U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 40-F
o |
REGISTRATION STATEMENT PURSUANT TO SECTION 12 OF THE SECURITIES EXCHANGE ACT of 1934 |
OR |
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ý |
ANNUAL REPORT PURSUANT TO SECTION 13(a) OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2008 Commission File Number 1-31690
TRANSCANADA CORPORATION
(Exact Name of Registrant as specified in its charter)
Canada
(Jurisdiction of incorporation or organization)
4922, 4923, 4924, 5172
(Primary Standard Industrial Classification Code Number (if applicable))
Not Applicable
(I.R.S. Employer Identification Number (if applicable))
TransCanada Tower, 450 - 1 Street S.W.
Calgary, Alberta, Canada, T2P 5H1
(403) 920-2000
(Address and telephone number of Registrant's principal executive offices)
TransCanada Northern Border Inc., 13710 FNB Parkway
Omaha, Nebraska, 68154-5200; (877) 290-2772
(Name, address (including zip code) and telephone number (including area code)
of agent for service in the United States)
Securities registered pursuant to section 12(b) of the Act:
Title of each class | Name of each exchange on which registered | |
Common Shares (including Rights under Shareholder Rights Plan) |
New York Stock Exchange |
Securities
registered pursuant to Section 12(g) of the Act: None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None
For annual reports, indicate by check mark the information filed with this Form: | ||
ý Annual Information Form | ý Audited annual financial statements |
Indicate the number of outstanding shares of each of the issuer's classes of capital or common stock as of the close of the period covered by the annual report.
At December 31, 2008, 616,471,522 common shares
were issued and outstanding
Indicate by check mark whether the Registrant by filing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934 (the "Exchange Act"). If "Yes" is marked, indicate the file number assigned to the Registrant in connection with such Rule.
Yes o | No ý |
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.
Yes ý | No o |
The documents (or portions thereof) forming part of this Form 40-F are incorporated by reference into the following registration statements under the Securities Act of 1933, as amended:
Form |
Registration No. |
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S-8 | 333-5916 | |
S-8 | 333-8470 | |
S-8 | 333-9130 | |
S-8 | 333-151736 | |
F-3 | 33-13564 | |
F-3 | 333-6132 | |
F-10 | 333-151781 |
AUDITED CONSOLIDATED ANNUAL FINANCIAL STATEMENTS AND
MANAGEMENT'S DISCUSSION & ANALYSIS
A. Audited Consolidated Annual Financial Statements
For audited consolidated financial statements, including the report of the independent chartered accountants, see pages 83 through 139 of the TransCanada Corporation ("TransCanada") 2008 Annual Report to Shareholders included herein. See the related supplementary note entitled "Reconciliation to United States GAAP" for a reconciliation of the differences between Canadian and United States generally accepted accounting principles, including the auditors' report, attached as document 13.4.
B. Management's Discussion & Analysis
For management's discussion and analysis, see pages 6 through 82 of the TransCanada 2008 Annual Report to Shareholders included herein under the heading "Management's Discussion & Analysis".
For the purposes of this Report, only pages 6 through 82 and 83 through 139 of the TransCanada 2008 Annual Report to Shareholders shall be deemed incorporated herein by reference and filed, and the balance of such 2008 Annual Report, except as otherwise specifically incorporated by reference in the TransCanada Annual Information Form, shall be deemed not filed with the U.S. Securities and Exchange Commission (the "Commission") as part of this Report under the Exchange Act.
C. Management's Report on Internal Control Over Financial Reporting
For information on management's internal control over financial reporting, see:
The Registrant undertakes to make available, in person or by telephone, representatives to respond to inquiries made by the staff of the Commission, and to furnish promptly, when requested to do so by the Commission staff, information relating to: the securities registered pursuant to Form 40-F; the securities in relation to which the obligation to file an Annual Report on Form 40-F arises; or transactions in said securities.
DISCLOSURE CONTROLS AND PROCEDURES
For information on disclosure controls and procedures, see "Controls and Procedures" in Management's Discussion and Analysis on page 69 of the TransCanada 2008 Annual Report to Shareholders.
2
AUDIT COMMITTEE FINANCIAL EXPERT
The Registrant's board of directors has determined that it has at least one audit committee financial expert serving on its audit committee. Mr. Kevin E. Benson has been designated an audit committee financial expert and is independent, as that term is defined by the New York Stock Exchange's listing standards applicable to the Registrant. The Commission has indicated that the designation of Mr. Benson as an audit committee financial expert does not make Mr. Benson an "expert" for any purpose, impose any duties, obligations or liability on Mr. Benson that are greater than those imposed on members of the audit committee and board of directors who do not carry this designation or affect the duties, obligations or liability of any other member of the audit committee.
The Registrant has adopted codes of business ethics for its President and Chief Executive Officer, Chief Financial Officer, Controller, directors, employees and contractors. The Registrant's codes are available on its website at www.transcanada.com. No waivers have been granted from any provision of the codes during the 2008 fiscal year.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
For information on principal accountant fees and services, see "Corporate Governance Audit Committee External Auditor Service Fees" and "Corporate Governance Audit Committee Pre-Approval Policies and Procedures" on pages 26 and 25, respectively, of the 2008 TransCanada Annual Information Form.
OFF-BALANCE SHEET ARRANGEMENTS
The Registrant has no off-balance sheet arrangements, as defined in this Form, other than the guarantees and commitments described in Note 23 of the Notes to the Audited Consolidated Financial Statements attached to this Form 40-F and incorporated herein by reference.
TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS
For information on Tabular Disclosure of Contractual Obligations, see "Contractual Obligations" in Management's Discussion and Analysis on pages 55 and 56 of the TransCanada 2008 Annual Report to Shareholders.
IDENTIFICATION OF THE AUDIT COMMITTEE
The Registrant has a separately-designated standing Audit Committee. The members of the Audit Committee are:
Chair: Members: |
K.E. Benson D.H. Burney P. Gauthier P.L. Joskow J.A. MacNaughton D.M.G. Stewart |
3
This document, the documents incorporated by reference, and other reports and filings made with the securities regulatory authorities may contain certain information that is forward-looking and is subject to important risks and uncertainties. The words "anticipate", "expect", "believe", "may", "should", "estimate", "project", "outlook", "forecast" or other similar words are used to identify such forward looking information. Forward-looking statements in this document are intended to provide TransCanada shareholders and potential investors with information regarding TransCanada and its subsidiaries, including management's assessment of TransCanada's and its subsidiaries' future financial and operational plans and outlook. Forward-looking statements in this document may include, among others, statements regarding the anticipated business prospects and financial performance of TransCanada and its subsidiaries, expectations or projections about the future, strategies and goals for growth and expansion, expected and future cash flows, costs, schedules, operating and financial results and expected impact of future commitments and contingent liabilities. All forward looking statements reflect TransCanada's beliefs and assumptions based on information available at the time the statements were made. Actual results or events may differ from those predicted in these forward-looking statements. Factors that could cause actual results or events to differ materially from current expectations include, among others, the ability of TransCanada to successfully implement its strategic initiatives and whether such strategic initiatives will yield the expected benefits, the operating performance of the Company's pipeline and energy assets, the availability and price of energy commodities, regulatory processes and decisions, changes in environmental and other laws and regulations, competitive factors in the pipeline and energy sectors, construction and completion of capital projects, labour, equipment and material costs, access to capital markets, interest and currency exchange rates, technological developments and the current economic conditions in North America. By its nature, forward-looking information is subject to various risks and uncertainties, which could cause TransCanada's actual results and experience to differ materially from the anticipated results or other expectations expressed. The Company's material risks and assumptions are discussed further in TransCanada's Management's Discussion and Analysis filed as document 13.2 hereto including under the headings "Pipelines Opportunities and Developments", "Pipelines Business Risks", "Energy Opportunities and Developments", "Energy Business Risks" and "Risk Management and Financial Instruments". Additional information on these and other factors is available in the reports filed by TransCanada with Canadian securities regulators and with the Commission. Readers are cautioned not to place undue reliance on this forward-looking information, which is given as of the date it is expressed in this document or otherwise, and to not use future-oriented information or financial outlooks for anything other than their intended purpose. TransCanada undertakes no obligation to update publicly or revise any forward-looking information, whether as a result of new information, future events or otherwise, except as required by law.
4
Pursuant to the requirements of the Exchange Act, the Registrant certifies that it meets all of the requirements for filing on Form 40-F and has duly caused this Annual Report to be signed on its behalf by the undersigned, thereto duly authorized, in the City of Calgary, Province of Alberta, Canada.
TRANSCANADA CORPORATION | |||
Per: |
/s/ GREGORY A. LOHNES GREGORY A. LOHNES Executive Vice-President and Chief Financial Officer |
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Date: February 25, 2009 |
DOCUMENTS FILED AS PART OF THIS REPORT
13.1 | TransCanada Corporation Annual Information Form for the year ended December 31, 2008. | |
13.2 |
Management's Discussion and Analysis (included on pages 6 through 82 of the TransCanada 2008 Annual Report to Shareholders). |
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13.3 |
2008 Audited Consolidated Financial Statements (included on pages 83 through 139 of the TransCanada 2008 Annual Report to Shareholders), including the auditors' report thereon. |
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13.4 |
Related supplementary note entitled "Reconciliation to United States GAAP" and the auditors' report thereon. |
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13.5 |
Management's Report on Internal Control Over Financial Reporting. |
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13.6 |
Report of the Independent Registered Public Accounting Firm on the effectiveness of TransCanada's Internal Control Over Financial Reporting, as at December 31, 2008. |
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99.1 |
Comments by Auditors for United States Readers on Canada-United States Reporting Differences. |
EXHIBITS
23.1 | Consent of KPMG LLP, Chartered Accountants. | |
31.1 |
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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31.2 |
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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32.1 |
Certification of Chief Executive Officer regarding Periodic Report containing Financial Statements. |
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32.2 |
Certification of Chief Financial Officer regarding Periodic Report containing Financial Statements. |
TRANSCANADA CORPORATION
ANNUAL INFORMATION FORM
February 23, 2009
TRANSCANADA CORPORATION i
TABLE OF CONTENTS
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Page |
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TABLE OF CONTENTS |
i |
PRESENTATION OF INFORMATION |
ii |
FORWARD-LOOKING INFORMATION |
ii |
TRANSCANADA CORPORATION |
1 |
Corporate Structure |
1 |
Intercorporate Relationships |
1 |
GENERAL DEVELOPMENT OF THE BUSINESS |
2 |
Developments in the Pipelines Business |
2 |
Developments in the Energy Business |
5 |
Financing Activities |
8 |
BUSINESS OF TRANSCANADA |
9 |
Pipelines Business |
9 |
Regulation of the Pipeline Business |
11 |
Energy Business |
12 |
GENERAL |
14 |
Employees |
14 |
Social and Environmental Policies |
14 |
Environmental Protection |
15 |
RISK FACTORS |
15 |
Environmental Risk Factors |
15 |
Other Risk Factors |
17 |
DIVIDENDS |
17 |
DESCRIPTION OF CAPITAL STRUCTURE |
17 |
Share Capital |
17 |
CREDIT RATINGS |
18 |
DBRS Limited (DBRS) |
19 |
Moodys Investors Service, Inc. (Moodys) |
19 |
Standard & Poors (S&P) |
19 |
MARKET FOR SECURITIES |
20 |
DIRECTORS AND OFFICERS |
20 |
Directors |
20 |
Board Committees |
22 |
Officers |
22 |
Conflicts of Interest |
23 |
CORPORATE GOVERNANCE |
24 |
AUDIT COMMITTEE |
24 |
Relevant Education and Experience of Members |
24 |
Pre-Approval Policies and Procedures |
25 |
External Auditor Service Fees |
26 |
LEGAL PROCEEDINGS AND REGULATORY ACTIONS |
26 |
MATERIAL CONTRACTS |
26 |
TRANSFER AGENT AND REGISTRAR |
27 |
INTEREST OF EXPERTS |
27 |
ADDITIONAL INFORMATION |
27 |
GLOSSARY |
28 |
SCHEDULE A |
A-1 |
SCHEDULE B |
B-1 |
TRANSCANADA CORPORATION ii
PRESENTATION OF INFORMATION
Unless the context indicates otherwise, a reference in this Annual Information Form (AIF) to TransCanada or the Company includes TransCanada Corporation and the subsidiaries of TransCanada Corporation through which its various business operations are conducted. In particular, TransCanada includes references to TransCanada PipeLines Limited (TCPL). Where TransCanada is referred to with respect to actions that occurred prior to its 2003 plan of arrangement with TCPL, which is described below under the heading TransCanada Corporation Corporate Structure, these actions were taken by TCPL or its subsidiaries. The term subsidiary, when referred to in this AIF, with reference to TransCanada means direct and indirect wholly owned subsidiaries of, and legal entities controlled by, TransCanada or TCPL, as applicable.
Unless otherwise noted, the information contained in this AIF is given at or for the year ended December 31, 2008 (Year End). Amounts are expressed in Canadian dollars unless otherwise indicated. Financial information is presented in accordance with Canadian generally accepted accounting principles.
Certain portions of TransCanadas Managements Discussion and Analysis dated February 23, 2009 (MD&A) are incorporated by reference into this AIF as stated below. The MD&A can be found on SEDAR at www.sedar.com under TransCanadas profile.
The Accounting Standards Board (AcSB) of the Canadian Institute of Chartered Accountants has announced that Canadian publicly accountable enterprises are required to adopt International Financial Reporting Standards (IFRS), as issued by the International Accounting Standards Board, effective January 1, 2011. In June 2008, the Canadian Securities Administrators proposed that Canadian public companies that are United States Securities and Exchange Commission (SEC) registrants, such as TransCanada, retain the option to prepare their financial statements under generally accepted accounting principles in the United States (US GAAP) instead of IFRS. In November 2008, the SEC issued for public comment a recommendation that, beginning in 2014, United States issuers be required to adopt IFRS using a phased-in approach based on market capitalization. TransCanada is currently considering the impact a conversion to IFRS or US GAAP would have on its accounting systems and financial statements. For more information on TransCanadas conversion project, see TransCanadas MD&A under Accounting Changes International Financial Reporting Standards.
Information relating to metric conversion can be found at Schedule A to this AIF.
FORWARD-LOOKING INFORMATION
This AIF, the documents incorporated by reference into this AIF, and other reports and filings made with the securities regulatory authorities may contain certain information that is forward-looking and is subject to important risks and uncertainties. The words anticipate, expect, believe, may, should, estimate, project, outlook, forecast or other similar words are used to identify such forward-looking information. Forward-looking statements in this document are intended to provide TransCanada shareholders and potential investors with information regarding TransCanada and its subsidiaries, including managements assessment of TransCanadas and its subsidiaries future financial and operational plans and outlook. Forward-looking statements in this document may include, among others, statements regarding the anticipated business prospects and financial performance of TransCanada and its subsidiaries, expectations or projections about the future, strategies and goals for growth and expansion, expected and future cash flows, costs, schedules, operating and financial results and expected impact of future commitments and contingent liabilities. All forward-looking statements reflect TransCanadas beliefs and assumptions based on information available at the time the statements were made. Actual results or events may differ from those predicted in these forward-looking statements. Factors that could cause actual results or events to differ materially from current expectations include, among others, the ability of TransCanada to successfully implement its strategic initiatives and whether such strategic initiatives will yield the expected benefits, the operating performance of the Companys pipeline and energy assets, the availability and price of energy commodities, regulatory processes and decisions, changes in environmental and other laws and regulations, competitive factors in the pipeline and energy sectors, construction and completion of capital projects, labour, equipment and material costs, access to capital markets, interest and currency exchange rates, technological developments and the current economic conditions in North America. By its nature, forward-looking information is subject to various risks and uncertainties, including those material risks discussed in this AIF under Risk Factors, which could cause TransCanadas actual results and experience to differ materially from the anticipated results or expectations expressed. Additional information on these and other factors is available in the reports filed by TransCanada with Canadian securities regulators and with the SEC. Readers are cautioned to not place undue reliance on this forward-looking information, which is given as of the date it is expressed in this AIF or otherwise, and to not use future-oriented information or financial outlooks for anything other than their intended purpose. TransCanada undertakes no obligation to update publicly or revise any forward-looking information, whether as a result of new information, future events or otherwise, except as required by law.
TRANSCANADA CORPORATION 1
TRANSCANADA CORPORATION
Corporate Structure
TransCanadas head office and registered office are located at 450 - First Street S.W., Calgary, Alberta, T2P 5H1. TransCanada was incorporated pursuant to the provisions of the Canada Business Corporations Act on February 25, 2003 in connection with a plan of arrangement which established TransCanada as the parent company of TCPL. The arrangement was approved by TCPL common shareholders on April 25, 2003 and, following court approval and the filing of Articles of Arrangement, the arrangement became effective May 15, 2003. Pursuant to the arrangement, the common shareholders of TCPL exchanged each of their TCPL common shares for one common share of TransCanada. The debt securities and preferred shares of TCPL remained obligations and securities of TCPL. TCPL continues to hold the assets it held prior to the arrangement and continues to carry on business as the principal operating subsidiary of the TransCanada group of entities. TransCanada does not hold any material assets directly other than the common shares of TCPL and receivables from certain of TransCanadas subsidiaries.
Intercorporate Relationships
The following diagram presents the name and jurisdiction of incorporation, continuance or formation of TransCanadas principal subsidiaries as at December 31, 2008. Each of these subsidiaries has total assets that exceeded 10% of the total consolidated assets of TransCanada or revenues that exceeded 10% of the total consolidated revenues of TransCanada as at and for the year ended December 31, 2008. TransCanada owns, directly or indirectly, 100 per cent of the voting shares of each of these subsidiaries.
The above diagram does not include all of the subsidiaries of TransCanada. The assets and revenues of excluded subsidiaries in the aggregate did not exceed 20% of the total consolidated assets or total consolidated revenues of TransCanada as at and for the year ended December 31, 2008.
TRANSCANADA CORPORATION 2
GENERAL DEVELOPMENT OF THE BUSINESS
The general development of TransCanadas business during the last three financial years, and the significant acquisitions, dispositions, events or conditions which have had an influence on that development, are described below.
Effective June 1, 2006, TransCanada revised the composition and names of its reportable business segments to Pipelines and Energy. Pipelines are principally comprised of the Companys pipelines in Canada, the U.S. and Mexico and its regulated natural gas storage operations in the U.S. Energy includes the Companys power operations, the non-regulated natural gas storage business, and liquefied natural gas (LNG) projects.
Developments in the Pipelines Business
TransCanadas strategy in Pipelines is focused on both growing its North American natural gas transmission network and maximizing the long-term value of its existing pipeline assets. Summarized below are significant developments that have occurred in TransCanadas Pipelines business over the last three years.
2008
Pipeline Developments
· January 4, 2008. The State of Alaska announced that TransCanada had submitted a complete Alaska Gasline Inducement Act (AGIA) application for a license to construct the Alaska Pipeline Project and would be advancing to the public comment stage.
· February 2008. In 2005, certain subsidiaries of Calpine Corporation (Calpine) filed for bankruptcy protection in both Canada and the U.S. The Portland Natural Gas Transmission System (the Portland System) and GTNC reached agreement with Calpine for allowed unsecured claims in the Calpine bankruptcy of US$125 million and US$192.5 million, respectively. Creditors were to receive shares in the re-organized Calpine and these shares would be subject to market price fluctuations as the new Calpine shares began to trade. In February 2008, the Portland System and GTNC received partial distributions of 6.1 million shares and 9.4 million shares, respectively. Subsequently, these shareholdings were sold into the market. Claims of Nova Gas Transmission Limited (NGTL) and Foothills Pipe Lines (South B.C.) Ltd., both wholly-owned subsidiaries of TransCanada, for $31.6 million and $44.4 million, respectively, were received in cash in January 2008 and were passed on to shippers on these systems.
· March 14, 2008. TransCanada Keystone Pipeline, LP (Keystone U.S.) received a Presidential Permit authorizing the construction, maintenance and operation of facilities at the United States and Canada border for the transportation of crude oil between the two countries. The Presidential Permit was a significant regulatory approval required to begin construction of the 3,456 kilometre (km) pipeline project that will transport crude oil from Alberta to markets in the United States (the Keystone Oil Pipeline). The Presidential Permit was issued following the issuance by the U.S. Department of State of the Final Environmental Impact Statement (FEIS) on January 11, 2008 for the construction of the Keystone U.S. pipeline and its Cushing extension. The FEIS stated the pipeline would result in limited adverse environmental impacts. Construction of the Keystone Oil Pipeline began in May 2008 in both Canada and the United States. Commissioning of the segment to Wood River and Patoka is expected to commence in late 2009 with commercial operations to follow in early 2010. Commissioning of the segment providing service to Cushing is expected to commence in late 2010.
· April 2008. An expansion to TransCanadas natural gas transmission system in the province of Alberta (the Alberta System) in the Fort McMurray area, comprising a total of approximately 150 km, was placed in service on its projected on-stream date.
· July 16, 2008. TransCanada announced plans to expand and extend the Keystone Oil Pipeline system and provide additional capacity in 2012 of 500,000 barrels per day (Bbl/d) from Western Canada to the United States Gulf Coast, near existing terminals in Port Arthur, Texas. The expansion, when completed, is expected to increase the
TRANSCANADA CORPORATION 3
Keystone Oil Pipeline system from 590,000 Bbl/d to approximately 1.1 million Bbl/d. Construction of the expansion facilities is expected to commence in 2010 subject to the receipt of the necessary regulatory approvals.
· September 3, 2008. TransCanada acquired Bison Pipeline LLC from Northern Border Pipeline Company (NBPL) for US$20 million. The assets of Bison Pipeline LLC included executed precedent agreements as well as regulatory, environmental and engineering work on the Bison Pipeline Project (Bison), a proposed 480 km (298 mile) pipeline from the Powder River Basin in Wyoming to the Northern Border Pipeline system in Morton County, North Dakota.
· September 8, 2008. TransCanada reached a proposed agreement with Canadian Utilities Limited (ATCO Pipelines) to provide integrated natural gas transmission service to customers. If approved by the regulatory authorities, the two companies will combine physical assets under a single rates and services structure with a single commercial interface with customers but with each company separately managing assets within distinct operating territories in the province. TransCanada continues to work with all stakeholders to finalize this agreement.
· October 29, 2008. TransCanada announced that the Keystone Oil Pipeline system successfully conducted the open season for expansion and extension to the United States Gulf Coast by securing additional firm, long-term contracts totaling 380,000 Bbl/d for an average term of approximately 17 years. With these shipper commitments the Keystone Oil Pipeline system has long-term commitments for 910,000 Bbl/d for an average term of approximately 18 years. This includes commitments made by shippers to sign transportation service agreements for 35,000 Bbl/d capacity in an open season to be held in 2009. The commitments represent approximately 83 per cent of the 1.1 million Bbl/d commercial design of the system.
· December 5, 2008. The Alaska Commissioner of Revenue and Natural Resources issued the AGIA license to TransCanada to advance the Alaska Pipeline Project, following on the approval by the Alaska Senate on August 1, 2008 of TransCanadas application for the license. TransCanada has committed under the AGIA to advance the Alaska Pipeline Project through an open season and subsequent United States Federal Energy Regulatory Commission (FERC) certification. TransCanada has commenced the engineering, environmental, field and commercial work, and expects to conclude an open season by July 31, 2010. Under AGIA, the State of Alaska has agreed to reimburse a share of the eligible pre-construction costs to TransCanada to a maximum of US$500 million.
· TransCanada agreed to increase its equity ownership in Keystone U.S. and TransCanada Keystone Pipeline Limited Partnership (Keystone Canada) up to 79.99 per cent from 50 per cent with ConocoPhillips equity ownership being reduced concurrently to 20.01 per cent.
· TransCanada continued funding of the Mackenzie Valley Aboriginal Pipeline Limited Partnership for its participation in the Mackenzie Gas Pipeline Project, a proposed 1,200 km (746 mile) natural gas pipeline to be constructed from a point near Inuvik, Northwest Territories to the northern border of Alberta, where it is expected to connect to the Alberta System.
Regulatory Matters
· January 2008. Gas Transmission Northwest Corporation (GTNC), a wholly-owned subsidiary of TransCanada, filed a Stipulation and Agreement with the FERC on October 31, 2007 comprised of an uncontested settlement of all aspects of its 2006 General Rate Case. On January 7, 2008, the FERC issued an order approving the settlement. The settlement rates were effective retroactive to January 1, 2007.
· March 18, 2008. TransCanada filed an application with the National Energy Board (NEB) to increase the interim tolls on its Canadian gas pipeline system (the Canadian Mainline) previously approved in December 2007. This toll increase was a result of a significant decrease in forecasted flows on the Canadian Mainline and was intended to allow TransCanada to more accurately meet its 2008 revenue requirement. On March 28, 2008, the NEB approved the amended interim tolls for transportation service effective April 1, 2008.
· June 17, 2008. TransCanada filed an application with the NEB to establish federal regulation for TransCanadas Alberta System. The application for a certificate of public convenience and necessity and related approvals was made to recognize that TransCanadas Alberta System was subject to Canadian federal jurisdiction and its operations to regulation by the NEB. An oral hearing to discuss this matter began on November 18, 2008 and concluded on November 28, 2008. A decision on the matter is expected to be issued by the end of February 2009. Currently, the provincial regulation of the Alberta System precludes TransCanada from acquiring, constructing or operating facilities that transport natural gas across Alberta provincial borders. Federal regulation would enable the Alberta System to extend across provincial borders, thereby providing integrated service to Alberta and British Columbia customers, and northern natural gas producers.
· June, 2008. The NEB approved TransCanadas application for additional pumping facilities required to expand the Canadian portion of the Keystone Oil Pipeline project from a nominal capacity of approximately 435,000 Bbl/d to 590,000 Bbl/d to accommodate volumes to be delivered to the Cushing markets, after holding an oral
TRANSCANADA CORPORATION 4
hearing on April 8, 2008. The hearing and decision followed on an application filed by Keystone Canada with the NEB in November 2007.
· October 10, 2008. The Alberta Utilities Commission (AUC) approved TransCanadas application for a permit to construct the North Central Corridor expansion, at a cost of approximately $925 million. The expansion comprises a 42-inch, 300 km (186 mile) natural gas pipeline and associated compression facilities on the northern section of the Alberta System. Construction on the project began in October 2008. The decision followed on a non-routine application filed with the Alberta Energy and Utilities Board (EUB) on November 20, 2007.
· December 17, 2008. The AUC approved NGTLs 2008-2009 Revenue Requirement Settlement Application as filed, in its entirety. As part of the settlement, fixed costs were established for operation, maintenance and administration costs, return on equity and income taxes. Any variances between actual costs and those agreed to in the settlement accrue to TransCanada, subject to a return on equity and income tax adjustment mechanism, which accounts for variances between actual and settlement rate base and income tax assumptions. The other cost elements of the settlement are treated on a flow-through basis. The AUC also approved the 2008 Interim Rates of NGTL on a final basis for the period January 1, 2008 to December 31, 2008.
Further information about these developments can be found in the MD&A under the headings TransCanadas Strategy, Pipelines Highlights, and Pipelines Opportunities and Developments.
2007
Pipeline Developments
· February 9, 2007. TransCanada received approval from the NEB to transfer a section of its Canadian Mainline transmission facilities to the Keystone Oil Pipeline project to transport crude oil from Alberta to refining centres in the U.S. Midwest and to construct and operate new oil pipeline facilities in Canada. TransCanada announced in January 2007 the start of a binding open season for an expansion and extension of the proposed Keystone Oil Pipeline. The purpose of the open season was to obtain binding commitments to support the expansion of the proposed Keystone Oil Pipeline from approximately 435,000 Bbl/d to 590,000 Bbl/d and the construction of a 468 kilometre extension of the U.S. portion of the pipeline.
· February 22, 2007. TransCanada closed its acquisitions of American Natural Resources Company and ANR Storage Company (collectively, ANR) and acquired an additional 3.6 per cent interest in Great Lakes Gas Transmission Partnership (Great Lakes) from El Paso Corporation for a total of US$3.4 billion, subject to certain post-closing adjustments, including approximately US$491 million of assumed long-term debt. Additionally, TransCanada increased its ownership in TC PipeLines, LP to 32.1 per cent in conjunction with the TC PipeLines, LP acquisition of a 46.4 per cent interest in Great Lakes. TransCanada subsequently became the operator of NBPL and now operates all three TC PipeLines, LP investments. The acquisition was financed partly through an offering of 39,470,000 subscription receipts at $38.00 per subscription receipt, which resulted in gross proceeds to TransCanada of approximately $1.725 billion including the exercise of an over-allotment option granted to the underwriters. Upon closing of the acquisition of ANR, the subscription receipts were automatically exchanged, without the payment of any additional consideration by the subscribers, on a one-to-one basis for common shares of TransCanada (Common Shares).
· December 2007. ConocoPhillips contributed $207 million to acquire a 50 per cent ownership interest in the Keystone Oil Pipeline. Affiliates of TransCanada will be responsible for constructing and operating the Keystone Oil Pipeline.
Regulatory Matters
· February 2007. TransCanada received approval from the NEB to integrate its natural gas pipeline system in southern British Columbia with its natural gas pipeline systems in southern Alberta and southwestern Saskatchewan (collectively, the Foothills System) effective April 1, 2007.
· May 2007. TransCanadas five-year settlement with interested stakeholders for the years 2007 to 2011 on its Canadian Mainline was approved by the NEB. The settlement reflects, among other things, a deemed common equity ratio of 40 per cent.
TRANSCANADA CORPORATION 5
2006
Pipeline Developments
· April 2006. TC PipeLines, LP, an affiliate of TransCanada, acquired an additional 20 per cent general partnership interest in NBPL for approximately US$307 million which brought its total general partnership interest in NBPL owned by TC Pipelines, LP to 50 per cent. TC PipeLines, LP also indirectly assumed approximately US$122 million of the debt of NBPL. TransCanada is the parent company of TC PipeLines GP, Inc., the general partner of TC PipeLines, LP.
· April 2006. TransCanada sold its 17.5 per cent general partner interest in Northern Border Partners, L.P. for proceeds of $35 million, net of current taxes.
· December 2006. The 130 km Tamazunchale natural gas pipeline in east-central Mexico went into commercial service.
· December 2006. TC PipeLines, LP acquired an additional 49 per cent ownership interest in Tuscarora Gas Transmission Company (Tuscarora). TransCanada became the operator of Tuscarora.
Regulatory Matters
· February 2006. TransCanada filed an application with the FERC for a certificate for a two-phase expansion of its existing natural gas pipeline in southern California, the North Baja system (North Baja) and the construction of a new lateral pipeline in Californias Imperial Valley.
· April 2006. The NEB approved a negotiated settlement of the 2006 Canadian Mainline tolls which included an increase in the deemed common equity ratio to 36 per cent from 33 per cent and incentives for managing costs through fixing certain components of the revenue requirement.
· June 2006. TransCanada filed an application with the NEB seeking approval to transfer a portion of TransCanadas Canadian Mainline natural gas transmission facilities to the Keystone Oil Pipeline project which was approved by the NEB in February 2007. Additionally, in December 2006, TransCanada filed an application with the NEB for approval to construct and operate the Canadian portion of the Keystone Oil Pipeline.
Developments in the Energy Business
TransCanada has built a substantial energy business over the past decade and has achieved a significant presence in power generation in selected regions of Canada and U.S. More recently, TransCanada has also developed a significant non-regulated natural gas storage business in Alberta. Summarized below are significant developments that have occurred in TransCanadas energy business over the last three years.
2009
· February 19, 2009. The FERC approved two separate applications filed by TransCanada on December 19, 2008 requesting approval to charge negotiated rates and to proceed with an open season in the spring of 2009 for each of the Zephyr (Zephyr) and Chinook (Chinook) transmission line projects. Both projects are proposed 500 kilovolt high voltage direct current transmission projects. Zephyr is a proposed 1,760 km (1,100 mile) transmission line that would originate in Wyoming, and Chinook is a proposed 1,600 km (1,000 mile) project that would originate in Montana. Both projects would terminate in Nevada, and it is anticipated that each would deliver 3,000 MW of primarily wind generation resources to markets in the southwestern United States. Pending successful completion of the open seasons, regulatory work could commence later in 2009.
2008
Energy Developments
· January 2008. A milestone in the Bruce Power A L.P. (Bruce A) Units 1 and 2 refurbishment and restart project was completed when the sixteenth and final new steam generator was installed. With the completion of this stage of the project, the authorized funding for Units 1 and 2 was increased from $2.75 billion to approximately $3.0 billion. This process was expected to result in a further increase in the total project cost to complete the Unit 1 and 2 restart. Project cost increases are subject to the capital cost-risk and reward-sharing mechanism under the agreement with the Ontario Power Authority. Bruce A Units 1 and 2 are expected to produce an additional 1,500 megawatts (MW) when completed in 2010.
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· February 2008. The potential anchor LNG supplier for the Cacouna LNG project (Cacouna) terminal in Québec announced it would no longer be pursuing the development of its LNG supply as originally planned. Although Cacouna received its primary regulatory approvals, project development has been suspended until alternate LNG supply is acquired and the North American market for LNG grows.
· April 2008. The comprehensive review of costs to complete the Bruce A Units 1 and 2 refurbishment and restart project was completed. Based on this assessment, the capital cost for the restart and refurbishment of Bruce A Units 1 and 2 is expected to be approximately $3.4 billion, up from an original 2005 cost estimate of $2.75 billion. TransCanadas share is expected to be approximately $1.7 billion compared to an original estimate of $1.4 billion.
· May 12, 2008. TransCanada announced that the Phoenix, Arizona based utility, Salt River Project, signed a 20 year power purchase agreement to secure 100 per cent of the output from the Coolidge Generating Station (Coolidge), a 575 MW simple-cycle natural gas-fired peaking power generation station currently in development to be located 72 km (45 miles) southeast of Phoenix in Coolidge, Arizona. In December 2008, the Arizona Corporation Commission granted a Certificate of Environmental Compatibility approving Coolidge. Construction is scheduled to begin in the summer of 2009, and the facility is expected to be commissioned in 2011.
· May 30, 2008. Portlands Energy Centre, a natural gas-fired combined-cycle power plant near downtown Toronto, Ontario (Portlands Energy Centre) went into service in simple-cycle mode, capable of delivering 340 MW of power during the summer of 2008. Portlands Energy Centre, which is 50 per cent owned by TransCanada, is currently under construction and is expected to be fully commissioned in combined-cycle mode in first quarter 2009 with delivery capabilities of 550 MW of power.
· July 4, 2008. Hydro-Québec Distribution notified the Régie the Lénergie that it would exercise its option to extend the suspension of all electricity generation from TransCanadas 550 MW Bécancour cogeneration power plant near Trois-Rivières, Québec (Bécancour) throughout 2009. This followed on TransCanadas agreement with Hydro-Québec Distribution to temporarily suspend all electricity generation from Bécancour during 2008. TransCanada will continue to receive payments under the agreement similar to those that would have been received under the normal course of operation.
· July 9, 2008. TransCanada announced that the Kibby Wind Power Project received unanimous final development plan approval from Maines Land Use Regulation Commission. Construction on the project began in July 2008. The capital cost of the project is expected to be approximately US$320 million with commissioning of the first phase expected to begin in fourth quarter 2009.
· August 26, 2008. TransCanada completed its acquisition of the 2,480 MW Ravenswood Generating Station (Ravenswood) located at Queens, New York for US$2.9 billion, subject to certain post-closing adjustments. The acquisition was completed pursuant to a membership interest and stock purchase agreement between KeySpan Corporation, KeySpan Energy Corporation and TransCanada Facility USA, Inc. dated March 31, 2008 (the Ravenswood Agreement) whereby TransCanada Facility USA, Inc. agreed to acquire all of the outstanding membership interests of KeySpan-Ravenswood, LLC and all of the outstanding shares of KeySpan Ravenswood Services Corp. from National Grid plc. KeySpan-Ravenswood, LLC directly or indirectly owned or controlled Ravenswood. The acquisition was financed through a combination of equity and term debt offerings, funds drawn on a newly established bridge loan facility and cash on hand (see Financing Activities below).
· November 22, 2008. The Carleton wind farm, the third of six phases of a wind energy project contracted by Hydro-Québec Distribution in the Gaspé Region of Québec (the Cartier Wind Energy Project), went into service and is capable of generating 109 MW of power.
· In fourth quarter 2008, Bruce Power completed a review of the end of life estimates for Units 3 and 4. Unit 3 is now expected to be in commercial service until 2011, which provides the benefit of nearly two additional years of generation before the unit commences an expected 36-month refurbishment period. After the refurbishment period, the end of life estimate for Unit 3 is expected to increase from the originally expected date of 2037 to 2038. In addition, Unit 4 is now expected to be in commercial service until 2016, providing nearly seven years of generation before the unit commences a similar refurbishment period, after which, the end of life estimate for Unit 4 is expected to increase from the originally expected date of 2036 to 2042.
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Regulatory Matters
· January 11, 2008. The FERC issued its FEIS for the Broadwater LNG project (Broadwater). A joint venture with Shell US Gas & Power LLC, Broadwater is a proposed offshore LNG facility in Long Island Sound, New York. The FEIS confirmed project need, supported the location of the project with acknowledgement of its target market and delivery goals, and found safety and security risks to be limited and acceptable. The FEIS concluded that with adherence to federal and state permit requirements and regulations, Broadwaters proposed mitigation measures and the FERCs recommendations, the project will not result in a significant impact on the environment.
· March 24, 2008. FERC authorized the construction and operation of Broadwater, subject to the conditions reflected in the authorization. On April 10, 2008, the New York State Department of State (NYSDOS) determined that construction and operation of the project would not be consistent with the states coastal zone policies. As a result of this unfavourable decision, TransCanada wrote down $27 million after tax of costs for Broadwater that had been capitalized to March 31, 2008. On June 6, 2008, Broadwater Energy, LLC filed an appeal with the United States Secretary of Commerce on the decision of the NYSDOS asking the Secretary of Commerce to override the NYSDOS decision on the basis that the project meets the criteria for approval under the Coastal Zone Management Act and applicable regulations. A decision is expected in early 2009.
Further information about each of these energy developments can be found in the MD&A under the headings TransCanadas Strategy, Energy Highlights and Energy Opportunities and Developments.
2007
Energy Developments
· June 2007. Following public hearings in 2006, the Québec government granted a provincial decree approving Cacouna. Cacouna also received federal approvals pursuant to the Canadian Environmental Assessment Act.
· September 2007. Cacouna announced that it was delaying the planned in-service date for the regasification terminal from 2010 to 2012. This delay resulted from a need to assess impacts of permit conditions, to review the facility design in light of escalating costs and to align the schedule with potential LNG supply facilities.
· November 2007. The second phase of the Cartier Wind Energy Project, the 101 MW Anse-à-Valleau wind farm, was placed into service. In addition, the Cartier Wind Energy Project began construction of a third project, the 109 MW Carleton wind farm.
2006
Energy Developments
· TransCanada continued construction of the Cartier Wind Energy Project, of which 62 per cent is owned by TransCanada. The first of six proposed wind farm projects, Baie-des-Sables, went into commercial service in late 2006.
· September 2006. Portlands Energy Centre L.P., 50 per cent owned by TransCanada, signed a 20-year Accelerated Clean Energy Supply contract with the Ontario Power Authority for Portlands Energy Centre.
· September 2006. Construction of Bécancour was completed and placed into service providing power to Hydro-Québec Distribution.
· November 2006. TransCanada was awarded a 20-year Clean Energy Supply contract by the Ontario Power Authority to build, own and operate a 683 MW natural gas-fired power plant near the Town of Halton Hills, Ontario.
· December 2006. The Edson gas storage facility was placed in service.
Regulatory Matters
· January 2006. TransCanada, on behalf of Broadwater, filed an application with the FERC for approval of the LNG regasification project to be located in Long Island Sound, New York. Coincident with the FERC process, Broadwater applied to the NYSDOS for a determination that the project is consistent with New Yorks coastal zone policies.
· December 2006. A public hearing on Cacouna was held in May and June of 2006 and in December 2006 the Minister of the Environment for Québec and the federal Minister of the Environment, jointly released the report of the Joint Commission on Cacouna.
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Financing Activities
2009
· January 9, 2009. TransCanada completed an issuance of US$750 million and US$1.25 billion of Senior Unsecured Notes maturing on January 15, 2019 and January 15, 2039, respectively, and bearing interest at 7.125 per cent and 7.625 per cent, respectively. The proceeds from these notes are expected to be used to partially fund TransCanadas capital projects, retire maturing debt obligations and for general corporate purposes. These notes were issued under a US$3.0 billion debt shelf prospectus filed on January 2, 2009.
· February 17, 2009. TransCanada completed the issuance of $300 million and $400 million of Medium-Term Notes maturing on February 14, 2014 and February 17, 2039, respectively, and bearing interest at 5.05 per cent and 8.05 per cent, respectively. The proceeds from these notes are expected to be used to fund the Alberta System and Canadian Mainline rate bases. These notes were issued under a $1.5 billion debt shelf prospectus filed in March, 2007.
2008
· May 5, 2008. TransCanada entered into an underwriting agreement with a syndicate of underwriters led by BMO Nesbitt Burns Inc., RBC Dominion Securities Inc., and TD Securities Inc. under which the underwriters agreed to purchase from TransCanada 30,200,000 Common Shares and sell the Common Shares to the public at a purchase price of $36.50 per Common Share. The underwriters were also granted an over-allotment option to purchase an additional 4,530,000 Common Shares at the same price. The offering was completed on May 13, 2008 and, together with the full exercise of the over-allotment option by the underwriters, 34,730,000 Common Shares were issued and resulted in gross proceeds to TransCanada of approximately $1.27 billion to be used by TransCanada to partially fund acquisitions and capital projects of TransCanada including, amongst others, the acquisition of Ravenswood, the construction of the Keystone Oil Pipeline, and for general corporate purposes. These Common Shares were issued under the base shelf prospectus filed in January, 2007.
· June 27, 2008. TransCanada executed an agreement with a syndicate of banks for a US$1.5 billion, committed, unsecured, one-year bridge loan facility, at a floating interest rate based on the London Interbank Offered Rate (LIBOR) plus 30 basis points. The facility is extendible at the option of TransCanada for an additional six month term at LIBOR plus 35 basis points. On August 25, 2008, TransCanada utilized US$255 million from this facility to fund a portion of the Ravenswood acquisition and cancelled the remainder of the commitment. At December 31, 2008, the US$255 million remained outstanding on the facility.
· August 11, 2008. TransCanada completed an issuance of US$850 million and US$650 million of Senior Unsecured Notes maturing on August 15, 2018 and August 15, 2038, respectively, and bearing interest at 6.50 per cent and 7.25 per cent, respectively. The proceeds from these notes were used to partially fund the Ravenswood acquisition and for general corporate purposes. These notes were issued under a US$2.5 billion debt shelf prospectus filed in September, 2007.
· August 20, 2008. TransCanada completed an issuance of $500 million of Medium-Term Notes maturing in August 2013 and bearing interest at 5.05 per cent. The proceeds from these notes were used to partially fund the Alberta Systems capital program and for general corporate purposes. These notes were issued under the debt shelf prospectus filed in March, 2007.
· November 17, 2008. TransCanada entered into an underwriting agreement with a syndicate of underwriters led by RBC Dominion Securities Inc., BMO Nesbitt Burns Inc., and TD Securities Inc. under which the underwriters agreed to purchase from TransCanada 30,500,000 Common Shares and sell the Common Shares to the public at a purchase price of $33.00 per Common Share. The underwriters were also granted an over-allotment option to purchase an additional 4,575,000 Common Shares at the same price. The offering was completed on November 25, 2008 and resulted in gross proceeds to TransCanada of approximately $1 billion to be used by TransCanada to partially fund its capital projects, including the Keystone Oil Pipeline, for general corporate purposes and to repay short-term indebtedness. The syndicate of underwriters fully exercised the over-allotment option on December 5, 2008 for additional gross proceeds to TransCanada of $151 million. The Common Shares were issued under the base shelf prospectus filed in July, 2008.
· In November 2008, TransCanada established a US$1.0 billion committed, unsecured bank facility with a syndicate of banks. The facility bears interest at a floating rate plus a margin. The facility has an initial term of 364 days with a one-year renewal at the option of the borrower and will support a new commercial paper program dedicated
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to funding a portion of expenditures for the Keystone Oil Pipeline and for general partnership purposes. As at December 31, 2008, no draws had been made on this facility.
Further information about financing activities can be found in the MD&A under the headings Short-Term Debt Financing Activities, 2009 and 2008 Long-Term Debt Financing Activities, 2007 Long-Term Debt Financing Activities, 2006 Long-Term Debt Financing Activities, 2008 Equity Financing Activities and 2007 Equity Financing Activities.
BUSINESS OF TRANSCANADA
TransCanada is a leading North American energy infrastructure company focused on pipelines and energy. At Year End, Pipelines accounted for approximately 54 per cent of revenues and 64 per cent of TransCanadas total assets and Energy accounted for approximately 46 per cent of revenues and 30 per cent of TransCanadas total assets. The following is a description of each of TransCanadas two main areas of operation.
The following table shows TransCanadas revenues from operations by segment, classified geographically, for the years ended December 31, 2008 and 2007.
Revenues From Operations (millions of dollars) |
|
2008 |
|
|
2007 |
|
Pipelines |
|
|
|
|
|
|
Canada - Domestic |
|
$2,005 |
|
|
$2,227 |
|
Canada - Export(1) |
|
1,123 |
|
|
1,003 |
|
United States |
|
1,522 |
|
|
1,482 |
|
|
|
4,650 |
|
|
4,712 |
|
Energy(2) |
|
|
|
|
|
|
Canada Domestic |
|
2,594 |
|
|
2,792 |
|
Canada - Export(1) |
|
2 |
|
|
3 |
|
United States |
|
1,373 |
|
|
1,321 |
|
|
|
3,969 |
|
|
4,116 |
|
Total Revenues(3) |
|
$8,619 |
|
|
$8,828 |
|
(1) Exports include pipeline revenues attributable to deliveries to U.S. pipelines and power deliveries to U.S. markets.
(2) Revenues include sales of natural gas.
(3) Revenues are attributed to countries based on country of origin of product or service.
Pipelines Business
TransCanada is a leader in the responsible development and reliable operation of North American energy infrastructure including natural gas pipelines, regulated gas storage facilities and projects related to oil pipelines. TransCanadas network of wholly owned pipelines extends more than 59,000 km (36,661 miles), tapping into virtually all major gas supply basins in North America.
TransCanada has substantial Canadian and U.S. natural gas pipeline and related holdings, and one oil pipeline project, including those listed below.
Canada
· TransCanadas Canadian Mainline is a 100 per cent owned 14,101 km (8,762 mile) natural gas transmission system in Canada that extends from the Alberta/Saskatchewan border east to the Québec/Vermont border and connects with other natural gas pipelines in Canada and the U.S.
· TransCanadas Alberta System is a 100 per cent owned natural gas transmission system in Alberta which gathers natural gas for use within the province and delivers it to provincial boundary points for connection with the Canadian Mainline and the Foothills System and with the natural gas pipelines of other companies. The 23,705 km (14,730 mile) system is one of the largest carriers of natural gas in North America.
· Keystone Oil Pipeline is a 3,456 km (2,147 mile) oil pipeline project currently under construction that will initially transport crude oil from Hardisty, Alberta to U.S. Midwest markets at Wood River and Patoka in Illinois, and to Cushing, Oklahoma. In addition, an expansion to the United States Gulf Coast is under development, which is expected to add approximately 2,720 km (1,690 miles) of pipe to the system. Commissioning of the segment to Wood River and Patoka is expected to begin in late 2009. Commissioning of the segment to Cushing is expected to begin in
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late 2010. The expansion to the United States Gulf Coast is expected to be commissioned in 2012, subject to regulatory approvals. Keystone Oil Pipeline was 62 per cent owned by TransCanada as at December 31, 2008 and TransCanada has agreed to increase its equity ownership in Keystone U.S. and Keystone Canada up to 79.99 per cent. In accordance with this agreement, TransCanada will fund 100 per cent of the construction expenditures until the participants project capital contributions are aligned with the revised ownership interests. Certain parties that have made volume commitments to the Keystone Oil Pipeline expansion have an option to acquire up to a combined 15 per cent equity ownership in Keystone U.S. and Keystone Canada by end of first quarter 2009. If all of the options are exercised, TransCanadas equity ownership would be reduced to 64.99 per cent.
· TransCanadas Foothills System is a 100 per cent owned, 1,241 km (771 mile) natural gas transmission system in Western Canada which carries natural gas for export from central Alberta to the U.S. border to serve markets in the U.S. Midwest, Pacific Northwest, California and Nevada. Effective April 1, 2007, the B.C. System was integrated into the Foothills System.
· TransCanada Pipeline Ventures LP, which is 100 per cent owned by TransCanada, owns a 161 km (100 mile) pipeline and related facilities that supply natural gas to the oil sands region of northern Alberta as well as a 27 km (17 mile) pipeline that supplies natural gas to a petrochemical complex at Joffre, Alberta.
· TransCanada Québec & Maritimes Pipeline Inc. (TQM) is 50 per cent owned by TransCanada. TQM is a 572 km (355 mile) pipeline system that connects with the Canadian Mainline and transports natural gas from Montréal to Québec City in Québec, and connects with the Portland System. TQM is operated by TransCanada.
United States
· TransCanadas ANR System (ANR System) is a 100 per cent owned 17,000 km (10,563 mile) natural gas transmission system which transports natural gas from producing fields located primarily in Texas and Oklahoma on its southwest leg, and in the Gulf of Mexico and Louisiana on its southeast leg. The system extends to markets located mainly in Wisconsin, Michigan, Illinois, Ohio and Indiana. ANRs natural gas pipeline also connects with other natural gas pipelines, providing access to diverse sources of North American supply, including Western Canada, and the mid-continent and Rocky Mountain supply regions, and a variety of markets in the Midwestern and northeastern U.S.
· Underground gas storage facilities owned and operated by ANR provide regulated gas storage services to customers on the ANR System and the Great Lakes Gas Transmission System (Great Lakes System) in upper Michigan. In 2008, ANR completed its storage enhancement project and added 14 billion cubic feet (Bcf) of storage. In total, the ANR business unit operates sixteen underground natural gas storage facilities throughout the State of Michigan with total natural gas storage capacity of 250 Bcf.
· The GTN System (GTN System) is TransCanadas 100 per cent owned natural gas transmission system which extends 2,174 km (1,351 miles) and links the Foothills System with Pacific Gas and Electric Companys California Gas Transmission System, with Williams Companies, Inc.s Northwest Pipeline in Washington and Oregon, and with Tuscarora.
· Bison pipeline is a proposed 480 km (298 mile) pipeline from the Powder River Basin in Wyoming to the Northern Border Pipeline System in North Dakota. The Bison pipeline has shipping commitments for approximately 405 mmcf/d and is expected to be in-service in fourth quarter 2010. TransCanada is continuing to work with prospective Bison shippers to advance this project.
· North Baja is TransCanadas 100 per cent owned natural gas transmission system which extends 129 km (80 miles) from Ehrenberg in southwestern Arizona to a point near Ogilby, California on the California/Mexico border and connects with the Gasoducto Bajanorte natural gas pipeline system in Mexico.
· The Great Lakes System is owned 53.6 per cent by TransCanada and 46.4 per cent by TC Pipelines, LP. The 3,404 km (2,115 mile) Great Lakes System connects with the Canadian Mainline at Emerson, Manitoba, and serves markets primarily in Central Canada and the Midwestern U.S. TransCanada operates the Great Lakes System and effectively owns 68.5 per cent of the system through its 53.6 per cent ownership interest and its indirect ownership, which it has through its 32.1 per cent interest in TC Pipelines, LP.
· The Northern Border Pipeline System (NBPL System) is 50 per cent owned by TC PipeLines, LP and is a 2,250 km (1,398 mile) natural gas transmission system, which serves the U.S. Midwest from a connection with the Foothills System near Monchy, Saskatchewan. TransCanada operates and effectively owns 16.1 per cent of the NBPL System through its 32.1 per cent interest in TC PipeLines, LP.
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· Tuscarora is 100 per cent owned by TC PipeLines, LP and has a 491 km (305 mile) pipeline system transporting natural gas from the GTN System at Malin, Oregon to Wadsworth, Nevada (the Tuscarora System) with delivery points in northeastern California and northwestern Nevada. TransCanada operates the Tuscarora System and effectively owns 32.1 per cent of the system through its 32.1 per cent interest in TC PipeLines, LP.
· The Iroquois Gas Transmission System (Iroquois System) connects with the Canadian Mainline near Waddington, New York and delivers natural gas to customers in the northeastern U.S. TransCanada has a 44.5 per cent ownership interest in this 666 km (414 mile) pipeline system.
· The Portland System is a 474 km (295 mile) pipeline that connects with TQM near East Hereford, Québec and delivers natural gas to customers in the northeastern U.S. TransCanada has a 61.7 per cent ownership interest in the Portland System and operates this pipeline.
· TransCanada holds a 32.1 per cent interest in TC PipeLines, LP, a publicly held limited partnership of which a subsidiary of TransCanada acts as the general partner. The remaining interest of TC PipeLines, LP is widely held by the public. TC PipeLines, LP owns a 50 per cent interest in the NBPL System, the remaining 46.4 per cent in the Great Lakes System and 100 per cent of Tuscarora.
· The Palomar pipeline project is a proposed 349 km (217 mile) pipeline extending from the GTN System to the Columbia River northwest of Portland. In December 2008, Palomar Gas Transmission LLC filed with the FERC for a certificate to build this pipeline, which is a 50/50 joint venture of GTNC and Northwest Natural Gas Co.
International
TransCanada also has the following natural gas pipeline and related holdings in Mexico and South America:
· TransGas is a 344 km (214 mile) natural gas pipeline system which runs from Mariquita in the central region of Colombia to Cali in the southwest of Colombia. TransCanada holds a 46.5 per cent ownership interest in this pipeline.
· Gas Pacifico is a 540 km (336 mile) natural gas pipeline extending from Loma de la Lata, Argentina to Concepción, Chile. INNERGY is an industrial natural gas marketing company based in Concepción that markets natural gas transported on Gas Pacifico. TransCanada holds a 30 per cent ownership interest both in Gas Pacifico and INNERGY.
· Tamazunchale is a 100 per cent owned, 130 km (81 mile) natural gas pipeline in east-central Mexico which extends from the facilities of Pemex Gas near Naranjos, Veracruz to an electricity generating station near Tamazunchale, San Luis Potosi. This pipeline went into service on December 1, 2006.
Further information about TransCanadas pipeline holdings, developments and opportunities and significant regulatory developments which relate to pipelines can be found in the MD&A under the headings Pipelines, Pipelines Opportunities and Developments and Pipelines Financial Analysis.
Regulation of the Pipeline Business
Canada
CANADIAN MAINLINE, TQM AND FOOTHILLS SYSTEM
Under the terms of the National Energy Board Act (Canada), the Canadian Mainline, TQM and the Foothills Systems are regulated by the NEB. The NEB sets tolls which provide TransCanada the opportunity to recover projected costs of transporting natural gas, including the return on the Canadian Mainline, TQM and Foothills Systems average investment base. In addition, new facilities are approved by the NEB before construction begins and the NEB regulates the operation of the Canadian Mainline, TQM and Foothills Systems. Net earnings of the Canadian Mainline, TQM and Foothills Systems may be affected by changes in investment base, the allowed return on equity, the level of deemed common equity and any incentive earnings.
ALBERTA SYSTEM
Effective January 1, 2008, the EUB was reorganized into the Energy Resources Conservation Board and the AUC. The AUC regulates all the physical and economic aspects of the Alberta System which were previously regulated by the EUB primarily under the provisions of the Gas Utilities Act (GUA) and the Pipeline Act. Under the GUA, the Alberta System rates, tolls and other charges, and terms and conditions of services are subject to approval by the AUC. Under the provisions of the Pipeline Act, the AUC oversees various matters including the economic, orderly and efficient development of pipeline facilities, the operation and abandonment of the facilities and certain related pollution and environmental conservation issues. In addition to
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requirements under the Pipeline Act, the construction and operation of natural gas pipelines in Alberta are subject to certain provisions of other provincial legislation such as the Environmental Protection and Enhancement Act.
In June 2008, TransCanada filed an application with the NEB seeking a determination that the Alberta System is within Canadian federal jurisdiction and subject to regulation by the NEB. TransCanada also requested approvals to operate the Alberta System under NEB regulation. A hearing on the application was held in November 2008 and a decision is expected by the end of February 2009.
KEYSTONE OIL PIPELINE
TransCanada is presently constructing the Canadian and U.S. sections of the Keystone Oil Pipeline and expects to place the base facilities into service in late 2009. The NEB regulates the terms and conditions of service, including rates, and the physical operation of the Canadian portion of the pipeline. NEB approval is also required for facility additions, such as the Canadian portion of the proposed Gulf Coast expansion project.
United States
TransCanadas wholly owned and partially owned U.S. pipelines, including the ANR System, the GTN System, the Great Lakes System, the Iroquois System, the Portland System, the NBPL System, North Baja and the Tuscarora System, are natural gas companies operating under the provisions of the Natural Gas Act of 1938 and the Natural Gas Policy Act of 1978, and are subject to the jurisdiction of the FERC. The Natural Gas Act of 1938 grants the FERC authority over the construction and operation of pipelines and related facilities. The FERC also has authority to regulate rates for natural gas transportation and interstate commerce.
The FERC also regulates the terms and conditions of service, including rates, on the U.S. portion of the Keystone Oil Pipeline. However, primary approvals for any facility additions to the Keystone Oil Pipeline are obtained from state agencies.
Energy Business
The Energy segment of TransCanadas business includes the acquisition, development, construction, ownership and operation of electrical power generation plants, the purchase and marketing of electricity, the provision of electricity account services to energy and industrial customers, the development, construction, ownership and operation of non-regulated natural gas storage in Alberta, and LNG facilities in Canada and the U.S.
The electrical power generation plants and power supply that TransCanada has an interest in, including those under development, in the aggregate, represent approximately 10,900 MW of power generation capacity. Power plants and power supply in Canada account for approximately 60 per cent of this total, and power plants in the U.S. account for the balance, being approximately 40 per cent.
TransCanada owns and operates the following facilities:
· Ravenswood, located in Queens, New York, is a 2,480 MW power plant that consists of multiple units employing steam turbine, combined cycle and combustion turbine technology. Ravenswood has the capacity to serve approximately 21 per cent of New York Citys peak load.
· TC Hydro, TransCanadas hydroelectric facilities located in New Hampshire, Vermont and Massachusetts on the Connecticut and Deerfield Rivers consist of 13 stations and associated dams and reservoirs with a total generating capacity of 583 MW.
· Ocean State Power, a 560 MW natural gas-fired, combined-cycle facility in Burrillville, Rhode Island.
· Bécancour, a 550 MW natural gas-fired cogeneration power plant located near Trois-Rivières, Québec. The entire power output is supplied to Hydro-Québec Distribution under a 20-year power purchase contract. Steam is also sold to an industrial customer for use in commercial processes.
· Natural gas-fired cogeneration plants in Alberta at Carseland (80 MW), Redwater (40 MW), Bear Creek (80 MW) and MacKay River (165 MW).
· Grandview, a 90 MW natural gas-fired cogeneration power plant located in Saint John, New Brunswick. Under a 20-year operating lease for tolls, Irving Oil Limited receives 100 per cent of the plants heat and electricity output.
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· Cancarb, a 27 MW facility at Medicine Hat, Alberta fuelled by waste heat from TransCanadas adjacent thermal carbon black facility.
· Edson, an underground natural gas storage facility connected to the Alberta System near Edson, Alberta. The facilitys central processing system is capable of maximum injection and withdrawal rates of 725 million cubic feet per day (mmcf/d) of natural gas. Edson has a working natural gas storage capacity of approximately 50 Bcf.
TransCanada has the following long-term power purchase arrangements in place:
· TransCanada has the rights to 100 per cent of the generating capacity of the 560 MW Sundance A coal-fired power generation facility under a Power Purchase Agreement (PPA), which expires in 2017. TransCanada also has the rights to 50 per cent of the generating capacity of the 706 MW Sundance B facility under a PPA, which expires in 2020 (Sundance). The Sundance facilities are located in south-central Alberta.
· The Sheerness facility, which consists of two 390 MW coal-fired thermal power generating units, is located in southeastern Alberta. TransCanada has the rights to 756 MW of generating capacity from the Sheerness PPA, which expires in 2020 (Sheerness).
TransCanada has interests in the following:
· Two generating stations, Bruce A which currently generates 1,500 MW and is expected to produce an additional 1,500 MW of power when restart of Units 1 and 2 is completed in 2010, and Bruce Power L.P. (Bruce B) with approximately 3,200 MW of generating capacity. Bruce Power is a partnership with generating facilities and offices located on 2,300 acres northwest of Toronto, Ontario on which are housed Bruce A and Bruce B. TransCanada owns 48.9 per cent of Bruce A which has four 750 MW reactors, two of which are currently being refurbished and are expected to restart in 2010. TransCanada owns 31.6 per cent of Bruce B, which has four operating reactors.
· A 60 per cent ownership in CrossAlta, which is an underground natural gas storage facility connected to the Alberta System located near Crossfield, Alberta. CrossAlta has a working natural gas capacity of 54 Bcf with a maximum deliverability capability of 480 mmcf/d.
· A 62 per cent interest in the Carleton (109 MW), Anse-à-Valleau (101 MW), and Baie-des-Sables (110 MW) wind farms, the first three phases of the Cartier Wind Energy Project, which commenced commercial operation in November 2008, November 2007 and November 2006, respectively.
TransCanada owns the following facilities which are under construction or development:
· The Cartier Wind Energy Project consists of six wind projects in the Gaspé region of Québec contracted by Hydro-Québec Distribution representing a total of 740 MW when all six wind projects are complete. Three of the wind farms are constructed and in service as noted above and the remaining three projects are under planning and development and are expected to be constructed through 2012, subject to the necessary approvals. Cartier Wind is 62 per cent owned by TransCanada.
· The Portlands Energy Centre, a 550 MW high efficiency, combined-cycle natural gas generation power plant located in Toronto, Ontario is 50 per cent owned by TransCanada and is under construction. The plant went into service in simple-cycle mode, capable of delivering 340 MW of electricity in the summer of 2008. It is anticipated to be fully commissioned in its combined-cycle mode, with delivery capabilities of 550 MW of power in the first quarter of 2009.
· A 683 MW natural gas-fired power plant near the town of Halton Hills, Ontario is under construction and is expected to be placed in service in the third quarter of 2010.
· The Coolidge generating station is a simple-cycle, natural gas-fired peaking power generation station under development in Coolidge, Arizona. Based on optimal operating conditions, TransCanada predicts an electrical output of approximately 575 MW from this facility, designed to provide a quick response to peak power demands. The project has received its required permits, and construction is expected to commence in the third quarter of 2009 with commissioning expected in 2011. When constructed, the power output will be supplied to Salt River Project Agricultural Improvement and Power District under a 20-year power purchase contract.
· The proposed 132 MW Kibby wind power project is under construction and is expected to include 44 turbines located in Kibby and Skinner townships in Maine. Construction began in July 2008 and commissioning of the first phase is expected to begin in fourth quarter 2009.
Further information about TransCanadas energy holdings and significant developments and opportunities relating to energy can be found in the MD&A under the headings Energy, Energy Financial Analysis and Energy Opportunities and Developments.
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14 |
|
GENERAL
Employees
At Year End, TransCanadas principal operating subsidiary, TCPL, had approximately 3,987 employees, substantially all of whom were employed in Canada and the U.S., as set forth in the following table.
Western Canada |
|
454 |
|
|
|
Calgary |
|
1,697 |
|
|
|
Eastern Canada |
|
242 |
|
|
|
U.S. West Coast |
|
146 |
|
|
|
U.S. Mid West |
|
478 |
|
|
|
U.S. Northeast |
|
379 |
|
|
|
U.S. Southeast/Gulf Coast |
|
246 |
|
|
|
Houston |
|
342 |
|
|
|
Mexico and Chile |
|
3 |
|
|
|
Total |
|
3,987 |
|
|
|
Social and Environmental Policies
Health, safety and environment (HS&E) is a priority in all of TransCanadas operations and is guided by its HS&E Commitment Statement. The HS&E Commitment Statement outlines guiding principles for a safe and healthy environment for TransCanadas employees, contractors and the public, and for the protection of the environment. All employees are held responsible and accountable for HS&E performance. Roles and responsibilities of employees are clearly defined to ensure appropriate financial, human and organizational resources are available to plan, implement and sustain the HS&E management system, and to ensure that each employee understands his or her role in HS&E management system implementation, success and continuous improvement. TransCanada is committed to being an industry leader in conducting its business so that it meets or exceeds all applicable laws and regulations, and minimizes risk to people and the environment. TransCanada is committed to tracking and improving its HS&E performance, and to promoting safety on and off the job, in the belief that all occupational injuries and illnesses are preventable. TransCanada endeavors to do business with companies and contractors that share its perspective on HS&E performance, and to influence them to improve TransCanadas collective performance. TransCanada is committed to respecting the diverse environments and cultures in which it operates, and to supporting open communication with the public, policy makers, scientists and public interest groups with whom we share stewardship of the world we inhabit.
TransCanada is committed to ensuring conformance with its internal policies and regulated requirements. The HS&E Committee of TransCanadas board of directors (the Board) monitors conformance with the Companys HS&E corporate policy through regular reporting. TransCanadas HS&E management system is modeled on the International Organization of Standardizations (ISO) standard for environmental management systems, ISO 14001, and focuses resources on the areas of significant risk to the organizations HS&E business activities. Management is informed regularly of all important HS&E operational issues and initiatives through formal reporting processes. TransCanadas HS&E management system and performance are assessed by an independent outside firm every three years. The most recent assessment occurred in November 2006. The HS&E management system also is subject to ongoing internal review to ensure that it remains effective as circumstances change.
In 2008, employee and contractor health and safety performance continued to be a top priority. Overall safety rates continue to perform significantly better than most industry benchmarks. TransCanadas assets were highly reliable in 2008 and there were no incidents that were material to TransCanadas operations.
The safety of the public and integrity of our pipelines is a top priority of TransCanada. The Company expects to spend approximately $185 million in 2009 for pipeline integrity on its wholly owned pipelines, which is higher than the amount spent in 2008 primarily due to increased levels of in-line pipeline inspection on all systems. Under the approved regulatory models in Canada, pipeline integrity expenditures on NEB and AUC regulated pipelines are treated on a flow-through basis and, as a result, have no impact on TransCanadas earnings. Expenditures on the GTN System are also recovered through a cost recovery mechanism in its rates. Pipeline safety in 2008 continued to be very good. TransCanada experienced one small-diameter pipeline failure in a remote part of east central Alberta. The line break resulted in minimal impact with no injuries or property damage. Spending associated with public safety on the Energy assets is focused primarily on hydro dams and associated equipment, and is consistent with previous years.
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Environmental Protection
TransCanadas facilities are subject to various federal, provincial, state and local statutes and regulations regarding environmental quality and pollution control. Environmental risks from TransCanadas operating facilities typically include: air emissions, such as nitrogen oxides (NOx), particulate matter and greenhouse gases; potential impacts on land, including land reclamation or restoration following construction; the use, storage or release of chemicals or hydrocarbons; the generation, handling and disposal of wastes and hazardous wastes; and water impacts such as uncontrolled water discharge. Environmental controls including physical design, programs, procedures and processes are in place to effectively manage these risks. TransCanada has ongoing inspection programs designed to keep all of our facilities in compliance with environmental requirements and we are confident that our systems are in material compliance with the applicable requirements.
TransCanada is not aware of any material outstanding orders, material claims or lawsuits against the Company in relation to the release or discharge of any material into the environment or in connection with environmental protection.
In 2008, TransCanada conducted various environmental risk assessments and remediation work, resulting in total costs of approximately $7.0 million for work conducted on TransCanadas Canadian facilities and US$5.5 million for work conducted on our U.S. facilities. TransCanada also conducted various retirement, reclamation and restoration work in 2008. Total costs were approximately $7.3 million.
In North America, climate change policy continues to evolve at regional and national levels. In 2008, policies related to industrial greenhouse gas (GHG) emissions were in effect in Alberta, British Columbia and Québec and affected TransCanadas assets located in those jurisdictions as discussed below.
In Alberta, the Specified Gas Emitters Regulation (SGER), which came into effect in 2007, requires industrial facilities to reduce GHG emissions intensities on an annual basis by 12 per cent from the baseline period, which has been established as the average emissions intensities in 2003, 2004 and 2005. A number of compliance mechanisms are available for those facilities unable to meet this target. TransCanadas Alberta-based pipe and power facilities are subject to this regulation, as are the Sundance and Sheerness coal-fired power facilities with which TransCanada has commercial arrangements. The cost of compliance incurred by TransCanadas Alberta-based facilities related to SGER was approximately $12 million covering the period from July 1, 2007, the date of implementation of the SGER, to December 31, 2007. Costs for 2008 compliance are estimated to be $28 million and will be finalized when compliance reports are submitted at the end of March 2009. Compliance costs of the Alberta System pipeline network are recovered through tolls paid by customers. Compliance costs for the Companys power generation facilities and interests in Alberta are partially recovered through contracts and the impact of increased operating costs on Alberta power market prices.
The hydrocarbon royalty in Québec is collected by the natural gas distributor on behalf of the Québec Government via a green fund contribution charge on gas consumed. In 2008, the cost to Bécancour was less than $1.0 million as a result of an agreement between TransCanada and Hydro-Québec Distribution to temporarily suspend the facilitys power generation. The financial charges are expected to increase substantially in 2010 when the plant returns to service.
British Columbias carbon tax, which came into effect in 2008, applies to carbon dioxide emissions arising from fossil fuel combustion. Compliance costs for fuel combustion at the Companys compressor and meter stations in British Columbia are recovered through tolls paid by customers. Costs related to the carbon tax for 2008 are approximately $1 million. This cost is expected to increase over the next four years as the tax rate (charge per tonne carbon dioxide) increases by $5 per tonne annually from the initial tax rate of $10 per tonne carbon dioxide.
RISK FACTORS
Environmental Risk Factors
As indicated above, there are multiple environmental risks associated with TransCanadas operating facilities and, as a consequence, TransCanadas operations are subject to various environmental laws and regulations that establish compliance and remediation obligations. Compliance obligations can result in significant costs associated with installing and maintaining pollution controls, fines and penalties resulting from any failure to comply, and potential limitations on operations. Remediation obligations can result in significant costs associated with the investigation and remediation of contaminated properties, some of which have been designated as Superfund sites by the United States Environmental Protection Agency under the Comprehensive Environmental Response, Compensation and Liability Act, and with damage claims arising out of
TRANSCANADA CORPORATION |
16 |
|
the contamination of properties or impact on natural resources. It is not possible for us to estimate exactly the amount and timing of all future expenditures related to environmental matters due to:
· uncertainties in estimating pollution control and clean up costs, including sites where only preliminary site investigation or agreements have been completed;
· the potential discovery of new sites or additional information at existing sites;
· the uncertainty in quantifying liability under environmental laws that impose joint and several liability on all potentially responsible parties;
· the evolving nature of environmental laws and regulations, including the interpretation and enforcement thereof; and
· the potential for litigation on existing or discontinued assets.
At December 31, 2008, TransCanada had accrued approximately $86 million for compliance and remediation obligations. TransCanada believes that it has considered all necessary contingencies and has established appropriate reserves for environmental liabilities; however there is the risk that unforeseen matters may arise requiring us to set aside additional monies.
In addition to those climate change policies already in force and which are described above under the heading Environmental Protection, there are also several federal (Canada and U.S.), regional and provincial initiatives currently in development. While recent political and economic events may significantly impact the scope and timing of new measures that are put in place, TransCanada anticipates that most of the Companys facilities in Canada and the United States will be captured under future regional and/or federal climate change regulations to manage industrial GHG emissions. Certain of these initiatives are outlined below.
TransCanada expects a number of its facilities will be affected by future Canadian federal climate change regulations. In April 2007, the Government of Canada released the Regulatory Framework for Air Emissions (Framework). The Framework outlines short-, medium- and long-term objectives for managing both GHG emissions and air pollutants in Canada. It is not known at this time whether the impacts from the pending regulations will be material as draft regulations have not been released. The Canadian government has also recently expressed interest in pursuing the development of a North American cap and trade system for GHG emissions. It is uncertain how the Framework will fit within a North American cap and trade system and what the specific requirements for industrial emitters will be. In the U.S., climate change is a strategic issue for the new administration and federal policy to manage domestic GHG emissions will be a priority.
At a regional level, seven western states and four Canadian provinces (British Columbia, Manitoba, Ontario and Québec) are focused on the implementation of a cap and trade program under the Western Climate Initiative (WCI). In the northeastern U.S., states that are members of the Regional Greenhouse Gas Initiative (RGGI) implemented a CO2 cap and trade program for electricity generators effective January 1, 2009. Participants in the Midwestern Greenhouse Gas Reduction Accord, which involves six states and one province (Manitoba), are developing a regional strategy for reducing members GHG emissions that will include a multi sector cap and trade mechanism.
At a provincial level, TransCanada has assets located in Ontario and Manitoba, where the provincial governments have announced climate change strategies that will impact industrial sources of GHG emissions (as mentioned above, British Columbia, Alberta and Québec already have policies in place). Details of these programs and information about how provincial programs will align with the Canadian governments climate change policies are still not available.
The Company expects a number of its facilities will be affected by new legislative initiatives in the United States. Under RGGI, both Ravenswood and Ocean State Power generation facilities will be required to submit allowances shortly after December 31, 2011. It is expected that the costs will be recovered from the market and the net impact to TransCanada will be minimal. Company assets located in WCI and Midwestern Greenhouse Gas Reduction Accord member states and in California will be covered by measures put in place in these states; however, the level of impact is not known at this time as key policy details remain outstanding.
TransCanada monitors climate change policy developments and, when warranted, participates in policy discussions in jurisdictions where the Company has operations. TransCanada is also continuing its programs to manage GHG emissions from its facilities and to evaluate new processes and technologies that result in improved efficiencies and lower GHG emission rates.
TRANSCANADA CORPORATION 17
Other Risk Factors
A discussion of the Companys risk factors can be found in the MD&A under the headings Pipelines - Opportunities and Developments, Pipelines - Business Risks, Pipelines Outlook, Energy - Opportunities and Developments, Energy - Business Risks, Energy Outlook, Corporate Outlook and Risk Management and Financial Instruments.
DIVIDENDS
The Board has not adopted a formal dividend policy. The Board reviews the financial performance of TransCanada quarterly and makes a determination of the appropriate level of dividends to be declared in the following quarter. Currently, TransCanadas payment of dividends on its Common Shares is primarily funded from dividends TransCanada receives as the sole common shareholder of TCPL. Provisions of various trust indentures and credit arrangements to which TCPL is a party restrict TCPLs ability to declare and pay dividends to TransCanada under certain circumstances and, if such restrictions apply, they may, in turn, have an impact on TransCanadas ability to declare and pay dividends on its Common Shares. In the opinion of TransCanadas management, such provisions do not currently restrict or alter TransCanadas ability to declare or pay dividends.
The dividends declared per Common Share of TransCanada during the past three completed financial years are set forth in the following table:
|
2008 |
2007 |
2006 |
Dividends declared on Common Shares |
$1.44 |
$1.36 |
$1.28 |
DESCRIPTION OF CAPITAL STRUCTURE
Share Capital
TransCanadas authorized share capital consists of an unlimited number of Common Shares, of which 616,471,522 were issued and outstanding at Year End, and an unlimited number of first preferred shares and second preferred shares, issuable in series, of which none are outstanding. The following is a description of the material characteristics of each of these classes of shares.
Common Shares
The Common Shares entitle the holders thereof to one vote per share at all meetings of shareholders, except meetings at which only holders of another specified class of shares are entitled to vote, and, subject to the rights, privileges, restrictions and conditions attaching to the first preferred shares and the second preferred shares, whether as a class or a series, and to any other class or series of shares of TransCanada which rank prior to the Common Shares, entitle the holders thereof to receive (i) dividends if, as and when declared by the Board out of the assets of TransCanada properly applicable to the payment of the dividends in such amount and payable at such times and at such place or places as the Board may from time to time determine and (ii) the remaining property of TransCanada upon a dissolution.
TransCanada has a Shareholder Rights Plan (the Plan) that is designed to ensure, to the extent possible, that all shareholders of TransCanada are treated fairly in connection with any take-over bid for the Company. The Plan creates a right attaching to each Common Share outstanding and to each Common Share subsequently issued. Each right becomes exercisable ten trading days after a person has acquired, or commences a take-over bid to acquire, 20 per cent or more of the Common Shares, other than by an acquisition pursuant to a take-over bid permitted under the terms of the Plan. Each right permits registered holders to receive Common Shares of TransCanada at 50 per cent of the market price of such shares as determined as at the end of the day prior to the exercise date. The Plan was reconfirmed at the 2007 annual and special meeting of shareholders and must be reconfirmed every third annual meeting thereafter.
TransCanada has a Dividend Reinvestment and Share Purchase Plan which permits common shareholders of TransCanada to elect to reinvest their cash dividends in additional Common Shares of TransCanada, and preferred shareholders of TCPL to elect, until such time as their participation is no longer permitted under securities law, to reinvest their cash dividends in Common Shares of TransCanada. These Common Shares may be provided to the participants at a discount to the average market price in the five days before dividend payment. The discount was set at 2 per cent commencing with the dividend payable in April 2007 and was increased to 3 per cent for the dividend payable in January 2009. Participants may also make additional cash payments of up to $10,000 per quarter to purchase additional Common
TRANSCANADA CORPORATION 18
Shares, which optional purchases are not eligible for any discount on the price of Common Shares. Participants are not responsible for payment of brokerage commissions or other transaction expenses for purchases made pursuant to the Dividend Reinvestment and Share Purchase Plan.
TransCanada also has stock-based compensation plans that allow some employees to purchase Common Shares of TransCanada. Option exercise prices approximate the market price for the Common Shares on the date the options were issued. Options granted under the plan are generally fully exercisable after three years and expire seven years after the date of grant.
First Preferred Shares
Subject to certain limitations, the Board may, from time to time, issue first preferred shares in one or more series and determine for any such series, its designation, number of shares and respective rights, privileges, restrictions and conditions. The first preferred shares as a class have, among others, provisions to the following effect.
The first preferred shares of each series rank on a parity with the first preferred shares of every other series, and are entitled to preference over the Common Shares, the second preferred shares and any other shares ranking junior to the first preferred shares with respect to the payment of dividends, the repayment of capital and the distribution of assets of TransCanada in the event of a liquidation, dissolution or winding up of TransCanada.
Except as provided by the Canada Business Corporations Act or as referred to below, the holders of the first preferred shares will not have any voting rights nor will they be entitled to receive notice of or to attend shareholders meetings. The holders of any particular series of first preferred shares will, if the directors so determine prior to the issuance of such series, be entitled to such voting rights as may be determined by the directors if TransCanada fails to pay dividends on that series of preferred shares for any period as may be so determined by the directors.
The provisions attaching to the first preferred shares as a class may be modified, amended or varied only with the approval of the holders of the first preferred shares as a class. Any such approval to be given by the holders of the first preferred shares may be given by the affirmative vote of the holders of not less than 66 2¤3 per cent of the first preferred shares represented and voted at a meeting or adjourned meeting of such holders.
Second Preferred Shares
The rights, privileges, restrictions and conditions attaching to the second preferred shares are substantially identical to those attaching to the first preferred shares, except that the second preferred shares are junior to the first preferred shares with respect to the payment of dividends, repayment of capital and the distribution of assets of TransCanada in the event of a liquidation, dissolution or winding up of TransCanada.
CREDIT RATINGS
Although TransCanada has not issued debt to the public, it has been assigned an issuer rating by Moodys Investors Service, Inc. (Moodys) of Baa1 with a stable outlook. TransCanada does not presently intend to issue debt securities to the public in its own name and future financing requirements are expected to continue to be funded primarily through its subsidiary, TCPL. The following table sets out the credit ratings assigned to those outstanding classes of securities of TCPL which have been rated by DBRS Limited (DBRS), Moodys and Standard and Poors (S&P):
|
DBRS |
Moodys |
S&P |
Senior Unsecured Debt |
|
|
|
Debentures |
A |
A3 |
A- |
Medium-term Notes |
A |
A3 |
A- |
Junior Subordinated Notes |
BBB (high) |
Baa1 |
BBB |
Preferred Shares |
Pfd-2 (low) |
Baa2 |
BBB |
Commercial Paper |
R-1 (low) |
- |
- |
Trend/Rating Outlook |
Stable |
Stable |
Stable |
Credit ratings are intended to provide investors with an independent measure of credit quality of an issue of securities. Credit ratings are not recommendations to purchase, hold or sell securities and do not address the market price or suitability of a specific security for a particular investor. There is no assurance that any rating will remain in effect for any given period of time or that any rating will not be revised or withdrawn entirely by a rating agency in the future if, in its judgment, circumstances so warrant. A description of the rating agencies credit ratings listed in the table above is set out below.
TRANSCANADA CORPORATION 19
DBRS Limited (DBRS)
DBRS has different rating scales for short and long-term debt and preferred shares. High or low grades are used to indicate the relative standing within a rating category. The absence of either a high or low designation indicates the rating is in the middle of the category. The R-1 (low) rating assigned to TCPLs short-term debt is the third highest of ten rating categories and indicates satisfactory credit quality. The overall strength and outlook for key liquidity, debt and profitability ratios is not normally as favourable as with higher rating categories, but these considerations are still respectable. Any qualifying negative factors that exist are considered manageable, and the entity is normally of sufficient size to have some influence in its industry. The A rating assigned to TCPLs senior unsecured debt is the third highest of ten categories for long-term debt. Long-term debt rated A is of satisfactory credit quality. Protection of interest and principal is still substantial, but the degree of strength is less than that of AA rated securities. While a respectable rating, entities in the A category are considered to be more susceptible to adverse economic conditions and have greater cyclical tendencies than higher rated entities. The BBB (high) rating assigned to junior subordinated notes is the fourth highest of the ten categories for long-term debt. Long-term debt rated BBB is of adequate credit quality. Protection of interest and principal is considered acceptable but there may be other adverse conditions present which reduce the strength of the entity and its rated securities. The Pfd-2 (low) rating assigned to TCPLs preferred shares is the second highest of six rating categories for preferred shares. Preferred shares rated Pfd-2 are of satisfactory credit quality. Protection of dividends and principal is still substantial; however, earnings, the balance sheet and coverage ratios are not as strong as Pfd-1 rated companies.
Moodys Investors Service, Inc. (Moodys)
Moodys has different rating scales for short and long-term obligations. Numerical modifiers 1, 2 and 3 are applied to each rating classification, with 1 being the highest and 3 being the lowest. The A3 rating assigned to TCPLs senior unsecured debt is the third highest of nine rating categories for long-term obligations. Obligations rated A are considered upper-medium grade and are subject to low credit risk. The Baa rating assigned to TCPLs junior subordinated debt and preferred shares is the fifth highest of nine rating categories for long-term obligations, with the junior subordinated debt ranking slightly higher within the Baa rating category with a modifier of 1 as opposed to the modifier of 2 on the preferred shares. Obligations rated Baa are subject to moderate credit risk, are considered medium-grade, and as such, may possess certain speculative characteristics.
Standard & Poors (S&P)
S&P has different rating scales for short and long-term obligations. Ratings may be modified by the addition of a plus (+) or minus (-) sign to show the relative standing within a particular rating category. The A- rating assigned to TCPLs senior unsecured debt is the third highest of ten rating categories for long-term obligations. An A rating indicates the obligors capacity to meet its financial commitment is strong; however, the obligation is slightly more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher rated categories. The BBB ratings assigned to TCPLs Junior Subordinated Notes and preferred shares are the fourth highest of ten rating categories for long-term obligations. An obligation rated BBB exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation.
TRANSCANADA CORPORATION 20
MARKET FOR SECURITIES
TransCanadas Common Shares are listed on the Toronto Stock Exchange (TSX) and the New York Stock Exchange (NYSE). The following table sets forth the reported monthly high, low, and month-end closing trading prices and monthly trading volumes of the Common Shares of TransCanada on the TSX and the NYSE for the period indicated:
Common Shares
|
TSX (TRP) |
NYSE (TRP) |
||||||
Month |
High |
Low |
Close |
Volume |
High |
Low |
Close |
Volume |
December 2008 |
34.50 |
31.53 |
33.17 |
43,677,420 |
27.82 |
24.97 |
27.14 |
5,101,834 |
November 2008 |
37.45 |
30.29 |
32.70 |
46,435,859 |
32.59 |
23.52 |
26.37 |
5,418,243 |
October 2008 |
39.26 |
29.42 |
36.42 |
69,562,035 |
36.33 |
24.45 |
30.30 |
6,675,763 |
September 2008 |
40.60 |
35.95 |
38.17 |
49,809,072 |
37.96 |
34.01 |
36.15 |
3,557,196 |
August 2008 |
40.65 |
38.50 |
40.27 |
28,550,772 |
39.18 |
35.99 |
37.97 |
2,467,304 |
July 2008 |
39.99 |
36.47 |
39.70 |
35,668,563 |
39.29 |
35.72 |
38.74 |
3,765,973 |
June 2008 |
40.71 |
37.79 |
39.50 |
34,833,031 |
40.08 |
37.39 |
38.77 |
2,381,500 |
May 2008 |
40.04 |
36.77 |
39.16 |
44,457,100 |
40.64 |
35.94 |
39.38 |
2,978,200 |
April 2008 |
38.90 |
35.98 |
36.90 |
54,718,260 |
37.70 |
35.33 |
36.74 |
3,467,500 |
March 2008 |
40.60 |
36.97 |
39.55 |
28,273,379 |
41.25 |
36.38 |
38.53 |
2,852,100 |
February 2008 |
40.50 |
38.70 |
39.54 |
27,480,832 |
41.53 |
38.54 |
40.09 |
2,390,000 |
January 2008 |
40.97 |
36.21 |
39.57 |
30,366,638 |
41.31 |
35.60 |
39.23 |
3,438,700 |
In addition, TransCanadas subsidiary, TCPL, has Cumulative Redeemable First Preferred Shares, Series U and Series Y listed on the TSX.
DIRECTORS AND OFFICERS
As of February 23, 2009, the directors and officers of TransCanada as a group beneficially owned, or exercised control or direction, directly or indirectly, over an aggregate of 1,401,751 Common Shares of TransCanada. This constitutes less than one per cent of TransCanadas Common Shares. In addition, officers held exercisable options to acquire an aggregate of 1,777,523 additional Common Shares. TransCanada collects this information from its directors and officers but otherwise has no direct knowledge of individual holdings of its securities.
Directors
Set forth below are the names of the thirteen directors who served on the Board at Year End, together with their jurisdictions of residence, all positions and offices held by them with TransCanada and its significant affiliates, their principal occupations or employment during the past five years and the year from which each director has continually served as a director of TransCanada and, prior to the arrangement, with TCPL. Positions and offices held with TransCanada are also held by such person at TCPL. Each director holds office until the next annual meeting or until his or her successor is earlier elected or appointed.
Name and |
|
Principal Occupation During the Five Preceding Years |
|
Director Since |
Kevin E. |
|
President and Chief Executive Officer, Laidlaw International, Inc. (transportation services) from June 2003 to October 2007, and Laidlaw, Inc. from September 2002 to June 2003. |
|
2005 |
Derek H. Burney, |
|
Senior strategic advisor at Ogilvy Renault LLP (law firm), Chair, Canwest Global Communications Corp. (communications) and Chair, International Advisory Board for Garda World Consulting & Investigation, a division of Garda World Security Corporation. Lead director at Shell Canada Limited (oil and gas) from April 2001 to May 2007. President and Chief Executive Officer, CAE Inc. (technology) from October 1999 to August 2004. |
|
2005 |
TRANSCANADA CORPORATION 21
Name and |
|
Principal Occupation During the Five Preceding Years |
|
Director Since |
Wendy K. Dobson Uxbridge, Ontario Canada |
|
Professor, Rotman School of Management and Director, Institute for International Business, University of Toronto. Vice Chair and Chair of the audit committee, Canadian Public Accountability Board from 2003 to 2009. Director, Toronto-Dominion Bank. Member of the Advisory Committees of the Peterson Institute of International Economics and the Canada Institute at the Woodrow Wilson International Centre. Member of the International Advisory Committee of the Asia Society and a director of the Stephen Leacock Foundation for Children. |
|
1992 |
E. Linn Draper |
|
Director, Alliance Data Systems Corporation (data processing and services), Lead Director, Alpha Natural Resources, Inc. (mining), NorthWestern Corporation (conducting business as NorthWestern Energy) (oil and gas) and Lead Director of Temple-Inland Inc. (materials). Chair, President and Chief Executive Officer of Columbus, Ohio-based American Electric Power Co., Inc. from April 1993 to April 2004. |
|
2005 |
The Hon. Paule Gauthier, P.C., O.C., O.Q., Q.C. |
|
Senior Partner, Stein Monast LLP (law firm). Director, Cossette Communication Group Inc., Institut Québecois des Hautes Études Internationales, Laval University, Metro Inc., RBC Dexia Investor Services Trust and Royal Bank of Canada. |
|
2002 |
Kerry L. Hawkins |
|
Director, NOVA Chemicals Corporation. President, Cargill Limited (agricultural) from September 1982 to December 2005. |
|
1996 |
S. Barry Jackson |
|
Chair of the Board, TransCanada since April 2005. Director, Nexen Inc. (oil and gas). Director, WestJet Airlines Ltd. Chair of Resolute Energy Inc. (oil and gas) from January 2002 to April 2005 and Chair of Deer Creek Energy Limited (oil and gas) from April 2001 to September 2005. |
|
2002 |
Paul L. Joskow |
|
Economist and President of the Alfred P. Sloan Foundation. On leave from his position as Professor of Economics and Management, Massachusetts Institute of Technology (MIT) where he has been on the faculty since 1972. Trustee of Yale University since July 1, 2008 and member of the Board of Overseers of the Boston Symphony Orchestra since September 2005. Director of the MIT Center for Energy and Environmental Policy Research from 1999 to 2007 and Director of National Grid plc from 2000 to 2007. Director of Exelon Corporation (energy) since July 2007. Trustee of Putnam Mutual Funds. President of the Yale University Council until July 1, 2006 and was on the Board of Directors of the Whitehead Institute of Biological Research until February 2005. |
|
2004 |
Harold N. Kvisle |
|
President and Chief Executive Officer of TransCanada since May 2003 and TCPL since May 2001. Director, Bank of Montreal. |
|
2001 |
John A. MacNaughton(2), |
|
Chair of the Business Development Bank of Canada and of CNSX Markets Inc. (formerly the Canadian Trading and Quotation System Inc.) (stock exchange). Director, Nortel Networks Corporation and Nortel Networks Limited (the principal operating subsidiary of Nortel Networks Corporation) (technology). Appointed by the Minister of Human Resources and Social Development as Nominating Committee Chair for the new Canada Employment Insurance Financing Board in 2008. Founding President and Chief Executive Officer of the Canadian Pension Plan Investment Board from 1999 to 2005. |
|
2006 |
David P. OBrien(3) |
|
Chair, EnCana Corporation (oil and gas) since April 2002 and Chair, Royal Bank of Canada since February 2004. Director, Molson Coors Brewing Company, Enerplus Resources Fund and C.D. Howe Institute. Chancellor, Concordia University and a member of the Science, Technology and Innovation Council of Canada. |
|
2001 |
TRANSCANADA CORPORATION 22
Name and |
|
Principal Occupation During the Five Preceding Years |
|
Director Since |
W. Thomas Stephens |
|
Chair and Chief Executive Officer of Boise Cascade, LLC from November 2004 to November 30, 2008. Director, Boise Inc. |
|
2007(4) |
D. Michael G. Stewart |
|
Director, Canadian Energy Services Inc., Pengrowth Corporation and Orleans Energy Ltd. Director of Esprit Exploration Ltd. (oil and gas) from May 2002 to September 2004; a director of Canada Southern Petroleum Ltd. from June 2003 to August 2004; Chairman and a trustee of Esprit Energy Trust (oil and gas) from August 2004 to October 2006; and a director of Creststreet Power & Income General Partner Limited, the General Partner of Creststreet Power & Income Fund L.P. (wind power) from December 2003 to February 2006. |
|
2006 |
(1) Mr. Benson was President and Chief Executive Officer of Canadian Airlines International Ltd. from July 1996 to February 2000. Canadian Airlines International Ltd. filed for protection under the Companies Creditors Arrangement Act (Canada) and applicable bankruptcy protection statutes in the U.S. on March 24, 2000.
(2) Mr. MacNaughton was a director of Nortel Networks Corporation and Nortel Networks Limited (either, Nortel) when they and certain other subsidiaries filed for creditor protection under the Companies Creditors Arrangement Act (Canada) and applicable bankruptcy protection statutes in the U.S. and the United Kingdom on January 14, 2009. Mr. MacNaughton became a director of Nortel on June 29, 2005. Nortel was subject to a management cease trade order on April 10, 2006 issued by the Ontario Securities Commission (OSC) and other provincial securities regulators. The cease trade order related to a delay in filing certain of Nortels 2005 financial statements. The order was revoked by the OSC on June 8, 2006 and by the other provincial securities regulators very shortly thereafter.
(3) Mr. OBrien was a director of Air Canada in April 2003 when Air Canada filed for protection under the Companies Creditors Arrangement Act (Canada) and applicable bankruptcy protection statutes in the U.S.
(4) Mr. Stephens previously served on the Board from 2000 to 2005.
Board Committees
TransCanada has four committees of the Board: the Audit Committee, the Governance Committee, the Health, Safety and Environment Committee and the Human Resources Committee. Mr. Jackson, the Chair of the Board, is a non-voting member of the Human Resources Committee and the Governance Committee. The voting members of each of these committees, as of Year End, are identified below:
Audit Committee |
Governance Committee |
Health, Safety & |
Human Resources |
||||
Chair: |
K.E. Benson |
Chair: |
W.K. Dobson |
Chair: |
E.L. Draper |
Chair: |
W.T. Stephens |
Members: |
D.H. Burney |
Members: |
D.H. Burney |
Members: |
P. Gauthier |
Members: |
W.K. Dobson |
|
P. Gauthier |
|
P.L. Joskow |
|
K.L. Hawkins |
|
E.L. Draper |
|
P.L. Joskow |
|
J.A. MacNaughton |
|
W.T. Stephens |
|
K.L. Hawkins |
|
J.A. MacNaughton |
|
D.P. OBrien |
|
D.M.G. Stewart |
|
D.P. OBrien |
|
D.M.G. Stewart |
|
|
|
|
|
|
The charters of the Governance Committee, the Health, Safety & Environment Committee and the Human Resources Committee can be found on TransCanadas website under the Corporate Governance - Board Committees page located at www.transcanada.com. Information about the audit committee can be found in this AIF under the heading Audit Committee.
Further information about the Board committees and corporate governance can also be found on TransCanadas website.
Officers
All of the executive officers and corporate officers of TransCanada reside in Calgary, Alberta, Canada. References to positions and offices with TransCanada prior to May 15, 2003 are references to the positions and offices held with TCPL. Current positions and offices held with TransCanada are also held by such person at TCPL. As of the date hereof, the officers of TransCanada, their present positions within TransCanada and their principal occupations during the five preceding years are as follows:
TRANSCANADA CORPORATION 23
Executive Officers
Name |
|
Present Position Held |
|
Principal Occupation During |
Harold N. Kvisle |
|
President and Chief Executive Officer |
|
President and Chief Executive Officer |
Russell K. Girling |
|
President, Pipelines |
|
Prior to June 2006, Executive Vice-President, Corporate Development and Chief Financial Officer |
Gregory A. Lohnes |
|
Executive Vice-President and Chief Financial Officer |
|
Prior to June 2006, President and Chief Executive Officer of Great Lakes Gas Transmission Company |
Dennis J. McConaghy |
|
Executive Vice-President, Pipeline Strategy and Development |
|
Prior to June 2006, Executive
Vice-President, Gas |
Sean McMaster |
|
Executive Vice-President, Corporate and General Counsel and Chief Compliance Officer |
|
Prior to October 2006, General Counsel and Chief Compliance Officer. Prior thereto, General Counsel since June 2006. Prior to June 2006, Vice-President, Transactions, Power Division, TCPL and concurrently, prior to August 2005, President TransCanada Power Services Ltd., general partner of TransCanada Power, L.P. |
Alexander J. Pourbaix |
|
President, Energy |
|
Prior to June 2006, Executive Vice-President, Power |
Sarah E. Raiss |
|
Executive Vice-President, Corporate Services |
|
Executive Vice-President, Corporate Services |
Donald M. Wishart |
|
Executive Vice-President, Operations and Engineering |
|
Executive Vice-President, Operations and Engineering |
Corporate Officers
Name |
|
Present Position Held |
|
Principal Occupation During |
Ronald L. Cook |
|
Vice-President, Taxation |
|
Vice-President, Taxation |
Donald J. DeGrandis |
|
Corporate Secretary |
|
Prior to June 2006, Associate General Counsel, Corporate |
Garry E. Lamb |
|
Vice-President, Risk |
|
Vice-President, Risk Management |
Donald R. Marchand |
|
Vice-President, Finance and |
|
Vice-President, Finance and Treasurer |
G. Glenn Menuz |
|
Vice President and Controller |
|
Prior to June 2006, Assistant Controller |
Conflicts of Interest
Directors and officers of TransCanada and its subsidiaries are required to disclose the existence of existing or potential conflicts in accordance with TransCanada policies governing directors and officers and in accordance with the Canada Business Corporations Act. Although some of the directors sit on boards or may be otherwise associated with companies that ship natural gas on TransCanadas pipeline systems, TransCanada, as a common carrier in Canada, cannot, under its tariff, deny transportation service to a credit-worthy shipper. Further, due to the specialized nature of the industry, TransCanada believes that it is important for its Board to be composed of qualified and knowledgeable directors, so some of them must come from oil and gas producers and shippers; the Governance Committee closely monitors relationships among directors to ensure that business associations do not affect the Boards performance. In a circumstance where a director declares an interest in any material contract or material transaction being considered at a meeting, the director generally absents himself or herself from the meeting during the consideration of the matter, and does not vote on the matter.
TRANSCANADA CORPORATION 24
CORPORATE GOVERNANCE
The Board and the members of TransCanadas management are committed to the highest standards of corporate governance. TransCanadas corporate governance practices comply with the governance rules of the Canadian Securities Administrators (CSA), those of the NYSE applicable to foreign issuers and of the SEC, and those mandated by the U.S. Sarbanes-Oxley Act of 2002. As a non-U.S. company, TransCanada is not required to comply with most of the NYSE corporate governance listing standards; however, except as summarized on our website at www.transcanada.com, the governance practices followed are in compliance with the NYSE standards for U.S. companies in all significant respects. TransCanada is in compliance with the CSAs Multilateral Instrument 52-110 pertaining to audit committees; National Policy 58-201, Corporate Governance Guidelines; and National Instrument 58-101, Disclosure of Corporate Governance Practices. Further information about TransCanadas corporate governance can be found on TransCanadas website at www.transcanada.com under the heading Corporate Governance or at Schedule A to TransCanadas management proxy circular.
AUDIT COMMITTEE
TransCanada has an Audit Committee which is responsible for assisting the Board in overseeing the integrity of TransCanadas financial statements and compliance with legal and regulatory requirements and in ensuring the independence and performance of TransCanadas internal and external auditors. The Charter of the Audit Committee can be found in Schedule B of this AIF and on TransCanadas website under the Corporate Governance - Board Committees page, at www.transcanada.com.
Relevant Education and Experience of Members
The members of the Audit Committee at Year End were Kevin E. Benson (Chair), Derek H. Burney, Paule Gauthier, Paul L. Joskow, John A. MacNaughton and D. Michael G. Stewart.
The Board believes that the composition of the Audit Committee reflects a high level of financial literacy and expertise. Each member of the Audit Committee has been determined by the Board to be independent and financially literate within the meaning of the definitions under Canadian and U.S. securities laws and the NYSE rules. In addition, the Board has determined that Mr. Benson is an Audit Committee Financial Expert as that term is defined under U.S. securities laws. The Board has made these determinations based on the education and breadth and depth of experience of each member of the Audit Committee. The following is a description of the education and experience, apart from their respective roles as directors of TransCanada, of each member of the Audit Committee that is relevant to the performance of his or her responsibilities as a member of the Audit Committee:
Kevin E. Benson
Mr. Benson earned a Bachelor of Accounting from the University of Witwatersrand (South Africa) and was a member of the South African Society of Chartered Accountants. Mr. Benson was the President and Chief Executive Officer of Laidlaw International, Inc. until October, 2007. In prior years, he has held several executive positions including one as President and Chief Executive Officer of Canadian Airlines International Ltd. and has served on other public company boards.
Derek H. Burney
Mr. Burney earned a Bachelor of Arts (Honours) and Master of Arts from Queens University. He is currently a senior strategic advisor at Ogilvy Renault LLP. Mr. Burney previously served as President and Chief Executive Officer of CAE Inc. and as Chairman and Chief Executive Officer of Bell Canada International Inc. Mr. Burney was the lead director at Shell Canada Limited until May 2007 and is the Chairman of Canwest Global Communications Corp. He has served on one other organizations audit committee.
Paule Gauthier
Mme. Gauthier earned a Bachelor of Arts from the Collège Jésus-Marie de Sillery, a Bachelor of Laws from Laval University and a Master of Laws in Business Law (Intellectual Property) from Laval-University. She has served on the boards of several public companies and other organizations and on the audit committees of certain of those boards.
TRANSCANADA CORPORATION 25
Paul L. Joskow
Mr. Joskow earned a Bachelor of Arts with Distinction in Economics from Cornell University, a Masters of Philosophy in Economics from Yale University, and Ph.D. in Economics from Yale University. He is currently the President of the Alfred P. Sloan Foundation and on leave from his position as a Professor of Economics and Management, MIT. He has served on the boards of several public companies and other organizations and on the audit committees of certain of those boards.
John A. MacNaughton
Mr. MacNaughton earned a Bachelor of Arts in Economics from the University of Western Ontario. Mr. MacNaughton is currently the Chairman of the Business Development Bank of Canada and of Canadian Trading and Quotation System Inc. In prior years, he has held several executive positions including founding President and Chief Executive Officer of the Canadian Pension Plan Investment Board and President of Nesbitt Burns Inc. He is currently the Chair of an audit committee of one other public company.
D. Michael G. Stewart
Mr. Stewart earned a Bachelor of Science (Honours) in Geological Science from Queens University. Mr. Stewart has served and continues to serve on the boards of several public companies and other organizations and on the audit committees of certain of those boards. He has been active in the Canadian energy industry for over 35 years.
Pre-Approval Policies and Procedures
TransCanadas Audit Committee has adopted a pre-approval policy with respect to permitted non-audit services. Under the policy, the Audit Committee has granted pre-approval for specified non-audit services. For engagements of $25,000 or less which are not within the annual pre-approved limit, approval by the Audit Committee is not required, and for engagements between $25,000 and $100,000, approval of the Audit Committee Chair is required, and the Audit Committee is to be informed of the engagement at the next scheduled Audit Committee meeting. For all engagements of $100,000 or more, pre-approval of the Audit Committee is required. In all cases, regardless of the dollar amount involved, where there is a potential for conflict of interest involving the external auditor to arise on an engagement, the Audit Committee Chair must pre-approve the assignment.
To date, TransCanada has not approved any non-audit services on the basis of the de-minimus exemptions. All non-audit services have been pre-approved by the Audit Committee in accordance with the pre-approval policy described above.
TRANSCANADA CORPORATION 26
External Auditor Service Fees
The following table provides information about the fees paid by the Company to KPMG LLP, the external auditor of the TransCanada group of companies, for professional services rendered for the 2008 and 2007 fiscal years.
Fee Category |
|
2008 |
|
2007 |
|
Description of Fee Category |
|
|
|
(millions of dollars) |
|
|
|
||
Audit Fees |
|
$6.69 |
|
$6.27 |
|
Aggregate fees for audit services rendered for the audit of the annual consolidated financial statements or services provided in connection with statutory and regulatory filings or engagements, the review of interim consolidated financial statements and information contained in various prospectuses and other offering documents. |
|
Audit Related Fees |
|
0.08 |
|
0.07 |
|
Aggregate fees for assurance and related services that are reasonably related to performance of the audit or review of the consolidated financial statements and are not reported as Audit Fees. The nature of services comprising these fees related to the audit of the financial statements of certain pension plans. |
|
Tax Fees |
|
0.14 |
|
0.06 |
|
Aggregate fees rendered for primarily tax compliance and tax advice. The nature of these services consisted of: tax compliance including the review of income tax returns; and tax items and tax services related to domestic and international taxation including income tax, capital tax and Goods and Services Tax. |
|
All Other Fees |
|
0.37 |
|
0.00 |
|
Aggregate fees for products and services other than those reported elsewhere in this table. The nature of these services consisted primarily of advice and training primarily related to compliance with IFRS. |
|
Total |
|
$7.28 |
|
$6.40 |
|
|
|
LEGAL PROCEEDINGS AND REGULATORY ACTIONS
The Canadian Alliance of Pipeline Landowners Association (CAPLA) and two individual landowners commenced an action in 2003 under Ontarios Class Proceedings Act, 1992, against TransCanada and Enbridge Inc. for damages of $500 million alleged to arise from the creation of a control zone within 30 metres of a pipeline pursuant to Section 112 of the National Energy Board Act. On November 20, 2006, TransCanada and Enbridge Inc. were granted a dismissal of the case but CAPLA appealed that decision. The appeal was heard on December 18, 2007. On April 3, 2008, the Ontario Court of Appeal dismissed CAPLAs appeal. The decision of the Ontario Court of Appeal is final and binding as CAPLA did not seek any further appeal within the time frame allowed.
TransCanada and its subsidiaries are subject to various other legal proceedings and regulatory actions arising in the normal course of business. While the final outcome of such legal proceedings and regulatory actions cannot be predicted with certainty and there can be no assurance that such matters will be resolved in TransCanadas favour, it is the opinion of TransCanadas management that the resolution of such proceedings and regulatory actions will not have a material impact on TransCanadas consolidated financial position, results of operations or liquidity.
MATERIAL CONTRACTS
The Ravenswood Agreement as described in this AIF under the heading General Development of the Business Developments in the Energy Business is available on SEDAR at www.sedar.com under TransCanadas profile.
The underwriting agreement between TransCanada Corporation and BMO Nesbitt Burns Inc., RBC Dominion Securities Inc., TD Securities Inc., Scotia Capital Inc., CIBC World Markets Inc., National Bank Financial Inc., HSBC Securities (Canada) Inc., UBS Securities Canada Inc., Canaccord Capital Corporation and FirstEnergy Capital Corp., as underwriters, dated May 5, 2008 as described in this AIF under the heading General Development of the Business Financing Activities is available on SEDAR at www.sedar.com under TransCanadas profile.
The underwriting agreement between TransCanada Corporation and RBC Dominion Securities Inc., BMO Nesbitt Burns Inc., TD Securities Inc., Scotia Capital Inc., CIBC World Markets Inc., National Bank Financial Inc., HSBC Securities (Canada) Inc. and UBS Securities Canada Inc., as underwriters, dated November 17, 2008 as described in this AIF under the heading General Development of the Business Financing Activities is available on SEDAR at www.sedar.com under TransCanadas profile.
TRANSCANADA CORPORATION 27
TRANSFER AGENT AND REGISTRAR
TransCanadas transfer agent and registrar is Computershare Trust Company of Canada with transfer facilities in the Canadian cities of Vancouver, Calgary, Winnipeg, Toronto, Montréal and Halifax.
INTEREST OF EXPERTS
TransCanadas auditors, KPMG LLP, have confirmed that they are independent within the meaning of the Rules of Professional Conduct of the Institute of Chartered Accountants of Alberta.
ADDITIONAL INFORMATION
1. Additional information in relation to TransCanada may be found under TransCanadas profile on SEDAR at www.sedar.com.
2. Additional information including directors and officers remuneration and indebtedness, principal holders of TransCanadas securities and securities authorized for issuance under equity compensation plans (all where applicable), is contained in TransCanadas management proxy circular for its most recent annual meeting of shareholders that involved the election of directors and can be obtained upon request from the Corporate Secretary of TransCanada.
3. Additional financial information is provided in TransCanadas audited consolidated financial statements and MD&A for its most recently completed financial year.
TRANSCANADA CORPORATION 28
GLOSSARY
AcSB |
|
Accounting Standards Board |
|
IFRS |
|
International Financial Reporting Standards |
AGIA |
|
Alaska Gasline Inducement Act |
|
Iroquois System |
|
A natural gas pipeline system in New York and Connecticut |
AIF |
|
Annual Information Form of TransCanada Corporation dated February 23, 2009 |
|
ISO |
|
International Organization of Standardization |
Alberta System |
|
A natural gas transmission system throughout the province of Alberta |
|
Keystone Canada |
|
TransCanada Keystone Pipeline Limited Partnership |
ANR |
|
American Natural Resources Company and ANR Storage Company |
|
Keystone Oil Pipeline |
|
A 3,456 km (2,147 mile) oil pipeline project currently under construction that will initially transport crude oil from Hardisty, Alberta to U.S. Midwest markets at Wood River and Patoka in Illinois, and to Cushing, Oklahoma |
ANR System |
|
A natural gas transmission system which extends approximately 17,000 km from producing fields in Louisiana, Oklahoma, Texas and the Gulf of Mexico to markets in Wisconsin, Michigan, Illinois, Ohio and Indiana |
|
Keystone U.S. |
|
TransCanada Keystone
Pipeline, LP |
ATCO Pipelines |
|
Canadian Utilities Limited |
|
MD&A |
|
TransCanadas Managements Discussion and Analysis dated February 23, 2009 |
AUC |
|
Alberta Utilities Commission |
|
mmcf/d |
|
Million cubic feet per day |
Bbl/d |
|
Barrels per day |
|
Moodys |
|
Moodys Investors Service, Inc. |
Bcf |
|
Billion cubic feet |
|
MW |
|
Megawatts |
Bécancour |
|
A power plant near Trois-Rivières, Québec |
|
NBPL |
|
Northern Border Pipeline Company |
Bison |
|
The Bison Pipeline Project, a proposed 298-mile pipeline from the Powder River Basin in Wyoming to the NBPL System |
|
NBPL System |
|
A natural gas transmission system located in the upper Midwestern portion of the U.S. |
Board |
|
TransCanadas Board of Directors |
|
NEB |
|
National Energy Board |
Broadwater |
|
A proposed offshore LNG facility in Long Island Sound, New York |
|
NGTL |
|
Nova Gas Transmission Limited |
Bruce A |
|
Bruce Power A L.P. |
|
North Baja |
|
A natural gas pipeline in southern California |
Bruce B |
|
Bruce Power L.P. |
|
NOx |
|
Nitrogen oxides |
Cacouna |
|
The proposed Cacouna Energy LNG facility in Cacouna, Québec |
|
NYSDOS |
|
New York Department of State |
Calpine |
|
Calpine Corporation |
|
NYSE |
|
New York Stock Exchange |
Canadian Mainline |
|
A natural gas pipeline system running from the Alberta border east to delivery points in eastern Canada and along the U.S. border |
|
Portland System |
|
A natural gas pipeline that runs through Maine and New Hampshire into Massachusetts |
CAPLA |
|
Canadian Alliance of Pipeline Landowners Association |
|
Portlands Energy Centre |
|
A natural gas-fired combined-cycle power plant near downtown Toronto, Ontario |
Cartier Wind Energy Project |
|
Six wind energy projects contracted by Hydro-Québec Distribution representing a total of 740 MW in the Gaspé region of Québec |
|
PPA |
|
Power Purchase Arrangement |
CO2 |
|
Carbon dioxide |
|
Ravenswood |
|
Ravenswood Generating Station |
Common Shares |
|
Common shares of TransCanada |
|
Ravenswood Agreement |
|
The membership interest and stock purchase agreement between KeySpan Corporation and TransCanada Facility USA Inc. dated March 31, 2008 |
Coolidge |
|
Coolidge Generating Station |
|
RGGI |
|
Regional Greenhouse Gas Initiative |
CSA |
|
Canadian Securities Administrators |
|
S&P |
|
Standard and Poors |
DBRS |
|
DBRS Limited |
|
SEC |
|
United States Securities and Exchange Commission |
EUB |
|
Alberta Energy and Utilities Board |
|
SGER |
|
Specified Gas Emitters Regulation |
FEIS |
|
Final Environment Impact Statement |
|
Sheerness |
|
A power plant consisting of two 390 MW coal-fired thermal powered generating units |
FERC |
|
Federal Energy Regulatory Commission (USA) |
|
Sundance |
|
Two coal fired electrical generating facilities which produce 560 MW and 706 MW, respectively |
Framework |
|
The Regulatory Framework for Air Emissions |
|
TCPL |
|
TransCanada PipeLines Limited |
Foothills System |
|
A natural gas pipeline system in southeastern B.C., southern Alberta and southwestern Saskatchewan |
|
TQM |
|
Trans Québec & Maritimes Pipeline Inc. |
GHG |
|
Greenhouse gas |
|
TransCanada or the Company |
|
TransCanada Corporation |
GTNC |
|
Gas Transmission Northwest Corporation |
|
TSX |
|
Toronto Stock Exchange |
GTN System |
|
A natural gas transmission system running from northwestern Idaho, through Washington and Oregon to the California border |
|
Tuscarora |
|
Tuscarora Gas Transmission Company |
Great Lakes |
|
Great Lakes Gas Transmission Limited Partnership |
|
Tuscarora System |
|
A natural gas pipeline that runs from Oregon through northeast California to Reno, Nevada |
Great Lakes System |
|
A natural gas pipeline system in the north central U.S., roughly parallel to the Canada-U.S. Border |
|
U.S. |
|
United States |
GUA |
|
Gas Utilities Act (Alberta) |
|
WCI |
|
Western Climate Initiative |
HS&E |
|
Health, Safety and Environment |
|
Year End |
|
December 31, 2008 |
TRANSCANADA CORPORATION A-1
SCHEDULE A
METRIC CONVERSION TABLE
The conversion factors set out below are approximate factors. To convert from Metric to Imperial multiply by the factor indicated. To convert from Imperial to Metric divide by the factor indicated.
Metric |
Imperial |
Factor |
Kilometres (km) |
Miles |
0.62 |
Millimetres |
Inches |
0.04 |
Gigajoules |
Million British thermal units |
0.95 |
Cubic metres* |
Cubic feet |
35.3 |
Kilopascals |
Pounds per square inch |
0.15 |
Degrees Celsius |
Degrees Fahrenheit |
to convert
to Fahrenheit multiply by 1.8, |
* The conversion is based on natural gas at a base pressure of 101.325 kilopascals and at a base temperature of 15 degrees Celsius.
TRANSCANADA CORPORATION B-1
SCHEDULE B
CHARTER OF THE AUDIT COMMITTEE
1. Purpose
The Audit Committee shall assist the Board of Directors (the Board) in overseeing and monitoring, among other things, the:
· Companys financial accounting and reporting process;
· integrity of the financial statements;
· Companys internal control over financial reporting;
· external financial audit process;
· compliance by the Company with legal and regulatory requirements; and
· independence and performance of the Companys internal and external auditors.
To fulfill its purpose, the Audit Committee has been delegated certain authorities by the Board of Directors that it may exercise on behalf of the Board.
2. Roles and Responsibilities
I. Appointment of the Companys External Auditors
Subject to confirmation by the external auditors of their compliance with Canadian and U.S. regulatory registration requirements, the Audit Committee shall recommend to the Board the appointment of the external auditors, such appointment to be confirmed by the Companys shareholders at each annual meeting. The Audit Committee shall also recommend to the Board the compensation to be paid to the external auditors for audit services and shall pre-approve the retention of the external auditors for any permitted non-audit service and the fees for such service. The Audit Committee shall also be directly responsible for the oversight of the work of the external auditor (including resolution of disagreements between management and the external auditor regarding financial reporting) for the purpose of preparing or issuing an audit report or related work. The external auditor shall report directly to the Audit Committee.
The Audit Committee shall also receive periodic reports from the external auditors regarding the auditors independence, discuss such reports with the auditors, consider whether the provision of non-audit services is compatible with maintaining the auditors independence and the Audit Committee shall take appropriate action to satisfy itself of the independence of the external auditors.
II. Oversight in Respect of Financial Disclosure
The Audit Committee, to the extent it deems it necessary or appropriate, shall:
(a) review, discuss with management and the external auditors and recommend to the Board for approval, the Companys audited annual financial statements, annual information form including management discussion and analysis, all financial statements in prospectuses and other offering memoranda, financial statements required by regulatory authorities, all prospectuses and all documents which may be incorporated by reference into a prospectus, including without limitation, the annual proxy circular, but excluding any pricing supplements issued under a medium term note prospectus supplement of the Company;
(b) review, discuss with management and the external auditors and recommend to the Board for approval the release to the public of the Companys interim reports, including the financial statements, management discussion and analysis and press releases on quarterly financial results;
(c) review and discuss with management and external auditors the use of pro forma or adjusted non-GAAP information and the applicable reconciliation;
TRANSCANADA CORPORATION B-2
(d) review and discuss with management and external auditors financial information and earnings guidance provided to analysts and rating agencies; provided, however, that such discussion may be done generally (consisting of discussing the types of information to be disclosed and the types of presentations to be made). The Audit Committee need not discuss in advance each instance in which the Company may provide earnings guidance or presentations to rating agencies;
(e) review with management and the external auditors major issues regarding accounting and auditing principles and practices, including any significant changes in the Companys selection or application of accounting principles, as well as major issues as to the adequacy of the Companys internal controls and any special audit steps adopted in light of material control deficiencies that could significantly affect the Companys financial statements;
(f) review and discuss quarterly reports from the external auditors on:
(i) all critical accounting policies and practices to be used;
(ii) all alternative treatments of financial information within generally accepted accounting principles that have been discussed with management, ramifications of the use of such alternative disclosures and treatments, and the treatment preferred by the external auditor;
(iii) other material written communications between the external auditor and management, such as any management letter or schedule of unadjusted differences;
(g) review with management and the external auditors the effect of regulatory and accounting initiatives as well as off-balance sheet structures on the Companys financial statements;
(h) review with management, the external auditors and, if necessary, legal counsel, any litigation, claim or contingency, including tax assessments, that could have a material effect upon the financial position of the Company, and the manner in which these matters have been disclosed in the financial statements;
(i) review disclosures made to the Audit Committee by the Companys CEO and CFO during their certification process for the periodic reports filed with securities regulators about any significant deficiencies in the design or operation of internal controls or material weaknesses therein and any fraud involving management or other employees who have a significant role in the Companys internal controls;
(j) discuss with management the Companys material financial risk exposures and the steps management has taken to monitor and control such exposures, including the Companys risk assessment and risk management policies;
III. Oversight in Respect of Legal and Regulatory Matters
(a) review with the Companys General Counsel legal matters that may have a material impact on the financial statements, the Companys compliance policies and any material reports or inquiries received from regulators or governmental agencies.
IV. Oversight in Respect of Internal Audit
(a) review the audit plans of the internal auditors of the Company including the degree of coordination between such plan and that of the external auditors and the extent to which the planned audit scope can be relied upon to detect weaknesses in internal control, fraud or other illegal acts;
(b) review the significant findings prepared by the internal auditing department and recommendations issued by the Company or by any external party relating to internal audit issues, together with managements response thereto;
(c) review compliance with the Companys policies and avoidance of conflicts of interest;
TRANSCANADA CORPORATION B-3
(d) review the adequacy of the resources of the internal auditor to ensure the objectivity and independence of the internal audit function, including reports from the internal audit department on its audit process with associates and affiliates;
(e) ensure the internal auditor has access to the Chair of the Audit Committee and of the Board and to the Chief Executive Officer and meet separately with the internal auditor to review with him any problems or difficulties he may have encountered and specifically:
(i) any difficulties which were encountered in the course of the audit work, including restrictions on the scope of activities or access to required information, and any disagreements with management;
(ii) any changes required in the planned scope of the internal audit; and
(iii) the internal audit department responsibilities, budget and staffing;
and to report to the Board on such meetings;
(f) bi-annually review officers expenses and aircraft usage reports;
V. Insight in Respect of the External Auditors
(a) review the annual post-audit or management letter from the external auditors and managements response and follow-up in respect of any identified weakness, inquire regularly of management and the external auditors of any significant issues between them and how they have been resolved, and intervene in the resolution if required;
(b) review the quarterly unaudited financial statements with the external auditors and receive and review the review engagement reports of external auditors on unaudited financial statements of the Company;
(c) receive and review annually the external auditors formal written statement of independence delineating all relationships between itself and the Company;
(d) meet separately with the external auditors to review with them any problems or difficulties the external auditors may have encountered and specifically:
(i) any difficulties which were encountered in the course of the audit work, including any restrictions on the scope of activities or access to required information, and any disagreements with management; and
(ii) any changes required in the planned scope of the audit;
and to report to the Board on such meetings;
(e) review with the external auditors the adequacy and appropriateness of the accounting policies used in preparation of the financial statements;
(f) meet with the external auditors prior to the audit to review the planning and staffing of the audit;
(g) receive and review annually the external auditors written report on their own internal quality control procedures; any material issues raised by the most recent internal quality control review, or peer review, of the external auditors, or by any inquiry or investigation by governmental or professional authorities, within the preceding five years, and any steps taken to deal with such issues;
(h) review and evaluate the external auditors, including the lead partner of the external auditor team;
TRANSCANADA CORPORATION B-4
(i) ensure the rotation of the lead (or coordinating) audit partner having primary responsibility for the audit and the audit partner responsible for reviewing the audit as required by law, but at least every five years;
VI. Oversight in Respect of Audit and Non-Audit Services
(a) pre-approve all audit services (which may entail providing comfort letters in connection with securities underwritings) and all permitted non-audit services, other than non-audit services where:
(i) the aggregate amount of all such non-audit services provided to the Company constitutes not more than 5% of the total fees paid by the Company and its subsidiaries to the external auditor during the fiscal year in which the non-audit services are provided;
(ii) such services were not recognized by the Company at the time of the engagement to be non-audit services; and
(iii) such services are promptly brought to the attention of the Audit Committee and approved prior to the completion of the audit by the Audit Committee or by one or more members of the Audit Committee to whom authority to grant such approvals has been delegated by the Audit Committee;
(b) approval by the Audit Committee of a non-audit service to be performed by the external auditor shall be disclosed as required under securities laws and regulations;
(c) the Audit Committee may delegate to one or more designated members of the Audit Committee the authority to grant pre-approvals required by this subsection. The decisions of any member to whom authority is delegated to pre-approve an activity shall be presented to the Audit Committee at its first scheduled meeting following such pre-approval;
(d) if the Audit Committee approves an audit service within the scope of the engagement of the external auditor, such audit service shall be deemed to have been pre-approved for purposes of this subsection;
VII. Oversight in Respect of Certain Policies
(a) review and recommend to the Board for approval policy changes and program initiatives deemed advisable by management or the Audit Committee with respect to the Companys codes of business conduct and ethics;
(b) obtain reports from management, the Companys senior internal auditing executive and the external auditors and report to the Board on the status and adequacy of the Companys efforts to ensure its businesses are conducted and its facilities are operated in an ethical, legally compliant and socially responsible manner, in accordance with the Companys codes of business conduct and ethics;
(c) establish a non-traceable, confidential and anonymous system by which callers may ask for advice or report any ethical or financial concern, ensure that procedures for the receipt, retention and treatment of complaints in respect of accounting, internal controls and auditing matters are in place, and receive reports on such matters as necessary;
(d) annually review and assess the adequacy of the Companys public disclosure policy;
(e) review and approve the Companys hiring policies for partners, employees and former partners and employees of the present and former external auditors (recognizing the Sarbanes-Oxley Act of 2002 does not permit the CEO, controller, CFO or chief accounting officer to have participated in the Companys audit as an employee of the external auditors during the preceding one-year period) and monitor the Companys adherence to the policy;
TRANSCANADA CORPORATION B-5
VIII. Oversight in Respect of Financial Aspects of the Companys Pension Plans, specifically:
(a) provide advice to the Human Resources Committee on any proposed changes in the Companys pension plans in respect of any significant effect such changes may have on pension financial matters;
(b) review and consider financial and investment reports and the funded status relating to the Companys pension plans and recommend to the Board on pension contributions;
(c) receive, review and report to the Board on the actuarial valuation and funding requirements for the Companys pension plans;
(d) review and approve annually the Statement of Investment Policies and Procedures (SIP&P);
(e) approve the appointment or termination of auditors and investment managers;
IX. Oversight in Respect of Internal Administration
(a) review annually the reports of the Companys representatives on certain audit committees of subsidiaries and affiliates of the Company and any significant issues and auditor recommendations concerning such subsidiaries and affiliates;
(b) review the succession plans in respect of the Chief Financial Officer, the Vice President, Risk Management and the Director, Internal Audit;
(c) review and approve guidelines for the Companys hiring of partners, employees and former partners and employees of the external auditors who were engaged on the Companys account;
X. Oversight Function
While the Audit Committee has the responsibilities and powers set forth in this Charter, it is not the duty of the Audit Committee to plan or conduct audits or to determine that the Companys financial statements and disclosures are complete and accurate or are in accordance with generally accepted accounting principles and applicable rules and regulations. These are the responsibilities of management and the external auditors. The Audit Committee, its Chair and any of its members who have accounting or related financial management experience or expertise, are members of the Board, appointed to the Audit Committee to provide broad oversight of the financial disclosure, financial risk and control related activities of the Company, and are specifically not accountable nor responsible for the day to day operation of such activities. Although designation of a member or members as an audit committee financial expert is based on that individuals education and experience, which that individual will bring to bear in carrying out his or her duties on the Audit Committee, designation as an audit committee financial expert does not impose on such person any duties, obligations or liability that are greater than the duties, obligations and liability imposed on such person as a member of the Audit Committee and Board in the absence of such designation. Rather, the role of any audit committee financial expert, like the role of all Audit Committee members, is to oversee the process and not to certify or guarantee the internal or external audit of the Companys financial information or public disclosure.
3. Composition of Audit Committee
The Audit Committee shall consist of three or more Directors, a majority of whom are resident Canadians (as defined in the Canada Business Corporations Act), and all of whom are unrelated and/or independent for the purposes of applicable Canadian and United States securities law and applicable rules of any stock exchange on which the Companys shares are listed. Each member of the Audit Committee shall be financially literate and at least one member shall have accounting or related financial management expertise (as those terms are defined from time to time under the requirements or guidelines for audit committee service under securities laws and the applicable rules of any stock exchange on which the Companys securities are listed for trading or, if it is not so defined as that term is interpreted by the Board in its business judgment).
4. Appointment of Audit Committee Members
The members of the Audit Committee shall be appointed by the Board from time to time, on the recommendation of the Governance Committee and shall hold office until the next annual meeting of shareholders or until their successors are
TRANSCANADA CORPORATION B-6
earlier appointed or until they cease to be Directors of the Company.
5. Vacancies
Where a vacancy occurs at any time in the membership of the Audit Committee, it may be filled by the Board on the recommendation of the Governance Committee.
6. Audit Committee Chair
The Board shall appoint a Chair of the Audit Committee who shall:
(a) review and approve the agenda for each meeting of the Audit Committee and as appropriate, consult with members of management;
(b) preside over meetings of the Audit Committee;
(c) ensure the Committee has sufficient information to permit it to properly discharge its duties and responsibilities;
(d) report to the Board on the activities of the Audit Committee relative to its recommendations, resolutions, actions and concerns; and
(e) meet as necessary with the internal and external auditors.
7. Absence of Audit Committee Chair
If the Chair of the Audit Committee is not present at any meeting of the Audit Committee, one of the other members of the Audit Committee present at the meeting shall be chosen by the Audit Committee to preside at the meeting.
8. Secretary of Audit Committee
The Corporate Secretary shall act as Secretary to the Audit Committee.
9. Meetings
The Chair, or any two members of the Audit Committee, or the internal auditor, or the external auditors, may call a meeting of the Audit Committee. The Audit Committee shall meet at least quarterly. The Audit Committee shall meet periodically with management, the internal auditors and the external auditors in separate executive sessions.
10. Quorum
A majority of the members of the Audit Committee, present in person or by telephone or other telecommunication device that permit all persons participating in the meeting to speak to each other, shall constitute a quorum.
11. Notice of Meetings
Notice of the time and place of every meeting shall be given in writing or facsimile communication to each member of the Audit Committee at least 24 hours prior to the time fixed for such meeting; provided, however, that a member may in any manner waive a notice of a meeting. Attendance of a member at a meeting is a waiver of notice of the meeting, except where a member attends a meeting for the express purpose of objecting to the transaction of any business on the grounds that the meeting is not lawfully called.
12. Attendance of Company Officers and Employees at Meeting
At the invitation of the Chair of the Audit Committee, one or more officers or employees of the Company may attend any meeting of the Audit Committee.
13. Procedure, Records and Reporting
The Audit Committee shall fix its own procedure at meetings, keep records of its proceedings and report to the Board when the Audit Committee may deem appropriate but not later than the next meeting of the Board.
TRANSCANADA CORPORATION B-7
14. Review of Charter and Evaluation of Audit Committee
The Audit Committee shall review its Charter annually or otherwise, as it deems appropriate, and if necessary propose changes to the Governance Committee and the Board. The Audit Committee shall annually review the Audit Committees own performance.
15. Outside Experts and Advisors
The Audit Committee is authorized, when deemed necessary or desirable, to retain and set and pay the compensation for independent counsel, outside experts and other advisors, at the Companys expense, to advise the Audit Committee or its members independently on any matter.
16. Reliance
Absent actual knowledge to the contrary (which shall be promptly reported to the Board), each member of the Audit Committee shall be entitled to rely on (i) the integrity of those persons or organizations within and outside the Company from which it receives information, (ii) the accuracy of the financial and other information provided to the Audit Committee by such persons or organizations and (iii) representations made by Management and the external auditors, as to any information technology, internal audit and other non-audit services provided by the external auditors to the Company and its subsidiaries.
celebrating yesterday delivering today building for tomorrow 2008 annual report |
celebrating yesterday It was a true engineering wonder of its time. Nearly 3,700 kilometres of steel pipe pushed through some of the toughest terrain in Canada. Up to 5,000 workers persevered through a multitude of obstacles, often under extremely adverse conditions, to build what would be the worlds longest pipeline. In 2008, TransCanadas Canadian Mainline celebrated 50 years of history recognizing a milestone anniversary of the final weld on the first pipeline system designed to deliver Alberta natural gas to markets in Ontario and Quebec. Construction of the Mainlines western leg began on June 17, 1956 at Burstall, Saskatchewan. Natural gas reached the cities of Winnipeg, Manitoba and Regina, Saskatchewan on the Canadian Prairies in September 1957. Workers pushed on, challenged by the terrain and the remoteness of the land - moving about one kilometre a day across Ontario and, finally into Quebec. The final weld on the pipeline took place in Kapuskasing, Ontario on October 10, 1958. To commemorate the event, Canada Post and TransCanada unveiled a special edition Canadian postage stamp, depicting a single, anonymous welder representing thousands of labourers who worked to complete the historic pipline. A little known fact a silver dollar was welded to the pipe in that location. That silver dollar is now on display at TransCanadas head office in Calgary, Alberta. Canadian Mainline construction Facts $375 million original cost. 655,000 tons of pipe carried by 25,000 railway cars. 184 lakes and rivers crossed. Permission needed from more than 5,000 landowners. Swamp-like muskeg swallowed vehicles up to their door handles. Impenetrable rock that took up to 30,000 sticks of dynamite per kilometre to dislodge. Workers faced bone numbing winters and mosquito-infested summers. Rain, mud, snow and ice were the yearly challenges faced by crews. |
22 7 15 19 3 11 14 2 5 18 17 16 21 20 12 23 24 9 8 10 13 3 6 1 19 4 New York Boston Houston Toronto Calgary Portland Kapuskasing Montreal Natural Gas Pipeline Proposed Pipeline Oil Pipeline Power Facility Gas Storage |
Pipelines TransCanada operates one of the largest natural gas pipeline systems in North America. With 50 years of experience, we are experts in the business of operating, maintaining and building large-diameter, long-haul pipelines. The strength of our pipeline business is rooted in these examples of critical infrastructure: Delivering 20% of the natural gas consumed in North America 1 Alberta System This 23,705 kilometre (14,730 mile) pipeline moves approximately 11 Bcf/d, making it one of the largest in North America. It gathers natural gas for use in Alberta and delivers it to provincial border points for export to North American markets. In 2008, the Alberta System gathered 66 per cent of the natural gas produced in Western Canada. 2 Canadian Mainline This 14,101 kilometre (8,762 mile) pipeline extends east from the Alberta border to Quebec and connects with other natural gas pipelines in Canada and the United States. Across the Canadian prairies, the system consists of five parallel lines capable of transporting approximately 7.0 Bcf/d. 3 ANR Pipeline System 4 ANR Storage This 17,000 kilometre (10,563 mile) pipeline has a peak day capacity of 6.8 Bcf/d. It delivers natural gas from producing fields in Texas, Oklahoma, Louisiana and the Gulf of Mexico to markets in Wisconsin, Michigan, Illinois, Ohio and Indiana. ANR also owns and operates 250 Bcf of regulated natural gas storage capacity in Michigan. 5 GTN 6 Northern Border 7 Great Lakes These three natural gas pipelines include a total of 7,828 kilometres (4,864 miles) of pipe and deliver natural gas from Western Canada to premium markets across North America. Energy TransCanada has built a successful power business by acquiring low-cost, baseload generation, and developing new large-scale facilities backed by long-term power purchase arrangements. Today we own or have interests in 19 power plants in Canada and the United States. We also have a significant non-regulated natural gas storage business in Alberta where we own or have the rights to 120 Bcf of capacity. Some examples of our Energy assets include: Capacity to power 11 million homes 8 9 Sundance 10 Sheerness Through these power purchase arrangements in Alberta and a number of other wholly-owned plants, we market 20 per cent of the provinces power. 11 Bruce Power Canadas first private nuclear generating station, this facility currently produces 4,700 MW of power or more than 20 per cent of Ontarios electricity. 12 Ravenswood Generating Station Located in Queens, New York, the 2,480 MW power plant is capable of supplying 20 per cent of New York Citys power needs. 13 TC Hydro 13 hydroelectric facilities on the Connecticut and Deerfield rivers in New Hampshire, Vermont and Massachusetts produce 583 MW of power. |
TransCanada is a leading North American energy infrastructure company. With approximately $40 billion in assets, today we are a leader in the responsible development and reliable operation of North American energy infrastructure including natural gas and oil pipelines, power generation and natural gas storage facilities. Our 59,000 kilometre (36,661 mile) wholly-owned natural gas pipeline network taps into virtually every major natural gas supply basin on the continent and provides our customers with unparalleled access to premium markets. Each day we deliver 20 per cent of the natural gas consumed in North America. Looking forward, our vast pipeline network is well positioned to connect new sources of supply such as shale gas, coalbed methane and offshore liquefied natural gas as well as supply from the north. We are also one of the continents largest providers of natural gas storage and related services with approximately 370 billion cubic feet of capacity enough to meet the needs of nearly four million homes each year. As one of Canadas largest independent power producers, TransCanada owns, controls or is developing more than 10,900 megawatts of power generation in Canada and the United States enough capacity to power 11 million homes. Our diversified power portfolio includes natural gas, nuclear, coal, hydro and wind generation primarily located in Alberta, Ontario, Quebec and the northeastern United States. Recently, we made a significant entry into the oil pipeline business through the Keystone Pipeline System. When completed it will be one of North Americas largest oil delivery systems with the capacity to move 1.1 million barrels per day from Western Canada to markets in the U.S. Midwest and Gulf Coast. Going forward, we will continue to create value for our shareholders and our customers by building and operating the energy infrastructure that North America needs. Today, we are in the midst of an $18 billion capital program that will see a number of attractive, low-risk projects completed over the next four years. They include expansions of our existing pipeline infrastructure, new pipeline infrastructure, new natural gas storage facilities and new power plants critical infrastructure in the markets we serve. As we build for tomorrow, TransCanada is committed to being a reliable and safe operator, with a focus on providing low-cost, competitive services to our customers. With growth comes greater responsibility. Responsibility to our investors, to our customers, to our employees, to the contractors who work diligently with us, to the regulators across the continent who scrutinize our proposals, to the thousands of residents in communities located near our pipelines and power plants, and to the environment. We have always worked hard to ensure environmental sustainability wherever we operate. Our success is a reflection of our exceptional team of 4,000 committed and motivated employees who bring skill, experience, energy and knowledge to the work they do. They are our competitive advantage. Creating value for our shareholders and customers $40 billion in assets 4,000 talented employees delivering today |
building for tomorrow Pipelines 14 Keystone Pipeline System This US$12 billion pipeline will stretch 6,176 kilometres (3,837 miles) from Hardisty, Alberta to refining centres in the U.S. Midwest and Gulf Coast. When completed, Keystone will be one of the largest oil delivery systems in North America with the capacity to move 1.1 million barrels of oil a day to an American market looking for a growing and reliable supply. In 2008, TransCanada agreed to increase its ownership interest up to 79.99 per cent of Keystone. 15 Alberta System North Central Corridor Expansion Stretching 300 kilometres (186 miles) across northern Alberta, the $925 million North Central Corridor expansion will optimize natural gas flows on the Alberta System and allow TransCanada to address changing supply and demand dynamics in the province. 16 Bison Pipeline Project The 480 kilometre (298 mile) Bison Pipeline project will move natural gas from the Powder River Basin in Wyoming to the Northern Border System in North Dakota, tapping into a growing supply of U.S. Rockies natural gas for Midwest markets in the United States. The US$500 - US$600 million initiative is expected to begin shipping natural gas in late 2010. 17 Groundbirch 18 Horn River Pipeline Projects Groundbirch and Horn River are both designed to transport natural gas to market from shale gas deposits in northeastern British Columbia. TransCanada held a successful open season late in 2008 for the Groundbirch line, with commitments reaching 1.1 Bcf/d by 2014. The 77 kilometre (48 mile) project should be operational in late 2010. The company continues to work with potential shippers on the Horn River line. It is expected to start shipping gas in early 2011. 19 Northern Pipeline Projects Billed as the largest construction project in U.S. history, the US$26 billion (2007 dollars) Alaska Pipeline would transport natural gas from untapped reserves in Prudhoe Bay in the North to Alberta, where it would integrate with the Alberta System to provide access to diverse markets across North America. TransCanada has received a license from the Alaska government to advance the 2,760 kilometre (1,715 mile) line and is committed to moving the project through an open season in 2010 and the subsequent regulatory process. If successful, the project could be sanctioned in 2014, with natural gas anticipated to start flowing in 2018. In Canada, TransCanada and the other co-venture companies involved in the Mackenzie Gas Pipeline project continue to pursue approval of the proposed 1,200 kilometre (746 mile) pipeline project, focusing on obtaining regulatory approval and the Canadian governments support of an acceptable fiscal framework. Attractive, low-risk projects... Keystone will deliver 1.1 million barrels of oil per day to U.S. markets $18 billion capital program underway Today, TransCanada is in the midst of an $18 billion capital program that will see a number of attractive, low-risk energy infrastructure projects completed over the next four years. Each project has |
Energy 11 Bruce Power The $3.4 billion refurbishment of Bruce A Units 1 and 2 is expected to be completed in 2010. TransCanadas share of the capital investment is approximately $1.7 billion. When complete, the two units will be capable of delivering 1,500 MW of electricity to the Ontario market enough to power one and a half million homes. Bruce Power is made up of two generating stations A and B with each consisting of four generating units. TransCanada owns 48.9 per cent of Bruce A and 31.6 per cent of Bruce B. 20 Portlands Energy 21 Halton Hills Construction of the Portlands Energy Centre is nearing completion and should be fully operational early in 2009. The 550 MW facility can supply 25 per cent of Torontos electricity needs. This high-efficiency power plant is 50 per cent owned by TransCanada and is expected to cost $730 million. Work on the $670 million Halton Hills Generating Station is 50 per cent complete. The 683 MW facility should be operational late in 2010. Located 40 kilometres (25 miles) west of Toronto, Halton Hills will generate enough power for 600,000 homes. 22 Coolidge TransCanada continues to establish its energy footprint in the U.S. with a 575 MW power project in Coolidge, Arizona. The US$500 million plant will provide a quick response to peak power demands, have reserve capacity, and the ability to add power quickly to support reliability in the region. Construction is expected to begin in the summer of 2009 and be complete in 2011. 23 Cartier 24 Kibby The Cartier and Kibby Wind projects will generate clean, renewable electricity for thousands of families. Cartier is the largest wind power project in Canada, valued at $1.1 billion. Its six phases will ultimately generate 740 MW of power. Three phases are now complete, with the remainder coming on stream by 2012. TransCanada owns 62 per cent of Cartier. Residents of New England will ultimately see 44 wind turbines built between 2009 and 2010 as part of the US$320 million Kibby project. This 132 MW initiative will be the largest wind power development in the state, providing enough green energy for 50,000 homes in the state of Maine. been commercially secured through long-term contractual arrangements. These arrangements, along with our expertise in developing, building and operating largescale energy infrastructure gives us confidence these projects will generate attractive, long-term returns for our shareholders. Looking forward, we will continue to cultivate a high quality portfolio of future growth opportunities that will create additional value for decades to come. Bruce Power will add 1,500 MW to the Ontario market generating long-term returns for our shareholders |
Building on our track record of success 2008 Financial Highlights 04 05 06 07 08 2.53 2.13 2.49 2.21 2.31 Net Income per Common Share Basic (dollars) 04 05 06 07 08 3,021 1,703 1,951 2,378 2,621 Funds Generated from Operations(1) (millions of dollars) 04 05 06 07 08 6,363 2,046 2,071 2,042 5,874 Capital Expenditures and Acquisitions (millions of dollars) 04 05 06 07 08 29.80 36.65 40.61 40.54 33.17 Market Price Close Toronto Stock Exchange (dollars) 04 05 06 07 08 2.25 1.62 1.72 1.90 2.08 Comparable Earnings(1) per Common Share Basic (dollars) 04 05 06 07 08 1.44 1.16 1.22 1.28 1.36 Dividends Declared per Common Share (dollars) (1) Non-GAAP measure that does not have any standardized meaning prescribed by generally accepted accounting principles. For more information on non-GAAP measures see page 16 in the Managements Discussion and Analysis of the 2008 Annual Report. (2) Compared to 2007. Net Income $1.4 billion or $2.53 per common share, a 10% increase(2) Comparable Earnings(1) $1.3 billion or $2.25 per common share, an 8% increase(2) Dividends Declared $1.44 per common share, a 6% increase(2) Funds Generated from Operations(1) $3.0 billion, a 15% increase(2) Capital Expenditures and Acquisitions $6.4 billion invested in core businesses |
Financial Highlights |
Year ended December 31 (millions of dollars) |
2004 | 2005 | 2006 | 2007 | 2008 | |||||||
Income | ||||||||||||
Comparable earnings(1) | 786 | 839 | 925 | 1,100 | 1,279 | |||||||
Net income |
1,032 |
1,209 |
1,079 |
1,223 |
1,440 |
|||||||
Cash Flow |
||||||||||||
Funds generated from operations | 1,703 | 1,951 | 2,378 | 2,621 | 3,021 | |||||||
(Increase)/decrease in operating working capital | 29 | (49 | ) | (303 | ) | 215 | (181 | ) | ||||
Net cash provided by operations | 1,732 | 1,902 | 2,075 | 2,836 | 2,840 | |||||||
Capital expenditures and acquisitions |
2,046 |
2,071 |
2,042 |
5,874 |
6,363 |
|||||||
Balance Sheet |
||||||||||||
Total assets | 22,422 | 24,113 | 25,909 | 30,330 | 39,414 | |||||||
Long-term debt | 9,749 | 9,640 | 10,887 | 12,377 | 15,368 | |||||||
Junior subordinated notes | | | | 975 | 1,213 | |||||||
Common shareholders' equity | 6,565 | 7,206 | 7,701 | 9,785 | 12,898 | |||||||
Common Share Statistics Year ended December 31 |
2004 |
2005 |
2006 |
2007 |
2008 |
|||||||
Comparable earnings(1) Basic |
$1.62 |
$1.72 |
$1.90 |
$2.08 |
$2.25 |
|||||||
Net income per share Basic |
$2.13 |
$2.49 |
$2.21 |
$2.31 |
$2.53 |
|||||||
Net income per share Diluted |
$2.12 |
$2.47 |
$2.20 |
$2.30 |
$2.52 |
|||||||
Dividends declared per share |
$1.16 |
$1.22 |
$1.28 |
$1.36 |
$1.44 |
|||||||
Common shares outstanding (millions) |
||||||||||||
Average for the year | 484.1 | 486.2 | 488.0 | 529.9 | 569.6 | |||||||
End of year | 484.9 | 487.2 | 489.0 | 539.8 | 616.5 | |||||||
Market Price Close |
||||||||||||
Toronto Stock Exchange (Canadian dollars) | 29.80 | 36.65 | 40.61 | 40.54 | 33.17 | |||||||
New York Stock Exchange (U.S. dollars) | 24.87 | 31.48 | 34.95 | 40.93 | 27.14 | |||||||
(1) Non-GAAP measure that does not have any standardized meaning prescribed by generally accepted accounting principles. For more information on non-GAAP measures see page 16 in the Management's Discussion and Analysis of the 2008 Annual Report. |
TRANSCANADA CORPORATION 1
Chairman's Message |
Being able to say that 2008 was another strong year for TransCanada comes with considerable satisfaction. Success can be elusive at the best of times, but to be successful in this difficult global economy is a true achievement. TransCanada has done just that, producing strong financial results and making significant progress on a number of important initiatives. |
Recognition of this performance was demonstrated by our ability to secure significant funding during 2008 for our large portfolio of attractive projects. This support in the capital markets was particularly gratifying and these funds will be used to continue to deliver long-term value to our shareholders. In early February, as a further reflection of the confidence we have in the company, the Board approved an increase in the dividend on common shares for the ninth consecutive year, taking the quarterly dividend to $0.38 per common share or $1.52 annually. We also approved a three per cent discount on common shares issued under our dividend reinvestment and share purchase plan. The plan allows common and preferred shareholders to participate in our future by purchasing additional common shares at a discount. While our financial track record is sound, we continue our commitment to social responsibility. TransCanada is one of only five companies from Canada to be recognized among this year's Global 100 Most Sustainable Corporations in the World. These companies are honoured as having the best ability to manage environmental, social and governance risks. In addition, TransCanada was named to The Dow Jones Sustainability Index, recognizing the financial performance of leading sustainability-driven companies worldwide. The Board of Directors of TransCanada remains focused on strong corporate governance. Overseeing strategic direction and decision-making by the executive leadership are key responsibilities at all times but especially in this challenging environment, and we are focused on the goals and objectives we set for TransCanada over the long-term. In the final analysis, though, delivering results must be founded on a practical philosophy, sound strategy and flawless execution. TransCanada's thoughtful, measured approach, the company's leaders and our 4,000 employees across North America are the reasons for our success. Along with all of the members of the Board of Directors, I would like to thank each team member for their extraordinary efforts in advancing our business in 2008. The company has doubled its asset base over the last decade to $40 billion through your contributions and continues on its path of becoming North America's leading energy infrastructure company. |
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On behalf of the Board of Directors, S. Barry Jackson |
2 CHAIRMAN'S MESSAGE
Letter to Shareholders |
TransCanada delivered strong operating and financial results in 2008. Each of our major business units generated strong results, with growing cash flows and excellent progress on major initiatives. Capital projects were executed to a very high standard, setting the stage for continued growth in earnings, cash flow and shareholder value in the years to come. |
In 2008, TransCanada earned $1.4 billion or $2.53 per share, compared to $1.2 billion or $2.31 per share in 2007, an increase of 10 per cent on a per share basis. Comparable earnings(1) per share increased approximately eight per cent to $2.25 per share. Funds generated from operations(1) increased substantially, to a record $3 billion. That represents a 15 per cent increase over 2007 and is nearly three times as large as our funds generated from operations(1) in 1999. Our long term shareholders will recall that TransCanada established a new strategic direction in 2000, shedding international assets, exiting the volatile midstream business and focusing our efforts on pipeline and power generation opportunities within North America. In 2001 we further reduced our exposure to commodity price volatility by selling our natural gas marketing and trading business. |
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Since 1999 TransCanada has invested approximately $24 billion in stable, value-creating pipeline and energy growth opportunities. Those investments have transformed TransCanada: today we are the unquestioned leader in North American natural gas transmission; we are building a large and very competitive oil pipeline business; we are one of North America's largest and most profitable natural gas storage operators; and we own the largest and most profitable private-sector power business in Canada. |
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Our investments have been both large and profitable. Since 1999 our comparable earnings(1) per share have grown at a compound average annual rate of nine per cent, from $1.08 in 1999 to $2.25 in 2008. Over that same period we generated significant additional earnings and cash proceeds from the sale of non-core assets and certain other items. These transactions funded a significant portion of our capital program over the past nine years. |
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TransCanada's strong financial performance has enabled our Board of Directors to increase our dividend on common shares in each of the past nine years. Most recently, we increased our dividend to $1.52 per share on an annualized basis, an increase of six percent over 2008. Our Board of Directors also approved an increase in the discount on the issuance of common shares from treasury under our Dividend Reinvestment and Share Purchase Plan from two to three per cent. This provides existing shareholders with an opportunity to participate in the future growth of the company by reinvesting their dividends in additional common shares. |
LETTER TO SHAREHOLDERS 3
Our natural gas pipeline business achieved excellent results in 2008. Each day we deliver approximately 20 per cent of the natural gas consumed in North America, and we continue to build on that industry-leading position. We are currently investing more than $1.5 billion to expand and extend our Alberta System. We have asked Canada's National Energy Board to assume jurisdiction over the Alberta System, a move that will enable TransCanada to compete for new natural gas supplies in British Columbia, the Northwest Territories and Alaska. We are excited by the prospects for shale gas development in northeastern British Columbia and we look forward to extending our system to serve producers in the Montney and Horn River shale plays. |
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We continue to build a large scale, profitable natural gas pipeline business in the United States. Our 2007 acquisition of the ANR System has proven to be both profitable and well-timed. Rockies volumes have filled the southwest leg of ANR, and the emerging Haynesville and Fayetteville shale plays are expected to contribute significant volumes to the southeast leg in the years ahead. ANR's large natural gas storage business in Michigan has grown significantly since acquisition, and we see significant capital investment opportunities throughout the ANR System in the years ahead. Notably, we now have a strong commercial and business development team in Houston, Texas, improving our access to natural gas pipeline opportunities in the United States. |
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Our efforts to bring Mackenzie and Alaska gas to market continue to move forward. These large, long term projects will connect more than 4 Bcf/d to our Alberta System, providing shippers with unparalleled access to premium North American markets through our GTN, Northern Border, Great Lakes and Canadian Mainline systems. |
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Five years ago we identified the opportunity to move growing volumes of crude oil from Alberta's oilsands to major United States refining centres in the southern Midwest and Gulf Coast regions. Construction is well underway on our Keystone pipeline from Hardisty, Alberta to Wood River and Patoka, Illinois, with flows commencing in early 2010. We are currently finalizing regulatory applications for the Keystone expansion, which will extend our reach to premium markets in the Gulf Coast region. Both Keystone and the Gulf Coast expansion are underpinned by long-term contracts to move more than 900,000 barrels per day. |
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Our power generation business has grown more than tenfold over the past nine years, and projects currently under construction will deliver significant growth in cash flow and earnings over the next three years. The 550 MW Portlands Energy Centre in Toronto is expected to be in service in first quarter 2009. The 683 MW Halton Hills Generating Station located west of Toronto is expected to be in service in third quarter 2010. The 1,500 MW refurbishment of Bruce A Units 1 and 2 is also expected to come on line in 2010. Other projects now under construction or in development include the Cartier and Kibby Wind projects and the Coolidge Generating Station. These large-scale generating projects are highly efficient, located in premium markets, and underpinned by strong, long-term commercial arrangements. |
4 LETTER TO SHAREHOLDERS
Energy infrastructure is a long-cycle, capital intensive business, and we structure our projects carefully to ensure stable profitability throughout the cycle. With a strong balance sheet and significant liquidity, TransCanada has the ability to endure turbulent economic times, today and in the future. Our strong cash flows from existing assets together with continued access to capital markets means we are well positioned to fund our sizeable capital program and deliver growing cash flow and earnings in the years ahead. |
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TransCanada's enduring success is a reflection of the skills and commitment of our outstanding team of 4,000 employees located in Calgary, Houston and many other regions across North America. Our employees truly are our competitive advantage. Their operating and commercial expertise, their project development and execution capabilities and their dedication to value creation are unparalleled in the energy infrastructure industry. I am confident that we will continue to deliver significant shareholder value for many years to come. |
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Hal Kvisle President and Chief Executive Officer |
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(1) Non-GAAP measure that does not have any standardized meaning prescribed by generally accepted accounting principles. For more information on non-GAAP measures see page 16 in the Management's Discussion and Analysis of the 2008 Annual Report. |
LETTER TO SHAREHOLDERS 5
TRANSCANADA OVERVIEW | 8 | ||
TRANSCANADA'S STRATEGY |
9 |
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CONSOLIDATED FINANCIAL REVIEW | |||
Selected Three Year Consolidated Financial Data | 11 | ||
Highlights | 12 | ||
Segment Results | 14 | ||
Results of Operations | 15 | ||
FORWARD-LOOKING INFORMATION | 15 | ||
NON-GAAP MEASURES |
16 |
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OUTLOOK |
17 |
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PIPELINES | |||
Highlights | 20 | ||
Results | 20 | ||
Financial Analysis | 21 | ||
Opportunities and Developments | 23 | ||
Business Risks | 27 | ||
Outlook | 29 | ||
Natural Gas Throughput Volumes | 31 | ||
ENERGY | |||
Highlights | 34 | ||
Results | 34 | ||
Power Plants Nominal Generating Capacity and Fuel Type | 35 | ||
Financial Analysis | 35 | ||
Opportunities and Developments | 45 | ||
Business Risks | 47 | ||
Outlook | 48 | ||
CORPORATE | |||
Results | 49 | ||
Financial Results | 49 | ||
Outlook | 50 | ||
DISCONTINUED OPERATIONS | 50 | ||
LIQUIDITY AND CAPITAL RESOURCES | |||
Summarized Cash Flow | 50 | ||
Highlights | 51 | ||
CONTRACTUAL OBLIGATIONS | |||
Contractual Obligations | 55 | ||
Principal Repayments | 56 | ||
Interest Payments | 56 | ||
Purchase Obligations | 57 | ||
RISK MANAGEMENT AND FINANCIAL INSTRUMENTS | |||
Financial Risks and Financial Instruments | 59 | ||
Other Risks | 66 | ||
6 MANAGEMENT'S DISCUSSION AND ANALYSIS
CONTROLS AND PROCEDURES | 69 | ||
SIGNIFICANT ACCOUNTING POLICIES AND CRITICAL ACCOUNTING ESTIMATES |
70 |
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ACCOUNTING CHANGES |
73 |
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SELECTED QUARTERLY CONSOLIDATED FINANCIAL DATA |
75 |
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FOURTH QUARTER 2008 HIGHLIGHTS |
77 |
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SHARE INFORMATION |
79 |
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OTHER INFORMATION |
79 |
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GLOSSARY OF TERMS |
80 |
MANAGEMENT'S DISCUSSION AND ANALYSIS 7
The Management's Discussion and Analysis (MD&A) dated February 23, 2009 should be read in conjunction with the audited Consolidated Financial Statements of TransCanada Corporation (TransCanada or the Company) and the notes thereto for the year ended December 31, 2008, which are prepared in accordance with Canadian generally accepted accounting principles (GAAP). This MD&A covers TransCanada's financial position and operations as at and for the year ended December 31, 2008. Amounts are stated in Canadian dollars unless otherwise indicated. Abbreviations and acronyms used in this MD&A are identified in the Glossary of Terms in the Company's 2008 Annual Report.
TRANSCANADA OVERVIEW
In 2008, TransCanada celebrated the 50th anniversary of the completion of its original pipeline from Alberta to Ontario and Québec. Fifty years of experience has established TransCanada as a significant player in the development and operation of North American energy infrastructure, including natural gas and oil pipelines, power generation plants, and natural gas storage facilities.
TransCanada has invested approximately $24 billion in capital projects in the last nine years, and currently has more than $40 billion in total assets. The Company is currently executing an $18 billion capital program and most of the projects are expected to be completed by 2012. Over the longer term, TransCanada intends to continue to pursue and develop its substantial portfolio of large-scale infrastructure projects. TransCanada is committed to maintaining the financial strength required to build the energy infrastructure needed to serve increased energy demand, respond to shifting energy supply-demand dynamics and replace aging North American infrastructure.
Pipelines Assets
The TransCanada network of more than 59,000 kilometres (km) (36,661 miles) of wholly owned and 7,800 km (4,847 miles) of partially owned natural gas pipelines connect virtually every major natural gas supply basin and market, transporting 20 per cent of the natural gas consumed in North America. TransCanada's natural gas pipelines link gas supplies from Western Canada, the United States (U.S.) mid-continent and Gulf of Mexico to premium North American markets. These assets are well positioned to connect emerging natural gas supplies, including northern gas, northeastern British Columbia (B.C.) and U.S. shale gas, and offshore liquefied natural gas (LNG) imports, to growing markets.
TransCanada's Alberta System gathered 66 per cent of the natural gas produced in Western Canada or 15 per cent of total North American production in 2008. TransCanada exports natural gas from the Western Canada Sedimentary Basin (WCSB) to Eastern Canada and the U.S. West, Midwest, and Northeast through three wholly owned pipeline systems: the Canadian Mainline, the GTN System and Foothills. TransCanada also exports natural gas from the WCSB to Eastern Canada and to the U.S. West, Midwest, and Northeast through six partially owned natural gas pipeline systems: Great Lakes, Iroquois, Portland, TQM, Northern Border and Tuscarora. Certain of these pipeline systems are held through the Company's 32.1 per cent interest in TC PipeLines, LP (PipeLines LP).
ANR was acquired in February 2007. ANR transports natural gas from producing fields located primarily in Oklahoma, Texas, Louisiana and the Gulf of Mexico to markets located in Wisconsin, Michigan, Illinois, Ohio and Indiana. It also connects with numerous other natural gas pipelines, providing customers with access to diverse sources of North American supply, including Western Canada and the Rocky Mountain region, and to a variety of end-user markets in the midwestern and northeastern U.S. ANR owns and operates 250 billion cubic feet (Bcf) of regulated natural gas storage capacity in Michigan.
In addition, the Company has agreed to increase its ownership interest up to 79.99 per cent in each of TransCanada Keystone Pipeline Limited Partnership and TransCanada Keystone Pipeline, LP (collectively, Keystone partnerships). TransCanada has partnered with ConocoPhillips, a global, integrated oil and gas producer and refiner to build the Keystone crude oil pipeline. Currently under construction, the Keystone pipeline will transport 1.1 million barrels per day (Bbl/d) of crude oil from Hardisty, Alberta to U.S. Midwest markets at Wood River and Patoka in Illinois, and at Cushing, Oklahoma, and to U.S. Gulf Coast markets. The pipeline is supported by long-term contracts with strong counterparties and provides a low-cost shipping option. While the current economic slowdown and low oil price environment have eased the pace of oil sands project activity, developments in the medium to long term in Alberta will provide attractive opportunities for further additions to crude oil transmission infrastructure.
8 MANAGEMENT'S DISCUSSION AND ANALYSIS
Energy Assets
TransCanada's Energy business has grown from 754 megawatts (MW) in 1999 to more than 10,900 MW in 2008. The Company's diverse power generation portfolio of primarily low-cost, baseload or long-term contracted facilities comprises a total of 19 plants in Alberta, Eastern Canada, New England, and New York City. The accompanying graph illustrates each fuel source as a percentage of the Company's overall Energy portfolio:
TransCanada has developed a significant non-regulated natural gas storage business in Alberta where the Company owns or has rights to 120 Bcf or approximately one-third of the natural gas storage capacity in the province. Opportunities and developments in the Company's Pipelines and Energy businesses are discussed further in the "Pipelines" and "Energy" sections of this MD&A. |
TRANSCANADA'S STRATEGY
TransCanada's vision is to be the leading energy infrastructure company in North America with a strong focus on pipelines and power generation opportunities located in regions where it has or can develop significant competitive advantage. Since 2000, TransCanada's key strategies continue to evolve with the Company's growth and development and its changing business environment. TransCanada's corporate strategy integrates five fundamental value-creating activities:
These strategies are defined by an integrated set of activities and performance objectives:
Maximize the full-life value of TransCanada's infrastructure assets and commercial positions
TransCanada relies on a low-risk business model to maximize the full-life value of existing assets and positions that generate predictable, sustainable streams of cash flows and earnings. In the Company's Pipelines business, the natural gas pipeline network connects traditional and emerging basins to growing markets offering effective service and competitive rates. TransCanada's Energy business supplies growing power markets through long-term power purchase agreements, and low-cost baseload generation. The Company's activities in gas, nuclear, wind and hydro energy sources demonstrate its commitment to a sustainable energy future. TransCanada continues to make its long-term commercial and physical asset operations a priority. The Company attempts to maximize the life and value of its assets by focusing on sustainable business initiatives derived from engaging in market and regulatory developments, combined with an accretive capital investment program.
Cultivate a focused portfolio of high quality development options
The Company's core western and eastern regions are the primary focus of growth initiatives in the Pipelines and Energy businesses. Consideration is given to new markets with good fundamentals where TransCanada has or can develop competitive strengths. There is a continued focus on low-cost, baseload power assets as well as on power and natural gas storage assets supported by firm, long-term contracts with reputable counterparties. Greenfield development and acquisition of power generation, power transmission and natural gas storage are considered if they meet the Company's investment standards. Greenfield and brownfield pipeline projects are being pursued to diversify the Pipelines business and add incremental value to existing assets. Key areas of focus include greenfield development options to connect the Company's natural gas pipelines to northern gas reserves and emerging Canadian and U.S. shale gas supplies, and transporting crude oil from the Alberta oil sands. Other possible growth opportunities include acquiring natural gas and
MANAGEMENT'S DISCUSSION AND ANALYSIS 9
oil transmission assets that complement TransCanada's existing assets, acquiring partners' interests in associated pipelines and acquiring stand-alone transmission enterprises in new regions of North America.
Commercially develop and physically execute new asset investment programs
TransCanada's current $18 billion capital program is expected to begin generating revenue over the next four years beginning in 2009. The Company is committed to completing the projects in its capital programs on time and on budget to deliver service to its customers and returns to its shareholders. Its large portfolio of projects is characterized by highly contracted, long-term revenue streams and limited exposure to capital cost risks. These are key features of TransCanada's model for managing construction risks and improving the return realized from new investment programs. This strategy will be applied to Pipelines and Energy growth opportunities that address North America's emerging energy infrastructure needs.
Maximize TransCanada's competitive strengths
TransCanada will use its competitive strengths to achieve responsible, profitable operations and growth. In the Pipelines and Energy infrastructure businesses, size and scale of operations must be large enough to compete effectively and offer recognized value to customers. The Company believes its competitive strengths include the discipline it applies in operations, governance and project, financial and risk management, and its ability to obtain capital at suitable terms. TransCanada strives to provide customers with safe, low-cost, reliable and responsible service by such means as improved efficiencies, operational reliability and enhanced environmental and safety performance. The Company also strives to maintain constructive relationships with its key stakeholder groups. Utilizing these strengths is the responsibility of all employees, and all employees contribute to the success of the Company. To maximize the quality, capability and contribution of the Company's employees, management encourages and supports its employees' innovative thinking, development and leadership.
Maximize TransCanada's financial strength and reputation
TransCanada continues to value its reputation for financial strength based on a history of predictable, growing earnings and cash flow. The Company continues to communicate its financial performance to current and prospective debt and equity holders, while making its management of risks transparent. TransCanada strives to maintain access to low-cost capital in all market environments to enable it to capture growth opportunities and improve its financial performance.
10 MANAGEMENT'S DISCUSSION AND ANALYSIS
CONSOLIDATED FINANCIAL REVIEW
SELECTED THREE YEAR CONSOLIDATED FINANCIAL DATA
(millions of dollars, except per share amounts)
2008 | 2007 | 2006 | ||||||
Income Statement | ||||||||
Revenues | 8,619 | 8,828 | 7,520 | |||||
Net income |
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Continuing operations | 1,440 | 1,223 | 1,051 | |||||
Discontinued operations | | | 28 | |||||
1,440 | 1,223 | 1,079 | ||||||
Comparable earnings(1) |
1,279 |
1,100 |
925 |
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Per Common Share Data |
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Net income basic | ||||||||
Continuing operations | $2.53 | $2.31 | $2.15 | |||||
Discontinued operations | | | 0.06 | |||||
$2.53 | $2.31 | $2.21 | ||||||
Net income diluted |
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Continuing operations | $2.52 | $2.30 | $2.14 | |||||
Discontinued operations | | | 0.06 | |||||
$2.52 | $2.30 | $2.20 | ||||||
Comparable earnings per share(1) |
$2.25 |
$2.08 |
$1.90 |
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Dividends declared |
$1.44 |
$1.36 |
$1.28 |
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Summarized Cash Flow |
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Funds generated from operations(1) | 3,021 | 2,621 | 2,378 | |||||
(Increase)/decrease in operating working capital | (181 | ) | 215 | (303 | ) | |||
Net cash provided by operations | 2,840 | 2,836 | 2,075 | |||||
Balance Sheet |
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Total assets | 39,414 | 30,330 | 25,909 | |||||
Total long-term liabilities | 20,392 | 16,511 | 14,464 | |||||
MANAGEMENT'S DISCUSSION AND ANALYSIS 11
HIGHLIGHTS
Net Income
Comparable Earnings
Cash from Operations
Investing Activities
Financing Activities
12 MANAGEMENT'S DISCUSSION AND ANALYSIS
Balance Sheet
Dividend
Refer to "Results of Operations" below and to the "Liquidity and Capital Resources" section of this MD&A for further discussion of these highlights.
MANAGEMENT'S DISCUSSION AND ANALYSIS 13
SEGMENT RESULTS
Reconciliation of Comparable Earnings to Net Income
Year ended December 31 (millions of dollars except per share amounts) |
2008 | 2007 | 2006 | ||||||
Pipelines | |||||||||
Comparable earnings | 740 | 686 | 529 | ||||||
Specific items (net of tax): | |||||||||
Calpine bankruptcy settlements | 152 | | | ||||||
GTN lawsuit settlement | 10 | | | ||||||
Bankruptcy settlement with Mirant | | | 18 | ||||||
Gain on sale of Northern Border Partners, L.P. interest | | | 13 | ||||||
Net earnings | 902 | 686 | 560 | ||||||
Energy |
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Comparable earnings | 641 | 459 | 429 | ||||||
Specific items (net of tax, where applicable): | |||||||||
Writedown of Broadwater costs | (27 | ) | | | |||||
Gain on sale of land | | 14 | | ||||||
Fair value adjustments of natural gas storage inventory and forward contracts | | 7 | | ||||||
Income tax reassessments and adjustments | | 34 | 23 | ||||||
Net earnings | 614 | 514 | 452 | ||||||
Corporate |
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Comparable expenses | (102 | ) | (45 | ) | (33 | ) | |||
Specific item: | |||||||||
Income tax reassessments and adjustments | 26 | 68 | 72 | ||||||
Net (expenses)/earnings | (76 | ) | 23 | 39 | |||||
Net Income |
|||||||||
Continuing operations(1) | 1,440 | 1,223 | 1,051 | ||||||
Discontinued operations | | | 28 | ||||||
Net Income | 1,440 | 1,223 | 1,079 | ||||||
Comparable Earnings(1) | 1,279 | 1,100 | 925 | ||||||
Net Income Per Share Basic |
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Continuing operations(2) | $2.53 | $2.31 | $2.15 | ||||||
Discontinued operations | | | 0.06 | ||||||
$2.53 | $2.31 | $2.21 | |||||||
Comparable Earnings Per Share(2) | $2.25 | $2.08 | $1.90 | ||||||
(1)Comparable Earnings | 1,279 | 1,100 | 925 | ||||
Specific items (net of tax, where applicable): | |||||||
Calpine bankruptcy settlements | 152 | | | ||||
GTN lawsuit settlement | 10 | | | ||||
Writedown of Broadwater costs | (27 | ) | | | |||
Gain on sale of land | | 14 | | ||||
Fair value adjustments of natural gas storage inventory and forward contracts | | 7 | | ||||
Bankruptcy settlement with Mirant | | | 18 | ||||
Gain on sale of Northern Border Partners, L.P. interest | | | 13 | ||||
Income tax reassessments and adjustments | 26 | 102 | 95 | ||||
Net Income from Continuing Operations | 1,440 | 1,223 | 1,051 | ||||
(2)Comparable Earnings Per Share |
$2.25 |
$2.08 |
$1.90 |
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Specific items per share: | |||||||
Calpine bankruptcy settlements | 0.27 | | | ||||
GTN lawsuit settlement | 0.02 | | | ||||
Writedown of Broadwater costs | (0.05 | ) | | | |||
Gain on sale of land | | 0.03 | | ||||
Fair value adjustments of natural gas storage inventory and forward contracts | | 0.01 | | ||||
Bankruptcy settlement with Mirant | | | 0.04 | ||||
Gain on sale of Northern Border Partners, L.P. interest | | | 0.03 | ||||
Income tax reassessments and adjustments | 0.04 | 0.19 | 0.18 | ||||
Net Income Per Share from Continuing Operations | $2.53 | $2.31 | $2.15 | ||||
14 MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
Net income and net income from continuing operations (net earnings) were $1,440 million or $2.53 per share in 2008 compared to $1,223 million or $2.31 per share in 2007. Net income and net earnings in 2006 were $1,079 million or $2.21 per share and $1,051 million or $2.15 per share, respectively. Results in 2006 included net income from discontinued operations of $28 million or $0.06 per share, reflecting bankruptcy settlements with Mirant Corporation and certain of its subsidiaries (Mirant) related to their transactions with TransCanada's Gas Marketing business. TransCanada divested its Gas Marketing business in 2001.
Net income in 2008 included $152 million of after-tax gains on shares received by the GTN System and Portland from the Calpine bankruptcy settlements, $10 million after tax of GTN System lawsuit settlement proceeds and a $27 million after-tax writedown of costs previously capitalized for Broadwater. Net income in 2008 also included $26 million of favourable income tax adjustments from an internal restructuring and realization of losses. Net income in 2007 included $102 million ($68 million in Corporate and $34 million in Energy) of favourable income tax adjustments recorded in 2007 relating to changes in Canadian federal and provincial corporate income tax legislation, the resolution of certain tax matters and an internal restructuring. Net income in 2007 also included an after-tax gain of $14 million on the sale of land and $7 million after tax of net unrealized gains resulting from changes in the fair value of proprietary natural gas storage inventory and natural gas forward purchase and sale contracts. Net earnings in 2006 included $95 million of favourable income tax adjustments, proceeds from an $18 million after-tax bankruptcy settlement with Mirant and an after-tax gain of $13 million from the sale of TransCanada's general partner interest in Northern Border Partners, L.P.
Excluding the above-noted items, comparable earnings for 2008, 2007 and 2006 were $1,279 million ($2.25 per share), $1,100 million ($2.08 per share) and $925 million ($1.90 per share), respectively. Comparable earnings in 2008 increased $179 million or $0.17 per share compared to 2007 due to higher earnings in the Energy and Pipelines businesses, partially offset by an increase in net expenses in Corporate. Pipelines' earnings increased in 2008 compared to 2007 primarily due to a full year of earnings in 2008 from ANR. Energy's earnings from Western Power, Eastern Power and Bruce A and Bruce B (collectively, Bruce Power) operations increased in 2008 compared to 2007 primarily due to higher realized prices. Corporate net expenses in 2008 increased from 2007 primarily due to unrealized losses from the changes in the fair value of derivatives, which are used to manage TransCanada's exposure to rising interest rates but do not qualify for hedge accounting, and higher financial charges.
Comparable earnings increased $175 million or $0.18 per share in 2007 compared to 2006 primarily due to additional earnings from the acquisition of ANR in February 2007, a full year of earnings in 2007 from the Bécancour and Edson facilities, and positive impacts from rate case settlements for the GTN System and Canadian Mainline. These increases were partially offset by a lower contribution from Bruce Power in 2007.
Results in each business segment are discussed further in the "Pipelines", "Energy" and "Corporate" sections of this MD&A.
FORWARD-LOOKING INFORMATION
This MD&A may contain certain information that is forward looking and is subject to important risks and uncertainties. The words "anticipate", "expect", "believe", "may", "should", "estimate", "project", "outlook", "forecast" or other similar words are used to identify such forward-looking information. Forward-looking statements in this document are intended to provide TransCanada shareholders and potential investors with information regarding TransCanada and its subsidiaries, including management's assessment of TransCanada's and its subsidiaries' future financial and operational plans and outlook. Forward-looking statements in this document may include, among others, statements regarding the anticipated business prospects and financial performance of TransCanada and its subsidiaries, expectations or projections about the future, strategies and goals for growth and expansion, expected and future cash flows, costs, schedules, operating and financial results and expected impact of future commitments and contingent liabilities. All forward-looking statements reflect TransCanada's beliefs and assumptions based on information available at the time the
MANAGEMENT'S DISCUSSION AND ANALYSIS 15
statements were made. Actual results or events may differ from those predicted in these forward-looking statements. Factors that could cause actual results or events to differ materially from current expectations include, among others, the ability of TransCanada to successfully implement its strategic initiatives and whether such strategic initiatives will yield the expected benefits, the operating performance of the Company's pipeline and energy assets, the availability and price of energy commodities, regulatory processes and decisions, changes in environmental and other laws and regulations, competitive factors in the pipeline and energy sectors, construction and completion of capital projects, labour, equipment and material costs, access to capital markets, interest and currency exchange rates, technological developments and the current economic conditions in North America. By its nature, forward-looking information is subject to various risks and uncertainties, including those material risks discussed in the "Pipelines", "Energy" and "Risk Management and Financial Instruments" sections in this MD&A, which could cause TransCanada's actual results and experience to differ materially from the anticipated results or expectations expressed. Additional information on these and other factors is available in the reports filed by TransCanada with Canadian securities regulators and with the U.S. Securities and Exchange Commission (SEC). Readers are cautioned to not place undue reliance on this forward-looking information, which is given as of the date it is expressed in this MD&A or otherwise, and to not use future-oriented information or financial outlooks for anything other than their intended purpose. TransCanada undertakes no obligation to update publicly or revise any forward-looking information, whether as a result of new information, future events or otherwise, except as required by law.
NON-GAAP MEASURES
TransCanada uses the measures "comparable earnings", "comparable earnings per share", "funds generated from operations" and "operating income" in this MD&A. These measures do not have any standardized meaning prescribed by Canadian GAAP. They are, therefore, considered to be non-GAAP measures and are unlikely to be comparable to similar measures presented by other entities. Management of TransCanada uses these non-GAAP measures to improve its ability to compare financial results among reporting periods and to enhance its understanding of operating performance, liquidity and ability to generate funds to finance operations. These non-GAAP measures are also provided to readers as additional information on TransCanada's operating performance, liquidity and ability to generate funds to finance operations.
Management uses comparable earnings/(expenses) to better evaluate trends in the Company's underlying operations. Comparable earnings comprise net income from continuing operations adjusted for specific items that are significant, but are not reflective of the Company's underlying operations in the year. Specific items are subjective, however, management uses its judgement and informed decision-making when identifying items to be excluded in calculating comparable earnings, some of which may recur. Specific items may include but are not limited to certain income tax refunds and adjustments, gains or losses on sales of assets, legal and bankruptcy settlements, and certain fair value adjustments. The Segment Results table in this MD&A presents a reconciliation of comparable earnings to net income from continuing operations. Comparable earnings per share is calculated by dividing comparable earnings by the weighted average number of shares outstanding for the period.
Funds generated from operations comprises net cash provided by operations before changes in operating working capital. A reconciliation of funds generated from operations to net cash provided by operations is presented in the Summarized Cash Flow table in the "Liquidity and Capital Resources" section of this MD&A.
Operating income is reported in the Company's Energy business segment and comprises revenues less operating expenses as shown on the Consolidated Income Statement. A reconciliation of operating income to net income is presented in the "Energy" section of this MD&A.
16 MANAGEMENT'S DISCUSSION AND ANALYSIS
OUTLOOK
TransCanada's corporate strategy is underpinned by a long-term focus on growing its Pipelines and Energy businesses in a disciplined and measured manner. In 2009 and beyond, TransCanada expects its net earnings and cash flow, combined with a strong balance sheet and proven access to capital markets, to provide the financial strength TransCanada will need to complete its current capital expenditure program and continue to pursue other long-term growth opportunities and create additional value for its shareholders in the same disciplined and measured manner utilized in developing its current capital expenditure program. TransCanada believes this prudence is especially important in the economic environment that currently exists in North America. In 2009, the Company will continue to implement its strategy and grow the Pipelines and Energy businesses as discussed in the "TransCanada's Strategy" section of this MD&A.
The current economic slowdown is not expected to have a significant impact on TransCanada's near-term earnings as the majority of TransCanada's operations are underpinned by either long-term contracts or earn a regulated return. In addition, TransCanada's continued focus on risk management is expected to further lessen the negative impact of the current economic slowdown to TransCanada.
The Company's results in 2009 may be affected positively or negatively by a number of factors and developments as discussed throughout this MD&A, including without limitation, the factors and developments discussed in the "Forward-Looking Information", "Pipelines Business Risks" and "Energy Business Risks" sections. Refer to the "Pipelines Outlook", "Energy Outlook" and "Corporate Outlook" sections of this MD&A for further discussion of outlook.
MANAGEMENT'S DISCUSSION AND ANALYSIS 17
CANADIAN MAINLINE Owned 100 per cent by TransCanada, the Canadian Mainline is a 14,101 km (8,762 miles) natural gas transmission system in Canada that extends from the Alberta/Saskatchewan border east to the Québec/Vermont border and connects with other natural gas pipelines in Canada and the U.S.
ALBERTA SYSTEM Owned 100 per cent by TransCanada, the Alberta System is a 23,705 km (14,730 miles) natural gas transmission system in Alberta. One of the largest transmission systems in North America, it gathers natural gas for use within the province and delivers it to provincial boundary points for connection with the Company's Canadian Mainline and Foothills natural gas pipelines and with the natural gas pipelines of other companies.
ANR Owned 100 per cent by TransCanada, ANR is a 17,000 km (10,563 miles) transmission system that transports natural gas from producing fields located primarily in Texas and Oklahoma on its southwest leg and in the Gulf of Mexico and Louisiana on its southeast leg. The system extends to markets located mainly in Wisconsin, Michigan, Illinois, Ohio and Indiana. ANR's natural gas pipeline also connects with other natural gas pipelines providing access to diverse sources of North American supply including Western Canada and the Rocky Mountain supply basin, and a variety of markets in the midwestern and northeastern U.S. ANR also owns and operates regulated underground natural gas storage facilities in Michigan with a total capacity of 250 Bcf.
18 MANAGEMENT'S DISCUSSION AND ANALYSIS
GTN SYSTEM Owned 100 per cent by TransCanada, the GTN System is a 2,174 km (1,351 miles) natural gas transmission system that links Foothills with Pacific Gas and Electric Company's California Gas Transmission System, with Williams Companies, Inc.'s Northwest Pipeline in Washington and Oregon, and with Tuscarora.
FOOTHILLS Owned 100 per cent by TransCanada, the 1,241 km (771 miles) Foothills transmission system in Western Canada carries natural gas for export from central Alberta to the U.S. border to serve markets in the U.S. Midwest, Pacific Northwest, California and Nevada.
NORTH BAJA Owned 100 per cent by TransCanada, the North Baja natural gas transmission system extends 129 km (80 miles) from Ehrenberg in southwestern Arizona to a point near Ogilby, California on the California/Mexico border and connects with the Gasoducto Bajanorte natural gas pipeline system in Mexico.
VENTURES LP Owned 100 per cent by TransCanada, Ventures LP is comprised of a 161 km (100 miles) pipeline and related facilities that supply natural gas to the oil sands region near Fort McMurray, Alberta as well as a 27 km (17 miles) pipeline that supplies natural gas to a petrochemical complex at Joffre, Alberta.
TAMAZUNCHALE Owned 100 per cent by TransCanada, the 130 km (81 miles) Tamazunchale natural gas pipeline in east central Mexico extends from the facilities of Pemex Gas near Naranjos, Veracruz, to an electricity generating station near Tamazunchale, San Luis Potosi.
TUSCARORA Owned 100 per cent by PipeLines LP, Tuscarora is a 491 km (305 miles) pipeline system transporting natural gas from the GTN System at Malin, Oregon, to Wadsworth, Nevada, with delivery points in northeastern California and northwestern Nevada. TransCanada operates Tuscarora and effectively owns 32.1 per cent of the system through its 32.1 per cent interest in PipeLines LP.
NORTHERN BORDER Owned 50 per cent by PipeLines LP, the 2,250 km (1,398 miles) Northern Border natural gas transmission system serves the U.S. Midwest from a connection with Foothills near Monchy, Saskatchewan. TransCanada operates Northern Border and effectively owns 16.1 per cent of the system through its 32.1 per cent interest in PipeLines LP.
GREAT LAKES Owned 53.6 per cent by TransCanada and 46.4 per cent by PipeLines LP, the 3,404 km (2,115 miles) Great Lakes natural gas transmission system connects with the Canadian Mainline at Emerson, Manitoba, and serves markets in Central Canada and the midwestern U.S. TransCanada operates Great Lakes and effectively owns 68.5 per cent of the system through its 53.6 per cent direct ownership interest and its indirect ownership, which it has through its 32.1 per cent interest in PipeLines LP.
IROQUOIS Owned 44.5 per cent by TransCanada, the 666 km (414 miles) Iroquois pipeline system connects with the Canadian Mainline near Waddington, New York, and delivers natural gas to customers in the northeastern U.S.
TQM Owned 50 per cent by TransCanada, TQM is a 572 km (355 miles) pipeline system that connects with the Canadian Mainline and transports natural gas from Montréal to Québec City in Québec, and connects with the Portland system. TQM is operated by TransCanada.
PORTLAND Owned 61.7 per cent by TransCanada, Portland is a 474 km (295 miles) pipeline that connects with TQM near East Hereford, Québec and delivers natural gas to customers in the northeastern U.S. Portland is operated by TransCanada.
BISON The Bison pipeline project is a proposed 480 km (298 miles) pipeline from the Powder River Basin in Wyoming to the Northern Border system in North Dakota.
KEYSTONE Keystone is an oil pipeline consisting of 3,456 km (2,147 miles) of pipe under construction that will initially transport crude oil from Hardisty, Alberta to U.S. Midwest markets at Wood River and Patoka in Illinois, and to Cushing, Oklahoma. In addition, an expansion to the U.S. Gulf Coast is under development, which is expected to add approximately 2,720 km (1,690 miles) of pipe to the system. Commissioning of the segment to Wood River and Patoka is expected to begin in late 2009. Commissioning of the segment to Cushing is expected to begin in late 2010. The expansion to the U.S. Gulf Coast is expected to be commissioned in 2012, subject to regulatory approvals. In 2008, TransCanada agreed to increase its ownership interest in Keystone up to 79.99 per cent. At December 31, 2008, TransCanada owned 62 per cent of Keystone.
TRANSGAS Owned 46.5 per cent by TransCanada, TransGas is a 344 km (214 miles) natural gas pipeline system extending from Mariquita in the central region of Colombia to Cali in southwestern Colombia.
GAS PACIFICO/INNERGY Owned 30 per cent by TransCanada, Gas Pacifico is a 540 km (336 miles) natural gas pipeline extending from Loma de la Lata, Argentina to Concepción, Chile. TransCanada also has a 30 per cent ownership interest in INNERGY, an industrial natural gas marketing company based in Concepción that markets natural gas transported on Gas Pacifico.
MANAGEMENT'S DISCUSSION AND ANALYSIS 19
PIPELINES HIGHLIGHTS
PIPELINES RESULTS
Year ended December 31 (millions of dollars)
2008 | 2007 | 2006 | ||||||
Wholly Owned Pipelines | ||||||||
Canadian Mainline | 278 | 273 | 239 | |||||
Alberta System | 145 | 138 | 136 | |||||
ANR(1) | 132 | 104 | n/a | |||||
GTN | 65 | 58 | 46 | |||||
Foothills | 24 | 26 | 27 | |||||
644 | 599 | 448 | ||||||
Other Pipelines |
||||||||
Great Lakes(2) | 44 | 47 | 44 | |||||
PipeLines LP(3) | 25 | 18 | 4 | |||||
Iroquois | 18 | 15 | 15 | |||||
Tamazunchale(4) | 16 | 10 | 2 | |||||
Other(5) | 34 | 46 | 51 | |||||
Northern Development | (9 | ) | (7 | ) | (5 | ) | ||
General, administrative, support costs and other | (32 | ) | (42 | ) | (30 | ) | ||
96 | 87 | 81 | ||||||
Comparable Earnings(6) | 740 | 686 | 529 | |||||
Calpine bankruptcy settlements(7) | 152 | | | |||||
GTN lawsuit settlement | 10 | | | |||||
Bankruptcy settlement with Mirant | | | 18 | |||||
Gain on sale of Northern Border Partners, L.P. interest | | | 13 | |||||
Net Earnings | 902 | 686 | 560 | |||||
20 MANAGEMENT'S DISCUSSION AND ANALYSIS
Net earnings from the Pipelines business were $902 million in 2008 compared to $686 million in 2007 and $560 million in 2006. Comparable earnings from the Pipelines business of $740 million in 2008 excluded the $152 million after-tax ($279 million pre-tax) gains received by Portland and the GTN System from the bankruptcy settlements with Calpine and $10 million after-tax ($17 million pre-tax) proceeds received by GTN from a lawsuit settlement with a software supplier. The $54 million increase in comparable earnings in 2008 from 2007 was primarily due to a full year of earnings from ANR, the Alberta System rate settlement and higher earnings for the Canadian Mainline. Comparable earnings in 2006 were $529 million and excluded an $18 million bankruptcy settlement with Mirant and a $13 million gain on sale of TransCanada's general partner interest in Northern Border Partners, L.P. The increase in comparable earnings in 2007 compared to 2006 was primarily due to the acquisitions of ANR and additional interest in Great Lakes, higher earnings as a result of rate settlements for Canadian Mainline and the GTN System, and an increased ownership in PipeLines LP.
PIPELINES FINANCIAL ANALYSIS
Canadian Mainline
The Canadian Mainline is regulated by the NEB, which sets tolls that provide TransCanada with the opportunity to recover projected costs of transporting natural gas, including a return on the Canadian Mainline's average investment base. The NEB also approves new facilities before construction begins. Net earnings from the Canadian Mainline are affected by changes in the investment base, the rate of return on common equity (ROE), the level of deemed common equity and potential incentive earnings.
The Canadian Mainline currently operates under a five-year tolls settlement effective from 2007 to 2011. The cost of capital reflects an ROE as determined by the NEB's ROE formula on deemed common equity of 40 per cent. The remaining capital structure consists of short- and long-term debt, following the agreed upon redemption of the US$460 million 8.25 per cent Preferred Securities in 2007.
The settlement also established certain elements of the Canadian Mainline's fixed operating, maintenance and administration (OM&A) costs for each of the five years. The variance between actual and agreed-upon OM&A costs accrues entirely to TransCanada from 2007 to 2009, and will be shared equally between TransCanada and its customers in 2010 and 2011. All other cost elements of the revenue requirement are treated on a flow-through basis. The settlement also allows for performance-based incentive arrangements that the Company believes are mutually beneficial to both TransCanada and its customers.
Net earnings of $278 million in 2008 were $5 million higher than $273 million in 2007 primarily due to higher performance-based incentives earned and increased OM&A cost savings and an ROE of 8.71 per cent in 2008, as determined by the NEB, compared to 8.46 per cent in 2007. These increases were partially offset by a lower average investment base.
Net earnings of $273 million in 2007 were $34 million higher than $239 million in 2006. The increase primarily reflected the positive impact of the increase in deemed common equity ratio to 40 per cent from 36 per cent as a
MANAGEMENT'S DISCUSSION AND ANALYSIS 21
result of the Canadian Mainline tolls settlement, performance-based incentives earned and OM&A cost savings. These increases were partially offset by a lower allowed ROE of 8.46 per cent in 2007 (2006 8.88 per cent) and a lower average investment base.
Alberta System
Construction and operation of the Alberta System's facilities and the terms and conditions of its services, including rates, are regulated by the AUC, primarily under the provisions of the Gas Utilities Act (Alberta) and the Pipeline Act (Alberta).
In December 2008, the AUC approved TransCanada's 2008-2009 Revenue Requirement Settlement Application, as discussed further in the "Pipelines Opportunities and Developments" section of this MD&A.
The Alberta System's net earnings of $145 million in 2008 were $7 million higher than in 2007. The increase was due to the recognition of earnings related to the revenue requirement settlement. Earnings in 2007 reflected an ROE of 8.51 per cent on deemed common equity of 35 per cent.
Net earnings of $138 million in 2007 were $2 million higher than in 2006. The increase was primarily due to OM&A cost savings, partially offset by a lower allowed ROE and a lower investment base in 2007. The allowed ROE prescribed by the Alberta Energy and Utilities Board, the AUC's predecessor, was 8.51 per cent in 2007 compared with 8.93 per cent in 2006 on deemed common equity of 35 per cent.
ANR
TransCanada completed the acquisition of ANR in February 2007. The operations of ANR are regulated primarily by the U.S. Federal Energy Regulatory Commission (FERC). ANR provides natural gas transportation, storage and various capacity-related services to a variety of customers in both the U.S. and Canada. ANR's transmission system has a peak-day capacity of 6.8 billion cubic feet per day (Bcf/d). Due to the seasonal nature of its business, ANR's volumes and revenues are generally expected to be higher in the winter months. ANR also owns and operates 250 Bcf of underground natural gas storage facilities in Michigan. ANR's regulated natural gas storage and transportation services operate under current FERC-approved tariff rates. These tariffs include maximum and minimum rate levels for services and permit ANR to discount or negotiate rates on a non-discriminatory basis.
22 MANAGEMENT'S DISCUSSION AND ANALYSIS
ANR Pipeline Company's (ANR Pipeline) rates were established pursuant to a settlement approved by the FERC effective November 1997. ANR Storage Company's rates were established pursuant to a settlement approved by the FERC effective June 1990. None of ANR's FERC-regulated operations are required to file for new rates at any time in the future, nor are any of the operations prohibited from filing a rate case.
Net income for 2008 was $132 million compared to $104 million for the period from the date of acquisition on February 22, 2007 to December 31, 2007. The increase in 2008 was primarily due to a full year of earnings in 2008 and increased revenues from new growth projects, partially offset by higher OM&A costs, including remediation expenditures for damage caused by Hurricane Ike.
GTN
Both of GTN's systems, the GTN System and North Baja (collectively, GTN), are subject to FERC-approved tariffs that establish maximum and minimum rates for various services. GTN's pipeline rates were established pursuant to a settlement approved by the FERC in January 2008, and these rates became effective January 1, 2007. Under the settlement, a five-year moratorium was established during which the GTN System and the settling parties are prohibited under the Natural Gas Act of 1938 from taking certain actions, including any filings to adjust rates. The settlement also requires the GTN System to file a rate case within seven years of the effective date. The systems are permitted to discount or negotiate these rates on a non-discriminatory basis. GTN's earnings are affected by variations in contracted volume levels, volumes delivered and prices charged under the various service types, as well as by variations in the costs of providing services.
GTN's comparable earnings were $65 million in 2008, an increase of $7 million compared to 2007 primarily due to decreased OM&A expenses. An increase in revenues for North Baja was offset by a decrease in revenues for the GTN System.
Comparable earnings were $58 million in 2007, a $12 million increase from 2006. The increase was primarily due to the positive impact of the rate case settlement in 2007, partially offset by lower long-term firm contracted volumes, a higher provision taken for non-payment of contract revenues from Calpine and a weaker U.S. dollar in 2007.
Other Pipelines
TransCanada's direct and indirect investments in various natural gas pipelines and its project development activities relating to natural gas and oil transmission opportunities throughout North America are included in Other Pipelines.
TransCanada's comparable earnings from Other Pipelines were $96 million in 2008 compared to $87 million in 2007. The increase was primarily due to lower general, administrative and support costs, and higher earnings from PipeLines LP, Tamazunchale and Iroquois, partially offset by lower earnings from Gas Pacifico/INNERGY, TransGas, Portland and Great Lakes.
Comparable earnings from Other Pipelines were $87 million in 2007, a $6 million increase compared to 2006. The increase was primarily due to higher PipeLines LP earnings resulting from TransCanada's increased ownership interests in PipeLines LP and Great Lakes, and a full year of earnings in 2007 from Tamazunchale. These increases were partially offset by higher project development and support costs associated with growing the Pipelines business, the effects of a weaker U.S. dollar in 2007 and proceeds of a bankruptcy settlement received by Portland in 2006.
At December 31, 2008, Other Assets included $74 million and $42 million for capitalized costs related to the Keystone expansion to the U.S. Gulf Coast and the Bison pipeline project, respectively.
PIPELINES OPPORTUNITIES AND DEVELOPMENTS
Keystone
Keystone is expected to deliver crude oil from Hardisty, Alberta, to U.S. Midwest markets at Wood River and Patoka in Illinois, and to Cushing, Oklahoma.
MANAGEMENT'S DISCUSSION AND ANALYSIS 23
In March 2008, the U.S. Department of State issued a Presidential Permit to Keystone authorizing construction, maintenance and operations of facilities at the U.S./Canada border for the transportation of crude oil between the two countries. Construction of Keystone began in May 2008 in both Canada and the U.S. Commissioning of the Wood River and Patoka segment is expected to commence in late 2009 with commercial operations to follow in early 2010. Commissioning of the Cushing segment is expected to commence in late 2010.
In June 2008, Keystone received approval from the NEB to add new pumping facilities to accommodate an increase to approximately 590,000 Bbl/d from 435,000 Bbl/d in volumes to be delivered to the Cushing markets.
After an open season conducted during third quarter 2008, Keystone secured additional firm, long-term contracts totaling 380,000 Bbl/d for an average term of approximately 17 years. With these shipper commitments, Keystone will proceed with the necessary regulatory applications in Canada and the U.S. for approvals to construct and operate an expansion of the pipeline system that will provide additional capacity from Western Canada to the U.S. Gulf Coast in 2012 and will increase the total commercial capacity of Keystone to approximately 1.1 million Bbl/d. With the additional contracts, Keystone now has secured long-term commitments for 910,000 Bbl/d for an average term of approximately 18 years. This includes commitments made by shippers to sign transportation service agreements for 35,000 Bbl/d of capacity in an open season to be held in 2009. The commitments represent approximately 83 per cent of the commercial design of the system.
The entire Keystone project is currently expected to cost approximately US$12 billion between 2008 and 2012. In 2008, the Keystone partnerships made capital expenditures of approximately $1.7 billion on the entire project, of which $1.0 billion was contributed by TransCanada.
TransCanada has agreed to increase its equity ownership in the Keystone partnerships up to 79.99 per cent from 50 per cent with ConocoPhillips' equity ownership being reduced concurrently to 20.01 per cent. In accordance with this agreement, TransCanada will fund 100 per cent of the construction expenditures until the participants' project capital contributions are aligned with the revised ownership interests. At December 31, 2008, TransCanada's equity ownership in the Keystone partnerships was approximately 62 per cent. Certain parties that have made volume commitments to the Keystone expansion have an option to acquire up to a combined 15 per cent equity ownership in the Keystone partnerships by the end of first quarter 2009. If all of the options are exercised, TransCanada's equity ownership would be reduced to 64.99 per cent.
Keystone's tolls, tariffs and facilities are regulated by the NEB in Canada and the FERC in the U.S., and have been approved for the segments shipping to Wood River, Patoka and Cushing. The Company expects the tolls and tariffs to remain in place for the term of the initial shipper contracts, which comprise approximately 83 per cent of Keystone's commercial capacity.
Canadian Mainline
In December 2008, the NEB announced that, pursuant to its formula, the 2009 allowed ROE for NEB-regulated pipelines, including the Canadian Mainline, will be 8.57 per cent, a decrease from 8.71 per cent in 2008.
Alberta System
In December 2008, the AUC approved the Alberta System's 2008-2009 Revenue Requirement Settlement Application. As part of the settlement, fixed costs were established for ROE, income taxes and OM&A costs. Any variances between actual costs and those agreed to in the settlement accrue to TransCanada, subject to an ROE and income tax adjustment mechanism, which accounts for variances between actual and settlement rate base, and income tax assumptions. The other cost elements of the settlement are treated on a flow-through basis.
In November 2008, an NEB hearing concluded on TransCanada's application to establish Federal jurisdiction over the Alberta System. A decision is expected from the NEB at the end of February 2009. Changing from AUC to NEB jurisdiction will allow the expansion of the Alberta System beyond Alberta provincial borders.
24 MANAGEMENT'S DISCUSSION AND ANALYSIS
In October 2008, the AUC approved TransCanada's application for a permit to construct the North Central Corridor expansion at a cost of approximately $925 million. The expansion comprises a 300 km (186 miles) natural gas pipeline and associated compression facilities on the northern section of the Alberta System.
On September 8, 2008, TransCanada reached a proposed agreement with Canadian Utilities Limited (ATCO Pipelines) to provide seamless natural gas transmission service to customers. If approved by regulatory authorities, the arrangement will see the two companies combine physical assets under a single rates and services structure with a single commercial interface for customers but with each company separately managing assets within distinct operating territories in the province. TransCanada continues to work with all stakeholders to finalize this agreement.
In February 2008, the AUC initiated a Generic Cost of Capital proceeding to review the generic ROE and capital structures of AUC regulated utilities. In November 2008, TransCanada filed an application requesting an 11 per cent ROE on 40 per cent deemed common equity for the Alberta System in 2009. The hearing is scheduled to begin on May 19, 2009.
ANR
In 2008, ANR completed its STEP 2008 project, which added 14 Bcf of storage and 200 million cubic feet per day (mmcf/d) of withdrawal capacity to the Cold Springs 1 storage field located in Northern Michigan, and increased ANR's total storage capacity to 250 Bcf. The project was completed under budget and service was provided on schedule. Supply on ANR's southwest leg was increased as a result of an interconnect with the Rockies Express natural gas pipeline, which commenced service in January 2008. There is strong potential for new supply on the southeast leg from shale gas in the mid-continent region, and another interconnect with the Rockies Express pipeline is planned for the southeast leg in Indiana in mid-2009. ANR is also pursuing other supply additions on both its southwest and southeast legs.
In September 2008, certain portions of the Company's Gulf of Mexico offshore facilities were impacted by Hurricane Ike. The Company estimates its total exposure to damage costs to be approximately US$30 million to US$40 million, mainly to replace, repair and abandon capital assets, including the estimated cost to abandon an offshore platform. At December 31, 2008, capital expenditures of US$2 million and OM&A costs of US$6 million had been incurred. The remaining costs are primarily expected to be capital expenditures. Service on the majority of the offshore facilities has been restored and related throughput volumes have returned to near pre-hurricane levels. The timing of the remaining facilities' return to service is primarily dependent upon decisions to be made by upstream producers regarding their damaged facilities in the Gulf of Mexico.
Palomar
In December 2008, Palomar Gas Transmission LLC filed with the FERC for a certificate to build a pipeline extending from the GTN System in central Oregon, to the Columbia River northwest of Portland. The proposed pipeline is expected to be capable of transporting up to 1.3 Bcf/d of natural gas. The project is a 50/50 joint venture of GTN and Northwest Natural Gas Co.
North Baja
In September 2008, the FERC approved North Baja's application to build a natural gas pipeline to serve the Yucca Power Plant owned by Arizona Public Service Company. Three miles of the proposed pipeline are expected to be in the U.S. and owned by North Baja, and another three miles in Mexico are owned by Gasoducto Bajanorte. Pending final approval by the U.S. Government, construction is expected to commence in first quarter 2009 with a projected in-service date of May 2009.
Portland
On April 1, 2008, Portland filed a general rate case with the FERC proposing a rate increase of approximately six per cent as well as other changes to its tariffs. In accordance with a FERC order dated May 1, 2008, the proposed tariffs went into effect on September 1, 2008, subject to refund. The hearing is scheduled to begin on July 13, 2009.
MANAGEMENT'S DISCUSSION AND ANALYSIS 25
TQM
In December 2008, the NEB concluded a proceeding with respect to TQM's Cost of Capital application for 2007 and 2008. The application sought an ROE of 11 per cent on deemed equity of 40 per cent. The proceeding also provided an opportunity for TQM to propose alternatives to the current ROE formula. A decision from the NEB is expected in first quarter 2009.
U.S. Rockies Pipeline Projects
The Bison pipeline project is a proposed pipeline from the Powder River Basin in Wyoming to the Northern Border system in North Dakota. The project has shipping commitments for approximately 405 mmcf/d and is expected to be in service in fourth quarter 2010. The capital cost of the Bison pipeline project is estimated at US$500 million to US$600 million. TransCanada continues to work with Bison shippers to finalize the size and design of this project.
In addition, TransCanada is proposing the Pathfinder pipeline project, a 1,006 km (625 miles) pipeline from Meeker, Colorado to the Northern Border system in North Dakota. A portion of the Pathfinder pipeline may share a common route with the Bison pipeline and may also share some common facilities. TransCanada continues to work with prospective Pathfinder shippers to advance this project.
TransCanada and Williams Gas Pipeline Company, LLC (Williams) are evaluating the development of the Sunstone pipeline, a proposed pipeline from Wyoming to Stanfield, Oregon. This project would provide Pacific Northwest and California markets with access to incremental Rockies supply. TransCanada and its partner continue to work with customers to determine the appropriate size, time and route for this project.
Mackenzie Gas Pipeline Project
The MGP is a proposed 1,200 km (746 miles) natural gas pipeline to be constructed from a point near Inuvik, Northwest Territories to the northern border of Alberta, where it is expected to connect to the Alberta System.
TransCanada's involvement with the MGP arises from a 2003 agreement between the Mackenzie Valley Aboriginal Pipeline Group (APG) and the MGP, whereby TransCanada agreed to finance the APG's one-third share of the pre-development costs associated with the project. Cumulative advances made by TransCanada totaled $140 million at December 31, 2008 and are included in Other Assets. These amounts constitute a loan to the APG, which becomes repayable only after the natural gas pipeline commences commercial operations. The total amount of the loan is expected to form part of the rate base of the pipeline and to subsequently be repaid from the APG's share of future natural gas pipeline revenues or from alternate financing. If the project does not proceed, TransCanada has no recourse against the APG for recovery of advances made. Accordingly, TransCanada's ability to recover its investment through loan repayments and/or equity ownership in the project depends upon a successful outcome of the project.
Under the terms of certain MGP agreements, TransCanada holds an option to acquire up to a five per cent equity ownership in the natural gas pipeline at the time of the decision to construct it. In addition, TransCanada gains certain rights of first refusal to acquire 50 per cent of any divestitures by existing partners and an entitlement to obtain a one-third interest in all expansion opportunities once the APG reaches a one-third ownership share, with the other natural gas pipeline owners and the APG sharing the balance.
TransCanada and the other co-venture companies involved in the MGP continue to pursue approval of the proposed project, focusing on obtaining regulatory approval and the Canadian government's support of an acceptable fiscal framework. Project timing continues to be uncertain. Detailed discussions with the Canadian government have taken place and have resulted in a proposal in January 2009 from the government to the MGP. The co-venture group is considering the proposal and is expected to respond to the government in the near future. In the event the co-venture group is unable to reach an agreement with the government on an acceptable fiscal framework, the parties will need to determine the appropriate next steps for the project. For TransCanada, this may result in a reassessment of the carrying amount of the APG advances.
26 MANAGEMENT'S DISCUSSION AND ANALYSIS
Alaska Pipeline Project
In November 2007, TransCanada submitted an application to the State of Alaska for a license to construct the Alaska Pipeline Project under the AGIA. In January 2008, Alaska Governor Sarah Palin's administration determined that TransCanada's application was the only proposal that met all of the state's requirements and in December 2008 the State of Alaska issued the AGIA license to TransCanada. Under the AGIA, the State of Alaska has agreed to reimburse a share of TransCanada's eligible pre-construction costs to a maximum of US$500 million.
The Alaska Pipeline Project will be a 4.5 Bcf/d natural gas pipeline extending approximately 2,760 km (1,715 miles) from a new natural gas treatment plant at Prudhoe Bay, Alaska to Alberta. This pipeline will integrate with the Alberta System to provide access to diverse markets across North America. The application included provision for expansions up to 5.9 Bcf/d through the addition of compressor stations in Alaska and Canada. TransCanada estimated the total capital cost of the entire project to be approximately US$26 billion in 2007 dollars.
Since the AGIA license was awarded, TransCanada has moved forward with developing the project, which involves engineering, environmental, aboriginal relations and commercial work to conclude an initial binding open season by mid-2010. TransCanada continues its efforts to align with potential shippers and if sufficient firm contracts are secured in the open season, construction would begin following regulatory approvals, with an anticipated in-service date of 2018.
PIPELINES BUSINESS RISKS
Supply, Markets and Competition
TransCanada faces competition at both the supply and market ends of its systems. This competition comes from other natural gas pipelines accessing the increasingly mature WCSB and markets served by TransCanada's pipelines. In addition, the continued expiration of long-term firm contracts has resulted in significant reductions in long-term firm contracted capacity and shifts to short-term firm and interruptible contracts on the Canadian Mainline, the Alberta System, Foothills and the GTN System.
In 2008, the gas supply environment changed. Production out of the WCSB declined while supply in the U.S. grew. Previously it had been expected that U.S. supply would decline. Furthermore, with lower natural gas prices, lower cost U.S. gas developments may hinder the further development of WCSB gas supplies.
TransCanada's primary source of natural gas supply is the WCSB. The WCSB has remaining discovered natural gas reserves of approximately 57 trillion cubic feet and a reserves-to-production ratio of approximately nine years at current levels of production. Historically, sufficient additional reserves have been discovered on an ongoing basis to maintain the reserves-to-production ratio at close to nine years, however, supply from the WCSB has declined in recent years due to a continued reduction in levels of drilling activity in the basin. The reduced drilling activity is a result of lower prices, higher supply costs, which include higher royalties in Alberta, and competition for capital from other North American basins that have lower exploration costs. Drilling levels in the WCSB are expected to reach a low point in 2009 and then should begin to recover in the ensuing years assuming that gas prices stabilize at $6 to $7 per gigajoule (GJ) and that finding and development costs become more economical. TransCanada anticipates there will be excess natural gas pipeline capacity out of the WCSB in the foreseeable future as a result of capacity expansions on its wholly owned and partially owned natural gas pipelines over the past decade, competition from other pipelines, and significant growth in natural gas demand within Alberta driven by oil sands and electricity generation requirements.
TransCanada's Alberta System is the major natural gas gathering and transportation system for the WCSB, connecting most of the natural gas processing plants in Alberta to domestic and export markets. Despite reduced overall drilling levels, activity remains robust in certain areas of the WCSB, which has resulted in the need for new transmission infrastructure. The primary areas of high activity have been deeper conventional drilling in western Alberta and in the foothills region of B.C., and coalbed methane development in central Alberta. Recently, shale gas production in B.C. has emerged as a potentially significant natural gas supply source.
MANAGEMENT'S DISCUSSION AND ANALYSIS 27
Historically, TransCanada's eastern natural gas pipeline system has been supplied by long-haul flows from the WCSB and by short-haul volumes received from storage fields and interconnecting pipelines in southwestern Ontario. Over the last few years, the Canadian Mainline has experienced reductions in long-haul flows, which have been partially offset by increases in short-haul volumes, resulting in an increase in Canadian Mainline tolls.
Demand for natural gas in TransCanada's key eastern markets, which are served by the Canadian Mainline, is expected to continue to increase, particularly to meet the expected growth in natural gas-fired power generation. However, the Company believes the current environment could reverse this trend in the short term given sufficient levels of erosion of market demand. Although there are opportunities to increase market share in Canadian domestic and U.S. export markets, TransCanada faces significant competition in these regions. Consumers in the northeastern U.S. generally have access to an array of natural gas pipeline and supply options. Eastern markets that historically received Canadian supplies only from TransCanada are now capable of receiving supplies from new natural gas pipelines that source U.S. and Atlantic Canadian supplies.
The source of oil supply for Keystone is located primarily in Alberta, which produces approximately 79 per cent of the oil in the WCSB. In 2008, the WCSB produced a total of approximately 2.4 million Bbl/d, comprised of 1.2 million Bbl/d of conventional crude oil and condensate, and 1.2 million Bbl/d of oil from the oil sands area of Alberta. The production of conventional oil has been declining but has been offset by increases in production of oil from the Alberta oil sands. The Alberta Energy Resources Conservation Board has estimated that there are 173 billion barrels of remaining established reserves in the Alberta oil sands.
A decline in oil prices in late 2008 has resulted in announcements of delays in oil sands projects and upgraders, however, in December 2008, the Canadian Association of Petroleum Producers forecast WCSB oil supply would increase from 2.4 million Bbl/d in 2008 to 3.5 million Bbl/d by 2015 and 4.1 million Bbl/d by 2020.
Keystone has 910,000 Bbl/d of contracts for capacity, on a ship or pay basis, with an average contract life of 18 years, which the Company believes will provide incentive for contract shippers to ship on Keystone. However, Keystone must compete for spot throughput with other oil pipelines from Alberta.
Keystone's markets for crude oil are refiners in the U.S. Midwest and Gulf Coast regions. A competing pipeline can also deliver WCSB crude oil to the Midwest markets supplied by Keystone. Currently, competing pipelines can deliver oil to the U.S. Gulf Coast, through interconnections with other pipelines. Keystone must also compete with U.S. domestically produced oil and imported oil for markets in the Midwest and Gulf Coast regions.
ANR's natural gas supply is primarily sourced from the Gulf of Mexico and mid-continent U.S. regions, which are also served by competing natural gas pipelines. ANR also has competition from other natural gas pipelines and storage operations in its primary markets in the U.S. Midwest. The Gulf of Mexico region is extremely competitive given its extensive natural gas pipeline network. ANR is one of many interstate and intrastate pipelines in the region competing for new and existing production as well as for new supplies from shale production in the mid-continent, from the Rockies Express natural gas pipeline originating in the Rocky Mountain region, and from LNG. Several new natural gas pipelines are proposed or under construction to connect new supplies to the numerous pipelines in the Gulf of Mexico region. ANR competes with other natural gas pipelines in the region to attract supply to its pipeline for alternative markets and storage. In addition to pipeline competition for market and supply, current difficult economic conditions are expected to reduce energy demand and may put future ANR capacity renewals at risk as the North American economy slows or potentially contracts in key markets in the upper U.S. Midwest. As lower natural gas prices reduce drilling activity, the supply growth that has been fuelling the growth in pipeline infrastructure in the mid-continent could slow down but is still expected to exceed demand requirements in the near term. These factors could negatively affect pipeline capacity value as transportation capacity becomes more abundant.
The GTN System must compete with other pipelines to access natural gas supplies and markets. Transportation service capacity on the GTN System provides customers in the U.S. Pacific Northwest, California and Nevada with access to supplies of natural gas primarily from the WCSB. These three markets may also access supplies from other basins. In the Pacific Northwest market, natural gas transported on the GTN System competes with the Rocky Mountain natural gas
28 MANAGEMENT'S DISCUSSION AND ANALYSIS
supply and with additional western Canadian supply transported by other pipelines. Historically, natural gas supplies from the WCSB have been competitively priced in relation to supplies from the other regions serving these markets. The GTN System has experienced significant contract non-renewals since 2005 as the natural gas it transports from the WCSB competes for the California and Nevada markets against supplies from the Rocky Mountain and southwestern U.S. basins. Recently, Pacific Gas and Electric Company, the GTN System's largest customer, received California Public Utilities Commission approval to commit to capacity on a proposed competing project out of the Rocky Mountain basin to the California border.
Regulatory Financial Risk
Regulatory decisions continue to have a significant impact on the financial returns from existing investments in TransCanada's Canadian wholly owned pipelines and are expected to have a similarly significant impact on financial returns from future investments. TransCanada remains concerned that current financial returns approved by regulators are not as competitive as returns from other assets with similar risk profiles. In recent years, TransCanada applied to the NEB and the AUC for an ROE of 11 per cent on 40 per cent deemed common equity for both the Canadian Mainline and the Alberta System. The NEB has reaffirmed its ROE formula and the AUC has established a generic ROE that is largely aligned with the NEB formula. Through rate applications and negotiated settlements, TransCanada has been able to improve the common equity components of its Canadian wholly owned pipeline capital structures, but there is no assurance that this success can be repeated.
Most recently, TransCanada has continued to address concerns about financial returns on the Alberta System in the AUC's 2009 Generic Cost of Capital Proceeding. In November 2008, TransCanada filed an application requesting an ROE of 11 per cent on 40 per cent deemed common equity for the Alberta System. TQM filed an application with the NEB in December 2007 requesting a fair return on capital, consisting of an ROE of 11 per cent on 40 per cent deemed common equity. The outcome of these proceedings may influence the regulators' view of fair financial returns on equity associated with TransCanada's other Canadian wholly owned pipelines.
Throughput Risk
As transportation contracts expire, TransCanada's U.S. natural gas pipelines are expected to become more exposed to the risk of reduced throughput and their revenues more likely to experience increased variability. Throughput risk is created by supply and market competition, gas basin pricing, economic activity, weather variability, natural gas pipeline competition and pricing of alternative fuels.
Execution and Capital Cost Risk
Capital costs related to the construction of Keystone are subject to a capital cost risk- and reward-sharing mechanism with its customers. This mechanism allows Keystone to adjust its tolls by a factor based on the percentage change in the capital cost of the project. Tolls for the portion of Keystone to Wood River, Patoka and Cushing will be adjusted by a factor equal to 50 per cent of the percentage change in capital cost. Tolls on the expansion to the U.S. Gulf Coast will be adjusted by a factor equal to 75 per cent of the percentage change in capital cost.
Refer to the "Risk Management and Financial Instruments" section of this MD&A for information on managing risks in the Pipelines business.
PIPELINES OUTLOOK
TransCanada assumes that its operations in 2009 will be materially consistent with those in 2008 except for the impact of those factors discussed in this section.
Although demand for natural gas and crude oil has declined and is expected to further decline in North America in 2009 due to the current economic downturn, the Company expects demand to increase in the long term. TransCanada's Pipelines business will continue to focus on the delivery of natural gas to growing markets, connecting new supply, progressing development of new infrastructure to connect natural gas from the north and unconventional supplies such as shale gas, coalbed methane and LNG, and construction and expansion of Keystone.
MANAGEMENT'S DISCUSSION AND ANALYSIS 29
TransCanada expects producers will continue to explore and develop new fields in Western Canada, particularly in northeastern B.C. and the west and central foothills regions of Alberta. There is also expected to be significant exploration and development activity aimed at unconventional resources such as coalbed methane and shale gas.
In 2008, TransCanada filed an application with the NEB to establish federal jurisdiction for the Alberta System. If the application is approved, the Alberta System will switch from AUC regulation to NEB regulation, allowing it to construct and operate pipeline extensions into other provinces and allowing it to provide direct integrated Alberta System natural gas transmission service to gas production locations outside of Alberta. Extensions of the Alberta System beyond Alberta's borders are currently prohibited under provincial regulation. An NEB jurisdiction decision is expected in first quarter 2009.
Most of TransCanada's current expansion plans in Canadian natural gas transmission are focused on the Alberta System. TransCanada recently concluded a binding open season process for natural gas transmission service for the Montney shale gas region located in northeastern B.C. Five shippers have committed to firm gas transportation contracts on the Groundbirch pipeline that will serve the Montney region. Volumes associated with these commitments will reach 1.1 Bcf/d by 2014. The Groundbirch pipeline is expected to commence service in fourth quarter 2010, subject to receipt of necessary approvals.
In addition, TransCanada is finalizing details associated with a binding open season and pipeline extension project to service the Horn River shale gas region located in northeastern B.C. Five shippers have committed to firm gas transportation contracts for a total volume of 378 mmcf/d by second quarter 2012. Subject to concluding a successful binding open season, the Horn River project is expected to commence operation in second quarter 2011, subject to receipt of necessary approvals.
Both the Groundbirch and Horn River projects are proposed as extensions to the Alberta System, which will provide B.C. producers with direct integrated gas transmission service from receipt points in B.C. These pipeline projects will increase netbacks to producers and increase the throughput on the Alberta System and on its downstream pipelines that serve markets located throughout North America, as well as increase usage of the Nova Inventory Transfer commercial hub that is used by buyers and sellers of natural gas throughout North America.
In addition to extensions into B.C., new facilities are required to expand the integrated Alberta System in response to changes in the distribution of supply and in markets across the Alberta System.
In the U.S., TransCanada expects unconventional production will continue to be developed from shale gas reservoirs in east Texas, northwest Louisiana, Arkansas, and southwest Oklahoma. Supplies from coalbed methane and tight gas sands in the Rocky Mountain region are also expected to grow. Additionally, in the medium to long term, some level of incremental supply is anticipated from LNG imports into the U.S., particularly in the summer months. The resulting growth in supply will provide additional commercial opportunities for TransCanada. In particular, the southwest leg of ANR is expected to continue to remain fully subscribed for the foreseeable future, and new transport routes are being developed to move the additional Rocky Mountain and shale gas production to midwestern and eastern U.S. markets, including interconnections with ANR. As mid-continent supplies develop, the southeast leg of ANR has capacity to transport additional volumes of Rocky Mountain and mid-continent shale production, as well as LNG.
Producers continue to develop new oil supply in Western Canada. There are several new oil sands projects under construction that will begin production in 2009 and 2010. By 2015, oil sands production is expected to double from 1.2 million Bbl/d in 2008 and total Western Canada oil supply is projected to grow over the same period to approximately 3.5 million Bbl/d from 2.4 million Bbl/d. The primary market for new oil production extends from the U.S. Midwest to the U.S. Gulf Coast and contains a large number of refineries that are well equipped to handle Canadian light and heavy crude oil blends. Incremental western Canadian crude oil production is expected to replace declining U.S. imports of crude oil from other countries.
This increase in WCSB crude oil exports requires new pipeline capacity, including Keystone and further expansions to the U.S. Gulf Coast. TransCanada will continue to pursue additional opportunities to move crude oil from Alberta to U.S. markets.
30 MANAGEMENT'S DISCUSSION AND ANALYSIS
TransCanada will continue to focus on operational excellence and on collaborative efforts with all stakeholders to achieve negotiated settlements and service options that will increase the value of the Company's business to customers and shareholders.
Earnings
The Company expects continued growth on its Alberta System. The Company also anticipates a modest level of investment in its other existing Canadian natural gas pipelines, resulting in an expected continued net decline in the average investment base due to annual depreciation. A net decline in the average investment base has the effect of reducing year-over-year earnings from these assets. Under the current regulatory model, earnings from Canadian pipelines are not affected by short-term fluctuations in the commodity price of natural gas, changes in throughput volumes or changes in contract levels.
Reduced firm transportation contract volumes due to customer defaults, lower supply available for export from the WCSB and expiry of long-term contracts could have a negative impact on short-term earnings from TransCanada's U.S. natural gas pipelines, unless the available capacity can be recontracted. The ability to recontract available capacity is influenced by prevailing market conditions and competitive factors, including competing natural gas pipelines and supply from other natural gas sources in markets served by TransCanada's U.S. pipelines. Earnings from Pipelines' foreign operations are also impacted by changes in foreign currency exchange rates.
Capital Expenditures
Total capital spending for all pipelines in 2008 was $1.8 billion. Capital spending for the wholly owned pipelines in 2009 is expected to be approximately $1.1 billion. In addition, capital spending for TransCanada's share of constructing Keystone is expected to be approximately $3.6 billion in 2009.
NATURAL GAS THROUGHPUT VOLUMES
(Bcf)
2008 | 2007 | 2006 | ||||
Canadian Mainline(1) | 3,467 | 3,183 | 2,955 | |||
Alberta System(2) | 3,800 | 4,020 | 4,051 | |||
ANR(3) | 1,655 | 1,210 | n/a | |||
GTN System | 783 | 827 | 790 | |||
Foothills | 1,292 | 1,441 | 1,403 | |||
North Baja | 104 | 90 | 95 | |||
Great Lakes | 784 | 829 | 816 | |||
Northern Border | 731 | 800 | 799 | |||
Iroquois | 376 | 394 | 384 | |||
TQM | 170 | 207 | 158 | |||
Ventures LP | 165 | 178 | 179 | |||
Gas Pacifico | 73 | 71 | 52 | |||
Portland | 50 | 58 | 52 | |||
Tamazunchale(4) | 53 | 29 | n/a | |||
Tuscarora | 30 | 28 | 28 | |||
TransGas | 26 | 24 | 22 |
MANAGEMENT'S DISCUSSION AND ANALYSIS 31
BEAR CREEK An 80 MW natural gas-fired cogeneration plant, Bear Creek is located near Grande Prairie, Alberta.
MACKAY RIVER A 165 MW natural gas-fired cogeneration plant, MacKay River is located near Fort McMurray, Alberta.
REDWATER A 40 MW natural gas-fired cogeneration plant, Redwater is located near Redwater, Alberta.
SUNDANCE A&B TransCanada has the rights to 100 per cent of the generating capacity of the 560 MW Sundance A coal-fired power generating facility under a PPA, which expires in 2017. TransCanada also has the rights to 50 per cent of the generating capacity of the 706 MW Sundance B facility under a PPA that expires in 2020. The Sundance facilities are located in south-central Alberta.
SHEERNESS TransCanada has the rights to 756 MW of generating capacity from the Sheerness coal-fired plant under a PPA, which expires in 2020. The Sheerness plant is located in southeastern Alberta.
CARSELAND An 80 MW natural gas-fired cogeneration plant, Carseland is located near Carseland, Alberta.
32 MANAGEMENT'S DISCUSSION AND ANALYSIS
CANCARB A 27 MW facility fuelled by waste heat from TransCanada's adjacent thermal carbon black (a natural gas by-product) facility, Cancarb is located in Medicine Hat, Alberta.
BRUCE POWER Bruce Power is a nuclear generating facility located northwest of Toronto, Ontario. TransCanada owns 48.9 per cent of Bruce A, which has four 750 MW reactors, two of which are currently being refurbished and are expected to restart in 2010. TransCanada owns 31.6 per cent of Bruce B, which has four operating reactors with a combined capacity of approximately 3,200 MW.
HALTON HILLS A 683 MW natural gas-fired power plant, Halton Hills is under construction near the town of Halton Hills, Ontario, and is expected to be in service in third quarter 2010.
PORTLANDS ENERGY A 550 MW high-efficiency, combined-cycle natural gas generation power plant, Portlands Energy is under construction near the downtown area of Toronto, Ontario. The plant is 50 per cent owned by TransCanada and is expected to be commissioned in its combined-cycle mode in first quarter 2009.
BÉCANCOUR A 550 MW natural gas-fired cogeneration power plant, Bécancour is located near Trois-Rivières, Québec.
CARTIER WIND The 740 MW Cartier Wind farm consists of six wind power projects located in Québec. Cartier Wind is 62 per cent owned by TransCanada. Three of the projects, Baie-des-Sables, Anse-á-Valleau and Carleton have generating capacities of 110 MW, 101 MW and 109 MW, respectively. Planning and construction of the remaining three projects will continue, subject to future approvals.
GRANDVIEW A 90 MW natural gas-fired cogeneration power plant, Grandview is located in Saint John, New Brunswick.
KIBBY WIND The 132 MW Kibby Wind power project is under construction and will include 44 turbines located in Kibby and Skinner Townships in Maine. Construction began in July 2008 and commissioning of the first phase is expected to begin in fourth quarter 2009.
TC HYDRO With a total generating capacity of 583 MW, TC Hydro comprises 13 hydroelectric facilities, including stations and associated dams and reservoirs, on the Connecticut and Deerfield rivers in New Hampshire, Vermont and Massachusetts.
OSP A 560 MW natural gas-fired, combined-cycle facility, OSP is located in Burrillville, Rhode Island.
RAVENSWOOD In August 2008, TransCanada acquired the 2,480 MW multiple unit generating facility in Queens, New York employing dual-fuel capable steam turbine, combined cycle and combustion turbine technology.
COOLIDGE A 575 MW simple-cycle, natural gas-fired peaking power generation station, Coolidge is under development in Coolidge, Arizona. Detailed engineering, geotechnical and regulatory work began in 2008 and commissioning of the facility is expected in 2011.
EDSON An underground natural gas storage facility, Edson is connected to the Alberta System near Edson, Alberta. The facility's central processing system is capable of maximum injection and withdrawal rates of 725 mmcf/d of natural gas. Edson has a working natural gas storage capacity of approximately 50 Bcf.
CROSSALTA An underground natural gas storage facility, CrossAlta is connected to the Alberta System and is located near Crossfield, Alberta. TransCanada owns 60 per cent of CrossAlta, which has a working natural gas capacity of 54 Bcf with a maximum capability of delivering 480 mmcf/d.
MANAGEMENT'S DISCUSSION AND ANALYSIS 33
ENERGY HIGHLIGHTS
ENERGY RESULTS
Year ended December 31 (millions of dollars)
2008 | 2007 | 2006 | |||||
Western Power | 426 | 308 | 297 | ||||
Eastern Power | 338 | 255 | 187 | ||||
Bruce Power | 201 | 167 | 235 | ||||
Natural Gas Storage | 135 | 136 | 93 | ||||
General, administrative, support costs and other | (168 | ) | (158 | ) | (144 | ) | |
Operating income | 932 | 708 | 668 | ||||
Financial charges | (23 | ) | (22 | ) | (23 | ) | |
Interest income and other | 6 | 10 | 5 | ||||
Income taxes | (274 | ) | (237 | ) | (221 | ) | |
Comparable Earnings(1) | 641 | 459 | 429 | ||||
Writedown of Broadwater costs | (27 | ) | | | |||
Gain on sale of land | | 14 | | ||||
Fair value adjustments of natural gas storage inventory and forward contracts | | 7 | | ||||
Income tax adjustments | | 34 | 23 | ||||
Net Earnings | 614 | 514 | 452 | ||||
Energy's net earnings in 2008 of $614 million increased $100 million compared to $514 million in 2007. Comparable earnings of $641 million in 2008 increased $182 million compared to 2007 and excluded a $27 million writedown of costs previously capitalized for Broadwater. The increases in comparable and net earnings were due to higher operating income in Western Power, Eastern Power and Bruce Power. Comparable earnings of $459 million for 2007 excluded net unrealized gains of $7 million resulting from changes in fair value of proprietary natural gas storage inventory and natural gas forward purchase and sale contracts, a $14 million gain on sale of land and $34 million of favourable income tax adjustments. Energy's net earnings in 2007 were $514 million compared to $452 million in 2006. Comparable earnings were $459 million in 2007, an increase of $30 million from 2006. The increase was due |
34 MANAGEMENT'S DISCUSSION AND ANALYSIS
to higher operating income in Eastern Power, Natural Gas Storage and Western Power, partially offset by a reduced contribution from Bruce Power. Comparable earnings excluded net unrealized gains of $7 million resulting from natural gas storage fair value changes, a $14 million gain on sale of land, $34 million of favourable income tax adjustments in 2007 as well as a $23 million favourable impact in 2006 from future income taxes as a result of reductions in Canadian federal and provincial corporate income tax rates. |
POWER PLANTS NOMINAL GENERATING CAPACITY AND FUEL TYPE
MW | Fuel Type | ||||
Western Power | |||||
Sheerness | 756 | Coal | |||
Coolidge(1) | 575 | Natural gas | |||
Sundance A | 560 | Coal | |||
Sundance B(2) | 353 | Coal | |||
MacKay River | 165 | Natural gas | |||
Carseland | 80 | Natural gas | |||
Bear Creek | 80 | Natural gas | |||
Redwater | 40 | Natural gas | |||
Cancarb | 27 | Natural gas | |||
2,636 | |||||
Eastern Power |
|||||
Ravenswood(3) | 2,480 | Natural gas/oil | |||
Halton Hills(1) | 683 | Natural gas | |||
TC Hydro | 583 | Hydro | |||
OSP | 560 | Natural gas | |||
Bécancour | 550 | Natural gas | |||
Cartier Wind(4) | 458 | Wind | |||
Portlands Energy(5) | 275 | Natural gas | |||
Kibby Wind(1) | 132 | Wind | |||
Grandview | 90 | Natural gas | |||
5,811 | |||||
Bruce Power(6) |
2,480 |
Nuclear |
|||
Total nominal generating capacity(1) |
10,927 |
||||
ENERGY FINANCIAL ANALYSIS
Western Power
As at December 31, 2008, Western Power owns or has the rights to approximately 2,600 MW of power supply in Alberta and the western U.S. from its three long-term power purchase arrangements (PPA), six natural gas-fired cogeneration facilities and a peaking facility under development in Arizona. The power supply portfolio of Western Power in Alberta comprises approximately 1,700 MW of low-cost, base-load coal-fired generation supply through the three long-term PPAs and approximately 400 MW of natural gas-fired cogeneration assets. This supply portfolio includes
MANAGEMENT'S DISCUSSION AND ANALYSIS 35
some of the lowest cost, most competitive generation in the Alberta market area. The Sheerness and Sundance B PPAs have remaining terms of 12 years, while the Sundance A PPA has a remaining term of nine years. In 2008, the Salt River Project Agricultural Improvement and Power District (Salt River Project), a utility based in Phoenix, Arizona, entered into a 20-year PPA to secure 100 per cent of the output from TransCanada's planned Coolidge generating station. The simple-cycle natural gas-fired peaking power facility to be located in Coolidge, Arizona is expected to be commissioned in 2011 and have a nominal generating capacity of 575 MW.
Western Power relies on its two integrated functions, marketing and plant operations, to generate earnings. The marketing function, based in Calgary, Alberta, purchases and resells electricity sourced from the PPAs, markets uncommitted volumes from the cogeneration facilities, and purchases and resells power and natural gas to maximize the value of the cogeneration facilities. The marketing function is integral to optimizing Energy's return from its portfolio of power supply and to managing risks associated with uncontracted volumes. A portion of Energy's power is sold into the spot market for operational reasons and the amount of supply volumes eventually sold into the spot market is dependent upon the ability to transact in forward sales markets at acceptable contract terms. This approach to portfolio management helps to minimize costs in situations where TransCanada would otherwise have to purchase electricity in the open market to fulfil its contractual sales obligations. To reduce exposure to spot market prices on uncontracted volumes, Western Power had, as at December 31, 2008, fixed-price power sales contracts to sell approximately 8,800 gigawatt hours (GWh) in 2009 and 5,500 GWh in 2010.
Plant operations in Alberta consist of five natural gas-fired cogeneration power plants with an approximate combined output capacity of 400 MW ranging from 27 MW to 165 MW per facility. A portion of the expected output is sold under long-term contracts and the remaining output is subject to fluctuations in the price of power and natural gas. Market heat rate is an economic measure for natural gas-fired power plants and is determined by dividing the average price of power per megawatt hour (MWh) by the average price of natural gas per GJ for a given period. To the extent power is not sold under long-term contracts and plant fuel gas has not been purchased under long-term contracts, the profitability of a natural gas-fired generating facility rises in proportion to an increase in the market heat rate and declines in proportion to a decrease in the market heat rate. Market heat rates in Alberta increased in 2008 by approximately six per cent as a result of an increase in average power prices, partially offset by an increase in spot market natural gas prices. Market heat rates averaged approximately 12.05 GJ/MWh in 2008 compared to approximately 11.40 GJ/MWh in 2007.
Western Power's plants operated with an average plant availability of approximately 87 per cent in 2008 compared to 90 per cent in 2007. The decrease was primarily due to an extended outage at the Cancarb power plant.
Western Power Results
Year ended December 31 (millions of dollars)
2008 | 2007 | 2006 | |||||
Revenues | |||||||
Power | 1,140 | 1,045 | 1,185 | ||||
Other(1) | 130 | 89 | 169 | ||||
1,270 | 1,134 | 1,354 | |||||
Commodity purchases resold | |||||||
Power | (575 | ) | (608 | ) | (767 | ) | |
Other(2) | (64 | ) | (65 | ) | (135 | ) | |
(639 | ) | (673 | ) | (902 | ) | ||
Plant operating costs and other | (180 | ) | (135 | ) | (135 | ) | |
Depreciation | (25 | ) | (18 | ) | (20 | ) | |
Operating income | 426 | 308 | 297 | ||||
36 MANAGEMENT'S DISCUSSION AND ANALYSIS
Western Power Sales Volumes
Year ended December 31 (GWh)
2008 | 2007 | 2006 | ||||||
Supply | ||||||||
Generation | 2,322 | 2,154 | 2,259 | |||||
Purchased | ||||||||
Sundance A & B and Sheerness PPAs | 12,368 | 12,199 | 12,712 | |||||
Other purchases | 807 | 1,433 | 1,905 | |||||
15,497 | 15,786 | 16,876 | ||||||
Contracted vs. Spot |
||||||||
Contracted | 11,284 | 11,998 | 12,750 | |||||
Spot | 4,213 | 3,788 | 4,126 | |||||
15,497 | 15,786 | 16,876 | ||||||
Operating income was $426 million in 2008, an increase of $118 million from $308 million in 2007. The increase was primarily due to increased margins from a combination of higher overall realized power prices and market heat rates on uncontracted volumes of power sold, as well as a $23 million increase from sales of sulphur at significantly higher prices in 2008. In 2008, the Company sold the remainder of its sulphur stock pile, which it has been selling in modest quantities on a break-even basis since 2005.
Revenues increased in 2008 primarily due to the higher overall power sales prices. Commodity purchases resold decreased in 2008 compared to 2007 primarily due to a decrease in volumes purchased and the expiry of certain retail contracts. Plant operating costs and other, which includes fuel gas consumed in generation, increased in 2008 as a result of higher volumes of gas purchased at higher prices. Purchased power volumes in 2008 decreased primarily due to the expiry of certain retail contracts, partially offset by increased utilization from the Alberta PPAs. Approximately 27 per cent of power sales volumes were sold in the spot market in 2008 compared to 24 per cent in 2007.
Operating income was $308 million in 2007, an increase of $11 million from $297 million in 2006. The increase was primarily due to lower PPA costs, partially offset by slightly lower overall realized power prices. Revenues decreased in 2007 compared to 2006 due mainly to the lower overall power sales prices realized in 2007 as well as lower volumes purchased and generated. Commodity purchases resold decreased in 2007 compared to 2006 primarily due to lower PPA costs, a decrease in volumes purchased and the expiry of certain retail contracts. Purchased power volumes in 2007 decreased compared to 2006 mainly as a result of an increase in outage hours at the Sundance A facility and the expiry of certain retail contracts. Approximately 24 per cent of power sales volumes were sold into the spot market in 2007, which was consistent with 2006.
Eastern Power
Eastern Power owns approximately 5,800 MW of power generation capacity, including facilities under construction or in the development phase. Eastern Power's current operating power generation assets are Ravenswood, TC Hydro, OSP, Bécancour, the Cartier Wind farms and Grandview. Ravenswood, acquired in August 2008, is a 2,480 MW gas and oil-fired generating facility consisting of multiple units employing steam turbine, combined-cycle and combustion turbine technology. Ravenswood, located in Queens, has the capacity to serve approximately 21 per cent of the overall peak load in New York City. The TC Hydro assets include 13 hydroelectric stations housing a total of 39 hydroelectric generating units in New Hampshire, Vermont and Massachusetts.
MANAGEMENT'S DISCUSSION AND ANALYSIS 37
OSP, a natural gas-fired combined-cycle facility, is the largest power plant in Rhode Island. Bécancour, a natural gas-fired cogeneration plant located near Trois Rivières, Québec, was placed into service in September 2006. The entire power output is supplied to Hydro-Québec under a 20 year power purchase contract. Steam from this facility is sold to an industrial customer for use in commercial processes. Cartier has a combined generating capacity of 320 MW and consists of three wind farms, Carleton, Anse-á-Valleau, and Baie-des-Sables, which were placed into service in November 2008, November 2007 and November 2006, respectively. Output from these three wind farms is supplied to Hydro-Québec under 20 year power purchase contracts. Grandview is a natural gas-fired cogeneration facility on the site of the Irving Oil Refinery (Irving) in Saint John, New Brunswick. Under a 20 year tolling arrangement which will expire in 2025, Irving supplies fuel for the plant and contracts for 100 per cent of the plant's heat and electricity output.
Eastern Power conducts its business primarily in the deregulated New England and New York power markets and in Eastern Canada. In the New England market, TransCanada has established a marketing operation through its wholly owned subsidiary, TransCanada Power Marketing Ltd. (TCPM). TCPM is located in Westborough, Massachusetts, and effective January 1, 2009, also markets the output from the Ravenswood facility. To reduce exposure to spot market prices on uncontracted volumes, Eastern Power had, as at December 31, 2008, fixed price sales contracts to sell forward approximately 13,000 GWh in 2009 and 15,000 GWh in 2010, although certain contracted volumes are dependant on customer usage levels. Actual amounts contracted in future periods will depend on market liquidity and other factors. Fixed price sales contracts in 2009 exclude approximately 4,300 GWh of generation from the Bécancour power plant as a result of a suspension of electricity generation that began in January 2008 and continues through December 2009. The suspension of the Bécancour power facility is discussed further in the "Energy Opportunities and Developments" section of this MD&A.
TCPM focuses on selling power under short- and long-term contracts to wholesale, commercial and industrial customers while managing a portfolio of power supplies sourced from both its own generation and wholesale power purchases. In 2008, TCPM continued to expand its marketing presence and customer base in the New England market.
The Forward Capacity Market (FCM) in the New England power pool is intended to promote investment in new and existing power resources needed to meet growing consumer demand and maintain a reliable power system. Under the FCM, Independent System Operator New England (ISO-NE) projects the needs of the power system three years in advance, following which it holds an annual auction to purchase power resources to satisfy future needs. Prior to the auction period, certain transition payments are made to capacity suppliers in New England that were in existence at June 2006.
ISO-NE has undertaken two Forward Capacity Auctions (FCA) under the FCM framework for procurement of installed capacity; FCA1 for the 2010-2011 period and FCA2 for the 2011-2012 period. All of Eastern Power's existing and planned power assets in the New England market were entered into both FCA1 and FCA2. Both auctions resulted in significant amounts of qualifying capacity resulting in decreased prices. The clearing prices in these auctions were US$4.25 and US$3.12 per kilowatt-month, respectively. Future auction results will be affected by actual demand growth and the pace of progress in the development of new qualifying resources that bid into these auctions, as well as other factors.
The New York Independent System Operator (NYISO) relies on a locational capacity market intended to promote investment in new and existing power resources needed to meet growing consumer demand and maintain a reliable power system. Currently, a series of voluntary forward auctions and a mandatory spot demand curve price setting process is used to determine the price that is paid to capacity suppliers. There are separate demand curves for each of the three capacity zones: Long Island, New York City and the rest of the state. Ravenswood's capacity is located in the New York City capacity zone. Energy and capacity prices for Ravenswood are affected by circumstances that have an impact on supply and demand within this zone, certain NYISO market rules impacting both buyers and suppliers of capacity in this zone, and certain reliability criteria set out by the NYISO and the New York State Reliability Council. There is currently surplus capacity within this zone, however, TransCanada expects capacity will tighten after 2009 as a result of the expected retirement of a power station owned by the New York Power Authority.
38 MANAGEMENT'S DISCUSSION AND ANALYSIS
Eastern Power Results(1)
Year ended December 31 (millions of dollars)
2008 | 2007 | 2006 | ||||||
Revenues | ||||||||
Power | 1,254 | 1,481 | 789 | |||||
Other(2) | 350 | 239 | 292 | |||||
1,604 | 1,720 | 1,081 | ||||||
Commodity purchases resold | ||||||||
Power | (519 | ) | (755 | ) | (379 | ) | ||
Other(3) | (324 | ) | (208 | ) | (257 | ) | ||
(843 | ) | (963 | ) | (636 | ) | |||
Plant operating costs and other | (342 | ) | (454 | ) | (226 | ) | ||
Depreciation | (81 | ) | (48 | ) | (32 | ) | ||
Operating income | 338 | 255 | 187 | |||||