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 25: United States Accounting Principles and Reporting

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As previously discussed in Note 3, TransCanada will be adopting U.S. GAAP effective January 1, 2012. The consolidated financial statements have been prepared in accordance with CGAAP which in some respects, differ from U.S. GAAP. The effects of significant differences between CGAAP and U.S. GAAP are described in this note.

Reconciliation of Net Income and Comprehensive Income to U.S. GAAP

Year ended December 31 (millions of dollars) 2011  2010  2009 
Net Income – CGAAP 1,711  1,387  1,476 
U.S. GAAP adjustments:      
Unrealized loss/(gain) on natural gas inventory held in storage(1) 15  (3)
Tax impact of unrealized loss/(gain) on natural gas inventory held in storage (1) (5)
Dilution gain(2) –  –  (29)
Tax impact of dilution gain –  –  11 
Tax recovery due to a change in tax legislation substantively enacted in Canada(4) (4) (4) – 
Net Income – U.S. GAAP 1,710  1,393  1,456 
Less: Net Income Attributable to Non-Controlling Interests (129) (115) (96)
Net Income Attributable to Controlling Interests – U.S. GAAP 1,581  1,278  1,360 
Less: Preferred Share Dividends (55) (45) (6)
Net Income Attributable to Common Shareholders – U.S. GAAP 1,526  1,233  1,354 
Other Comprehensive Loss – CGAAP (36) (239) (153)
U.S. GAAP adjustments:      
Change in funded status of post-retirement plan liability(3) (106) (11)
Tax impact of change in funded status of post-retirement plan liability 27  (2)
Change in funded status of post-retirement plan liability of equity investment (80) (119) (48)
Other Comprehensive Loss – U.S. GAAP (195) (365) (196)
Less: Other Comprehensive Income Attributable to Non-Controlling Interests (11) (6) (7)
Other Comprehensive Loss Attributable to Controlling Interests – U.S. GAAP (206) (371) (203)
Comprehensive Income Attributable to Common Shares – U.S. GAAP 1,320  862  1,151 

Information Prepared in Accordance with U.S. GAAP

The differences between CGAAP and the following information prepared in accordance with U.S. GAAP relates principally to the accounting for joint venture investments. Under CGAAP, the Company accounts for joint venture investments using the proportionate consolidation basis of accounting whereby the Company's proportionate share of assets, liabilities, revenues, expenses and cash flows are included in the Company's financial statements. U.S. GAAP requires that these joint venture investments be recorded on an equity basis of accounting. Information on the balances that have been proportionately consolidated under CGAAP is included in Note 8 to these financial statements. The effects of any additional differences between CGAAP and U.S. GAAP are described in the footnotes below.

Condensed Consolidated Statement of Income – U.S. GAAP

Year ended December 31 (millions of dollars) 2011  2010  2009 
Revenues(1) 7,694  6,634  6,778 
       
Income from Equity Investments 415  453  478 
       
Operating and Other Expenses      
Plant operating costs and other(2) 2,768  2,434  2,621 
Commodity purchases resold 846  960  772 
Depreciation and amortization 1,328  1,160  1,201 
Valuation provision for MGP –  146  – 
  4,942  4,700  4,594 
       
Financial Charges/(Income)      
Interest expense 937  701  954 
Interest income and other (55) (94) (118)
  882  607  836 
       
Income before Income Taxes 2,285  1,780  1,826 
       
Income Taxes Expenses/(Recovery)      
Current(2)(4) 210  (139) 13 
Deferred(1) 365  526  357 
  575  387  370 
       
Net Income – U.S. GAAP 1,710  1,393  1,456 
Net Income Attributable to Non-Controlling Interests 129  115  96 
Net Income Attributable to Controlling Interests – U.S. GAAP 1,581  1,278  1,360 
Preferred Share Dividends 55  45 
Net Income Attributable to Common Shares – U.S. GAAP 1,526  1,233  1,354 
       
Net Income per Common Share – U.S. GAAP      
Basic $2.17  $1.79  $2.08 
Diluted $2.17  $1.78  $2.08 

Consolidated Statement of Comprehensive Income – U.S. GAAP

Year ended December 31 (millions of dollars) 2011  2010  2009 
Net Income – U.S. GAAP 1,710  1,393  1,456 
       
Other Comprehensive Income/(Loss), Net of Income Taxes      
Change in foreign currency translation gains and losses on investments in foreign operations(8) 113  (180) (471)
Change in fair value of derivative instruments to hedge the net investments in foreign operations(9) (73) 89  258 
Change in fair value of derivative instruments designated as cash flow hedges(10) (212) (169) (29)
Reclassification to Net Income of gains and losses on derivative instruments designated as cash flow hedges(11) 147  53  71 
Unrealized actuarial gains and losses on pension and other post-retirement benefit plans(3)(12) (89) (12) (1)
Reclassification to Net Income of actuarial gains and losses and prior service costs on pension and other post-retirement benefit plans(3)(13) 10 
Other Comprehensive Loss on equity investments(14) (91) (151) (30)
Other Comprehensive Loss – U.S. GAAP (195) (365) (196)
Comprehensive Income – U.S. GAAP 1,515  1,028  1,260 
       
Comprehensive Income Attributable to Non-Controlling Interests 140  121  103 
Comprehensive Income Attributable to Controlling Interests – U.S. GAAP 1,375  907  1,157 
Preferred Share Dividends 55  45 
Comprehensive Income Attributable to Common Shares – U.S. GAAP 1,320  862  1,151 

Condensed Consolidated Balance Sheet – U.S. GAAP

As at December 31 (millions of dollars) 2011  2010   
Assets      
Current Assets(1) 3,110  2,799   
Plant, Property and Equipment(7) 32,467  30,987   
Equity Investments(3)(5)(6) 5,077  4,683   
Goodwill 3,534  3,457   
Regulatory Assets(3) 1,684  1,699   
Intangibles and Other Assets(3)(6) 1,466  1,624   
  47,338  45,249   
       
Liabilities      
Current Liabilities(4)(7) 5,522  5,352   
Regulatory Liabilities 297  308   
Deferred Amounts(3)(5) 929  728   
Deferred Income Tax Liabilities(1)(3)(6) 3,591  3,241   
Long-Term Debt(6) 17,724  17,122   
Junior Subordinated Notes(6) 1,016  993   
  29,079  27,744   
       
Equity      
Common shares, no par value 12,011  11,745   
Issued and outstanding: 2011 – 704 million shares      
Issued and outstanding: 2010 – 696 million shares      
Preferred shares 1,224  1,224   
Additional paid-in capital(2) 380  349   
Retained earnings(1)(2)(4) 4,628  4,273   
Accumulated other comprehensive (loss)/income(3) (1,449) (1,243)  
Equity Attributable to Controlling Interests 16,794  16,348   
Equity Attributable to Non-Controlling Interests 1,465  1,157   
  18,259  17,505   
  47,338  45,249   

Consolidated Statement of Accumulated Other Comprehensive (Loss)/Income – U.S. GAAP

Year ended December 31 (millions of dollars) 2011  2010  2009 
Balance at beginning of year (1,243) (872) (669)
Change in foreign currency translation gains and losses on investments in foreign operations(8) 113  (180) (471)
Change in fair value of derivative instruments to hedge the net investments in foreign operations(9) (73) 89  258 
Change in fair value of derivative instruments designated as cash flow hedges(10) (213) (165) (27)
Reclassification to Net Income of gains and losses on derivative instruments designated as cash flow hedges(11) 137  43  62 
Unrealized actuarial gains and losses on pension and other post-retirement benefit plans(3)(12) (89) (12) (1)
Reclassification to Net Income of actuarial gains and losses and prior service costs on pension and other post-retirement benefit plans(3)(13) 10 
Other Comprehensive Loss on equity investments(14) (91) (151) (30)
Balance at end of year (1,449) (1,243) (872)

Condensed Consolidated Statement of Cash Flows – U.S. GAAP

Year ended December 31 (millions of dollars) 2011  2010  2009 
Net cash provided by operations 3,759  2,876  3,008 
Net cash used in investing activities (3,127) (5,296) (7,347)
Net cash (used in)/provided by financing activities (642) 2,188  4,204 
Effect of foreign exchange rate changes on cash and cash equivalents (7) (93)
Decrease in cash and cash equivalents (6) (239) (228)
Cash and cash equivalents beginning of year 660  899  1,127 
Cash and cash equivalents end of year 654  660  899 
(1) Under U.S. GAAP, inventory is recorded at lower of cost or market. Under CGAAP, natural gas inventory held in storage is recorded at its fair value.
(2) Under U.S. GAAP, the dilution gain resulting from TC PipeLines, LP's 2009 equity issuance was accounted for as an equity transaction. Under CGAAP, the dilution gain was included in Net Income.
(3)

Under U.S. GAAP, an employer is required to recognize the overfunded or underfunded status of a defined benefit post-retirement plan as an asset or liability in its Consolidated Balance Sheet and to recognize changes in that funded status, through OCI, in the year in which the changes occur. The amounts recognized in the Company's U.S. GAAP Consolidated Balance Sheet for its DB Plans and other post-retirement benefits are as follows:

December 31 (millions of dollars) 2011  2010 
Intangibles and other assets –  40 
Deferred amounts (321) (156)
  (321) (116)

Pre-tax amounts recognized in U.S. GAAP AOCI are as follows:

  2011 2010 2009
December 31
(millions of dollars)
Pension Benefits Other Benefits Pension Benefits Other Benefits Pension Benefits Other Benefits
Net loss 283 29 179 24 170 21
Prior service cost 7 2 9 2 10 2
  290 31 188 26 180 23

Pre-tax amounts recognized in U.S. GAAP OCI were as follows:

  2011 2010 2009
December 31
(millions of dollars)
Pension 
Benefits 
Other 
Benefits 
Pension 
Benefit s
Other 
Benefits 
Pension 
Benefits 
Other 
Benefits 
Amortization of net loss from AOCI to OCI (10) (1) (5) (1) (5) (1)
Amortization of prior service (credit) from AOCI to OCI (2) –  (2) –  (2) – 
Funded status adjustment 113  15  (1)
  101  (5) (2)

The funded status based on the accumulated benefit obligation for all DB Plans is as follows:

December 31 (millions of dollars) 2011  2010
Accumulated benefit obligation 1,691  1,463
Fair value of plan assets 1,656  1,636
Funded status – (deficit)/surplus (35) 173

Included in the above accumulated benefit obligation and fair value of plan assets are the following amounts in respect of plans that are not fully funded.

December 31 (millions of dollars) 2011  2010 
Accumulated benefit obligation 446  182 
Fair value of plan assets 391  178 
Funded status – (deficit) (55) (4)

The estimated net loss and prior service cost for the DB Plans that will be amortized from AOCI into net periodic benefit cost over the next fiscal year are $10 million and $1 million, respectively. The estimated net loss and prior service cost for the other post-retirement plans that will be amortized from AOCI into net periodic benefit cost over the next fiscal year is $1 million and $1 million, respectively.

(4)

In accordance with CGAAP, the Company recorded current income tax benefits resulting from substantively enacted Canadian federal income tax legislation. Under U.S. GAAP, the legislation must be fully enacted for income tax adjustments to be recorded.

Below is the reconciliation of the annual changes in the total unrecognized tax benefit:

December 31 (millions of dollars) 2011  2010 
Unrecognized tax benefits at beginning of year 62  55 
Gross increases – tax positions in prior years
Gross decreases – tax positions in prior years (7) (1)
Gross increases – current year positions 11 
Settlements –  (7)
Lapses of statute of limitations (23) (1)
Unrecognized tax benefits at end of year 52  62 

TransCanada expects the enactment of certain Canadian federal tax legislation in the next 12 months which is expected to result in a favourable income tax adjustment of approximately $20 million. Otherwise, subject to the results of audit examinations by taxing authorities and other legislative amendments, TransCanada does not anticipate further adjustments to the unrecognized tax benefits during the next twelve months that would have a material impact on its financial statements.

TransCanada and its subsidiaries are subject to either Canadian federal and provincial income tax, U.S. federal, state and local income tax or the relevant income tax in other international jurisdictions. The Company has substantially concluded all Canadian federal and provincial income tax matters for the years through 2006. Substantially all material U.S. federal income tax matters have been concluded for years through 2007 and U.S. state and local income tax matters through 2006.

TransCanada's continuing practice is to recognize interest and penalties related to income tax uncertainties in Income Tax Expense. Net tax expense for the year ended December 31, 2011 reflects a reversal of $12 million of interest expense and nil for penalties (2010 – $3 million for interest expense and nil for penalties; 2009 – $8 million reversal of interest expense and nil for penalties). At December 31, 2011, the Company had $7 million accrued for interest expense and nil accrued for penalties (December 31, 2010 – $19 million accrued for interest expense and nil accrued for penalties).

(5)

As a consequence of using equity accounting for certain of these joint ventures under U.S. GAAP, the Company is required to reflect an additional liability of $111 million at December 31, 2011 (December 31, 2010 – $150 million) for certain guarantees related to debt and other performance commitments of the joint venture operations that were not required to be recorded when the underlying liability was reflected on the balance sheet under the proportionate consolidation method of accounting.

U.S. GAAP requires the disclosure of the difference, if any, between the carrying value of the investment and the investor's underlying equity in the net assets of the investee on an ongoing basis, rather than only at the date of purchase as required under CGAAP. At December 31, 2011, the difference between the carrying value of the investment and the underlying equity in the net assets of Northern Border Pipeline Company and Bruce Power is US$120 million (2010 – US$121 million) and $752 million (2010 – $783 million), respectively. This difference is primarily due to goodwill recorded with respect to the acquisition of Northern Border and the fair value assessment of assets at the time of acquisition of Bruce Power.

The distributed earnings from long-term investments for the year ended December 31, 2011 were $494 million (2010 – $250 million; 2009 – $265 million). The undistributed earnings from long-term investments as at December 31, 2011 were $1,283 million (2010 – $1,361 million; 2009 – $1,174 million).

(6) In accordance with U.S. GAAP, debt issue costs are recorded as a deferred asset rather than being included in Long-Term Debt as required under CGAAP.
(7) In 2009, the Company purchased the remaining 20 per cent ownership interest in Keystone, increasing its ownership interest to 100 per cent. Under CGAAP, the transaction was considered to be an asset purchase; however, under U.S. GAAP it is considered to be a business combination. The purchase price was allocated to Plant, Property and Equipment (US$734 million) and Short-term Debt (US$197 million) using fair values of the net assets at the date of acquisition. There is no Income Statement impact under U.S. GAAP as no gain or loss was created.
(8) Net of income tax recovery of $29 million in 2011 (2010 – $65 million expense; 2009 – $92 million expense).
(9) Net of income tax recovery of $28 million in 2011 (2010 – $37 million expense; 2009 – $124 million expense).
(10) Net of income tax recovery of $106 million in 2011 (2010 – $82 million recovery; 2009 – $38 million recovery).
(11) Net of income tax expense of $77 million in 2011 (2010 – $28 million expense; 2009 – $48 million expense).
(12) Net of income tax recovery of $30 million in 2011 (2010 – $7 million recovery; 2009 – nil).
(13) Net of income tax expense of $3 million in 2011 (2010 – $3 million expense; 2009 – $2 million expense).
(14) Primarily related to reclassification to Net Income of actuarial losses on pension and other post-retirement benefit plans, reclassification to Net Income of gains and losses on derivative instruments designated as cash flow hedges, offset by gains and losses on derivative instruments designated as cash flow hedges. Net of income tax recovery of $3 million in 2011 (2010 – $69 million recovery; 2009 – $17 million recovery).