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 24: Commitments, Contingencies and Guarantees

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Commitments

Operating Leases

Future annual payments, net of sub-lease receipts, under the Company's operating leases for various premises, services and equipment are approximately as follows:

Year ended December 31 (millions of dollars) Minimum 
Lease 
Payments
Amounts Recoverable 
under Sub-leases 
Net 
Payments 
2012 87  (8) 79 
2013 85  (7) 78 
2014 81  (7) 74 
2015 76  (5) 71 
2016 75  (3) 72 
2017 and thereafter 363  (2) 361 
  767  (32) 735 

The operating lease agreements for premises, services and equipment expire at various dates through 2052, with an option to renew certain lease agreements for periods of one year to 10 years. Net rental expense on operating leases in 2011 was $79 million (2010 – $80 million; 2009 – $64 million).

TransCanada's commitments under the Alberta PPAs are considered to be operating leases and a portion of these PPAs have been subleased to third parties under similar terms and conditions. Future payments under these PPAs have been excluded from operating leases in the above table, as these payments are dependent upon plant availability and other factors. TransCanada's share of payments under the PPAs in 2011 was $394 million (2010 – $363 million; 2009 – $384 million). The generating capacities and expiry dates of the PPAs are as follows:

  Megawatts Expiry Date
Sundance A 560 December 31, 2017
Sundance B 353 December 31, 2020
Sheerness 756 December 31, 2020

TransCanada and its affiliates have long-term natural gas transportation and natural gas purchase arrangements as well as other purchase obligations, all of which are transacted at market prices and in the normal course of business.

Other Commitments

At December 31, 2011, TransCanada was committed to Natural Gas Pipelines capital expenditures totalling approximately $250 million, primarily related to construction costs of the Alberta System and Guadalajara.

At December 31, 2011, the Company was committed to Oil Pipelines capital expenditures totalling approximately $992 million, primarily related to construction costs of Keystone XL.

At December 31, 2011, the Company was committed to Energy capital expenditures totalling approximately $290 million and includes TransCanada's share of capital costs of Bruce Power and Cartier Wind.

On December 15, 2011, TransCanada agreed to purchase nine Ontario solar projects from Canadian Solar Solutions Inc., with a combined capacity of 86 MW, for approximately $470 million. Under the terms of the agreement, each of the nine solar projects will be developed and constructed by Canadian Solar Solutions Inc. using photovoltaic panels. TransCanada will purchase each project once construction and acceptance testing have been completed and operations have begun under 20-year PPAs with the Ontario Power Authority (OPA) under the Feed-in Tariff program in Ontario. TransCanada anticipates the projects will be placed in service between late 2012 and mid-2013, subject to regulatory approvals.

Contingencies

TransCanada is subject to laws and regulations governing environmental quality and pollution control. At December 31, 2011, the Company had accrued approximately $49 million (2010 – $59 million) related to operating facilities, which represents the estimated amount it expects to expend to remediate the sites. However, additional liabilities may be incurred as assessments occur and remediation efforts continue.

TransCanada 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.

Sundance A PPA

In December 2010, Sundance A Units 1 and 2 were withdrawn from service and were subject to a force majeure claim by the PPA owner in January 2011. In February 2011, the owner notified TransCanada that it had determined it was uneconomic to replace or repair Units 1 and 2, and that the Sundance A PPA should therefore be terminated.

TransCanada has disputed both the force majeure and the economic destruction claims under the binding dispute resolution process provided in the PPA and both matters will be heard through a single binding arbitration process. The arbitration panel has scheduled a hearing in April 2012 for these claims. Assuming the hearing concludes within the time allotted, TransCanada expects to receive a decision in mid-2012.

TransCanada has continued to record revenues and costs throughout 2011 as it considers this event to be an interruption of supply in accordance with the terms of the PPA. The Company does not believe the owner's claims meet the tests of force majeure or destruction as specified in the PPA and has therefore recorded $156 million of pre-tax income for the year ended December 31, 2011. The outcome of any arbitration process is not certain, however, TransCanada believes the matter will be resolved in its favour.

Guarantees

TransCanada and its joint venture partners on Bruce Power, Cameco Corporation and BPC Generation Infrastructure Trust (BPC), have severally guaranteed one-third of certain contingent financial obligations of Bruce B related to power sales agreements, a lease agreement and contractor services. The guarantees have terms ranging from 2018 to perpetuity. In addition, TransCanada and BPC have each severally guaranteed one-half of certain contingent financial obligations related to an agreement with the OPA to refurbish and restart Bruce A power generation units. The guarantees have terms ending in 2018 and 2019. TransCanada's share of the potential exposure under these Bruce A and Bruce B guarantees was estimated to be $863 million at December 31, 2011. The fair value of these Bruce Power guarantees at December 31, 2011 is estimated to be $29 million. The Company's exposure under certain of these guarantees is unlimited.

In addition to the guarantees for Bruce Power, 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 related primarily to redelivery of natural gas, PPA payments and the payment of liabilities. TransCanada's share of the potential exposure under these assurances was estimated at December 31, 2011 to range from $182 million to a maximum of $498 million. The fair value of these guarantees at December 31, 2011 is estimated to be $7 million, which has been included in Deferred Amounts. For certain of these entities, any payments made by TransCanada under these guarantees in excess of its ownership interest are to be reimbursed by its partners.