Notes to Consolidated Financial Statements

1. Description of TransCanada's Business
2. Accounting Policies
3. Accounting Changes
4. Segmented Information
5. Plant, Property and Equipment
6. Goodwill
7. Rate-Regulated Businesses
8. Joint Venture Investments
9. Intangibles and Other Assets
10. Notes Payable
11. Deferred Amounts
12. Income Taxes
13. Long-Term Debt
14. Long-Term Debt of Joint Ventures
15. Junior Subordinated Notes
16. Non-Controlling Interests
17. Common Shares
18. Preferred Shares
19. Asset Retirement Obligations
20. Employee Future Benefits
21. Risk Management and Financial Instruments
22. Changes in Operating Working Capital
23. Acquisitions and Dispositions
24. Commitments, Contingencies and Guarantees
25. United States Accounting Principles and Reporting

Note 20: Employee Future Benefits

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The Company sponsors DB Plans that cover a significant majority of employees. Pension benefits provided under the DB Plans are based on years of service and highest average earnings over three consecutive years of employment. Upon commencement of retirement, pension benefits in the Canadian DB Plans increase annually by a portion of the increase in the Consumer Price Index. Past service costs are amortized over the expected average remaining service life of employees, which is approximately eight years (2010 – eight years; 2009 – eight years).

The Company also provides its employees with a Savings Plan in Canada, DC Plans consisting of 401(k) Plans in the U.S., and post-employment benefits other than pensions, including termination benefits and life insurance and medical benefits beyond those provided by government-sponsored plans. Past service costs are amortized over the expected average remaining life expectancy of former employees, which was approximately 12 years at December 31, 2011. Contributions to the Savings Plan and DC Plans are expensed as incurred. In 2011, the Company expensed $23 million (2010 and 2009 – $21 million) for the Savings Plan and DC Plans.

Total cash payments for employee future benefits, consisting of cash contributed by the Company to the DB Plans and other benefit plans, was $93 million in 2011 (2010 – $127 million; 2009 – $168 million), including $23 million in 2011 (2010 and 2009 – $21 million) related to the Savings Plan and DC Plans. In addition to these cash payments, in 2011 the Company provided a $27 million letter of credit to the DB Plan.

The Company measures its accrued benefit obligations and the fair value of plan assets for accounting purposes as at December 31 of each year. The most recent actuarial valuation of the pension plans for funding purposes was as at January 1, 2012, and the next required valuation will be as at January 1, 2013.

  Pension Benefit Plans Other Benefit Plans
December 31 (millions of dollars) 2011  2010  2011  2010 
Change in Benefit Obligation        
Benefit obligation – beginning of year 1,622  1,476  159  150 
Current service cost 54  50 
Interest cost 91  89 
Employee contributions
Benefits paid (71) (73) (9) (9)
Actuarial loss 131  95 
Transfers –  (8) –  – 
Foreign exchange rate changes (11) (2)
Benefit obligation – end of year 1,836  1,622  170  159 
         
Change in Plan Assets        
Plan assets at fair value – beginning of year 1,636  1,447  29  27 
Actual return on plan assets 21  177  – 
Employer contributions 62  98 
Employee contributions
Benefits paid (71) (73) (9) (9)
Transfers –  (8) –  – 
Foreign exchange rate changes (9) –  (1)
Plan assets at fair value – end of year 1,656  1,636  29  29 
Funded status – plan (deficit)/surplus (180) 14  (141) (130)
Unamortized net actuarial loss 549  345  50  42 
Unamortized past service costs 15  18  (3) (3)
Accrued Benefit Asset/(Liability), Net of Valuation Allowance of Nil 384  377  (94) (91)

The accrued benefit asset/(liability) net of valuation allowance of nil in the Company's Balance Sheet was as follows:

  Pension Benefit Plans Other Benefit Plans
December 31 (millions of dollars) 2011  2010  2011  2010 
Intangibles and Other Assets 399  380  –  – 
Deferred Amounts (15) (3) (94) (91)
  384  377  (94) (91)

Included in the above benefit obligation and fair value of plan assets were the following amounts for plans that are not fully funded:

  Pension Benefit Plans Other Benefit Plans
December 31 (millions of dollars) 2011  2010  2011  2010 
Benefit obligation (1,836) (417) (170) (159)
Plan assets at fair value 1,656  391  29  29 
Funded Status – Plan Deficit (180) (26) (141) (130)

The Company's expected funding contributions in 2012 are approximately $119 million for the DB Plans and approximately $31 million for the other benefit plans, Savings Plan and DC Plans. In addition to these contributions, the Company expects to provide a $48 million letter of credit in 2012 to the DB Plan.

The following are estimated future benefit payments, which reflect expected future service:

(millions of dollars) Pension Benefits Other Benefits
2012 85 9
2013 90 9
2014 94 10
2015 99 10
2016 104 10
2017 to 2021 591 57

The rate used to discount pension and other post-employment benefit plan obligations was developed based on a yield curve of corporate AA bond yields at December 31, 2011. This yield curve is used to develop spot rates that vary based on the duration of the obligations. The estimated future cash flows for the pension and other post-employment obligations were matched to the corresponding rates on the spot rate curve to derive a weighted average discount rate.

The significant weighted average actuarial assumptions adopted in measuring the Company's benefit obligations were as follows:

  Pension Benefit Plans Other Benefit Plans
December 31 (millions of dollars) 2011 2010 2011 2010
Discount rate 5.05% 5.55% 5.10% 5.65%
Rate of compensation increase 3.15% 3.20%    

The significant weighted average actuarial assumptions adopted in measuring the Company's net benefit plan cost were as follows:

  Pension Benefit Plans Other Benefit Plans
December 31
(millions of dollars)
2011 2010 2009 2011 2010 2009
Discount rate 5.55% 6.00% 6.65% 5.60% 6.00% 6.50%
Expected long-term rate of return on plan assets 6.95% 6.95% 6.95% 6.40% 7.80% 7.75%
Rate of compensation increase 3.10% 3.20% 3.25%      

The overall expected long-term rate of return on plan assets is based on historical and projected rates of return for the portfolio in aggregate and for each asset class in the portfolio. Assumed projected rates of return are selected after analyzing historical experience and estimating future levels and volatility of returns. Asset class benchmark returns, asset mix and anticipated benefit payments from plan assets are also considered in determining the overall expected rate of return. The discount rate is based on market interest rates of high-quality bonds that match the timing and benefits expected to be paid under each plan.

An 8.50 per cent average annual rate of increase in the per capita cost of covered health care benefits was assumed for 2012 measurement purposes. The rate was assumed to decrease gradually to five per cent by 2019 and remain at this level thereafter. A one per cent change in assumed health care cost trend rates would have the following effects:

(millions of dollars) Increase Decrease
Effect on total of service and interest cost components 1 (1)
Effect on post-employment benefit obligation 15 (13)

The Company's net benefit cost is as follows:

  Pension Benefit Plans Other Benefit Plans
Year ended December 31
(millions of dollars)
2011  2010  2009  2011  2010  2009 
Current service cost 54  50  45 
Interest cost 91  89  89 
Actual return on plan assets (21) (177) (206) –  (3) (5)
Actuarial loss 131  95  107  10 
Elements of net benefit cost prior to adjustments to recognize the long-term nature of net benefit cost 255  57  35  18  16  16 
Difference between expected and actual return on plan assets (93) 68  107  (2)
Difference between actuarial loss/(gain) recognized and actual actuarial loss/(gain) on accrued benefit obligation (110) (86) (101) (5) (6) (8)
Difference between amortization of past service costs and actual plan amendments –  –  – 
Amortization of transitional obligation related to regulated business –  –  – 
  55  43  45  13  13  13 

The Company pension plans' weighted average asset allocations and target allocations by asset category were as follows:

Asset Category

  Percentage of Plan Assets Target Allocations
December 31 2011 2010 2011
Debt securities 39% 37% 35% to 60%
Equity securities 61% 63% 40% to 65%
  100% 100%  

Debt securities included the Company's debt of $2 million (0.1 per cent of total plan assets) and $4 million (0.2 per cent of total plan assets) at December 31, 2011 and 2010, respectively. Equity securities included the Company's common shares of $3 million (0.2 per cent of total plan assets) and $3 million (0.2 per cent of total plan assets) at December 31, 2011 and 2010, respectively.

Pension plan assets are managed on a going concern basis, subject to legislative restrictions, and are diversified across asset classes to maximize returns at an acceptable level of risk. Asset mix strategies consider plan demographics and may include traditional equity and debt securities, as well as alternative assets such as infrastructure, private equity and derivatives to diversify risk. Derivatives are not used for speculative purposes and the use of leveraged derivatives is prohibited.

All investments are measured at fair value using market prices. Where the fair value cannot be readily determined by reference to generally available price quotations, the fair value is determined by considering the discounted cash flows on a risk-adjusted basis and by comparison to similar assets which are publicly traded.

The following table presents plan assets for DB Plans and other post-employment benefits measured at fair value, which have been categorized into three categories based on a fair value hierarchy. In Level I, the fair value of assets is determined by reference to quoted prices in active markets for identical assets. In Level II, determination of the fair value of assets includes valuations using inputs, other than quoted prices, for which all significant inputs are observable, directly or indirectly. This category includes fair value determined using valuation techniques, such as option pricing models and extrapolation using observable inputs. In Level III, determination of the fair value of assets is based on inputs that are not readily observable and are significant to the overall fair value measurement.

Asset Category Quoted
Prices in
Active Markets
(Level I)
Significant Other
Observable
Inputs
(Level II)
Significant
Unobservable
Inputs
(Level III)
Total Percentage of
Total Portfolio
December 31
(millions of Canadian dollars)
2011 2010 2011 2010 2011 2010 2011 2010 2011  2010 
Cash and cash equivalents 25 19 25 19 1% 1%
Equity Securities:                    
Canadian 374 394 95 93 469 487 28% 29%
U.S. 251 225 55 117 306 342 18% 21%
International 25 31 231 199 256 230 15% 14%
Fixed Income Securities:                    
Canadian Bonds:                    
Federal
303 302 303 302 18% 18%
Provincial
158 127 158 127 9% 8%
Municipal
4 4 4 4 –  – 
Corporate
47 64 47 64 3% 4%
U.S. Bonds:                    
State
29 28 29 28 2% 2%
Corporate
29 19 29 19 2% 1%
International:                    
Corporate
9 9 1% – 
Mortgage Backed
30 22 30 22 2% 1%
Other Investments:                    
Private Equity Funds 20 21 20 21 1% 1%
  675 669 990 975 20 21 1,685 1,665 100% 100%

The following table presents the net change in the Level III fair value category:

(millions of dollars, pre-tax) Private Equity Funds 
Balance at December 31, 2009 25 
Realized and unrealized losses (6)
Purchases and sales
Balance at December 31, 2010 21 
Realized and unrealized losses (2)
Purchases and sales
Balance at December 31, 2011 20 

Employee Future Benefits of Joint Ventures

Certain of the Company's joint ventures sponsor DB Plans as well as post-employment benefits other than pensions, including defined life insurance and medical benefits beyond those provided by government-sponsored plans. The obligations of these plans are non-recourse to TransCanada. The following amounts in this note, including those in the accompanying tables, represent TransCanada's proportionate share with respect to these plans.

Total cash payments for employee future benefits, consisting of cash contributed by the Company's joint ventures to DB Plans and other benefit plans was $59 million in 2011 (2010 – $58 million; 2009 – $54 million).

The Company's joint ventures measure the benefit obligations and the fair value of plan assets for accounting purposes as at December 31 of each year. The most recent actuarial valuations of the pension plans for funding purposes were as at January 1, 2012, and the next required valuations will be as at January 1, 2013.

  Pension Benefit Plans Other Benefit Plans
December 31 (millions of dollars) 2011  2010  2011  2010 
Change in Benefit Obligation        
Benefit obligation – beginning of year 864  695  208  170 
Current service cost 27  19  11 
Interest cost 46  42  11  10 
Employee contributions –  – 
Benefits paid (33) (31) (4) (5)
Actuarial loss 73  132  25  25 
Benefit obligation – end of year 985  864  251  208 
         
Change in Plan Assets        
Plan assets at fair value – beginning of year 727  641  –  – 
Actual return on plan assets 13  57  –  – 
Employer contributions 53  53 
Employee contributions –  – 
Benefits paid (33) (31) (4) (5)
Plan assets at fair value – end of year 768  727  – 
Funded status – plan deficit (217) (137) (249) (208)
Unamortized net actuarial loss 317  230  71  49 
Unamortized past service costs –  – 
Accrued Benefit Asset/(Liability), Net of Valuation Allowance of Nil 100  93  (176) (157)

The accrued benefit asset/(liability), net of valuation allowance of nil in the Company's Balance Sheet was as follows:

  Pension Benefit Plans Other Benefit Plans
December 31 (millions of dollars) 2011 2010 2011  2010 
Intangibles and Other Assets 100 93 –  – 
Deferred Amounts (176) (157)
  100 93 (176) (157)

The following amounts were included in the above benefit obligation and fair value of plan assets for plans that are not fully funded:

  Pension Benefit Plans Other Benefit Plans
December 31 (millions of dollars) 2011  2010  2011  2010 
Benefit obligation (979) (864) (251) (208)
Plan assets at fair value 761  727  – 
Funded Status – Plan Deficit (218) (137) (249) (208)

The expected total funding contributions of the Company's joint ventures in 2012 are approximately $73 million for the pension benefit plans and approximately $7 million for the other benefit plans.

The following are estimated future benefit payments, which reflect expected future service:

(millions of dollars) Pension
Benefits
Other
Benefits
2012 37 7
2013 38 8
2014 40 8
2015 42 9
2016 44 10
2017 to 2021 310 60

The significant weighted average actuarial assumptions adopted in measuring the benefit obligations of the Company's joint ventures were as follows:

  Pension Benefit Plans Other Benefit Plans
December 31 2011 2010 2011 2010
Discount rate 4.75% 5.25% 4.60% 5.10%
Rate of compensation increase 3.50% 3.50%    

The significant weighted average actuarial assumptions adopted in measuring the net benefit plan costs of the Company's joint ventures were as follows:

  Pension Benefit Plans Other Benefit Plans
Year ended December 31 2011 2010 2009 2011 2010 2009
Discount rate 5.25% 6.00% 6.75% 5.10% 5.80% 6.40%
Expected long-term rate of return on plan assets 7.00% 7.00% 7.00%      
Rate of compensation increase 3.50% 3.50% 3.50%      

An 8.50 per cent average annual rate of increase in the per capita cost of covered health care benefits was assumed for 2012 measurement purposes. The rate was assumed to decrease gradually to five per cent by 2019 and remain at this level thereafter. A one per cent change in assumed health care cost trend rates would have the following effects:

(millions of dollars) Increase Decrease
Effect on total of service and interest cost components 4 (3)
Effect on post-employment benefit obligation 35 (28)

The Company's proportionate share of net benefit cost of joint ventures is as follows:

  Pension Benefit Plans Other Benefit Plans
Year ended December 31
(millions of dollars)
2011  2010  2009  2011  2010  2009 
Current service cost 27  19  16  11 
Interest cost 46  42  40  11  10 
Actual return on plan assets (13) (57) (63) –  –  – 
Actuarial loss/(gain) 73  132  68  25  25  27 
Elements of net benefit cost prior to adjustments to recognize the long-term nature of net benefit cost 133  136  61  47  43  41 
Difference between expected and actual return on plan assets (38) 12  25  –  –  – 
Difference between actuarial loss/(gain) recognized and actual actuarial loss/(gain) on accrued benefit obligation (62) (128) (67) (22) (24) (28)
  33  20  19  25  19  13 

The weighted average asset allocations and target allocations by asset category in the pension plans of the Company's joint ventures were as follows:

December 31 Percentage of Plan Assets Target Allocations
Asset Category 2011 2010 2011
Debt securities 45% 41% 40%
Equity securities 55% 59% 60%
  100% 100%  

Debt securities included the Company's debt of $1 million (0.2 per cent of total plan assets) and $1 million (0.2 per cent of total plan assets) at December 31, 2011 and 2010, respectively. Equity securities included the Company's common shares of $4 million (0.6 per cent of total plan assets) and $4 million (0.5 per cent of total plan assets) at December 31, 2011 and 2010, respectively.

The assets of the joint ventures' pension plans are managed on a going concern basis subject to legislative restrictions. The plans' investment policies are to maximize returns within an acceptable risk tolerance. Pension assets are invested in a diversified manner with consideration given to the demographics of the plans' participants.