TransCanada Announces Strong Third Quarter Results, Board Declares Dividend of $0.34 Per Common Share
TransCanada Corporation (TSX: TRP)(NYSE: TRP) –
Third Quarter Highlights
(All financial figures are unaudited and in Canadian dollars unless noted otherwise)
– Net income for third quarter 2007 of $324 million ($0.60 per share) compared to $293 million ($0.60 per share) in third quarter 2006
– Comparable earnings for third quarter 2007 of $309 million ($0.57 per share), compared to $243 million ($0.50 per share) for the same period in 2006, an increase of approximately 14 per cent on a per share basis
– Funds generated from operations for third quarter 2007 of $702 million compared to $662 million for the same period in 2006, an increase of approximately six per cent
– Dividend of $0.34 per common share declared by the Board of Directors
– Significant advancement on the Keystone Oil Pipeline project and expanded scope of the Bruce A Restart and Refurbishment Project
“TransCanada’s strong financial performance during the third quarter is a result of solid contributions from our existing assets, and our continued disciplined approach to growing our pipelines and energy businesses,” said Hal Kvisle, president and chief executive officer. “The acquisition of ANR, and the completion of Becancour and Edson facilities in late 2006, have contributed to increased earnings and cash flow in 2007. As we move ahead on our portfolio of large scale infrastructure projects such as Keystone and the Bruce A refurbishment, we expect to continue to generate strong returns for our shareholders.”
TransCanada Corporation (TransCanada) reported net income for third quarter 2007 of $324 million ($0.60 per share) compared to $293 million ($0.60 per share) for third quarter 2006.
Comparable earnings were $309 million ($0.57 per share) for third quarter 2007 compared to $243 million ($0.50 per share) in third quarter 2006. The $66 million ($0.07 per share) increase was due to higher contributions from both the Pipelines and Energy businesses. The increase in Pipelines was primarily due to additional income earned from the acquisition of ANR and higher earnings from the Canadian Mainline. The increase in the Energy business was primarily due to the impact of higher realized power prices in Alberta and the start-up of the Becancour and Edson facilities in late 2006. Comparable earnings in third quarter 2007 excluded $15 million of favourable tax reassessments and associated interest income relating to prior years, and in third quarter 2006, excluded a $50 million income tax benefit related to the resolution of certain income tax matters with taxation authorities and changes in estimates.
Net income and net income from continuing operations were $846 million ($1.60 per share) for the first nine months in 2007 compared to net income of $810 million ($1.66 per share), and net income from continuing operations of $782 million ($1.60 per share) for the same period last year.
Comparable earnings for the first nine months of 2007 were $800 million ($1.51 per share), compared to $668 million ($1.36 per share) for the same period in 2006. The $132 million ($0.15 per share) increase was primarily due to additional income earned from the acquisition of ANR, higher earnings from the Canadian Mainline, higher realized power prices in Alberta and the start-up of the Becancour and Edson facilities in late 2006. Partially offsetting these increases was a lower contribution from Bruce Power. Comparable earnings for the nine months ended September 30, 2007 excluded positive income tax adjustments of $46 million. Comparable earnings for the nine months ended September 30, 2006, excluded $83 million in favourable income tax adjustments, an $18-million bankruptcy settlement with Mirant, and a $13-million gain on the sale of TransCanada’s interest in Northern Border Partners, L.P.
Net cash provided by operations in third quarter 2007 was $834 million compared to $619 million for the same period in 2006. Net cash provided by operations for the nine months ended 2007 was $2.14 billion compared to $1.58 billion for the same period in 2006. The increase in net cash provided by operations was primarily due to an increase in funds generated from operations and a decrease in operating working capital.
Funds generated from operations of $ 702 million and $1.88 billion for the three and nine months ended September 30, 2007 increased $40 million and $162 million, respectively, when compared to the same periods in 2006. These increases were mainly due to an increase in cash generated through earnings.
Notable recent developments in Pipelines, Energy and Corporate include:
Pipelines:
– TransCanada reached another major milestone on the Keystone Oil Pipeline project after receiving NEB approval to construct and operate the Canadian portion of the Keystone Oil pipeline. The approval includes converting a portion of the Canadian Mainline to crude oil service from natural gas service, and includes agreement on the toll methodology and tariff. Construction is anticipated to begin in early 2008 and Keystone is expected to be in-service in fourth quarter 2009.
– Based on strong industry support for Keystone, TransCanada has entered into contracts or conditionally awarded approximately US$3.0 billion for major materials and pipeline construction contractors and is continuing to secure land access agreements in preparation for the start of construction in the spring of 2008. The capital cost of Keystone is expected to be approximately US$5.2 billion based on the increased size and scope of the project and the executed material and service construction contracts. In November, an application with the National Energy Board (NEB) is expected to be filed for additional pumping facilities required to expand Keystone from a nominal capacity of approximately 435,000 barrels per day to 590,000 barrels per day.
– TransCanada and Northwest Natural Gas Company announced the formation of Palomar Gas Transmission. Palomar proposes to build a natural gas pipeline that would serve growing markets in Oregon, the Pacific Northwest, and the western U.S. If approved, and with sufficient shipper interest, the new pipeline is scheduled to begin service in late 2011.
– After a July 2007 approval from the Energy and Utilities Board (Alberta) to initiate negotiations with respect to the Alberta System revenue requirement, negotiations with stakeholders began in September 2007 and are ongoing. The intent is to reach a settlement for a term of up to three years beginning January 1, 2008.
– In October 2007, TransCanada’s North Baja pipeline received a certificate from the U.S. Federal Energy Regulatory Commission authorizing it to expand and modify its existing system. The modification will facilitate the importation of regassified liquefied natural gas from Mexico into the California and Arizona markets.
Energy:
– TransCanada announced the expansion of the Unit 4 refurbishment on the revised Bruce A Restart project that includes installing 480 new fuel channels in Unit 4. This will extend the expected operational life of the 750 MW unit from 2017 to 2036. The expansion is estimated to be an additional $1 billion, resulting in a total investment in the restart and refurbishment program of approximately $5.25 billion. TransCanada’s share is expected to be approximately $2.6 billion.
– Construction began at Halton Hills Generating Station, a 683 MW natural gas-fired power plant in Halton Hills, Ontario. The facility is anticipated to be in-service by the summer of 2010.
– Construction is progressing as planned on the Portlands Energy Centre (550 MW), a partnership with Ontario Power Generation.
– Cartier Wind received environmental approval from the Quebec Government to build its proposed $170-million Carleton wind farm on the Gaspe Peninsula of Quebec. The Carleton wind farm (109.5 MW) is the third project to be developed after Hydro-Quebec’s first wind energy call for tenders in 2004. TransCanada has a 62 per cent ownership interest in Cartier Wind.
– TransCanada and the Saskatchewan Government agreed to contribute up to $26 million each for the engineering design phase of a proposed polygeneration plant. The Belle Plaine facility would use petroleum coke as feedstock to produce valuable products with very low emissions, and generate 300 MW of electricity.
Corporate:
– In October 2007, TransCanada sold US$1 billion of 30-year senior notes bearing a coupon of 6.20 per cent. Proceeds will be used to repay outstanding commercial paper and for general corporate purposes.
Teleconference – Audio and Slide Presentation
TransCanada will hold a teleconference today at 8:00 a.m. (Mountain) / 10 a.m. (Eastern) to discuss the third quarter 2007 financial results and general developments and issues concerning the company. Analysts, members of the media and other interested parties wanting to participate should phone
1-866-299-6655 or 416-641-6140 (Toronto area) at least 10 minutes prior to the start of the teleconference. No passcode is required. A live audio and slide presentation webcast of the teleconference will also be available on TransCanada’s website at www.transcanada.com.
The conference will begin with a short address by members of TransCanada’s executive management, followed by a question and answer period for investment analysts. A question and answer period for members of the media will immediately follow.
A replay of the teleconference will be available two hours after the conclusion of the call until midnight (Eastern) November 6, 2007. Please call 1-800-408-3053 or 416-695-5800 (Toronto area) and enter passcode 3239079#. The webcast will be archived and available for replay on www.transcanada.com.
About TransCanada
With more than 50 years experience, TransCanada is a leader in the responsible development and reliable operation of North American energy infrastructure including natural gas pipelines, power generation, gas storage facilities, and projects related to oil pipelines and LNG facilities. TransCanada’s network of wholly owned pipelines extends more than 59,000 kilometres (36,500 miles), tapping into virtually all major gas supply basins in North America. TransCanada is one of the continent’s largest providers of gas storage and related services with approximately 360 billion cubic feet of storage capacity. A growing independent power producer, TransCanada owns, or has interests in, approximately 7,700 megawatts of power generation in Canada and the United States. TransCanada’s common shares trade on the Toronto and New York stock exchanges under the symbol TRP.
FORWARD-LOOKING INFORMATION
This news release may contain certain information that is forward looking and is subject to important risks and uncertainties. The words “anticipate”, “expect”, “may”, “should”, “estimate”, “project”, “outlook”, “forecast” or other similar words are used to identify such forward-looking information. All forward-looking statements are based on TransCanada’s beliefs and assumptions based on information available at the time such statements were made. The results or events predicted in this information may differ from actual results or events. Factors which could cause actual results or events to differ materially from current expectations include, among other things, the ability of TransCanada to successfully implement its strategic initiatives and whether such strategic initiatives will yield the expected benefits, the availability and price of energy commodities, regulatory decisions, changes in environmental and other laws and regulations, competitive factors in the pipeline and energy industry sectors, construction and completion of capital projects, access to capital markets, interest and currency exchange rates, technological developments and the current economic conditions in North America. By its nature, such 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. For additional information on these and other factors, see the reports filed by TransCanada with Canadian securities regulators and with the U.S. Securities and Exchange 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 news release or as otherwise stated, and 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” and “funds generated from operations” in this news release. These measures do not have any standardized meaning prescribed by generally accepted accounting principles (GAAP) and are therefore considered to be non-GAAP measures. These measures are unlikely to be comparable to similar measures presented by other entities. These measures have been used to provide readers with additional information on TransCanada’s operating performance, liquidity and its ability to generate funds to finance its operations. These measures are used by Management to increase comparability of financial results between reporting periods and to enhance its understanding of operating performance, liquidity and ability to generate funds to finance operations.
Comparable earnings is comprised of net income from continuing operations adjusted for specific items that are significant and not typical of the Company’s operations. The identification of specific items is subjective and management uses judgement in determining the items to be excluded in calculating comparable earnings. Specific items may include, but are not limited to, certain income tax refunds and adjustments, gains or losses on sales of assets, legal settlements and bankruptcy settlements received from former customers. A reconciliation of comparable earnings to net income is presented in the Consolidated Results of Operation section in the Management’s Discussion and Analysis accompanying this news release. 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 is comprised of 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 Third Quarter 2007 Financial Highlights chart in this news release.
Third Quarter 2007 Financial Highlights (unaudited) Three months ended Nine months ended Operating Results September 30 September 30 (millions of dollars) 2007 2006 2007 2006 ————————————————————————— Revenues 2,210 1,850 6,671 5,429 Net Income Continuing operations 324 293 846 782 Discontinued operations – – – 28 ———————————————- 324 293 846 810 ———————————————- ———————————————- Comparable Earnings(1) 309 243 800 668 ———————————————- ———————————————- Cash Flows Funds generated from operations(1) 702 662 1,880 1,718 Decrease/(increase) in operating working capital 132 (43) 261 (136) ———————————————- Net cash provided by operations 834 619 2,141 1,582 ———————————————- ———————————————- Capital Expenditures 364 372 1,056 1,002 Acquisitions, Net of Cash Acquired (2) – 4,222 358 ————————————————————————— ————————————————————————— Three months ended Nine months ended September 30 September 30 Common Share Statistics 2007 2006 2007 2006 ————————————————————————— Net Income Per Share – Basic Continuing operations $0.60 $0.60 $1.60 $1.60 Discontinued operations – – – 0.06 ———————————————- $0.60 $0.60 $1.60 $1.66 ———————————————- ———————————————- Comparable Earnings Per Share – Basic(1) $0.57 $0.50 $1.51 $1.36 Dividends Declared Per Share $0.34 $0.32 $1.02 $0.96 Basic Common Shares Outstanding (millions) Average for the period 537 488 527 488 End of period 538 488 538 488 ————————————————————————— ————————————————————————— (1)For a further discussion on comparable earnings, funds generated from operations and comparable earnings per share, refer to the Non-GAAP Measures section in this News Release. TRANSCANADA CORPORATION – THIRD QUARTER 2007 Quarterly Report to Shareholders
Management’s Discussion and Analysis
The Management’s Discussion and Analysis (MD&A) dated October 29, 2007 should be read in conjunction with the accompanying unaudited Consolidated Financial Statements of TransCanada Corporation (TransCanada or the Company) for the three and nine months ended September 30, 2007. It should also be read in conjunction with the audited Consolidated Financial Statements and notes thereto, and the MD&A contained in TransCanada’s 2006 Annual Report for the year ended December 31, 2006. Additional information relating to TransCanada, including the Company’s Annual Information Form and other continuous disclosure documents, is available on SEDAR at www.sedar.com under TransCanada Corporation. Amounts are stated in Canadian dollars unless otherwise indicated. Capitalized and abbreviated terms that are used but not otherwise defined herein are identified in the Glossary of Terms contained in TransCanada’s 2006 Annual Report.
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”, “may”, “should”, “estimate”, “project”, “outlook”, “forecast” or other similar words are used to identify such forward-looking information. All forward-looking statements are based on TransCanada’s beliefs and assumptions based on information available at the time such statements were made. The results or events predicted in this information may differ from actual results or events. Factors which could cause actual results or events to differ materially from current expectations include, among other things, the ability of TransCanada to successfully implement its strategic initiatives and whether such strategic initiatives will yield the expected benefits, the availability and price of energy commodities, regulatory decisions, changes in environmental and other laws and regulations, competitive factors in the pipeline and energy industry sectors, construction and completion of capital projects, access to capital markets, interest and currency exchange rates, technological developments and the current economic conditions in North America. By its nature, such 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. For additional information on these and other factors, see the reports filed by TransCanada with Canadian securities regulators and with the U.S. Securities and Exchange Commission (SEC). 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 MD&A or as otherwise stated, and 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
The Company 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 generally accepted accounting principles (GAAP) and are therefore considered to be non-GAAP measures. These measures are unlikely to be comparable to similar measures presented by other entities. These measures have been used to provide readers with additional information on the Company’s operating performance, liquidity and its ability to generate funds to finance its operations. These measures are used by Management to increase comparability of financial results between reporting periods and to enhance its understanding of operating performance, liquidity and ability to generate funds to finance operations.
Comparable earnings is comprised of net income from continuing operations adjusted for specific items that are significant and not typical of the Company’s operations. The identification of specific items is subjective and management uses judgement in determining the items to be excluded in calculating comparable earnings. Specific items may include, but are not limited to, certain income tax refunds and adjustments, gains or losses on sales of assets, legal settlements and bankruptcy settlements received from former customers. A reconciliation of comparable earnings to net income is presented in the Consolidated Results of Operations section in this MD&A. 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 is comprised of 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 Liquidity and Capital Resources section in this MD&A.
Operating income is used in the Energy segment and is comprised of revenues less operating expenses as shown on the consolidated income statement. A reconciliation of operating income to net earnings is presented in the Energy section in this MD&A.
Consolidated Results of Operations Reconciliation of Comparable Earnings to Net Income (unaudited) Three months ended Nine months ended (millions of dollars September 30 September 30 except per share amounts) 2007 2006 2007 2006 ————————————————————————— Pipelines Comparable earnings 163 130 484 403 Specific items: Bankruptcy settlement with Mirant – – – 18 Gain on sale of Northern Border Partners, L.P interest – – – 13 ———————————————- Net earnings 163 130 484 434 ———————————————- Energy Comparable earnings 156 123 352 297 Specific item: Income tax adjustments – – 4 23 ———————————————- Net earnings 156 123 356 320 ———————————————- Corporate Comparable (expenses)/ earnings (10) (10) (36) (32) Specific item: Income tax reassessments and adjustments 15 50 42 60 ———————————————- Net earnings 5 40 6 28 ———————————————- Net Income Continuing operations(1) 324 293 846 782 Discontinued operations – – – 28 ———————————————- Net Income 324 293 846 810 ———————————————- ———————————————- Net Income Per Share Continuing operations(2) $0.60 $0.60 $1.60 $1.60 Discontinued operations – – – 0.06 ———————————————- Basic $0.60 $0.60 $1.60 $1.66 ———————————————- ———————————————- Diluted $0.60 $0.60 $1.60 $1.65 ———————————————- ———————————————- (1)Comparable Earnings 309 243 800 668 Specific items (net of tax, where applicable): Income tax reassessments and adjustments 15 50 46 83 Bankruptcy settlement with Mirant – – – 18 Gain on sale of Northern Border Partners, L.P. interest – – – 13 ———————————————- Net Income from Continuing Operations 324 293 846 782 ———————————————- ———————————————- (2)Comparable Earnings Per Share $0.57 $0.50 $1.51 $1.36 Specific items – per share Income tax reassessments and adjustments 0.03 0.10 0.09 0.17 Bankruptcy settlement with Mirant – – – 0.04 Gain on sale of Northern Border Partners, L.P. interest – – – 0.03 ———————————————- Net Income Per Share from Continuing Operations $0.60 $0.60 $1.60 $1.60 ———————————————- ———————————————-
TransCanada’s net income and net income from continuing operations (net earnings) in third quarter 2007 were $324 million or $0.60 per share compared to $293 million or $0.60 per share in third quarter 2006. The $31-million increase in net income and net earnings in third quarter 2007 compared to 2006 was primarily due to income from the acquisition of ANR in February 2007, higher realized Alberta power prices, the start-up of the Becancour and Edson facilities, and higher income recorded due to a five-year settlement on the Canadian Mainline approved by the National Energy Board (NEB) in May 2007. Third quarter 2007 net earnings included $15 million of favourable income tax reassessments and associated interest income relating to prior years, compared with an income tax benefit of $50 million recorded in third quarter 2006 relating to the resolution of certain income tax matters with taxation authorities and changes in estimates. On a per share basis, net income in third quarter 2007 remained consistent with third quarter 2006 although the Company had an increased number of shares outstanding following the Company’s share issuances in 2007.
Comparable earnings for third quarter 2007 were $309 million or $0.57 per share, compared to $243 million or $0.50 per share for the same period in 2006. Comparable earnings excluded the above-mentioned $15-million and $50-million positive income tax reassessments and adjustments in third quarter 2007 and 2006, respectively.
Net income and net earnings were $846 million or $ 1.60 per share for the first nine months in 2007 compared to net income of $810 million or $1.66 per share, and net earnings of $782 million or $1.60 per share for the same period last year. The increase in net income and net earnings was due to factors discussed above as well as additional positive income tax adjustments of $ 31 million in the first six months of 2007 due to changes in Canadian federal income tax legislation, the resolution of certain income tax matters and an internal restructuring. These increases were partially offset by decreased earnings from Bruce Power. Net income and net earnings for the nine months ended September 30, 2006 included approximately $83 million in favourable income tax adjustments and benefits from the resolution of certain income tax matters, reductions in Canadian federal and provincial income tax rates and changes in estimates. In addition, net income and net earnings in 2006 included an $18-million after-tax ($29 million pre-tax) bankruptcy settlement with Mirant Corporation and certain of its subsidiaries (Mirant) and a $13 million after-tax ($23 million pre-tax) gain on the sale of TransCanada’s general partner interest in Northern Border Partners, L.P. TransCanada’s net income for the nine months ended September 30, 2006 also included net income from discontinued operations of $28 million or $0.06 per share, reflecting bankruptcy settlements with Mirant received in first quarter 2006 related to the Gas Marketing business divested in 2001. On a per share basis, net earnings for the first nine months in 2007 remained consistent with the same period in 2006 although the Company had an increased number of shares outstanding following the Company’s share issuances in 2007.
Comparable earnings for the first nine months of 2007 were $800 million or $1.51 per share, compared to $668 million or $ 1.36 per share for the same period in 2006. Comparable earnings for the nine months ended September 30, 2007 excluded positive income tax reassessments and adjustments of $46 million. Comparable earnings for the nine months ended September 30, 2006, excluded $83 million in favourable income tax adjustments, the $18-million bankruptcy settlement with Mirant and the $13-million gain on the sale of TransCanada’s interest in Northern Border Partners, L.P.
Results from each business segment for the three and nine months ended September 30, 2007 are discussed further in the Pipelines, Energy and Corporate sections of this MD&A.
Funds generated from operations of $ 702 million and $1,880 million for the three and nine months ended September 30, 2007 increased $40 million and $162 million, respectively, compared to the same periods in 2006.
Pipelines
The Pipelines business generated net earnings and comparable earnings of $163 million in third quarter 2007, an increase of $33 million compared to $130 million in third quarter 2006.
Net earnings for the nine months ended September 30, 2007 were $484 million compared to $434 million for the same period in 2006. Excluding the $18-million Mirant settlement in first quarter 2006 and the $13-million gain on the sale of TransCanada’s interest in Northern Border Partner’s L.P. in second quarter 2006, comparable earnings increased $81 million compared to 2006.
Pipelines Results-at-a-Glance Three months ended Nine months ended (unaudited) September 30 September 30 (millions of dollars) 2007 2006 2007 2006 ————————————————————————— Wholly Owned Pipelines Canadian Mainline 69 59 201 179 Alberta System 32 35 97 102 ANR(1) 19 69 GTN 10 12 26 39 Foothills(2) 6 7 20 21 ———————————————- 136 113 413 341 ———————————————- Other Pipelines Great Lakes(3) 11 10 36 33 Iroquois 3 4 11 11 Portland 1 6 7 10 PipeLines LP(4) 8 (1) 14 3 Ventures LP 3 3 9 9 TQM 2 2 5 5 TransGas 2 3 10 8 Gas Pacifico/INNERGY – 1 2 5 Tamazunchale 2 7 Northern Development (1) (1) (3) (3) General, administrative, support costs and other (4) (10) (27) (19) ———————————————- 27 17 71 62 ———————————————- Comparable earnings 163 130 484 403 Bankruptcy settlement with Mirant – – – 18 Gain on sale of Northern Border Partners, L.P. interest – – – 13 ———————————————- Net Earnings 163 130 484 434 ———————————————- ———————————————- (1)ANR’s results include operations since February 22, 2007. (2)Foothills’ results reflect the combined operations of Foothills and the BC System. Effective April 1, 2007, Foothills and BC System were integrated. (3)Great Lakes’ results reflect TransCanada’s 53.55 per cent ownership in Great Lakes since February 22, 2007 and 50 per cent ownership prior to that date. (4)PipeLines LP’s results include TransCanada’s effective ownership of an additional 15 per cent in Great Lakes as a result of TransCanada’s 32.1 per cent interest in PipeLines LP since February 22, 2007.
Wholly Owned Pipelines
Canadian Mainline’s net earnings increased $10 million and $22 million for the three and nine months ended September 30, 2007, respectively, compared to the corresponding periods in 2006. These increases reflect the impact of a five-year tolls settlement (the Settlement) with interested stakeholders effective January 1, 2007 to December 31, 2011 on the Canadian Mainline. The Settlement was approved by the NEB in May 2007 and included an increase in the deemed common equity ratio from 36 per cent to 40 per cent.
As a result of the Settlement, Canadian Mainline’s net earnings for the three and nine months ended September 30, 2007 increased due to the higher deemed common equity ratio compared to the same period in the prior year. In addition, Canadian Mainline’s net earnings were positively impacted by certain performance-based incentive arrangements and operations, maintenance and administrative cost savings. Partially offsetting these increases were the negative impacts of a lower rate of return on common equity (ROE) of 8.46 per cent in 2007 (8.88 per cent in 2006) and a lower average investment base.
The Alberta System’s net earnings decreased $3 million and $5 million for the three and nine months ended September 30, 2007, respectively, compared to the same periods in 2006. The decreases were primarily due to a lower investment base and a lower ROE in 2007. Earnings in 2007 reflect an ROE of 8.51 per cent compared to an ROE of 8.93 per cent in 2006, both on a deemed common equity ratio of 35 per cent.
For the three and nine months ended September 30, 2007, ANR’s net earnings were $19 million and $69 million, respectively, which are generally in line with the Company’s expectations. TransCanada completed the acquisition of ANR on February 22, 2007 and included its net earnings from this date. ANR’s revenues are primarily derived from its interstate natural gas transmission, storage, gathering and related services. Due to the seasonal nature of the business, ANR’s volumes, revenues and net earnings are generally expected to be higher in the winter months.
GTN’s net earnings for the three and nine months ended September 30, 2007 decreased $2 million and $13 million, respectively, from the same periods in 2006 primarily due to lower operating revenues in 2007 as a result of lower volumes contracted on a long-term firm basis and a higher provision taken in 2007 for non-payment of contract transportation revenues from a subsidiary of Calpine Corporation that filed for bankruptcy protection. Pending resolution of GTN’s current rate case filing, GTN is recording its 2007 revenues at 2006 rates. As a result, GTN has been recording a provision for rate refund equal to the difference in transportation revenue based on GTN’s interim 2007 rates and the rates that were in effect in 2006.
Operating Statistics Gas Nine months Transmission ended Canadian Alberta Northwest September 30 Mainline(1) System(2) ANR(3)(4) System(3) Foothills(5) (unaudited) 2007 2006 2007 2006 2007 2007 2006 2007 2006 ————————————————————————— Average investment base ($ millions) 7,323 7,450 4,236 4,293 n/a n/a n/a 824 856 Delivery volumes (Bcf) Total 2,359 2,209 2,994 3,033 829 600 592 1,058 1,051 Average per day 8.6 8.1 11.0 11.1 3.8 2.2 2.2 3.9 3.9 ————————————————————————— (1)Canadian Mainline deliveries originating at the Alberta border and in Saskatchewan for the nine months ended September 30, 2007 were 1,655 Bcf (2006 – 1,694 Bcf); average per day was 6.1 Bcf (2006 – 6.2 Bcf). (2)Field receipt volumes for the Alberta System for the nine months ended September 30, 2007 were 3,064 Bcf (2006 – 3,133 Bcf); average per day was 11.2 Bcf (2006 – 11.5 Bcf). (3)ANR and the Gas Transmission Northwest System results are not impacted by current average investment base as these systems operate under a fixed rate model approved by the U.S. Federal Energy Regulatory Commission (FERC). (4)ANR includes results of pipeline operations since February 22, 2007. (5)Foothills reflects the combined operations of Foothills and the BC System. Effective April 1, 2007, Foothills and BC System were integrated.
Other Pipelines
TransCanada’s proportionate share of net earnings from Other Pipelines was $27 million for the three months ended September 30, 2007 compared to $17 million for the same period in 2006. The increase is primarily due to increased earnings from PipeLines LP and lower project development costs. PipeLines LP’s earnings increased primarily due to TransCanada’s increased partnership interest and PipeLines LP’s acquisition of a 46.45 per cent interest in Great Lakes on February 22, 2007, as well as an adjustment recorded in third quarter 2007 related to TransCanada’s increased ownership. Project development costs decreased due to the timing of costs incurred relative to the same period last year and the capitalization of project costs related to the Keystone oil pipeline extension in third quarter 2007. Net earnings also increased in third quarter 2007 due to earnings from Tamazunchale, which commenced operations in December 2006. These increases were partially offset by decreased earnings from Portland, in comparison to the prior year, due to a bankruptcy settlement received in 2006.
Net earnings for the nine months ended September 30, 2007 were $71 million compared to $62 million in the same period in 2006. Net earnings increased in 2007 primarily due to increased earnings from Tamazunchale and PipeLines LP, as discussed above, partially offset by higher project development and support costs related to growing the Pipelines business.
The Company is currently evaluating the impact of Mexico’s Corporate Flat Rate Tax legislation, which passed into law on October 1, 2007. The Company anticipates that the legislation will not have a material impact on its financial statements.
As at September 30, 2007, TransCanada had advanced $135 million to the Aboriginal Pipeline Group with respect to the Mackenzie Gas Pipeline Project (MGP) and had capitalized $204 million related to the Keystone oil pipeline.
TransCanada and its co-venturers on the MGP continue to pursue the development of the project, focusing on the regulatory process and discussions with the Canadian federal government on fiscal framework. Project timing is uncertain and is conditional upon regulatory and fiscal matters. TransCanada’s ability to recover its investment remains dependent on the successful outcome of the project.
Energy
Energy’s net earnings of $156 million in third quarter 2007 increased $33 million compared to $123 million in third quarter 2006.
Energy’s net earnings for the nine months ended September 30, 2007 of $356 million increased $36 million compared to $320 million for the same period in 2006. Excluding the $4 million of income tax adjustments in 2007 and $23 million of income tax adjustments in 2006, Energy’s comparable earnings for the nine months ended September 30, 2007 increased $55 million.
Energy Results-at-a-Glance Three months ended Nine months ended (unaudited) September 30 September 30 (millions of dollars) 2007 2006 2007 2006 ————————————————————————— Bruce Power 64 72 124 176 Western Power Operations 120 84 250 188 Eastern Power Operations 52 40 189 132 Natural Gas Storage 39 24 89 63 General, administrative, support costs and other (38) (35) (113) (100) ———————————————- Operating income 237 185 539 459 Financial charges (6) (5) (16) (17) Interest income and other 2 2 8 5 Income taxes (77) (59) (179) (150) ———————————————- Comparable Earnings 156 123 352 297 Income tax adjustments – – 4 23 ———————————————- Net earnings 156 123 356 320 ———————————————- ———————————————- Bruce Power Bruce Power Results-at-a-Glance(1) Three months ended Nine months ended September 30 September 30 (unaudited) 2007 2006 2007 2006 ————————————————————————— Bruce Power (100 per cent basis) (millions of dollars) Revenues Power 517 478 1,427 1,396 Other(2) 35 15 85 43 ———————————————- 552 493 1,512 1,439 ———————————————- Operating expenses Operations and maintenance (239) (210) (793) (656) Fuel (23) (26) (76) (68) Supplemental rent (43) (42) (128) (127) Depreciation and amortization (43) (34) (115) (99) ———————————————- (348) (312) (1,112) (950) ———————————————- Operating Income 204 181 400 489 ———————————————- ———————————————- TransCanada’s proportionate share 69 69 137 170 Adjustments (5) 3 (13) 6 ———————————————- TransCanada’s operating income from Bruce Power 64 72 124 176 ———————————————- ———————————————- Bruce Power – Other Information Plant availability Bruce A 79% 86% 81% 76% Bruce B 96% 92% 88% 94% Combined Bruce Power 90% 90% 86% 88% Sales volumes (GWh)(3) Bruce A – 100 per cent 2,610 2,850 7,930 7,440 Bruce B – 100 per cent 6,820 6,540 18,620 19,790 Combined Bruce Power – 100 per cent 9,430 9,390 26,550 27,230 TransCanada’s proportionate share 3,427 3,448 9,747 9,848 Results per MWh(4) Bruce A power revenues $60 $59 $59 $58 Bruce B power revenues $53 $48 $52 $49 Combined Bruce Power revenues $55 $51 $54 $51 Combined Bruce Power fuel $ 3 $ 3 $ 3 $ 2 Combined Bruce Power operating expenses(5) $36 $32 $41 $34 Percentage of output sold to spot market 52% 33% 45% 37% ———————————————- ———————————————- (1)All information in the table includes adjustments to eliminate the effects of inter-partnership transactions between Bruce A and Bruce B. (2)Includes fuel cost recoveries for Bruce A of $9 million and $26 million for the three and nine months ended September 30, 2007, respectively ($9 million and $19 million for the three and nine months ended September 30, 2006, respectively). Includes changes in fair value of held-for-trading derivatives of $18 million and $36 million for the three and nine months ended September 30, 2007, respectively (nil for each of the three and nine months ended September 30, 2006). (3)Gigawatt hours. (4)Megawatt hours. (5)Net of fuel cost recoveries.
TransCanada’s operating income of $64 million from its investment in Bruce Power decreased $8 million in third quarter 2007 compared to third quarter 2006 primarily due to higher post-employment benefit and other employee-related costs, higher costs associated with planned and unplanned outages (mainly at Bruce A), and lower positive purchase price amortizations related to the expiry of power sales agreements. These impacts were partially offset by higher revenues resulting primarily from higher realized prices.
TransCanada’s share of Bruce Power’s generation for third quarter 2007 of 3,427 GWh is consistent with third quarter 2006 generation of 3,448 GWh. Bruce Power prices achieved during third quarter 2007 (excluding other revenues) were $55 per MWh compared to $51 per MWh in third quarter 2006. Bruce Power’s combined operating expenses (net of fuel cost recoveries) in third quarter 2007 increased to $ 36 per MWh from $32 per MWh in third quarter 2006 which, consistent with the nine-months results, was primarily due to higher employee-related and planned outage costs, and slightly lower output.
Approximately 25 reactor days of planned maintenance outages as well as approximately 12 reactor days of unplanned outages occurred on the six operating units in third quarter 2007. In third quarter 2006, Bruce Power experienced approximately 22 reactor days of planned maintenance outages and 20 reactor days of unplanned outages. The Bruce Power units ran at a combined average availability of 90 per cent in both third quarter 2007 and 2006.
TransCanada’s operating income from its investment in Bruce Power for the nine months ended September 30, 2007 was $124 million compared to $176 million for the same period in 2006. The decrease of $52 million was primarily due to higher post-employment benefit and other employee-related costs, reduced output, higher costs associated with planned and unplanned outages, and lower positive purchase price amortizations related to the expiry of power sales agreements. Partially offsetting these decreases was the impact of higher realized prices.
The overall plant availability percentage in 2007 is expected to be in the low 90s for the four Bruce B units and in the high 70s for the two operating Bruce A units. Two planned outages were scheduled for Bruce A Unit 3 in 2007. The first planned one month outage was completed in May. A second outage that began late in third quarter 2007 is expected to last approximately one and a half months. Similarly, there were two planned outages for Bruce A Unit 4 in 2007, one completed in April and a second one completed in September. A planned two and a half month maintenance outage for Bruce B Unit 6 was completed in April.
Income from Bruce B is directly impacted by the fluctuations in wholesale spot market prices for electricity. Net earnings from both Bruce A and Bruce B units are impacted by overall plant availability, which in turn is impacted by scheduled and unscheduled maintenance. As a result of a contract with the Ontario Power Authority (OPA), all of the output from Bruce A in third quarter 2007 was sold at a fixed price of $59.69 per MWh (before recovery of fuel costs from the OPA) compared to $58.63 per MWh for third quarter 2006. Sales from the Bruce B Units 5 to 8 were subject to a floor price of $46.82 per MWh in third quarter 2007 and $45.99 per MWh in third quarter 2006. Both the Bruce A and Bruce B reference prices are adjusted annually for inflation on April 1. In first quarter 2007, the Bruce A fixed price was $58.63 per MWh (2006 – $57.37 per MWh) and the Bruce B floor price was $45.99 per MWh (2006 – $45.00 per MWh). Payments received pursuant to the Bruce B floor price mechanism are subject to a recapture payment dependent on annual spot prices over the term of the contract. Bruce B net earnings do not include any amounts received under this floor price mechanism to date. To further reduce its exposure to spot market prices, Bruce B has entered into fixed price sales contracts to sell forward approximately 2,500 GWh of output for the remainder of 2007 and 8,600 GWh for 2008.
The capital cost of Bruce A’s revised four-unit, seven-year restart and refurbishment project is expected to total approximately $5.25 billion, with TransCanada’s share being approximately $2.6 billion. As at September 30, 2007, Bruce A had incurred capital costs of $1.8 billion with respect to the revised restart and refurbishment project.
Western Power Operations Western Power Operations Results-at-a-Glance (unaudited) Three months ended Nine months ended (millions of September 30 September 30 dollars) 2007 2006 2007 2006 ————————————————————————— Revenues Power 325 311 832 807 Other(1) 22 32 71 134 ———————————————- 347 343 903 941 ———————————————- Commodity purchases resold Power (172) (194) (486) (534) Other(2) (18) (27) (53) (103) ———————————————- (190) (221) (539) (637) ———————————————- Plant operating costs and other (32) (32) (100) (100) Depreciation (5) (6) (14) (16) ———————————————- Operating income 120 84 250 188 ———————————————- ———————————————- (1)Other revenue includes Cancarb Thermax and natural gas sold. (2)Other cost of sales includes the cost of natural gas sold. Western Power Operations Sales Volumes Three months ended Nine months ended (unaudited) September 30 September 30 (GWh) 2007 2006 2007 2006 ————————————————————————— Supply Generation 560 599 1,683 1,622 Purchased Sundance A & B and Sheerness PPAs 2,860 3,283 8,990 9,520 Other purchases 362 455 1,227 1,460 ———————————————- 3,782 4,337 11,900 12,602 ———————————————- ———————————————- Sales Contracted 2,845 3,261 9,354 9,236 Spot 937 1,076 2,546 3,366 ———————————————- 3,782 4,337 11,900 12,602 ———————————————- ———————————————-
Western Power Operations’ operating income of $120 million in third quarter 2007 increased $36 million compared to $84 million in third quarter 2006. This increase was primarily due to increased margins from the Alberta power purchase arrangements (PPA) resulting from higher overall realized power prices and lower PPA costs, partially offset by lower volumes. Higher prices were realized despite a three per cent decrease in average Alberta spot market prices, due to recontracting at higher prices. Western Power Operations’ strategy is to reduce its exposure to lower spot market prices by contracting the majority of volumes and selling fewer volumes into the spot market.
Purchased volumes of 2,860 GWh in third quarter 2007 decreased 423 GWh compared to third quarter 2006 primarily due to a planned outage at the Sundance B facility.
Western Power Operations manages the sale of its supply volumes on a portfolio basis. A portion of its supply is held for sale in 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 assists in minimizing costs in situations where Western Power Operations would otherwise have to purchase electricity in the open market to fulfill its contractual sales obligations. Consistent with third quarter 2006, approximately 25 per cent of power sales volumes were sold into the spot market in third quarter 2007. To reduce its exposure to spot market prices on uncontracted volumes, as at September 30, 2007, Western Power Operations had fixed-price power sales contracts to sell approximately 2,600 GWh for the remainder of 2007 and 7,600 GWh for 2008.
Western Power Operations’ operating income for the nine months ended September 30, 2007 increased $62 million to $250 million compared to the same period in 2006. This increase was primarily due to higher overall realized power prices and lower PPA costs.
Eastern Power Operations Eastern Power Operations Results-at-a-Glance(1) (unaudited) Three months ended Nine months ended (millions of September 30 September 30 dollars) 2007 2006 2007 2006 ————————————————————————— Revenue Power 392 192 1,135 527 Other(2) 39 49 186 224 ———————————————- 431 241 1,321 751 ———————————————- Commodity purchases resold Power (226) (94) (586) (284) Other(2) (38) (47) (163) (196) ———————————————- (264) (141) (749) (480) ———————————————- Plant operating costs and other (103) (53) (347) (118) Depreciation (12) (7) (36) (21) ———————————————- Operating income 52 40 189 132 ———————————————- ———————————————- (1)Includes Becancour and Baie-des-Sables effective September 17, 2006 and November 21, 2006, respectively. (2)Other includes natural gas. Eastern Power Operations Sales Volumes(1) Three months ended Nine months ended (unaudited) September 30 September 30 (GWh) 2007 2006 2007 2006 ————————————————————————— Supply Generation 1,915 1,039 5,966 2,693 Purchased 2,087 934 5,175 2,331 ———————————————- 4,002 1,973 11,141 5,024 ———————————————- ———————————————- Sales Contracted 3,913 1,829 10,707 4,715 Spot 89 144 434 309 ———————————————- 4,002 1,973 11,141 5,024 ———————————————- ———————————————- (1)Includes Becancour and Baie-des-Sables effective September 17, 2006 and November 21, 2006, respectively.
Eastern Power Operations’ operating income of $ 52 million and $ 189 million for the three and nine months ended September 30, 2007, respectively, increased $12 million and $57 million, compared to the same periods in 2006. The increase was primarily due to incremental income earned in 2007 from the startup of the 550 MW Becancour cogeneration plant in September 2006 and payments received under the newly designed forward capacity market in New England, partially offset by decreased generation from the TC Hydro facilities resulting from reduced water flows.
Generation volumes in third quarter 2007 of 1,915 GWh increased 876 GWh compared to 1,039 GWh generated in third quarter 2006 primarily due to the placing into service of the Becancour facility, partially offset by decreased output from the TC Hydro generation assets resulting from reduced water flows.
Eastern Power Operations’ power revenues of $392 million increased $ 200 million in third quarter 2007, compared to third quarter 2006, primarily due to the placing into service of the Becancour and Baie-des-Sables facilities, increased sales volumes to commercial and industrial customers, and revenue received under the newly designed forward capacity market in New England. Power commodity purchases resold of $226 million and purchased power volumes of 2,087 GWh were significantly higher in third quarter 2007, compared to third quarter 2006, primarily due to the impact of increased purchases to supply increased sales volumes to wholesale, commercial and industrial customers. Plant operating costs and other of $103 million, which includes fuel gas consumed in generation, increased in third quarter 2007 from the prior year primarily as a result of the startup of the Becancour facility.
In third quarter 2007, approximately two per cent of power sales volumes were sold into the spot market compared to approximately seven per cent in third quarter 2006. Eastern Power Operations is focused on selling the majority of its power under contract to wholesale, commercial and industrial customers, while managing a portfolio of power supplies sourced from its own generation and wholesale power purchases. To reduce its exposure to spot market prices, as at September 30, 2007, Eastern Power Operations entered into fixed price power sales contracts to sell approximately 4,000 GWh for the remainder of 2007 and 12,400 GWh for 2008, although certain contracted volumes are dependent on customer usage levels.
Power Plant Availability
Weighted Average Power Plant Availability(1) Three months ended Nine months ended September 30 September 30 (unaudited) 2007 2006 2007 2006 ————————————————————————— Bruce Power 90% 90% 86% 88% Western Power Operations 91% 94% 93% 86% Eastern Power Opera