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Details about reclassifications out of AOCI into the consolidated statement of income are as follows:
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Amounts reclassified from Affected line item accumulated other in the condensed comprehensive consolidated loss(1) statement of income --------------------- three months ended March 31 -------------------------------------------------------- (unaudited - millions of Canadian 2017 2016 $) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Cash flow hedges Commodities 4 (82) Revenue (Energy) Foreign exchange Interest income and - (34) other Interest rate (4) (4) Interest expense ---------------------------------------------------------------------------- - (120) Total before tax - 40 Income tax expense ---------------------------------------------------------------------------- - (80) Net of tax ---------------------------------------------------------------------------- Pension and other post-retirement benefit plan adjustments Amortization of actuarial loss Plant operating (4) (5) costs (2) 2 1 Income tax expense ---------------------------------------------------------------------------- (2) (4) Net of tax ---------------------------------------------------------------------------- Equity investments Equity income Income from equity (4) (4) investments 1 1 Income tax expense ---------------------------------------------------------------------------- (3) (3) 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 10 for additional detail./T/
10. 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:
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three months ended March 31 ---------------------------------------- Other post- Pension benefit retirement benefit plans plans ---------------------------------------- (unaudited - millions of Canadian $) 2017 2016 2017 2016 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Service cost 29 26 1 1 Interest cost 34 30 4 2 Expected return on plan assets (50) (40) (5) - Amortization of actuarial loss 4 4 - 1 Amortization of regulatory asset 6 4 - - ---------------------------------------------------------------------------- Net benefit cost recognized 23 24 - 4 ---------------------------------------------------------------------------- ----------------------------------------------------------------------------/T/
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.
11. 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 March 31, 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, notes, 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 March 31, 2017, there were no significant amounts past due or impaired, no significant credit risk concentration and no significant credit losses during the period.
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:
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---------------------------------------------------------------------------- ---------------------------------------------------------------------------- (unaudited - millions of Canadian $, unless noted otherwise) March 31, 2017 December 31, 2016 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Notional amount 28,400 (US 21,400) 26,600 (US 19,800) Fair value 31,500 (US 23,600) 29,400 (US 21,900) ---------------------------------------------------------------------------- ----------------------------------------------------------------------------/T/
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:
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March 31, 2017 December 31, 2016 ----------------------------------------- Notional or Notional or (unaudited - millions of Canadian Fair principal Fair principal $, unless noted otherwise) value(1) amount value(1) amount ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- U.S. dollar cross-currency interest rate swaps (maturing 2017 to 2019)(2) (337) US 2,000 (425) US 2,350 U.S. dollar foreign exchange forward contracts - - (7) US 150 ---------------------------------------------------------------------------- (337) US 2,000 (432) US 2,500 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- (1) Fair values equal carrying values. (2) In the three months ended March 31, 2017, net realized gains of $1 million (2016 - gains of $2 million) related to the interest component of cross-currency swap settlements are included in interest expense./T/
FINANCIAL INSTRUMENTS
Non-derivative financial instruments
Fair value of non-derivative financial instruments
The fair value of the Company's Notes receivable is calculated by discounting future payments of interest and principal using forward interest rates. 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:
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March 31, 2017 December 31, 2016 ---------------------------------------- Carrying Fair Carrying Fair (unaudited - millions of Canadian $) amount value amount value ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Notes receivable(1) 115 158 165 211 Current and long-term debt(2,3) (38,832) (43,770) (40,150) (45,047) Junior subordinated notes (5,879) (6,021) (3,931) (3,825) ---------------------------------------------------------------------------- (44,596) (49,633) (43,916) (48,661) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- (1) Notes receivable are included in Assets held for sale on the condensed consolidated balance sheet. The fair value is 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 months ended March 31, 2017 included unrealized gains of $2 million (2016 - losses of $12 million) 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 March 31, 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./T/
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:
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March 31, 2017 December 31, 2016 ----------------------------------------------------------- (unaudited - LMCI Other LMCI Other millions of restricted restricted restricted restricted Canadian $) investments investments(2) investments investments(2) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Fair Values(1) Fixed income securities (maturing within 1 year) - 27 - 19 Fixed income securities (maturing within 1-5 years) - 106 - 117 Fixed income securities (maturing within 5-10 years) 13 - 9 - Fixed income securities (maturing after 10 years) 572 - 513 - ---------------------------------------------------------------------------- 585 133 522 136 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- (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. March 31, 2017 March 31, 2016 ----------------------------------------------------------- (unaudited - LMCI Other LMCI Other millions of restricted restricted restricted restricted Canadian $) investments(1) investments(2) investments(1) investments(2) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Net unrealized gains in the period three months ended 2 - 5 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./T/
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