TRP
$50.58
Transcananda Pipelines
($.70)
(1.37%)
Earnings Details
2nd Quarter June 2017
Friday, July 28, 2017 7:30:12 AM
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Summary

Transcananda Pipelines (TRP) Recent Earnings

Transcananda Pipelines (TRP) reported 2nd Quarter June 2017 earnings of $0.56 per share on revenue of $2.4 billion. The consensus earnings estimate was $0.50 per share on revenue of $1.9 billion. Revenue grew 12.0% on a year-over-year basis.

TransCanada Corporation is an energy infrastructure company. The Company operates in three business segments: Natural Gas Pipelines, Liquid Pipelines and Energy.

Results
Reported Earnings
$0.56
Earnings Whisper
-
Consensus Estimate
$0.50
Reported Revenue
$2.39 Bil
Revenue Estimate
$1.91 Bil
Growth
Earnings Growth
Revenue Growth
Power Rating
Grade
Earnings Release

TransCanada Reports Strong Second Quarter 2017 Financial Results; Performance Highlights Diversified, Low Risk Business Strategy

CALGARY, ALBERTA--(Marketwired - July 28, 2017) - TransCanada Corporation (TSX:TRP)(TRP) (TransCanada or the Company) today announced net income attributable to common shares for second quarter 2017 of $881 million or $1.01 per share compared to net income of $365 million or $0.52 per share for the same period in 2016. Comparable earnings for second quarter 2017 were $659 million or $0.76 per share compared to $366 million or $0.52 per share for the same period in 2016. TransCanada’s Board of Directors also declared a quarterly dividend of $0.625 per common share for the quarter ending September 30, 2017, equivalent to $2.50 per common share on an annualized basis.

"Our diversified portfolio of high-quality, low risk energy infrastructure assets continued to perform very well in the second quarter of 2017," said Russ Girling, TransCanada’s president and chief executive officer. "Comparable earnings per share increased 46 per cent compared to second quarter 2016 primarily due to the Columbia acquisition in July 2016 and the realization of associated synergies, strong performance across our Natural Gas and Liquids Pipelines businesses and higher earnings from Bruce Power following a major planned outage in second quarter 2016. The growth in earnings was accompanied by a significant increase in net cash provided by operations which rose to $1.4 billion from $1.1 billion in the same period last year."

"In the quarter, we added $2 billion of additional expansion projects on the NGTL System and today announced a $0.2 billion expansion on the Canadian Mainline, highlighting the organic growth opportunities that continue to emanate from our broad, strategically located asset base. We are now advancing a $24 billion near-term capital program that is expected to generate significant growth in earnings and cash flow and support an expected annual dividend growth rate at the upper end of an eight to 10 per cent range through 2020," added Girling. "To date we have invested $9.0 billion in these projects and are well positioned to both execute and fund the remainder of the program over the next few years. In addition, we concluded the sale of our U.S. Northeast merchant generation facilities, with proceeds used to fully retire the Columbia acquisition bridge facilities. With those sales complete, over 95 per cent of our future EBITDA is expected to be derived from regulated or long-term contracted assets."

"We also continue to progress a number of additional medium to longer-term organic growth opportunities in our three core businesses of natural gas pipelines, liquids pipelines and energy in Canada, the United States and Mexico. Success in advancing Keystone XL or other growth initiatives, including the Bruce Power life extension, could further augment or extend the Company’s dividend growth outlook," concluded Girling.

Highlights

(All financial figures are unaudited and in Canadian dollars unless noted otherwise)

Second quarter 2017 financial results Net income attributable to common shares of $881 million or $1.01 per share

Net income attributable to common shares of $881 million or $1.01 per share

Comparable earnings of $659 million or $0.76 per share

Comparable earnings before interest, taxes, depreciation and amortization (EBITDA) of $1.8 billion

Net cash provided by operations of $1.4 billion

Comparable funds generated from operations of $1.4 billion 

Comparable distributable cash flow of $936 million or $1.08 per common share

Declared a quarterly dividend of $0.625 per common share for the quarter ending September 30, 2017

Announced $2 billion of additional expansions on the NGTL System to increase receipt and delivery capacity

In April, closed the sale of TC Hydro for US$1.07 billion and in June completed the sale of Ravenswood, Ironwood, Ocean State Power and Kibby Wind for US$2.029 billion. The proceeds from the sales were used to fully retire the acquisition bridge facilities which partially financed the Columbia acquisition

On June 1, sold a 49.34 per cent interest in Iroquois Gas Transmission System, LP (Iroquois), together with our remaining 11.81 per cent interest in Portland Natural Gas Transmission System (PNGTS), to our master limited partnership, TC PipeLines, LP for a value of US$765 million

Raised US$500 million at TC PipeLines, LP from issuance of 10 year senior unsecured notes

Raised $1.5 billion in gross proceeds through a Canadian offering of Junior Subordinated Notes maturing in 2077

Established an At-The-Market (ATM) program that allows us to issue up to $1 billion in common shares from time to time over a 25-month period, at our discretion, at the prevailing market price when sold in Canada or the United States. The ATM program will be activated at our discretion, if and as required, based on the spend profile of TransCanada’s capital program and relative cost of other funding options

In July, launched an open season to solicit additional binding commitments from interested parties for transportation of crude oil on the Keystone Pipeline and for the Keystone XL Pipeline project from Hardisty, Alberta to markets in Cushing, Oklahoma and the U.S. Gulf Coast

On July 25, 2017, we were notified that Pacific NorthWest (PNW) LNG would not be proceeding with their proposed LNG project. As part of our Prince Rupert Gas Transmission (PRGT) agreement, following receipt of a termination notice, we would be reimbursed for the full costs and carrying charges incurred to advance the PRGT project. We expect to receive this payment later in 2017

On July 28, announced a $0.2 billion expansion project on the Canadian Mainline in southern Ontario

Net income attributable to common shares increased by $516 million to $881 million or $1.01 per share for the three months ended June 30, 2017 compared to the same period last year. Net income per common share in 2017 includes the dilutive effect of issuing 161 million common shares in 2016. Second quarter 2017 results included a $265 million after-tax net gain on the monetization of the U.S. Northeast power assets which was comprised of a $441 million after-tax gain on the sale of TC Hydro and an incremental loss of $176 million after-tax on the sale of the thermal and wind package, an after-tax charge of $15 million for integration-related costs associated with the acquisition of Columbia and a $4 million after-tax charge related to the maintenance of Keystone XL assets. Second quarter 2016 included a charge of $113 million related to costs associated with the Columbia acquisition which were primarily related to the dividend equivalent payments on the subscription receipts issued as part of the permanent financing of the transaction, an after-tax $10 million restructuring charge related to expected future losses under lease commitments and $9 million after-tax related to Keystone XL maintenance and liquidation costs. All of these specific items as well as unrealized gains and losses from changes in risk management activities are excluded from comparable earnings.

Comparable earnings for second quarter 2017 were $659 million or $0.76 per share compared to $366 million or $0.52 per share for the same period in 2016, an increase of $293 million or $0.24 per share and includes the dilutive effect of issuing 161 million common shares in 2016. The increase in second quarter comparable earnings was primarily due to higher contributions from U.S. Natural Gas Pipelines reflecting incremental earnings from Columbia following the July 1, 2016 acquisition and higher ANR transportation revenues resulting from higher rates effective August 1, 2016, higher earnings from Bruce Power mainly due to higher volumes resulting from fewer planned outage days, a higher contribution from Mexican Natural Gas Pipelines due to earnings from the Mazatlán and Topolobampo pipelines and higher earnings from Liquids Pipelines mainly due to higher volumes. These increases were partially offset by higher interest expense mainly as a result of debt assumed in the acquisition of Columbia and long-term debt issuances.

Notable recent developments include:

Natural Gas Pipelines:

NGTL System: In June, we announced an additional $2 billion expansion program, subject to regulatory approvals, supported by new contracted customer demand for approximately 3 Bcf/d of incremental firm receipt and delivery services. The expansion will also increase delivery capacity at the Alberta/British Columbia export delivery point by 381 MMcf/d to serve markets in the Pacific Northwest, California and Nevada. NGTL now has a $7.1 billion near-term capital program targeted for completion by 2021.

Canadian Mainline Tolling Option Open Season: In April, an application was filed with the National Energy Board (NEB) for approval of the long-term fixed-price service from the Empress receipt point in Alberta to the Dawn hub in Southern Ontario. The NEB is following a modified Streamlined Application Process with adjudication expected to follow after oral arguments are presented on September 11, 2017. The new service is requested to begin November 1, 2017.

Canadian Mainline Maple Compressor Expansion Project: The Canadian Mainline has received requests for expansion capacity to the southern Ontario market plus delivery to Atlantic Canada via the TQM and PNGTS systems. The requests for approximately 80 MMcf/d of firm service underpin the need for new compression at the existing Maple compressor site. Customers have executed 15-year precedent agreements to proceed with the estimated $160 million project. Once we have completed our tariff process for this capacity addition, an application to the NEB for approval to proceed with the project is planned for early 2018 to meet a November 1, 2019 in-service date.

Coastal GasLink: The continuing delay in the Final Investment Decision (FID) for the LNG Canada project has triggered a restructuring of provisions in the Coastal GasLink project agreement with LNG Canada that will result in the payment of certain amounts to TransCanada with respect to carrying charges on costs incurred since inception of the project. An approximate $80 million payment will be received in September 2017, followed by quarterly payments of approximately $7 million until further notice. We continue to work with LNG Canada under the agreement towards a FID.

Prince Rupert Gas Transmission: On July 25, 2017, we were notified that PNW LNG would not be proceeding with their proposed LNG project. As part of our PRGT agreement, following receipt of a termination notice, we would be reimbursed for the full costs and carrying charges incurred to advance the PRGT project. We expect to receive this payment later in 2017.

Sale of Iroquois and PNGTS to TC PipeLines, LP: On June 1, 2017, we sold a 49.34 per cent interest in Iroquois, together with our remaining 11.81 per cent interest in PNGTS, to our master limited partnership, TC PipeLines, LP for a value of US$765 million.

Leach XPress and Rayne XPress: We continue to advance construction on the US$1.5 billion Leach XPress and the US$0.4 billion Rayne XPress projects. Both projects are expected to enter service in November 2017.

Liquids Pipelines:

Keystone XL: On July 27, 2017, we launched an open season to solicit additional binding commitments from interested parties for transportation of crude oil on the Keystone Pipeline and for the Keystone XL Pipeline project from Hardisty, Alberta to markets in Cushing, Oklahoma and the U.S. Gulf Coast. The open season will close on September 28, 2017.

Grand Rapids: In June, the Grand Rapids pipeline commenced line fill activities with anticipated in-service in third quarter 2017.

Energy:

Monetization of U.S. Northeast power business: On April 19, 2017, we closed the sale of TC Hydro to Great River Hydro, LLC for US$1.07 billion resulting in a gain of $717 million ($441 million after-tax) recorded in second quarter 2017. On June 2, 2017, we completed the sale of Ravenswood, Ironwood, Ocean State Power and Kibby Wind to Helix Generation, LLC for US$2.029 billion. An additional loss of approximately $219 million ($176 million after-tax) was recorded in second quarter 2017, primarily related to an adjustment to the purchase price and repair costs for an unplanned outage at Ravenswood prior to close. Insurance recoveries for a portion of the repair costs are expected to be received by the end of 2017 which will partially reduce this loss. Proceeds from the sale transactions were used to fully retire the remaining bridge facilities that partially funded the acquisition of Columbia. We also initiated the monetization of our TransCanada Power Marketing Ltd. (TCPM) operations and will realize the value of the remaining marketing contracts and working capital over time.

Corporate:

Common Share Dividend: Our Board of Directors declared a quarterly dividend of $0.625 per share for the quarter ending September 30, 2017 on TransCanada’s outstanding common shares. The quarterly amount is equivalent to $2.50 per common share on an annualized basis.

Junior Subordinated Debt Issuance: In May 2017, TransCanada Trust issued $1.5 billion of 60-year Junior Subordinated Notes in Canada to third party investors with a fixed interest rate of 4.65 per cent for the first ten years converting to a floating rate thereafter. The notes are callable at par beginning ten years following their issuance. All of the proceeds of the issuance by the Trust were loaned to TransCanada PipeLines Limited (TCPL) in $1.5 billion of subordinated notes at a rate of 4.90 per cent which includes a 0.25 per cent administration charge.

Financing at TC PipeLines, LP: In May 2017, TC PipeLines, LP raised US$500 million from issuance of 10-year senior unsecured notes bearing an interest rate of 3.90 per cent.

Dividend Reinvestment Plan (DRP): Based on the most recent quarter, approximately 35 per cent of the common share dividends declared are being reinvested in TransCanada common shares through our DRP.

ATM Equity Issuance Program: In June 2017, we established an ATM program that allows us to issue common shares from treasury having an aggregate gross sales price of up to $1.0 billion or their U.S. dollar equivalent, from time to time, at our discretion, at the prevailing market price when sold through the Toronto Stock Exchange or the New York Stock Exchange. The ATM program, which is effective for a 25-month period, will be activated at our discretion, if and as required, based on the spend profile of TransCanada’s capital program and relative cost of other funding options. At June 30, 2017, no common shares were issued under the program.

Teleconference and Webcast:

We will hold a teleconference and webcast on Friday, July 28, 2017 to discuss our second quarter 2017 financial results. Russ Girling, TransCanada President and Chief Executive Officer, and Don Marchand, Executive Vice-President and Chief Financial Officer, along with other members of the TransCanada executive leadership team, will discuss the financial results and Company developments at 9 a.m. (MT) / 11 a.m. (ET).

Members of the investment community and other interested parties are invited to participate by calling 800.377.0758 or 416.340.2218 (Toronto area). Please dial in 10 minutes prior to the start of the call. No pass code is required. A live webcast of the teleconference will be available at www.transcanada.com.

A replay of the teleconference will be available two hours after the conclusion of the call until midnight (ET) on August 4, 2017. Please call 800.408.3053 or 905.694.9451 (Toronto area) and enter pass code 9154252.

The unaudited interim condensed Consolidated Financial Statements and Management’s Discussion and Analysis (MD&A) are available under TransCanada’s profile on SEDAR at www.sedar.com, with the U.S. Securities and Exchange Commission on EDGAR at www.sec.gov/info/edgar.shtml and on the TransCanada website at www.transcanada.com.

With more than 65 years’ experience, TransCanada is a leader in the responsible development and reliable operation of North American energy infrastructure including natural gas and liquids pipelines, power generation and gas storage facilities. TransCanada operates a network of natural gas pipelines that extends more than 91,500 kilometres (56,900 miles), tapping into virtually all major gas supply basins in North America. TransCanada is the continent’s largest provider of gas storage and related services with 653 billion cubic feet of storage capacity. A large independent power producer, TransCanada owns or has interests in approximately 6,200 megawatts of power generation in Canada and the United States. TransCanada is also the developer and operator of one of North America’s leading liquids pipeline systems that extends over 4,300 kilometres (2,700 miles) connecting growing continental oil supplies to key markets and refineries. TransCanada’s common shares trade on the Toronto and New York stock exchanges under the symbol TRP. Visit TransCanada.com and our blog to learn more, or connect with us on social media and 3BL Media.

Forward Looking Information

This release contains certain information that is forward-looking and is subject to important risks and uncertainties (such statements are usually accompanied by words such as "anticipate", "expect", "believe", "may", "will", "should", "estimate", "intend" or other similar words). Forward-looking statements in this document are intended to provide TransCanada security holders and potential investors with information regarding TransCanada and its subsidiaries, including management’s assessment of TransCanada’s and its subsidiaries’ future plans and financial outlook. All forward-looking statements reflect TransCanada’s beliefs and assumptions based on information available at the time the statements were made and as such are not guarantees of future performance. Readers are cautioned not to place undue reliance on this forward-looking information, which is given as of the date it is expressed in this news release, and not to use future-oriented information or financial outlooks for anything other than their intended purpose. TransCanada undertakes no obligation to update or revise any forward-looking information except as required by law. For additional information on the assumptions made, and the risks and uncertainties which could cause actual results to differ from the anticipated results, refer to the Quarterly Report to Shareholders dated July 27, 2017 and 2016 Annual Report filed under TransCanada’s profile on SEDAR at www.sedar.com and with the U.S. Securities and Exchange Commission at www.sec.gov.

Non-GAAP Measures

This news release contains references to non-GAAP measures, including comparable earnings, comparable EBITDA, comparable distributable cash flow, comparable funds generated from operations, comparable earnings per share and comparable distributable cash flow per share, that do not have any standardized meaning as prescribed by U.S. GAAP and therefore are unlikely to be comparable to similar measures presented by other companies. These non-GAAP measures are calculated on a consistent basis from period to period and are adjusted for specific items in each period, as applicable. For more information on non-GAAP measures, refer to TransCanada’s Quarterly Report to Shareholders dated July 27, 2017.

Quarterly report to shareholders

Second quarter 2017

Financial highlights

 
  three months ended
  six months ended
June 30
June 30
(unaudited - millions of $, except per share amounts)
  2017
  2016
  2017
  2016
 
   
   
   
   
Income
   
   
   
   
Revenues
  3,217
    2,751
    6,608     5,254  
Net income attributable to common shares
  881
    365
    1,524     617
 
 
 
per common share - basic
  $1.01
    $0.52
    $1.76     $0.88  
 
 
 
 
- diluted
  $1.01
    $0.52
    $1.75     $0.88  
Comparable EBITDA1
  1,830
    1,369
    3,807     2,871  
Comparable earnings1
  659
    366
    1,357     860
 
 
 
per common share1
  $0.76
    $0.52
    $1.56     $1.22  
 
   
   
   
   
Cash flows
   
   
   
   
Net cash provided by operations
  1,353
    1,148
    2,655     2,229  
Comparable funds generated from operations1
  1,408
    1,056
    2,916     2,305  
Comparable distributable cash flow1
  936
    702
    2,158     1,676  
 
 
per common share1
  $1.08
    $1.00
    $2.49     $2.38  
Capital spending - capital expenditures
  1,792
    982
    3,352     1,818  
 
- projects in development
  56
    90
    98
    157
 
 
 
 - contributions to equity investments
  473
    114
    665
    284
 
Acquisitions, net of cash acquired
  -
    4
    -
    999
 
Proceeds from sales of assets, net of transaction costs
  4,147
    -
    4,147     6
 
 
   
   
   
   
Dividends declared
   
   
   
   
Per common share
  $0.625     $0.565     $1.25     $1.13  
Basic common shares outstanding (millions)
   
   
   
   
Average for the period
  870
    703
    868
    703
 
End of period
  871
    703
    871
    703
 
(1) Comparable EBITDA, comparable earnings, comparable earnings per common share, comparable funds generated from operations, comparable distributable cash flow and comparable distributable cash flow per common share are all non-GAAP measures. See the non-GAAP measures section for more information.

Management’s discussion and analysis

July 27, 2017

This management’s discussion and analysis (MD&A) contains information to help the reader make investment decisions about TransCanada Corporation. It discusses our business, operations, financial position, risks and other factors for the three and six months ended June 30, 2017, and should be read with the accompanying unaudited condensed consolidated financial statements for the three and six months ended June 30, 2017 which have been prepared in accordance with U.S. GAAP.

This MD&A should also be read in conjunction with our December 31, 2016 audited consolidated financial statements and notes and the MD&A in our 2016 Annual Report. 

FORWARD-LOOKING INFORMATION

We disclose forward-looking information to help current and potential investors understand management’s assessment of our future plans and financial outlook, and our future prospects overall.

Statements that are forward-looking are based on certain assumptions and on what we know and expect today and generally include words like anticipate, expect, believe, may, will, should, estimate or other similar words.

Forward-looking statements in this MD&A include information about the following, among other things:

planned changes in our business

our financial and operational performance, including the performance of our subsidiaries

expectations or projections about strategies and goals for growth and expansion

expected cash flows and future financing options available to us

expected dividend growth

expected costs for planned projects, including projects under construction, permitting and in development

expected schedules for planned projects (including anticipated construction and completion dates)

expected regulatory processes and outcomes

expected impact of regulatory outcomes

expected outcomes with respect to legal proceedings, including arbitration and insurance claims

expected capital expenditures and contractual obligations

expected operating and financial results

expected impact of future accounting changes, commitments and contingent liabilities

expected industry, market and economic conditions.

Forward-looking statements do not guarantee future performance. Actual events and results could be significantly different because of assumptions, risks or uncertainties related to our business or events that happen after the date of this MD&A.

Our forward-looking information is based on the following key assumptions, and subject to the following risks and uncertainties:

Assumptions

inflation rates, commodity prices and capacity prices

nature and scope of hedging

regulatory decisions and outcomes

foreign exchange rates

interest rates

tax rates

planned and unplanned outages and the use of our pipeline and energy assets

integrity and reliability of our assets

access to capital markets

anticipated construction costs, schedules and completion dates.

Risks and uncertainties

our ability to realize the anticipated benefits from the acquisition of Columbia

our ability to successfully implement our strategic initiatives

whether our strategic initiatives will yield the expected benefits

the operating performance of our pipeline and energy assets

amount of capacity sold and rates achieved in our pipeline businesses

the availability and price of energy commodities

the amount of capacity payments and revenues we receive from our energy business

regulatory decisions and outcomes

outcomes of legal proceedings, including arbitration and insurance claims

performance and credit risk of our counterparties

changes in market commodity prices

changes in the political environment

changes in environmental and other laws and regulations

competitive factors in the pipeline and energy sectors

construction and completion of capital projects

costs for labour, equipment and materials

access to capital markets

interest, tax and foreign exchange rates

weather

cyber security

technological developments

economic conditions in North America as well as globally.

You can read more about these factors and others in reports we have filed with Canadian securities regulators and the SEC, including the MD&A in our 2016 Annual Report.

As actual results could vary significantly from the forward-looking information, you should not put undue reliance on forward-looking information and should not use future-oriented information or financial outlooks for anything other than their intended purpose. We do not update our forward-looking statements due to new information or future events, unless we are required to by law.

FOR MORE INFORMATION

You can find more information about TransCanada in our annual information form and other disclosure documents, which are available on SEDAR (www.sedar.com).

NON-GAAP MEASURES

This MD&A references the following non-GAAP measures:

comparable earnings

comparable earnings per common share

comparable EBITDA

comparable EBIT

funds generated from operations

comparable funds generated from operations

comparable distributable cash flow

comparable distributable cash flow per common share.

These measures do not have any standardized meaning as prescribed by U.S. GAAP and therefore may not be similar to measures presented by other entities.

Comparable measures

We calculate comparable measures by adjusting certain GAAP and non-GAAP measures for specific items we believe are significant but not reflective of our underlying operations in the period. These comparable measures are calculated on a consistent basis from period to period and are adjusted for specific items in each period, as applicable.

Our decision not to adjust for a specific item is subjective and made after careful consideration. Specific items may include:

certain fair value adjustments relating to risk management activities

income tax refunds and adjustments and changes to enacted tax rates

gains or losses on sales of assets

legal, contractual and bankruptcy settlements

impact of regulatory or arbitration decisions relating to prior year earnings

restructuring costs

impairment of goodwill, investments and other assets including certain ongoing maintenance and liquidation costs

acquisition costs.

We exclude the unrealized gains and losses from changes in the fair value of derivatives used to reduce our exposure to certain financial and commodity price risks. These derivatives generally provide effective economic hedges, but do not meet the criteria for hedge accounting. As a result, the changes in fair value are recorded in net income. As these amounts do not accurately reflect the gains and losses that will be realized at settlement, we do not consider them reflective of our underlying operations.

The following table identifies our non-GAAP measures against their equivalent GAAP measures.

Comparable measure
Original measure
 
 
comparable earnings
net income attributable to common shares
comparable earnings per common share
net income per common share
comparable EBITDA
segmented earnings
comparable EBIT
segmented earnings
comparable funds generated from operations net cash provided by operations
comparable distributable cash flow
net cash provided by operations

Comparable earnings and comparable earnings per share

Comparable earnings represent earnings or loss attributable to common shareholders on a consolidated basis adjusted for specific items. Comparable earnings is comprised of segmented earnings, interest expense, AFUDC, interest income and other, income taxes and non-controlling interests adjusted for the specific items. See the Consolidated results section for a reconciliation to net income attributable to common shares.

Comparable EBIT and comparable EBITDA

Comparable EBIT represents segmented earnings adjusted for the specific items described above. We use comparable EBIT as a measure of our earnings from ongoing operations as it is a useful measure of our performance and an effective tool for evaluating trends in each segment. Comparable EBITDA is calculated the same way as comparable EBIT but excludes the non-cash charges for depreciation and amortization. See the Reconciliation of non-GAAP measures section for a reconciliation to segmented earnings.

Funds generated from operations and comparable funds generated from operations

Funds generated from operations reflects net cash provided by operations before changes in operating working capital. We believe it is a useful measure of our consolidated operating cash flow because it does not include fluctuations from working capital balances, which do not necessarily reflect underlying operations in the same period, and is used to provide a consistent measure of the cash generating performance of our assets. Comparable funds generated from operations is adjusted for the cash impact of specific items noted above. See the Financial condition section for a reconciliation to net cash provided by operations.

Comparable distributable cash flow and comparable distributable cash flow per share

We believe comparable distributable cash flow is a useful supplemental measure of performance that defines cash available to common shareholders before capital allocation. Comparable distributable cash flow is defined as comparable funds generated from operations less preferred share dividends, distributions to non-controlling interests and maintenance capital expenditures. Maintenance capital expenditures are expenditures incurred to maintain our operating capacity, asset integrity and reliability, and include amounts attributable to our proportionate share of maintenance capital expenditures on our equity investments. Although we deduct maintenance capital expenditures in determining comparable distributable cash flow, in certain of our rate-regulated businesses, maintenance capital expenditures are included in their respective rate bases, on which we earn a regulated return and recover depreciation through future tolls. See the Financial condition section for a reconciliation to net cash provided by operations.

Consolidated results - second quarter 2017

Certain costs previously reported in our Corporate segment are now being reported within the business segments to better align with how we measure our financial performance. 2016 results have been adjusted to reflect this change.

 
  three months ended
  six months ended
June 30
June 30
(unaudited - millions of $, except per share amounts)   2017
  2016
  2017
  2016
 
   
   
   
   
Canadian Natural Gas Pipelines
  305
    342
    587
    614
 
U.S. Natural Gas Pipelines
  401
    188
    962
    455
 
Mexico Natural Gas Pipelines
  120
    41
    238
    86
 
Liquids Pipelines
  251
    198
    478
    410
 
Energy
  645
    371
    843
    245
 
Corporate
  (40
)
  (24
)
  (73
)
  (51
)
Total segmented earnings
  1,682     1,116     3,035
    1,759  
Interest expense
  (524
)
  (514
)
  (1,024 )
  (934
)
Allowance for funds used during construction
  121
    111
    222
    212
 
Interest income and other
  89
    6
    109
    106
 
Income before income taxes
  1,368     719
    2,342
    1,143  
Income tax expense
  (393
)
  (274
)
  (593
)
  (344
)
Net income
  975
    445
    1,749
    799
 
Net income attributable to non-controlling interests
  (55
)
  (52
)
  (145
)
  (132
)
Net income attributable to controlling interests
  920
    393
    1,604
    667
 
Preferred share dividends
  (39
)
  (28
)
  (80
)
  (50
)
Net income attributable to common shares
  881
    365
    1,524
    617
 
Net income per common share - basic
  $1.01
  $0.52
  $1.76
  $0.88  
 
- diluted
  $1.01
  $0.52
  $1.75
  $0.88  

Net income attributable to common shares increased by $516 million and $907 million or $0.49 and $0.88 per share for the three and six months ended June 30, 2017 compared to the same periods in 2016. Net income per common share in 2017 included the dilutive effect of issuing 161 million common shares in 2016.

The 2017 results included:

a $255 million after-tax net gain related to the monetization of our U.S. Northeast power business, which included a $441 million after-tax gain on the sale of TC Hydro in second quarter, an incremental loss of $176 million after tax recorded in second quarter on the sale of the thermal and wind package and $10 million year-to-date of after-tax disposition costs

an after-tax charge of $15 million in second quarter and $39 million year-to-date for integration-related costs associated with the acquisition of Columbia

an after-tax charge of $4 million in second quarter and $11 million year-to-date related to the maintenance of Keystone XL assets which is being expensed pending further advancement of the project

a $7 million income tax recovery in first quarter related to the realized loss on a third party sale of Keystone XL project assets. A provision for the expected pre-tax loss on these assets was included in our 2015 impairment charge, but the related income tax recoveries could not be recorded until realized.

The 2016 results included:

a $176 million after-tax impairment charge in first quarter on the carrying value of our Alberta PPAs as a result of our decision to terminate the PPAs

a charge of $113 million in second quarter and $139 million year-to-date related to costs associated with the acquisition of Columbia. In second quarter, $109 million related to the dividend equivalent payments on the subscription receipts issued as part of the permanent financing of the transaction, $10 million ($36 million year-to-date) related to acquisition costs and $6 million related to interest earned on the subscription receipt funds held in escrow

an after-tax charge of $9 million in second quarter and $15 million year-to-date related to Keystone XL costs for the maintenance and liquidation of project assets which are being expensed pending further advancement of the project

an after-tax charge of $10 million in second quarter for restructuring charges mainly related to expected future losses under lease commitments. These charges formed part of a restructuring initiative, which commenced in 2015, to maximize the effectiveness and efficiency of our existing operations and reduce overall costs

an additional $3 million after-tax loss on the sale of TC Offshore which closed on March 31, 2016.

Net income in all periods included unrealized gains and losses from changes in risk management activities which we exclude, along with the above-noted items, to arrive at comparable earnings.

Comparable earnings increased by $293 million and $497 million for the three and six months ended June 30, 2017 compared to the same periods in 2016 as discussed below in the reconciliation of net income to comparable earnings.

RECONCILIATION OF NET INCOME TO COMPARABLE EARNINGS

 
  three months ended
  six months ended
June 30
June 30
(unaudited - millions of $, except per share amounts)
  2017
  2016
  2017
  2016
 
   
   
   
   
Net income attributable to common shares
  881
    365
    1,524     617
 
Specific items (net of tax):
   
   
   
   
 
Net gain on sales of U.S. Northeast power assets
  (265
)
  -
    (255
)
  -
 
 
Integration and acquisition related costs - Columbia   15
    113
    39
    139
 
 
Keystone XL asset costs
  4
    9
    11
    15
 
 
Keystone XL income tax recoveries
  -
    -
    (7
)
  -
 
 
Alberta PPA terminations
  -
    -
    -
    176
 
 
Restructuring costs
  -
    10
    -
    10
 
 
TC Offshore loss on sale
  -
    -
    -
    3
 
 
Risk management activities1
  24
    (131
)
  45
    (100
)
Comparable earnings
  659
    366
    1,357     860
 
 
   
   
   
   
Net income per common share
  $1.01
  $0.52
  $1.76
  $0.88
Specific items (net of tax):
   
   
   
   
 
Net gain on sales of U.S. Northeast power assets
  (0.30 )
  -
    (0.29 )
  -
 
 
Integration and acquisition related costs - Columbia   0.02
    0.16
    0.04
    0.20
 
 
Keystone XL asset costs
  -
    0.01
    0.01
    0.02
 
 
Keystone XL income tax recoveries
  -
    -
    (0.01 )
  -
 
 
Alberta PPA terminations
  -
    -
    -
    0.25
 
 
Restructuring costs
  -
    0.01
    -
    0.01
 
 
Risk management activities
  0.03
    (0.18 )
  0.05
    (0.14 )
Comparable earnings per common share
  $0.76
  $0.52
  $1.56
  $1.22
(1)
  Risk management activities
  three months ended
  six months ended
June 30
June 30
    (unaudited - millions of $)
  2017
  2016
  2017
  2016
     
   
   
   
   
    Canadian Power
  3
    20
    4
    7
 
    U.S. Power
  (94 )
  204     (156 )
  89
 
    Liquids marketing
  4
    4
    4
    2
 
    Natural Gas Storage
  (4
)
  -
    1
    5
 
    Foreign exchange
  41
    (4
)
  56
    49
 
    Income tax attributable to risk management activities
  26
    (93 )
  46
    (52 )
    Total unrealized (losses)/gains from risk management activities   (24 )
  131     (45
)
  100  

Comparable earnings increased by $293 million or $0.24 per share for the three months ended June 30, 2017 compared to the same period in 2016. This was primarily the net effect of:

higher contribution from U.S. Natural Gas Pipelines due to incremental earnings from Columbia following the July 1, 2016 acquisition and higher ANR transportation revenues resulting from a FERC-approved rate settlement effective August 1, 2016

higher earnings from Bruce Power mainly due to higher volumes resulting from fewer planned outage days

higher interest expense mainly as a result of debt assumed in the acquisition of Columbia on July 1, 2016 and long-term debt issuances

higher contribution from Mexico Natural Gas Pipelines due to earnings from Topolobampo beginning in July 2016 and Mazatlán beginning in December 2016

higher earnings from Liquids Pipelines mainly due to higher volumes.

Comparable earnings increased by $497 million or $0.34 per share for the six months ended June 30, 2017 compared to the same period in 2016. This was primarily the net effect of:

higher contribution from U.S. Natural Gas Pipelines due to incremental earnings from Columbia following the July 1, 2016 acquisition and higher ANR transportation revenues resulting from a FERC-approved rate settlement effective August 1, 2016

higher interest expense as a result of debt assumed in the acquisition of Columbia on July 1, 2016 and long-term debt issuances

higher contribution from Mexico Natural Gas Pipelines due to earnings from Topolobampo beginning in July 2016 and Mazatlán beginning in December 2016

higher earnings from Bruce Power mainly due to higher volumes resulting from fewer planned outage days partially offset by higher interest expense

higher earnings from Liquids Pipelines mainly due to higher volumes

higher earnings from Western Power following the termination of the Alberta PPAs in March 2016.

Comparable earnings per share in 2017 included the dilutive effect of issuing 161 million common shares in 2016.

Capital Program

We are developing quality projects under our capital program. These long-life infrastructure assets are supported by long-term commercial arrangements with creditworthy counterparties or regulated business models and are expected to generate significant growth in earnings and cash flow.

Our capital program consists of approximately $24 billion of near-term projects and approximately $43 billion of medium to longer-term projects. Amounts presented exclude maintenance capital expenditures, capitalized interest and AFUDC. All projects are subject to cost adjustments due to market conditions, route refinement, permitting conditions, scheduling and timing of regulatory permits.

Near-term projects

at June 30, 2017
  Expected in-service date   Estimated project cost
  Carrying value
(unaudited - billions of $)
 
   
   
   
Canadian Natural Gas Pipelines
   
   
   
Canadian Mainline
  2017-2019
  0.5
 
  0.2
 
NGTL System1
  2017
  2.3
 
  1.2
 
 
  2018
  0.3
 
  -
 
 
  2019
  2.2
 
  0.3
 
 
  2020
  1.9
 
  0.1
 
 
  2021+
  0.4
 
  -
 
U.S. Natural Gas Pipelines
   
   
   
 
Columbia Gas
   
   
   
 
Leach XPress
  2017
  US 1.5
 
  US 0.9
 
 
Modernization I
  2017
  US 0.2
 
  US 0.1
 
 
WB XPress
  2018
  US 0.8
 
  US 0.3
 
 
Mountaineer XPress
  2018
  US 2.0
 
  US 0.2
 
 
Modernization II
  2018-2020
  US 1.1
 
  -
 
Columbia Gulf
   
   
   
 
Rayne XPress
  2017
  US 0.4
 
  US 0.3
 
 
Cameron Access
  2018
  US 0.3
 
  US 0.2
 
 
Gulf XPress
  2018
  US 0.6
 
  US 0.1
 
Midstream - Gibraltar
  2017
  US 0.3
 
  US 0.2
 
Mexico Natural Gas Pipelines
   
   
   
Tula
  2018
  US 0.6
 
  US 0.4
 
Villa de Reyes
  2018
  US 0.6
 
  US 0.3
 
Sur de Texas2
  2018
  US 1.3
 
  US 0.4
 
Liquids Pipelines
   
   
   
Grand Rapids2
  2017
  0.9
 
  0.8
 
Northern Courier
  2017
  1.0
 
  1.0
 
White Spruce
  2018
  0.2
 
  -
 
Energy
   
   
   
Napanee
  2018
  1.1
 
  0.8
 
Bruce Power - life extension3
  up to 2020+
  1.0
 
  0.2
 
 
   
  21.5
 
  8.0
 
Foreign exchange impact on near-term projects4
   
  2.9
 
  1.0
 
Total near-term projects (billions of Cdn$)
   
  24.4
 
  9.0
 
(1) As of June 30, 2017, near-term NGTL System capital projects are being reported by expected in-service dates.
(2) Our proportionate share.
(3) Amounts reflect our proportionate share of the remaining capital costs that Bruce Power expects to incur on its life extension investment programs in advance of major refurbishment outages which are expected to begin in 2020.
(4) Reflects U.S./Canada foreign exchange rate of $1.30 at June 30, 2017.

Medium to longer-term projects

The medium to longer-term projects have greater uncertainty with respect to timing and estimated project costs. The expected in-service dates of these projects are post-2020, and costs provided in the schedule below reflect the most recent costs for each project as filed with the various regulatory authorities or otherwise determined. These projects have all been commercially secured or, in the case of Keystone XL, commercial support is expected to be achieved. All these projects are subject to approvals that include sponsor FID and/or complex regulatory processes.

at June 30, 2017
  Segment
  Estimated project cost
  Carrying value
(unaudited - billions of $)
 
   
   
   
Heartland and TC Terminals
  Liquids Pipelines
  0.9
 
  0.1
 
Upland
  Liquids Pipelines
  US 0.6
 
  -
 
Grand Rapids Phase 21
  Liquids Pipelines
  0.7
 
  -
 
Bruce Power - life extension1
  Energy
  5.3
 
  -
 
Keystone projects
   
   
   
 
Keystone XL2
  Liquids Pipelines
  US 8.0
 
  US 0.3
 
 
Keystone Hardisty Terminal2
  Liquids Pipelines
  0.3
 
  0.1
 
Energy East projects
   
   
   
 
Energy East3
  Liquids Pipelines
  15.7
 
  0.8
 
 
Eastern Mainline
  Canadian Natural Gas Pipelines   2.0
 
  0.1
 
BC west coast LNG-related projects
   
   
   
 
Coastal GasLink
  Canadian Natural Gas Pipelines   4.8
 
  0.4
 
 
NGTL System - Merrick
  Canadian Natural Gas Pipelines   1.9
 
  -
 
 
   
  40.2
 
  1.8
 
Foreign exchange impact on medium to longer-term projects4
   
  2.6
 
  0.1
 
Total medium to longer-term projects (billions of Cdn$)
   
  42.8
 
  1.9
 
(1) Our proportionate share.
(2) Carrying value reflects amount remaining after impairment charge recorded in fourth quarter 2015.
(3) Excludes transfer of Canadian Mainline natural gas assets.
(4) Reflects U.S./Canada foreign exchange rate of $1.30 at June 30, 2017.

Outlook

Our overall comparable earnings outlook for 2017 is expected to be higher than what was previously included in the 2016 Annual Report as a result of stronger performance across our business segments, including from the U.S. Northeast power business in first half 2017, as detailed in the MD&A.

Consolidated capital spending

Our expected total capital expenditures, projects in development and contributions to equity investments for 2017 as outlined in the 2016 Annual Report, remain unchanged.

Canadian Natural Gas Pipelines

The following is a reconciliation of comparable EBITDA and comparable EBIT (our non-GAAP measures) to segmented earnings (the equivalent GAAP measure). Certain costs previously reported in our Corporate segment are now being reported within the business segments to better align with how we measure our financial performance. 2016 results have been adjusted to reflect this change.

 
  three months ended
  six months ended
June 30
June 30
(unaudited - millions of $)
  2017
  2016
  2017
  2016
 
   
   
   
   
NGTL System
  236
    241
    466
    467
 
Canadian Mainline
  264
    291
    511
    522
 
Other Canadian pipelines1
  28
    30
    56
    62
 
Business development
  (1
)
  (1
)
  (2
)
  (2
)
Comparable EBITDA
  527
    561
    1,031     1,049  
Depreciation and amortization
  (222 )
  (219 )
  (444
)
  (435
)
Comparable EBIT and segmented earnings   305
    342
    587
    614
 
(1) Includes results from Foothills, Ventures LP and our share of equity income from our investment in TQM.

Canadian Natural Gas Pipelines segmented earnings decreased by $37 million and $27 million for the three and six months ended June 30, 2017 compared to the same periods in 2016 and are equivalent to comparable EBIT.

Net income and comparable EBITDA for our rate-regulated Canadian Natural Gas Pipelines are generally affected by our approved ROE, our investment base, our level of deemed common equity and incentive earnings or losses. Changes in depreciation, financial charges and income taxes also impact comparable EBITDA but do not have a significant impact on net income as they are almost entirely recovered in revenues on a flow-through basis.

NET INCOME - NGTL SYSTEM AND CANADIAN MAINLINE

 
  three months ended
  six months ended
June 30
June 30
(unaudited - millions of $)   2017
  2016
  2017
  2016
 
   
   
   
   
NGTL System
  87
    79
    169     152  
Canadian Mainline
  48
    52
    100     102  

Net income for the NGTL System increased by $8 million and $17 million for the three and six months ended June 30, 2017 compared to the same periods in 2016 mainly due to a higher average investment base and higher OM&A incentive earnings in 2017. The NGTL System is operating under the two-year 2016-2017 Revenue Requirement Settlement which includes an ROE of 10.1 per cent on 40 per cent deemed equity and a mechanism for sharing variances above and below a fixed annual OM&A amount with flow-through treatment of all other costs.

Net income for the Canadian Mainline decreased by $4 million and $2 million for the three and six months ended June 30, 2017 compared to the same periods in 2016 primarily due to a lower average investment base and higher carrying charges on regulatory deferrals, partially offset by higher incentive earnings. The Canadian Mainline is operating under the NEB 2014 Decision which includes an approved ROE of 10.1 per cent on a 40 per cent deemed equity with a possible range of achieved outcomes between 8.7 per cent and 11.5 per cent. The decision also includes an incentive mechanism that has both upside and downside risk and a $20 million annual after-tax contribution from us.

DEPRECIATION AND AMORTIZATION

Depreciation and amortization increased by $3 million and by $9 million for the three and six months ended June 30, 2017 compared to the same periods in 2016 mainly due to facilities that were placed in service for the NGTL System and Canadian Mainline.

OPERATING STATISTICS - NGTL SYSTEM AND CANADIAN MAINLINE

six months ended June 30
NGTL System1
  Canadian Mainline2
(unaudited)
2017
  2016
  2017
  2016
 
 
   
   
   
Average investment base (millions of $) 8,043     7,357     4,131     4,398  
Delivery volumes (Bcf):
 
   
   
   
 
Total
2,044     1,994     903
    849
 
 
Average per day
11.3
    11.0
    5.0
    4.7
 
(1) Field receipt volumes for the NGTL System for the six months ended June 30, 2017 were 2,070 Bcf (2016 - 2,075 Bcf). Average per day was 11.4 Bcf (2016 - 11.4 Bcf).
(2) Canadian Mainline’s throughput volumes represent physical deliveries to domestic and export markets. Physical receipts originating at the Alberta border and in Saskatchewan for the six months ended June 30, 2017 were 474 Bcf (2016 - 530 Bcf). Average per day was 2.6 Bcf (2016 - 2.9 Bcf).

U.S. Natural Gas Pipelines

The following is a reconciliation of comparable EBITDA and comparable EBIT (our non-GAAP measures) to segmented earnings (the equivalent GAAP measure). Certain costs previously reported in our Corporate segment are now being reported within the business segments to better align with how we measure our financial performance. 2016 results have been adjusted to reflect this change.

 
  three months ended
  six months ended
June 30
June 30
(unaudited - millions of US$, unless otherwise noted)
  2017
  2016
  2017
  2016
 
   
   
   
   
Columbia Gas1
  136
    -
    321
    -
 
ANR
  93
    70
    215
    157
 
TC PipeLines, LP2,3
  26
    27
    58
    58
 
Great Lakes4
  13
    12
    40
    37
 
Midstream1
  20
    -
    43
    -
 
Columbia Gulf1
  21
    -
    39
    -
 
Other U.S. pipelines1,2,3,5
  26
    10
    55
    24
 
Non-controlling interests6
  75
    75
    183
    170
 
Business development
  -
    -
    (1
)
  (1
)
Comparable EBITDA
  410
    194
  953
    445
Depreciation and amortization
  (112 )
  (49 )
  (224 )
  (100 )
Comparable EBIT
  298
    145     729
    345
 
Foreign exchange impact
  103
    43
    243
    114
 
Comparable EBIT (Cdn$)
  401
    188     972
    459
 
Specific items:
   
   
   
   
 
Integration and acquisition related costs - Columbia   -
    -
    (10
)
  -
 
 
TC Offshore loss on sale
  -
    -
    -
    (4
)
Segmented earnings (Cdn$)
  401
    188     962
    455
 
(1) We completed the acquisition of Columbia on July 1, 2016 and the publicly held units of Columbia Pipeline Partners LP (CPPL) on February 17, 2017.
(2) Results from Northern Border and Iroquois reflect our share of equity income from these investments. We acquired additional interests in Iroquois of 0.65 per cent on May 1, 2016 and 4.87 per cent on March 31, 2016. TC PipeLines, LP acquired TransCanada’s 49.34 per cent interest in Iroquois and its remaining 11.81 per cent interest in PNGTS on June 1, 2017.
(3) TC PipeLines, LP periodically conducts at-the-market equity issuances which decrease our ownership in TC PipeLines, LP. The following shows our ownership interest in TC PipeLines, LP and our effective ownership interest of Great Lakes and PNGTS through our ownership interest in TC PipeLines, LP for the periods presented.
     
  Effective ownership percentage as of
     
  June 30, 2017  
June 30, 2016
     
   
 
 
    TC PipeLines, LP
  26.3
 
27.4
    Effective ownership through TC PipeLines, LP:    
 
 
     
Great Lakes
  12.2
 
12.7
     
PNGTS
  16.2
 
13.7
(4) Represents our 53.6 per cent direct interest in Great Lakes. The remaining 46.4 per cent is held by TC PipeLines, LP.
(5) Includes our effective ownership in Millennium and Hardy Storage and our direct ownership in Iroquois and PNGTS up to June 1, 2017.
(6) Comparable EBITDA for the portions of TC PipeLines, LP, PNGTS and CPPL that we do not own. Effective February 17, 2017, we acquired the remaining publicly held units of CPPL.

U.S. Natural Gas Pipelines segmented earnings increased by $213 million and $507 million for the three and six months ended June 30, 2017 compared to the same periods in 2016 primarily due to the acquisition of Columbia. Segmented earnings for the six months ended June 30, 2017 included a first quarter $10 million pre-tax charge primarily due to integration-related costs associated with the Columbia acquisition. Segmented earnings for the six months ended June 30, 2016 included a $4 million pre-tax loss ($3 million after tax) as a result of a December 2015 agreement to sell TC Offshore which closed in early 2016. These amounts have been excluded from our calculation of comparable EBIT. As well, a stronger U.S. dollar had a positive impact on the Canadian dollar equivalent segmented earnings from our U.S. operations.

Earnings from our U.S. Natural Gas Pipelines operations, which include Columbia effective July 1, 2016, are generally affected by contracted volume levels, volumes delivered and the rates charged as well as by the cost of providing services. Columbia and ANR results are also affected by the contracting and pricing of their storage capacity and commodity sales. Transmission and storage revenues are generally higher in winter months due to increased seasonal demand for our services.

Comparable EBITDA for U.S. Natural Gas Pipelines increased by US$216 million and US$508 million for the three and six months ended June 30, 2017 compared to the same periods in 2016 and was the net effect of:

US$193 million and US$443 million of EBITDA for the three and six months ended June 30, 2017 as a result of the acquisition of Columbia on July 1, 2016

higher ANR transportation and storage revenue resulting from a FERC-approved rate settlement, effective August 1, 2016.

DEPRECIATION AND AMORTIZATION

Depreciation and amortization increased by US$63 million and US$124 million for the three and six months ended June 30, 2017 compared to the same periods in 2016 mainly due to the acquisition of Columbia and higher depreciation rates on ANR resulting from a FERC-approved rate settlement, effective August 1, 2016.

US$5 million of first quarter 2017 depreciation related to Columbia information system assets retired as part of the Columbia integration process has been excluded from comparable EBIT and included as part of integration and acquisition related costs to arrive at segmented earnings.

Mexico Natural Gas Pipelines

The following is a reconciliation of comparable EBITDA and comparable EBIT (our non-GAAP measures) to segmented earnings (the equivalent GAAP measure). Certain costs previously reported in our Corporate segment are now being reported within the business segments to better align with how we measure our financial performance. 2016 results have been adjusted to reflect this change.

 
  three months ended
  six months ended
June 30
June 30
(unaudited - millions of US$, unless otherwise noted)   2017
  2016
  2017
  2016
 
   
   
   
   
Topolobampo
  40
    -
    80
    (1
)
Tamazunchale
  27
    28
    56
    55
 
Guadalajara
  17
    15
    34
    32
 
Mazatlán
  17
    -
    33
    -
 
Sur de Texas1
  7
    -
    11
    -
 
Other
  -
    1
    -
    -
 
Business development
  -
    (2
)
  -
    (5
)
Comparable EBITDA
  108     42
    214     81
 
Depreciation and amortization
  (19 )
  (7
)
  (36 )
  (13 )
Comparable EBIT
  89
    35
    178     68
 
Foreign exchange impact
  31
    6
    60
    18
 
Comparable EBIT and segmented earnings (Cdn$)
  120     41
    238     86
 
(1) Represents our 60 per cent equity interest in a joint venture with IEnova to build, own and operate the Sur de Texas pipeline.

Mexico Natural Gas Pipelines segmented earnings increased by $79 million and $152 million for the three and six months ended June 30, 2017 compared to the same periods in 2016 and are equivalent to comparable EBIT. A stronger U.S. dollar had a positive impact on the Canadian dollar equivalent segmented earnings from our Mexico operations.

Earnings from our Mexico operations are underpinned by long-term, stable, primarily U.S. dollar-denominated revenue contracts, and are affected by the cost of providing service.

Comparable EBITDA for Mexico Natural Gas Pipelines increased by US$66 million and US$133 million for the three and six months ended June 30, 2017 compared to the same periods in 2016 and was the net effect of:

incremental earnings from Topolobampo. The Topolobampo project has experienced a delay in construction which, under the terms of our Transportation Service Agreement (TSA) with the CFE, constitutes a force majeure event with provisions allowing for the collection and recognition of revenue as per the original TSA service commencement date of July 2016

incremental earnings from Mazatlán. Construction is complete and the collection and recognition of revenue began per the terms of the TSA in December 2016

equity earnings from our investment in the Sur de Texas pipeline which records AFUDC during construction.

DEPRECIATION AND AMORTIZATION

Depreciation and amortization increased by US$12 million and US$23 million for the three and six months ended June 30, 2017 compared to the same periods in 2016 primarily due to the commencement of depreciation on Topolobampo and Mazatlán.

Liquids Pipelines

The following is a reconciliation of comparable EBITDA and comparable EBIT (our non-GAAP measures) to segmented earnings (the equivalent GAAP measure). Certain costs previously reported in our Corporate segment are now being reported within the business segments to better align with how we measure our financial performance. 2016 results have been adjusted to reflect this change.

 
  three months ended
  six months ended
June 30
June 30
(unaudited - millions of $)
  2017
  2016
  2017
  2016
 
   
   
   
   
Keystone Pipeline System
  329     274     635
    576
 
Business development and other
  3
    2
    9
    (4
)
Comparable EBITDA
  332     276     644
    572
 
Depreciation and amortization
  (80 )
  (69 )
  (157 )
  (141 )
Comparable EBIT
  252     207     487
    431
 
Specific items:
   
   
   
   
 
Keystone XL asset costs
  (5
)
  (13 )
  (13
)
  (23
)
 
Risk management activities   4
    4
    4
    2
 
Segmented earnings
  251     198     478
    410
 
 
   
   
   
   
Comparable EBIT denominated as follows:
   
   
   
   
Canadian dollars
  57
    56
    112
    109
 
U.S. dollars
  146     116     281
    243
 
Foreign exchange impact
  49
    35
    94
    79
 
 
  252     207     487
    431
 

Liquids Pipelines segmented earnings increased by $53 million and $68 million for the three and six months ended June 30, 2017 compared to the same periods in 2016 and included pre-tax charges related to Keystone XL costs for the maintenance of project assets which are being expensed pending further advancement of the project as well as unrealized gains from changes in the fair value of derivatives related to our liquids marketing business.

Keystone Pipeline System earnings are generated primarily by providing pipeline capacity to shippers for fixed monthly payments that are not linked to actual throughput volumes. Uncontracted capacity is offered to the market on a spot basis and provides opportunities to generate incremental earnings.

Comparable EBITDA for Liquids Pipelines increased by $56 million and $72 million for the three and six months ended June 30, 2017 compared to the same periods in 2016 and was the net effect of:

higher volumes on Keystone pipeline

higher contribution from liquids marketing activities

increased business development activities, including advancement of Keystone XL

a stronger U.S. dollar which had a positive impact on the Canadian dollar equivalent comparable earnings from our U.S. operations.

DEPRECIATION AND AMORTIZATION

Depreciation and amortization increased by $11 million and $16 million for the three and six months ended June 30, 2017 compared to the same periods in 2016 as a result of new facilities being placed in service and the effect of a stronger U.S. dollar.

Energy

The following is a reconciliation of comparable EBITDA and comparable EBIT (our non-GAAP measures) to segmented earnings (the equivalent GAAP measure). Certain costs previously reported in our Corporate segment are now being reported within the business segments to better align with how we measure our financial performance. 2016 results have been adjusted to reflect this change.

 
  three months ended
  six months ended
June 30
June 30
(unaudited - millions of $)
  2017
  2016
  2017
  2016
 
   
   
   
   
Canadian Power
   
   
   
   
Western Power1
  23
    18
    53
    22
 
Eastern Power
  83
    84
    177
    186
 
Bruce Power
  132     20
    223
    134
 
Canadian Power - comparable EBITDA1,2
  238     122     453
    342
 
Depreciation and amortization
  (36 )
  (36 )
  (73
)
  (83
)
Canadian Power-comparable EBIT1,2
  202     86
    380
    259
 
U.S. Power (US$)
   
   
   
   
U.S. Power - comparable EBITDA
  32
    82
    86
    157
 
Depreciation and amortization3
  -
    (33 )
  -
    (64
)
U.S. Power - comparable EBIT
  32
    49
    86
    93
 
Foreign exchange impact
  9
    11
    27
    28
 
U.S. Power-comparable EBIT (Cdn$)
  41
    60
    113
    121
 
 
   
   
   
   
Natural Gas Storage and other - comparable EBITDA
  11
    9
    32
    18
 
Depreciation and amortization
  (3
)
  (3
)
  (6
)
  (6
)
Natural Gas Storage and other - comparable EBIT
  8
    6
    26
    12
 
 
   
   
   
   
Business Development comparable EBITDA and EBIT
  (3
)
  (5
)
  (6
)
  (8
)
Energy-comparable EBIT1,2
  248     147     513
    384
 
Specific items:
   
   
   
   
 
Net gain on sales of U.S. Northeast power assets   492     -
    481
    -
 
 
Alberta PPA terminations
  -
    -
    -
    (240 )
 
Risk management activities
  (95 )
  224     (151 )
  101
 
Segmented earnings1,2
  645     371     843
    245
 
(1) Included losses from the Alberta PPAs up to March 7, 2016 when the PPAs were terminated.
(2) Includes our share of equity income from our investments in Portlands Energy and Bruce Power.
(3) U.S. Northeast power assets no longer depreciated effective November 2016 when classified as held for sale.

Energy segmented earnings increased by $274 million and $598 million for the three and six months ended June 30, 2017 compared to the same periods in 2016 and included the following specific items:

in 2017, a net gain of $481 million before tax related to the monetization of our U.S. Northeast power business which included a $717 million gain on the sale of TC Hydro, a loss of $219 million on the sale of the thermal and wind package and $17 million of pre-tax disposition costs. See Recent developments section for more details

in 2016, a $240 million pre-tax charge, which included a $29 million impairment of our equity investment in ASTC Power Partnership, on the carrying value of our Alberta PPAs as a result of our decision to terminate the PPAs

unrealized gains and losses from changes in the fair value of derivatives used to reduce our exposure to certain commodity price risks as follows:

Risk management activities
  three months ended
  six months ended
June 30
June 30
(unaudited - millions of $, pre-tax)
  2017
  2016
  2017
  2016
 
   
   
   
   
Canadian Power
  3
    20
    4
    7
 
U.S. Power
  (94 )
  204     (156 )
  89
 
Natural Gas Storage
  (4
)
  -
    1
    5
 
Total unrealized (losses)/gains from risk management activities   (95 )
  224     (151 )
  101  

The variances in these unrealized gains and losses reflect the impact of changes in forward natural gas and power prices and the volume of our positions for these derivatives over a certain period of time, however, they do not accurately reflect the gains and losses that will be realized on settlement, or the offsetting impacts of other derivative and non-derivative transactions that make up our business as a whole. As a result, we do not consider them reflective of our underlying operations.

The remainder of the Energy segmented earnings are equivalent to comparable EBIT and are discussed in the following sections.

CANADIAN POWER

Western and Eastern Power

The following are the components of comparable EBITDA and comparable EBIT.

 
  three months ended
  six months ended
June 30
June 30
(unaudited - millions of $)
  2017
  2016
  2017
  2016
 
   
   
   
   
Revenues1
   
   
   
   
Western Power
  43
    36
    89
    124  
Eastern Power
  93
    108     198     203  
Other2
  5
    -
    20
    29
 
 
  141     144     307     356  
Income from equity investments
  7
    7
    15
    7
 
Commodity purchases resold
  (1
)
  -
    (2
)
  (59 )
Plant operating costs and other   (41 )
  (49 )
  (90 )
  (96 )
Comparable EBITDA3
  106     102     230     208  
Depreciation and amortization
  (36 )
  (36 )
  (73 )
  (83 )
Comparable EBIT3
  70
    66
    157     125  
 
   
   
   
   
Breakdown of comparable EBITDA
   
   
   
   
Western Power3
  23
    18
    53
    22
 
Eastern Power
  83
    84
    177     186  
Comparable EBITDA3
  106     102     230     208  
 
   
   
   
   
Plant availability4
   
   
   
   
Western Power5
  95
%
  83
%
  97
%
  91
%
Eastern Power
  93
%
  97
%
  96
%
  92
%
(1) Includes the realized gains and losses from financial derivatives used to manage Canadian Power’s assets which are presented on a net basis in Western and Eastern Power revenues. The unrealized gains and losses from financial derivatives have been excluded to arrive at comparable EBITDA.
(2) Includes revenues from the sale of unused natural gas transportation and sale of excess natural gas purchased for generation.
(3) Included Alberta PPAs up to March 7, 2016 when the PPAs were terminated.
(4) The percentage of time the plant was available to generate power, regardless of whether it was running.
(5) Plant availability was higher in the three and six months ended June 30, 2017 than the same periods in 2016 due to an unplanned outage at the Mackay River facility as a result of the Northern Alberta wildfires in 2016.

Western Power

Comparable EBITDA for Western Power increased by $5 million and $31 million for the three and six months ended June 30, 2017 compared to the same periods in 2016. Results from the Alberta PPAs are included up to March 7, 2016 when we terminated the PPAs for the Sundance A, Sundance B and Sheerness facilities.

Depreciation and amortization decreased by $10 million for the six months ended June 30, 2017 compared to the same period in 2016 following the termination of the Alberta PPAs.

Eastern Power

Comparable EBITDA for Eastern Power decreased by $9 million for the six months ended June 30, 2017 compared to the same period in 2016 mainly due to lower earnings on the sale of unused natural gas transportation.

Bruce Power

Bruce Power results reflect our proportionate share. The following is our proportionate share of the components of comparable EBITDA and comparable EBIT.

 
  three months ended
  six months ended
June 30
June 30
(unaudited - millions of $, unless noted otherwise)
  2017
  2016
  2017
  2016
 
   
   
   
   
Equity income included in comparable EBITDA and EBIT comprised of:
   
   
   
   
 
Revenues
  428
    325
    829
    752
 
 
Operating expenses
  (209
)
  (225
)
  (433
)
  (462
)
 
Depreciation and other
  (87
)
  (80
)
  (173
)
  (156
)
Comparable EBITDA and EBIT1
  132
    20
    223
    134
 
 
   
   
   
   
Bruce Power - other information
   
   
   
   
Plant availability2
  92
%
  71
%
  91
%
  80
%
Planned outage days
  41
    209
    97
    285
 
Unplanned outage days
  3
    4
    20
    12
 
Sales volumes (GWh)1
  6,309     4,700     12,292     10,534  
Realized sales price per MWh3
  $68
    $69
    $67
    $67
 
(1) Represents our 48.4 per cent (2016 - 48.5 per cent) ownership interest in Bruce Power. Sales volumes include deemed generation.
(2) The percentage of time the plant was available to generate power, regardless of whether it was running.
(3) Calculation based on actual and deemed generation. Realized sales prices per MWh includes realized gains and losses from contracting activities and cost flow-through items. Excludes unrealized gains and losses on contracting activities and non-electricity revenues.

Comparable EBITDA from Bruce Power increased by $112 million and $89 million for the three and six months ended June 30, 2017 compared to the same periods in 2016 mainly due to higher volumes resulting from fewer planned outage days, partially offset by higher interest expense.

Planned outage work, which commenced on Unit 5 in February 2017, was completed in May 2017. Planned outages for Units 3 and 6 are scheduled to occur in second half of 2017. The overall average plant availability percentage in 2017 is expected to be approximately 90 per cent.

NATURAL GAS STORAGE AND OTHER

Comparable EBITDA for Natural Gas Storage and Other increased by $2 million and $14 million for the three and six months ended June 30, 2017 compared to the same periods in 2016 mainly due to increased third party storage revenues as a result of higher realized natural gas storage price spreads.

U.S. POWER

In second quarter 2017, we sold our U.S. Power generation assets and initiated the wind down of our TransCanada Power Marketing Ltd. (TCPM) operations. We expect to realize the value of the remaining TCPM marketing contracts and working capital over time. See Recent developments section for more details.

The following are the components of comparable EBITDA and comparable EBIT.

 
  three months ended
  six months ended
June 30
June 30
(unaudited - millions of US$)
  2017
  2016
  2017
  2016
 
   
   
   
   
Revenue
   
   
   
   
Power1
  480
    411
    1,010     829
 
Capacity
  41
    77
    83
    139
 
 
  521
    488
    1,093     968
 
Commodity purchases resold
  (407 )
  (289 )
  (816
)
  (594 )
Plant operating costs and other2   (82
)
  (117 )
  (191
)
  (217 )
Comparable EBITDA3
  32
    82
    86
    157
 
Depreciation and amortization4
  -
    (33
)
  -
    (64
)
Comparable EBIT
  32
    49
    86
    93
 
(1) Includes the realized gains and losses from financial derivatives used to manage U.S. Power’s business which are presented on a net basis in Power revenues. The unrealized gains and losses from financial derivatives are excluded to arrive at comparable EBITDA.
(2) Includes the cost of fuel consumed in generation.
(3) TC Hydro earnings included up to April 19, 2017 sale date; Ravenswood, Ironwood, Ocean State Power and Kibby Wind earnings included up to June 2, 2017 sale date.
(4) U.S. Northeast power assets no longer depreciated effective November 2016 when classified as held for sale.

Comparable EBITDA for U.S. Power decreased by US$50 million and US$71 million for the three and six months ended June 30, 2017 compared to the same periods in 2016 mainly due to the sale of our generation assets in the second quarter 2017, partially offset by higher sales to customers in the PJM and New England wholesale markets.

Corporate

The following is a reconciliation of comparable EBITDA and comparable EBIT (our non-GAAP measures) to segmented losses (the equivalent GAAP measure). Certain costs previously reported in our Corporate segment are now being reported within the business segments to better align with how we measure our financial performance. 2016 results have been adjusted to reflect this change.

 
  three months ended
  six months ended
June 30
June 30
(unaudited - millions of $)
  2017
  2016
  2017
  2016
 
   
   
   
   
Comparable EBITDA and EBIT
  (12 )
  -
    (16 )
  (1
)
Specific items:
   
   
   
   
 
Integration and acquisition related costs - Columbia   (20 )
  (10 )
  (49 )
  (36 )
 
Foreign exchange loss - inter-affiliate loan
  (8
)
  -
    (8
)
  -
 
 
Restructuring costs
  -
    (14 )
  -
    (14 )
Segmented losses
  (40 )
  (24 )
  (73 )
  (51 )

Corporate segmented losses increased by $16 million and $22 million for the three and six months ended June 30, 2017 compared to the same periods in 2016 and included the following specific items that have been excluded from comparable EBIT:

acquisition and integration costs associated with the acquisition of Columbia

foreign exchange loss on an inter-affiliate loan, which is offset in Interest income and other. This peso-denominated loan to the Sur de Texas project represents our proportionate share of its financing

restructuring costs related to expected future losses under lease commitments.

OTHER INCOME STATEMENT ITEMS

Interest expense

 
  three months ended
  six months ended
June 30
June 30
(unaudited - millions of $)
  2017
  2016
  2017
  2016
 
   
   
   
   
Interest on long-term debt and junior subordinated notes
   
   
   
   
Canadian dollar-denominated
  (118 )
  (110 )
  (226
)
  (221 )
U.S. dollar-denominated
  (323 )
  (250 )
  (640
)
  (496 )
Foreign exchange impact
  (111 )
  (73
)
  (214
)
  (158 )
 
  (552 )
  (433 )
  (1,080 )
  (875 )
Other interest and amortization expense
  (28
)
  (18
)
  (45
)
  (37
)
Capitalized interest
  56
    46
    101
    87
 
Interest expense included in comparable earnings
  (524 )
  (405 )
  (1,024 )
  (825 )
Specific item:
   
   
   
   
 
Integration and acquisition related costs - Columbia   -
    (109 )
  -
    (109 )
Interest expense
  (524 )
  (514 )
  (1,024 )
  (934 )

Interest expense increased by $10 million and $90 million for the three and six months ended June 30, 2017 compared to the same periods in 2016 and primarily reflects the net effect of:

debt assumed in the acquisition of Columbia on July 1, 2016

U.S. dollar-denominated long-term debt and junior subordinated notes issuances, including the impact of foreign exchange

higher capitalized interest on Liquids and LNG projects and the Napanee power generating facility

in 2016, the dividend equivalent payments on the subscription receipts issued to partially fund the Columbia acquisition.

Allowance for funds used during construction

 
  three months ended
  six months ended
June 30
June 30
(unaudited - millions of $)
  2017
  2016
  2017
  2016
 
   
   
   
   
Canadian dollar-denominated
  55
    47
    105     88
 
U.S. dollar-denominated
  49
    49
    87
    94
 
Foreign exchange impact
  17
    15
    30
    30
 
Allowance for funds used during construction   121     111     222     212  

AFUDC increased $10 million for both the three and six months ended June 30, 2017 compared to the same periods in 2016. The increase in Canadian dollar-denominated AFUDC is primarily due to increased investment in our NGTL System expansions, while the year-to-date decrease in U.S. dollar-denominated AFUDC is primarily due to the completed construction of the Topolobampo and Mazatlán pipelines, partially offset by increased investment in projects acquired as part of the Columbia acquisition on July 1, 2016.

Interest income and other

 
  three months ended
  six months ended
June 30
June 30
(unaudited - millions of $)
  2017
  2016
  2017
  2016
 
   
   
   
   
Interest income and other included in comparable earnings
  40
    4
    45
    51
 
Specific items:
   
   
   
   
 
Foreign exchange gain - inter-affiliate loan
  8
    -
    8
    -
 
 
Integration and acquisition related costs - Columbia   -
    6
    -
    6
 
 
Risk management activities
  41
    (4
)
  56
    49
 
Interest income and other
  89
    6
    109     106  

Interest income and other increased by $83 million and $3 million for the three and six months ended June 30, 2017 compared to the same periods in 2016 and was primarily the net effect of:

foreign exchange impact on the translation of foreign currency denominated working capital balances

income of $18 million related to Coastal GasLink project costs incurred to date. See Recent developments section for more information

realized losses in 2017 compared to realized gains in 2016 on derivatives used to manage our net exposure to foreign exchange rate fluctuations on U.S. dollar-denominated income

foreign exchange gain on an inter-affiliate loan receivable from the Sur de Texas project which is offset in Corporate segmented losses

in 2016, interest income on the gross proceeds of the subscription receipts held in escrow

unrealized gains on risk management activities in 2017 compared to 2016. These amounts have been excluded from comparable earnings.

Income tax expense

 
  three months ended
  six months ended
June 30
June 30
(unaudited - millions of $)
  2017
  2016
  2017
  2016
 
   
   
   
   
Income tax expense included in comparable earnings
  (198 )
  (189 )
  (442 )
  (369 )
Specific items:
   
   
   
   
 
Net gain on sales of U.S. Northeast power assets
  (227 )
  -
    (226 )
  -
 
 
Integration and acquisition related costs - Columbia   5
    -
    20
    -
 
 
Keystone XL asset costs
  1
    4
    2
    8
 
 
Keystone XL income tax recoveries
  -
    -
    7
    -
 
 
Alberta PPA terminations
  -
    -
    -
    64
 
 
Restructuring costs
  -
    4
    -
    4
 
 
TC Offshore loss on sale
  -
    -
    -
    1
 
 
Risk management activities
  26
    (93
)
  46
    (52
)
Income tax expense
  (393 )
  (274 )
  (593 )
  (344 )

Income tax expense included in comparable earnings increased by $9 million and $73 million for the three and six months ended June 30, 2017 compared to the same periods in 2016 mainly as a result of higher pre-tax earnings in 2017 compared to 2016 and changes in the proportion of income earned between Canadian and foreign jurisdictions.

Net income attributable to non-controlling interests

 
  three months ended
  six months ended
June 30
June 30
(unaudited - millions of $)
  2017
  2016
  2017
  2016
 
   
   
   
   
 Net income attributable to non-controlling interests   (55
)
  (52
)
  (145
)
  (132
)
 
                       

Net income attributable to non-controlling interests increased by $13 million for the six months ended June 30, 2017 compared to the same period in 2016 primarily due to the acquisition of Columbia which included a non-controlling interest in CPPL. On February 17, 2017, we acquired all of the outstanding publicly held common units of CPPL.

Preferred share dividends

 
  three months ended
  six months ended
June 30
June 30
(unaudited - millions of $)
  2017
  2016
  2017
  2016
 
   
   
   
   
 Preferred share dividends   (39
)
  (28
)
  (80
)
  (50
)
 
                       

Preferred share dividends increased by $11 million and $30 million for the three and six months ended June 30, 2017 compared to the same periods in 2016 primarily due to the issuance of Series 13 and Series 15 preferred shares in April 2016 and November 2016, respectively.

Recent developments

CANADIAN NATURAL GAS PIPELINES

NGTL System

On June 14, 2017, we announced an additional $2 billion expansion program on our NGTL System based on new contracted customer demand for approximately 3 Bcf/d of incremental firm receipt and delivery services. We also successfully concluded a recent expansion open season for incremental service at the Alberta/British Columbia export delivery point, which connects Canadian supply through our downstream pipelines to Pacific Northwest, California and Nevada markets. The open season was over-subscribed and all 381 MMcf/d of available expansion service was awarded under long-term contracts.

This additional expansion program increases our overall near-term capital program for completion to 2021 on the NGTL System to $7.1 billion.

North Montney

On March 20, 2017, we filed an application with the NEB for a variance to the existing approvals for North Montney to remove the condition that the project could only proceed once a positive FID is made for the Pacific Northwest LNG project. North Montney is now underpinned by restructured, 20-year commercial contracts with shippers and is not dependent on the LNG project proceeding. On April 19, 2017, the NEB granted an interim extension of the sunset clause that was due to expire June 10, 2017 to March 31, 2018. In-service dates are planned for April 2019 and April 2020, subject to regulatory approval.

Towerbirch Expansion

On March 10, 2017, the Government of Canada approved the $0.4 billion Towerbirch Expansion project. The project consists of 55 km (34 miles) of 36-inch loop to the Groundbirch Mainline plus 32 km (20 miles) of new 30-inch pipe and four new meter stations. In February 2017, the B.C. Government approved the environmental assessment with conditions that have since been met.

Canadian Mainline Tolling Option Open Season

On March 13, 2017, we announced the successful conclusion of the long-term fixed-price open season on the Canadian Mainline for service from the Empress receipt point in Alberta to the Dawn hub in Southern Ontario. The open season resulted in binding, long-term contracts from WCSB gas producers to transport 1.5 PJ/d of natural gas at a simplified toll of $0.77/GJ. The term of each contract is 10 years and includes early termination rights that can be exercised following the initial five years of service and upon payment of an increased toll for the final two years of the contract. The application to the NEB for approval of the service was filed on April 26, 2017. The NEB is following a modified Streamlined Application Process with adjudication expected to follow after oral arguments are presented on September 11, 2017. The new service is requested to begin November 1, 2017.

Canadian Mainline Maple Compressor Expansion Project

The Canadian Mainline has received requests for expansion capacity to the southern Ontario market plus delivery to Atlantic Canada via the TQM and PNGTS systems. The requests for approximately 80 MMcf/d of firm service underpin the need for new compression at the existing Maple compressor site. Customers have executed 15-year precedent agreements to proceed with the estimated $160 million project. Once we have completed our tariff process for this capacity addition, an application to the NEB for approval to proceed with the project is planned for early 2018 to meet a November 1, 2019 in-service date.

Coastal GasLink

The continuing delay in the FID for the LNG Canada project has triggered a restructuring of provisions in the Coastal GasLink project agreement with LNG Canada that will result in the payment of certain amounts to TransCanada with respect to carrying charges on costs incurred since inception of the project. An approximate $80 million payment will be received in September 2017, followed by quarterly payments of approximately $7 million until further notice. We continue to work with LNG Canada under the agreement towards a FID.

Prince Rupert Gas Transmission

On July 25, 2017, we were notified that PNW LNG would not be proceeding with their proposed LNG project. As part of our PRGT agreement, following receipt of a termination notice, we would be reimbursed for the full costs and carrying charges incurred to advance the PRGT project. We expect to receive this payment later in 2017.

U.S. NATURAL GAS PIPELINES

Sale of Iroquois and PNGTS to TC PipeLines, LP

On June 1, 2017, we closed the sale of a 49.34 per cent interest in Iroquois Gas Transmission System, LP (Iroquois) and our remaining 11.81 per cent interest in Portland Natural Gas Transmission System (PNGTS) to TC PipeLines, LP valued at US$765 million. Proceeds were comprised of US$597 million in cash and US$168 million representing a proportionate share of Iroquois and PNGTS debt.

Leach XPress and Rayne XPress

FERC approvals and Notices to Proceed were received in first quarter 2017 for both the Leach XPress and Rayne XPress projects allowing construction activities to begin. The US$1.5 billion Leach XPress project and the US$0.4 billion Rayne XPress project are expected to be in service in November 2017.

Great Lakes Rate Case

Great Lakes is required to file a new Section 4 rate case with rates effective no later than January 1, 2018 as part of the settlement agreement with shippers approved November 2013. On March 31, 2017, Great Lakes submitted a General Section 4 Rate Filing and Tariff Changes with the FERC. The rates proposed in the filing will be effective on October 1, 2017, subject to refund, if alternate resolution to the proceeding is not reached prior to that date. Great Lakes has initiated customer discussions regarding the details of the filing and will seek to achieve a mutually beneficial resolution through settlement with its customers.

Columbia Pipeline Partners LP

On February 17, 2017, we completed the acquisition, for cash, of all outstanding publicly held common units of CPPL at a price of US$17.00 and a stub period distribution payment of US$0.10 per common unit for an aggregate transaction value of US$921 million.

LIQUIDS PIPELINES

Energy East

In January 2017, the NEB appointed three new panel members to undertake the review of the Energy East and Eastern Mainline projects. The new NEB panel members voided all decisions made by the previous hearing panel and will decide how to move forward with the hearing. We are not required to refile the application and parties will not be required to reapply for intervener status. All other proceedings and associated deadlines are no longer applicable. If the new panel members determine that the project application is complete, the 21-month NEB review period will commence.

On March 29, 2017, the NEB issued its decision to hear the Energy East and Eastern Mainline projects together. A hearing date has not yet been announced by the NEB.

On May 10, 2017, the NEB solicited comments on a draft list of issues for the Energy East and Eastern Mainline projects with comments due from the general public on May 31, 2017. Energy East and Eastern Mainline projects provided their comments on the draft list of issues on June 21, 2017. At the same time, we provided our response to the comments received by the NEB from the general public. We are awaiting the NEB’s decision on the final list of issues. In addition, we are awaiting further direction from the NEB regarding the regulatory review process.

Keystone XL

In February 2017, we filed an application with the Nebraska Public Service Commission (PSC) seeking approval for the Keystone XL pipeline route through that state. A hearing on the application is scheduled in August 2017 and a final decision on the proposed route is expected by the end of November 2017.

In March 2017, the U.S. Department of State issued a U.S. Presidential Permit authorizing construction of the U.S./Canada border crossing facilities of the Keystone XL pipeline. We discontinued our claim under Chapter 11 of the North American Free Trade Agreement and have also withdrawn the U.S. Constitutional challenge. With the receipt of the U.S. Presidential Permit, we will continue to work through the Nebraska PSC process to obtain route approval through that state and with other U.S. federal agencies to obtain ancillary permits.

Given the passage of time since the Keystone XL Presidential Permit application was previously denied in November 2015, we are updating the shipping contracts and anticipate the core contract shipper group will be modified with the introduction of new shippers and reductions in volume commitments by other shippers. We anticipate commercial support for the project to be substantially similar to that which existed when we first applied for Keystone XL.

On July 27, 2017, we launched an open season to solicit additional binding commitments from interested parties for transportation of crude oil on the Keystone Pipeline and Keystone XL Pipeline project from Hardisty, Alberta to markets in Cushing, Oklahoma and the U.S. Gulf Coast. The open season will close on September 28, 2017.

Grand Rapids

On June 1, 2017, the Grand Rapids pipeline, which will connect producing areas northwest of Fort McMurray, Alberta to terminals in the Edmonton/Heartland region, commenced line fill activities with anticipated in-service in third quarter 2017.

ENERGY

U.S. Power

Monetization of U.S. Northeast power business

On April 19, 2017, we closed the sale of TC Hydro to Great River Hydro, LLC for US$1.07 billion resulting in a gain of $717 million ($441 million after tax) recorded in second quarter 2017.

On June 2, 2017, we closed the sale of Ravenswood, Ironwood, Ocean State Power and Kibby Wind to Helix Generation, LLC for US$2.029 billion. An additional loss on sale of approximately $219 million ($176 million after tax) was recorded in second quarter 2017, primarily related to an adjustment to the purchase price and repair costs for an unplanned outage at Ravenswood prior to close. Insurance recoveries for a portion of the repair costs are expected to be received by the end of 2017 and will partially reduce this loss.

Proceeds from the sale transactions were used to fully retire the remaining bridge facilities that partially funded the acquisition of Columbia.

After assessing our options, we initiated the wind down of our TCPM operations and will realize the value of the remaining marketing contracts and working capital over time.

Financial condition

We strive to maintain strong financial capacity and flexibility in all parts of the economic cycle. We rely on our operating cash flow to sustain our business, pay dividends and fund a portion of our growth. In addition, we access capital markets to meet our financing needs, manage our capital structure and to preserve our credit ratings.

We believe we have the financial capacity to fund our existing capital program through our predictable and growing cash flow from operations, access to capital markets (including through our At-The-Market (ATM) equity issuance program), our Dividend Reinvestment Plan (DRP), portfolio management including proceeds from potential drop downs of additional natural gas pipeline assets to TC PipeLines, LP, cash on hand and substantial committed credit facilities.

At June 30, 2017, our current assets were $4.9 billion and current liabilities were $10.1 billion, leaving us with a working capital deficit of $5.2 billion compared to a surplus of $0.4 billion at December 31, 2016. Our working capital deficiency is considered to be in the normal course of business and is managed through:

our ability to generate cash flow from operations

our access to capital markets

approximately $8.3 billion of unutilized, unsecured committed credit facilities.

CASH PROVIDED BY OPERATING ACTIVITIES

 
  three months ended
  six months ended
June 30
June 30
(unaudited - millions of $, except per share amounts)
  2017
  2016
  2017
  2016
 
   
   
   
   
Net cash provided by operations
  1,353     1,148     2,655     2,229  
(Decrease)/increase in operating working capital
  (17
)
  (218
)
  138
    (86
)
Funds generated from operations1
  1,336     930
    2,793     2,143  
Specific items:
   
   
   
   
 
Integration and acquisition related costs - Columbia
  20
    113
    52
    139
 
 
Keystone XL asset costs
  5
    13
    13
    23
 
 
U.S. Northeast power disposition costs
  6
    -
    17
    -
 
 
Current income taxes on sales of U.S. Northeast power assets   41
    -
    41
    -
 
Comparable funds generated from operations1
  1,408     1,056     2,916     2,305  
Dividends on preferred shares
  (38
)
  (23
)
  (77
)
  (46
)
Distributions paid to non-controlling interests
  (69
)
  (62
)
  (149
)
  (124
)
Maintenance capital expenditures including equity investments
  (365
)
  (269
)
  (532
)
  (459
)
Comparable distributable cash flow1
  936
    702
    2,158     1,676  
Comparable distributable cash flow per common share1
  $1.08
  $1.00
  $2.49     $2.38  
(1) See the non-GAAP measures section in this MD&A for further discussion of funds generated from operations, comparable funds generated from operations, comparable distributable cash flow and comparable distributable cash flow per common share.

COMPARABLE FUNDS GENERATED FROM OPERATIONS

Comparable funds generated from operations increased $352 million and $611 million for the three and six months ended June 30, 2017 compared to the same periods in 2016 primarily due to the increase in comparable earnings.

COMPARABLE DISTRIBUTABLE CASH FLOW

Comparable distributable cash flow, a non-GAAP measure, helps us assess the cash available to common shareholders before capital allocation. The increase from second quarter 2016 to 2017 was driven by an increase in comparable funds generated from operations partially offset by higher maintenance capital expenditures, distributions paid to non-controlling interests and dividends on preferred shares. Comparable distributable cash flow per share in 2017 includes the dilutive effect of issuing 161 million common shares in 2016.

Although we deduct maintenance capital expenditures in determining comparable distributable cash flow, in certain of our rate-regulated businesses maintenance capital expenditures are included in their respective rate bases on which we earn a regulated return and recover depreciation through future tolls.

The following provides a breakdown of maintenance capital expenditures:

 
  three months ended
  six months ended
June 30
June 30
(unaudited - millions of $)
  2017
  2016
  2017
  2016
 
   
   
   
   
Canadian Natural Gas Pipelines
  71
    42
    120     97
 
U.S. Natural Gas Pipelines
  237     94
    307     165  
Other
  57
    133     105     197  
Maintenance capital expenditures including equity investments   365     269     532     459  

CASH PROVIDED BY/(USED IN) INVESTING ACTIVITIES

 
  three months ended
  six months ended
June 30
June 30
(unaudited - millions of $)
  2017
  2016
  2017
  2016
 
   
   
   
   
Capital spending
   
   
   
   
 
Capital expenditures
  (1,792 )
  (982
)
  (3,352 )
  (1,818
)
 
Capital projects in development
  (56
)
  (90
)
  (98
)
  (157
)
 
Contributions to equity investments   (473
)
  (114
)
  (665
)
  (284
)
 
  (2,321 )
  (1,186
)
  (4,115 )
  (2,259
)
Restricted cash
  -
    (13,113 )
  -
    (13,113 )
Acquisitions, net of cash acquired
  -
    (4
)
  -
    (999
)
Proceeds from sale of assets, net of transaction costs
  4,147
    -
    4,147
    6
 
Other distributions from equity investments
  1
    725
    364
    725
 
Deferred amounts and other
  (169
)
  (20
)
  (254
)
  32
 
Net cash provided by/(used in) investing activities
  1,658
    (13,598 )
  142
    (15,608 )

Capital expenditures in 2017 were primarily related to:

expansion of Columbia pipelines

expansion of the NGTL System

construction of Mexico pipelines

expansion of the Canadian Mainline

capital additions to our ANR pipeline

construction of the Napanee power generating facility.

Costs incurred on Capital projects in development primarily relate to the Energy East and LNG pipeline projects.

Contributions to equity investments have increased in 2017 compared to 2016 primarily due to our investments in Sur de Texas and Bruce Power and includes our proportionate share of Sur de Texas debt financing requirements.

Restricted cash in 2016 represented the amount held in escrow at June 30, 2016 for the purchase of Columbia on July 1, 2016 and included the proceeds from the sale of subscription receipts, net of dividend equivalent payments, and draws on the committed bridge loan credit facilities.

In second quarter 2017, we closed the sale of the our U.S. Northeast power assets for net proceeds of $4,147 million.

The decrease in Other distributions from equity investments is primarily due to Bruce Power financings undertaken to fund its capital program and make distributions to its partners. In second quarter 2016, Bruce Power issued senior notes in the capital markets and borrowed under a bank credit facility which resulted in $725 million being received by us. In first quarter 2017, Bruce Power issued additional senior notes in the capital markets which resulted in $362 million being received by us.

CASH (USED IN)/PROVIDED BY FINANCING ACTIVITIES

 
  three months ended
  six months ended
June 30
June 30
(unaudited - millions of $)
  2017
  2016
  2017
  2016
 
   
   
   
   
Notes payable issued/(repaid), net
  111
    (853
)
  781
    323
 
Long-term debt issued, net of issue costs
  817
    10,335     817
    12,327  
Long-term debt repaid
  (4,418 )
  (933
)
  (5,469 )
  (2,290 )
Junior subordinated notes issued, net of issue costs
  1,489
    -
    3,471
    -
 
Dividends and distributions paid
  (435
)
  (482
)
  (854
)
  (932
)
Common shares/subscription receipts issued, net of issue costs
  18
    4,371
    36
    4,374
 
Common shares repurchased
  -
    -
    -
    (14
)
Partnership units of TC PipeLines, LP issued, net of issue costs   27
    82
    119
    106
 
Common units of Columbia Pipeline Partners LP acquired
  -
    -
    (1,205 )
  -
 
Preferred shares issued, net of issue costs
  -
    492
    -
    492
 
Net cash (used in)/provided by financing activities
  (2,391 )
  13,012     (2,304 )
  14,386  

LONG-TERM DEBT ISSUED

(unaudited - millions of $)   Issue date   Type
  Maturity date   Amount
  Interest rate
Company
TC PIPELINES, LP
   
   
   
   
 
  May 2017
  Senior Unsecured Notes   May 2027
  US 500     3.90
%
 
   
   
   
           

LONG-TERM DEBT RETIRED

(unaudited - millions of $)  
Retirement date   Type
  Amount
  Interest rate
Company
 
 
 
   
   
   
TRANSCANADA PIPELINES LIMITED
   
   
   
 
 
June 2017
  Acquisition Bridge Facility   US 1,513     Floating
 
 
February 2017
  Acquisition Bridge Facility   US 500
    Floating
 
 
January 2017
  Medium Term Notes
  300
    5.10
%
TRANSCANADA PIPELINE USA LTD.
   
   
   
 
 
June 2017
  Acquisition Bridge Facility   US 630
    Floating
 
 
April 2017
  Acquisition Bridge Facility   US 1,070     Floating

The acquisition bridge facilities were put into place to finance a portion of the Columbia acquisition. Proceeds from the sales of the U.S. Northeast power assets were used to fully retire the remaining acquisition bridge facilities in second quarter 2017.

JUNIOR SUBORDINATED NOTES ISSUED

(unaudited - millions of $)  
Issue date   Type
  Maturity date   Amount
  Interest rate
Company
 
 
 
   
   
   
   
 
TRANSCANADA PIPELINES LIMITED
   
   
   
   
 
 
 
May 2017
  Junior Subordinated Notes1,2   May 2077
  1,500
    4.90
%
 
 
 
March 2017   Junior Subordinated Notes1,2   March 2077
  US 1,500
  5.55
%
 
 
 
 
   
   
             
(1) The Junior subordinated notes are subordinated in right of payment to existing and future senior indebtedness or other obligations of TCPL.
(2) The Junior subordinated notes were issued to TransCanada Trust (the Trust), a financing trust subsidiary wholly-owned by TCPL. While the obligations of the Trust are fully and unconditionally guaranteed by TCPL on a subordinated basis, the Trust is not consolidated in TransCanada’s financial statements because TCPL does not have a variable interest in the Trust and the only substantive assets of the Trust are junior subordinated notes of TCPL.

In May 2017, the Trust issued $1.5 billion of Trust Notes - Series 2017-B (Trust Notes) to third party investors with a fixed interest rate of 4.65 per cent for the first ten years converting to a floating rate thereafter. All of the proceeds of the issuance by the Trust were loaned to TCPL for $1.5 billion of junior subordinated notes of TCPL at an initial fixed rate of 4.90 per cent, including a 0.25 per cent administration charge. The rate will reset commencing May 2027 until May 2047 to the three month Bankers’ Acceptance rate plus 3.33 per cent per annum; from May 2047 until May 2077, the interest rate will reset to the three month Bankers’ Acceptance rate plus 4.08 per cent per annum. The junior subordinated notes are callable at TCPL’s option at any time on or after May 18, 2027 at 100 per cent of the principal amount plus accrued and unpaid interest to the date of redemption.

In March 2017, the Trust issued US$1.5 billion of Trust Notes - Series 2017-A (Trust Notes) to third party investors with a fixed interest rate of 5.30 per cent for the first ten years converting to a floating rate thereafter. All of the proceeds of the issuance by the Trust were loaned to TCPL for US$1.5 billion of junior subordinated notes of TCPL at an initial fixed rate of 5.55 per cent, including a 0.25 per cent administration charge. The rate will reset commencing March 2027 until March 2047 to the three month LIBOR plus 3.458 per cent per annum; from March 2047 until March 2077, the interest rate will reset to the three month LIBOR plus 4.208 per cent per annum. The junior subordinated notes are callable at TCPL’s option at any time on or after March 15, 2027 at 100 per cent of the principal amount plus accrued and unpaid interest to the date of redemption.

Pursuant to the terms of the Trust Notes and related agreements, in certain circumstances (1) TCPL may issue deferral preferred shares to holders of the Trust Notes in lieu of interest; and (2) TransCanada and TCPL would be prohibited from declaring or paying dividends on or redeeming their outstanding preferred shares (or, if none are outstanding, their respective common shares) until all deferral preferred shares are redeemed by TCPL. The Trust Notes may also be automatically exchanged for preferred shares of TCPL upon certain kinds of bankruptcy and insolvency events. All of these preferred shares would rank equally with any other outstanding first preferred shares of TCPL.

DIVIDEND REINVESTMENT PLAN

Under our DRP, eligible holders of common and preferred shares of TransCanada can reinvest their dividends and make optional cash payments to obtain additional TransCanada common shares. Common shares are issued from treasury at a discount of two per cent. For the dividends declared on May 5, 2017, approximately 35 per cent of common share dividends declared were designated to be reinvested by shareholders in TransCanada common shares under the DRP. Since issuance under the DRP from treasury at a discount began in July 2016, the cumulative participation rate has been approximately 38 per cent of common shares, resulting in $773 million of common equity issued.

TRANSCANADA CORPORATION ATM EQUITY ISSUANCE PROGRAM

In June 2017, we established an ATM program that allows us to issue common shares from treasury having an aggregate gross sales price of up to $1.0 billion or their U.S. dollar equivalent, from time to time, at our discretion, at the prevailing market price when sold through the Toronto Stock Exchange or the New York Stock Exchange. The ATM program, which is effective for a 25-month period, will be activated at our discretion, if and as required, based on the spend profile of TransCanada’s capital program and relative cost of other funding options. At June 30, 2017, no common shares were issued under the program.

TC PIPELINES, LP ATM EQUITY ISSUANCE PROGRAM

During first and second quarter 2017, 1.6 million common units were issued under the TC PipeLines, LP ATM program generating net proceeds of approximately US$90 million. At June 30, 2017, our ownership interest in TC PipeLines, LP was 26.3 per cent as a result of issuances under the ATM program and resulting dilution.

In connection with the late filing of an employee-related Form 8-K with the SEC, in March 2016, TC PipeLines, LP became ineligible to use the then effective shelf registration statement upon the filing of its 2015 Annual Report. As a result, it was determined that the purchasers of the 1.6 million common units that were issued from March 8, 2016 to May 19, 2016 under the ATM program may have a rescission right for an amount equal to the purchase price paid for the units, plus statutory interest and less any distributions paid, upon the return of such units to TC PipeLines, LP. All rescission rights have expired and no unitholder claimed or attempted to exercise any rescission rights prior to the expiration date.

DIVIDENDS

On July 27, 2017, we declared quarterly dividends as follows:

Quarterly dividend on our common shares
 
 
$
0.625 per share
 Payable on October 31, 2017 to shareholders of record at the close of business on September 29, 2017
Quarterly dividends on our preferred shares
 
 
Series 1
$0.204125
Series 2
$0.15432055
Series 3
$0.1345
Series 4
$0.11399178
Payable on September 29, 2017 to shareholders of record at the close of business on August 31, 2017
Series 5
$0.14143750
Series 6
$0.14007945
Series 7
$0.25
Series 9
$0.265625
Payable on October 30, 2017 to shareholders of record at the close of business on October 2, 2017
Series 11
$0.2375
Series 13
$0.34375
Series 15
$0.30625
Payable on August 31, 2017 to shareholders of record at the close of business on August 11, 2017

SHARE INFORMATION

as at July 24, 2017
 
 
 
 
 
Common shares
Issued and outstanding  
 
871 million
 
Preferred shares
Issued and outstanding Convertible to
Series 1
9.5 million
Series 2 preferred shares
Series 2
12.5 million
Series 1 preferred shares
Series 3
8.5 million
Series 4 preferred shares
Series 4
5.5 million
Series 3 preferred shares
Series 5
12.7 million
Series 6 preferred shares
Series 6
1.3 million
Series 5 preferred shares
Series 7
24 million
Series 8 preferred shares
Series 9
18 million
Series 10 preferred shares
Series 11
10 million
Series 12 preferred shares
Series 13
20 million
Series 14 preferred shares
Series 15
40 million
Series 16 preferred shares
 
 
 
Options to buy common shares Outstanding
Exercisable
 
11 million
7 million

CREDIT FACILITIES

We have several committed credit facilities that support our commercial paper programs and provide short-term liquidity for general corporate purposes. In addition, we have demand credit facilities that are also used for general corporate purposes, including issuing letters of credit and providing additional liquidity.

At July 27, 2017, we had a total of $10.9 billion of committed revolving and demand credit facilities, including:

Amount
  Unused
  Borrower
Description
  Matures
capacity
 
   
   
 
   
$3.0 billion
  $3.0 billion
  TCPL
Committed, syndicated, revolving, extendible credit facility that supports TCPL’s Canadian dollar commercial paper program and for general corporate purposes   December 2021
US$2.0 billion   US$2.0 billion   TCPL
Committed, syndicated, revolving, extendible credit facility that supports TCPL’s U.S. dollar commercial paper program
  December 2017
US$1.0 billion   US$0.8 billion   TCPL USA
Committed, syndicated, revolving, extendible credit facility that is used for TCPL USA general corporate purposes, guaranteed by TCPL
  December 2017
US$1.0 billion   US$0.1 billion   Columbia
Committed, syndicated, revolving, extendible credit facility that is used for Columbia’s general corporate purposes, guaranteed by TCPL
  December 2017
US$0.5 billion   US$0.5 billion   TransCanada American Investments Ltd. (TAIL) Committed, syndicated, revolving, extendible credit facility that supports TAIL’s U.S. dollar commercial paper program, guaranteed by TCPL
  December 2017
$2.1 billion
  $0.8 billion
  TCPL/TCPL USA
Supports the issuance of letters of credit and provides additional liquidity
  Demand

At July 27, 2017, our operated affiliates had an additional $0.6 billion of undrawn capacity on committed credit facilities.

See Financial risks and financial instruments for more information about liquidity, market and other risks.

CONTRACTUAL OBLIGATIONS

Our capital commitments have decreased by approximately $0.8 billion since December 31, 2016 primarily as a result of decreased commitments for the Sur de Texas and NGTL System natural gas pipelines due to the progression of construction. Transportation by others commitments have increased by approximately $0.6 billion since December 31, 2016 primarily related to Canadian Mainline contracts. Other Energy commitments have decreased by approximately $0.4 billion since December 31, 2016 as a result of the sale of our U.S. Northeast power assets.

Our operating lease commitments at December 31, 2016 included future payments related to our U.S. Northeast power business. As a result of the completion of the thermal sale on June 2, 2017, the remaining future obligations included at December 31, 2016 have decreased by: $2 million in 2017, $52 million in 2018, $34 million in 2019 and $102 million in 2022 and beyond.

There were no other material changes to our contractual obligations in second quarter 2017 or to payments due in the next five years or after. See the MD&A in our 2016 Annual Report for more information about our contractual obligations.

Financial risks and financial instruments

We are exposed to liquidity risk, counterparty credit risk and market risk, and have strategies, policies and limits in place to mitigate their impact on our earnings, cash flow and, ultimately, shareholder value. These are designed to ensure our risks and related exposures are in line with our business objectives and risk tolerance.

See our 2016 Annual Report for more information about the risks we face in our business. Our risks have not changed substantially since December 31, 2016, other than described below.

In second quarter 2017, we sold our U.S. Northeast merchant power generation assets and initiated the wind down of our TCPM operations. We expect to realize the value of the remaining marketing contracts and working capital over time. As a result, our exposure to commodity risk has been reduced.

LIQUIDITY RISK

We manage our liquidity risk by continuously forecasting our cash flow for a 12 month period to ensure we have adequate cash balances, cash flow from operations, committed and demand credit facilities and access to capital markets to meet our operating, financing and capital expenditure obligations under both normal and stressed economic conditions.

COUNTERPARTY CREDIT RISK

We have exposure to counterparty credit risk in the following areas:

accounts receivable

the fair value of derivative assets

cash and cash equivalents.

We review our accounts receivable regularly and record allowances for doubtful accounts using the specific identification method. At June 30, 2017, we had no significant credit losses, no significant credit risk concentration and no significant amounts past due or impaired.

We have significant credit and performance exposure to financial institutions because they hold cash deposits and provide committed credit lines and letters of credit that help manage our exposure to counterparties and provide liquidity in commodity, foreign exchange and interest rate derivative markets.

LOAN RECEIVABLE FROM AFFILIATE

We hold a 60 per cent equity interest in a joint venture with IEnova to build, own and operate the Sur de Texas pipeline for which we account as an equity investment. On April 21, 2017, we issued a peso-denominated unsecured revolving credit facility to the joint venture. This $1 billion facility bears interest at a floating interest rate per annum. As at June 30, 2017, Intangible and other assets on our condensed consolidated balance sheet included a $341 million loan receivable from the Sur de Texas joint venture (December 31, 2016 - nil). This loan receivable represents our proportionate share of our affiliate’s debt financing requirements and is included in Contributions to equity investments on our condensed consolidated statement of cash flow. Interest income and other included $3 million in the three and six months ended June 30, 2017 as a result of inter-affiliate lending to the Sur de Texas joint venture (2016 - nil and nil).

FOREIGN EXCHANGE AND INTEREST RATE RISK

We generate revenues and incur expenses that are denominated in currencies other than Canadian dollars. As a result, our earnings and cash flows are exposed to currency fluctuations.

A portion of our businesses generate earnings in U.S. dollars, but since we report our financial results in Canadian dollars, changes in the value of the U.S. dollar against the Canadian dollar can affect our net income. As our U.S. dollar-denominated operations continue to grow, this exposure increases. The majority of this risk is offset by interest expense on U.S. dollar-denominated debt and by using foreign exchange derivatives.

We have floating interest rate debt which subjects us to interest rate cash flow risk. We manage this using a combination of interest rate swaps and options.

Average exchange rate - U.S. to Canadian dollars

three months ended June 30, 2017 1.34  
three months ended June 30, 2016 1.29  
 
 
six months ended June 30, 2017
1.33  
six months ended June 30, 2016
1.32  

The impact of changes in the value of the U.S. dollar on our U.S. operations is significantly offset by interest on U.S. dollar-denominated long-term debt, as set out in the table below. Comparable EBIT is a non-GAAP measure. See our Reconciliation of non-GAAP measures section for more information.

Significant U.S. dollar-denominated amounts

 
  three months ended June 30
  six months ended June 30
(unaudited - millions of US$)
  2017
  2016
  2017
  2016
 
   
   
   
   
U.S. Natural Gas Pipelines comparable EBIT
  298
    145
    729
    345
 
Mexico Natural Gas Pipelines comparable EBIT
  89
    35
    178
    68
 
U.S. Liquids Pipelines comparable EBIT
  146
    116
    281
    243
 
U.S. Power comparable EBIT
  32
    49
    86
    93
 
AFUDC on U.S. dollar-denominated projects
  49
    49
    87
    94
 
Interest on U.S. dollar-denominated long-term debt
  (323
)
  (250
)
  (640 )
  (496 )
Capitalized interest on U.S. dollar-denominated capital expenditures   1
    9
    1
    16
 
U.S. dollar non-controlling interests
  (41
)
  (40
)
  (109 )
  (100 )
 
  251
    113
    613
    263
 

Derivatives designated as a net investment hedge

We hedge our net investment in foreign operations (on an after-tax basis) with U.S. dollar-denominated debt, cross-currency interest rate swaps, foreign exchange forward contracts and foreign exchange options.

The fair values and notional or principal amounts for the derivatives designated as a net investment hedge were as follows:

 
  June 30, 2017
  December 31, 2016
(unaudited - millions of Canadian $, unless noted otherwise)
  Fair value1
  Notional or principal amount   Fair value1   Notional or principal amount
 
   
   
   
   
U.S. dollar cross-currency interest rate swaps (maturing 2017 to 2019)2   (240
)
  US 1,500
  (425
)
  US 2,350
U.S. dollar foreign exchange forward contracts
  -
    -
  (7
)
  US 150
 
  (240
)
  US 1,500
  (432
)
  US 2,500
(1) Fair values equal carrying values.
(2) In the three and six months ended June 30, 2017, net realized gains of $1 million and $2 million, respectively, (2016 - gains of $2 million and $4 million, respectively) related to the interest component of cross-currency swaps settlements are included in interest expense.

U.S. dollar-denominated debt designated as a net investment hedge

(unaudited - millions of Canadian $, unless noted otherwise)   June 30, 2017
    December 31, 2016  
 
   
     
 
Notional amount
  25,000 (US 19,300 )
  26,600 (US 19,800 )
Fair value
  28,500 (US 22,000 )
  29,400 (US 21,900 )

FINANCIAL INSTRUMENTS

All financial instruments, including both derivative and non-derivative instruments, are recorded on the balance sheet at fair value unless they were entered into and continue to be held for the purpose of receipt or delivery in accordance with our normal purchase and sales exemptions and are documented as such. In addition, fair value accounting is not required for other financial instruments that qualify for certain accounting exemptions.

Derivative instruments

We use derivative instruments to reduce volatility associated with fluctuations in commodity prices, interest rates and foreign exchange rates. We apply hedge accounting to derivative instruments that qualify and are designated for hedge accounting treatment.

The majority of derivative instruments that are not designated or do not qualify for hedge accounting treatment have been entered into as economic hedges to manage our exposure to market risk (held for trading). Changes in the fair value of held for trading derivative instruments are recorded in net income in the period of change. This may expose us to increased variability in reported operating results since the fair value of the held for trading derivative instruments can fluctuate significantly from period to period.

Balance sheet presentation of derivative instruments

The balance sheet classification of the fair value of derivative instruments is as follows:

(unaudited - millions of $)   June 30, 2017   December 31, 2016
 
   
   
Other current assets
  320
    376
 
Intangible and other assets   126
    133
 
Accounts payable and other
  (532
)
  (607
)
Other long-term liabilities   (248
)
  (330
)
 
  (334
)
  (428
)

Unrealized and realized (losses)/gains of derivative instruments

The following summary does not include hedges of our net investment in foreign operations.

 
  three months ended June 30
  six months ended June 30
(unaudited - millions of $, pre-tax)
  2017
  2016
  2017
  2016
 
   
   
   
   
Derivative instruments held for trading1
   
   
   
   
Amount of unrealized (losses)/gains in the period    
   
   
   
 
Commodities2
  (91
)
  187
    (147 )
  120
 
 
Foreign exchange
  41
    20
    56
    47
 
 
Interest rate
  -
    -
    -
    -
 
Amount of realized (losses)/gains in the period
   
   
   
   
 
Commodities
  (37
)
  (47
)
  (85
)
  (142 )
 
Foreign exchange
  (5
)
  13
    (9
)
  57
 
Derivative instruments in hedging relationships
   
   
   
   
Amount of realized gains/(losses) in the period
   
   
   
   
 
Commodities
  7
    (67
)
  13
    (140 )
 
Foreign exchange
  -
    (43
)
  5
    (106 )
 
Interest rate
  -
    1
    1
    3
 
(1) Realized and unrealized gains and losses on held for trading derivative instruments used to purchase and sell commodities are included net in revenues. Realized and unrealized gains and losses on interest rate and foreign exchange held for trading derivative instruments are included net in interest expense and interest income and other, respectively.
(2) Following the March 17, 2016 announcement of our intention to sell the U.S. Northeast power business, a loss of $49 million and a gain of $7 million were recorded in net income in the three months ended March 31, 2016 relating to discontinued cash flow hedges where it was probable that the anticipated underlying transaction would not occur as a result of a future sale.

Derivatives in cash flow hedging relationships

The components of the condensed consolidated statement of OCI related to derivatives in cash flow hedging relationships including the portion attributable to non-controlling interests is as follows:

 
  three months ended June 30
  six months ended June 30
(unaudited - millions of $, pre-tax)
  2017
  2016
  2017
  2016
 
   
   
   
   
Change in fair value of derivative instruments recognized in OCI (effective portion)1
   
   
   
   
 
Commodities
  (2
)
  42
    3
    26
 
 
Foreign exchange
  -
    40
    -
    5
 
 
Interest rate
  -
    (1
)
  1
    (4
)
 
  (2
)
  81
    4
    27
 
Reclassification of (losses)/gains on derivative instruments from AOCI to net income (effective portion)1    
   
   
   
 
Commodities2
  (7
)
  (21
)
  (11
)
  61
 
 
Foreign exchange3
  -
    (39
)
  -
    (5
)
 
Interest rate4
  5
    4
    9
    8
 
 
  (2
)
  (56
)
  (2
)
  64
 
Gains/(losses) on derivative instruments recognized in net income (ineffective portion)
   
   
   
   
 
Commodities2
  -
    43
    -
    (15
)
 
  -
    43
    -
    (15
)
(1) No amounts have been excluded from the assessment of hedge effectiveness. Amounts in parentheses indicate losses recorded to OCI.
(2) Reported within revenues on the condensed consolidated statement of income.
(3) Reported within interest income and other on the condensed consolidated statement of income.
(4) Reported within interest expense on the condensed consolidated statement of income.

Credit risk related contingent features of derivative instruments

Derivatives often contain financial assurance provisions that may require us to provide collateral if a credit risk related contingent event occurs (for example, if our credit rating is downgraded to non-investment grade). We may also need to provide collateral if the fair value of our derivative financial instruments exceeds pre-defined exposure limits.

Based on contracts in place and market prices at June 30, 2017, the aggregate fair value of all derivative contracts with credit-risk-related contingent features that were in a net liability position was $11 million (December 31, 2016 - $19 million), with collateral provided in the normal course of business of nil (December 31, 2016 - nil). If the credit-risk-related contingent features in these agreements were triggered on June 30, 2017, we would have been required to provide additional collateral of $11 million (December 31, 2016 - $19 million) to our counterparties. Collateral may also need to be provided should the fair value of derivative instruments exceed pre-defined contractual exposure limit thresholds.

We have sufficient liquidity in the form of cash and undrawn committed revolving bank lines to meet these contingent obligations should they arise.

Other information

CONTROLS AND PROCEDURES

Management, including our President and CEO and our CFO, evaluated the effectiveness of our disclosure controls and procedures as at June 30, 2017, as required by the Canadian securities regulatory authorities and by the SEC, and concluded that our disclosure controls and procedures are effective at a reasonable assurance level.

Effective April 1, 2017, management successfully integrated Columbia, which we acquired on July 1, 2016, to our existing enterprise resource planning (ERP) system. As a result of the Columbia ERP system integration, certain processes supporting our internal control over financial reporting for Columbia operations changed in second quarter 2017, however, the overall controls and procedures we follow in establishing internal controls over financial reporting were not significantly impacted.

Assets attributable to Columbia represented approximately 17.4 per cent of our total assets as of June 30, 2017 and revenues attributable to Columbia for the six months ended June 30, 2017 represented approximately 15.1 per cent of our total revenues for that period.

Other than this system implementation, there were no changes in second quarter 2017 that had or are likely to have a material impact on our internal control over financial reporting.

CRITICAL ACCOUNTING ESTIMATES AND ACCOUNTING POLICY CHANGES

When we prepare financial statements that conform with U.S. GAAP, we are required to make estimates and assumptions that affect the timing and amount we record for our assets, liabilities, revenues and expenses because these items may be affected by future events. We base the estimates and assumptions on the most current information available, using our best judgement. We also regularly assess the assets and liabilities themselves. You can find a summary of our critical accounting estimates in our 2016 Annual Report.

Our significant accounting policies have remained unchanged since December 31, 2016 other than described below. You can find a summary of our significant accounting policies in our 2016 Annual Report.

Changes in accounting policies for 2017

Inventory

In July 2015, the FASB issued new guidance on simplifying the measurement of inventory. The new guidance specifies that an entity should measure inventory within the scope of this guidance at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. This new guidance was effective January 1, 2017, was applied prospectively and did not have a material impact on our consolidated balance sheet.

Derivatives and hedging

In March 2016, the FASB issued new guidance that clarifies the requirements for assessing whether contingent call or put options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. The new guidance requires only an assessment of the four-step decision sequence outlined in U.S. GAAP to determine whether the economic characteristics and risks of call or put options are clearly and closely related to the economic characteristics and risks of their debt hosts. This new guidance was effective January 1, 2017, was applied prospectively and has not resulted in any impact on our consolidated financial statements.

Equity method investments

In March 2016, the FASB issued new guidance that simplifies the transition to equity method accounting. The new guidance eliminates the requirement to retroactively apply the equity method of accounting when an increase in ownership interest in an investment qualifies it for equity method accounting. This new guidance was effective January 1, 2017, was applied prospectively and has not resulted in any impact on our consolidated financial statements.

Employee share-based payments

In March 2016, the FASB issued new guidance that simplifies several aspects of the accounting for employee share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. The new guidance also permits entities to make an accounting policy election either to continue to estimate the total number of awards for which the requisite service period will not be rendered or to account for forfeitures when they occur. We have elected to account for forfeitures when they occur. This new guidance was effective January 1, 2017 and resulted in a cumulative-effect adjustment of $12 million to opening retained earnings and the recognition of a deferred tax asset related to employee share-based payments made prior to the adoption of this guidance.

Consolidation

In October 2016, the FASB issued new guidance on consolidation relating to interests held through related parties that are under common control. The new guidance amends the consolidation requirements such that if a decision maker is required to evaluate whether it is the primary beneficiary of a VIE, it will need to consider only its proportionate indirect interest in the VIE held through a common control party. The new guidance was effective January 1, 2017, was applied retrospectively and did not result in any change to our consolidation conclusions.

Future accounting changes

Revenue from contracts with customers

In 2014, the FASB issued new guidance on revenue from contracts with customers. The new guidance requires that an entity recognize revenue in accordance with a five-step model. This model is used to depict the transfer of promised goods or services to customers in an amount that reflects the total consideration to which it expects to be entitled during the term of the contract in exchange for those goods or services. The new guidance also requires additional disclosures about the nature, amount, timing and uncertainty of revenue and the related cash flows. We will adopt the new standard on the effective date of January 1, 2018. There are two methods in which the new standard can be adopted: (1) a full retrospective approach with restatement of all prior periods presented, or (2) a modified retrospective approach with a cumulative-effect adjustment as of the date of adoption. We currently anticipate adopting the standard using the modified retrospective approach with the cumulative-effect of the adjustment recognized at the date of adoption, subject to allowable and elected practical expedients.

We have identified all existing customer contracts that are within the scope of the new guidance and are on schedule in the process of analyzing individual contracts or groups of contracts by operating segment to identify any significant changes in how revenues are recognized as a result of implementing the new guidance. While we have not identified any material differences in the amount and timing of revenue recognition for the operating segments that have been analyzed to date, the evaluation is not complete and we have not concluded on the overall impact of adopting the new guidance. We continue our contract analysis to obtain the information necessary to quantify the cumulative-effect adjustment, if any, on prior period revenues and revenue recognized going forward. We also continue to address any system and process changes necessary to compile the information to meet the recognition and disclosure requirements of the new guidance.

Financial instruments

In January 2016, the FASB issued new guidance on the accounting for equity investments and financial liabilities. The new guidance will change the income statement effect of equity investments and the recognition of changes in the fair value of financial liabilities when the fair value option is elected. The new guidance also requires us to assess valuation allowances for deferred tax assets related to available for sale debt securities in combination with their other deferred tax assets. This new guidance is effective January 1, 2018 and a method of adoption is specified for each component of the guidance. We are currently evaluating the impact of the adoption of this guidance and have not yet determined the effect on our consolidated financial statements.

Leases

In February 2016, the FASB issued new guidance on the accounting for leases. The new guidance amends the definition of a lease requiring the customer to have both (1) the right to obtain substantially all of the economic benefits from the use of the asset and (2) the right to direct the use of the asset in order for an arrangement to qualify as a lease. The new guidance also establishes a right-of-use (ROU) model that requires a lessee to recognize a ROU asset and corresponding lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new guidance does not make extensive changes to lessor accounting.

The new guidance is effective on January 1, 2019, with early adoption permitted. A modified retrospective transition approach is required for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. We are continuing to identify and analyze existing lease agreements to determine the effect of adoption of the new guidance on our consolidated financial statements. We are also addressing system and process changes necessary to compile the information to meet the recognition and disclosure requirements of the new guidance.

Measurement of credit losses on financial instruments

In June 2016, the FASB issued new guidance that significantly changes how entities measure credit losses for most financial assets and certain other financial instruments that are not measured at fair value through net income. The new guidance amends the impairment model of financial instruments basing it on expected losses rather than incurred losses. These expected credit losses will be recognized as an allowance rather than a direct write down of the amortized cost basis. The new guidance is effective January 1, 2020 and will be applied using a modified retrospective approach. We are currently evaluating the impact of the adoption of this guidance and have not yet determined the effect on our consolidated financial statements.

Income taxes

In October 2016, the FASB issued new guidance on the income tax effects of intra-entity transfers of assets other than inventory. The new guidance requires the recognition of deferred and current income taxes for an intra-entity asset transfer when the transfer occurs. The new guidance is effective January 1, 2018 and will be applied using a modified retrospective approach. We are currently evaluating the impact of the adoption of this guidance and have not yet determined the effect on our consolidated financial statements.

Restricted cash

In November 2016, the FASB issued new guidance on restricted cash and cash equivalents on the statement of cash flows. The new guidance requires that the statement of cash flows explain the change during the period in the total cash and cash equivalents balance, and amounts generally described as restricted cash or restricted cash equivalents. Restricted cash and cash equivalents will be included with Cash and cash equivalents when reconciling the beginning of year and end of year total amounts on the statement of cash flows. This new guidance is effective January 1, 2018 and will be applied retrospectively, however, early adoption is permitted.

Goodwill impairment

In January 2017, the FASB issued new guidance on simplifying the test for goodwill impairment by eliminating Step 2 of the impairment test, which is the requirement to calculate the implied fair value of goodwill to measure the impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value. This new guidance is effective January 1, 2020 and will be applied prospectively, however, early adoption is permitted.

Employee post-retirement benefits

In March 2017, the FASB issued new guidance that will require entities to disaggregate the current service cost component from the other components of net benefit cost and present it with other current compensation costs for related employees in the income statement. The new guidance also requires that the other components of net benefit cost be presented elsewhere in the income statement and excluded from income from operations if such a subtotal is presented. In addition, the new guidance makes changes to the components of net benefit cost that are eligible for capitalization. Entities must use a retrospective transition method to adopt the requirement for separate presentation in the income statement of the components of net benefit cost, and a prospective transition method to adopt the change to capitalization of benefit costs. This new guidance is effective January 1, 2018. We are currently evaluating the impact of the adoption of this guidance, however, do not expect a material impact on our consolidated financial statements.

Amortization on purchased callable debt securities

In March 2017, the FASB issued new guidance that shortens the amortization period for the premium on certain purchased callable debt securities by requiring entities to amortize the premium to the earliest call date. This new guidance is effective January 1, 2019 and will be applied using a modified retrospective approach. We are currently evaluating the impact of the adoption of this guidance and have not yet determined the effect on our consolidated financial statements.

Reconciliation of non-GAAP measures

 
  three months ended
  six months ended
June 30
June 30
(unaudited - millions of $)
  2017
  2016
  2017
  2016
 
   
   
   
   
Comparable EBITDA
   
   
   
   
Canadian Natural Gas Pipelines
  527
    561
    1,031
    1,049  
U.S. Natural Gas Pipelines
  551
    252
    1,271
    590
 
Mexico Natural Gas Pipelines
  145
    49
    285
    102
 
Liquids Pipelines
  332
    276
    644
    572
 
Energy
  287
    231
    592
    559
 
Corporate
  (12
)
  -
    (16
)
  (1
)
Comparable EBITDA
  1,830     1,369     3,807
    2,871  
Depreciation and amortization
  (516
)
  (444
)
  (1,026 )
  (898
)
Comparable EBIT
  1,314     925
    2,781
    1,973  
Specific items:
   
   
   
   
 
Net gain on sales of U.S. Northeast power assets
  492
    -
    481
    -
 
 
Integration and acquisition related costs - Columbia   (20
)
  (10
)
  (59
)
  (36
)
 
Foreign exchange loss - inter-affiliate loan
  (8
)
  -
    (8
)
  -
 
 
Keystone XL asset costs
  (5
)
  (13
)
  (13
)
  (23
)
 
Alberta PPA terminations
  -
    -
    -
    (240
)
 
Restructuring costs
  -
    (14
)
  -
    (14
)
 
TC Offshore loss on sale
  -
    -
    -
    (4
)
 
Risk management activities1
  (91
)
  228
    (147
)
  103
 
Segmented earnings
  1,682     1,116     3,035
    1,759  
(1)
  Risk management activities
  three months ended
  six months ended
June 30
June 30
    (unaudited - millions of $)
  2017
  2016
  2017
  2016
     
   
   
   
   
    Canadian Power
  3
    20
    4
    7
 
    U.S. Power
  (94 )
  204     (156 )
  89
 
    Natural Gas Storage
  (4
)
  -
    1
    5
 
    Liquids marketing
  4
    4
    4
    2
 
    Total unrealized (losses)/gains from risk management activities   (91 )
  228     (147 )
  103  

Quarterly results

SELECTED QUARTERLY CONSOLIDATED FINANCIAL DATA

 
  2017
  2016
  2015
(unaudited - millions of $, except per share amounts)
  Second   First
  Fourth     Third
    Second   First
  Fourth     Third
 
                                     
Revenues
  3,217
  3,391
  3,619
    3,632
    2,751
  2,503
  2,851
    2,944
Net income/(loss) attributable to common shares
  881
  643
  (358
)
  (135
)
  365
  252
  (2,458 )
  402
Comparable earnings
  659
  698
  626
    622
    366
  494
  453
    440
Per share statistics
                                     
 
Net income/(loss) per common share - basic and diluted   $1.01
  $0.74
  $(0.43 )
  $(0.17 )
  $0.52
  $0.36
  $(3.47 )
  $0.57
 
Comparable earnings per common share
  $0.76
  $0.81
  $0.75
    $0.78
    $0.52
  $0.70
  $0.64
    $0.62
 
Dividends declared per common share
  $0.625   $0.625   $0.565     $0.565     $0.565   $0.565   $0.52
    $0.52

FACTORS AFFECTING QUARTERLY FINANCIAL INFORMATION BY BUSINESS SEGMENT

Quarter-over-quarter revenues and net income sometimes fluctuate, the causes of which vary across our business segments.

In our Canadian Natural Gas Pipelines, U.S. Natural Gas Pipelines and Mexico Natural Gas Pipelines segments, except for seasonal fluctuations in short-term throughput volumes on U.S. pipelines, quarter-over-quarter revenues and net income generally remain relatively stable during any fiscal year. Over the long term, however, they fluctuate because of:

regulatory decisions

negotiated settlements with shippers

acquisitions and divestitures

developments outside of the normal course of operations

newly constructed assets being placed in service.

In Liquids Pipelines, revenues and net income are based on contracted crude oil transportation and uncommitted spot transportation. Quarter-over-quarter revenues and net income are also affected by:

developments outside of the normal course of operations

newly constructed assets being placed in service

regulatory decisions.

In Energy, quarter-over-quarter revenues and net income are affected by:

weather

customer demand

market prices for natural gas and power

capacity prices and payments

planned and unplanned plant outages

acquisitions and divestitures

certain fair value adjustments

developments outside of the normal course of operations

newly constructed assets being placed in service.

FACTORS AFFECTING FINANCIAL INFORMATION BY QUARTER

We calculate comparable measures by adjusting certain GAAP and non-GAAP measures for specific items we believe are significant but not reflective of our underlying operations in the period.

Comparable earnings exclude the unrealized gains and losses from changes in the fair value of certain derivatives used to reduce our exposure to certain financial and commodity price risks. These derivatives generally provide effective economic hedges, but do not meet the criteria for hedge accounting. As a result, the changes in fair value are recorded in net income. As these amounts do not accurately reflect the gains and losses that will be realized at settlement, we do not consider them reflective of our underlying operations.

In second quarter 2017, comparable earnings excluded:

a $265 million net after-tax gain related to the monetization of our U.S. Northeast power business which includes a $441 million after-tax gain on the sale of TC Hydro and a loss of $176 million after tax on the sale of the thermal and wind package

an after-tax charge of $15 million for integration-related costs associated with the acquisition of Columbia

an after-tax charge of $4 million related to the maintenance of Keystone XL assets which are being expensed pending further advancement of the project.

In first quarter 2017, comparable earnings excluded:

a charge of $24 million after tax for integration-related costs associated with the acquisition of Columbia

a charge of $10 million after tax for costs related to the monetization of our U.S. Northeast power business

a charge of $7 million after tax related to the maintenance of Keystone XL assets which are being expensed pending further advancement of the project

a $7 million income tax recovery related to the realized loss on a third party sale of Keystone XL project assets. A provision for the expected pre-tax loss on these assets was included in our 2015 impairment charge, but the related income tax recoveries could not be recorded until realized.

In fourth quarter 2016, comparable earnings excluded:

an $870 million after-tax charge related to the loss on U.S. Northeast power assets held for sale which included an $863 million after-tax loss on the thermal and wind package held for sale and $7 million of after-tax costs related to the monetization

an additional $68 million after-tax loss on the transfer of environmental credits to the Balancing Pool upon final settlement of the Alberta PPA terminations

an after-tax charge of $67 million for costs associated with the acquisition of Columbia which included a $44 million deferred tax adjustment upon acquisition and $23 million of retention, severance and integration costs

an after-tax charge of $18 million related to Keystone XL costs for the maintenance and liquidation of project assets which are being expensed pending further advancement of the project

an after-tax restructuring charge of $6 million for additional expected future losses under lease commitments. These charges form part of a restructuring initiative, which commenced in 2015, to maximize the effectiveness and efficiency of our existing operations and reduce overall costs.

In third quarter 2016, comparable earnings excluded:

a $656 million after-tax impairment on Ravenswood goodwill. As a result of information received during the process to monetize our U.S. Northeast Power business in third quarter 2016, it was determined that the fair value of Ravenswood no longer exceeded its carrying value

costs associated with the acquisition of Columbia including a charge of $67 million after tax primarily related to retention, severance and integration expenses

$28 million of income tax recoveries related to the realized loss on a third party sale of Keystone XL plant and equipment. A provision for the expected loss on these assets was included in our fourth quarter 2015 impairment charge but the related tax recoveries could not be recorded until realized

a charge of $9 million after tax related to Keystone XL costs for the maintenance and liquidation of project assets which are being expensed pending further advancement of the project

a $3 million after-tax charge related to the monetization of our U.S. Northeast Power business.

In second quarter 2016, comparable earnings excluded:

a charge of $113 million related to costs associated with the acquisition of Columbia

a charge of $9 million after tax related to Keystone XL costs for the maintenance and liquidation of project assets which are being expensed pending further advancement of the project

a charge of $10 million after tax for restructuring charges mainly related to expected future losses under lease commitments.

In first quarter 2016, comparable earnings excluded:

a $176 million after-tax impairment charge on the carrying value of our Alberta PPAs as a result of our decision to terminate the PPAs

a charge of $26 million related to costs associated with the acquisition of Columbia

a charge of $6 million after tax related to Keystone XL costs for the maintenance and liquidation of project assets which are being expensed pending further advancement of the project

an additional $3 million after-tax loss on the sale of TC Offshore which closed on March 31, 2016.

In fourth quarter 2015, comparable earnings excluded:

a $2,891 million after-tax impairment charge on the carrying value of our investment in Keystone XL and related projects

an $86 million after-tax loss provision related to the sale of TC Offshore expected to close in early 2016

a net charge of $60 million after tax for our business restructuring and transformation initiative comprised of $28 million mainly related to 2015 severance costs and a provision of $32 million for 2016 planned severance costs and expected future losses under lease commitments. These charges form part of a restructuring initiative which commenced in 2015 to maximize the effectiveness and efficiency of our existing operations and reduce overall costs

a $43 million after-tax charge related to an impairment in value of turbine equipment held for future use in our Energy business

a charge of $27 million after tax related to Bruce Power’s retirement of debt in conjunction with the merger of the Bruce A and Bruce B partnerships

a $199 million positive income adjustment related to the impact on our net income from non-controlling interests of TC PipeLines, LP’s impairment of their equity investment in Great Lakes.

In third quarter 2015, comparable earnings excluded a charge of $6 million after-tax for severance costs as part of a restructuring initiative to maximize the effectiveness and efficiency of our existing operations.

Condensed consolidated statement of income

 
  three months ended
  six months ended
June 30
June 30
(unaudited - millions of Canadian $, except per share amounts)   2017
  2016
  2017
  2016
 
   
   
   
   
Revenues
   
   
   
   
Canadian Natural Gas Pipelines
  922
    908
    1,804     1,726  
U.S. Natural Gas Pipelines
  879
    344
    1,873     773
 
Mexico Natural Gas Pipelines
  150
    62
    293
    128
 
Liquids Pipelines
  501
    416
    973
    852
 
Energy
  765
    1,021
    1,665     1,775  
 
  3,217
    2,751
    6,608     5,254  
Income from Equity Investments
  197
    66
    371
    201
 
Operating and Other Expenses
   
   
   
   
Plant operating costs and other
  1,014
    754
    2,004     1,469  
Commodity purchases resold
  547
    375
    1,090     845
 
Property taxes
  153
    128
    315
    269
 
Depreciation and amortization
  516
    444
    1,033     898
 
Asset impairment charges
  -
    -
    -
    211
 
 
  2,230
    1,701
    4,442     3,692  
Gain/(Loss) on Sale of Assets
  498
    -
    498
    (4
)
Financial Charges
   
   
   
   
Interest expense
  524
    514
    1,024     934
 
Allowance for funds used during construction
  (121
)
  (111
)
  (222
)
  (212
)
Interest income and other
  (89
)
  (6
)
  (109
)
  (106
)
 
  314
    397
    693
    616
 
Income before Income Taxes
  1,368
    719
    2,342     1,143  
Income Tax Expense
   
   
   
   
Current
  55
    55
    122
    89
 
Deferred
  338
    219
    471
    255
 
 
  393
    274
    593
    344
 
Net Income
  975
    445
    1,749     799
 
Net income attributable to non-controlling interests
  55
    52
    145
    132
 
Net Income Attributable to Controlling Interests
  920
    393
    1,604     667
 
Preferred share dividends
  39
    28
    80
    50
 
Net Income Attributable to Common Shares
  881
    365
    1,524     617
 
 
   
   
   
   
Net Income per Common Share
   
   
   
   
Basic
  $1.01
    $0.52
    $1.76     $0.88  
Diluted
  $1.01
    $0.52
    $1.75     $0.88  
Dividends Declared per Common Share
  $0.625     $0.565     $1.25     $1.13  
 
   
   
   
   
Weighted Average Number of Common Shares (millions)
   
   
   
   
Basic
  870
    703
    868
    703
 
Diluted
  872
    703
    870
    703
 

See accompanying notes to the condensed consolidated financial statements.

Condensed consolidated statement of comprehensive income

 
  three months ended
  six months ended
June 30
June 30
(unaudited - millions of Canadian $)
  2017
  2016
  2017
  2016
 
   
   
   
   
Net Income
  975
    445     1,749     799
 
Other Comprehensive (Loss)/Income, Net of Income Taxes
   
   
   
   
Foreign currency translation (losses)/gains on net investment in foreign operations
  (269 )
  5
    (351
)
  (207 )
Reclassification of foreign currency translation gains on net investment in foreign operations
  (77
)
  -
    (77
)
  -
 
Change in fair value of net investment hedges
  (1
)
  (6
)
  (2
)
  (8
)
Change in fair value of cash flow hedges
  (2
)
  55
    3
    16
 
Reclassification to net income of gains and losses on cash flow hedges
  (1
)
  (40 )
  (1
)
  40
 
Reclassification of actuarial gains and losses on pension and other post-retirement benefit plans   4
    4
    7
    8
 
Other comprehensive income on equity investments
  -
    4
    3
    7
 
Other comprehensive (loss)/income (Note 8)
  (346 )
  22
    (418
)
  (144 )
Comprehensive Income
  629
    467     1,331     655
 
Comprehensive income attributable to non-controlling interests
  6
    54
    56
    28
 
Comprehensive Income Attributable to Controlling Interests
  623
    413     1,275     627
 
Preferred share dividends
  39
    28
    80
    50
 
Comprehensive Income Attributable to Common Shares
  584
    385     1,195     577
 

See accompanying notes to the condensed consolidated financial statements.

Condensed consolidated statement of cash flows

 
  three months ended
  six months ended
June 30
June 30
(unaudited - millions of Canadian $)
  2017
  2016
  2017
  2016
 
   
   
   
   
Cash Generated from Operations
   
   
   
   
Net income
  975
    445
    1,749
    799
 
Depreciation and amortization
  516
    444
    1,033
    898
 
Asset impairment charges
  -
    -
    -
    211
 
Deferred income taxes
  338
    219
    471
    255
 
Income from equity investments
  (197
)
  (66
)
  (371
)
  (201
)
Distributions received from operating activities of equity investments   228
    181
    447
    440
 
Employee post-retirement benefits expense, net of funding
  6
    (20
)
  9
    (9
)
(Gain)/loss on sale of assets
  (498
)
  -
    (498
)
  4
 
Equity allowance for funds used during construction
  (78
)
  (67
)
  (142
)
  (124
)
Unrealized losses/(gains) on financial instruments
  50
    (224
)
  91
    (153
)
Other
  (4
)
  18
    4
    23
 
Decrease/(increase) in operating working capital
  17
    218
    (138
)
  86
 
Net cash provided by operations
  1,353
    1,148
    2,655
    2,229
 
Investing Activities
   
   
   
   
Capital expenditures
  (1,792 )
  (982
)
  (3,352 )
  (1,818
)
Capital projects in development
  (56
)
  (90
)
  (98
)
  (157
)
Contributions to equity investments
  (473
)
  (114
)
  (665
)
  (284
)
Restricted cash
  -
    (13,113 )
  -
    (13,113 )
Acquisitions, net of cash acquired
  -
    (4
)
  -
    (999
)
Proceeds from sale of assets, net of transaction costs
  4,147
    -
    4,147
    6
 
Other distributions from equity investments
  1
    725
    364
    725
 
Deferred amounts and other
  (169
)
  (20
)
  (254
)
  32
 
Net cash provided by/(used in) investing activities
  1,658
    (13,598 )
  142
    (15,608 )
Financing Activities
   
   
   
   
Notes payable issued/(repaid), net
  111
    (853
)
  781
    323
 
Long-term debt issued, net of issue costs
  817
    10,335
    817
    12,327
 
Long-term debt repaid
  (4,418 )
  (933
)
  (5,469 )
  (2,290
)
Junior subordinated notes issued, net of issue costs
  1,489
    -
    3,471
    -
 
Dividends on common shares
  (328
)
  (397
)
  (628
)
  (762
)
Dividends on preferred shares
  (38
)
  (23
)
  (77
)
  (46
)
Distributions paid to non-controlling interests
  (69
)
  (62
)
  (149
)
  (124
)
Common shares/subscription receipts issued, net of issue costs
  18
    4,371
    36
    4,374
 
Common shares repurchased
  -
    -
    -
    (14
)
Preferred shares issued, net of issue costs
  -
    492
    -
    492
 
Partnership units of TC PipeLines, LP issued, net of issue costs
  27
    82
    119
    106
 
Common units of Columbia Pipeline Partners LP acquired
  -
    -
    (1,205 )
  -
 
Net cash (used in)/provided by financing activities
  (2,391 )
  13,012
    (2,304 )
  14,386
 
Effect of Foreign Exchange Rate Changes on Cash and Cash Equivalents
  (24
)
  (73
)
  (19
)
  (130
)
Increase in Cash and Cash Equivalents
  596
    489
    474
    877
 
Cash and Cash Equivalents
   
   
   
   
Beginning of period
  894
    1,238
    1,016
    850
 
Cash and Cash Equivalents
   
   
   
   
End of period
  1,490
    1,727
    1,490
    1,727
 

See accompanying notes to the condensed consolidated financial statements.

Condensed consolidated balance sheet

 
  June 30,
  December 31,
(unaudited - millions of Canadian $)
  2017
  2016
ASSETS
   
   
Current Assets
   
   
Cash and cash equivalents
  1,490
    1,016
 
Accounts receivable
  2,117
    2,075
 
Inventories
  393
    368
 
Assets held for sale
  -
    3,717
 
Other
  899
    908
 
 
  4,899
    8,084
 
Plant, Property and Equipment
net of accumulated depreciation of $23,054 and $22,263, respectively   55,951     54,475  
Equity Investments
  6,315
    6,544
 
Regulatory Assets
  1,306
    1,322
 
Goodwill
  13,569     13,958  
Intangible and Other Assets
  3,490
    3,026
 
Restricted Investments
  784
    642
 
 
  86,314     88,051  
LIABILITIES
   
   
Current Liabilities
   
   
Notes payable
  1,559
    774
 
Accounts payable and other
  4,057
    3,861
 
Dividends payable
  557
    526
 
Accrued interest
  609
    595
 
Liabilities related to assets held for sale
  -
    86
 
Current portion of long-term debt
  3,270
    1,838
 
 
  10,052     7,680
 
Regulatory Liabilities
  2,376
    2,121
 
Other Long-Term Liabilities
  980
    1,183
 
Deferred Income Tax Liabilities
  8,054
    7,662
 
Long-Term Debt
  31,276     38,312  
Junior Subordinated Notes
  7,218
    3,931
 
 
  59,956     60,889  
Common Units Subject to Rescission or Redemption
  -
    1,179
 
EQUITY
   
   
Common shares, no par value
  20,544     20,099  
 
Issued and outstanding: June 30, 2017 - 871 million shares
   
   
 
December 31, 2016 - 864 million shares
   
   
Preferred shares
  3,980
    3,980
 
Additional paid-in capital
  -
    -
 
Retained earnings
  1,251
    1,138
 
Accumulated other comprehensive loss
  (1,289 )
  (960
)
Controlling Interests
  24,486     24,257  
Non-controlling interests
  1,872
    1,726
 
 
  26,358     25,983  
 
  86,314     88,051  

Commitments, Contingencies and Guarantees (Note 12)

Variable Interest Entities (Note 13)

Subsequent Event (Note 14)

See accompanying notes to the condensed consolidated financial statements.

Condensed consolidated statement of equity

 
six months ended June 30
(unaudited - millions of Canadian $)
2017
  2016
Common Shares
 
   
Balance at beginning of period
20,099     12,102  
Shares issued on exercise of stock options
39
    29
 
Shares repurchased
-
    (6
)
Shares issued under dividend reinvestment and share purchase plan
406
    -
 
Balance at end of period
20,544     12,125  
Preferred Shares
       
Balance at beginning and end of period
3,980
    2,992
 
Additional Paid-In Capital
       
Balance at beginning of period
-
    7
 
Issuance of stock options, net of exercises
2
    5
 
Dilution impact from TC PipeLines, LP units issued
13
    12
 
Impact of common shares repurchased
-
    (8
)
Impact of asset drop downs to TC PipeLines, LP
(202
)
  (38
)
Impact of Columbia Pipeline Partners LP acquisition
(171
)
  -
 
Reclassification of Additional Paid-In Capital deficit to Retained Earnings
358
    22
 
Balance at end of period
-
    -
 
Retained Earnings
       
Balance at beginning of period
1,138
    2,769
 
Net income attributable to controlling interests
1,604
    667
 
Common share dividends
(1,087 )
  (794
)
Preferred share dividends
(58
)
  (44
)
Adjustment related to employee share-based payments (Note 2)
12
    -
 
Reclassification of Additional Paid-In Capital deficit to Retained Earnings
(358
)
  (22
)
Balance at end of period
1,251
    2,576
 
Accumulated Other Comprehensive Loss
       
Balance at beginning of period
(960
)
  (939
)
Other comprehensive loss
(329
)
  (40
)
Balance at end of period
(1,289 )
  (979
)
Equity Attributable to Controlling Interests
24,486     16,714  
Equity Attributable to Non-Controlling Interests
       
Balance at beginning of period
1,726
    1,717
 
Net income attributable to non-controlling interests
       
 
TC PipeLines, LP
127
    110
 
 
Portland Natural Gas Transmission System
9
    22
 
 
Columbia Pipeline Partners LP
9
    -
 
Other comprehensive loss attributable to non-controlling interests
(89
)
  (104
)
Issuance of TC PipeLines, LP units
       
 
Proceeds, net of issue costs
119
    106
 
 
Decrease in TransCanada’s ownership of TC PipeLines, LP (21
)
  (19
)
Reclassification from/(to) common units of TC PipeLines, LP subject to rescission
106
    (106
)
Distributions declared to non-controlling interests
(147
)
  (125
)
Impact of Columbia Pipeline Partners LP acquisition
33
    -
 
Balance at end of period
1,872
    1,601
 
Total Equity
26,358     18,315  

See accompanying notes to the condensed consolidated financial statements.

Notes to condensed consolidated financial statements

(unaudited)

1. Basis of presentation

These condensed consolidated financial statements of TransCanada Corporation (TransCanada or the Company) have been prepared by management in accordance with U.S. GAAP. The accounting policies applied are consistent with those outlined in TransCanada’s annual audited consolidated financial statements for the year ended December 31, 2016, except as described in Note 2, Accounting changes. Capitalized and abbreviated terms that are used but not otherwise defined herein are identified in TransCanada’s 2016 Annual Report.

These condensed consolidated financial statements reflect adjustments, all of which are normal recurring adjustments that are, in the opinion of management, necessary to reflect fairly the financial position and results of operations for the respective periods. These condensed consolidated financial statements do not include all disclosures required in the annual financial statements and should be read in conjunction with the 2016 audited consolidated financial statements included in TransCanada’s 2016 Annual Report. Certain comparative figures have been reclassified to conform with the current period’s presentation.

Earnings for interim periods may not be indicative of results for the fiscal year in the Company’s natural gas pipelines segments due to the timing of regulatory decisions and seasonal fluctuations in short-term throughput volumes on U.S. pipelines. Earnings for interim periods may also not be indicative of results for the fiscal year in the Company’s Energy segment due to the impact of seasonal weather conditions on customer demand and market pricing in certain of the Company’s investments in electrical power generation plants and non-regulated gas storage facilities.

USE OF ESTIMATES AND JUDGEMENTS

In preparing these financial statements, TransCanada is required to make estimates and assumptions that affect both the amount and timing of recording assets, liabilities, revenues and expenses since the determination of these items may be dependent on future events. The Company uses the most current information available and exercises careful judgement in making these estimates and assumptions. In the opinion of management, these condensed consolidated financial statements have been properly prepared within reasonable limits of materiality and within the framework of the Company’s significant accounting policies included in the consolidated financial statements for the year ended December 31, 2016, except as described in Note 2, Accounting changes.

2. Accounting changes

CHANGES IN ACCOUNTING POLICIES FOR 2017

Inventory

In July 2015, the FASB issued new guidance on simplifying the measurement of inventory. The new guidance specifies that an entity should measure inventory within the scope of this guidance at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. This new guidance was effective January 1, 2017, was applied prospectively and did not have a material impact on the Company’s consolidated balance sheet.

Derivatives and hedging

In March 2016, the FASB issued new guidance that clarifies the requirements for assessing whether contingent call or put options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. The new guidance requires only an assessment of the four-step decision sequence outlined in U.S. GAAP to determine whether the economic characteristics and risks of call or put options are clearly and closely related to the economic characteristics and risks of their debt hosts. This new guidance was effective January 1, 2017, was applied prospectively and has not resulted in any impact on the Company’s consolidated financial statements.

Equity method investments

In March 2016, the FASB issued new guidance that simplifies the transition to equity method accounting. The new guidance eliminates the requirement to retroactively apply the equity method of accounting when an increase in ownership interest in an investment qualifies it for equity method accounting. This new guidance was effective January 1, 2017, was applied prospectively and has not resulted in any impact on the Company’s consolidated financial statements.

Employee share-based payments

In March 2016, the FASB issued new guidance that simplifies several aspects of the accounting for employee share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. The new guidance also permits entities to make an accounting policy election either to continue to estimate the total number of awards for which the requisite service period will not be rendered or to account for forfeitures when they occur. The Company has elected to account for forfeitures when they occur. This new guidance was effective January 1, 2017 and resulted in a cumulative-effect adjustment of $12 million to opening retained earnings and the recognition of a deferred tax asset related to employee share-based payments made prior to the adoption of this guidance.

Consolidation

In October 2016, the FASB issued new guidance on consolidation relating to interests held through related parties that are under common control. The new guidance amends the consolidation requirements such that if a decision maker is required to evaluate whether it is the primary beneficiary of a VIE, it will need to consider only its proportionate indirect interest in the VIE held through a common control party. The new guidance was effective January 1, 2017, was applied retrospectively and did not result in any change to the Company’s consolidation conclusions.

FUTURE ACCOUNTING CHANGES

Revenue from contracts with customers

In 2014, the FASB issued new guidance on revenue from contracts with customers. The new guidance requires that an entity recognize revenue in accordance with a five-step model. This model is used to depict the transfer of promised goods or services to customers in an amount that reflects the total consideration to which it expects to be entitled during the term of the contract in exchange for those goods or services. The new guidance also requires additional disclosures about the nature, amount, timing and uncertainty of revenue and the related cash flows. The Company will adopt the new standard on the effective date of January 1, 2018. There are two methods in which the new standard can be adopted: (1) a full retrospective approach with restatement of all prior periods presented, or (2) a modified retrospective approach with a cumulative-effect adjustment as of the date of adoption. The Company currently anticipates adopting the standard using the modified retrospective approach with the cumulative-effect of the adjustment recognized at the date of adoption, subject to allowable and elected practical expedients.

The Company has identified all existing customer contracts that are within the scope of the new guidance and is on schedule in the process of analyzing individual contracts or groups of contracts by operating segment to identify any significant changes in how revenues are recognized as a result of implementing the new guidance. While the Company has not identified any material differences in the amount and timing of revenue recognition for the operating segments that have been analyzed to date, the evaluation is not complete and the Company has not concluded on the overall impact of adopting the new guidance. The Company continues its contract analysis to obtain the information necessary to quantify the cumulative-effect adjustment, if any, on prior period revenues and revenue recognized going forward. The Company also continues to address any system and process changes necessary to compile the information to meet the recognition and disclosure requirements of the new guidance.

Financial instruments

In January 2016, the FASB issued new guidance on the accounting for equity investments and financial liabilities. The new guidance will change the income statement effect of equity investments and the recognition of changes in the fair value of financial liabilities when the fair value option is elected. The new guidance also requires the Company to assess valuation allowances for deferred tax assets related to available for sale debt securities in combination with their other deferred tax assets. This new guidance is effective January 1, 2018 and a method of adoption is specified for each component of the guidance. The Company is currently evaluating the impact of the adoption of this guidance and has not yet determined the effect on its consolidated financial statements.

Leases

In February 2016, the FASB issued new guidance on the accounting for leases. The new guidance amends the definition of a lease requiring the customer to have both (1) the right to obtain substantially all of the economic benefits from the use of the asset and (2) the right to direct the use of the asset in order for an arrangement to qualify as a lease. The new guidance also establishes a right-of-use (ROU) model that requires a lessee to recognize a ROU asset and corresponding lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new guidance does not make extensive changes to lessor accounting.

The new guidance is effective on January 1, 2019, with early adoption permitted. A modified retrospective transition approach is required for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is continuing to identify and analyze existing lease agreements to determine the effect of adoption of the new guidance on its consolidated financial statements. The Company is also addressing system and process changes necessary to compile the information to meet the recognition and disclosure requirements of the new guidance.

Measurement of credit losses on financial instruments

In June 2016, the FASB issued new guidance that significantly changes how entities measure credit losses for most financial assets and certain other financial instruments that are not measured at fair value through net income. The new guidance amends the impairment model of financial instruments basing it on expected losses rather than incurred losses. These expected credit losses will be recognized as an allowance rather than a direct write down of the amortized cost basis. The new guidance is effective January 1, 2020 and will be applied using a modified retrospective approach. The Company is currently evaluating the impact of the adoption of this guidance and has not yet determined the effect on its consolidated financial statements.

Income taxes

In October 2016, the FASB issued new guidance on the income tax effects of intra-entity transfers of assets other than inventory. The new guidance requires the recognition of deferred and current income taxes for an intra-entity asset transfer when the transfer occurs. The new guidance is effective January 1, 2018 and will be applied using a modified retrospective approach. The Company is currently evaluating the impact of the adoption of this guidance and has not yet determined the effect on its consolidated financial statements.

Restricted cash

In November 2016, the FASB issued new guidance on restricted cash and cash equivalents on the statement of cash flows. The new guidance requires that the statement of cash flows explain the change during the period in the total cash and cash equivalents balance, and amounts generally described as restricted cash or restricted cash equivalents. Restricted cash and cash equivalents will be included with Cash and cash equivalents when reconciling the beginning of year and end of year total amounts on the statement of cash flows. This new guidance is effective January 1, 2018 and will be applied retrospectively, however, early adoption is permitted.

Goodwill impairment

In January 2017, the FASB issued new guidance on simplifying the test for goodwill impairment by eliminating Step 2 of the impairment test, which is the requirement to calculate the implied fair value of goodwill to measure the impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value. This new guidance is effective January 1, 2020 and will be applied prospectively, however, early adoption is permitted.

Employee post-retirement benefits

In March 2017, the FASB issued new guidance that will require entities to disaggregate the current service cost component from the other components of net benefit cost and present it with other current compensation costs for related employees in the income statement. The new guidance also requires that the other components of net benefit cost be presented elsewhere in the income statement and excluded from income from operations if such a subtotal is presented. In addition, the new guidance makes changes to the components of net benefit cost that are eligible for capitalization. Entities must use a retrospective transition method to adopt the requirement for separate presentation in the income statement of the components of net benefit cost, and a prospective transition method to adopt the change to capitalization of benefit costs. This new guidance is effective January 1, 2018. The Company is currently evaluating the impact of the adoption of this guidance, however, does not expect a material impact on its consolidated financial statements.

Amortization on purchased callable debt securities

In March 2017, the FASB issued new guidance that shortens the amortization period for the premium on certain purchased callable debt securities by requiring entities to amortize the premium to the earliest call date. This new guidance is effective January 1, 2019 and will be applied using a modified retrospective approach. The Company is currently evaluating the impact of the adoption of this guidance and has not yet determined the effect on its consolidated financial statements.

3. Segmented information

three months ended June 30, 2017
  Canadian Natural Gas Pipelines
  U.S. Natural Gas Pipelines
  Mexico Natural Gas Pipelines
  Liquids Pipelines    
   
   
(unaudited - millions of Canadian $)  
 
 
 
  Energy
  Corporate
  Total
 
   
   
   
   
   
   
   
Revenues
  922
 
  879
 
  150
 
  501
 
  765
    -
    3,217
 
Income from equity investments
  2
 
  57
 
  5
 
  (1
)
  142
    (8
)
  197
 
Plant operating costs and other
  (328
)
  (337
)
  (10
)
  (147
)
  (160 )
  (32
)
  (1,014 )
Commodity purchases resold
  -
 
  -
 
  -
 
  -
 
  (547 )
  -
    (547
)
Property taxes
  (69
)
  (48
)
  -
 
  (22
)
  (14
)
  -
    (153
)
Depreciation and amortization
  (222
)
  (150
)
  (25
)
  (80
)
  (39
)
  -
    (516
)
Gain on sale of assets
  -
 
  -
 
  -
 
  -
 
  498
    -
    498
 
Segmented earnings/(loss)
  305
 
  401
 
  120
 
  251
 
  645
    (40
)
  1,682
 
Interest expense
  (524
)
Allowance for funds used during construction
  121
 
Interest income and other
  89
 
Income before income taxes
  1,368
 
Income tax expense
  (393
)
Net income
  975
 
Net income attributable to non-controlling interests
  (55
)
Net income attributable to controlling interests
  920
 
Preferred share dividends
  (39
)
Net income attributable to common shares
  881
 
three months ended June 30, 2016
 
   
   
    Liquids Pipelines    
   
   
  Canadian Natural Gas Pipelines 
  U.S. Natural Gas Pipelines 
  Mexico Natural Gas Pipelines 
 
(unaudited - millions of Canadian $)
  Energy     Corporate     Total  
 
 
 
 
 
 
 
   
   
   
   
Revenues
 
908
   
344
   
62
    416
 
  1,021
    -
    2,751  
Income from equity investments
 
3
   
37
   
-
    (1
)
  27
    -
    66
 
Plant operating costs and other
 
(286
)
 
(110
)
 
(13
)
  (125
)
  (196
)
  (24
)
  (754
)
Commodity purchases resold
 
-
   
-
   
-
    -
 
  (375
)
  -
    (375
)
Property taxes
 
(64
)
 
(19
)
 
-
    (23
)
  (22
)
  -
    (128
)
Depreciation and amortization
 
(219
)
 
(64
)
 
(8
)
  (69
)
  (84
)
  -
    (444
)
Segmented earnings/(loss)
 
342
   
188
   
41
    198
 
  371
    (24
)
  1,116  
Interest expense
  (514
)
Allowance for funds used during construction
  111
 
Interest income and other
  6
 
Income before income taxes
  719
 
Income tax expense
  (274
)
Net income
  445
 
Net income attributable to non-controlling interests
  (52
)
Net income attributable to controlling interests
  393
 
Preferred share dividends
  (28
)
Net income attributable to common shares
  365
 
six months ended June 30, 2017
  Canadian Natural Gas Pipelines
  U.S. Natural Gas Pipelines
  Mexico Natural Gas Pipelines
  Liquids Pipelines    
   
   
(unaudited - millions of Canadian $)  
 
 
 
  Energy
  Corporate
  Total
 
   
   
   
   
   
   
   
Revenues
  1,804
 
  1,873
 
  293
 
  973
 
  1,665
    -
    6,608
 
Income from equity investments
  5
 
  122
 
  11
 
  (1
)
  242
    (8
)
  371
 
Plant operating costs and other
  (640
)
  (632
)
  (19
)
  (292
)
  (356
)
  (65
)
  (2,004 )
Commodity purchases resold
  -
 
  -
 
  -
 
  -
 
  (1,090 )
  -
    (1,090 )
Property taxes
  (138
)
  (95
)
  -
 
  (45
)
  (37
)
  -
    (315
)
Depreciation and amortization
  (444
)
  (306
)
  (47
)
  (157
)
  (79
)
  -
    (1,033 )
Gain on sale of assets
  -
 
  -
 
  -
 
  -
 
  498
    -
    498
 
Segmented earnings/(loss)
  587
 
  962
 
  238
 
  478
 
  843
    (73
)
  3,035
 
Interest expense
  (1,024 )
Allowance for funds used during construction
  222
 
Interest income and other
  109
 
Income before income taxes
  2,342
 
Income tax expense
  (593
)
Net income
  1,749
 
Net income attributable to non-controlling interests
  (145
)
Net income attributable to controlling interests
  1,604
 
Preferred share dividends
  (80
)
Net income attributable to common shares
  1,524
 
six months ended June 30, 2016
  Canadian Natural Gas Pipelines
  U.S. Natural Gas Pipelines
  Mexico Natural Gas Pipelines
  Liquids Pipelines    
   
   
(unaudited - millions of Canadian $)  
 
 
 
  Energy
  Corporate
  Total
 
   
   
   
   
   
   
   
Revenues
  1,726
 
  773
 
  128
 
  852
 
  1,775     -
    5,254
 
Income from equity investments
  6
 
  85
 
  -
 
  (1
)
  111
    -
    201
 
Plant operating costs and other
  (546
)
  (228
)
  (26
)
  (254
)
  (364
)
  (51
)
  (1,469 )
Commodity purchases resold
  -
 
  -
 
  -
 
  -
 
  (845
)
  -
    (845
)
Property taxes
  (137
)
  (40
)
  -
 
  (46
)
  (46
)
  -
    (269
)
Depreciation and amortization
  (435
)
  (131
)
  (16
)
  (141
)
  (175
)
  -
    (898
)
Asset impairment charges
  -
 
  -
 
  -
 
  -
 
  (211
)
  -
    (211
)
Loss on sale of assets
  -
 
  (4
)
  -
 
  -
 
  -
    -
    (4
)
Segmented earnings/(loss)
  614
 
  455
 
  86
 
  410
 
  245
    (51
)
  1,759
 
Interest expense
  (934
)
Allowance for funds used during construction
  212
 
Interest income and other
  106
 
Income before income taxes
  1,143
 
Income tax expense
  (344
)
Net Income
  799
 
Net income attributable to non-controlling interests
  (132
)
Net Income attributable to controlling interests
  667
 
Preferred share dividends
  (50
)
Net Income attributable to common shares
  617
 

TOTAL ASSETS

(unaudited - millions of Canadian $)   June 30, 2017   December 31, 2016
 
   
   
Canadian Natural Gas Pipelines
  16,564     15,816
 
U.S. Natural Gas Pipelines
  34,926     34,422
 
Mexico Natural Gas Pipelines
  5,386
    5,013
 
Liquids Pipelines
  16,789     16,896
 
Energy
  9,181
    13,169
 
Corporate
  3,468
    2,735
 
 
  86,314     88,051
 

4. Income taxes

The effective tax rates for the six-month periods ended June 30, 2017 and 2016 were 25 per cent and 30 per cent, respectively. The lower effective tax rate in 2017 was primarily the result of lower flow-through taxes in 2017 on Canadian regulated pipelines and changes in the proportion of income earned between Canadian and foreign jurisdictions.

5. Long-term debt

LONG-TERM DEBT ISSUED

The Company issued long-term debt in the six months ended June 30, 2017 as follows:

(unaudited - millions of Canadian $, unless noted otherwise)          
Company
 
Issue date  
Type
 
Maturity date  
Amount
 
Interest rate
 
 
 
 
 
 
 
 
 
 
 
TC PIPELINES, LP
 
 
 
 
 
 
 
 
 
 
May 2017
 
Senior Unsecured Notes  
May 2027
 
US 500
 
 
3.90
%
 
 
 
 
 
 
 
 
 
 
 
 
 

LONG-TERM DEBT RETIRED

The Company retired long-term debt in the six months ended June 30, 2017 as follows:

(unaudited - millions of Canadian $, unless noted otherwise)  
Retirement date   Type
  Amount
  Interest rate
Company
 
 
 
   
   
   
TRANSCANADA PIPELINES LIMITED
   
   
   
 
 
June 2017
  Acquisition Bridge Facility   US 1,513     Floating
 
 
February 2017
  Acquisition Bridge Facility   US 500
    Floating
 
 
January 2017
  Medium Term Notes
  300
    5.10
%
TRANSCANADA PIPELINE USA LTD.
   
   
   
 
 
June 2017
  Acquisition Bridge Facility   US 630
    Floating
 
 
April 2017
  Acquisition Bridge Facility   US 1,070     Floating

The acquisition bridge facilities were put into place to finance a portion of the Columbia acquisition. Proceeds from the sale of the U.S. Northeast power assets were used to fully retire the remaining acquisition bridge facilities in second quarter 2017.

In the three and six months ended June 30, 2017, TransCanada capitalized interest related to capital projects of $56 million and $101 million (2016 - $46 million and $87 million).

6. Junior subordinated notes issued

(unaudited - millions of Canadian $, unless noted otherwise)  
Company
  Issue date   Type
  Maturity date   Amount
  Interest rate
 
   
   
   
   
   
TRANSCANADA PIPELINES LIMITED   May 2017
  Junior Subordinated Notes1,2   May 2077
  1,500
    4.90
%
TRANSCANADA PIPELINES LIMITED   March 2017   Junior Subordinated Notes1,2   March 2077
  US 1,500     5.55
%
(1) The Junior subordinated notes are subordinated in right of payment to existing and future senior indebtedness or other obligations of TCPL.
(2) The Junior subordinated notes were issued to TransCanada Trust (the Trust), a financing trust subsidiary wholly-owned by TCPL. While the obligations of the Trust are fully and unconditionally guaranteed by TCPL on a subordinated basis, the Trust is not consolidated in TransCanada’s financial statements because TCPL does not have a variable interest in the Trust and the only substantive assets of the Trust are junior subordinated notes of TCPL.

In May 2017, the Trust issued $1.5 billion of Trust Notes - Series 2017-B (Trust Notes) to third party investors with a fixed interest rate of 4.65 per cent for the first ten years converting to a floating rate thereafter. All of the proceeds of the issuance by the Trust were loaned to TCPL for $1.5 billion of junior subordinated notes of TCPL at an initial fixed rate of 4.90 per cent, including a 0.25 per cent administration charge. The rate will reset commencing May 2027 until May 2047 to the three month Bankers’ Acceptance rate plus 3.33 per cent per annum; from May 2047 until May 2077, the interest rate will reset to the three month Bankers’ Acceptance rate plus 4.08 per cent per annum. The junior subordinated notes are callable at TCPL’s option at any time on or after May 18, 2027 at 100 per cent of the principal amount plus accrued and unpaid interest to the date of redemption.

In March 2017, the Trust issued US$1.5 billion of Trust Notes - Series 2017-A (Trust Notes) to third party investors with a fixed interest rate of 5.30 per cent for the first ten years converting to a floating rate thereafter. All of the proceeds of the issuance by the Trust were loaned to TCPL for US$1.5 billion of junior subordinated notes of TCPL at an initial fixed rate of 5.55 per cent, including a 0.25 per cent administration charge. The rate will reset commencing March 2027 until March 2047 to the three month LIBOR plus 3.458 per cent per annum; from March 2047 until March 2077, the interest rate will reset to the three month LIBOR plus 4.208 per cent per annum. The junior subordinated notes are callable at TCPL’s option at any time on or after March 15, 2027 at 100 per cent of the principal amount plus accrued and unpaid interest to the date of redemption.

Pursuant to the terms of the Trust Notes and related agreements, in certain circumstances (1) TCPL may issue deferral preferred shares to holders of the Trust Notes in lieu of interest; and (2) TransCanada and TCPL would be prohibited from declaring or paying dividends on or redeeming their outstanding preferred shares (or, if none are outstanding, their respective common shares) until all deferral preferred shares are redeemed by TCPL. The Trust Notes may also be automatically exchanged for preferred shares of TCPL upon certain kinds of bankruptcy and insolvency events. All of these preferred shares would rank equally with any other outstanding first preferred shares of TCPL.

7. Common units subject to rescission or redemption

Columbia Pipeline Partners LP acquisition

On February 17, 2017, the Company acquired all outstanding publicly held common units of Columbia Pipeline Partners LP (CPPL) at a price of US$17.00 and a stub period distribution payment of US$0.10 per common unit for an aggregate transaction value of US$921 million. As this was a transaction between entities under common control, it was recognized in equity.

At December 31, 2016, the entire $1,073 million (US$799 million) of the Company’s non-controlling interest in CPPL was recorded as Common units subject to rescission or redemption on the condensed consolidated balance sheet.

Common units of TC PipeLines, LP subject to rescission

In March 2017, rescission rights on 0.4 million TC PipeLines, LP common units expired and $24 million was reclassified to equity.

During second quarter 2017, rescission rights on the remaining 1.2 million TC PipeLines, LP common units expired and $82 million (US$63 million) was reclassified to equity. At June 30, 2017, there were no outstanding Common units subject to rescission or redemption on the condensed consolidated balance sheet (December 31, 2016 - $106 million (US$82 million)).

8. Other comprehensive loss and accumulated other comprehensive loss

Components of other comprehensive loss, including the portion attributable to non-controlling interests and related tax effects, are as follows:

three months ended June 30, 2017
   
  Income Tax
   
(unaudited - millions of Canadian $)
  Before Tax Amount   Recovery/
  Net of Tax Amount
Expense
 
   
   
   
Foreign currency translation losses on net investment in foreign operations
  (265
)
  (4
)
  (269
)
Reclassification of foreign currency translation gains on net investment on disposal of foreign operations   (77
)
  -
    (77
)
Change in fair value of net investment hedges
  (1
)
  -
    (1
)
Change in fair value of cash flow hedges
  (2
)
  -
    (2
)
Reclassification to net income of gains and losses on cash flow hedges
  (2
)
  1
    (1
)
Reclassification of actuarial gains and losses on pension and other post-retirement benefit plans
  5
 
  (1
)
  4
 
Other comprehensive loss
  (342
)
  (4
)
  (346
)
three months ended June 30, 2016
   
  Income Tax
   
(unaudited - millions of Canadian $)
  Before Tax Amount   Recovery/
  Net of Tax Amount
Expense
 
   
   
   
Foreign currency translation gains on net investment in foreign operations
  5
 
  -
    5
 
Change in fair value of net investment hedges
  (7
)
  1
    (6
)
Change in fair value of cash flow hedges
  81
 
  (26
)
  55
 
Reclassification to net income of gains and losses on cash flow hedges
  (56
)
  16
    (40
)
Reclassification of actuarial gains and losses on pension and other post-retirement benefit plans   6
 
  (2
)
  4
 
Other comprehensive income on equity investments
  5
 
  (1
)
  4
 
Other comprehensive income
  34
 
  (12
)
  22
 
six months ended June 30, 2017
   
  Income Tax
   
(unaudited - millions of Canadian $)
  Before Tax Amount   Recovery/
  Net of Tax Amount
Expense
 
   
   
   
Foreign currency translation losses on net investment in foreign operations
  (353
)
  2
    (351
)
Reclassification of foreign currency translation gains on net investment on disposal of foreign operations   (77
)
  -
    (77
)
Change in fair value of net investment hedges
  (3
)
  1
    (2
)
Change in fair value of cash flow hedges
  4
 
  (1
)
  3
 
Reclassification to net income of gains and losses on cash flow hedges
  (2
)
  1
    (1
)
Reclassification of actuarial gains and losses on pension and other post-retirement benefit plans
  10
 
  (3
)
  7
 
Other comprehensive income on equity investments
  4
 
  (1
)
  3
 
Other comprehensive loss
  (417
)
  (1
)
  (418
)
six months ended June 30, 2016
   
  Income Tax
   
(unaudited - millions of Canadian $)
  Before Tax Amount   Recovery/
  Net of Tax Amount
Expense
 
   
   
   
Foreign currency translation losses on net investment in foreign operations
  (205
)
  (2
)
  (207
)
Change in fair value of net investment hedges
  (10
)
  2
    (8
)
Change in fair value of cash flow hedges
  27
 
  (11
)
  16
 
Reclassification to net income of gains and losses on cash flow hedges
  64
 
  (24
)
  40
 
Reclassification of actuarial gains and losses on pension and other post-retirement benefit plans   11
 
  (3
)
  8
 
Other comprehensive income on equity investments
  9
 
  (2
)
  7
 
Other comprehensive loss
  (104
)
  (40
)
  (144
)

The changes in AOCI by component are as follows:

three months ended June 30, 2017
  Currency
   
  Pension and
   
   
Translation Adjustments
OPEB Plan Adjustments
(unaudited - millions of Canadian $)
 
  Cash Flow Hedges  
  Equity Investments
  Total1
 
   
   
   
   
   
AOCI balance at April 1, 2017
  (418
)
  (24
)
  (205
)
  (345
)
  (992
)
Other comprehensive loss before reclassifications2
  (221
)
  (2
)
  -
 
  -
 
  (223
)
Amounts reclassified from accumulated other comprehensive loss   (77
)
  (1
)
  4
 
  -
 
  (74
)
Net current period other comprehensive (loss)/income
  (298
)
  (3
)
  4
 
  -
 
  (297
)
AOCI balance at June 30, 2017
  (716
)
  (27
)
  (201
)
  (345
)
  (1,289 )
(1) All amounts are net of tax. Amounts in parentheses indicate losses recorded to OCI.
(2) Other comprehensive loss before reclassifications on currency translation adjustments is net of non-controlling interest losses of $49 million.
six months ended June 30, 2017
  Currency
   
  Pension and
   
   
Translation Adjustments
OPEB Plan Adjustments
(unaudited - millions of Canadian $)
 
  Cash Flow Hedges
 
  Equity Investments
  Total1
 
   
   
   
   
   
AOCI balance at January 1, 2017
  (376
)
  (28
)
  (208
)
  (348
)
  (960
)
Other comprehensive (loss)/income before reclassifications2
  (263
)
  2
 
  -
 
  -
 
  (261
)
Amounts reclassified from accumulated other comprehensive loss   (77
)
  (1
)
  7
 
  3
 
  (68
)
Net current period other comprehensive (loss)/income3
  (340
)
  1
 
  7
 
  3
 
  (329
)
AOCI balance at June 30, 2017
  (716
)
  (27
)
  (201
)
  (345
)
  (1,289 )
(1) All amounts are net of tax. Amounts in parentheses indicate losses recorded to OCI.
(2) Other comprehensive (loss)/income before reclassifications on currency translation adjustments and cash flow hedges is net of non-controlling interest losses of $90 million and gains of $1 million, respectively.
(3) Losses related to cash flow hedges reported in AOCI and expected to be reclassified to net income in the next 12 months are estimated to be $9 million ($6 million, net of tax) at June 30, 2017. These estimates assume constant commodity prices, interest rates and foreign exchange rates over time, however, the amounts reclassified will vary based on the actual value of these factors at the date of settlement.

Details about reclassifications out of AOCI into the consolidated statement of income are as follows:

 
  Amounts reclassified from
  Affected line item
accumulated other comprehensive loss1
in the condensed
consolidated statement of income
 
  three months ended
  six months ended
 
June 30
June 30
(unaudited - millions of Canadian $)
  2017
2016
  2017
2016
 
 
   
 
   
 
   
Cash flow hedges
   
 
   
 
   
 
Commodities
  7
  21
    11
  (61
)
  Revenue (Energy)
 
Foreign exchange
  -
  39
    -
  5
    Interest income and other
 
Interest rate
  (5
)
(4
)
  (9
)
(8
)
  Interest expense
 
  2
  56
    2
  (64
)
  Total before tax
 
  (1
)
(16
)
  (1
)
24
    Income tax expense
 
  1
  40
    1
  (40
)
  Net of tax
Pension and other post-retirement benefit plan adjustments
   
 
   
 
   
 
Amortization of actuarial loss
  (4
)
(6
)
  (8
)
(11
)
  Plant operating costs 2
 
  1
  2
    3
  3
    Income tax expense
 
  (3
)
(4
)
  (5
)
(8
)
  Net of tax
Equity investments
   
 
   
 
   
 
Equity income
  -
  (5
)
  (4
)
(9
)
  Income from equity investments
 
  -
  1
    1
  2
    Income tax expense
 
  -
  (4
)
  (3
)
(7
)
  Net of tax
Currency translation adjustments
   
 
   
 
   
 
Realization of foreign currency translation gain on disposal of foreign operations   77
  -
    77
  -
    Gain/(loss) on sale of assets
 
  -
  -
    -
  -
    Income tax expense
 
  77
  -
    77
  -
    Net of tax
(1) All amounts in parentheses indicate expenses to the condensed consolidated statement of income.
(2) These accumulated other comprehensive loss components are included in the computation of net benefit cost. Refer to Note 9 for additional detail.

9. Employee post-retirement benefits

The net benefit cost recognized for the Company’s defined benefit pension plans (DB Plan) and other post-retirement benefit plans is as follows:

 
  three months ended June 30
  six months ended June 30
 
  Pension benefit plans
  Other post-retirement benefit plans
  Pension benefit plans
  Other post-retirement benefit plans
(unaudited - millions of Canadian $)
  2017
  2016
  2017
 
2016
  2017
  2016
  2017
 
2016
 
   
   
   
 
 
   
   
   
 
 
Service cost
  27
    25
    1
 
 
-
 
  56
    51
    2
 
 
1
 
Interest cost
  28
    29
    3
 
 
3
 
  62
    59
    7
 
 
5
 
Expected return on plan assets
  (39
)
  (39
)
  (6
)
 
(1
)
  (89
)
  (79
)
  (11
)
 
(1
)
Amortization of actuarial loss
  4
    6
    -
 
 
-
 
  8
    10
    -
 
 
1
 
Amortization of regulatory asset
  1
    5
    1
 
 
-
 
  7
    9
    1
 
 
-
 
Amortization of transitional obligation related to regulated business   -
    -
    -
 
 
1
 
  -
    -
    -
 
 
1
 
Net benefit cost recognized
  21
    26
    (1
)
 
3
 
  44
    50
    (1
)
 
7
 

Effective April 1, 2017, the Company closed its U.S. DB Plan to non-union new entrants. As of April 1, 2017, all non-union hires will participate in the existing defined contribution plan (DC Plan). Non-union U.S. employees who currently participate in the DC Plan will have one final election opportunity to become a member of the DB Plan as of January 1, 2018.

10. Risk management and financial instruments

RISK MANAGEMENT OVERVIEW

TransCanada has exposure to market risk and counterparty credit risk, and has strategies, policies and limits in place to manage the impact of these risks on earnings and cash flow.

COUNTERPARTY CREDIT RISK

TransCanada’s maximum counterparty credit exposure with respect to financial instruments at June 30, 2017, without taking into account security held, consisted of cash and cash equivalents, accounts receivable, available for sale assets recorded at fair value, the fair value of derivative assets, loans and advances receivable. The Company regularly reviews its accounts receivable and records an allowance for doubtful accounts as necessary using the specific identification method. At June 30, 2017, there were no significant amounts past due or impaired, no significant credit risk concentration and no significant credit losses during the period.

LOAN RECEIVABLE FROM AFFILIATE

Related party transactions are conducted in the normal course of business and are measured at the exchange amount, which is the amount of consideration established and agreed to by the related parties.

TransCanada holds a 60 per cent equity interest in a joint venture with IEnova to build, own and operate the Sur de Texas pipeline for which it accounts as an equity investment. On April 21, 2017, TransCanada issued a peso-denominated unsecured revolving credit facility to the joint venture. This $1 billion facility bears interest at a floating interest rate per annum. As at June 30, 2017, Intangible and other assets on the Company’s condensed consolidated balance sheet included a $341 million loan receivable from the Sur de Texas joint venture (December 31, 2016 - nil). This loan receivable represents TransCanada’s proportionate share of its affiliate’s debt financing requirements and is included in Contributions to equity investments on the Company’s condensed consolidated statement of cash flows. Interest income and other included $3 million in the three and six months ended June 30, 2017 as a result of inter-affiliate lending to the Sur de Texas joint venture (2016 - nil and nil).

NET INVESTMENT IN FOREIGN OPERATIONS

The Company hedges its net investment in foreign operations (on an after-tax basis) with U.S. dollar-denominated debt, cross-currency interest rate swaps and foreign exchange forward contracts and options.

U.S. dollar-denominated debt designated as a net investment hedge

The notional amounts and fair value of U.S. dollar-denominated debt designated as a net investment hedge were as follows:

(unaudited - millions of Canadian $, unless noted otherwise)   June 30, 2017
    December 31, 2016  
 
   
     
 
Notional amount
  25,000 (US 19,300 )
  26,600 (US 19,800 )
Fair value
  28,500 (US 22,000 )
  29,400 (US 21,900 )

Derivatives designated as a net investment hedge

The fair values and notional or principal amounts for the derivatives designated as a net investment hedge were as follows:

 
  June 30, 2017
  December 31, 2016
(unaudited - millions of Canadian $, unless noted otherwise)
  Fair value1
  Notional or principal amount   Fair value1   Notional or principal amount
 
   
   
   
   
U.S. dollar cross-currency interest rate swaps (maturing 2017 to 2019)2   (240
)
  US 1,500
  (425
)
  US 2,350
U.S. dollar foreign exchange forward contracts
  -
    -
  (7
)
  US 150
 
  (240
)
  US 1,500
  (432
)
  US 2,500
(1) Fair values equal carrying values.
(2) In the three and six months ended June 30, 2017, net realized gains of $1 million and $2 million, respectively, (2016 - gains of $2 million and $4 million, respectively) related to the interest component of cross-currency swap settlements are included in interest expense.

FINANCIAL INSTRUMENTS

Non-derivative financial instruments

Fair value of non-derivative financial instruments

The fair value of Long-term debt and Junior subordinated notes is estimated using an income approach based on quoted market prices for the same or similar debt instruments from external data service providers.

Available for sale assets are recorded at fair value which is calculated using quoted market prices where available. Certain non-derivative financial instruments included in cash and cash equivalents, accounts receivable, intangible and other assets, notes payable, accounts payable and other, accrued interest and other long-term liabilities have carrying amounts that approximate their fair value due to the nature of the item or the short time to maturity and would also be classified in Level II of the fair value hierarchy.

Credit risk has been taken into consideration when calculating the fair value of non-derivative instruments.

Balance sheet presentation of non-derivative financial instruments

The following table details the fair value of the non-derivative financial instruments, excluding those where carrying amounts approximate fair value, and would be classified in Level II of the fair value hierarchy:

 
  June 30, 2017
  December 31, 2016
(unaudited - millions of Canadian $)
  Carrying
  Fair
  Carrying
  Fair
amount
value
amount
value
 
   
   
   
   
Notes receivable1
  -
    -
    165
    211
 
Long-term debt including current portion2,3   (34,546 )
  (39,892 )
  (40,150 )
  (45,047 )
Junior subordinated notes
  (7,218
)
  (7,505
)
  (3,931
)
  (3,825
)
 
  (41,764 )
  (47,397 )
  (43,916 )
  (48,661 )
(1) Notes receivable was included in Assets held for sale at December 31, 2016 on the condensed consolidated balance sheet. The fair value was calculated based on the original contract terms.
(2) Long-term debt is recorded at amortized cost except for US$850 million (December 31, 2016 - US$850 million) that is attributed to hedged risk and recorded at fair value.
(3) Consolidated net income for the three and six months ended June 30, 2017 included unrealized losses of $1 million and unrealized gains of $1 million, respectively, (2016 - unrealized losses of $1 million and $13 million, respectively) for fair value adjustments attributable to the hedged interest rate risk associated with interest rate swap fair value hedging relationships on US$850 million of long-term debt at June 30, 2017 (December 31, 2016 - US$850 million). There were no other unrealized gains or losses from fair value adjustments to the non-derivative financial instruments.

Available for sale assets summary

The following tables summarize additional information about the Company’s restricted investments that are classified as available for sale assets:

 
June 30, 2017
  December 31, 2016
(unaudited - millions of Canadian $)
LMCI restricted investments   Other restricted investments2   LMCI restricted investments   Other restricted investments2
 
 
   
   
   
Fair Values1
 
   
   
   
 
Fixed income securities (maturing within 1 year)
-
 
  30
 
  -
 
  19
 
 
Fixed income securities (maturing within 1-5 years)
-
 
  107
 
  -
 
  117
 
 
Fixed income securities (maturing within 5-10 years) 15
 
  -
 
  9
 
  -
 
 
Fixed income securities (maturing after 10 years)
659
 
  -
 
  513
 
  -
 
 
674
 
  137
 
  522
 
  136
 
(1) Available for sale assets are recorded at fair value and included in other current assets and restricted investments on the condensed consolidated balance sheet.
(2) Other restricted investments have been set aside to fund insurance claim losses to be paid by the Company’s wholly-owned captive insurance subsidiary.
 
  June 30, 2017
  June 30, 2016
(unaudited - millions of Canadian $)
  LMCI restricted investments1
  Other restricted investments2   LMCI restricted investments1
  Other restricted investments2
 
   
   
   
   
Net unrealized gains in the period
   
   
   
   
 
three months ended   13
 
  -
 
  17
 
  -
 
 
six months ended
  15
 
  -
 
  22
 
  1
 
Net realized losses in the period
   
   
   
   
 
three months ended   (1
)
  -
 
  -
 
  -
 
 
six months ended
  (1
)
  -
 
  -
 
  -
 
(1) Gains and losses arising from changes in the fair value of LMCI restricted investments impact the subsequent amounts to be collected through tolls to cover future pipeline abandonment costs. As a result, the Company records these gains and losses as regulatory assets or liabilities.
(2) Unrealized gains and losses on other restricted investments are included in OCI.

Derivative instruments

Fair value of derivative instruments

The fair value of foreign exchange and interest rate derivatives has been calculated using the income approach which uses period end market rates and applies a discounted cash flow valuation model. The fair value of commodity derivatives has been calculated using quoted market prices where available. In the absence of quoted market prices, third-party broker quotes or other valuation techniques have been used. The fair value of options has been calculated using the Black-Scholes pricing model. Credit risk has been taken into consideration when calculating the fair value of derivative instruments.

In some cases, even though the derivatives are considered to be effective economic hedges, they do not meet the specific criteria for hedge accounting treatment or are not designated as a hedge and are accounted for at fair value with changes in fair value recorded in net income in the period of change. This may expose the Company to increased variability in reported earnings because the fair value of the derivative instruments can fluctuate significantly from period to period.

Balance sheet presentation of derivative instruments

The balance sheet classification of the fair value of the derivative instruments as at June 30, 2017 is as follows:

at June 30, 2017
Cash Flow Hedges
  Fair Value Hedges   Net Investment Hedges   Held for Trading
  Total Fair Value of Derivative Instruments1
(unaudited - millions of Canadian $)
 
 
   
   
   
   
Other current assets
 
   
   
   
   
 
Commodities2
4
 
  -
 
  -
 
  268
 
  272
 
 
Foreign exchange
-
 
  -
 
  3
 
  42
 
  45
 
 
Interest rate
2
 
  -
 
  -
 
  1
 
  3
 
 
6
 
  -
 
  3
 
  311
 
  320
 
Intangible and other assets
 
   
   
   
   
 
Commodities2
1
 
  -
 
  -
 
  121
 
  122
 
 
Foreign exchange
-
 
  -
 
  4
 
  -
 
  4
 
 
1
 
  -
 
  4
 
  121
 
  126
 
Total Derivative Assets
7
 
  -
 
  7
 
  432
 
  446
 
 
 
   
   
   
   
Accounts payable and other
 
   
   
   
   
 
Commodities2
(1
)
  -
 
  -
 
  (354
)
  (355
)
 
Foreign exchange
-
 
  -
 
  (162
)
  (13
)
  (175
)
 
Interest rate
-
 
  (2
)
  -
 
  -
 
  (2
)
 
(1
)
  (2
)
  (162
)
  (367
)
  (532
)
Other long-term liabilities
 
   
   
   
   
 
Commodities2
-
 
  -
 
  -
 
  (162
)
  (162
)
 
Foreign exchange
-
 
  -
 
  (85
)
  -
 
  (85
)
 
Interest rate
-
 
  (1
)
  -
 
  -
 
  (1
)
 
-
 
  (1
)
  (85
)
  (162
)
  (248
)
Total Derivative Liabilities
(1
)
  (3
)
  (247
)
  (529
)
  (780
)
 
 
   
   
   
   
Total Derivatives
6
 
  (3
)
  (240
)
  (97
)
  (334
)
(1) Fair value equals carrying value.
(2) Includes purchases and sales of power, natural gas and liquids.

The balance sheet classification of the fair value of the derivative instruments as at December 31, 2016 is as follows:

at December 31, 2016
Cash Flow Hedges
  Fair Value Hedges   Net Investment Hedges   Held for Trading
  Total Fair Value of Derivative Instruments1
(unaudited - millions of Canadian $)
 
 
   
   
   
   
Other current assets
 
   
   
   
   
 
Commodities2
6
 
  -
 
  -
 
  351
 
  357
 
 
Foreign exchange
-
 
  -
 
  6
 
  10
 
  16
 
 
Interest rate
1
 
  1
 
  -
 
  1
 
  3
 
 
7
 
  1
 
  6
 
  362
 
  376
 
Intangible and other assets
 
   
   
   
   
 
Commodities2
4
 
  -
 
  -
 
  118
 
  122
 
 
Foreign exchange
-
 
  -
 
  10
 
  -
 
  10
 
 
Interest rate
1
 
  -
 
  -
 
  -
 
  1
 
 
5
 
  -
 
  10
 
  118
 
  133
 
Total Derivative Assets
12
 
  1
 
  16
 
  480
 
  509
 
 
 
   
   
   
   
Accounts payable and other
 
   
   
   
   
 
Commodities2
-
 
  -
 
  -
 
  (330
)
  (330
)
 
Foreign exchange
-
 
  -
 
  (237
)
  (38
)
  (275
)
 
Interest rate
(1
)
  (1
)
  -
 
  -
 
  (2
)
 
(1
)
  (1
)
  (237
)
  (368
)
  (607
)
Other long-term liabilities
 
   
   
   
   
 
Commodities2
-
 
  -
 
  -
 
  (118
)
  (118
)
 
Foreign exchange
-
 
  -
 
  (211
)
  -
 
  (211
)
 
Interest rate
-
 
  (1
)
  -
 
  -
 
  (1
)
 
-
 
  (1
)
  (211
)
  (118
)
  (330
)
Total Derivative Liabilities
(1
)
  (2
)
  (448
)
  (486
)
  (937
)
 
 
   
   
   
   
Total Derivatives
11
 
  (1
)
  (432
)
  (6
)
  (428
)
(1) Fair value equals carrying value.
(2) Includes purchases and sales of power, natural gas and liquids.

The majority of derivative instruments held for trading have been entered into for risk management purposes and all are subject to the Company’s risk management strategies, policies and limits. These include derivatives that have not been designated as hedges or do not qualify for hedge accounting treatment but have been entered into as economic hedges to manage the Company’s exposures to market risk.

Notional and Maturity Summary

The maturity and notional principal or quantity outstanding related to the Company’s derivative instruments excluding hedges of the net investment in foreign operations is as follows:

at June 30, 2017
Power
  Natural Gas
  Liquids
  Foreign Exchange
  Interest
(unaudited)
 
 
 
 
 
 
   
   
   
   
 
Purchases1
103,510     186
    12
    -
 
  -
 
 
Sales1
65,642
    167
    13
    -
 
  -
 
 
Millions of U.S. dollars
-
    -
    -
    US 2,722
  US 1,550
 
Millions of Mexican pesos -
    -
    -
    MXN 300
  -
 
 
Maturity dates
2017-2021
  2017-2020
  2017
  2017-2018
  2017-2019
(1)
Volumes for power, natural gas and liquids derivatives are in GWh, Bcf and MMBbls, respectively.
   
at December 31, 2016
Power
  Natural Gas
  Liquids
  Foreign Exchange
  Interest
(unaudited)
 
 
 
 
 
 
   
   
   
   
 
Purchases1
86,887     182
    6
    -
 
  -
 
 
Sales1
58,561     147
    6
    -
 
  -
 
 
Millions of U.S. dollars -
    -
    -
    US 2,394
  US 1,550
 
Maturity dates
2017-2021
  2017-2020
  2017
  2017
  2017-2019
(1) Volumes for power, natural gas and liquids derivatives are in GWh, Bcf and MMBbls, respectively.

Unrealized and Realized (Losses)/Gains of Derivative Instruments

The following summary does not include hedges of the net investment in foreign operations.

 
  three months ended June 30
  six months ended June 30
(unaudited - millions of Canadian $)
  2017
  2016
  2017
  2016
 
   
   
   
   
Derivative instruments held for trading1
   
   
   
   
Amount of unrealized (losses)/gains in the period    
   
   
   
 
Commodities2
  (91
)
  187
    (147 )
  120
 
 
Foreign exchange
  41
    20
    56
    47
 
 
Interest rate
  -
    -
    -
    -
 
Amount of realized (losses)/gains in the period
   
   
   
   
 
Commodities
  (37
)
  (47
)
  (85
)
  (142 )
 
Foreign exchange
  (5
)
  13
    (9
)
  57
 
Derivative instruments in hedging relationships
   
   
   
   
Amount of realized gains/(losses) in the period
   
   
   
   
 
Commodities
  7
    (67
)
  13
    (140 )
 
Foreign exchange
  -
    (43
)
  5
    (106 )
 
Interest rate
  -
    1
    1
    3
 
(1) Realized and unrealized gains and losses on held for trading derivative instruments used to purchase and sell commodities are included net in Revenues. Realized and unrealized gains and losses on interest rate and foreign exchange derivative instruments held for trading are included net in Interest expense and Interest income and other, respectively.
(2) Following the March 17, 2016 announcement of the Company’s intention to sell the U.S. Northeast power assets, a loss of $49 million and a gain of $7 million were recorded in net income in the three months ended March 31, 2016 relating to discontinued cash flow hedges where it was probable that the anticipated underlying transaction would not occur as a result of a future sale.

Derivatives in cash flow hedging relationships

The components of OCI (Note 8) related to derivatives in cash flow hedging relationships including the portion attributable to non-controlling interests are as follows:

 
  three months ended June 30
  six months ended June 30
(unaudited - millions of Canadian $, pre-tax)
  2017
  2016
  2017
  2016
 
   
   
   
   
Change in fair value of derivative instruments recognized in OCI (effective portion)1
   
   
   
   
 
Commodities
  (2
)
  42
    3
    26
 
 
Foreign exchange
  -
    40
    -
    5
 
 
Interest rate
  -
    (1
)
  1
    (4
)
 
  (2
)
  81
    4
    27
 
 
 
Reclassification of (losses)/gains on derivative instruments from AOCI to net income (effective portion)1    
   
   
   
 
Commodities2
  (7
)
  (21
)
  (11
)
  61
 
 
Foreign exchange3
  -
    (39
)
  -
    (5
)
 
Interest rate4
  5
    4
    9
    8
 
 
  (2
)
  (56
)
  (2
)
  64
 
 
 
Gains/(losses) on derivative instruments recognized in net income (ineffective portion)
   
   
   
   
 
Commodities2
  -
    43
    -
    (15
)
 
  -
    43
    -
    (15
)
(1) No amounts have been excluded from the assessment of hedge effectiveness. Amounts in parentheses indicate losses recorded to OCI.
(2) Reported within revenues on the condensed consolidated statement of income.
(3) Reported within interest income and other on the condensed consolidated statement of income.
(4) Reported within interest expense on the condensed consolidated statement of income.

Offsetting of derivative instruments

The Company enters into derivative contracts with the right to offset in the normal course of business as well as in the event of default. TransCanada has no master netting agreements, however, similar contracts are entered into containing rights to offset. The Company has elected to present the fair value of derivative instruments with the right to offset on a gross basis in the balance sheet. The following table shows the impact on the presentation of the fair value of derivative instrument assets and liabilities had the Company elected to present these contracts on a net basis:

at June 30, 2017
  Gross derivative instruments presented on the balance sheet   Amounts available for offset1   Net amounts
(unaudited - millions of Canadian $)
 
 
 
 
   
   
   
Derivative - Asset
   
   
   
 
Commodities
  394
 
  (313
)
  81
 
 
Foreign exchange
  49
 
  (43
)
  6
 
 
Interest rate
  3
 
  (1
)
  2
 
Total
  446
 
  (357
)
  89
 
Derivative - Liability
   
   
   
 
Commodities
  (517
)
  313
 
  (204
)
 
Foreign exchange
  (260
)
  43
 
  (217
)
 
Interest rate
  (3
)
  1
 
  (2
)
Total
  (780
)
  357
 
  (423
)
(1) Amounts available for offset do not include cash collateral pledged or received.

The following table shows the impact on the presentation of the fair value of derivative instrument assets and liabilities had the Company elected to present these contracts on a net basis as at December 31, 2016:

at December 31, 2016
  Gross derivative instruments presented on the balance sheet   Amounts available for offset1   Net amounts
(unaudited - millions of Canadian $)
 
 
 
 
   
   
   
Derivative - Asset
   
   
   
 
Commodities
  479
 
  (362
)
  117
 
 
Foreign exchange
  26
 
  (26
)
  -
 
 
Interest rate
  4
 
  (1
)
  3
 
Total
  509
 
  (389
)
  120
 
Derivative - Liability
   
   
   
 
Commodities
  (448
)
  362
 
  (86
)
 
Foreign exchange
  (486
)
  26
 
  (460
)
 
Interest rate
  (3
)
  1
 
  (2
)
Total
  (937
)
  389
 
  (548
)
(1) Amounts available for offset do not include cash collateral pledged or received.

With respect to the derivative instruments presented above as at June 30, 2017, the Company provided cash collateral of $381 million (December 31, 2016 - $305 million) and letters of credit of $7 million (December 31, 2016 - $27 million) to its counterparties. The Company held nil (December 31, 2016 - nil) in cash collateral and $3 million (December 31, 2016 - $3 million) in letters of credit from counterparties on asset exposures at June 30, 2017.

Credit risk related contingent features of derivative instruments

Derivative contracts entered into to manage market risk often contain financial assurance provisions that allow parties to the contracts to manage credit risk. These provisions may require collateral to be provided if a credit-risk-related contingent event occurs, such as a downgrade in the Company’s credit rating to non-investment grade.

Based on contracts in place and market prices at June 30, 2017, the aggregate fair value of all derivative instruments with credit-risk-related contingent features that were in a net liability position was $11 million (December 31, 2016 - $19 million), for which the Company had provided collateral in the normal course of business of nil (December 31, 2016 - nil). If the credit-risk-related contingent features in these agreements were triggered on June 30, 2017, the Company would have been required to provide additional collateral of $11 million (December 31, 2016 - $19 million) to its counterparties. Collateral may also need to be provided should the fair value of derivative instruments exceed pre-defined contractual exposure limit thresholds.

The Company has sufficient liquidity in the form of cash and undrawn committed revolving credit facilities to meet these contingent obligations should they arise.

FAIR VALUE HIERARCHY

The Company’s financial assets and liabilities recorded at fair value have been categorized into three categories based on a fair value hierarchy.

Levels
How fair value has been determined
Level I
Quoted prices in active markets for identical assets and liabilities that the Company has the ability to access at the measurement date.
Level II
Valuation based on the extrapolation of inputs, other than quoted prices included within Level I, for which all significant inputs are observable directly or indirectly.
Inputs include published exchange rates, interest rates, interest rate swap curves, yield curves and broker quotes from external data service providers.
This category includes interest rate and foreign exchange derivative assets and liabilities where fair value is determined using the income approach and commodity derivatives where fair value is determined using the market approach.
Transfers between Level I and Level II would occur when there is a change in market circumstances.
Level III Valuation of assets and liabilities are measured using a market approach based on extrapolation of inputs that are unobservable or where observable data does not support a significant portion of the derivative’s fair value. This category mainly includes long-dated commodity transactions in certain markets where liquidity is low and the Company uses the most observable inputs available or, if not available, long-term broker quotes to estimate the fair value for these transactions. Valuation of options is based on the Black-Scholes pricing model.
Assets and liabilities measured at fair value can fluctuate between Level II and Level III depending on the proportion of the value of the contract that extends beyond the time frame for which significant inputs are considered to be observable. As contracts near maturity and observable market data become available, they are transferred out of Level III and into Level II.

The fair value of the Company’s derivative assets and liabilities measured on a recurring basis, including both current and non-current portions for 2017, are categorized as follows:

at June 30, 2017
  Quoted prices in active markets   Significant other observable inputs   Significant unobservable inputs    
(unaudited - millions of Canadian $)
  (Level I)1
  (Level II)1
  (Level III)1
  Total
 
   
   
   
   
Derivative instrument assets:
   
   
   
   
 
Commodities
  42
 
  325
 
  27
 
  394
 
 
Foreign exchange
  -
 
  49
 
  -
 
  49
 
 
Interest rate
  -
 
  3
 
  -
 
  3
 
Derivative instrument liabilities:
   
   
   
   
 
Commodities
  (42
)
  (457
)
  (18
)
  (517 )
 
Foreign exchange
  -
 
  (260
)
  -
 
  (260 )
 
Interest rate
  -
 
  (3
)
  -
 
  (3
)
 
  -
 
  (343
)
  9
 
  (334 )
(1) There were no transfers from Level I to Level II or from Level II to Level III for the six months ended June 30, 2017.

The fair value of the Company’s derivative assets and liabilities measured on a recurring basis, including both current and non-current portions for 2016, are categorized as follows:

at December 31, 2016
  Quoted prices in active markets (Level I)1
  Significant other observable inputs (Level II)1   Significant unobservable inputs    
(Level III)1
(unaudited - millions of Canadian $)
 
 
 
  Total
 
   
   
   
   
Derivative instrument assets:
   
   
   
   
 
Commodities
  134
 
  326
 
  19
 
  479
 
 
Foreign exchange
  -
 
  26
 
  -
 
  26
 
 
Interest rate
  -
 
  4
 
  -
 
  4
 
Derivative instrument liabilities:
   
   
   
   
 
Commodities
  (102
)
  (343
)
  (3
)
  (448 )
 
Foreign exchange
  -
 
  (486
)
  -
 
  (486 )
 
Interest rate
  -
 
  (3
)
  -
 
  (3
)
 
  32
 
  (476
)
  16
 
  (428 )
(1) There were no transfers from Level I to Level II or from Level II to Level III for the year ended December 31, 2016.

The following table presents the net change in fair value of derivative assets and liabilities classified as Level III of the fair value hierarchy:

 
  three months ended June 30
  six months ended June 30
(unaudited - millions of Canadian $)
  2017
  2016
  2017
  2016
 
   
   
   
   
Balance at beginning of period
  10
    9
    16
    9
 
Settlements
  5
    (4
)
  5
    (3
)
Sales
  (3
)
  -
    (5
)
  (1
)
Total (losses)/gains included in net income   (2
)
  7
    (2
)
  10
 
Transfers out of Level III
  (1
)
  -
    (5
)
  (3
)
Balance at end of period1
  9
    12
    9
    12
 
(1) For the three and six months ended June 30, 2017, revenues include unrealized losses of $1 million and gains of $1 million, respectively, attributed to derivatives in the Level III category that were still held at June 30, 2017 (2016 - gains of $6 million and $8 million, respectively).

A 10 per cent increase or decrease in commodity prices, with all other variables held constant, would result in a $1 million increase or $3 million decrease, respectively, in the fair value of outstanding derivative instruments included in Level III as at June 30, 2017. 

11. Acquisitions & Dispositions

U.S. Natural Gas Pipelines

Iroquois Gas Transmission System and Gas Transmission Northwest LLC

On June 1, 2017, TransCanada completed the sale of its 49.34 per cent interest in Iroquois and its remaining 11.81 per cent interest in PNGTS to TC PipeLines LP, valued at US$765 million. Proceeds were comprised of US$597 million in cash and US$168 million representing a proportionate share of Iroquois and PNGTS debt.

Columbia Pipeline Group

In second quarter 2017, the Company completed its procedures over measuring the volume of base gas acquired as part of the acquisition of Columbia. As a result, the Company prospectively decreased the fair value of base gas by $116 million (US$90 million). This impacted the purchase price equation by decreasing property, plant and equipment by $116 million (US$90 million), decreasing deferred tax liabilities by $45 million (US$35 million) and increasing goodwill by $71 million (US$55 million). This adjustment did not impact the Company’s net income.

Energy

U.S. Northeast Power Assets

On June 2, 2017, TransCanada completed the sale of Ravenswood, Ironwood, Kibby Wind and Ocean State Power for proceeds of approximately US$2.029 billion, subject to post-closing adjustments. The Company recorded an additional loss on sale of $219 million ($176 million after tax) which included $2 million in foreign currency translation gains. The additional loss was primarily related to an adjustment to the purchase price and repair costs for an unplanned outage at Ravenswood prior to close. In 2016, the Company recorded a loss of approximately $829 million ($863 million after tax) which included the impact of an estimated $70 million of foreign currency translation gains. The actual foreign currency translation gains of $72 million were reclassified from AOCI to Net income on closing of the transaction.

On April 19, 2017, the Company completed the sale of TC Hydro for gross proceeds of US$1.07 billion, subject to post-closing adjustments. As a result, the Company recorded a gain on sale of approximately $717 million ($441 million after tax) including the impact of an estimated $5 million of foreign currency translation gains which were reclassified from AOCI to net income.

Gains and losses from these sales are included in Gain/(loss) on sale of assets in the condensed consolidated statement of income. The proceeds received from the sale of the U.S. Northeast Power Assets were used to fully repay the outstanding balances on the Company’s acquisition bridge facilities that partially funded the acquisition of Columbia.

12. Commitments, contingencies and guarantees

COMMITMENTS

TransCanada’s operating lease commitments at December 31, 2016 included future payments related to our U.S. Northeast power assets. As a result of the completion of the thermal sale on June 2, 2017, the remaining future obligations included at December 31, 2016 have decreased by: $2 million in 2017, $52 million in 2018, $34 million in 2019 and $102 million in 2022 and beyond.

CONTINGENCIES

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.

In March 2017, the U.S. Department of State issued a U.S. Presidential Permit authorizing construction of the U.S./Canada border crossing facilities of the Keystone XL pipeline. TransCanada discontinued the claim under Chapter 11 of the North American Free Trade Agreement and has also withdrawn the U.S. Constitutional challenge.

GUARANTEES

TransCanada and its partner on the Sur de Texas pipeline, IEnova, have jointly guaranteed the obligations for construction services during the construction of the pipeline.

TransCanada and its joint venture partner on Bruce Power, BPC Generation Infrastructure Trust, have each severally guaranteed certain contingent financial obligations of Bruce Power related to a lease agreement and contractor and supplier services.

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. Such agreements include guarantees and letters of credit which are primarily related to delivery of natural gas, construction services and the payment of liabilities. 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.

The carrying value of these guarantees has been included in other long-term liabilities. Information regarding the Company’s guarantees is as follows:

 
   
  at June 30, 2017
  at December 31, 2016
(unaudited - millions of Canadian $)   Term
  Potential
  Carrying
  Potential
  Carrying
exposure1
value
exposure1
value
 
   
   
   
   
   
Sur de Texas
  ranging to 2020   571
    6
    805
    53
 
Bruce Power
  ranging to 2018   88
    1
    88
    1
 
Other jointly owned entities
  ranging to 2059   107
    14
    87
    28
 
 
   
  766
    21
    980
    82
 
(1) TransCanada’s share of the potential estimated current or contingent exposure.

13. Variable interest entities

The Company consolidates a number of entities that are considered to be VIEs. A VIE is a legal entity that does not have sufficient equity at risk to finance its activities without additional subordinated financial support or is structured such that equity investors lack the ability to make significant decisions relating to the entity’s operations through voting rights or do not substantively participate in the gains and losses of the entity.

In the normal course of business, the Company consolidates VIEs in which it has a variable interest and for which it is considered to be the primary beneficiary. VIEs in which the Company has a variable interest but is not the primary beneficiary are considered non-consolidated VIEs and are accounted for as equity investments.

Consolidated VIEs

The Company’s consolidated VIEs consist of legal entities where the Company has the power, through voting or similar rights, to direct the activities of the VIE that most significantly impact economic performance including purchasing or selling significant assets; maintenance and operations of assets; incurring additional indebtedness; or determining the strategic operating direction of the entity. In addition, the Company has the obligation to absorb losses or the right to receive benefits from the consolidated VIE that could potentially be significant to the VIE.

A significant portion of the Company’s assets are held through VIEs in which the Company holds a 100 per cent voting interest, the VIE meets the definition of a business and the VIE’s assets can be used for general corporate purposes. The assets and liabilities of the consolidated VIEs whose assets cannot be used for purposes other than the settlement of the VIE’s obligations are as follows:

 
  June 30,
  December 31,
(unaudited - millions of Canadian $)   2017
  2016
 
   
   
ASSETS
   
   
Current Assets
   
   
Cash and cash equivalents
  66
    77
 
Accounts receivable
  59
    71
 
Inventories
  24
    25
 
Other
  8
    10
 
 
  157
    183
 
Plant, Property and Equipment
  3,704     3,685
 
Equity Investments
  861
    606
 
Goodwill
  508
    525
 
Intangible and Other Assets
  -
    1
 
 
  5,230     5,000
 
LIABILITIES
   
   
Current Liabilities
   
   
Accounts payable and other
  67
    80
 
Accrued interest
  23
    21
 
Current portion of long-term debt
  99
    76
 
 
  189
    177
 
Regulatory Liabilities
  33
    34
 
Other Long-Term Liabilities
  3
    4
 
Deferred Income Tax Liabilities
  13
    7
 
Long-Term Debt
  3,353     2,827
 
 
  3,591     3,049
 

Non-Consolidated VIEs

The Company’s non-consolidated VIEs consist of legal entities where the Company does not have the power to direct the activities that most significantly impact the economic performance of these VIEs or where this power is shared with third parties. The Company contributes capital to these VIEs and receives ownership interests that provide it with residual claims on assets after liabilities are paid.

The carrying value of these VIEs and the maximum exposure to loss as a result of the Company’s involvement with these VIEs are as follows:

 
  June 30,
  December 31,
(unaudited - millions of Canadian $)
  2017
  2016
 
   
   
Balance sheet
   
   
 
Equity investments
  4,393     4,964
 
Off-balance sheet
   
   
 
Potential exposure to guarantees   173
    163
 
Maximum exposure to loss
  4,566     5,127
 

14. Subsequent event

On July 25, 2017, the Company was notified that PNW LNG would not be proceeding with their proposed LNG project. As part of the PRGT agreement, following receipt of a termination notice, TransCanada would be reimbursed for the full costs and carrying charges incurred to advance the PRGT project. At June 30, 2017, approximately $0.5 billion was included in Intangible and other assets on the Company’s condensed consolidated balance sheet.

TransCanada Media Enquiries: Mark Cooper/James Millar 403.920.7859 or 800.608.7859 TransCanada Investor & Analyst Enquiries: David Moneta/Stuart Kampel 403.920.7911 or 800.361.6522