NOTES TO FINANCIAL STATEMENTS
December 31, 2018 and 2017
NOTE 1: DESCRIPTION OF PLAN
The TransCanada 401(k) and Savings Plan (the Plan) is a defined contribution plan that provides retirement benefits for employees of TransCanada USA Services Inc. (TCUSA or the Company) or its subsidiaries not covered by a collective bargaining agreement, unless participation is required by the agreement. The Plan excludes employees hired under the Company’s student program, until they reach age 21 and have completed at least 1,000 hours of service, special project employees, non-resident persons with no income from a United States source and non-resident persons who have been non-residents for a period of 183 days or more, unless the employee remains on the Company's payroll. The Plan is subject to the provisions of the
Employee Retirement Income Security Act of 1974,
as amended (ERISA).
On April 1, 2017, employees of Columbia Pipeline Group, Inc. were transferred to become employees of TC USA and the Plan was amended to exclude the transferred employees from participating in the Plan. The Columbia Pipeline Group 401(k) Savings Plan (the Columbia 401(k) Plan) was also amended to provide for continued participation by the transferred employees under the Columbia 401(k) Plan. On December 31, 2017, the Columbia 401(k) Plan was merged into the Plan.
On December 31, 2017, the TransCanada 401(k) and Savings IBEW 1245 Plan was also merged into the Plan.
The Board of Directors of TCUSA (the Board) has appointed the TransCanada USA Investment Committee and TransCanada USA Benefits Committee as the plan administrators and fiduciaries of the Plan. The Board has also appointed Fidelity Management Trust Company (Fidelity or the Trustee) as custodian and trustee of the Plan’s assets. Fidelity Investments Institutional Operations Company serves as the recordkeeper for the Plan.
Employee and Employer Contributions
Each year, participants may elect to defer a percentage of their eligible compensation into the Plan subject to an annual limit of the lesser of 60 per cent of their eligible compensation or
$18,500
(2017 - $18,000) (the Deferral Limit), subject to certain limitations under the Internal Revenue Code of 1986, as amended (the Code). Participants age 50 or older who are making deferral contributions may also make catch-up contributions of up to $6,000. Subject to the Deferral Limit, eligible employees may contribute up to 100 per cent of bonuses designated by the Company. The Company will match 100 per cent of each participant’s contributions up to a maximum of five per cent of the participant’s eligible compensation for the Plan year.
The Company will also make annual enhanced profit sharing contributions in an amount equal to seven per cent of a participant’s base salary, if the participant has elected, or is deemed to have elected, not to accrue credited service under the TransCanada USA Services Inc. Retirement Plan. Collectively bargained employees may be eligible for a different match and/or enhanced profit sharing contribution as defined in their collective bargaining agreement. In 2018, the Company made enhanced contributions of $12 million. Participants may also contribute amounts transferred to the Plan from another qualified plan at the participant’s request (rollover).
A discretionary profit sharing contribution in the amount of $1,537,000 from the 2017 plan year of the former Columbia 401(k) Plan was authorized on March 9, 2018 and included in the 2018 employer contributions to the Plan.
Participant Accounts
Each participant’s account is credited with the participant’s and Company’s contributions and an allocation of Plan earnings. Earnings are allocated from a particular fund based on the ratio of a participant’s account invested in the fund to all participants’ investments in that fund.
Participants are responsible for investment decisions relating to the investment of assets in their account. The Trustee carries out all investing transactions on behalf of the participant. In the event investment instructions are not received from the participant, contributions are allocated to the Plan's qualified default option, the Vanguard Target Retirement funds, based upon the participant's expected retirement date.
Investment in TransCanada Corporation
Investment options available to participants includes a TransCanada Corporation (TransCanada) stock fund (the TransCanada Stock Fund). TransCanada is the indirect parent company to TCUSA. Participants may elect to invest up to 10 per cent of contributions in the TransCanada Stock Fund. Participants may elect to exchange up to 10 per cent of their existing account balance into the TransCanada Stock Fund, subject to a 10 per cent maximum account value. Additionally, no more than 10 per cent of any rollover contribution can be invested in the TransCanada Stock Fund.
Vesting
Participants are immediately vested in their contributions, including rollovers, employer contributions and any earnings thereon.
Notes Receivable from Participants
Participants may borrow from their fund accounts a minimum of $1,000 up to a maximum equal to the lesser of $50,000 reduced by the highest outstanding note balance in their account during the prior 12 month period or 50 per cent of their vested account balance. Note terms range from one to five years for general notes or up to 15 years for the purchase of a primary residence. The notes are secured by the balance in the participant’s account and bear interest at a reasonable interest rate, as determined by the Plan Administrator, based on prevailing market interest rates at the time. Interest rates remain fixed throughout the duration of the term. Interest rates on notes outstanding at
December 31, 2018
ranged from
3.25 per cent
to
8.25 per cent
(
2017
-
3.25 per cent
to
8.25 per cent
). Principal and interest are paid through payroll deductions.
A note receivable from a participant shall be considered in default if any scheduled repayment remains unpaid as of the last business day of the calendar quarter following the calendar quarter in which the note is initially considered past due. In the event of a default or termination of employment the entire outstanding note and accrued interest is considered to be a deemed distribution to the participant.
Payment of Benefits
Participants are eligible to request a distribution of their vested amounts upon retirement, death, total and permanent disability, severance of employment with the Company or, in very limited circumstances, in the event of financial hardship. Distributions are made in the form of a lump-sum payment, installment payments or a rollover to another qualified account.
A participant’s normal retirement age is 65, however, participants may elect to withdraw all or a portion of their contributions after the age of 59½, subject to certain conditions.
In certain circumstances, participants may elect to withdraw all or a portion of their vested matching and profit sharing contributions that have been in their account for at least 24 months or after they have at least 60 months of participation in the Plan.
Forfeitures
As participants are immediately 100 per cent vested in their account balance, there are no forfeitures.
Administrative Expenses
The Plan Administrator is responsible for filing all required reports on behalf of the Plan. The Company provides or pays for certain accounting, legal and management services on behalf of the Plan. The Company has not charged the Plan for these expenses or services. Loans and other transaction specific fees are charged to the accounts of participants electing such transaction. Certain investment related expenses, including management fees, are deducted from the mutual funds in which the Plan invests, including those sponsored by an affiliate of Fidelity. These expenses are presented as a reduction of investment income.
Plan Termination
Although it has not expressed any intent to do so, with approval from its Board of Directors, the Company has the right under the Plan to discontinue contributions at any time and to terminate the Plan, subject to the provisions of ERISA.
NOTE 2: SUMMARY OF ACCOUNTING POLICIES
Basis of Accounting
The financial statements of the Plan are presented on an accrual basis of accounting in accordance with U.S. generally accepted accounting principles.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and changes therein, and disclosure of contingent assets and liabilities. Actual results could differ from these estimates.
Investment Valuation and Income Recognition
The Plan’s investments are stated at fair value. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. See Note 3 for discussion of fair value measurements.
Interest income is recorded on the accrual basis and dividends are recorded on the ex-dividend date.
Net (Depreciation)/Appreciation in Fair Value of Investments consists of: (1) the unrealized gains or losses on investments held during the year and (2) the realized gains or losses recognized on the sale of investments during the year. Realized gains and losses from security transactions are reported on the average cost basis.
Purchases and sales of securities are recorded on a trade-date basis.
Notes Receivable from Participants
Notes Receivable from Participants includes the unpaid principal balance plus any accrued interest. Defaulted notes receivable from participants are recorded as a distribution based upon the terms of the plan document.
Other Revenue
The agreement between the Trustee and the Plan includes a revenue sharing arrangement whereby the Trustee shares revenue generated by the Plan that was paid from the mutual fund holdings sponsored by an affiliate of the Trustee. These deposits are included in the other revenue amount in the statement of changes in net assets available for benefits. The funds can be used to pay plan expenses or be allocated to participants. Income from revenue sharing during 2018 was $37,037 of which $37,092 (2017 - $20) remains available at December 31, 2018 for allocation to participants or to offset future plan expenses.
Payment of Benefits
Benefits are recorded when paid.
Recently Issued Pronouncements
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, 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 the Plan financial statements.
NOTE 3: INVESTMENTS
Participants direct the investment of their account balances into a broad range of investment securities offered by the Plan. Investment securities are exposed to various risks, such as counterparty credit risk, liquidity risk and market risk. Due to the level of risk associated with certain investment securities and the level of uncertainty related to changes in value of these investments, it is reasonably possible that changes in the values of investment securities may occur in the near term and that such changes could materially affect participant account balances and the amounts reported in the financial statements.
The Plan offers alternatives that may mitigate participant risks, including the opportunity to diversify investments across multiple participant-directed fund elections including active and passively managed funds covering multiple asset classes. Additionally, the investments within each participant-directed fund election are further diversified into various financial instruments, with the exception of the TransCanada Stock Fund, which invests in securities of a single issuer.
The Plan’s exposure to credit loss in the event of nonperformance of investments is limited to the carrying value of such instruments. The Plan’s concentrations of credit risk, interest rate risk and market risk are dictated by the Plan’s provisions as well as those of ERISA and the participants’ investment preference.
Fair Value Hierarchy
The Plan’s financial assets and liabilities recorded at fair value have been categorized into three levels based on a fair value hierarchy. In Level I, the fair value of assets and liabilities is determined by reference to quoted prices in active markets for identical assets and liabilities. In Level II, determination of the fair value of assets and liabilities includes valuations using inputs, other than quoted prices, for which all significant inputs are observable, directly or indirectly. This category includes fair value determined using valuation techniques, such as option pricing models and extrapolation using observable inputs. In Level III, determination of the fair value of assets and liabilities is based on inputs that are not readily observable and are significant to the overall fair value measurement. There were no Level II or Level III investments or transfers between levels in
2018
or
2017
.
Interest bearing cash:
Stated at cost which approximates fair value.
Common stock:
Valued at the closing price reported on the New York Stock Exchange.
Mutual funds:
Valued at the daily closing price reported by the fund. Mutual funds held by the Plan are open end mutual funds that are registered with the Securities and Exchange Commission. These funds are required to publish their daily net asset value and transact at that price. The mutual funds held by the Plan are deemed to be actively traded.
Common collective trusts:
Common collective trusts hold underlying investments that have prices which are derived from quoted prices in active markets. The fair value of the Plan's interest in these funds is based on the funds' daily NAV (net asset value), which is considered to be the best approximation of fair value. The funds’ underlying assets are principally short-term money market funds, marketable equities and fixed income securities. Units held in common
collective trusts are valued at the unit value as reported by the investment managers as of December 31,
2018
. Redemptions of the common collective trust held by the Plan are allowed daily for participants; however, the Plan is subject to a twelve-month redemption notice period. There are no unfunded commitments.
The method described above for common collective trusts may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Plan’s valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.
The following tables set forth, by level within the fair value hierarchy, the Plan’s investment assets at fair value as of December 31,
2018
and
2017
. As required, assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement:
|
|
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|
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Fair Value Measurements at December 31, 2018
|
|
(thousands of U.S. dollars)
|
|
Total
|
|
Level 1
|
Level 2
|
Level 3
|
|
|
|
|
|
|
|
|
|
Interest bearing cash
|
|
414
|
|
|
414
|
|
—
|
|
—
|
|
|
Mutual funds
|
|
551,180
|
|
|
551,180
|
|
—
|
|
—
|
|
|
Common collective trusts
|
|
86,641
|
|
|
—
|
|
—
|
|
—
|
|
|
Common stock
|
|
21,325
|
|
|
21,325
|
|
—
|
|
—
|
|
|
TransCanada common stock
|
|
6,818
|
|
|
6,818
|
|
—
|
|
—
|
|
|
Total
|
|
666,378
|
|
|
579,737
|
|
—
|
|
—
|
|
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|
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|
|
|
|
|
|
|
|
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|
|
|
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Fair Value Measurements at December 31, 2017
|
|
(thousands of U.S. dollars)
|
|
Total
|
|
Level 1
|
Level 2
|
Level 3
|
|
|
|
|
|
|
|
|
|
Mutual funds
|
|
588,670
|
|
|
588,670
|
|
—
|
|
—
|
|
|
Common collective trusts
|
|
86,474
|
|
|
—
|
|
—
|
|
—
|
|
|
TransCanada common stock
|
|
8,065
|
|
|
8,065
|
|
—
|
|
—
|
|
|
Total
|
|
683,209
|
|
|
596,735
|
|
—
|
|
—
|
|
Net Depreciation in Fair Value of Investments
Net depreciation in fair value of investments by major category (including investments purchased, sold and held during the year) was as follows:
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|
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|
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|
Year ended December 31 (thousands of U.S. dollars)
|
|
2018
|
|
|
|
|
|
|
Mutual funds
|
|
(50,131
|
)
|
|
Common collective trusts
|
|
(3,770
|
)
|
|
TransCanada common stock
|
|
(2,333
|
)
|
|
Common stock and other
|
|
239
|
|
|
Net Depreciation in Fair Value of Investments
|
|
(55,995
|
)
|
NOTE 4: OTHER RECEIVABLES
Other receivables consist of non-monetary balances from an investment account separately managed specifically for the Plan by Baron Capital. The underlying investments of the account are deemed to be self directed because participants are allowed to invest or redeem their funds on a daily basis. Baron Capital deploys the funds in U.S. mid-cap securities, which are valued at the last sale reported on the exchange in which the securities are principally traded.
NOTE 5: INCOME TAXES
Effective December 15, 2009, the Plan was restated to a volume submitter plan. The volume submitter plan sponsor obtained an advisory opinion on March 31, 2014 in which the Internal Revenue Service stated that the Plan, as then designed, was in compliance with the applicable requirements of the Code. The Plan Administrator believes that the Plan is designed and is currently being operated in compliance with the applicable requirements of the Code. The Plan is exempt from federal income taxes. Accordingly, no provision for federal income taxes has been made in the accompanying financial statements.
The Plan Administrator has analyzed any income tax assets and liabilities of the Plan and has concluded that as of December 31, 2018 and
2017
, there are no uncertain income tax positions taken or expected to be taken that would require recognition of a liability or asset, or disclosure in the financial statements. The Plan is subject to audits by taxing jurisdictions, however, there are currently no audits in progress for any tax periods. The Plan Administrator believes it is no longer subject to income tax examinations for years prior to 2014.
NOTE 6: PARTY-IN-INTEREST AND RELATED PARTY TRANSACTIONS
Certain Plan investments are shares of mutual funds managed by an affiliate of Fidelity, the Trustee; therefore, these investments qualify as party-in-interest transactions.
At December 31, 2018 Plan investments included $
6,812,676
(
2017
– $
8,063,488
) of TransCanada common stock and
$5,511
(
2017
–
$1,863
) in a stock purchase account. Transactions involving these investments are permitted party-in-interest transactions.
NOTE 7: SUBSEQUENT EVENTS
The Plan has evaluated subsequent events through the date these financial statements were issued.