Risk Management and Financial Instruments
Risk Management and Financial Instruments
Development Projects and Acquisitions
TransCanada continues to focus on growing its Natural Gas Pipelines, Oil Pipelines and Energy operations through greenfield development projects and acquisitions. TransCanada capitalizes costs incurred on certain of its projects during the development period prior to construction when the project meets specific criteria and is expected to proceed through to completion. The related capital costs of a project that does not proceed through to completion are expensed at the time it is discontinued to the extent that these costs and underlying materials cannot be utilized on another project. There is a risk with respect to TransCanada's acquisition of assets and operations that certain commercial opportunities and operational synergies may not materialize as expected and that the assets would subsequently be subject to an impairment write-down.
Although each of TransCanada's newly-constructed assets goes through rigorous acceptance testing prior to being placed in service, there is a risk that these assets will have lower than expected availability or performance, especially in their first year of operations.
Health, Safety and Environment Risk Management
Health, safety and environment (HS&E) are top priorities in all of TransCanada's operations and activities. These areas are guided by the Company's HS&E Commitment Statement, which outlines guiding principles for a safe and healthy environment for TransCanada's employees, contractors and the public, and for TransCanada's commitment to protect the environment. All employees are responsible for the Company's HS&E performance. The Company is committed to being an industry leader in conducting its business so that it meets or exceeds all applicable laws and regulations, and minimizes risk to people and the environment. The Company is committed to tracking and improving its HS&E performance, and to promoting safety on and off the job in the belief that all occupational injuries and illnesses are preventable. TransCanada endeavours to do business with companies and contractors that share its perspective on HS&E performance and to influence them to improve their collective performance. TransCanada is committed to respecting the diverse environments and cultures in which it operates and to supporting open communication with its stakeholders.
The HS&E Committee of TransCanada's Board of Directors monitors compliance with the Company's HS&E corporate policy through regular reporting. TransCanada's HS&E management system is modeled on the International Organization for Standardization (ISO) standard for environmental management systems, ISO 14001, and focuses resources on the areas of significant risk to the organization's HS&E business activities. Management is informed regularly of all important HS&E operational issues and initiatives through formal reporting processes. TransCanada's HS&E management system and performance are assessed by an independent outside firm every three years. The most recent assessment occurred in December 2009 and did not identify any material issues. The HS&E management system is subject to ongoing internal review to ensure that it remains effective as circumstances change.
As one of TransCanada's priorities, safety is an integral part of the way its employees work. In 2010, one of the Company's objectives was to sustain health and safety performance. Overall, the Company's safety frequency rates in 2010 continued to be better than most industry benchmarks.
The safety and integrity of the Company's existing and newly-developed infrastructure also continued to be top priorities. All new assets are designed, constructed and commissioned with full consideration given to safety and integrity, and are brought into service only after all necessary requirements have been satisfied. The Company expects to spend approximately $250 million in 2011 for pipeline integrity on its wholly owned pipelines, an increase of approximately $95 million over 2010 primarily due to increased levels of in-line pipeline inspection on all systems and pipeline enhancements in areas of population encroachment. Under the approved regulatory models in Canada, non-capital pipeline integrity expenditures on NEB-regulated pipelines are treated on a flow-through basis and, as a result, these expenditures have no impact on TransCanada's earnings. Under the Keystone contracts, pipeline integrity expenditures are recovered through the tolling mechanism and, as a result, these expenditures have no impact on TransCanada's earnings. Expenditures for GTN may also be recovered through a cost-recovery mechanism in its rates if threshold expenditures are achieved. TransCanada's pipeline safety record in 2010 continued to be above industry benchmarks. TransCanada experienced no pipeline breaks in 2010. Spending associated with public safety on the Energy assets is focused primarily on the Company's hydro dams and associated equipment, and is consistent with previous years.
TransCanada's facilities are subject to stringent federal, provincial, state and local environmental statutes and regulations, including requirements that establish compliance and remedial obligations. Such laws and regulations generally require facilities to obtain or comply with a wide variety of environmental restrictions, licences, permits and other approvals. Failure to comply with these laws and regulations may result in the assessment of administrative, civil or criminal penalties, the imposition of remedial requirements or the issuance of orders respecting future operations. TransCanada has ongoing inspection programs designed to keep all of its facilities in compliance with environmental requirements.
As mentioned above, TransCanada's operations are subject to various environmental laws and regulations that establish compliance and remediation obligations. Compliance obligations can result in significant costs associated with installing and maintaining pollution controls, fines and penalties resulting from any failure to comply, and potential limitations on operations. Remediation obligations can result in significant costs associated with the investigation and remediation of contaminated properties, and with damage claims arising from the contamination of properties. It is not possible for the Company to estimate the amount and timing of all future expenditures related to environmental matters due to:
Environmental risks from TransCanada's operating facilities typically include: air emissions, such as nitrogen oxides, particulate matter and greenhouse gases (GHG); potential impacts on land, including land reclamation or restoration following construction; the use, storage and release of chemicals or hydrocarbons; the generation, handling and disposal of wastes and hazardous wastes; and water impacts such as uncontrolled water discharge. Environmental controls including physical design, programs, procedures and processes are in place to effectively manage these risks.
At December 31, 2010, TransCanada recorded liabilities of approximately $84 million (2009 — $91 million) for remediation obligations and compliance costs associated with environmental regulations. The Company believes it has considered all necessary contingencies and established appropriate reserves for environmental liabilities, however, there is the risk that unforeseen matters may arise requiring the Company to set aside additional amounts.
TransCanada is not aware of any material outstanding orders, claims or lawsuits against it in relation to the release or discharge of any material into the environment or in connection with environmental protection.
Regulation of air pollutant emissions under the U.S. Clean Air Act and state regulations continue to evolve. A number of EPA initiatives could lead to impacts ranging from requirements to install emissions control equipment, to additional administrative and reporting requirements. At this time, there is insufficient detail to accurately determine the potential impacts of these initiatives. While the majority of the proposals are not expected to be material to TransCanada, the Company anticipates additional future costs related to the monitoring and control of air emissions.
In addition to those climate change policies already in place, there are also several federal, Canada and U.S., regional and provincial initiatives currently in development. While recent political and economic events may significantly affect the scope and timing of new policies, TransCanada anticipates that most of the Company's facilities in Canada and the U.S. are or will be subject to federal or regional climate change regulations to manage industrial GHG emissions. Certain of these initiatives are outlined below.
In 2010, the Company owned assets in four regions, Alberta, Québec, B.C., and northeastern U.S., where regulations exist to address industrial GHG emissions. TransCanada has procedures in place to address these regulations.
In Alberta, under the Specified Gas Emitters Regulation, industrial facilities emitting GHGs over an intensity threshold level are required to reduce GHG emissions intensities by 12 per cent below an average baseline. TransCanada's Alberta-based facilities are subject to this regulation, as are the Sundance and Sheerness coal-fired power facilities with which TransCanada has PPAs. As an alternative to reducing emissions intensities, compliance can be achieved through acquiring offsets or making payments to a technology fund at a cost of $15 per tonne of carbon dioxide (CO2) equivalents in excess of the mandated reduction. A program is in place to manage the compliance costs incurred by these assets as a result of regulation. Compliance costs on the Alberta System are recovered through rates paid by customers. Some of the compliance costs from the Company's power generation facilities in Alberta are recovered through market pricing and contract flow-through provisions. TransCanada has estimated and recorded related costs of $22 million for 2010, after contracted cost recovery.
In Québec, the natural gas distributor collects the hydrocarbon royalty on behalf of the provincial government through a green fund contribution charge on gas consumed. In 2010, the cost pertaining to the Bécancour facility arising from the hydrocarbon royalty was less than $1 million as a result of an agreement between TransCanada and Hydro-Québec to temporarily suspend the facility's power generation. The cost is expected to increase substantially when the plant returns to service.
The carbon tax in B.C., which came into effect in mid 2008, applies to CO2 emissions from fossil fuel combustion. Compliance costs for fuel combustion at the Company's compressor and meter stations in B.C. are recovered through tolls paid by customers. Costs related to the carbon tax in 2010 were estimated to be $4 million. As specified by this law, the cost per tonne of CO2 will increase in July 2011 to $25 from $20.
Northeastern U.S. states that are members of the Regional Greenhouse Gas Initiative (RGGI) implemented a CO2 cap-and-trade program for electricity generators effective in January 2009. Under the RGGI, both the Ravenswood and OSP generation facilities will be required to submit allowances following the end of the first compliance period on December 31, 2011. TransCanada participated in the quarterly auctions of allowances for the Ravenswood and OSP generation facilities and incurred related costs of approximately $5 million in 2010. These costs were generally recovered through the power market and the net impact on TransCanada was not significant.
The Canadian government has continued to express interest in pursuing a harmonized continental climate change strategy. In January 2010, Environment Canada submitted a revised GHG reduction target to the United Nations Framework Convention on Climate Change as part of its submission for the Copenhagen Accord. The revised target represents a 17 per cent reduction in GHG emissions by 2020 relative to 2005 levels. In June 2010, the Federal government initiated consultation on its policy for coal-fired power operations with the stated intention of publishing the draft regulatory framework in Canada Gazette in early 2011. TransCanada participated in this consultation process directly through meetings with government officials and the Canadian Electricity Association. The new regulations to reduce GHG emissions for coal-fired operations are expected to come into effect July 2015.
In the U.S., the EPA is proceeding towards regulating industrial GHG emissions under the Clean Air Act. In May 2010, the EPA issued its final version of the Tailoring Rule, which outlines emissions thresholds and a schedule for phasing in certain permitting requirements under the Clean Air Act. Under this rule, the Prevention of Significant Deterioration (PSD) program stipulates the air pollution protection criteria a company must meet to obtain a construction permit. Requirements will apply to GHG emissions starting in January 2011. The second phase of the program will commence in July 2011, with new rulemaking in 2012 to establish emission thresholds and permitting requirements to take effect in 2013. In addition to the PSD requirements, the Tailoring Rule sets comparable emissions thresholds and timetables for new and existing facilities to obtain operating permits under Title V of the Clean Air Act. The regulation of GHG emissions by the EPA under the Clean Air Act would have implications for TransCanada with respect to permitting for existing, new and modified facilities.
The Western Climate Initiative (WCI) continues to work toward implementing a regional cap-and-trade program expected to come into effect in 2012. The cap-and-trade program would be a key component of the plan to help WCI members reach their goal of reducing GHG emissions 15 per cent below 2005 levels by 2020. Beginning in 2012, the cap would cover utilities and large industrial sectors, and expand by 2015 to cover transportation fuels, and commercial and residential fuels. The WCI comprises seven western U.S. states and four Canadian provinces. While TransCanada has assets located in all four Canadian member provinces (B.C., Manitoba, Ontario and Québec) and five of the member states (California, Oregon, Washington, Montana and Arizona), the cap-and-trade program is proposed to begin in 2012 in California and the Canadian provinces of B.C., Québec and Ontario. The programs would cover TransCanada's pipeline and power facilities, however, TransCanada expects the cost of compliance would be largely recoverable on the facilities that trigger emissions thresholds.
In April 2010, the EPA published an "Advanced Notice of Proposed Rulemaking" to solicit comments with respect to the EPA's reassessment of current regulations under the Toxic Substances Control Act, governing the authorized use of polychlorinated biphenyls (PCB) in certain equipment. The proposed changes could require notification to the EPA when PCBs are discovered in any pipeline system, a phase out and eventual elimination of PCB use in pipeline systems and air compressor systems, and the immediate elimination of the storage of PCB equipment for reuse. If finalized as proposed, these changes are likely to have significant cost implications for the Company's U.S. assets.
TransCanada monitors climate change policy developments and, when warranted, participates in policy discussions in jurisdictions where the Company has operations. The Company is also continuing its programs to manage GHG emissions from its facilities and to evaluate new processes and technologies that result in improved efficiencies and lower GHG emission rates.
In 2010, the Keystone Wood River/Patoka phase became operational. Steel pipelines are a safe, efficient and economical method of transporting crude oil. The equipment and procedures put in place with respect to Keystone provide the capability to contain oil leaks quickly and safely.
TransCanada's pipelines are designed, constructed and operated to the highest industry standards and meet or exceed all regulatory requirements. Keystone is continuously monitored and is fully automated with remotely-started secure pumps and valves. A variety of methods are used to detect and prevent leaks. In the unlikely event of a leak or spill, valves can be closed to isolate the leak and limit spill volumes.
The Company has established emergency response plans to be enacted in the unlikely event of a leak or spill along TransCanada's operational crude oil pipeline. The plans encompass the necessary personnel and equipment to respond to any size of spill as well as clean-up and remediation operations to minimize any effects on the environment. The plans outline specific environmental features in the vicinity of the pipeline and containment and remediation efforts are based on practices that are well-understood and tested. In addition, TransCanada has an on-going program to provide local emergency responders with the information and training necessary to ensure their preparedness for responding to events.
The impact of new or proposed provincial, state or federal safety and environmental laws, regulations, guidelines and enforcement in Canada and the U.S. on TransCanada's business is not yet certain. TransCanada makes assumptions about possible expenditures to safety and environmental matters based on current laws and regulations and interpretations thereof. If the laws or regulations or the interpretation thereof changes, the Company's assumptions may change. Incremental costs may or may not be recoverable under existing rate structures or commercial agreements. Proposed changes in environmental policy, legislation or regulation are routinely monitored by TransCanada and where the risks are potentially large or uncertain the Company works independently or through industry associations to comment on proposals.
Future Abandonment Costs
Dependent on specific operating jurisdictions, the Company may have obligations to abandon its facilities in accordance with applicable laws and regulations.
To the extent legal obligations exist and can be reasonably estimated, the Company records Asset Retirement Obligations based on estimated fair value, which are accreted at the end of each period. The Company recorded Asset Retirement Obligations associated with the retirement of certain power generation facilities, natural gas pipelines and transportation facilities, and natural gas storage systems. The estimates or assumptions required to calculate Asset Retirement Obligations include scope of abandonment and reclamation activities, inflation rates, discount rates and timing of retirement assets. By their nature, these assumptions are subject to measurement uncertainty. The Company has determined that the scope and timing of asset retirement related to its regulated natural gas pipelines, oil pipelines and hydroelectric power plants are so uncertain that a reasonable estimate cannot be made. As a result, the Company has not recorded amounts for Asset Retirement Obligations related to these assets, with the exception of certain abandoned facilities.
The NEB's Land Matters Consultation Initiative deals with pipeline abandonment, including related financial issues. The goal of this initiative is for all pipeline companies regulated under the National Energy Board Act (Canada) to begin collecting and setting aside funds to cover future abandonment costs by mid-2014. In its May 2009 decision, the NEB established several filing deadlines relating to the financial issues, including deadlines for preparing and filing an estimate of the abandonment costs to be used to begin collecting funds, developing a proposal for collecting these funds through tolls or some other satisfactory method and developing a proposed process to set aside the funds collected. TransCanada is preparing to file its estimates of abandonment costs for its Canadian oil and natural gas pipelines by May 31, 2011, as required by the NEB decision. These costs would be recovered from shippers through tolls in accordance with the NEB's determination that abandonment costs are a legitimate cost of providing service and are recoverable upon NEB approval from users of the system. The specific toll impacts have not yet been determined as they will be the subject of a subsequent NEB filing in late 2012.
For the foreseeable future, the Company intends to operate and maintain these assets as long as supply and demand exists for hydroelectric power generation, natural gas and oil. The Company continues to evaluate its obligations related to future abandonment costs and to monitor developments that could impact the amounts it records.