The consolidated financial statements of the Company
have been prepared by Management in accordance with Canadian generally accepted
accounting principles (Canadian GAAP). These accounting principles are different
in some respects from United States generally accepted accounting principles
(U.S. GAAP) and the significant differences are described in Note 20. Amounts
are stated in Canadian dollars unless otherwise indicated. Certain comparative
figures have been reclassified to conform with the current year’s
presentation.
Since a determination of many assets, liabilities,
revenues and expenses is dependent upon future events, the preparation of these
consolidated financial statements requires the use of estimates and assumptions
which have been made using careful judgment. In the opinion of Management, these
consolidated financial statements have been properly prepared within reasonable
limits of materiality and within the framework of the significant accounting
policies summarized below.
Basis of Presentation The consolidated financial
statements include the accounts of TransCanada PipeLines Limited and its
subsidiaries, as well as its proportionate share of the accounts of its joint
ventures. The Company uses the equity method of accounting for investments over
which it is able to exercise significant influence.
Regulation The Alberta System is regulated by the
Alberta Energy and Utilities Board (EUB), and the Canadian Mainline and the BC
System are subject to the authority of the National Energy Board (NEB). All
Canadian natural gas transmission operations are regulated with respect to the
determination of tolls, construction and operations. In June 2002, the Company
received the NEB decision on its Fair Return application (Fair Return decision)
to determine the cost of capital to be included in the calculation of 2001 and
2002 final tolls on the Canadian Mainline. The Fair Return decision on the cost
of capital included an increase in the deemed common equity ratio from 30 to 33
per cent effective January 1, 2001. The NEB also decided that the return on
equity as calculated based on the NEB formula continued to be appropriate for
the Canadian Mainline which results in an approved rate of return on common
equity of 9.61 per cent for 2001 and 9.53 per cent for 2002. The natural gas
pipelines in the United States and certain power plants are also subject to the
authority of regulatory bodies. In order to achieve a proper matching of
revenues and expenses, the timing of recognition of certain revenues and
expenses in these businesses may differ from that otherwise expected under
generally accepted accounting principles.
Cash and Short-Term Investments The Company’s
short-term investments with original maturities of three months or less are
considered to be cash equivalents and are recorded at cost, which approximates
market value.
Inventories Inventories are carried at the lower of
average cost or net realizable value.
Transmission Plant, property and equipment of
natural gas transmission operations are carried at cost. Depreciation is
calculated on the straight-line basis. Pipeline and compression equipment are
depreciated at annual rates ranging from two to five per cent and metering and
other plant are depreciated at various rates. Removal and site restoration costs
are not determinable and will be recorded when reasonably estimable and when
approved by the regulators. An allowance for funds used during construction,
using the rate of return on rate base approved by the regulators, is capitalized
and included in the cost of gas transmission plant.
Power and Other Plant, property and equipment in
the power business are recorded at cost and depreciated on the straight-line
basis over estimated service lives at average annual rates ranging from two to
five per cent. Other plant, property and equipment are recorded at cost and
depreciated on a straight-line basis over estimated useful lives at average
annual rates ranging from four to twenty per cent.
Power Purchase Arrangements The initial payments
for power purchase arrangements (PPAs) are deferred and are being amortized over the terms of the
contracts, from the dates of acquisition, which range from nine to 27 years.
PPAs are long-term contracts to purchase power on a predetermined basis. PPAs
are included in Other Assets.
Income Taxes As prescribed by the regulators, the
taxes payable method of accounting for income taxes is used for tollmaking
purposes for Canadian natural gas transmission operations. Under the taxes
payable method, it is not necessary to provide for future income taxes. This
method is also used for accounting purposes, since there is reasonable
expectation that future taxes payable will be included in future costs of
service and recorded in revenues at that time. The liability method of
accounting for income taxes is used for the remainder of the Company’s
operations. Under this method, future tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Future income tax assets and liabilities are
measured using enacted or substantively enacted tax rates expected to apply to
taxable income in the years in which temporary differences are expected to be
recovered or settled. Changes to these balances are recognized in income in the
period in which they occur.
Canadian income taxes are not provided on the unremitted
earnings of foreign investments which are considered to be indefinitely
reinvested in foreign operations.
Foreign Currency Translation The Company’s foreign
operations are self-sustaining and are translated into Canadian dollars using
the current rate method. Translation adjustments are reflected in the foreign
exchange adjustment in Shareholders’ Equity.
Exchange gains or losses on the principal amounts of
foreign currency debt, junior subordinated debentures and preferred securities
related to the Alberta System and the Canadian Mainline are deferred until they
are recovered in tolls.
Derivative Financial Instruments The Company
utilizes derivative and other financial instruments to manage its exposure to
changes in foreign currency exchange rates, interest rates and energy commodity
prices. Gains or losses relating to derivatives that are hedges are deferred and
recognized in the same period and in the same financial statement category as
the gains or losses on the corresponding hedged transactions. The recognition of
gains and losses on derivatives used as hedges for Alberta System and Canadian
Mainline exposures is determined through the regulatory process.
A derivative must be designated and effective to be
accounted for as a hedge. For cash flow hedges, effectiveness is achieved if the
changes in the cash flows of the derivative substantially offset the changes in
the cash flows of the hedged position and the timing of the cash flows is
similar. Effectiveness for fair value hedges is achieved if the fair value of
the derivative substantially offsets changes in fair value attributable to the
hedged item. In the event that a derivative does not meet the designation or
effectiveness criterion, the gain or loss on the derivative is recognized in
income. If a derivative that qualifies as a hedge is settled early, the gain or
loss at settlement is deferred and recognized when the gain or loss on the
hedged transaction is recognized. Premiums paid or received with respect to
derivatives that are hedges are deferred and amortized to income over the term
of the hedge.
Employee Benefit Plans The Company sponsors defined
benefit pension plans. The cost of defined benefit pensions and other
post-employment benefits earned by employees is actuarially determined using the
projected benefit method pro-rated on service and Management’s best estimate of
expected plan investment performance, salary escalation, retirement ages of
employees and expected health care costs. Pension plan assets are measured at
fair value. The expected return on pension plan assets is determined using
market-related values. Adjustments arising from plan amendments are amortized on
a straight-line basis over the average remaining service period of employees
active at the date of amendment. The excess of the net actuarial gain or loss
over 10 per cent of the greater of the benefit obligation and the fair value of
plan assets is amortized over the average remaining service period of the active
employees. In addition to the defined benefit plan, the Company previously
sponsored two additional plans, a defined contribution plan and a combination of
the defined benefit and defined contribution plans which were effectively
terminated at December 31, 2002.
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