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TransCanada Reports First Quarter 2017 Financial Results; Strong Results Build Upon Transformational 2016 – Part 11


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:

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-- regulatory decisions
-- negotiated settlements with shippers
-- acquisitions and divestitures
-- developments outside of the normal course of operations
-- newly constructed assets being placed in service.

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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:

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-- developments outside of the normal course of operations -- newly constructed assets being placed in service -- regulatory decisions.

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

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-- 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.

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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 first quarter 2017, comparable earnings excluded:

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-- 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

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In fourth quarter 2016, comparable earnings excluded:

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-- 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.

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In third quarter 2016, comparable earnings excluded:

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-- 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.

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In second quarter 2016, comparable earnings excluded:

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-- 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.

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In first quarter 2016, comparable earnings excluded:

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-- 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.

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In fourth quarter 2015, comparable earnings excluded:

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-- 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.

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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.

In second quarter 2015, comparable earnings excluded a $34 million adjustment to income tax expense due to the enactment of an increase in the Alberta corporate income tax rate in June 2015 and a charge of $8 million after-tax for severance costs primarily as a result of the restructuring of our major projects group in response to delayed timelines on certain of our major projects along with a continued focus on enhancing the efficiency and effectiveness of our operations.

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Condensed consolidated statement of income ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- three months ended March 31 ------------------------------ (unaudited - millions of Canadian $, except per share amounts) 2017 2016 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Revenues Canadian Natural Gas Pipelines 882 818 U.S. Natural Gas Pipelines 994 429 Mexico Natural Gas Pipelines 143 66 Liquids Pipelines 472 436 Energy 900 754 ---------------------------------------------------------------------------- 3,391 2,503 Income from Equity Investments 174 135 Operating and Other Expenses Plant operating costs and other 990 715 Commodity purchases resold 543 470 Property taxes 162 141 Depreciation and amortization 517 454 Asset impairment charges - 211 ---------------------------------------------------------------------------- 2,212 1,991 ---------------------------------------------------------------------------- Loss on sale of assets - (4) Financial Charges Interest expense 500 420 Allowance for funds used during construction (101) (101) Interest income and other (20) (100) ---------------------------------------------------------------------------- 379 219 ---------------------------------------------------------------------------- Income before Income Taxes 974 424 ---------------------------------------------------------------------------- Income Tax Expense Current 67 34 Deferred 133 36 ---------------------------------------------------------------------------- 200 70 ---------------------------------------------------------------------------- Net Income 774 354 Net income attributable to non-controlling interests 90 80 ---------------------------------------------------------------------------- Net Income Attributable to Controlling Interests 684 274 Preferred share dividends 41 22 ---------------------------------------------------------------------------- Net Income Attributable to Common Shares 643 252 ---------------------------------------------------------------------------- Net Income per Common Share Basic and diluted $0.74 $0.36 ---------------------------------------------------------------------------- Dividends Declared per Common Share $0.625 $0.565 ---------------------------------------------------------------------------- Weighted Average Number of Common Shares (millions) Basic 866 702 Diluted 868 703 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- See accompanying notes to the condensed consolidated financial statements.
Condensed consolidated statement of comprehensive income ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- three months ended March 31 ------------------------------ (unaudited - millions of Canadian $) 2017 2016 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Net Income 774 354 ---------------------------------------------------------------------------- Other Comprehensive Loss, Net of Income Taxes Foreign currency translation losses on net investment in foreign operations (82) (212) Change in fair value of net investment hedges (1) (2) Change in fair value of cash flow hedges 5 (39) Reclassification to net income of gains on cash flow hedges - 80 Reclassification of actuarial gains and losses on pension and other post-retirement benefit plans 3 4 Other comprehensive income on equity investments 3 3 ---------------------------------------------------------------------------- Other comprehensive loss (Note 9) (72) (166) ---------------------------------------------------------------------------- Comprehensive Income 702 188 Comprehensive income/(loss) attributable to non-controlling interests 50 (26) ---------------------------------------------------------------------------- Comprehensive Income Attributable to Controlling Interests 652 214 Preferred share dividends 41 22 ---------------------------------------------------------------------------- Comprehensive Income Attributable to Common Shares 611 192 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- See accompanying notes to the condensed consolidated financial statements.
Condensed consolidated statement of cash flows ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- three months ended March 31 ------------------------------ (unaudited - millions of Canadian $) 2017 2016 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Cash Generated from Operations Net income 774 354 Depreciation and amortization 517 454 Asset impairment charges - 211 Deferred income taxes 133 36 Income from equity investments (174) (135) Distributions received from operating activities of equity investments 219 259 Employee post-retirement benefits expense, net of funding 3 11 Loss on sale of assets - 4 Equity allowance for funds used during construction (64) (57) Unrealized losses on financial instruments 41 71 Other 8 5 Increase in operating working capital (155) (132) ---------------------------------------------------------------------------- Net cash provided by operations 1,302 1,081 ---------------------------------------------------------------------------- Investing Activities Capital expenditures (1,560) (836) Capital projects in development (42) (67) Contributions to equity investments (192) (170) Acquisitions, net of cash acquired - (995) Proceeds from sale of assets, net of transaction costs - 6 Other distributions from equity investments 363 - Deferred amounts and other (85) 52 ---------------------------------------------------------------------------- Net cash used in investing activities (1,516) (2,010) ---------------------------------------------------------------------------- Financing Activities Notes payable issued, net 670 1,176 Long-term debt issued, net of issue costs - 1,992 Long-term debt repaid (1,051) (1,357) Junior subordinated notes issued, net of issue costs 1,982 - Dividends on common shares (300) (365) Dividends on preferred shares (39) (23) Distributions paid to non-controlling interests (80) (62) Common shares issued, net of issue costs 18 3 Common shares repurchased - (14) Partnership units of TC PipeLines, LP issued, net of issue costs 92 24 Common units of Columbia Pipeline Partners LP acquired (1,205) - ---------------------------------------------------------------------------- Net cash provided by financing activities 87 1,374 ---------------------------------------------------------------------------- Effect of Foreign Exchange Rate Changes on Cash and Cash Equivalents 5 (57) ---------------------------------------------------------------------------- (Decrease)/increase in Cash and Cash Equivalents (122) 388 Cash and Cash Equivalents Beginning of period 1,016 850 ---------------------------------------------------------------------------- Cash and Cash Equivalents End of period 894 1,238 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- See accompanying notes to the condensed consolidated financial statements.
Condensed consolidated balance sheet ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- March 31, December 31, (unaudited - millions of Canadian $) 2017 2016 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- ASSETS Current Assets Cash and cash equivalents 894 1,016 Accounts receivable 2,120 2,075 Inventories 384 368 Assets held for sale 3,687 3,717 Other 918 908 ---------------------------------------------------------------------------- 8,003 8,084 Plant, Property and net of accumulated Equipment depreciation of $22,696 and $22,263, respectively 55,353 54,475 Equity Investments 6,262 6,544 Regulatory Assets 1,325 1,322 Goodwill 13,849 13,958 Intangible and Other Assets 3,148 3,026 Restricted Investments 699 642 ---------------------------------------------------------------------------- 88,639 88,051 ---------------------------------------------------------------------------- LIABILITIES Current Liabilities Notes payable 1,493 774 Accounts payable and other 3,806 3,861 Dividends payable 557 526 Accrued interest 549 595 Liabilities related to assets held for sale 60 86 Current portion of long-term debt 2,669 1,838 ---------------------------------------------------------------------------- 9,134 7,680 Regulatory Liabilities 2,259 2,121 Other Long-Term Liabilities 1,134 1,183 Deferred Income Tax Liabilities 7,749 7,662 Long-Term Debt 36,163 38,312 Junior Subordinated Notes 5,879 3,931 ---------------------------------------------------------------------------- 62,318 60,889 Common Units Subject to Rescission or Redemption 82 1,179 EQUITY Common shares, no par value 20,308 20,099 Issued and March 31, 2017 - 867 outstanding: million shares December 31, 2016 - 864 million shares Preferred shares 3,980 3,980 Additional paid-in capital - - Retained earnings 1,115 1,138 Accumulated other comprehensive loss (992) (960) ---------------------------------------------------------------------------- Controlling Interests 24,411 24,257 Non-controlling interests 1,828 1,726 ---------------------------------------------------------------------------- 26,239 25,983 ---------------------------------------------------------------------------- 88,639 88,051 ---------------------------------------------------------------------------- ----------------------------------------------------------------------------

Commitments, Contingencies and Guarantees (Note 12)
Variable Interest Entities (Note 13)
Subsequent Events (Note 14)

See accompanying notes to the condensed consolidated financial statements.

Condensed consolidated statement of equity ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- three months ended March 31 ------------------------------ (unaudited - millions of Canadian $) 2017 2016 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Common Shares Balance at beginning of period 20,099 12,102 Shares issued on exercise of stock options 19 3 Shares repurchased - (6) Shares issued under dividend reinvestment and share purchase plan 190 - ---------------------------------------------------------------------------- Balance at end of period 20,308 12,099 ---------------------------------------------------------------------------- Preferred Shares Balance at beginning and end of period 3,980 2,499 ---------------------------------------------------------------------------- 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 10 3 Impact of common shares repurchased - (8) Impact of asset drop down to TC PipeLines, LP - (38) Impact of Columbia Pipeline Partners LP acquisition (171) - Reclassification of Additional Paid-In Capital deficit to Retained Earnings 159 31 ---------------------------------------------------------------------------- Balance at end of period - - ---------------------------------------------------------------------------- Retained Earnings Balance at beginning of period 1,138 2,769 Net income attributable to controlling interests 684 274 Common share dividends (542) (397) Preferred share dividends (18) (21) Adjustment related to employee share-based payments (Note 2) 12 - Reclassification of Additional Paid-In Capital deficit to Retained Earnings (159) (31) ---------------------------------------------------------------------------- Balance at end of period 1,115 2,594 ---------------------------------------------------------------------------- Accumulated Other Comprehensive Loss Balance at beginning of period (960) (939) Other comprehensive loss (32) (60) ---------------------------------------------------------------------------- Balance at end of period (992) (999) ---------------------------------------------------------------------------- Equity Attributable to Controlling Interests 24,411 16,193 ---------------------------------------------------------------------------- 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 73 71 Portland Natural Gas Transmission System 8 9 Columbia Pipeline Partners LP 9 - Other comprehensive loss attributable to non- controlling interests (40) (106) Issuance of TC PipeLines, LP units Proceeds, net of issue costs 92 24 Decrease in TransCanada's ownership of TC PipeLines, LP (17) (4) Reclassification from common units subject to rescission 24 - Distributions declared to non-controlling interests (80) (68) Impact of Columbia Pipeline Partners LP acquisition 33 - ---------------------------------------------------------------------------- Balance at end of period 1,828 1,643 ---------------------------------------------------------------------------- Total Equity 26,239 17,836 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- See accompanying notes to the condensed consolidated financial statements.

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