EX-13.2 3 trp-03312019xfinstmts.htm FIRST QUARTER FINANCIAL STATEMENTS

Exhibit

EXHIBIT 13.2

Condensed consolidated statement of income

		three months ended March 31
(unaudited - millions of Canadian $, except per share amounts)		2019				2018
Revenues
Canadian Natural Gas Pipelines		967				884
U.S. Natural Gas Pipelines		1,304				1,091
Mexico Natural Gas Pipelines		152				151
Liquids Pipelines		728				623
Power and Storage		336				675
		3,487				3,424
Income from Equity Investments		155				80
Operating and Other Expenses
Plant operating costs and other		929				874
Commodity purchases resold		252				597
Property taxes		187				150
Depreciation and amortization		608				535
		1,976				2,156
Financial Charges
Interest expense		586				527
Allowance for funds used during construction		(139		)		(105		)
Interest income and other		(163		)		(63		)
		284				359
Income before Income Taxes		1,382				989
Income Tax Expense
Current		160				50
Deferred		76				71
		236				121
Net Income		1,146				868
Net income attributable to non-controlling interests		101				94
Net Income Attributable to Controlling Interests		1,045				774
Preferred share dividends		41				40
Net Income Attributable to Common Shares		1,004				734
Net Income per Common Share
Basic and diluted			$1.09				$0.83
Dividends Declared per Common Share			$0.75				$0.69
Weighted Average Number of Common Shares (millions)
Basic		921				885
Diluted		922				886

See accompanying notes to the Condensed consolidated financial statements.

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Condensed consolidated statement of comprehensive income

		three months ended March 31
(unaudited - millions of Canadian $)		2019			2018
Net Income		1,146			868
Other Comprehensive (Loss)/Income, Net of Income Taxes
Foreign currency translation losses and gains on net investment in foreign operations		(370	)		432
Change in fair value of net investment hedges		20			(2	)
Change in fair value of cash flow hedges		(17	)		7
Reclassification to net income of gains and losses on cash flow hedges		3			3
Reclassification of actuarial gains and losses on pension and other post-retirement benefit plans		3			(2	)
Other comprehensive income on equity investments		1			6
Other comprehensive (loss)/income		(360	)		444
Comprehensive Income		786			1,312
Comprehensive income attributable to non-controlling interests		61			160
Comprehensive Income Attributable to Controlling Interests		725			1,152
Preferred share dividends		41			40
Comprehensive Income Attributable to Common Shares		684			1,112

See accompanying notes to the Condensed consolidated financial statements.

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Condensed consolidated statement of cash flows

		three months ended March 31
(unaudited - millions of Canadian $)		2019			2018
Cash Generated from Operations
Net income		1,146			868
Depreciation and amortization		608			535
Deferred income taxes		76			71
Income from equity investments		(155	)		(80	)
Distributions received from operating activities of equity investments		277			234
Employee post-retirement benefits funding, net of expense		3			3
Equity allowance for funds used during construction		(94	)		(78	)
Unrealized (gains)/losses on financial instruments		(32	)		188
Other		(22	)		(122	)
Decrease/(increase) in operating working capital		142			(207	)
Net cash provided by operations		1,949			1,412
Investing Activities
Capital expenditures		(2,022	)		(1,702	)
Capital projects in development		(164	)		(36	)
Contributions to equity investments		(145	)		(358	)
Other distributions from equity investments		120			121
Deferred amounts and other		(26	)		110
Net cash used in investing activities		(2,237	)		(1,865	)
Financing Activities
Notes payable issued, net		2,852			1,812
Long-term debt issued, net of issue costs		24			93
Long-term debt repaid		(1,708	)		(1,226	)
Dividends on common shares		(419	)		(358	)
Dividends on preferred shares		(40	)		(39	)
Distributions to non-controlling interests		(56	)		(69	)
Common shares issued, net of issue costs		68			340
Partnership units of TC PipeLines, LP issued, net of issue costs		—			49
Net cash provided by financing activities		721			602
Effect of Foreign Exchange Rate Changes on Cash and Cash Equivalents		(7	)		29
Increase in Cash and Cash Equivalents		426			178
Cash and Cash Equivalents
Beginning of period		446			1,089
Cash and Cash Equivalents
End of period		872			1,267

See accompanying notes to the Condensed consolidated financial statements.

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Condensed consolidated balance sheet

			March 31,			December 31,
(unaudited - millions of Canadian $)			2019			2018
ASSETS
Current Assets
Cash and cash equivalents			872			446
Accounts receivable			2,214			2,535
Inventories			407			431
Assets held for sale			533			543
Other			879			1,180
			4,905			5,135
Plant, Property and Equipment	net of accumulated depreciation of $26,181 and $25,834, respectively		67,520			66,503
Equity Investments			6,966			7,113
Regulatory Assets			1,557			1,548
Goodwill			13,881			14,178
Loan Receivable from Affiliate			1,336			1,315
Intangible and Other Assets			1,867			1,921
Restricted Investments			1,315			1,207
			99,347			98,920
LIABILITIES
Current Liabilities
Notes payable			5,587			2,762
Accounts payable and other			4,693			5,408
Dividends payable			705			668
Accrued interest			613			646
Current portion of long-term debt			1,757			3,462
			13,355			12,946
Regulatory Liabilities			3,971			3,930
Other Long-Term Liabilities			1,492			1,008
Deferred Income Tax Liabilities			5,995			6,026
Long-Term Debt			35,857			36,509
Junior Subordinated Notes			7,380			7,508
			68,050			67,927
EQUITY
Common shares, no par value			23,466			23,174
Issued and outstanding:	March 31, 2019 – 924 million shares
	December 31, 2018 – 918 million shares
Preferred shares			3,980			3,980
Additional paid-in capital			11			17
Retained earnings			3,106			2,773
Accumulated other comprehensive loss			(926	)		(606	)
Controlling Interests			29,637			29,338
Non-controlling interests			1,660			1,655
			31,297			30,993
			99,347			98,920

Contingencies and Guarantees (Note 12)

Variable Interest Entities (Note 13)

Subsequent Event (Note 14)

See accompanying notes to the Condensed consolidated financial statements.

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Condensed consolidated statement of equity

	three months ended March 31
(unaudited - millions of Canadian $)	2019			2018
Common Shares
Balance at beginning of period	23,174			21,167
Shares issued:
Under at-the-market equity issuance program, net of issue costs	—			327
Under dividend reinvestment and share purchase plan	216			195
On exercise of stock options	76			14
Balance at end of period	23,466			21,703
Preferred Shares
Balance at beginning and end of period	3,980			3,980
Additional Paid-In Capital
Balance at beginning of period	17			—
Issuance of stock options, net of exercises	(6	)		3
Dilution from TC PipeLines, LP units issued	—			7
Balance at end of period	11			10
Retained Earnings
Balance at beginning of period	2,773			1,623
Net income attributable to controlling interests	1,045			774
Common share dividends	(693	)		(614	)
Preferred share dividends	(19	)		(19	)
Adjustment related to income tax effects of asset drop-downs to TC PipeLines, LP	—			95
Balance at end of period	3,106			1,859
Accumulated Other Comprehensive Loss
Balance at beginning of period	(606	)		(1,731	)
Other comprehensive (loss)/income attributable to controlling interests	(320	)		378
Balance at end of period	(926	)		(1,353	)
Equity Attributable to Controlling Interests	29,637			26,199
Equity Attributable to Non-Controlling Interests
Balance at beginning of period	1,655			1,852
Net income attributable to non-controlling interests	101			94
Other comprehensive (loss)/income attributable to non-controlling interests	(40	)		66
Issuance of TC PipeLines, LP units
Proceeds, net of issue costs	—			49
Decrease in TransCanada's ownership of TC PipeLines, LP	—			(9	)
Distributions declared to non-controlling interests	(56	)		(71	)
Balance at end of period	1,660			1,981
Total Equity	31,297			28,180

See accompanying notes to the Condensed consolidated financial statements.

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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, 2018, except as described in Note 2, Accounting changes. Capitalized and abbreviated terms that are used but not otherwise defined herein are identified in the 2018 audited Consolidated financial statements included in TransCanada’s 2018 Annual Report. As of first quarter 2019, the previously disclosed Energy segment has been renamed the Power and Storage segment.

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 2018 audited Consolidated financial statements included in TransCanada’s 2018 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 Power and Storage 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 JUDGMENTS

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 judgment 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 annual audited Consolidated financial statements for the year ended December 31, 2018, except as described in Note 2, Accounting changes.

2. Accounting changes

CHANGES IN ACCOUNTING POLICIES FOR 2019

Leases

In February 2016, the FASB issued new guidance on the accounting for leases. The new guidance amends the definition of a lease such that, in order for an arrangement to qualify as a lease, the lessee is required 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. 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 twelve months. Leases will be classified as finance or operating, with classification affecting the pattern of expense recognition in the consolidated statement of income. The new guidance does not make extensive changes to lessor accounting.

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The new guidance was effective January 1, 2019 and was applied using optional transition relief which allowed entities to initially apply the new lease standard at adoption (January 1, 2019) and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. This transition option allowed the Company to not apply the new guidance, including disclosure requirements, to the comparative periods presented.

The Company elected available practical expedients and exemptions upon adoption which allowed the Company:

• not to reassess prior conclusions on existing leases regarding lease identification, lease classification and initial direct costs under the new standard

• to carry forward the historical lease classification and its accounting treatment for land easements on existing agreements

• to not recognize ROU assets or lease liabilities for leases that qualify for the short-term lease recognition exemption

• to not separate lease and non-lease components for all leases for which the Company is the lessee and for facility and liquids tank terminals for which the Company is the lessor

• to use hindsight in determining the lease term and assessing ROU assets for impairment.

The new guidance had a significant impact on the Company's Condensed consolidated balance sheet, but did not have an impact on the Company's Condensed consolidated statements of income and cash flows. The most significant impact was the recognition of ROU assets and lease liabilities for operating leases and providing significant new disclosures about the Company's leasing activities. Refer to Note 7, Leases, for further information related to the impact of adopting the new guidance and the Company's updated accounting policies related to leases.

In the application of the new guidance, significant assumptions and judgments are used to determine the following:

• whether a contract contains a lease

• the duration of the lease term including exercising lease renewal options. The lease term for all of the Company’s leases includes the noncancellable period of the lease plus any additional periods covered by either a Company option to extend (or not to terminate) the lease that the Company is reasonably certain to exercise, or an option to extend (or not to terminate) the lease controlled by the lessor

• the discount rate for the lease.

Fair value measurement

In August 2018, the FASB issued new guidance that amends certain disclosure requirements for fair value measurements. This new guidance is effective January 1, 2020, however, early adoption of certain or all requirements is permitted. The Company elected to adopt this guidance effective first quarter 2019. The guidance was applied retrospectively and did not have a material impact on the Company's consolidated financial statements.

FUTURE ACCOUNTING CHANGES

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 as 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.

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Defined benefit plans

In August 2018, the FASB issued new guidance which amends and clarifies disclosure requirements related to defined benefit pension and other post-retirement benefit plans. This new guidance is effective January 1, 2021 and will be applied on a retrospective basis, however, early adoption is permitted. The Company is currently evaluating the timing and impact of the adoption of this guidance and has not yet determined the effect on its consolidated financial statements.

Implementation costs of cloud computing arrangements

In August 2018, the FASB issued new guidance requiring an entity in a hosting arrangement that is a service contract to follow the guidance for internal-use software to determine which implementation costs should be capitalized as an asset and which costs should be expensed. The guidance also requires the entity to amortize the capitalized implementation costs of a hosting arrangement over the term of the arrangement. This guidance is effective January 1, 2020, however, early adoption is permitted. This guidance can be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The Company is currently evaluating the timing and impact of adoption of this guidance and has not yet determined the effect on its consolidated financial statements.

Consolidation

In October 2018, the FASB issued new guidance for determining whether fees paid to decision makers and service providers are variable interests for indirect interests held through related parties under common control. This new guidance is effective January 1, 2020 and will be applied on a retrospective basis, however, early adoption is permitted. The Company is currently evaluating the timing and impact of the adoption of this guidance and has not yet determined the effect on its consolidated financial statements.

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3. Segmented information

three months ended March 31, 2019		Canadian Natural Gas Pipelines			U.S. Natural Gas Pipelines			Mexico Natural Gas Pipelines			Liquids Pipelines			Power and Storage1
(unaudited - millions of Canadian $)																	Corporate2			Total
Revenues		967			1,304			152			728			336			—			3,487
Intersegment revenues		—			42			—			—			5			(47	)	3	—
		967			1,346			152			728			341			(47	)		3,487
Income/(loss) from equity investments		1			76			6			14			72			(14	)	4	155
Plant operating costs and other		(343	)		(362	)		(12	)		(166	)		(88	)		42		3	(929	)
Commodity purchases resold		—			—			—			—			(252	)		—			(252	)
Property taxes		(69	)		(88	)		—			(28	)		(2	)		—			(187	)
Depreciation and amortization		(287	)		(180	)		(30	)		(88	)		(23	)		—			(608	)
Segmented Earnings/(Loss)		269			792			116			460			48			(19	)		1,666
Interest expense																				(586	)
Allowance for funds used during construction																				139
Interest income and other4																				163
Income before income taxes																				1,382
Income tax expense																				(236	)
Net Income																				1,146
Net income attributable to non-controlling interests																				(101	)
Net Income Attributable to Controlling Interests																				1,045
Preferred share dividends																				(41	)
Net Income Attributable to Common Shares																				1,004

1 Previously referred to as Energy.

2 Includes intersegment eliminations.

3 The Company records intersegment sales at contracted rates. For segmented reporting, these transactions are included as intersegment revenues in the segment providing the service and Plant operating costs and other in the segment receiving the service. These transactions are eliminated on consolidation. Intersegment profit is recognized when the product or service has been provided to third parties or otherwise realized.

4 Income/(loss) from equity investments includes foreign exchange losses on the Company's inter-affiliate loan with Sur de Texas. The offsetting foreign exchange gains on the inter-affiliate loan are included in Interest income and other. The peso-denominated loan to the Sur de Texas joint venture represents the Company's proportionate share of long-term debt financing for this joint venture.

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three months ended March 31, 2018		Canadian Natural Gas Pipelines			U.S. Natural Gas Pipelines			Mexico Natural Gas Pipelines			Liquids Pipelines			Power and Storage1
(unaudited - millions of Canadian $)																	Corporate2			Total
Revenues		884			1,091			151			623			675			—			3,424
Intersegment revenues		—			25			—			—			42			(67	)	3	—
		884			1,116			151			623			717			(67	)		3,424
Income/(loss) from equity investments		3			67			11			15			63			(79	)	4	80
Plant operating costs and other		(323	)		(324	)		(2	)		(191	)		(99	)		65		3	(874	)
Commodity purchases resold		—			—			—			—			(597	)		—			(597	)
Property taxes		(70	)		(55	)		—			(23	)		(2	)		—			(150	)
Depreciation and amortization		(241	)		(156	)		(23	)		(83	)		(32	)		—			(535	)
Segmented Earnings/(Loss)		253			648			137			341			50			(81	)		1,348
Interest expense																				(527	)
Allowance for funds used during construction																				105
Interest income and other4																				63
Income before income taxes																				989
Income tax expense																				(121	)
Net Income																				868
Net income attributable to non-controlling interests																				(94	)
Net Income Attributable to Controlling Interests																				774
Preferred share dividends																				(40	)
Net Income Attributable to Common Shares																				734

1 Previously referred to as Energy.

2 Includes intersegment eliminations.

3 The Company records intersegment sales at contracted rates. For segmented reporting, these transactions are included as intersegment revenues in the segment providing the service and Plant operating costs and other in the segment receiving the service. These transactions are eliminated on consolidation. Intersegment profit is recognized when the product or service has been provided to third parties or otherwise realized.

4 Income/(loss) from equity investments includes foreign exchange losses on the Company's inter-affiliate loan with Sur de Texas. The offsetting foreign exchange gains on the inter-affiliate loan are included in Interest income and other. The peso-denominated loan to the Sur de Texas joint venture represents the Company's proportionate share of long-term debt financing for this joint venture.

TOTAL ASSETS BY SEGMENT

(unaudited - millions of Canadian $)		March 31, 2019			December 31, 2018
Canadian Natural Gas Pipelines		19,287			18,407
U.S. Natural Gas Pipelines		43,532			44,115
Mexico Natural Gas Pipelines		6,858			7,058
Liquids Pipelines		17,025			17,352
Power and Storage		8,331			8,475
Corporate		4,314			3,513
		99,347			98,920

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4. Revenues

DISAGGREGATION OF REVENUES

The following tables summarize total Revenues for the three months ended March 31, 2019 and 2018:

three months ended March 31, 2019 (unaudited - millions of Canadian $)	Canadian Natural Gas Pipelines		U.S. Natural Gas Pipelines		Mexico Natural Gas Pipelines		Liquids Pipelines		Power and Storage		Total
Revenues from contracts with customers
Capacity arrangements and transportation	967		1,100		151		593		—		2,811
Power generation	—		—		—		—		343		343
Natural gas storage and other	—		180		1		1		28		210
	967		1,280		152		594		371		3,364
Other revenues1	—		24		—		134		(35	)	123
	967		1,304		152		728		336		3,487

1 Other revenues include income from the Company's marketing activities, financial instruments and lease arrangements. These arrangements are not in the scope of the revenue guidance. Refer to Note 7, Leases, and Note 11, Risk management and financial instruments, for further information on income from lease arrangements and financial instruments, respectively.

three months ended March 31, 2018 (unaudited - millions of Canadian $)	Canadian Natural Gas Pipelines		U.S. Natural Gas Pipelines		Mexico Natural Gas Pipelines		Liquids Pipelines		Power and Storage		Total
Revenues from contracts with customers
Capacity arrangements and transportation	884		884		150		534		—		2,452
Power generation	—		—		—		—		590		590
Natural gas storage and other	—		192		1		1		30		224
	884		1,076		151		535		620		3,266
Other revenues1	—		15		—		88		55		158
	884		1,091		151		623		675		3,424

1 Other revenues include income from the Company's marketing activities, financial instruments and lease arrangements. These arrangements are not in the scope of the revenue guidance. Refer to Note 11, Risk management and financial instruments, for further information on income from financial instruments.

CONTRACT BALANCES

	(unaudited - millions of Canadian $)	March 31, 2019			December 31, 2018
							Receivables from contracts with customers	1,382			1,684
	Contract assets1	249			159
	Long-term contract assets2	11			21
	Contract liabilities3	39			11
	Long-term contract liabilities4	119			121

1 Recorded as part of Other current assets on the Condensed consolidated balance sheet.

2 Recorded as part of Intangibles and other assets on the Condensed consolidated balance sheet.

3 Comprised of deferred revenue recorded in Accounts payable and other on the Condensed consolidated balance sheet. During the three months ended March 31, 2019, $6 million of revenue was recognized that was included in contract liabilities at the beginning of the period.

4 Comprised of deferred revenue recorded in Other long-term liabilities on the Condensed consolidated balance sheet.

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Contract assets and long-term contract assets primarily relate to the Company’s right to revenues for services completed but not invoiced at the reporting date on long-term committed capacity natural gas pipelines contracts. The change in contract assets is primarily related to the transfer to Accounts receivable when these rights become unconditional and the customer is invoiced as well as the recognition of additional revenues that remain to be invoiced. Contract liabilities and long-term contract liabilities primarily relate to force majeure fixed capacity payments received on long-term capacity arrangements in Mexico.    

FUTURE REVENUES FROM REMAINING PERFORMANCE OBLIGATIONS

Capacity Arrangements and Transportation

As at March 31, 2019, future revenues from long-term pipeline capacity arrangements and transportation contracts extending through 2045 are approximately $32.3 billion, of which approximately $5.4 billion is expected to be recognized during the remainder of 2019.

Power Generation

The Company has long-term power generation contracts extending through 2030. Revenues from power generation contracts have a variable component related to market prices that are subject to factors outside the Company’s influence. These revenues are considered to be fully constrained and are recognized on a monthly basis when the Company satisfies the performance obligation.

Natural Gas Storage and Other

As at March 31, 2019, future revenues from long-term natural gas storage and other contracts extending through 2033 are approximately $1.7 billion, of which approximately $366 million is expected to be recognized during the remainder of 2019.

5. Income taxes

Effective Tax Rates

The effective income tax rates for the three-month periods ended March 31, 2019 and 2018 were 17 per cent and 12 per cent, respectively. The higher effective tax rate in 2019 was primarily the result of lower foreign tax rate differentials partially offset by lower flow-through tax in Canadian rate-regulated pipelines.

Further to U.S. Tax Reform, the U.S. Treasury and the U.S. Internal Revenue Service issued proposed regulations in November and December of 2018 which provided administrative guidance and clarified certain aspects of the new laws with respect to interest deductibility, base erosion and anti-abuse tax, the new dividend received deduction and anti-hybrid rules. The proposed regulations are complex and comprehensive, and considerable uncertainty continues to exist pending release of the final regulations which is expected to occur later in 2019. As these proposed regulations have not been enacted as at March 31, 2019, their impact has not been reflected in income tax expense. If the proposed regulations are enacted as currently drafted, the resulting income tax expense should not have a material impact on the Company's financial statements.

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6. Assets held for sale

Coolidge Generating Station

In December 2018, TransCanada entered into an agreement to sell its Coolidge generating station in Arizona to SWG Coolidge Holdings, LLC (SWG). Salt River Project Agriculture Improvement and Power District (SRP), the PPA counterparty, subsequently exercised its contractual right of first refusal on a sale to a third party. On March 20, 2019, TransCanada terminated the agreement with SWG after entering into an agreement with SRP to sell the Coolidge generating station for approximately US$465 million, subject to timing of the close and related adjustments.

The sale will result in an estimated gain of approximately $70 million ($55 million after tax) including the release of an estimated $10 million of foreign currency translation gains. The gain will be recognized upon closing of the sale transaction, which is expected to occur mid-2019.

At March 31, 2019, the related assets and liabilities in the Power and Storage segment were classified as held for sale as follows:

(unaudited - millions of Canadian $)
Assets held for sale
Accounts receivable		6
Other current assets		1
Plant, property and equipment		526
Total assets held for sale		533
Liabilities related to assets held for sale
Other long-term liabilities		(3	)
Total liabilities related to assets held for sale1		(3	)

1 Included in Accounts payable and other on the Condensed consolidated balance sheet.

7. Leases

In 2016, the FASB issued new guidance on leases. The Company adopted the new guidance on January 1, 2019 using optional transition relief. Results reported for 2019 reflect the application of the new guidance, while the 2018 comparative results were prepared and reported under previous leases guidance.

Lessee Accounting Policy

The Company determines if an arrangement is a lease at inception of the contract. Operating leases are recognized as ROU assets and included in Plant, property and equipment while corresponding liabilities are included in Accounts payable and other, and Other long-term liabilities on the Condensed consolidated balance sheet.

Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at the commencement date of the lease agreement. As the Company’s lease contracts do not provide an implicit interest rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. The operating lease ROU asset also includes any lease payments made and initial direct costs incurred and excludes lease incentives. Lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Operating lease expense is recognized on a straight-line basis over the lease term and included in Plant operating costs and other in the Condensed consolidated statement of income.

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Lessor Accounting Policy

The Company is the lessor for certain contracts and these contracts are accounted for as operating leases. The Company recognizes lease payments as income over the lease term on a straight-line basis. Variable lease payments are recognized as income in the period in which the changes in facts and circumstances on which these payments are based occur.

Impact of New Lease Guidance on Date of Adoption

The following table illustrates the impact of the adoption of the new lease guidance on the Company's previously reported consolidated balance sheet line items:

(unaudited - millions of Canadian $)	As reported December 31, 2018		Adjustment		January 1, 2019
Plant, property and equipment	66,503		585		67,088
Accounts payable and other	5,408		57		5,465
Other long-term liabilities	1,008		528		1,536

As a Lessee

The Company has operating leases for corporate offices, other various premises, equipment and land. Some leases have an option to renew for periods of one to 25 years, and some may include options to terminate the lease within one year. Payments due under lease contracts include fixed payments plus, for many of the Company's leases, variable payments such as proportionate share of the buildings' property taxes, insurance and common area maintenance. The Company subleases some of the leased premises.

Operating lease cost is as follows:

(unaudited - millions of Canadian $)	three months ended March 31, 2019
Operating lease cost1	28
Sublease income	(2	)
Net operating lease cost	26

1 Includes short-term leases and variable lease costs.

Other information related to operating leases is noted in the following table:

(unaudited - millions of Canadian $)	three months ended March 31, 2019
Cash paid for amounts included in the measurement of operating lease liabilities	19
Weighted average remaining lease term	10.8	years
Weighted average discount rate	3.56%

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Maturities of operating lease liabilities on a prospective 12-month basis and where they are disclosed on the Condensed consolidated balance sheet as at March 31, 2019 are as follows:

(unaudited - millions of Canadian $)
2020	72
2021	69
2022	64
2023	58
2024	57
Thereafter	355
Total operating lease payments	675
Imputed interest	(110	)
Operating lease liabilities recorded on the Condensed consolidated balance sheet	565
Reported as follows:
Accounts payable and other	55
Other long-term liabilities	510
	565

Future payments reported under previous lease guidance for the Company’s operating leases as at December 31, 2018 were as follows:

(unaudited - millions of Canadian $)	Minimum operating lease payments
2019	81
2020	78
2021	76
2022	69
2023	67
Thereafter	390
	761

As at March 31, 2019, the carrying value of the ROU assets recorded under operating leases was $570 million and is included in Plant, property and equipment on the Condensed consolidated balance sheet.

As a Lessor

Coolidge, Grandview and Bécancour power plants in the Power and Storage segment and the Northern Courier pipeline in the Liquids Pipelines segment are accounted for as operating leases. As Coolidge is classified as Assets held for sale, it is not included in the following lease disclosures. The Company has long-term PPAs for the sale of power for the Power and Storage lease assets which expire between 2024 and 2026. Northern Courier pipeline transports bitumen and diluent between the Fort Hills mine site and Suncor Energy’s terminal, with a contract expiring in 2042.

Some leases contain variable lease payments that are based on operating hours and the reimbursement of variable costs, options to purchase the underlying asset at fair value or based on a formula considering the remaining fixed payments, and options to extend a lease up to five years. Lessees have rights under some leases to terminate under certain circumstances.

The Company also leases liquids tanks which are accounted for as operating leases.

Operating lease income recorded by the Company for the three months ended March 31, 2019 was $55 million.

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Future lease payments to be received under operating leases as at March 31, 2019 are as follows:

(unaudited - millions of Canadian $)	Future lease payments
Remainder of 2019	183
2020	226
2021	223
2022	218
2023	224
Thereafter	1,940
	3,014

The cost and accumulated depreciation for facilities accounted for as operating leases was $2,023 million and $338 million, respectively, at March 31, 2019 (December 31, 2018 – $2,007 million and $324 million, respectively).

8. Long-term debt

LONG-TERM DEBT REPAID

The Company retired long-term debt in the three months ended March 31, 2019 as follows:

(unaudited - millions of Canadian $, unless otherwise noted)
Company		Retirement date		Type		Amount			Interest rate
TRANSCANADA PIPELINES LIMITED
		March 2019		Debentures		100			10.50	%
		January 2019		Senior Unsecured Notes		US 750			7.125	%
		January 2019		Senior Unsecured Notes		US 400			3.125	%

CAPITALIZED INTEREST

In the three months ended March 31, 2019, TransCanada capitalized interest related to capital projects of $37 million (2018 – $26 million).

9. Other comprehensive (loss)/income and accumulated other comprehensive loss

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

three months ended March 31, 2019
(unaudited - millions of Canadian $)		Before Tax Amount			Income Tax Recovery/(Expense)			Net of Tax Amount
Foreign currency translation losses on net investment in foreign operations		(364	)		(6	)		(370	)
Change in fair value of net investment hedges		27			(7	)		20
Change in fair value of cash flow hedges		(22	)		5			(17	)
Reclassification to net income of gains and losses on cash flow hedges		4			(1	)		3
Reclassification of actuarial gains and losses on pension and other post-retirement benefit plans		4			(1	)		3
Other comprehensive income on equity investments		1			—			1
Other Comprehensive Loss		(350	)		(10	)		(360	)

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three months ended March 31, 2018
(unaudited - millions of Canadian $)		Before Tax Amount			Income Tax Recovery/(Expense)			Net of Tax Amount
Foreign currency translation gains on net investment in foreign operations		416			16			432
Change in fair value of net investment hedges		(3	)		1			(2	)
Change in fair value of cash flow hedges		6			1			7
Reclassification to net income of gains and losses on cash flow hedges		4			(1	)		3
Reclassification of actuarial gains and losses on pension and other post-retirement benefit plans		4			(6	)		(2	)
Other comprehensive income on equity investments		7			(1	)		6
Other Comprehensive Income		434			10			444

The changes in AOCI by component are as follows:

three months ended March 31, 2019
(unaudited - millions of Canadian $)		Currency Translation Adjustments			Cash Flow Hedges			Pension and OPEB Plan Adjustments			Equity Investments			Total1
AOCI balance at January 1, 2019		107			(23	)		(314	)		(376	)		(606	)
Other comprehensive loss before reclassifications2		(315	)		(12	)		—			(1	)		(328	)
Amounts reclassified from AOCI3,4		—			2			3			3			8
Net current period other comprehensive (loss)/income		(315	)		(10	)		3			2			(320	)
AOCI balance at March 31, 2019		(208	)		(33	)		(311	)		(374	)		(926	)

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 and cash flow hedges are net of non-controlling interests losses of $35 million and $5 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 $16 million ($12 million, net of tax) at March 31, 2019. 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.

4 Amounts reclassified from AOCI on cash flow hedges and equity investments are net of non-controlling interests gains of $1 million and nil, respectively.

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

		Amounts Reclassified From AOCI					Affected line item in the Condensed consolidated statement of income
		three months ended March 31
(unaudited - millions of Canadian $)		2019		2018
Cash flow hedges
Commodities		—		1			Revenues (Power and Storage)
Interest		(3	)	(5	)		Interest expense
		(3	)	(4	)		Total before tax
		1		1			Income tax expense
		(2	)	(3	)		Net of tax1,3
Pension and other post-retirement benefit plan adjustments
Amortization of actuarial losses		(4	)	(4	)		Plant operating costs and other2
		1		6			Income tax expense
		(3	)	2			Net of tax1
Equity investments
Equity income		(3	)	(7	)		Income from equity investments
		—		1			Income tax expense
		(3	)	(6	)		Net of tax1,3

1 All amounts in parentheses indicate expenses to the Condensed consolidated statement of income.

2 These AOCI components are included in the computation of net benefit cost. Refer to Note 10, Employee post-retirement benefits, for further information.

3 Amounts reclassified from AOCI on cash flow hedges and equity investments are net of non-controlling interests gains of $1 million and nil, respectively, for the three months ended March 31, 2019 (2018 – nil and nil).

10. Employee post-retirement benefits

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

		three months ended March 31
		Pension benefit plans						Other post-retirement benefit plans
(unaudited - millions of Canadian $)		2019			2018			2019			2018
Service cost1		33			30			1			1
Other components of net benefit cost1
Interest cost		35			33			4			3
Expected return on plan assets		(58	)		(55	)		(4	)		(4	)
Amortization of actuarial losses		3			4			1			—
Amortization of regulatory asset		3			5			—			—
		(17	)		(13	)		1			(1	)
Net Benefit Cost		16			17			2			—

1 Service cost and other components of net benefit cost are included in Plant operating costs and other in the Condensed consolidated statement of income.

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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, cash flow and shareholder value.

COUNTERPARTY CREDIT RISK

TransCanada’s maximum counterparty credit exposure with respect to financial instruments at March 31, 2019, without taking into account security held, consisted of cash and cash equivalents, accounts receivable, available-for-sale assets, derivative assets and a loan receivable.

The Company monitors its counterparties and regularly reviews its accounts receivable. The Company records an allowance for doubtful accounts as necessary using the specific identification method. At March 31, 2019, there were no significant credit losses, no significant credit risk concentration and no significant amounts past due or impaired.

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.

The Company holds a 60 per cent equity interest in a joint venture with IEnova to build, own and operate the Sur de Texas pipeline. The Company accounts for its interest in the joint venture as an equity investment. In 2017, the Company entered into a MXN$21.3 billion unsecured revolving credit facility with the joint venture, which bears interest at a floating rate and matures in March 2022.

At March 31, 2019, the Company's Condensed consolidated balance sheet included a MXN$19.4 billion or $1.3 billion (December 31, 2018 – MXN$18.9 billion or $1.3 billion) loan receivable from the Sur de Texas joint venture which represents TransCanada's proportionate share of long-term debt financing requirements related to the joint venture. Interest income and other included interest income of $35 million for the three months ended March 31, 2019 (2018 – $27 million) from this joint venture with a corresponding proportionate share of interest expense recorded in Income from equity investments.

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 swaps and foreign exchange options.

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

		March 31, 2019					December 31, 2018
(unaudited - millions of Canadian $, unless otherwise noted)		Fair value1,2			Notional amount		Fair value1,2			Notional amount
U.S. dollar cross-currency swaps (maturing 2019)3		(12	)		US 100		(43	)		US 300
U.S. dollar foreign exchange options (maturing 2019 to 2020)		(13	)		US 2,500		(47	)		US 2,500
		(25	)		US 2,600		(90	)		US 2,800

1 Fair value equals carrying value.

2 No amounts have been excluded from the assessment of hedge effectiveness.

3 In the three months ended March 31, 2019, Net income includes net realized gains of nil (2018 – $1 million) related to the interest component of cross-currency swap settlements which are reported within Interest expense on the Company's Condensed consolidated statement of income.

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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 otherwise noted)		March 31, 2019		December 31, 2018
Notional amount		30,800 (US 23,100)		31,000 (US 22,700)
Fair value		32,900 (US 24,600)		31,700 (US 23,200)

FINANCIAL INSTRUMENTS

Non-derivative financial instruments

Fair value of non-derivative financial instruments

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. Each of these instruments are 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 Company's non-derivative financial instruments, excluding those where carrying amounts approximate fair value, which are classified in Level II of the fair value hierarchy: 

		March 31, 2019						December 31, 2018
(unaudited - millions of Canadian $)		Carrying amount			Fair value			Carrying amount			Fair value
Long-term debt including current portion1,2		(37,614	)		(41,737	)		(39,971	)		(42,284	)
Junior subordinated notes		(7,380	)		(7,006	)		(7,508	)		(6,665	)
		(44,994	)		(48,743	)		(47,479	)		(48,949	)

1 Long-term debt is recorded at amortized cost except for US$450 million (December 31, 2018 – US$750 million) that is attributed to hedged risk and recorded at fair value.

2 Net income for the three months ended March 31, 2019 includes unrealized losses of $3 million (2018 – gains of $5 million) for fair value adjustments attributable to the hedged interest rate risk associated with interest rate swap fair value hedging relationships on US$450 million of long-term debt at March 31, 2019 (December 31, 2018 – US$750 million). There were no other unrealized gains or losses from fair value adjustments to the non-derivative financial instruments.

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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:

	March 31, 2019						December 31, 2018
(unaudited - millions of Canadian $)	LMCI restricted investments			Other restricted investments1			LMCI restricted investments			Other restricted investments1
Fair values of fixed income securities2
Maturing within 1 year	—			24			—			22
Maturing within 1-5 years	—			94			—			110
Maturing within 5-10 years	156			—			140			—
Maturing after 10 years	1,053			—			952			—
	1,209			118			1,092			132

1 Other restricted investments have been set aside to fund insurance claim losses to be paid by the Company's wholly-owned captive insurance subsidiary.

2 Available-for-sale assets are recorded at fair value and included in Other current assets and Restricted investments on the Company's Condensed consolidated balance sheet.

March 31, 2019

March 31, 2018

(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

51

1

2

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 Gains and losses on other restricted investments are included in Interest income and other on the Condensed consolidated statement of income.

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. Unrealized gains and losses on derivative instruments are not necessarily representative of the amounts that will be realized on settlement.

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.

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Balance sheet presentation of derivative instruments

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

at March 31, 2019	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	—			—			—			294			294
Foreign exchange	—			—			14			3			17
Interest rate	2			—			—			—			2
	2			—			14			297			313
Intangible and other assets
Commodities2	—			—			—			28			28
Foreign exchange	—			—			1			—			1
Interest rate	4			2			—			—			6
	4			2			1			28			35
Total Derivative Assets	6			2			15			325			348
Accounts payable and other
Commodities2	(4	)		—			—			(273	)		(277	)
Foreign exchange	—			—			(39	)		(71	)		(110	)
Interest rate	—			(2	)		—			—			(2	)
	(4	)		(2	)		(39	)		(344	)		(389	)
Other long-term liabilities
Commodities2	(1	)		—			—			(23	)		(24	)
Foreign exchange	—			—			(1	)		—			(1	)
Interest rate	(24	)		—			—			—			(24	)
	(25	)		—			(1	)		(23	)		(49	)
Total Derivative Liabilities	(29	)		(2	)		(40	)		(367	)		(438	)
Total Derivatives	(23	)		—			(25	)		(42	)		(90	)

1 Fair value equals carrying value.

2 Includes purchases and sales of power, natural gas and liquids.

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at December 31, 2018	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	1			—			—			716			717
Foreign exchange	—			—			16			1			17
Interest rate	3			—			—			—			3
	4			—			16			717			737
Intangible and other assets
Commodities2	1			—			—			50			51
Foreign exchange	—			—			1			—			1
Interest rate	8			1			—			—			9
	9			1			1			50			61
Total Derivative Assets	13			1			17			767			798
Accounts payable and other
Commodities2	(4	)		—			—			(622	)		(626	)
Foreign exchange	—			—			(105	)		(188	)		(293	)
Interest rate	—			(3	)		—			—			(3	)
	(4	)		(3	)		(105	)		(810	)		(922	)
Other long-term liabilities
Commodities2	—			—			—			(28	)		(28	)
Foreign exchange	—			—			(2	)		—			(2	)
Interest rate	(11	)		(1	)		—			—			(12	)
	(11	)		(1	)		(2	)		(28	)		(42	)
Total Derivative Liabilities	(15	)		(4	)		(107	)		(838	)		(964	)
Total Derivatives	(2	)		(3	)		(90	)		(71	)		(166	)

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.

Derivatives in fair value hedging relationships

The following table details amounts recorded on the Condensed consolidated balance sheet in relation to cumulative adjustments for fair value hedges included in the carrying amount of the hedged liabilities:

	Carrying amount						Fair value hedging adjustments1
(unaudited - millions of Canadian $)	March 31, 2019			December 31, 2018			March 31, 2019			December 31, 2018
Current portion of long-term debt	(332	)		(748	)		2			3
Long-term debt	(269	)		(273	)		(2	)		—
	(601	)		(1,021	)		—			3

1 At March 31, 2019 and December 31, 2018, adjustments for discontinued hedging relationships included in these balances were nil.

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Notional and Maturity Summary

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

at March 31, 2019	Power			Natural Gas			Liquids			Foreign Exchange			Interest Rate
(unaudited)
Purchases1	17,374			34			63			—			—
Sales1	14,243			43			82			—			—
Millions of U.S. dollars	—			—			—			3,900			1,400
Maturity dates	2019-2024			2019-2027			2019-2020			2019-2020			2019-2030

1 Volumes for power, natural gas and liquids derivatives are in GWh, Bcf and MMBbls, respectively.

at December 31, 2018	Power			Natural Gas			Liquids			Foreign Exchange			Interest Rate
(unaudited)
Purchases1	23,865			44			59			—			—
Sales1	17,689			56			79			—			—
Millions of U.S. dollars	—			—			—			3,862			1,650
Maturity dates	2019-2023			2019-2027			2019			2019			2019-2030

1 Volumes for power, natural gas and liquids derivatives are in GWh, Bcf and MMBbls, respectively.

Unrealized and realized (losses)/gains on derivative instruments

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

		three months ended March 31
(unaudited - millions of Canadian $)		2019			2018
Derivative Instruments Held for Trading1
Amount of unrealized (losses)/gains in the period
Commodities2		(88	)		(109	)
Foreign exchange		120			(79	)
Amount of realized gains/(losses) in the period
Commodities		107			110
Foreign exchange		(29	)		15
Derivative Instruments in Hedging Relationships
Amount of realized (losses)/gains in the period
Commodities		(7	)		3
Interest rate		—			1

1 Realized and unrealized gains and losses on held-for-trading derivative instruments used to purchase and sell commodities are included on a net basis in Revenues. Realized and unrealized gains and losses on interest rate and foreign exchange held-for-trading derivative instruments are included on a net basis in Interest expense and Interest income and other, respectively.

2 In the three months ended March 31, 2019 and 2018, there were no gains or losses included in Net income relating to discontinued cash flow hedges where it was probable that the anticipated transaction would not occur.

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Derivatives in cash flow hedging relationships

The components of OCI (Note 9) related to the change in fair value of derivatives in cash flow hedging relationships before tax and including the portion attributable to non-controlling interests are as follows: 

		three months ended March 31
(unaudited - millions of Canadian $)		2019			2018
Change in fair value of derivative instruments recognized in OCI (effective portion)1
Commodities		(3	)		(3	)
Interest rate		(19	)		9
		(22	)		6

1 No amounts have been excluded from the assessment of hedge effectiveness. Amounts in parentheses indicate losses recorded to OCI and AOCI.

Effect of fair value and cash flow hedging relationships

The following table details amounts presented on the Condensed consolidated statement of income in which the effects of fair value or cash flow hedging relationships are recorded.

		three months ended March 31
		Revenues (Power and Storage)						Interest Expense
(unaudited - millions of Canadian $)		2019			2018			2019			2018
Total Amount Presented in the Condensed Consolidated Statement of Income		336			675			(586	)		(527	)
Fair Value Hedges
Interest rate contracts
Hedged items		—			—			(6	)		(20	)
Derivatives designated as hedging instruments		—			—			(1	)		—
Cash Flow Hedges
Reclassification of gains/(losses) on derivative instruments from AOCI to net income1,2
Interest rate contracts		—			—			4			5
Commodity contracts		—			(1	)		—			—

1 Refer to Note 9, Other comprehensive (loss)/income and accumulated other comprehensive loss, for the components of OCI related to derivatives in cash flow hedging relationships including the portion attributable to non-controlling interests.

2 There are no amounts recognized in earnings that were excluded from effectiveness testing.

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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 Condensed consolidated 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 March 31, 2019		Gross derivative instruments			Amounts available for offset1			Net amounts
(unaudited - millions of Canadian $)
Derivative instrument assets
Commodities		322			(267	)		55
Foreign exchange		18			(18	)		—
Interest rate		8			(3	)		5
		348			(288	)		60
Derivative instrument liabilities
Commodities		(301	)		267			(34	)
Foreign exchange		(111	)		18			(93	)
Interest rate		(26	)		3			(23	)
		(438	)		288			(150	)

1 Amounts available for offset do not include cash collateral pledged or received.

at December 31, 2018		Gross derivative instruments			Amounts available for offset1			Net amounts
(unaudited - millions of Canadian $)
Derivative instrument assets
Commodities		768			(626	)		142
Foreign exchange		18			(18	)		—
Interest rate		12			(4	)		8
		798			(648	)		150
Derivative instrument liabilities
Commodities		(654	)		626			(28	)
Foreign exchange		(295	)		18			(277	)
Interest rate		(15	)		4			(11	)
		(964	)		648			(316	)

1 Amounts available for offset do not include cash collateral pledged or received.

With respect to the derivative instruments presented above, the Company provided cash collateral of $118 million and letters of credit of $37 million as at March 31, 2019 (December 31, 2018 – $143 million and $22 million) to its counterparties. At March 31, 2019, the Company held no cash collateral and $1 million in letters of credit (December 31, 2018 – nil and $1 million) from counterparties on asset exposures.

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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. The Company may also need to provide collateral if the fair value of its derivative financial instruments exceeds pre-defined exposure limits.

Based on contracts in place and market prices at March 31, 2019, the aggregate fair value of all derivative instruments with credit-risk-related contingent features that were in a net liability position was $4 million (December 31, 2018 – $6 million), for which the Company has provided no collateral in the normal course of business. If the credit-risk-related contingent features in these agreements were triggered on March 31, 2019, the Company would have been required to provide collateral of $4 million (December 31, 2018 – $6 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. An active market is a market in which frequency and volume of transactions provides pricing information on an ongoing basis.
Level II	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. Inputs include published exchange rates, interest rates, interest rate swap curves, yield curves and broker quotes from external data service providers.
Level III	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. There is uncertainty caused by using unobservable market data which may not accurately reflect possible future changes in fair value.

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

at March 31, 2019		Quoted prices in active markets			Significant other observable inputs			Significant unobservable inputs
(unaudited - millions of Canadian $)		(Level I)			(Level II)1			(Level III)1			Total
Derivative instrument assets
Commodities		235			86			1			322
Foreign exchange		—			18			—			18
Interest rate		—			8			—			8
Derivative instrument liabilities
Commodities		(229	)		(67	)		(5	)		(301	)
Foreign exchange		—			(111	)		—			(111	)
Interest rate		—			(26	)		—			(26	)
		6			(92	)		(4	)		(90	)

1 There were no transfers from Level II to Level III for the three months ended March 31, 2019.

at December 31, 2018		Quoted prices in active markets (Level I)			Significant other observable inputs (Level II)1			Significant unobservable inputs (Level III)1
(unaudited - millions of Canadian $)											Total
Derivative instrument assets
Commodities		581			187			—			768
Foreign exchange		—			18			—			18
Interest rate		—			12			—			12
Derivative instrument liabilities
Commodities		(555	)		(95	)		(4	)		(654	)
Foreign exchange		—			(295	)		—			(295	)
Interest rate		—			(15	)		—			(15	)
		26			(188	)		(4	)		(166	)

1 There were no transfers from Level II to Level III for the year ended December 31, 2018.

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 March 31
(unaudited - millions of Canadian $)		2019			2018
Balance at beginning of period		(4	)		(7	)
Total losses included in Net income		—			(2	)
Settlements		—			(9	)
Balance at end of period1		(4	)		(18	)

1 For the three months ended March 31, 2019, Revenues included unrealized gains of less than $1 million attributed to derivatives in the Level III category that were still held at March 31, 2019 (2018 – unrealized losses of $11 million).

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12. Contingencies and guarantees

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.

GUARANTEES

TransCanada and its partner on the Sur de Texas pipeline, IEnova, have jointly guaranteed the financial performance of this entity. Such agreements include a guarantee and a letter of credit which are primarily related to construction services and the delivery of natural gas.

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 on the Condensed consolidated balance sheet. Information regarding the Company’s guarantees is as follows:

				at March 31, 2019						at December 31, 2018
(unaudited - millions of Canadian $)		Term		Potential exposure1			Carrying value			Potential exposure1			Carrying value
Sur de Texas		ranging to 2020		174			1			183			1
Bruce Power		ranging to 2021		88			—			88			—
Other jointly-owned entities		ranging to 2059		102			11			104			11
				364			12			375			12

1 TransCanada’s share of the potential estimated current or contingent exposure.

13. Variable interest entities

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.

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Consolidated VIEs

The Company's consolidated VIEs consist of legal entities where the Company is the primary beneficiary. As the primary beneficiary, 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 Consolidated VIEs whose assets cannot be used for purposes other than the settlement of the VIE’s obligations are as follows:

			March 31,			December 31,
(unaudited - millions of Canadian $)			2019			2018
ASSETS
Current Assets
Cash and cash equivalents			69			45
Accounts receivable			69			79
Inventories			26			24
Other			9			13
			173			161
Plant, Property and Equipment			2,949			3,026
Equity Investments			847			965
Goodwill			444			453
Intangible and Other Assets			3			8
			4,416			4,613
LIABILITIES
Current Liabilities
Accounts payable and other			79			88
Accrued interest			31			24
Current portion of long-term debt			76			79
			186			191
Regulatory Liabilities			42			43
Other Long-Term Liabilities			4			3
Deferred Income Tax Liabilities			12			13
Long-Term Debt			3,003			3,125
			3,247			3,375

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Non-Consolidated VIEs

The Company’s non-consolidated VIEs consist of legal entities where the Company is not the primary beneficiary as it 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:

			March 31,			December 31,
(unaudited - millions of Canadian $)			2019			2018
Balance sheet
Equity investments			4,487			4,575
Off-balance sheet
Potential exposure to guarantees			168			170
Maximum exposure to loss			4,655			4,745

14. Subsequent Event

Long-term debt issuance

On April 10, 2019, TCPL issued $1.0 billion of Medium Term Notes, due in October 2049, bearing interest at a fixed rate of 4.34 per cent.