Home Annual Report 2001


Is there an appropriate level of competition in the natural gas pipeline business in Canada? Is it a good business for TransCanada?

Regulators, producers and pipeline operators have made major strides in recent years, introducing elements of a competitive structure to the Canadian natural gas pipeline industry. However, we still have some way to go before we achieve a business model that fosters competition without undue risk of over-building.

Rates of return on Canadian regulated pipelines are lower than in the United States. This limits our enthusiasm for further pipeline investments in Canada and that is frustrating - we genuinely want to serve our Canadian customers and we find it difficult to do so when Canadian returns are not competitive. In an increasingly continental energy market, it's in Canada's best interest to have strong Canadian pipeline companies that can move quickly to add capacity as required. To attract TransCanada's capital, our pipeline business needs to earn a fair return. That is the reason for our Fair Return Application before the National Energy Board.

What is TransCanada doing to better serve its customers?

We envision a responsive pipeline industry that offers a menu of services and pricing, along with the cost-effective reliability our customers have come to expect. TransCanada is taking a leadership role in articulating a new vision for the natural gas pipeline industry in Canada - one that reflects a new regulatory framework and offers real customer choice. We see our Alberta System evolving as the western hub, serving western producers and consumers, and our central Canada system evolving as an eastern hub, serving consumers in Ontario, Quebec and the eastern U.S. The steps to achieve this vision include clarifying the regulatory jurisdiction of our mainlines within Alberta; facilitating a trading hub in central Canada; establishing a new toll regime; and expanding export connections to the U.S. In January 2002, we began to share a discussion paper outlining our vision - over the course of the year we'll be working collaboratively with stakeholders toward these goals.

How is TransCanada positioning itself for a role in the development of northern gas reserves?

TransCanada is well positioned to play a key role in bringing natural gas from the Mackenzie Delta and Alaska to market. We are working to ensure Arctic natural gas ties into our system, which provides the greatest access to North American markets. Our experience and expertise in building and operating cold weather natural gas pipeline systems is unmatched in North America, as is our track record of bringing major pipeline projects in on time and on budget. TransCanada believes it makes sense to use spare capacity in our existing systems and augment that capacity as needed, giving customers considerable flexibility and minimizing up-front investment.

When will a northern pipeline become a reality?

The Alaska Highway and Mackenzie Valley pipelines will proceed when producers are ready to develop the gas reserves and commence production, and when regulatory approvals are in place. Once the pipeline approvals and logistics are in place, each pipeline will take approximately two years to construct. Given this schedule, we expect it will be five to ten years before either pipeline is operating.

We are convinced that gas from both Prudhoe Bay and the Mackenzie Delta will be needed to offset declines from existing basins and meet growing demand. The combined initial volumes from Prudhoe Bay and the Mackenzie Delta will be less than five per cent of North American gas demand. We expect the North American market will absorb those volumes very quickly.

Recently, you've had spare capacity on your pipeline systems. What steps are you taking to fill the pipe?

First, it's important to understand that spare capacity is not necessarily a bad thing. Through the 1990s, western Canadian producers were plagued by a shortage of pipeline capacity as production grew faster than new pipeline capacity could be approved and constructed. Gas that could have been exported to strong markets in the U.S. was trapped in Canada, resulting in wide price differentials and weak wellhead prices. This was an undesirable outcome that could have been avoided if there had been some mechanism to ensure a reasonable amount of spare capacity. We have committed to producers that we will do everything we can, working with them, to ensure there is never again a shortage of capacity.

Our current spare capacity enables us to quickly and effectively capture new supply opportunities. By maintaining spare capacity in Alberta and on our Canadian Mainline, we are able to accept incremental gas on short notice under short-term contracts - we could not do that when our pipes were running at capacity. Our flexibility and rapid response enabled us to capture the largest share of gas volumes from Ladyfern, one of the most significant gas discoveries in Western Canada in many years. Most of the Ladyfern gas is moving from British Columbia onto our Alberta System, from which it can be transported virtually anywhere in North America.

TransCanada is also working with industry to optimize our rates and service offerings to increase the value of our transportation capacity to customers.

In light of the difficulties faced by many energy companies in the latter half of 2001, what is your outlook for TransCanada?

We believe it's a good time for TransCanada to grow our core businesses of natural gas transmission and electric power. The longer-term business fundamentals remain strong with increased demand for both natural gas and electricity driven by population and economic growth.

At the same time, in the wake of the uncertainty in the energy sector in late 2001, we've experienced a renewed focus on credit quality, strong capitalization and stable operations. For TransCanada, where we've spent the last several years focusing our efforts on growing our core businesses, divesting non-core assets, reducing our debt and strengthening our balance sheet, this is a positive development. We continue to maintain 'A' category ratings with a stable outlook on our senior unsecured debt. Our credit rating, combined with our financial strength and flexibility, positions us to move quickly to acquire strategic assets. Our approach to growth will be opportunistic but deliberate.

Why is TransCanada - traditionally known as a natural gas pipeline company - moving aggressively into power?

A natural synergy exists between our pipeline and power businesses. Both businesses are capital intensive and require similar technical expertise. Both are driven by similar fundamentals - 40 to 50 per cent of the projected increase in demand for natural gas comes from power generation projects. In the current environment, with power offering higher returns than our Canadian regulated pipelines, we foresee strong earnings contributions from power developments and acquisitions.

Over the past three years, TransCanada has undergone significant change. How has this affected your workforce?

The transformation of the NOVA Gas Transmission and TransCanada organizations - two diversified, international companies with long-established corporate cultures - into one North American energy company posed numerous challenges. We had to make many difficult decisions that impacted our employees, yet we were able to successfully face those challenges through the commitment of our talented workforce. With the most significant organizational changes now behind us, we are committed to fostering a working environment that inspires excellence and positions us as one of the top employers in Canada.

We're continually working to evolve a new culture for TransCanada, strengthening the alignment of our human resource practices with our strategy, our company's values and our strong resolve to be competitive and create value for our customers and shareholders.

As a key player in the energy industry, what is TransCanada's position on Climate Change?

Climate Change is a complex issue that TransCanada takes very seriously. We have made considerable progress reducing our greenhouse gas (GHG) emissions as part of a larger effort to improve the combustion efficiency of our pipeline compression and power generation equipment.

TransCanada supports voluntary efforts to reduce GHG emissions and we've made exceptional progress over the past five years. Our voluntary efforts are focused on technical and operational improvements - we think operating initiatives that reduce GHG at the source are more important than other mechanisms such as international emissions trading and offset credits. We are encouraging the Canadian Government to work closely with our North American Free Trade Agreement partners to develop North American solutions that focus on emission reductions at the source.

Air quality is an equally important issue, particularly in urban environments. TransCanada is working to minimize emissions of sulphur oxides (SOx), nitrogen oxides (NOx) and other pollutants by monitoring our operations more closely and by installing cleaner-burning equipment where it will make a difference.

Combustion efficiency is our third important issue and a key element of our greenhouse gas and air quality initiatives. More efficient pipeline compressors and power generators consume less fossil fuel, conserving valuable energy resources and reducing greenhouse gas and other emissions. TransCanada is committed to a leadership role in combustion efficiency and we look forward to continuing progress in the near term and over the longer term.