in November of every fifth year thereafter. The holders of Series 12 preferred shares will be entitled to receive quarterly floating rate cumulative dividends at an annualized rate equal to the then 90-day Government of Canada treasury bill rate and 2.96 per cent.
The net proceeds of the above debt and preferred share offerings were used for general corporate purposes and to reduce short-term indebtedness.
TC PIPELINES, LP AT-THE-MARKET (ATM) EQUITY ISSUANCE PROGRAM
In first quarter 2015, fifty-five thousand common units were issued under the ATM program generating net proceeds of approximately US$3 million. Our ownership interest in TC PipeLines, LP will decrease as a result of the ATM program.
DIVIDENDS
On April 30, 2015, we declared quarterly dividends as follows:
SHARE INFORMATION
CREDIT FACILITIES
We use committed revolving credit facilities to support our commercial paper programs and, along with demand facilities, for general corporate purposes including issuing letters of credit as well as providing additional liquidity.
At March 31, 2015, we had approximately $7 billion in unsecured credit facilities, including:
At March 31, 2015, our operated affiliates had $0.4 billion of undrawn capacity on committed credit facilities.
See Financial risks and financial instruments for more information about liquidity, market and other risks.
CONTRACTUAL OBLIGATIONS
Our capital commitments have decreased by approximately $0.4 billion since December 31, 2014 primarily due to the completion or advancement of capital projects. Our other purchase obligations have increased by approximately $0.2 billion since December 31, 2014 primarily due to an increase in commodity purchase obligations and information technology and communication contracts. There were no other material changes to our contractual obligations in first quarter 2015 or to payments due in the next five years or after. See the MD&A in our 2014 Annual Report for more information about our contractual obligations.
Financial risks and financial instruments
We are exposed to liquidity risk, counterparty credit risk and market risk, and have strategies, policies and limits in place to mitigate their impact on our earnings, cash flow and, ultimately, shareholder value. These are designed to ensure our risks and related exposures are in line with our business objectives and risk tolerance.
See our 2014 Annual Report for more information about the risks we face in our business. Our risks have not changed substantially since December 31, 2014.
LIQUIDITY RISK
We manage our liquidity risk by continuously forecasting our cash requirements for a rolling twelve month period and making sure we have adequate cash balances, cash flow from operations, committed and demand credit facilities and access to capital markets to meet our operating, financing and capital expenditure obligations under both normal and stressed economic conditions.
COUNTERPARTY CREDIT RISK
We have exposure to counterparty credit risk in the following areas:
We review our accounts receivable regularly and record allowances for doubtful accounts using the specific identification method. At March 31, 2015, we had not incurred any significant credit losses and had no significant amounts past due or impaired. We had a credit risk concentration due from a counterparty of $241 million (US$190 million) and $258 million (US$222 million) at March 31, 2015 and December 31, 2014, respectively. This amount is expected to be fully collectible and is secured by a guarantee from the counterparty's investment grade parent company.
We have significant credit and performance exposure to financial institutions because they hold cash deposits and provide committed credit lines and letters of credit that help manage our exposure to counterparties and provide liquidity in commodity, foreign exchange and interest rate derivative markets.
FOREIGN EXCHANGE AND INTEREST RATE RISK
Certain of our businesses generate income in U.S. dollars, but since we report in Canadian dollars, changes in the value of the U.S. dollar against the Canadian dollar can affect our net income. As our U.S. dollar-denominated operations continue to grow, this exposure increases. The majority of this risk is offset by interest expense on U.S. dollar-denominated debt and by using foreign exchange derivatives.
We have floating interest rate debt and floating rate preferred shares (Series 2) which subject us to interest rate cash flow risk. We use interest rate swaps to help manage this risk.
Average exchange rate - U.S. to Canadian dollars
The impact of changes in the value of the U.S. dollar on our U.S. dollar-denominated operations is significantly offset by other U.S. dollar-denominated items, as set out in the table below.
Significant U.S. dollar-denominated amounts
Derivatives designated as a net investment hedge
We hedge our net investment in foreign operations (on an after-tax basis) with U.S. dollar-denominated debt, cross-currency interest rate swaps and foreign exchange forward contracts. The fair values and notional amounts for the derivatives designated as a net investment hedge were as follows:
U.S. dollar-denominated debt designated as a net investment hedge
The balance sheet classification of the fair value of derivatives used to hedge our net investment in foreign operations is as follows:
FINANCIAL INSTRUMENTS
All financial instruments, including both derivative and non-derivative instruments, are recorded on the balance sheet at fair value unless they were entered into and continue to be held for the purpose of receipt or delivery in accordance with our normal purchase and sales exemptions and are documented as such. In addition, fair value accounting is not required for other financial instruments that qualify for certain accounting exemptions.
Non-derivative financial instruments
Fair value of non-derivative financial instruments
The fair value of our notes receivable is calculated by discounting future payments of interest and principal using forward interest rates. The fair value of long-term debt and junior subordinated notes has been estimated using an income approach based on quoted market prices for the same or similar debt instruments from external data providers. The fair value of available for sale assets has been calculated using quoted market prices where available. Credit risk has been taken into consideration when calculating the fair value of non-derivative financial instruments.
Certain non-derivative financial instruments including cash and cash equivalents, accounts receivable, intangible and other assets, notes payable, accounts payable and other, accrued interest and other long-term liabilities have carrying amounts that approximate their fair value due to the nature of the item or the short time to maturity and would be classified in Level II of the fair value hierarchy.
Derivative instruments
We use derivative instruments to reduce volatility associated with fluctuations in commodity prices, interest rates and foreign exchange rates. We apply hedge accounting to derivative instruments that qualify and are designated for hedge accounting treatment. The effective portion of the change in the fair value of hedging derivatives for cash flow hedges and hedges of our net investment in foreign operations are recorded in OCI in the period of change. Any ineffective portion is recognized in net income in the same financial category as the underlying transaction. The change in the fair value of derivative instruments that have been designated as fair value hedges are recorded in net income in interest income and other expense and interest expense.
The majority of derivative instruments that are not designated or do not qualify for hedge accounting treatment have been entered into as economic hedges to manage our exposure to market risk (held for trading). Changes in the fair value of held for trading derivative instruments are recorded in net income in the period of change. This may expose us to increased variability in reported operating results since the fair value of the held for trading derivative instruments can fluctuate significantly from period to period.
The recognition of gains and losses on derivatives for Canadian natural gas regulated pipelines exposures is determined through the regulatory process. Gains and losses arising from changes in the fair value of derivatives accounted for as part of RRA, including those that qualify for hedge accounting treatment, can be recovered or refunded through the tolls charged by us. As a result, these gains and losses are deferred as regulatory assets or regulatory liabilities and are refunded to or collected from the ratepayers in subsequent years when the derivative settles.
Fair value of derivative instruments
The fair value of foreign exchange and interest rate derivatives has been calculated using the income approach which uses period-end market rates and applies a discounted cash flow valuation model. The fair value of power and natural gas derivatives has been calculated using quoted market prices where available. In the absence of quoted market prices, third-party broker quotes or other valuation techniques have been used. Credit risk has been taken into consideration when calculating the fair value of derivative instruments.
Balance sheet presentation of derivative instruments
The balance sheet classification of the fair value of the derivative instruments is as follows:
The effect of derivative instruments on the condensed consolidated statement of income
The following summary does not include hedges of our net investment in foreign operations.
Derivatives in cash flow hedging relationships
The components of the condensed consolidated statement of OCI related to derivatives in cash flow hedging relationships is as follows:
Credit risk related contingent features of derivative instruments
Derivatives contracts often contain financial assurance provisions that may require us to provide collateral if a credit risk related contingent event occurs (for example, if our credit rating is downgraded to non-investment grade).
Based on contracts in place and market prices at March 31, 2015, the aggregate fair value of all derivative contracts with credit-risk-related contingent features that were in a net liability position was $31 million (December 31, 2014 - $15 million), with collateral provided in the normal course of business of nil (December 31, 2014 - nil). If the credit-risk-related contingent features in these agreements had been triggered on March 31, 2015, we would have been required to provide collateral of $31 million (December 31, 2014 - $15 million) to our counterparties. Collateral may also need to be provided should the fair value of derivative instruments exceed pre-defined contractual exposure limit thresholds.
We have sufficient liquidity in the form of cash and undrawn committed revolving bank lines to meet these contingent obligations should they arise.
Other information
CONTROLS AND PROCEDURES
Management, including our President and CEO and our CFO, evaluated the effectiveness of our disclosure controls and procedures as at March 31, 2015, as required by the Canadian securities regulatory authorities and by the SEC, and concluded that our disclosure controls and procedures are effective at a reasonable assurance level.
There were no changes in first quarter 2015 that had or are likely to have a material impact on our internal control over financial reporting.
CRITICAL ACCOUNTING ESTIMATES AND ACCOUNTING POLICY CHANGES
When we prepare financial statements that conform with U.S. GAAP, we are required to make estimates and assumptions that affect the timing and amount we record for our assets, liabilities, revenues and expenses because these items may be affected by future events. We base the estimates and assumptions on the most current information available, using our best judgement. We also regularly assess the assets and liabilities themselves. You can find a summary of our critical accounting estimates in our 2014 Annual Report.
Our significant accounting policies have remained unchanged since December 31, 2014 other than described below. You can find a summary of our significant accounting policies in our 2014 Annual Report.
Changes in accounting policies for 2015
Reporting discontinued operations
In April 2014, the FASB issued amended guidance on the reporting of discontinued operations. The criteria of what will qualify as a discontinued operation has changed and there are expanded disclosures required. This new guidance was applied prospectively from January 1, 2015 and there was no impact on the Company's consolidated financial statements as a result of applying this new standard.
Future accounting changes
Revenue from contracts with customers
In May 2014, the FASB issued new guidance on revenue from contracts with customers. This guidance supersedes the current revenue recognition requirements and most industry-specific guidance. This new guidance requires that an entity recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. This new guidance is effective from January 1, 2017 with two methods in which the amendment can be applied: (1) retrospectively to each prior reporting period presented, or (2) retrospectively with the cumulative effect recognized at the date of initial application. Early application is not permitted.
In April 2015, the FASB proposed deferring the effective date to January 1, 2018 and proposed permitting early adoption of the standard but not before the original effective date.
We are currently evaluating the impact of the adoption of this ASU and have not yet determined the effect on our consolidated financial statements.
Extraordinary and unusual income statement items
In January 2015, the FASB issued new guidance on extraordinary and unusual income statement items. This update eliminates from GAAP the concept of extraordinary items. This new guidance is effective from January 1, 2016 and will be applied prospectively. We do not expect the adoption of this new standard to have a material impact on our consolidated financial statements
Consolidation
In February 2015, the FASB issued new guidance on consolidation analysis. This update requires that entities reevaluate whether they should consolidate certain legal entities, and eliminates the presumption that a general partner should consolidate a limited partnership. This new guidance is effective from January 1, 2016 and will be applied retrospectively. We are currently evaluating the impact of the adoption of this ASU and have not yet determined the effect on our consolidated financial statements.
Imputation of interest
In April 2015, the FASB issued new guidance on simplifying the accounting for debt issuance costs. The amendments in this update require that debt issuance costs be presented in the balance sheet as a direct deduction from the carrying amount of the debt liability consistent with debt discounts or premiums. This new guidance is effective January 1, 2016 and will be applied retrospectively. The application of this amendment will result in a reclassification of debt issuance costs currently recorded in intangible and other assets to an offset of their respective debt liabilities.
Reconciliation of non-GAAP measures
Comparable EBITDA and EBIT by business segment
Quarterly results
SELECTED QUARTERLY CONSOLIDATED FINANCIAL DATA
FACTORS AFFECTING QUARTERLY FINANCIAL INFORMATION BY BUSINESS SEGMENT
Quarter-over-quarter revenues and net income sometimes fluctuate. The causes of these fluctuations vary across our business segments.
In Natural Gas Pipelines, quarter-over-quarter revenues and net income from the Canadian regulated pipelines generally remain relatively stable during any fiscal year. Our U.S. natural gas pipelines are generally seasonal in nature with higher earnings in the winter months as a result of increased customer demands. Over the long term, however, results from both our Canadian and U.S. natural gas pipelines fluctuate because of:
In Liquids Pipelines, annual revenues and net income are based on contracted crude oil transportation and uncommitted spot transportation. Quarter-over-quarter revenues and net income are affected by:
In Energy, quarter-over-quarter revenues and net income are affected by:
FACTORS AFFECTING FINANCIAL INFORMATION BY QUARTER
We calculate comparable measures by adjusting certain GAAP and non-GAAP measures for specific items we believe are significant but not reflective of our underlying operations in the period.
Comparable earnings exclude the unrealized gains and losses from changes in the fair value of certain derivatives used to reduce our exposure to certain financial and commodity price risks. These derivatives generally provide effective economic hedges, but do not meet the criteria for hedge accounting. As a result, the changes in fair value are recorded in net income. As these amounts do not accurately reflect the gains and losses that will be realized at settlement, we do not consider them part of our underlying operations.
In second quarter 2014, comparable earnings excluded a $99 million after-tax gain on the sale of Cancarb Limited and a $31 million after-tax loss related to the termination of the Niska Gas Storage contract.
In second quarter 2013, comparable earnings excluded a $25 million favourable income tax adjustment due to the enactment of Canadian Federal tax legislation relating to Part VI.I tax in June 2013.
1. Basis of presentation
These condensed consolidated financial statements of TransCanada Corporation (TransCanada or the Company) have been prepared by management in accordance with U.S. GAAP. The accounting policies applied are consistent with those outlined in TransCanada's annual audited consolidated financial statements for the year ended December 31, 2014. Capitalized and abbreviated terms that are used but not otherwise defined herein are identified in TransCanada's 2014 Annual Report.
These condensed consolidated financial statements reflect adjustments, all of which are normal recurring adjustments that are, in the opinion of management, necessary to reflect fairly the financial position and results of operations for the respective periods. These condensed consolidated financial statements do not include all disclosures required in the annual financial statements and should be read in conjunction with the 2014 audited consolidated financial statements included in TransCanada's 2014 Annual Report. Certain comparative figures have been reclassified to conform with the current period's presentation.
Earnings for interim periods may not be indicative of results for the fiscal year in the Company's Natural Gas Pipelines segment due to the timing of regulatory decisions and seasonal fluctuations in short-term throughput volumes on U.S. pipelines. Earnings for interim periods may also not be indicative of results for the fiscal year in the Company's Energy segment due to the impact of seasonal weather conditions on customer demand and market pricing in certain of the Company's investments in electrical power generation plants and non-regulated gas storage facilities.
USE OF ESTIMATES AND JUDGEMENTS
In preparing these financial statements, TransCanada is required to make estimates and assumptions that affect both the amount and timing of recording assets, liabilities, revenues and expenses since the determination of these items may be dependent on future events. The Company uses the most current information available and exercises careful judgement in making these estimates and assumptions. In the opinion of management, these condensed consolidated financial statements have been properly prepared within reasonable limits of materiality and within the framework of the Company's significant accounting policies included in the consolidated financial statements for the year ended December 31, 2014, except as described in Note 2, Changes in accounting policies.
2. Changes in accounting policies
CHANGES IN ACCOUNTING POLICIES FOR 2015
Reporting discontinued operations
In April 2014, the FASB issued amended guidance on the reporting of discontinued operations. The criteria of what will qualify as a discontinued operation has changed and there are expanded disclosures required. This new guidance was applied prospectively from January 1, 2015 and there was no impact on the Company's consolidated financial statements as a result of applying this new standard.
FUTURE ACCOUNTING CHANGES
Revenue from contracts with customers
In May 2014, the FASB issued new guidance on revenue from contracts with customers. This guidance supersedes the current revenue recognition requirements and most industry-specific guidance. This new guidance requires that an entity recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. This new guidance is effective from January 1, 2017 with two methods in which the amendment can be applied: (1) retrospectively to each prior reporting period presented, or (2) retrospectively with the cumulative effect recognized at the date of initial application. Early application is not permitted.
In April 2015, the FASB proposed deferring the effective date to January 1, 2018 and proposed permitting early adoption of the standard but not before the original effective date.
The Company is currently evaluating the impact of the adoption of this ASU and has not yet determined the effect on its consolidated financial statements.
Extraordinary and unusual income statement items
In January 2015, the FASB issued new guidance on extraordinary and unusual income statement items. This update eliminates from GAAP the concept of extraordinary items. This new guidance is effective from January 1, 2016 and will be applied prospectively. The Company does not expect the adoption of this new standard to have a material impact on its consolidated financial statements.
Consolidation
In February 2015, the FASB issued new guidance on consolidation analysis. This update requires that entities reevaluate whether they should consolidate certain legal entities, and eliminates the presumption that a general partner should consolidate a limited partnership. This new guidance is effective from January 1, 2016 and will be applied retrospectively. The Company is currently evaluating the impact of the adoption of this ASU and has not yet determined the effect on its consolidated financial statements.
Imputation of interest
In April 2015, the FASB issued new guidance on simplifying the accounting for debt issuance costs. The ame
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