EXHIBIT 13.2
Condensed consolidated statement of income
three months ended September 30 | nine months ended September 30 | |||||||||||
(unaudited - millions of Canadian $) | 2018 | 2017 | 2018 | 2017 | ||||||||
Revenues | ||||||||||||
Canadian Natural Gas Pipelines | 934 | 921 | 2,772 | 2,725 | ||||||||
U.S. Natural Gas Pipelines | 967 | 811 | 2,988 | 2,684 | ||||||||
Mexico Natural Gas Pipelines | 156 | 139 | 460 | 432 | ||||||||
Liquids Pipelines | 564 | 437 | 1,831 | 1,410 | ||||||||
Energy | 535 | 887 | 1,724 | 2,581 | ||||||||
3,156 | 3,195 | 9,775 | 9,832 | |||||||||
Income from Equity Investments | 147 | 156 | 492 | 527 | ||||||||
Operating and Other Expenses | ||||||||||||
Plant operating costs and other | 884 | 929 | 2,580 | 2,962 | ||||||||
Commodity purchases resold | 318 | 621 | 1,239 | 1,711 | ||||||||
Property taxes | 127 | 127 | 429 | 442 | ||||||||
Depreciation and amortization | 564 | 506 | 1,669 | 1,539 | ||||||||
1,893 | 2,183 | 5,917 | 6,654 | |||||||||
(Loss)/Gain on Sales of Assets | — | (9 | ) | — | 489 | |||||||
Financial Charges | ||||||||||||
Interest expense | 608 | 522 | 1,740 | 1,578 | ||||||||
Allowance for funds used during construction | (147 | ) | (145 | ) | (365 | ) | (367 | ) | ||||
Interest income and other | (167 | ) | (83 | ) | (137 | ) | (192 | ) | ||||
294 | 294 | 1,238 | 1,019 | |||||||||
Income before Income Taxes | 1,116 | 865 | 3,112 | 3,175 | ||||||||
Income Tax Expense | ||||||||||||
Current | 30 | 7 | 169 | 129 | ||||||||
Deferred | 81 | 178 | 203 | 640 | ||||||||
111 | 185 | 372 | 769 | |||||||||
Net Income | 1,005 | 680 | 2,740 | 2,406 | ||||||||
Net income attributable to non-controlling interests | 59 | 44 | 229 | 189 | ||||||||
Net Income Attributable to Controlling Interests and to Common Shares | 946 | 636 | 2,511 | 2,217 |
See accompanying notes to the Condensed consolidated financial statements.
TRANSCANADA PIPELINES LIMITED [52
THIRD QUARTER 2018
Condensed consolidated statement of comprehensive income
three months ended September 30 | nine months ended September 30 | |||||||||||
(unaudited - millions of Canadian $) | 2018 | 2017 | 2018 | 2017 | ||||||||
Net Income | 1,005 | 680 | 2,740 | 2,406 | ||||||||
Other Comprehensive (Loss)/Income, Net of Income Taxes | ||||||||||||
Foreign currency translation gains and losses on net investment in foreign operations | (282 | ) | (370 | ) | 409 | (721 | ) | |||||
Reclassification of foreign currency translation gains on net investment on disposal of foreign operations | — | — | — | (77 | ) | |||||||
Change in fair value of net investment hedges | 9 | (1 | ) | (6 | ) | (3 | ) | |||||
Change in fair value of cash flow hedges | 4 | 1 | 9 | 4 | ||||||||
Reclassification to net income of gains and losses on cash flow hedges | 6 | — | 16 | (1 | ) | |||||||
Unrealized actuarial gains and losses on pension and other post-retirement benefit plans | — | 2 | — | 2 | ||||||||
Reclassification of actuarial gains and losses on pension and other post-retirement benefit plans | 10 | 4 | 10 | 11 | ||||||||
Other comprehensive income on equity investments | 6 | 3 | 18 | 6 | ||||||||
Other comprehensive (loss)/income | (247 | ) | (361 | ) | 456 | (779 | ) | |||||
Comprehensive Income | 758 | 319 | 3,196 | 1,627 | ||||||||
Comprehensive income/(loss) attributable to non-controlling interests | 28 | (25 | ) | 304 | 31 | |||||||
Comprehensive Income Attributable to Controlling Interests and to Common Shares | 730 | 344 | 2,892 | 1,596 |
See accompanying notes to the Condensed consolidated financial statements.
TRANSCANADA PIPELINES LIMITED [53
THIRD QUARTER 2018
Condensed consolidated statement of cash flows
three months ended September 30 | nine months ended September 30 | |||||||||||
(unaudited - millions of Canadian $) | 2018 | 2017 | 2018 | 2017 | ||||||||
Cash Generated from Operations | ||||||||||||
Net income | 1,005 | 680 | 2,740 | 2,406 | ||||||||
Depreciation and amortization | 564 | 506 | 1,669 | 1,539 | ||||||||
Deferred income taxes | 81 | 178 | 203 | 640 | ||||||||
Income from equity investments | (147 | ) | (156 | ) | (492 | ) | (527 | ) | ||||
Distributions received from operating activities of equity investments | 296 | 296 | 761 | 743 | ||||||||
Employee post-retirement benefits funding, net of expense | (22 | ) | (73 | ) | (22 | ) | (64 | ) | ||||
Loss/(gain) on sales of assets | — | 9 | — | (489 | ) | |||||||
Equity allowance for funds used during construction | (104 | ) | (107 | ) | (261 | ) | (249 | ) | ||||
Unrealized (gains)/losses on financial instruments | (29 | ) | (77 | ) | 120 | 14 | ||||||
Other | (93 | ) | (5 | ) | (152 | ) | (1 | ) | ||||
Increase in operating working capital | (285 | ) | (83 | ) | (129 | ) | (223 | ) | ||||
Net cash provided by operations | 1,266 | 1,168 | 4,437 | 3,789 | ||||||||
Investing Activities | ||||||||||||
Capital expenditures | (2,435 | ) | (2,031 | ) | (6,474 | ) | (5,383 | ) | ||||
Capital projects in development | (127 | ) | (37 | ) | (239 | ) | (135 | ) | ||||
Contributions to equity investments | (236 | ) | (475 | ) | (778 | ) | (1,140 | ) | ||||
Proceeds from sales of assets, net of transaction costs | — | — | — | 4,147 | ||||||||
Other distributions from equity investments | — | — | 121 | 362 | ||||||||
Deferred amounts and other | (16 | ) | 164 | 79 | (87 | ) | ||||||
Net cash used in investing activities | (2,814 | ) | (2,379 | ) | (7,291 | ) | (2,236 | ) | ||||
Financing Activities | ||||||||||||
Notes payable issued, net | 1,421 | 451 | 1,906 | 1,232 | ||||||||
Long-term debt issued, net of issue costs | 1,026 | 1,151 | 4,359 | 1,968 | ||||||||
Long-term debt repaid | (1,232 | ) | (46 | ) | (3,266 | ) | (5,515 | ) | ||||
Junior subordinated notes issued, net of issue costs | — | (3 | ) | — | 3,468 | |||||||
Advances from/(to) affiliate | 400 | (15 | ) | 1,066 | (15 | ) | ||||||
Dividends on common shares | (623 | ) | (544 | ) | (1,789 | ) | (1,573 | ) | ||||
Distributions paid to non-controlling interests | (57 | ) | (66 | ) | (174 | ) | (215 | ) | ||||
Common shares issued | 207 | 190 | 633 | 591 | ||||||||
Partnership units of TC PipeLines, LP issued, net of issue costs | — | 43 | 49 | 162 | ||||||||
Common units of Columbia Pipeline Partners LP acquired | — | — | — | (1,205 | ) | |||||||
Net cash provided by/(used in) financing activities | 1,142 | 1,161 | 2,784 | (1,102 | ) | |||||||
Effect of Foreign Exchange Rate Changes on Cash and Cash Equivalents | (10 | ) | (16 | ) | 47 | (35 | ) | |||||
(Decrease)/increase in Cash and Cash Equivalents | (416 | ) | (66 | ) | (23 | ) | 416 | |||||
Cash and Cash Equivalents | ||||||||||||
Beginning of period | 1,437 | 1,449 | 1,044 | 967 | ||||||||
Cash and Cash Equivalents | ||||||||||||
End of period | 1,021 | 1,383 | 1,021 | 1,383 |
See accompanying notes to the Condensed consolidated financial statements.
TRANSCANADA PIPELINES LIMITED [54
THIRD QUARTER 2018
Condensed consolidated balance sheet
September 30, | December 31, | ||||||
(unaudited - millions of Canadian $) | 2018 | 2017 | |||||
ASSETS | |||||||
Current Assets | |||||||
Cash and cash equivalents | 1,021 | 1,044 | |||||
Accounts receivable | 2,171 | 2,537 | |||||
Inventories | 381 | 378 | |||||
Assets held for sale | 458 | — | |||||
Other | 1,003 | 691 | |||||
5,034 | 4,650 | ||||||
Plant, Property and Equipment | net of accumulated depreciation of $25,206 and $23,734, respectively | 63,212 | 57,277 | ||||
Equity Investments | 6,683 | 6,366 | |||||
Regulatory Assets | 1,391 | 1,376 | |||||
Goodwill | 13,504 | 13,084 | |||||
Loan Receivable from Affiliate | 1,244 | 919 | |||||
Intangible and Other Assets | 1,886 | 1,423 | |||||
Restricted Investments | 1,101 | 915 | |||||
94,055 | 86,010 | ||||||
LIABILITIES | |||||||
Current Liabilities | |||||||
Notes payable | 3,742 | 1,763 | |||||
Accounts payable and other | 4,304 | 4,071 | |||||
Dividends payable | 630 | 552 | |||||
Due to affiliate | 3,617 | 2,551 | |||||
Accrued interest | 604 | 605 | |||||
Current portion of long-term debt | 1,671 | 2,866 | |||||
14,568 | 12,408 | ||||||
Regulatory Liabilities | 4,603 | 4,321 | |||||
Other Long-Term Liabilities | 637 | 727 | |||||
Deferred Income Tax Liabilities | 5,824 | 5,403 | |||||
Long-Term Debt | 35,029 | 31,875 | |||||
Junior Subordinated Notes | 7,186 | 7,007 | |||||
67,847 | 61,741 | ||||||
EQUITY | |||||||
Common shares, no par value | 22,394 | 21,761 | |||||
Issued and outstanding: | September 30, 2018 - 883 million shares | ||||||
December 31, 2017 - 872 million shares | |||||||
Additional paid-in capital | 17 | — | |||||
Retained earnings | 3,124 | 2,387 | |||||
Accumulated other comprehensive loss | (1,350 | ) | (1,731 | ) | |||
Controlling Interests | 24,185 | 22,417 | |||||
Non-controlling interests | 2,023 | 1,852 | |||||
26,208 | 24,269 | ||||||
94,055 | 86,010 |
Contingencies and Guarantees (Note 13)
Variable Interest Entities (Note 15)
Subsequent Events (Note 16)
See accompanying notes to the Condensed consolidated financial statements.
TRANSCANADA PIPELINES LIMITED [55
THIRD QUARTER 2018
Condensed consolidated statement of equity
nine months ended September 30 | |||||
(unaudited - millions of Canadian $) | 2018 | 2017 | |||
Common Shares | |||||
Balance at beginning of period | 21,761 | 20,981 | |||
Proceeds from shares issued | 633 | 591 | |||
Balance at end of period | 22,394 | 21,572 | |||
Additional Paid-In Capital | |||||
Balance at beginning of period | — | 211 | |||
Issuance of stock options | 10 | 9 | |||
Dilution from TC PipeLines, LP units issued | 7 | 18 | |||
Asset drop downs to TC PipeLines, LP | — | (202 | ) | ||
Columbia Pipeline Partners LP acquisition | — | (171 | ) | ||
Reclassification of additional paid-in capital deficit to retained earnings | — | 135 | |||
Balance at end of period | 17 | — | |||
Retained Earnings | |||||
Balance at beginning of period | 2,387 | 1,577 | |||
Net income attributable to controlling interests | 2,511 | 2,217 | |||
Common share dividends | (1,869 | ) | (1,633 | ) | |
Adjustment related to income tax effects of asset drop downs to TC PipeLines, LP | 95 | — | |||
Adjustment related to employee share-based payments | — | 12 | |||
Reclassification of additional paid-in capital deficit to retained earnings | — | (135 | ) | ||
Balance at end of period | 3,124 | 2,038 | |||
Accumulated Other Comprehensive Loss | |||||
Balance at beginning of period | (1,731 | ) | (960 | ) | |
Other comprehensive income/(loss) attributable to controlling interests | 381 | (621 | ) | ||
Balance at end of period | (1,350 | ) | (1,581 | ) | |
Equity Attributable to Controlling Interests | 24,185 | 22,029 | |||
Equity Attributable to Non-Controlling Interests | |||||
Balance at beginning of period | 1,852 | 1,726 | |||
Net income attributable to non-controlling interests | 229 | 189 | |||
Other comprehensive income/(loss) attributable to non-controlling interests | 75 | (158 | ) | ||
Issuance of TC PipeLines, LP units | |||||
Proceeds, net of issue costs | 49 | 162 | |||
Decrease in TCPL's ownership of TC PipeLines, LP | (9 | ) | (29 | ) | |
Distributions declared to non-controlling interests | (173 | ) | (212 | ) | |
Reclassification from common units of TC PipeLines, LP subject to rescission | — | 106 | |||
Impact of Columbia Pipeline Partners LP acquisition | — | 33 | |||
Balance at end of period | 2,023 | 1,817 | |||
Total Equity | 26,208 | 23,846 |
See accompanying notes to the Condensed consolidated financial statements.
TRANSCANADA PIPELINES LIMITED [56
THIRD QUARTER 2018
Notes to Condensed consolidated financial statements
(unaudited)
1. Basis of presentation
These Condensed consolidated financial statements of TransCanada PipeLines Limited (TCPL or the Company) have been prepared by management in accordance with U.S. GAAP. The accounting policies applied are consistent with those outlined in TCPL’s annual audited consolidated financial statements for the year ended December 31, 2017, except as described in Note 2, Accounting changes. Capitalized and abbreviated terms that are used but not otherwise defined herein are identified in the 2017 audited consolidated financial statements included in TCPL's 2017 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 2017 audited consolidated financial statements included in TCPL’s 2017 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 segments 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, TCPL 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 annual audited consolidated financial statements for the year ended December 31, 2017, except as described in Note 2, Accounting changes.
2. Accounting changes
CHANGES IN ACCOUNTING POLICIES FOR 2018
Revenue from contracts with customers
In 2014, the FASB issued new guidance on revenue from contracts with customers. The new guidance requires that an entity recognize revenue from these contracts in accordance with a prescribed model. This model is used to depict the transfer of promised goods or services to customers in amounts that reflect the total consideration to which it expects to be entitled during the term of the contract in exchange for those promised goods or services. Goods or services that are promised to a customer are referred to as the Company's "performance obligations." The total consideration to which the Company expects to be entitled can include fixed and variable amounts. The Company has variable revenue that is subject to factors outside the Company’s influence, such as market prices, actions of third parties and weather conditions. The Company considers this variable revenue to be "constrained" as it cannot be reliably estimated, and therefore recognizes variable revenue when the service is provided.
TRANSCANADA PIPELINES LIMITED [57
THIRD QUARTER 2018
The new guidance also requires additional disclosures about the nature, amount, timing and uncertainty of revenue recognition and related cash flows.
In the application of the new guidance, significant estimates and judgments are used to determine the following:
• | pattern of revenue recognition within a contract, based on whether the performance obligation is satisfied at a point in time versus over time |
• | term of the contract |
• | amount of variable consideration associated with a contract and timing of the associated revenue recognition. |
The new guidance was effective January 1, 2018, was applied using the modified retrospective transition method, and did not result in any material differences in the amount and timing of revenue recognition. Refer to Note 4, Revenues, for further information related to the impact of adopting the new guidance and the Company's updated accounting policies related to revenue recognition from contracts with customers.
Financial instruments
In January 2016, the FASB issued new guidance on the accounting for equity investments and financial liabilities. The new guidance changes the income statement effect of equity investments and the recognition of changes in the fair value of financial liabilities when the fair value option is elected. The new guidance also requires the Company to assess valuation allowances for deferred tax assets related to available for sale debt securities in combination with their other deferred tax assets. This new guidance was effective January 1, 2018 and did not have a material impact on the Company's consolidated financial statements.
Income taxes
In October 2016, the FASB issued new guidance on the income tax effects of intra-entity transfers of assets other than inventory. The new guidance requires the recognition of deferred and current income taxes for intra-entity asset transfers when the transfer occurs. The new guidance was effective January 1, 2018, was applied using a modified retrospective approach, and did not have a material impact on the Company's consolidated financial statements.
Restricted cash
In November 2016, the FASB issued new guidance on restricted cash and cash equivalents on the statement of cash flows. The new guidance requires that the statement of cash flows explain the change during the period in the total cash and cash equivalents balance, and amounts generally described as restricted cash or restricted cash equivalents. Restricted cash and cash equivalents will be included with cash and cash equivalents when reconciling the beginning of period and end of period total amounts on the statement of cash flows. This new guidance was effective January 1, 2018, was applied retrospectively, and did not have an impact on the Company's consolidated financial statements.
Employee post-retirement benefits
In March 2017, the FASB issued new guidance that requires entities to disaggregate the current service cost component from the other components of net benefit cost and present it with other current compensation costs for related employees in the income statement. The new guidance also requires that the other components of net benefit cost be presented elsewhere in the income statement and excluded from income from operations if such a subtotal is presented. In addition, the new guidance makes changes to the components of net benefit cost that are eligible for capitalization. Entities must use a retrospective transition method to adopt the requirement for separate presentation in the income statement of the components of net benefit cost, and a prospective transition method to adopt the change to capitalization of benefit costs. This new guidance was effective January 1, 2018 and did not have a material impact on the Company's consolidated financial statements.
TRANSCANADA PIPELINES LIMITED [58
THIRD QUARTER 2018
Hedge accounting
In August 2017, the FASB issued new guidance making more financial and non-financial hedging strategies eligible for hedge accounting. The new guidance also amends the presentation requirements relating to the change in fair value of a derivative and requires additional disclosures including cumulative basis adjustments for fair value hedges and the effect of hedging on individual line items in the statement of income. This new guidance is effective January 1, 2019 with early adoption permitted. This new guidance, which the Company elected to adopt effective January 1, 2018, was applied prospectively and did not have a material impact on the Company's consolidated financial statements.
FUTURE ACCOUNTING CHANGES
Leases
In February 2016, the FASB issued new guidance on the accounting for leases. The new guidance amends the definition of a lease such that, in order for an arrangement to qualify as a lease, the lessor is required to have both (1) the right to obtain substantially all of the economic benefits from the use of the asset and (2) the right to direct the use of the asset. The new guidance also establishes a right-of-use (ROU) model that requires a lessee to recognize a ROU asset and corresponding lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern of expense recognition in the statement of income. The new guidance does not make extensive changes to lessor accounting.
In January 2018, the FASB issued an optional practical expedient, to be applied upon transition, to omit the evaluation of land easements not previously accounted for as leases that existed or expired prior to the entity's adoption of the new lease guidance. An entity that elects this practical expedient is required to apply the practical expedient consistently to all of its existing or expired land easements not previously accounted for as leases. The Company intends to apply this practical expedient upon transition to the new standard.
The new guidance is effective January 1, 2019, with early adoption permitted. The Company will adopt the new standard on its effective date. A modified retrospective transition approach is required, applying the new standard to all leases existing at the date of initial application. In July 2018, the FASB issued a transition option allowing entities to not apply the new guidance, including disclosure requirements, to the comparative periods they present in their financial statements in the year of adoption. The Company will apply this transition option and therefore will not be required to update financial information and disclosures for dates and periods prior to January 1, 2019.
The Company will elect the package of practical expedients which permits entities not to reassess prior conclusions about lease identification, lease classification and initial direct costs under the rules of the new standard. The Company continues to monitor and analyze other optional practical expedients as well as additional guidance and clarifications provided by the FASB.
The Company has developed an inventory of existing lease agreements, has substantially completed its analysis on them, but continues to refine its view of what qualifies as a lease and evaluate the financial impact on its consolidated financial statements. The Company has also selected a system solution and continues to progress through the testing stage of implementation. The Company continues to assess process changes necessary to compile the information to meet the recognition and disclosure requirements of the new guidance and to analyze new contracts that may contain leases.
TRANSCANADA PIPELINES LIMITED [59
THIRD QUARTER 2018
Measurement of credit losses on financial instruments
In June 2016, the FASB issued new guidance that significantly changes how entities measure credit losses for most financial assets and certain other financial instruments that are not measured at fair value through net income. The new guidance amends the impairment model of financial instruments basing it on expected losses rather than incurred losses. These expected credit losses will be recognized as an allowance rather than as a direct write down of the amortized cost basis. The new guidance is effective January 1, 2020 and will be applied using a modified retrospective approach. The Company is currently evaluating the impact of the adoption of this guidance and has not yet determined the effect on its consolidated financial statements.
Goodwill impairment
In January 2017, the FASB issued new guidance on simplifying the test for goodwill impairment by eliminating Step 2 of the impairment test, which is the requirement to calculate the implied fair value of goodwill to measure the impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value. This new guidance is effective January 1, 2020 and will be applied prospectively, however, early adoption is permitted. The Company is currently evaluating the timing and impact of the adoption of this guidance.
Income taxes
In February 2018, the FASB issued new guidance that allows a reclassification from AOCI to retained earnings for stranded tax effects resulting from the U.S. Tax Reform. This new guidance is effective January 1, 2019, however, early adoption is permitted. This guidance can be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change is recognized. The Company is currently evaluating this guidance in conjunction with its analysis of the overall impact of U.S. Tax Reform.
Fair value measurement
In August 2018, the FASB issued new guidance that amends certain disclosure requirements for fair value measurements. This new guidance is effective January 1, 2020, however, early adoption of certain or all requirements is permitted. The Company is currently evaluating the timing and impact of adoption of this guidance and has not yet determined the effect on its consolidated financial statements.
Defined benefit plans
In August 2018, the FASB issued new guidance which amends and clarifies disclosure requirements related to defined benefit pension and other post retirement benefit plans. This new guidance is effective January 1, 2021, and will be applied on a retrospective basis. The Company is currently evaluating the timing and impact of the adoption of this guidance.
Implementation costs of cloud computing arrangements
In August 2018, the FASB issued new guidance requiring an entity in a hosting arrangement that is a service contract to follow the guidance for internal-use software to determine which implementation costs should be capitalized as an asset and which costs should be expensed. The guidance also requires the entity to amortize the capitalized implementation costs of a hosting arrangement over the term of the arrangement. This guidance is effective January 1, 2020, however, early adoption is permitted. This guidance can be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The Company is currently evaluating the timing and impact of adoption of this guidance and has not yet determined the effect on its consolidated financial statements.
TRANSCANADA PIPELINES LIMITED [60
THIRD QUARTER 2018
3. Segmented information
three months ended September 30, 2018 | Canadian Natural Gas Pipelines | U.S. Natural Gas Pipelines | Mexico Natural Gas Pipelines | Liquids Pipelines | |||||||||||||||||
(unaudited - millions of Canadian $) | Energy | Corporate1 | Total | ||||||||||||||||||
Revenues | 934 | 967 | 156 | 564 | 535 | — | 3,156 | ||||||||||||||
Intersegment revenues | — | 40 | — | — | 3 | (43 | ) | 2 | — | ||||||||||||
934 | 1,007 | 156 | 564 | 538 | (43 | ) | 3,156 | ||||||||||||||
Income/(loss) from equity investments | 3 | 62 | 8 | 22 | 112 | (60 | ) | 3 | 147 | ||||||||||||
Plant operating costs and other | (356 | ) | (313 | ) | (11 | ) | (160 | ) | (79 | ) | 35 | 2 | (884 | ) | |||||||
Commodity purchases resold | — | — | — | — | (318 | ) | — | (318 | ) | ||||||||||||
Property taxes | (59 | ) | (41 | ) | — | (24 | ) | (3 | ) | — | (127 | ) | |||||||||
Depreciation and amortization | (255 | ) | (170 | ) | (26 | ) | (86 | ) | (27 | ) | — | (564 | ) | ||||||||
Segmented Earnings/(Loss) | 267 | 545 | 127 | 316 | 223 | (68 | ) | 1,410 | |||||||||||||
Interest expense | (608 | ) | |||||||||||||||||||
Allowance for funds used during construction | 147 | ||||||||||||||||||||
Interest income and other3 | 167 | ||||||||||||||||||||
Income before income taxes | 1,116 | ||||||||||||||||||||
Income tax expense | (111 | ) | |||||||||||||||||||
Net Income | 1,005 | ||||||||||||||||||||
Net income attributable to non-controlling interests | (59 | ) | |||||||||||||||||||
Net Income Attributable to Controlling Interests and to Common Shares | 946 |
1 | Includes intersegment eliminations. |
2 | The Company records intersegment sales at contracted rates. For segmented reporting, these transactions are included as Intersegment revenues in the segment providing the service and Plant operating costs and other in the segment receiving the service. These transactions are eliminated on consolidation. Intersegment profit is recognized when the product or service has been provided to third parties or otherwise realized. |
3 | Income/(loss) from equity investments includes foreign exchange losses on the Company's inter-affiliate loan with Sur de Texas. The offsetting foreign exchange gains on the inter-affiliate loan are included in Interest income and other. The peso-denominated loan to the Sur de Texas joint venture represents the Company's proportionate share of debt financing for this joint venture. |
TRANSCANADA PIPELINES LIMITED [61
THIRD QUARTER 2018
three months ended September 30, 2017 | Canadian Natural Gas Pipelines | U.S. Natural Gas Pipelines | Mexico Natural Gas Pipelines | Liquids Pipelines | |||||||||||||||||
(unaudited - millions of Canadian $) | Energy | Corporate1 | Total | ||||||||||||||||||
Revenues | 921 | 811 | 139 | 437 | 887 | — | 3,195 | ||||||||||||||
Intersegment revenues | — | 10 | — | — | — | (10 | ) | 2 | — | ||||||||||||
921 | 821 | 139 | 437 | 887 | (10 | ) | 3,195 | ||||||||||||||
Income/(loss) from equity investments | 4 | 53 | (11 | ) | 4 | 99 | 7 | 3 | 156 | ||||||||||||
Plant operating costs and other | (318 | ) | (351 | ) | (10 | ) | (145 | ) | (79 | ) | (26 | ) | 2 | (929 | ) | ||||||
Commodity purchases resold | — | — | — | — | (621 | ) | — | (621 | ) | ||||||||||||
Property taxes | (63 | ) | (41 | ) | — | (22 | ) | (1 | ) | — | (127 | ) | |||||||||
Depreciation and amortization | (228 | ) | (145 | ) | (23 | ) | (71 | ) | (39 | ) | — | (506 | ) | ||||||||
Loss on sales of assets | — | — | — | — | (9 | ) | — | (9 | ) | ||||||||||||
Segmented Earnings/(Loss) | 316 | 337 | 95 | 203 | 237 | (29 | ) | 1,159 | |||||||||||||
Interest expense | (522 | ) | |||||||||||||||||||
Allowance for funds used during construction | 145 | ||||||||||||||||||||
Interest income and other3 | 83 | ||||||||||||||||||||
Income before income taxes | 865 | ||||||||||||||||||||
Income tax expense | (185 | ) | |||||||||||||||||||
Net Income | 680 | ||||||||||||||||||||
Net income attributable to non-controlling interests | (44 | ) | |||||||||||||||||||
Net Income Attributable to Controlling Interests and to Common Shares | 636 |
1 | Includes intersegment eliminations. |
2 | The Company records intersegment sales at contracted rates. For segmented reporting, these transactions are included as Intersegment revenues in the segment providing the service and Plant operating costs and other in the segment receiving the service. These transactions are eliminated on consolidation. Intersegment profit is recognized when the product or service has been provided to third parties or otherwise realized. |
3 | Income/(loss) from equity investments includes foreign exchange gains on the Company's inter-affiliate loan with Sur de Texas. The offsetting foreign exchange losses on the inter-affiliate loan are included in Interest income and other. The peso-denominated loan to the Sur de Texas joint venture represents the Company's proportionate share of debt financing for this joint venture. |
TRANSCANADA PIPELINES LIMITED [62
THIRD QUARTER 2018
nine months ended September 30, 2018 | Canadian Natural Gas Pipelines | U.S. Natural Gas Pipelines | Mexico Natural Gas Pipelines | Liquids Pipelines | |||||||||||||||||
(unaudited - millions of Canadian $) | Energy | Corporate1 | Total | ||||||||||||||||||
Revenues | 2,772 | 2,988 | 460 | 1,831 | 1,724 | — | 9,775 | ||||||||||||||
Intersegment revenues | — | 121 | — | — | 50 | (171 | ) | 2 | — | ||||||||||||
2,772 | 3,109 | 460 | 1,831 | 1,774 | (171 | ) | 9,775 | ||||||||||||||
Income/(loss) from equity investments | 9 | 188 | 20 | 50 | 277 | (52 | ) | 3 | 492 | ||||||||||||
Plant operating costs and other | (1,020 | ) | (925 | ) | (25 | ) | (506 | ) | (250 | ) | 146 | 2 | (2,580 | ) | |||||||
Commodity purchases resold | — | — | — | — | (1,239 | ) | — | (1,239 | ) | ||||||||||||
Property taxes | (200 | ) | (149 | ) | — | (74 | ) | (6 | ) | — | (429 | ) | |||||||||
Depreciation and amortization | (761 | ) | (489 | ) | (73 | ) | (254 | ) | (92 | ) | — | (1,669 | ) | ||||||||
Segmented Earnings/(Loss) | 800 | 1,734 | 382 | 1,047 | 464 | (77 | ) | 4,350 | |||||||||||||
Interest expense | (1,740 | ) | |||||||||||||||||||
Allowance for funds used during construction | 365 | ||||||||||||||||||||
Interest income and other3 | 137 | ||||||||||||||||||||
Income before income taxes | 3,112 | ||||||||||||||||||||
Income tax expense | (372 | ) | |||||||||||||||||||
Net Income | 2,740 | ||||||||||||||||||||
Net income attributable to non-controlling interests | (229 | ) | |||||||||||||||||||
Net Income Attributable to Controlling Interests and to Common Shares | 2,511 |
1 | Includes intersegment eliminations. |
2 | The Company records intersegment sales at contracted rates. For segmented reporting, these transactions are included as Intersegment revenues in the segment providing the service and Plant operating costs and other in the segment receiving the service. These transactions are eliminated on consolidation. Intersegment profit is recognized when the product or service has been provided to third parties or otherwise realized. |
3 | Income/(loss) from equity investments includes foreign exchange losses on the Company's inter-affiliate loan with Sur de Texas. The offsetting foreign exchange gains on the inter-affiliate loan are included in Interest income and other. The peso-denominated loan to the Sur de Texas joint venture represents the Company's proportionate share of debt financing for this joint venture. |
TRANSCANADA PIPELINES LIMITED [63
THIRD QUARTER 2018
nine months ended September 30, 2017 | Canadian Natural Gas Pipelines | U.S. Natural Gas Pipelines | Mexico Natural Gas Pipelines | Liquids Pipelines | |||||||||||||||||
(unaudited - millions of Canadian $) | Energy | Corporate1 | Total | ||||||||||||||||||
Revenues | 2,725 | 2,684 | 432 | 1,410 | 2,581 | — | 9,832 | ||||||||||||||
Intersegment revenues | — | 31 | — | — | — | (31 | ) | 2 | — | ||||||||||||
2,725 | 2,715 | 432 | 1,410 | 2,581 | (31 | ) | 9,832 | ||||||||||||||
Income/(loss) from equity investments | 9 | 175 | — | 3 | 341 | (1 | ) | 3 | 527 | ||||||||||||
Plant operating costs and other | (958 | ) | (1,004 | ) | (29 | ) | (437 | ) | (464 | ) | (70 | ) | 2 | (2,962 | ) | ||||||
Commodity purchases resold | — | — | — | — | (1,711 | ) | — | (1,711 | ) | ||||||||||||
Property taxes | (201 | ) | (136 | ) | — | (67 | ) | (38 | ) | — | (442 | ) | |||||||||
Depreciation and amortization | (672 | ) | (451 | ) | (70 | ) | (228 | ) | (118 | ) | — | (1,539 | ) | ||||||||
Gain on sales of assets | — | — | — | — | 489 | — | 489 | ||||||||||||||
Segmented Earnings/(Loss) | 903 | 1,299 | 333 | 681 | 1,080 | (102 | ) | 4,194 | |||||||||||||
Interest expense | (1,578 | ) | |||||||||||||||||||
Allowance for funds used during construction | 367 | ||||||||||||||||||||
Interest income and other3 | 192 | ||||||||||||||||||||
Income before income taxes | 3,175 | ||||||||||||||||||||
Income tax expense | (769 | ) | |||||||||||||||||||
Net Income | 2,406 | ||||||||||||||||||||
Net income attributable to non-controlling interests | (189 | ) | |||||||||||||||||||
Net Income Attributable to Controlling Interests and to Common Shares | 2,217 |
1 | Includes intersegment eliminations. |
2 | The Company records intersegment sales at contracted rates. For segmented reporting, these transactions are included as Intersegment revenues in the segment providing the service and Plant operating costs and other in the segment receiving the service. These transactions are eliminated on consolidation. Intersegment profit is recognized when the product or service has been provided to third parties or otherwise realized. |
3 | Income/(loss) from equity investments includes foreign exchange losses on the Company's inter-affiliate loan with Sur de Texas. The offsetting foreign exchange gains on the inter-affiliate loan are included in Interest income and other. The peso-denominated loan to the Sur de Texas joint venture represents the Company's proportionate share of debt financing for this joint venture. |
TOTAL ASSETS
(unaudited - millions of Canadian $) | September 30, 2018 | December 31, 2017 | ||||
Canadian Natural Gas Pipelines | 17,900 | 16,904 | ||||
U.S. Natural Gas Pipelines | 41,045 | 35,898 | ||||
Mexico Natural Gas Pipelines | 6,403 | 5,716 | ||||
Liquids Pipelines | 16,277 | 15,438 | ||||
Energy | 8,559 | 8,503 | ||||
Corporate | 3,871 | 3,551 | ||||
94,055 | 86,010 |
TRANSCANADA PIPELINES LIMITED [64
THIRD QUARTER 2018
4. Revenues
In 2014, the FASB issued new guidance on revenue from contracts with customers. The Company adopted the new guidance on January 1, 2018 using the modified retrospective transition method for all contracts that were in effect on the date of adoption. Results reported for 2018 reflect the application of the new guidance, while the 2017 comparative results were prepared and reported under previous revenue recognition guidance which is referred to herein as "legacy U.S. GAAP."
DISAGGREGATION OF REVENUES
The following tables summarize total Revenues for the three and nine months ended September 30, 2018:
three months ended September 30, 2018 (unaudited - millions of Canadian $) | Canadian Natural Gas Pipelines | U.S. Natural Gas Pipelines | Mexico Natural Gas Pipelines | Liquids Pipelines | Energy | Total | ||||||
Revenues from contracts with customers | ||||||||||||
Capacity arrangements and transportation | 934 | 788 | 155 | 511 | — | 2,388 | ||||||
Power generation | — | — | — | — | 450 | 450 | ||||||
Natural gas storage and other | — | 158 | 1 | 1 | 4 | 164 | ||||||
934 | 946 | 156 | 512 | 454 | 3,002 | |||||||
Other revenues1,2 | — | 21 | — | 52 | 81 | 154 | ||||||
934 | 967 | 156 | 564 | 535 | 3,156 |
1 | Other revenues include income from the Company's marketing activities, financial instruments and lease arrangements within each operating segment. Income from lease arrangements includes certain long term PPAs, as well as certain liquids pipelines capacity and transportation arrangements. These arrangements are not in the scope of the new guidance, therefore, revenues related to these contracts are excluded from revenues from contracts with customers. Refer to Note 12, Risk management and financial instruments, for further information on income from financial instruments. |
2 | Other revenues from U.S. Natural Gas Pipelines include the amortization of the net regulatory liabilities resulting from U.S. Tax Reform. Refer to Note 7, Income taxes, for further information. |
nine months ended September 30, 2018 (unaudited - millions of Canadian $) | Canadian Natural Gas Pipelines | U.S. Natural Gas Pipelines | Mexico Natural Gas Pipelines | Liquids Pipelines | Energy | Total | ||||||
Revenues from contracts with customers | ||||||||||||
Capacity arrangements and transportation | 2,772 | 2,457 | 457 | 1,558 | — | 7,244 | ||||||
Power generation | — | — | — | — | 1,455 | 1,455 | ||||||
Natural gas storage and other | — | 468 | 3 | 2 | 65 | 538 | ||||||
2,772 | 2,925 | 460 | 1,560 | 1,520 | 9,237 | |||||||
Other revenues1,2 | — | 63 | — | 271 | 204 | 538 | ||||||
2,772 | 2,988 | 460 | 1,831 | 1,724 | 9,775 |
1 | Other revenues include income from the Company's marketing activities, financial instruments and lease arrangements within each operating segment. Income from lease arrangements includes certain long term PPAs, as well as certain liquids pipelines capacity and transportation arrangements. These arrangements are not in the scope of the new guidance, therefore, revenues related to these contracts are excluded from revenues from contracts with customers. Refer to Note 12, Risk management and financial instruments, for further information on income from financial instruments. |
2 | Other revenues from U.S. Natural Gas Pipelines include the amortization of the net regulatory liabilities resulting from U.S. Tax Reform. Refer to Note 7, Income taxes, for further information. |
Revenues from contracts with customers are recognized net of any taxes collected from customers which are subsequently remitted to governmental authorities. The Company's contracts with customers include natural gas and liquids pipelines capacity arrangements and transportation contracts, power generation contracts, natural gas storage and other contracts.
TRANSCANADA PIPELINES LIMITED [65
THIRD QUARTER 2018
Canadian Natural Gas Pipelines
Capacity Arrangements and Transportation
Revenues from the Company's Canadian natural gas pipelines are generated from contractual arrangements for committed capacity and from the transportation of natural gas. Revenues earned from firm contracted capacity arrangements are recognized ratably over the term of the contract regardless of the amount of natural gas that is transported. Transportation revenues for interruptible or volumetric-based services are recognized when the service is performed.
Revenues from the Company's Canadian natural gas pipelines are subject to regulatory decisions by the NEB. The tolls charged on these pipelines are based on revenue requirements designed to recover the costs of providing natural gas capacity for transportation services, which includes a return of and return on capital, as approved by the NEB. The Company's Canadian natural gas pipelines are generally not subject to risks related to variances in revenues and most costs. These variances are generally subject to deferral treatment and are recovered or refunded in future tolls. Revenues recognized prior to an NEB decision on rates for that period reflect the NEB's last approved ROE assumptions. Adjustments to revenues are recorded when the NEB decision is received. Canadian natural gas pipelines' revenues are invoiced and received on a monthly basis. The Company does not take ownership of the natural gas that it transports for customers.
U.S. Natural Gas Pipelines
Capacity Arrangements and Transportation
Revenues from the Company's U.S. natural gas pipelines are generated from contractual arrangements for committed capacity and from the transportation of natural gas. Revenues earned from firm contracted capacity arrangements are generally recognized ratably over the term of the contract regardless of the amount of natural gas that is transported. Transportation revenues for interruptible or volumetric-based services are recognized when the service is performed. The Company has elected to utilize the practical expedient to recognize revenues from its U.S. natural gas pipelines as invoiced.
The Company's U.S. natural gas pipelines are subject to FERC regulations and, as a result, a portion of revenues collected may be subject to refund if invoiced during an interim period when a rate proceeding is ongoing. Allowances for these potential refunds are recognized using management's best estimate based on the facts and circumstances of the proceeding. Any allowances that are recognized during the proceeding process are refunded or retained at the time a regulatory decision becomes final. U.S. natural gas pipelines' revenues are invoiced and received on a monthly basis. The Company does not take ownership of the natural gas that it transports for customers.
Natural Gas Storage and Other
Revenues from the Company's regulated U.S. natural gas storage services are generated mainly from firm committed capacity storage contracts. The performance obligation in these contracts is the reservation of a specified amount of capacity for storage including specifications with regards to the amount of natural gas that can be injected or withdrawn on a daily basis. Revenues are recognized ratably over the contract period for firm committed capacity regardless of the amount of natural gas that is stored, and when gas is injected or withdrawn for interruptible or volumetric-based services. Natural gas storage services revenues are invoiced and received on a monthly basis. The Company does not take ownership of the natural gas that it stores for customers.
Revenues from the Company's midstream natural gas services, including gathering, treating, conditioning, processing, compression and liquids handling services, are generated from contractual arrangements and are recognized ratably over the term of the contract. The Company also owns mineral rights associated with certain natural gas storage facilities. These mineral rights can be leased or contributed to producers of natural gas in return for a royalty interest which is recognized when natural gas and associated liquids are produced. Midstream natural gas service revenues are invoiced and received on a monthly basis. The Company does not take ownership of the natural gas for which it provides midstream services.
TRANSCANADA PIPELINES LIMITED [66
THIRD QUARTER 2018
Mexico Natural Gas Pipelines
Capacity Arrangements and Transportation
Revenues from the Company's Mexico natural gas pipelines are primarily collected based on CRE-approved negotiated firm capacity contracts and are generally recognized ratably over the term of the contract. For certain firm capacity arrangements, the Company has elected to utilize the practical expedient to recognize revenues as invoiced. Transportation revenues related to interruptible or volumetric-based services are recognized when the service is performed. Other volumes shipped on these pipelines are subject to CRE-approved tariffs and revenues are recognized when the Company has performed the transportation services. Mexico natural gas pipelines' revenues are invoiced and received on a monthly basis. The Company does not take ownership of the natural gas that it transports for customers.
Liquids Pipelines
Capacity Arrangements and Transportation
Revenues from the Company's liquids pipelines are generated mainly from providing customers with firm capacity arrangements to transport crude oil. The performance obligation in these contracts is the reservation of a specified amount of capacity together with the transportation of crude oil on a monthly basis. Revenues earned from these arrangements are recognized ratably over the term of the contract regardless of the amount of crude oil that is transported. Revenues for interruptible or volumetric-based services are recognized when the service is performed. Liquids pipelines' revenues are invoiced and received on a monthly basis. The Company does not take ownership of the crude oil that it transports for customers.
Energy
Power Generation
Revenues from the Company's Energy business are primarily derived from long-term contractual commitments to provide power capacity to meet the demands of the market, and from the sale of electricity to both centralized markets and to customers. Power generation revenues also include revenues from the sale of steam to customers. Revenues and capacity payments are recognized as the services are provided and as electricity and steam is delivered. Power generation revenues are invoiced and received on a monthly basis.
Natural Gas Storage and Other
Non-regulated natural gas storage contracts include park, loan and term storage arrangements. Park and loan contracts allow for fixed injection or withdrawal volumes on specified dates for a specified price. Term storage contracts allow for a maximum amount of gas to be stored over a set period of time. Revenues from park and loan contracts are recognized and invoiced as the injection and withdrawal services are provided and revenues from term storage contracts are recognized ratably over the term of the contract. Term storage revenues are invoiced and received on a monthly basis. Revenues earned from the sale of proprietary natural gas are recognized in the month of delivery. Revenues from ancillary services are recognized as the service is provided. The Company does not take ownership of the natural gas that it stores for customers.
FINANCIAL STATEMENT IMPACT OF ADOPTING REVENUE FROM CONTRACTS WITH CUSTOMERS
The Company adopted the new guidance using the modified retrospective transition method. As a practical expedient under this transition method, the Company is not required to analyze completed contracts at the date of adoption. As a result, the Company made the following adjustments on January 1, 2018.
Capacity Arrangements and Transportation
For certain natural gas pipelines capacity contracts, amounts are invoiced to the customer in accordance with the terms of the contract, however, the related revenues are recognized when the Company satisfies its performance obligation to provide committed capacity ratably over the term of the contract. This difference in timing between revenue recognition and amounts invoiced creates a contract asset or contract liability under the new revenue recognition guidance. Under legacy U.S. GAAP, this difference was recorded as Accounts receivable. Under the new guidance, contract assets are
TRANSCANADA PIPELINES LIMITED [67
THIRD QUARTER 2018
included in Other current assets and Intangibles and other assets and contract liabilities are included in Accounts payable and other and Other long-term liabilities.
Impact of New Revenue Recognition Guidance on Date of Adoption
The following table illustrates the impact of the adoption of the new revenue recognition guidance on the Company's previously reported consolidated balance sheet line items:
As reported | Adjustment | |||||
(unaudited - millions of Canadian $) | December 31, 2017 | January 1, 2018 | ||||
Current Assets | ||||||
Accounts receivable | 2,537 | (62 | ) | 2,475 | ||
Other1 | 691 | 79 | 770 | |||
Current Liabilities | ||||||
Accounts payable and other2 | 4,071 | 17 | 4,088 |
1 | Adjustment relates to contract assets previously included in Accounts receivable. |
2 | Adjustment relates to contract liabilities previously included in Accounts receivable. |
Pro-forma Financial Statements under Legacy U.S. GAAP
As required by the new revenue recognition guidance, the following tables illustrate the pro-forma impact on the affected line items on the Condensed consolidated balance sheet, as at September 30, 2018, using legacy U.S. GAAP:
September 30, 2018 | |||||
As reported | Pro-forma using legacy U.S. GAAP | ||||
(unaudited - millions of Canadian $) | |||||
Current Assets | |||||
Accounts receivable | 2,171 | 2,461 | |||
Other | 1,003 | 713 |
CONTRACT BALANCES
(unaudited - millions of Canadian $) | September 30, 2018 | January 1, 2018 | ||||
Receivables from contracts with customers | 1,208 | 1,736 | ||||
Contract assets1 | 290 | 79 | ||||
Long-term contract assets2 | 35 | — | ||||
Contract liabilities3 | 41 | 17 | ||||
Long-term contract liabilities4 | 27 | — |
1 | Recorded as part of Other current assets on the Condensed consolidated balance sheet. |
2 | Recorded as part of Intangibles and other assets on the Condensed consolidated balance sheet. |
3 | Comprised of deferred revenue recorded in Accounts payable and other on the Condensed consolidated balance sheet. During the nine months ended September 30, 2018, $17 million of revenue was recognized that was included in the contract liability at the beginning of the period. |
4 | Comprised of deferred revenue recorded in Other long-term liabilities on the Condensed consolidated balance sheet. |
Contract assets and long-term contract assets primarily relate to the Company’s right to revenues for services completed but not invoiced at the reporting date on long-term committed capacity natural gas pipelines contracts. The change in contract assets is primarily related to the transfer to Accounts receivable when these rights become unconditional and the customer is invoiced as well as the recognition of additional revenues that remains to be invoiced. Contract liabilities and long term contract liabilities primarily relate to force majeure fixed capacity payments received on long term capacity arrangements in Mexico.
TRANSCANADA PIPELINES LIMITED [68
THIRD QUARTER 2018
FUTURE REVENUES FROM REMAINING PERFORMANCE OBLIGATIONS
As required by the new revenue recognition guidance, the following provides disclosure on future revenues allocated to remaining performance obligations representing contracted revenues that have not yet been recognized. Certain contracts that qualify for the use of one of the following practical expedients are excluded from the future revenues disclosures:
1) | The original expected duration of the contract is one year or less. |
2) | The Company recognizes revenue from the contract that is equal to the amount invoiced, where the amount invoiced represents the value to the customer of the service performed to date. This is referred to as the "right to invoice" practical expedient. |
3) | The variable revenue generated from the contract is allocated entirely to a wholly unsatisfied performance obligation or to a wholly unsatisfied promise to transfer a distinct good or service that forms part of a single performance obligation in a series. A single performance obligation in a series occurs when the promises under a contract are a series of distinct services that are substantially the same and have the same pattern of transfer to the customer over time. |
The following provides a discussion of the transaction price allocated to future performance obligations as well as practical expedients used by the Company.
Capacity Arrangements and Transportation
As at September 30, 2018, future revenues from long-term capacity arrangements and transportation contracts extending through 2043 are approximately $28.0 billion, of which approximately $1.4 billion is expected to be recognized during the remainder of 2018.
Future revenues from long-term capacity arrangements and transportation contracts do not include constrained variable revenues or arrangements to which the right to invoice practical expedient has been applied. As a result, these amounts are not representative of potential total future revenues expected from these contracts.
Future revenues from the Company's Canadian natural gas pipelines' regulated firm capacity contracts include fixed revenues for the time periods that tolls under current rate settlements are in effect, which is approximately one to three years. Many of these contracts are long-term in nature and revenues from the remaining performance obligations that extend beyond the current rate settlement term are considered to be fully constrained since future tolls remain unknown. Revenues from these contracts will be recognized once the performance obligation to provide capacity has been satisfied and the regulator has approved the applicable tolls. In addition, the Company considers interruptible transportation service revenues to be variable revenues since volumes cannot be estimated. These variable revenues are recognized on a monthly basis when the Company satisfies the performance obligation and have been excluded from the future revenues disclosure as the Company applies the practical expedient related to variable revenues to these contracts. The future variable revenues earned under these contracts are allocated entirely to unsatisfied performance obligations at September 30, 2018.
The Company also applies the right to invoice practical expedient to all of its U.S. and certain of its Mexico regulated natural gas pipeline capacity arrangements and flow-through revenues. Revenues from regulated capacity arrangements are recognized based on current rates and flow-through revenues are earned from the recovery of operating expenses. These revenues are recognized on a monthly basis as the Company performs the services and are excluded from future revenues disclosures.
Revenues from liquids pipelines capacity arrangements have a variable component based on volumes transported. As a result, these variable revenues are excluded from the future revenues disclosures as the Company applies the practical expedient related to variable revenues to these contracts. The future variable revenues earned under these contracts is allocated entirely to unsatisfied performance obligations at September 30, 2018.
TRANSCANADA PIPELINES LIMITED [69
THIRD QUARTER 2018
Power Generation
The Company has long-term power generation contracts extending through 2032. Revenues from power generation have a variable component related to market prices that are subject to factors outside the Company’s influence. These revenues are considered to be fully constrained and are recognized on a monthly basis when the Company satisfies the performance obligation. The Company applies the practical expedient related to variable revenues to these contracts. As a result, future revenues from these contracts are excluded from the disclosures.
Natural Gas Storage and Other
As at September 30, 2018, future revenues from long-term natural gas storage and other contracts extending through 2033 are approximately $1.2 billion, of which approximately $127 million is expected to be recognized during the remainder of 2018. The Company applies the practical expedients related to contracts that are for a duration of one year or less and where it recognizes variable consideration, and therefore excludes the related revenues from the future revenues disclosure. As a result, this amount is lower than the potential total future revenues from these contracts.
5. Assets held for sale
Cartier Wind
On August 1, 2018, TCPL entered into an agreement to sell its interests in the Cartier Wind power facilities in Québec to Innergex Renewable Energy Inc. At September 30, 2018, the related assets and liabilities were classified as held for sale in the Energy segment. Subsequently, on October 24, 2018, the Company closed the sale for gross proceeds of approximately $630 million before closing adjustments, resulting in an estimated gain of $170 million ($135 million after tax) to be recognized in fourth quarter 2018.
At September 30, 2018, the related assets and liabilities in the Energy segment were classified as held for sale as follows:
(unaudited - millions of Canadian $) | |||
Assets held for sale | |||
Plant, property and equipment | 458 | ||
Total assets held for sale | 458 | ||
Liabilities related to assets held for sale | |||
Other long-term liabilities | 14 | ||
Total liabilities related to assets held for sale1 | 14 |
1 | Included in Accounts payable and other on the Condensed consolidated balance sheet. |
6. Plant, Property and Equipment, Equity Investments and Goodwill
The Company reviews plant, property and equipment and equity investments for impairment whenever events or changes in circumstances indicate the carrying value of the asset may not be recoverable.
Goodwill is tested for impairment on an annual basis or more frequently if events or changes in circumstance indicate that it might be impaired. The Company can initially make this assessment based on qualitative factors. If the Company concludes that it is not more likely than not that the fair value of the reporting unit is less than its carrying value, then an impairment test is not performed.
TRANSCANADA PIPELINES LIMITED [70
THIRD QUARTER 2018
In March 2018, FERC proposed changes related to U.S. Tax Reform and income taxes for rate-making purposes in a master limited partnership (MLP) that may have an impact on the future earnings and cash flows of FERC-regulated pipelines. On July 18, 2018, FERC issued final rulings (Final Rule) with respect to these changes. The March and July 2018 FERC proposed changes and Final Rule are collectively referred to herein as the "2018 FERC Actions."
The Company continues to monitor developments following the Final Rule on the 2018 FERC Actions. TCPL will incorporate results to date, future filings for individual pipelines, as well as FERC responses to others in the industry into its annual goodwill impairment tests as well as its normal review of plant, property and equipment and equity investments for recoverability.
As at September 30, 2018, the goodwill balances related to Great Lakes and Tuscarora are US$573 million and US$82 million (December 31, 2017 – US$573 million and US$82 million), respectively. At December 31, 2017, the estimated fair value of Great Lakes exceeded its carrying value by less than 10 per cent. There is a risk that the goodwill balances related to both of these assets could be negatively impacted by the FERC developments, once finalized, or by other changes in management's estimates of fair value resulting in a goodwill impairment charge.
7. Income taxes
U.S. Tax Reform
Pursuant to the enactment of U.S. Tax Reform, the Company recorded net regulatory liabilities and a corresponding reduction in net deferred income tax liabilities in the amount of $1,686 million at December 31, 2017 related to the Company's U.S. natural gas pipelines subject to RRA. Amounts recorded to adjust income taxes remain provisional as the Company's interpretation, assessment and presentation of the impact of U.S. Tax Reform may be further clarified with additional guidance from tax authorities. Should additional guidance be provided by tax authorities during the one-year measurement period permitted by the SEC, the Company will review the provisional amounts and adjust as appropriate.
Commencing January 1, 2018, the Company has amortized the net regulatory liabilities using the Reverse South Georgia methodology. Under this methodology, rate-regulated entities determine and immediately begin recording amortization based on their composite depreciation rates. Amortization of the net regulatory liabilities in the amount of $12 million and $36 million was recorded for the three and nine months ended September 30, 2018, respectively, and included in Revenues in the Condensed consolidated statement of income. Once the final impact of the 2018 FERC Actions is determined there may be prospective adjustments to the Company's net regulatory liabilities.
Effective Tax Rates
The effective income tax rates for the nine-month periods ended September 30, 2018 and 2017 were 12 per cent and 24 per cent, respectively. The lower effective tax rate in 2018 was primarily the result of the rate change resulting from U.S. Tax Reform and lower flow-through income taxes in Canadian rate-regulated pipelines.
TRANSCANADA PIPELINES LIMITED [71
THIRD QUARTER 2018
8. Long-term debt
LONG-TERM DEBT ISSUED
The Company issued long-term debt in the nine months ended September 30, 2018 as follows:
(unaudited - millions of Canadian $, unless noted otherwise) | ||||||||||||
Company | Issue date | Type | Maturity Date | Amount | Interest rate | |||||||
TRANSCANADA PIPELINES LIMITED | ||||||||||||
July 2018 | Medium Term Notes | July 2048 | 800 | 4.18 | % | |||||||
July 2018 | Medium Term Notes | March 2028 | 200 | 3.39 | % | |||||||
May 2018 | Senior Unsecured Notes | May 2028 | US 1,000 | 4.25 | % | |||||||
May 2018 | Senior Unsecured Notes | May 2038 | US 500 | 4.75 | % | |||||||
May 2018 | Senior Unsecured Notes | May 2048 | US 1,000 | 4.875 | % |
LONG-TERM DEBT RETIRED
The Company retired long-term debt in the nine months ended September 30, 2018 as follows:
(unaudited - millions of Canadian $, unless noted otherwise) | ||||||||||
Company | Retirement date | Type | Amount | Interest rate | ||||||
COLUMBIA PIPELINE GROUP, INC. | ||||||||||
June 2018 | Senior Unsecured Notes | US 500 | 2.45 | % | ||||||
PORTLAND NATURAL GAS TRANSMISSION SYSTEM | ||||||||||
May 2018 | Senior Secured Notes | US 18 | 5.90 | % | ||||||
TRANSCANADA PIPELINES LIMITED | ||||||||||
August 2018 | Senior Unsecured Notes | US 850 | 6.50 | % | ||||||
March 2018 | Debentures | 150 | 9.45 | % | ||||||
January 2018 | Senior Unsecured Notes | US 500 | 1.875 | % | ||||||
January 2018 | Senior Unsecured Notes | US 250 | Floating | |||||||
GREAT LAKES GAS TRANSMISSION LIMITED PARTNERSHIP | ||||||||||
March 2018 | Senior Unsecured Notes | US 9 | 6.73 | % |
CAPITALIZED INTEREST
In the three and nine months ended September 30, 2018, TCPL capitalized interest related to capital projects of $33 million and $89 million, respectively (2017 – $49 million and $150 million, respectively).
9. Common shares
During the nine months ended September 30, 2018, the Company issued the following common shares to TransCanada, resulting in 883 million shares outstanding at September 30, 2018 (December 31, 2017 – 872 million):
• | 3.4 million shares on January 31, 2018 for proceeds of $192 million |
• | 4.3 million shares on April 30, 2018 for proceeds of $234 million |
• | 3.6 million shares on July 31, 2018 for proceeds of $207 million. |
TRANSCANADA PIPELINES LIMITED [72
THIRD QUARTER 2018
10. Other comprehensive (loss)/income and accumulated other comprehensive loss
Components of other comprehensive (loss)/income, including the portion attributable to non-controlling interests and related tax effects, are as follows:
three months ended September 30, 2018 | Income Tax | ||||||||
(unaudited - millions of Canadian $) | Before Tax Amount | Recovery/(Expense) | Net of Tax Amount | ||||||
Foreign currency translation losses on net investment in foreign operations | (273 | ) | (9 | ) | (282 | ) | |||
Change in fair value of net investment hedges | 12 | (3 | ) | 9 | |||||
Change in fair value of cash flow hedges | 5 | (1 | ) | 4 | |||||
Reclassification to net income of gains and losses on cash flow hedges | 8 | (2 | ) | 6 | |||||
Reclassification of actuarial gains and losses on pension and other post-retirement benefit plans | 4 | 6 | 10 | ||||||
Other comprehensive income on equity investments | 7 | (1 | ) | 6 | |||||
Other comprehensive loss | (237 | ) | (10 | ) | (247 | ) |
three months ended September 30, 2017 | Income Tax | ||||||||
(unaudited - millions of Canadian $) | Before Tax Amount | Recovery/(Expense) | Net of Tax Amount | ||||||
Foreign currency translation losses on net investment in foreign operations | (364 | ) | (6 | ) | (370 | ) | |||
Change in fair value of net investment hedges | (1 | ) | — | (1 | ) | ||||
Change in fair value of cash flow hedges | 1 | — | 1 | ||||||
Unrealized actuarial gains and losses on pension and other post-retirement benefit plans | 5 | (3 | ) | 2 | |||||
Reclassification of actuarial gains and losses on pension and other post-retirement benefit plans | 6 | (2 | ) | 4 | |||||
Other comprehensive income on equity investments | 4 | (1 | ) | 3 | |||||
Other comprehensive loss | (349 | ) | (12 | ) | (361 | ) |
nine months ended September 30, 2018 | Income Tax | ||||||||
(unaudited - millions of Canadian $) | Before Tax Amount | Recovery/(Expense) | Net of Tax Amount | ||||||
Foreign currency translation gains on net investment in foreign operations | 397 | 12 | 409 | ||||||
Change in fair value of net investment hedges | (8 | ) | 2 | (6 | ) | ||||
Change in fair value of cash flow hedges | 8 | 1 | 9 | ||||||
Reclassification to net income of gains and losses on cash flow hedges | 21 | (5 | ) | 16 | |||||
Reclassification of actuarial gains and losses on pension and other post-retirement benefit plans | 12 | (2 | ) | 10 | |||||
Other comprehensive income on equity investments | 20 | (2 | ) | 18 | |||||
Other comprehensive income | 450 | 6 | 456 |
TRANSCANADA PIPELINES LIMITED [73
THIRD QUARTER 2018
nine months ended September 30, 2017 | Income Tax | ||||||||
(unaudited - millions of Canadian $) | Before Tax Amount | Recovery/(Expense) | Net of Tax Amount | ||||||
Foreign currency translation losses on net investment in foreign operations | (717 | ) | (4 | ) | (721 | ) | |||
Reclassification of foreign currency translation gains on net investment on disposal of foreign operations | (77 | ) | — | (77 | ) | ||||
Change in fair value of net investment hedges | (4 | ) | 1 | (3 | ) | ||||
Change in fair value of cash flow hedges | 5 | (1 | ) | 4 | |||||
Reclassification to net income of gains and losses on cash flow hedges | (2 | ) | 1 | (1 | ) | ||||
Unrealized actuarial gains and losses on pension and other post-retirement benefit plans | 5 | (3 | ) | 2 | |||||
Reclassification of actuarial gains and losses on pension and other post-retirement benefit plans | 16 | (5 | ) | 11 | |||||
Other comprehensive income on equity investments | 8 | (2 | ) | 6 | |||||
Other comprehensive loss | (766 | ) | (13 | ) | (779 | ) |
The changes in AOCI by component are as follows:
three months ended September 30, 2018 | Currency | Pension and | |||||||||||||
(unaudited - millions of Canadian $) | Translation Adjustments | Cash Flow Hedges | OPEB Plan Adjustments | Equity Investments | Total1 | ||||||||||
AOCI balance at July 1, 2018 | (462 | ) | (26 | ) | (203 | ) | (443 | ) | (1,134 | ) | |||||
Other comprehensive (loss)/income before reclassifications2 | (239 | ) | 3 | — | — | (236 | ) | ||||||||
Amounts reclassified from AOCI3 | — | 5 | 10 | 5 | 20 | ||||||||||
Net current period other comprehensive (loss)/income | (239 | ) | 8 | 10 | 5 | (216 | ) | ||||||||
AOCI balance at September 30, 2018 | (701 | ) | (18 | ) | (193 | ) | (438 | ) | (1,350 | ) |
1 | All amounts are net of tax. Amounts in parentheses indicate losses recorded to OCI. |
2 | Other comprehensive (loss)/income before reclassifications on currency translation adjustments and cash flow hedges are net of non-controlling interest losses of $34 million and gains of $1 million, respectively. |
3 | Amounts reclassified from AOCI on cash flow hedges and equity investments are net of non-controlling interest gains of $1 million and $1 million, respectively. |
nine months ended September 30, 2018 | Currency | Pension and | |||||||||||||
(unaudited - millions of Canadian $) | Translation Adjustments | Cash Flow Hedges | OPEB Plan Adjustments | Equity Investments | Total1 | ||||||||||
AOCI balance at January 1, 2018 | (1,043 | ) | (31 | ) | (203 | ) | (454 | ) | (1,731 | ) | |||||
Other comprehensive income before reclassifications2 | 342 | 1 | — | — | 343 | ||||||||||
Amounts reclassified from AOCI3,4 | — | 12 | 10 | 16 | 38 | ||||||||||
Net current period other comprehensive income | 342 | 13 | 10 | 16 | 381 | ||||||||||
AOCI balance at September 30, 2018 | (701 | ) | (18 | ) | (193 | ) | (438 | ) | (1,350 | ) |
1 | All amounts are net of tax. Amounts in parentheses indicate losses recorded to OCI. |
2 | Other comprehensive income before reclassifications on currency translation adjustments and cash flow hedges are net of non-controlling interest gains of $61 million and $8 million, respectively. |
3 | Losses related to cash flow hedges reported in AOCI and expected to be reclassified to net income in the next 12 months are estimated to be $16 million ($11 million after tax) at September 30, 2018. These estimates assume constant commodity prices, interest rates and foreign exchange rates over time, however, the amounts reclassified will vary based on the actual value of these factors at the date of settlement. |
4 | Amounts reclassified from AOCI on cash flow hedges and equity investments are net of non-controlling interest gains of $4 million and $2 million, respectively. |
TRANSCANADA PIPELINES LIMITED [74
THIRD QUARTER 2018
Details about reclassifications out of AOCI into the Condensed consolidated statement of income are as follows:
Amounts Reclassified From AOCI | Affected line item in the Condensed consolidated statement of income | ||||||||||||
three months ended September 30 | nine months ended September 30 | ||||||||||||
(unaudited - millions of Canadian $) | 2018 | 2017 | 2018 | 2017 | |||||||||
Cash flow hedges | |||||||||||||
Commodities | (3 | ) | 4 | (4 | ) | 15 | Revenues (Energy) | ||||||
Interest | (4 | ) | (4 | ) | (13 | ) | (13 | ) | Interest expense | ||||
(7 | ) | — | (17 | ) | 2 | Total before tax | |||||||
2 | — | 5 | (1 | ) | Income tax expense | ||||||||
(5 | ) | — | (12 | ) | 1 | Net of tax1,3 | |||||||
Pension and other post-retirement benefit plan adjustments | |||||||||||||
Amortization of actuarial gains and losses | (4 | ) | (4 | ) | (12 | ) | (12 | ) | Plant operating costs and other2 | ||||
Settlement charge | — | (2 | ) | — | (2 | ) | Plant operating costs and other2 | ||||||
(4 | ) | (6 | ) | (12 | ) | (14 | ) | Total before tax | |||||
(6 | ) | 2 | 2 | 5 | Income tax expense | ||||||||
(10 | ) | (4 | ) | (10 | ) | (9 | ) | Net of tax1 | |||||
Equity investments | |||||||||||||
Equity income | (6 | ) | (4 | ) | (19 | ) | (8 | ) | Income from equity investments | ||||
1 | 1 | 3 | 2 | Income tax expense | |||||||||
(5 | ) | (3 | ) | (16 | ) | (6 | ) | Net of tax1,3 | |||||
Currency translation adjustments | |||||||||||||
Realization of foreign currency translation gain on disposal of foreign operations | — | — | — | 77 | Gain on sales of assets | ||||||||
— | — | — | — | Income tax expense | |||||||||
— | — | — | 77 | Net of tax1 |
1 | All amounts in parentheses indicate expenses to the Condensed consolidated statement of income. |
2 | These AOCI components are included in the computation of net benefit cost. Refer to Note 11, Employee post-retirement benefits, for further information. |
3 | Amounts reclassified from AOCI on cash flow hedges and equity investments are net of non-controlling interest gains of $1 million and $1 million, respectively, for the three months ended September 30, 2018 (2017 – nil and nil) and $4 million and $2 million, respectively, for the nine months ended September 30, 2018 (2017 – nil and nil). |
TRANSCANADA PIPELINES LIMITED [75
THIRD QUARTER 2018
11. Employee post-retirement benefits
The net benefit cost recognized for the Company’s pension benefit plans and other post-retirement benefit plans is as follows:
three months ended September 30 | nine months ended September 30 | |||||||||||||||||||||||
Pension benefit plans | Other post-retirement benefit plans | Pension benefit plans | Other post-retirement benefit plans | |||||||||||||||||||||
(unaudited - millions of Canadian $) | 2018 | 2017 | 2018 | 2017 | 2018 | 2017 | 2018 | 2017 | ||||||||||||||||
Service cost1 | 30 | 25 | 1 | 1 | 91 | 81 | 3 | 3 | ||||||||||||||||
Other components of net benefit cost1 | ||||||||||||||||||||||||
Interest cost | 33 | 30 | 3 | 3 | 100 | 92 | 10 | 10 | ||||||||||||||||
Expected return on plan assets | (55 | ) | (45 | ) | (4 | ) | (5 | ) | (165 | ) | (134 | ) | (12 | ) | (16 | ) | ||||||||
Amortization of actuarial loss | 4 | 3 | — | 1 | 11 | 11 | 1 | 1 | ||||||||||||||||
Amortization of regulatory asset | 5 | 26 | — | — | 14 | 33 | — | 1 | ||||||||||||||||
Settlement charge | — | 2 | — | — | — | 2 | — | — | ||||||||||||||||
(13 | ) | 16 | (1 | ) | (1 | ) | (40 | ) | 4 | (1 | ) | (4 | ) | |||||||||||
Net Benefit Cost | 17 | 41 | — | — | 51 | 85 | 2 | (1 | ) |
1 | Service cost and other components of net benefit cost are included in Plant operating costs and other in the Condensed consolidated statement of income. |
12. Risk management and financial instruments
RISK MANAGEMENT OVERVIEW
TCPL has exposure to market risk and counterparty credit risk, and has strategies, policies and limits in place to manage the impact of these risks on earnings and cash flow.
COUNTERPARTY CREDIT RISK
TCPL’s maximum counterparty credit exposure with respect to financial instruments at September 30, 2018, without taking into account security held, consisted of cash and cash equivalents, accounts receivable, available-for-sale assets, derivative assets and loans receivable. The Company regularly reviews its accounts receivable and records an allowance for doubtful accounts as necessary using the specific identification method. At September 30, 2018, there were no significant amounts past due or impaired, no significant credit risk concentration and no significant credit losses during the period.
LOAN RECEIVABLE FROM AFFILIATE
The Company holds a 60 per cent equity interest in a joint venture with IEnova to build, own and operate the Sur de Texas pipeline. The Company accounts for its interest in the joint venture as an equity investment. In 2017, the Company entered into a MXN$21.3 billion unsecured revolving credit facility with the joint venture, which bears interest at a floating rate and matures in March 2022. Draws on the credit facility result in a loan receivable from the joint venture representing the Company's proportionate share of the debt financing requirements advanced to the joint venture.
TRANSCANADA PIPELINES LIMITED [76
THIRD QUARTER 2018
At September 30, 2018, the balance of the Company's loan receivable from the joint venture totaled MXN$18.0 billion or $1.2 billion (December 31, 2017 – MXN$14.4 billion or $919 million) and Interest income and other included $32 million and $88 million of interest income on this loan receivable for the three and nine months ended September 30, 2018 (2017 – $11 million and $14 million). Amounts recognized in Interest income and other are offset by a corresponding proportionate share of interest expense recorded in Income from equity investments.
NET INVESTMENT IN FOREIGN OPERATIONS
The Company hedges its 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 and options.
The fair values and notional amounts for the derivatives designated as a net investment hedge were as follows:
September 30, 2018 | December 31, 2017 | |||||||||
(unaudited - millions of Canadian $, unless noted otherwise) | Fair value1,2 | Notional amount | Fair value1,2 | Notional amount | ||||||
U.S. dollar cross-currency interest rate swaps (maturing 2018 to 2019)3 | (42 | ) | US 300 | (199 | ) | US 1,200 | ||||
U.S. dollar foreign exchange options (maturing 2018 to 2019) | (2 | ) | US 2,000 | 5 | US 500 | |||||
(44 | ) | US 2,300 | (194 | ) | US 1,700 |
1 | Fair value equals carrying value. |
2 | No amounts have been excluded from the assessment of hedge effectiveness. |
3 | In the three and nine months ended September 30, 2018, Net income includes net realized gains of nil and $1 million, respectively (2017 – $1 million and $3 million, respectively) related to the interest component of cross-currency swap settlements which are reported within Interest expense. |
The notional amounts and fair value of U.S. dollar-denominated debt designated as a net investment hedge were as follows:
(unaudited - millions of Canadian $, unless noted otherwise) | September 30, 2018 | December 31, 2017 | ||
Notional amount | 28,300 (US 21,900) | 25,400 (US 20,200) | ||
Fair value | 30,200 (US 23,300) | 28,900 (US 23,100) |
FINANCIAL INSTRUMENTS
Non-derivative financial instruments
Fair value of non-derivative financial instruments
Available-for-sale assets are recorded at fair value which is calculated using quoted market prices where available. Certain non-derivative financial instruments included in Cash and cash equivalents, Accounts receivable, Intangible and other assets, Notes payable, Accounts payable and other, Due to affiliate, 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. Each of these instruments are classified in Level II of the fair value hierarchy.
Credit risk has been taken into consideration when calculating the fair value of non-derivative instruments.
TRANSCANADA PIPELINES LIMITED [77
THIRD QUARTER 2018
Balance sheet presentation of non-derivative financial instruments
The following table details the fair value of the Company's non-derivative financial instruments, excluding those where carrying amounts approximate fair value, which are classified in Level II of the fair value hierarchy:
September 30, 2018 | December 31, 2017 | |||||||||||
(unaudited - millions of Canadian $) | Carrying amount | Fair value | Carrying amount | Fair value | ||||||||
Long-term debt including current portion1,2 | (36,700 | ) | (39,956 | ) | (34,741 | ) | (40,180 | ) | ||||
Junior subordinated notes | (7,186 | ) | (7,014 | ) | (7,007 | ) | (7,233 | ) | ||||
(43,886 | ) | (46,970 | ) | (41,748 | ) | (47,413 | ) |
1 | Long-term debt is recorded at amortized cost except for US$700 million (December 31, 2017 – US$1.1 billion) that is attributed to hedged risk and recorded at fair value. |
2 | Net income for the three and nine months ended September 30, 2018 includes unrealized losses of $1 million and unrealized gains of $3 million, respectively, (2017 – gains of $1 million and $2 million, respectively) for fair value adjustments attributable to the hedged interest rate risk associated with interest rate swap fair value hedging relationships on US$700 million of long-term debt at September 30, 2018 (December 31, 2017 – US$1.1 billion). There were no other unrealized gains or losses from fair value adjustments to the non-derivative financial instruments. |
Available for sale assets summary
The following tables summarize additional information about the Company's restricted investments that are classified as available-for-sale assets:
September 30, 2018 | December 31, 2017 | ||||||||||
(unaudited - millions of Canadian $) | LMCI restricted investments | Other restricted investments1 | LMCI restricted investments | Other restricted investments1 | |||||||
Fair values of fixed income securities2 | |||||||||||
Maturing within 1 year | — | 19 | — | 23 | |||||||
Maturing within 1-5 years | — | 113 | — | 107 | |||||||
Maturing within 5-10 years | 84 | — | 14 | — | |||||||
Maturing after 10 years | 894 | — | 790 | — | |||||||
978 | 132 | 804 | 130 |
1 | Other restricted investments have been set aside to fund insurance claim losses to be paid by the Company's wholly-owned captive insurance subsidiary. |
2 | Available-for-sale assets are recorded at fair value and included in Other current assets and Restricted investments on the Condensed consolidated balance sheet. |
September 30, 2018 | September 30, 2017 | |||||||||||
(unaudited - millions of Canadian $) | LMCI restricted investments1 | Other restricted investments2 | LMCI restricted investments1 | Other restricted investments2 | ||||||||
Net unrealized (losses)/gains in the period | ||||||||||||
three months ended | (34 | ) | — | (38 | ) | — | ||||||
nine months ended | (29 | ) | 1 | (23 | ) | — | ||||||
Net realized losses in the period | ||||||||||||
three months ended | — | — | — | — | ||||||||
nine months ended | (3 | ) | — | (1 | ) | — |
1 | Gains and losses arising from changes in the fair value of LMCI restricted investments impact the subsequent amounts to be collected through tolls to cover future pipeline abandonment costs. As a result, the Company records these gains and losses as regulatory assets or liabilities. |
2 | Gains and losses on other restricted investments are included in Interest income and other. |
TRANSCANADA PIPELINES LIMITED [78
THIRD QUARTER 2018
Derivative instruments
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 commodity 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. The fair value of options has been calculated using the Black-Scholes pricing model. Credit risk has been taken into consideration when calculating the fair value of derivative instruments.
In some cases, even though the derivatives are considered to be effective economic hedges, they do not meet the specific criteria for hedge accounting treatment or are not designated as a hedge and are accounted for at fair value with changes in fair value recorded in net income in the period of change. This may expose the Company to increased variability in reported earnings because the fair value of the derivative instruments can fluctuate significantly from period to period.
Balance sheet presentation of derivative instruments
The balance sheet classification of the fair value of derivative instruments is as follows:
at September 30, 2018 | Cash Flow Hedges | Fair Value Hedges | Net Investment Hedges | Held for Trading | Total Fair Value of Derivative Instruments1 | |||||||||
(unaudited - millions of Canadian $) | ||||||||||||||
Other current assets | ||||||||||||||
Commodities2 | 1 | — | — | 332 | 333 | |||||||||
Foreign exchange | — | — | 13 | 20 | 33 | |||||||||
Interest rate | 6 | — | — | — | 6 | |||||||||
7 | — | 13 | 352 | 372 | ||||||||||
Intangible and other assets | ||||||||||||||
Commodities2 | — | — | — | 66 | 66 | |||||||||
Foreign exchange | — | — | — | — | — | |||||||||
Interest rate | 17 | — | — | — | 17 | |||||||||
17 | — | — | 66 | 83 | ||||||||||
Total Derivative Assets | 24 | — | 13 | 418 | 455 | |||||||||
Accounts payable and other | ||||||||||||||
Commodities2 | (4 | ) | — | — | (313 | ) | (317 | ) | ||||||
Foreign exchange | — | — | (57 | ) | (39 | ) | (96 | ) | ||||||
Interest rate | — | (5 | ) | — | — | (5 | ) | |||||||
(4 | ) | (5 | ) | (57 | ) | (352 | ) | (418 | ) | |||||
Other long-term liabilities | ||||||||||||||
Commodities2 | (1 | ) | — | — | (40 | ) | (41 | ) | ||||||
Foreign exchange | — | — | — | — | — | |||||||||
Interest rate | — | (2 | ) | — | — | (2 | ) | |||||||
(1 | ) | (2 | ) | — | (40 | ) | (43 | ) | ||||||
Total Derivative Liabilities | (5 | ) | (7 | ) | (57 | ) | (392 | ) | (461 | ) | ||||
Total Derivatives | 19 | (7 | ) | (44 | ) | 26 | (6 | ) |
1 | Fair value equals carrying value. |
2 | Includes purchases and sales of power, natural gas and liquids. |
TRANSCANADA PIPELINES LIMITED [79
THIRD QUARTER 2018
at December 31, 2017 | Cash Flow Hedges | Fair Value Hedges | Net Investment Hedges | Held for Trading | Total Fair Value of Derivative Instruments1 | |||||||||
(unaudited - millions of Canadian $) | ||||||||||||||
Other current assets | ||||||||||||||
Commodities2 | 1 | — | — | 249 | 250 | |||||||||
Foreign exchange | — | — | 8 | 70 | 78 | |||||||||
Interest rate | 3 | — | — | 1 | 4 | |||||||||
4 | — | 8 | 320 | 332 | ||||||||||
Intangible and other assets | ||||||||||||||
Commodities2 | — | — | — | 69 | 69 | |||||||||
Interest rate | 4 | — | — | — | 4 | |||||||||
4 | — | — | 69 | 73 | ||||||||||
Total Derivative Assets | 8 | — | 8 | 389 | 405 | |||||||||
Accounts payable and other | ||||||||||||||
Commodities2 | (6 | ) | — | — | (208 | ) | (214 | ) | ||||||
Foreign exchange | — | — | (159 | ) | (10 | ) | (169 | ) | ||||||
Interest rate | — | (4 | ) | — | — | (4 | ) | |||||||
(6 | ) | (4 | ) | (159 | ) | (218 | ) | (387 | ) | |||||
Other long-term liabilities | ||||||||||||||
Commodities2 | (2 | ) | — | — | (26 | ) | (28 | ) | ||||||
Foreign exchange | — | — | (43 | ) | — | (43 | ) | |||||||
Interest rate | — | (1 | ) | — | — | (1 | ) | |||||||
(2 | ) | (1 | ) | (43 | ) | (26 | ) | (72 | ) | |||||
Total Derivative Liabilities | (8 | ) | (5 | ) | (202 | ) | (244 | ) | (459 | ) | ||||
Total Derivatives | — | (5 | ) | (194 | ) | 145 | (54 | ) |
1 | Fair value equals carrying value. |
2 | Includes purchases and sales of power, natural gas and liquids. |
The majority of derivative instruments held for trading have been entered into for risk management purposes and all are subject to the Company's risk management strategies, policies and limits. These include derivatives that have not been designated as hedges or do not qualify for hedge accounting treatment but have been entered into as economic hedges to manage the Company's exposures to market risk.
Derivatives in fair value hedging relationships
The following table details amounts recorded on the Condensed consolidated balance sheet in relation to cumulative adjustments for fair value hedges included in the carrying amount of the hedged liabilities:
Carrying amount | Fair value hedging adjustments1 | ||||||||||
(unaudited - millions of Canadian $) | September 30, 2018 | December 31, 2017 | September 30, 2018 | December 31, 2017 | |||||||
Current portion of long-term debt | (387 | ) | (688 | ) | 1 | 1 | |||||
Long-term debt | (511 | ) | (685 | ) | 6 | 4 | |||||
(898 | ) | (1,373 | ) | 7 | 5 |
1 | At September 30, 2018 and December 31, 2017, adjustments for discontinued hedging relationships included in these balances were nil. |
TRANSCANADA PIPELINES LIMITED [80
THIRD QUARTER 2018
Notional and Maturity Summary
The maturity and notional principal or quantity outstanding related to the Company's derivative instruments excluding hedges of the net investment in foreign operations is as follows:
at September 30, 2018 | Power | Natural Gas | Liquids | Foreign Exchange | Interest Rate | |||||||||
(unaudited) | ||||||||||||||
Purchases1 | 30,533 | 61 | 55 | — | — | |||||||||
Sales1 | 22,711 | 70 | 74 | — | — | |||||||||
Millions of U.S. dollars | — | — | — | 3,898 | 1,200 | |||||||||
Maturity dates | 2018-2022 | 2018-2021 | 2018-2019 | 2018-2019 | 2018-2028 |
1 | Volumes for power, natural gas and liquids derivatives are in GWh, Bcf and MMBbls, respectively. |
at December 31, 2017 | Power | Natural Gas | Liquids | Foreign Exchange | Interest Rate | |||||||||
(unaudited) | ||||||||||||||
Purchases1 | 66,132 | 133 | 6 | — | — | |||||||||
Sales1 | 42,836 | 135 | 7 | — | — | |||||||||
Millions of U.S. dollars | — | — | — | 2,931 | 2,300 | |||||||||
Millions of Mexican pesos | — | — | — | 100 | — | |||||||||
Maturity dates | 2018-2022 | 2018-2021 | 2018 | 2018 | 2018-2022 |
1 | Volumes for power, natural gas and liquids derivatives are in GWh, Bcf and MMBbls, respectively. |
Unrealized and realized (losses)/gains on derivative instruments
The following summary does not include hedges of the net investment in foreign operations.
three months ended September 30 | nine months ended September 30 | |||||||||||
(unaudited - millions of Canadian $) | 2018 | 2017 | 2018 | 2017 | ||||||||
Derivative Instruments Held for Trading1 | ||||||||||||
Amount of unrealized (losses)/gains in the period | ||||||||||||
Commodities2 | (31 | ) | 45 | (41 | ) | (102 | ) | |||||
Foreign exchange | 60 | 33 | (79 | ) | 89 | |||||||
Interest rate | — | (1 | ) | — | (1 | ) | ||||||
Amount of realized gains/(losses) in the period | ||||||||||||
Commodities | 81 | (82 | ) | 210 | (167 | ) | ||||||
Foreign exchange | (5 | ) | 19 | 14 | 10 | |||||||
Interest rate | — | 1 | — | 1 | ||||||||
Derivative Instruments in Hedging Relationships | ||||||||||||
Amount of realized gains/(losses) in the period | ||||||||||||
Commodities | 1 | 4 | — | 17 | ||||||||
Foreign exchange | — | — | — | 5 | ||||||||
Interest rate | (2 | ) | — | (1 | ) | 1 |
1 | Realized and unrealized gains and losses on held-for-trading derivative instruments used to purchase and sell commodities are included on a net basis in Revenues. Realized and unrealized gains and losses on interest rate and foreign exchange held-for-trading derivative instruments are included on a net basis in Interest expense and Interest income and other, respectively. |
2 | In the three and nine months ended September 30, 2018 and 2017, there were no gains or losses included in Net Income relating to discontinued cash flow hedges where it was probable that the anticipated transaction would not occur. |
TRANSCANADA PIPELINES LIMITED [81
THIRD QUARTER 2018
Derivatives in cash flow hedging relationships
The components of OCI related to the change in fair value of derivatives in cash flow hedging relationships including the portion attributable to non-controlling interests are as follows:
three months ended September 30 | nine months ended September 30 | |||||||||||
(unaudited - millions of Canadian $) | 2018 | 2017 | 2018 | 2017 | ||||||||
Change in fair value of derivative instruments recognized in OCI (effective portion)1 | ||||||||||||
Commodities | 3 | 2 | (3 | ) | 5 | |||||||
Interest rate | 2 | (1 | ) | 11 | — | |||||||
5 | 1 | 8 | 5 |
1 | Amounts presented are pre-tax. No amounts have been excluded from the assessment of hedge effectiveness. Amounts in parentheses indicate losses recorded to OCI and AOCI. |
Effect of fair value and cash flow hedging relationships
The following tables detail amounts presented on the Condensed consolidated statement of income in which the effects of fair value or cash flow hedging relationships are recorded.
three months ended September 30 | ||||||||||||
Revenues (Energy) | Interest Expense | |||||||||||
(unaudited - millions of Canadian $) | 2018 | 2017 | 2018 | 2017 | ||||||||
Total Amount Presented in the Condensed Consolidated Statement of Income | 535 | 887 | (608 | ) | (522 | ) | ||||||
Fair Value Hedges | ||||||||||||
Interest rate contracts | ||||||||||||
Hedged items | — | — | (17 | ) | (18 | ) | ||||||
Derivatives designated as hedging instruments | — | — | (2 | ) | (1 | ) | ||||||
Cash Flow Hedges | ||||||||||||
Reclassification of gains/(losses) on derivative instruments from AOCI to net income | ||||||||||||
Interest rate contracts1 | — | — | 5 | 4 | ||||||||
Commodity contracts2 | 3 | (4 | ) | — | — |
1 | Refer to Note 10, Other comprehensive (loss)/income and accumulated other comprehensive loss, for the components of OCI related to derivatives in cash flow hedging relationships including the portion attributable to non-controlling interests. |
2 | There are no amounts recognized in earnings that were excluded from effectiveness testing. |
TRANSCANADA PIPELINES LIMITED [82
THIRD QUARTER 2018
nine months ended September 30 | ||||||||||||
Revenues (Energy) | Interest Expense | |||||||||||
(unaudited - millions of Canadian $) | 2018 | 2017 | 2018 | 2017 | ||||||||
Total Amount Presented in the Condensed Consolidated Statement of Income | 1,724 | 2,581 | (1,740 | ) | (1,578 | ) | ||||||
Fair Value Hedges | ||||||||||||
Interest rate contracts | ||||||||||||
Hedged items | — | — | (59 | ) | (56 | ) | ||||||
Derivatives designated as hedging instruments | — | — | (4 | ) | 1 | |||||||
Cash Flow Hedges | ||||||||||||
Reclassification of gains/(losses) on derivative instruments from AOCI to net income | ||||||||||||
Interest rate contracts1 | — | — | 17 | 13 | ||||||||
Commodity contracts2 | 4 | (15 | ) | — | — |
1 | Refer to Note 10, Other comprehensive (loss)/income and accumulated other comprehensive loss, for the components of OCI related to derivatives in cash flow hedging relationships including the portion attributable to non-controlling interests. |
2 | There are no amounts recognized in earnings that were excluded from effectiveness testing. |
Offsetting of derivative instruments
The Company enters into derivative contracts with the right to offset in the normal course of business as well as in the event of default. TCPL has no master netting agreements, however, similar contracts are entered into containing rights to offset. The Company has elected to present the fair value of derivative instruments with the right to offset on a gross basis in the balance sheet. The following table shows the impact on the presentation of the fair value of derivative instrument assets and liabilities on the Condensed consolidated balance sheet had the Company elected to present these contracts on a net basis:
at September 30, 2018 | Gross derivative instruments | Amounts available for offset1 | Net amounts | ||||||
(unaudited - millions of Canadian $) | |||||||||
Derivative instrument assets | |||||||||
Commodities | 399 | (309 | ) | 90 | |||||
Foreign exchange | 33 | (24 | ) | 9 | |||||
Interest rate | 23 | — | 23 | ||||||
455 | (333 | ) | 122 | ||||||
Derivative instrument liabilities | |||||||||
Commodities | (358 | ) | 309 | (49 | ) | ||||
Foreign exchange | (96 | ) | 24 | (72 | ) | ||||
Interest rate | (7 | ) | — | (7 | ) | ||||
(461 | ) | 333 | (128 | ) |
1 | Amounts available for offset do not include cash collateral pledged or received. |
TRANSCANADA PIPELINES LIMITED [83
THIRD QUARTER 2018
at December 31, 2017 | Gross derivative instruments | Amounts available for offset1 | Net amounts | ||||||
(unaudited - millions of Canadian $) | |||||||||
Derivative instrument assets | |||||||||
Commodities | 319 | (198 | ) | 121 | |||||
Foreign exchange | 78 | (56 | ) | 22 | |||||
Interest rate | 8 | (1 | ) | 7 | |||||
405 | (255 | ) | 150 | ||||||
Derivative instrument liabilities | |||||||||
Commodities | (242 | ) | 198 | (44 | ) | ||||
Foreign exchange | (212 | ) | 56 | (156 | ) | ||||
Interest rate | (5 | ) | 1 | (4 | ) | ||||
(459 | ) | 255 | (204 | ) |
1 | Amounts available for offset do not include cash collateral pledged or received. |
With respect to the derivative instruments presented above, the Company provided cash collateral of $87 million and letters of credit of $17 million as at September 30, 2018 (December 31, 2017 – $165 million and $30 million) to its counterparties. At September 30, 2018, the Company held nil in cash collateral and $1 million in letters of credit (December 31, 2017 – nil and $3 million) from counterparties on asset exposures.
Credit-risk-related contingent features of derivative instruments
Derivative contracts entered into to manage market risk often contain financial assurance provisions that allow parties to the contracts to manage credit risk. These provisions may require collateral to be provided if a credit-risk-related contingent event occurs, such as a downgrade in the Company’s credit rating to non-investment grade. The Company may also need to provide collateral if the fair value of its derivative financial instruments exceeds pre-defined exposure limits.
Based on contracts in place and market prices at September 30, 2018, the aggregate fair value of all derivative instruments with credit-risk-related contingent features that were in a net liability position was $2 million (December 31, 2017 – $2 million), for which the Company did not provide collateral in the normal course of business at September 30, 2018 or December 31, 2017. If the credit-risk-related contingent features in these agreements were triggered on September 30, 2018, the Company would have been required to provide collateral of $2 million (December 31, 2017 – $2 million) to its counterparties. Collateral may also need to be provided should the fair value of derivative instruments exceed pre-defined contractual exposure limit thresholds.
The Company has sufficient liquidity in the form of cash and undrawn committed revolving credit facilities to meet these contingent obligations should they arise.
TRANSCANADA PIPELINES LIMITED [84
THIRD QUARTER 2018
FAIR VALUE HIERARCHY
The Company’s financial assets and liabilities recorded at fair value have been categorized into three categories based on a fair value hierarchy.
Levels | How fair value has been determined |
Level I | Quoted prices in active markets for identical assets and liabilities that the Company has the ability to access at the measurement date. An active market is a market in which frequency and volume of transactions provides pricing information on an ongoing basis. |
Level II | Valuation based on the extrapolation of inputs, other than quoted prices included within Level I, for which all significant inputs are observable directly or indirectly. Inputs include published exchange rates, interest rates, interest rate swap curves, yield curves and broker quotes from external data service providers. This category includes interest rate and foreign exchange derivative assets and liabilities where fair value is determined using the income approach and commodity derivatives where fair value is determined using the market approach. Transfers between Level I and Level II would occur when there is a change in market circumstances. |
Level III | Valuation of assets and liabilities are measured using a market approach based on extrapolation of inputs that are unobservable or where observable data does not support a significant portion of the derivative's fair value. This category mainly includes long-dated commodity transactions in certain markets where liquidity is low and the Company uses the most observable inputs available or, if not available, long-term broker quotes to estimate the fair value for these transactions. Valuation of options is based on the Black-Scholes pricing model. Assets and liabilities measured at fair value can fluctuate between Level II and Level III depending on the proportion of the value of the contract that extends beyond the time frame for which significant inputs are considered to be observable. As contracts near maturity and observable market data become available, they are transferred out of Level III and into Level II. |
The fair value of the Company’s derivative assets and liabilities measured on a recurring basis, including both current and non-current portions are categorized as follows:
at September 30, 2018 | Quoted prices in active markets | Significant other observable inputs | Significant unobservable inputs | |||||||||
(unaudited - millions of Canadian $) | (Level I)1 | (Level II)1 | (Level III)1 | Total | ||||||||
Derivative instrument assets | ||||||||||||
Commodities | 217 | 145 | 37 | 399 | ||||||||
Foreign exchange | — | 33 | — | 33 | ||||||||
Interest rate | — | 23 | — | 23 | ||||||||
Derivative instrument liabilities | ||||||||||||
Commodities | (220 | ) | (87 | ) | (51 | ) | (358 | ) | ||||
Foreign exchange | — | (96 | ) | — | (96 | ) | ||||||
Interest rate | — | (7 | ) | — | (7 | ) | ||||||
(3 | ) | 11 | (14 | ) | (6 | ) |
1 | There were no transfers from Level I to Level II or from Level II to Level III for the nine months ended September 30, 2018. |
TRANSCANADA PIPELINES LIMITED [85
THIRD QUARTER 2018
at December 31, 2017 | Quoted prices in active markets (Level I)1 | Significant other observable inputs (Level II)1 | Significant unobservable inputs (Level III)1 | |||||||||
(unaudited - millions of Canadian $) | Total | |||||||||||
Derivative instrument assets | ||||||||||||
Commodities | 21 | 283 | 15 | 319 | ||||||||
Foreign exchange | — | 78 | — | 78 | ||||||||
Interest rate | — | 8 | — | 8 | ||||||||
Derivative instrument liabilities | ||||||||||||
Commodities | (27 | ) | (193 | ) | (22 | ) | (242 | ) | ||||
Foreign exchange | — | (212 | ) | — | (212 | ) | ||||||
Interest rate | — | (5 | ) | — | (5 | ) | ||||||
(6 | ) | (41 | ) | (7 | ) | (54 | ) |
1 | There were no transfers from Level I to Level II or from Level II to Level III for the year ended December 31, 2017. |
The following table presents the net change in fair value of derivative assets and liabilities classified as Level III of the fair value hierarchy:
three months ended September 30 | nine months ended September 30 | ||||||||||||
(unaudited - millions of Canadian $) | 2018 | 2017 | 2018 | 2017 | |||||||||
Balance at beginning of period | 40 | 9 | (7 | ) | 16 | ||||||||
Total losses included in Net income | (24 | ) | (10 | ) | (6 | ) | (12 | ) | |||||
Settlements | (14 | ) | (1 | ) | 9 | 4 | |||||||
Sales | — | — | — | (5 | ) | ||||||||
Transfers out of Level III | (16 | ) | — | (10 | ) | (5 | ) | ||||||
Balance at end of period1 | (14 | ) | (2 | ) | (14 | ) | (2 | ) |
1 | For the three and nine months ended September 30, 2018, Revenues include unrealized losses of $16 million and $2 million, respectively, attributed to derivatives in the Level III category that were still held at September 30, 2018 (2017 – unrealized losses of $10 million and $14 million, respectively). |
A 10 per cent increase or decrease in commodity prices, with all other variables held constant, would result in a $27 million decrease or increase, respectively, in the fair value of outstanding derivative instruments included in Level III as at September 30, 2018.
TRANSCANADA PIPELINES LIMITED [86
THIRD QUARTER 2018
13. Contingencies and guarantees
CONTINGENCIES
TCPL and its subsidiaries are subject to various legal proceedings, arbitrations and actions arising in the normal course of business. While the final outcome of such legal proceedings and actions cannot be predicted with certainty, it is the opinion of management that the resolution of such proceedings and actions will not have a material impact on the Company’s consolidated financial position or results of operations.
GUARANTEES
TCPL and its joint venture partner on the Sur de Texas pipeline, IEnova, have jointly guaranteed the obligations for construction services during the construction of the pipeline.
TCPL and its joint venture partner on Bruce Power, BPC Generation Infrastructure Trust, have each severally guaranteed certain contingent financial obligations of Bruce Power related to a lease agreement and contractor and supplier services.
The Company and its partners in certain other jointly owned entities have either (i) jointly and severally, (ii) jointly or (iii) severally guaranteed the financial performance of these entities. Such agreements include guarantees and letters of credit which are primarily related to delivery of natural gas, construction services and the payment of liabilities. For certain of these entities, any payments made by TCPL under these guarantees in excess of its ownership interest are to be reimbursed by its partners.
The carrying value of these guarantees has been included in Other long-term liabilities on the Condensed consolidated balance sheet. Information regarding the Company’s guarantees is as follows:
at September 30, 2018 | at December 31, 2017 | |||||||||||||
(unaudited - millions of Canadian $) | Term | Potential exposure1 | Carrying value | Potential exposure1 | Carrying value | |||||||||
Sur de Texas | ranging to 2020 | 187 | 1 | 315 | 2 | |||||||||
Bruce Power | ranging to 2019 | 88 | — | 88 | 1 | |||||||||
Other jointly-owned entities | ranging to 2059 | 104 | 11 | 104 | 13 | |||||||||
379 | 12 | 507 | 16 |
1 | TCPL’s share of the potential estimated current or contingent exposure. |
14. Related party transactions
Related party transactions are conducted in the normal course of business and are measured at the exchange amount, which is the amount of consideration established and agreed to by the related parties.
The following amounts are included in Due to affiliate:
2018 | 2017 | |||||||||||||||
(unaudited - millions of Canadian $) | Maturity Date | Outstanding September 30 | Effective Interest Rate | Outstanding December 31 | Effective Interest Rate | |||||||||||
Credit Facility1 | Demand | 3,617 | 3.7 | % | 2,551 | 3.2 | % |
1 | TCPL has an unsecured $4.5 billion credit facility with TransCanada. Interest on this facility is charged at the prime rate per annum. |
TRANSCANADA PIPELINES LIMITED [87
THIRD QUARTER 2018
In the three and nine months ended September 30, 2018, Interest expense included $31 million and $79 million of interest charges as a result of inter-affiliate borrowing (September 30, 2017 – $18 million and $50 million).
At September 30, 2018, Accounts payable and other included $5 million due to TransCanada (December 31, 2017 – $16 million). In the three and nine months ended September 30, 2018, the Company made interest payments of $31 million and $77 million to TransCanada (September 30, 2017 – $17 million and $49 million).
15. Variable interest entities
A VIE is a legal entity that does not have sufficient equity at risk to finance its activities without additional subordinated financial support or is structured such that equity investors lack the ability to make significant decisions relating to the entity’s operations through voting rights or do not substantively participate in the gains and losses of the entity.
In the normal course of business, the Company consolidates VIEs in which it has a variable interest and for which it is considered to be the primary beneficiary. VIEs in which the Company has a variable interest but is not the primary beneficiary are considered non-consolidated VIEs and are accounted for as equity investments.
Consolidated VIEs
The Company's consolidated VIEs consist of legal entities where the Company is the primary beneficiary. As the primary beneficiary, the Company has the power, through voting or similar rights, to direct the activities of the VIE that most significantly impact economic performance including purchasing or selling significant assets; maintenance and operations of assets; incurring additional indebtedness; or determining the strategic operating direction of the entity. In addition, the Company has the obligation to absorb losses or the right to receive benefits from the consolidated VIE that could potentially be significant to the VIE.
A significant portion of the Company’s assets are held through VIEs in which the Company holds a 100 per cent voting interest, the VIE meets the definition of a business and the VIE’s assets can be used for general corporate purposes. The Consolidated VIEs whose assets cannot be used for purposes other than the settlement of the VIE’s obligations are as follows:
TRANSCANADA PIPELINES LIMITED [88
THIRD QUARTER 2018
September 30, | December 31, | ||||||
(unaudited - millions of Canadian $) | 2018 | 2017 | |||||
ASSETS | |||||||
Current Assets | |||||||
Cash and cash equivalents | 62 | 41 | |||||
Accounts receivable | 59 | 63 | |||||
Inventories | 22 | 23 | |||||
Other | 13 | 11 | |||||
156 | 138 | ||||||
Plant, Property and Equipment | 3,576 | 3,535 | |||||
Equity Investments | 925 | 917 | |||||
Goodwill | 505 | 490 | |||||
Intangible and Other Assets | 17 | 3 | |||||
5,179 | 5,083 | ||||||
LIABILITIES | |||||||
Current Liabilities | |||||||
Accounts payable and other | 79 | 137 | |||||
Dividends payable | — | 1 | |||||
Accrued interest | 30 | 23 | |||||
Current portion of long-term debt | 74 | 88 | |||||
183 | 249 | ||||||
Regulatory Liabilities | 39 | 34 | |||||
Other Long-Term Liabilities | 2 | 3 | |||||
Deferred Income Tax Liabilities | 13 | 13 | |||||
Long-Term Debt | 3,152 | 3,244 | |||||
3,389 | 3,543 |
Non-Consolidated VIEs
The Company’s non-consolidated VIEs consist of legal entities where the Company does not have the power to direct the activities that most significantly impact the economic performance of these entities or where this power is shared with third parties. The Company contributes capital to these VIEs and receives ownership interests that provide it with residual claims on assets after liabilities are paid.
The carrying value of these VIEs and the maximum exposure to loss as a result of the Company's involvement with these VIEs are as follows:
September 30, | December 31, | ||||||
(unaudited - millions of Canadian $) | 2018 | 2017 | |||||
Balance sheet | |||||||
Equity investments | 4,430 | 4,372 | |||||
Off-balance sheet | |||||||
Potential exposure to guarantees | 171 | 171 | |||||
Maximum exposure to loss | 4,601 | 4,543 |
TRANSCANADA PIPELINES LIMITED [89
THIRD QUARTER 2018
16. Subsequent Events
Long-term debt issuance
On October 12, 2018, TCPL issued US$1.0 billion of Senior Unsecured Notes, due in March 2049, bearing interest at a fixed rate of 5.10 per cent and US$400 million of Senior Unsecured Notes, due in May 2028, bearing interest at a fixed rate of 4.25 per cent.
Reimbursement of Coastal GasLink pipeline pre-development costs
In accordance with provisions in the agreements with the LNG Canada joint venture participants, to date, four parties have elected to reimburse TCPL for their share of pre-development costs on the Coastal GasLink (CGL) pipeline project, totalling $399 million of cost reimbursement, with payments due by November 30, 2018. At September 30, 2018, pre-development costs for the CGL pipeline were included in Intangible and other assets on the Company's Condensed consolidated balance sheet.