TransCanada Online Annual Report 2002

Harold N. Kvisle

IN 2002, TRANSCANADA MAINTAINED ITS LEADERSHIP POSITION IN THE NORTH AMERICAN NATURAL GAS TRANSMISSION BUSINESS AND CONTINUED ITS DISCIPLINED, VALUE-CREATING GROWTH IN POWER.

TransCanada delivered another year of strong financial performance with increases in earnings and operating cash flow. We continued to strengthen our balance sheet and liquidity position. In January 2003, TransCanada’s Board of Directors raised the dividend on common shares for the third consecutive year. The quarterly dividend was increased by eight per cent to $0.27 per share for the quarter ending March 31, 2003.

We accomplished this against a backdrop of challenge and change within the North American energy industry. Our achievements are testament to the dedication and commitment of the people of TransCanada. Our expertise, experience and disciplined approach to value creation make TransCanada the strongest team in the business and I’m proud to be part of that team. I thank all employees for their contributions to our continuing success.

including dividends, was 21 per cent in each of the last two years and 48 per cent in 2000.

are our premium assets, the experience and expertise of our people and our strong financial position.

is to be one of the most profitable, competitive, reliable providers of wholesale natural gas transportation and electric power in North America.

is focused on developing the infrastructure required to link future supply sources with growing demand.

STRATEGY AND FOCUS

Our achievements are clear evidence that the strategic direction we established in 2000 is working exceptionally well. While we have refined our key strategies to keep pace with developments in the rapidly changing external environment, the five core components have remained consistent.

1. Sustain, Grow and Optimize Our North American Natural Gas Transmission Business

In 2002, we substantially completed the Westpath expansion project on the Alberta and BC systems to serve growing markets in California and the Pacific Northwest. This project marked the first field installation and testing of X100 steel line pipe – the highest strength large diameter line pipe in use worldwide. Throughout the year, we continued our efforts to optimize all aspects of our wholly-owned pipelines, which together comprise the largest single natural gas transmission system in North America.

We also acquired a general partnership interest in Northern Border Partners, L.P., which owns a 70 per cent interest in Northern Border Pipeline Company. We consider Northern Border to be one of the preferred routes to move gas from the Northern frontier to midwestern markets.

The projected growth of North American natural gas demand, combined with the potential to acquire significant assets as competitors seek to restore their balance sheets, create attractive opportunities for TransCanada.

On the supply side, growth is expected from a number of traditional sources including the Western Canada Sedimentary Basin (WCSB) and the Gulf Coast. However, even optimistic assessments of future supply from these basins will not meet the anticipated growth in demand. We strongly believe northern gas and offshore liquefied natural gas will be required by the end of the decade.

In the near term, our emphasis will be on connecting new supply from the WCSB to our Alberta System. We will also expand and extend our long-haul delivery systems as appropriate and look to increase our ownership in partially-owned pipeline systems.

Over the long term we will move forward on northern development. We will also seek opportunities to work closely with producers and regional stakeholders to build the facilities necessary for the importation of liquefied natural gas.

TransCanada supports the development of both the Mackenzie Valley and Alaska Highway pipelines. At this point in time, we expect the Mackenzie Valley pipeline to be the first to proceed. Our high capacity connections from the WCSB to premier North American markets will enable us to move northern gas when the time is right. Our many years of experience in constructing and operating large diameter natural gas pipeline systems in cold weather, combined with our solid reputation for safety and reliability, are significant competitive advantages.

2. Establish a New Regulated Business Model

On the regulatory front, 2002 proved to be a challenging year. The National Energy Board’s (NEB) decision on the Canadian Mainline Fair Return application – and its subsequent denial of TransCanada’s request to review this decision – was disappointing. In our view, the ruling does not recognize the long-term business risks of the Canadian Mainline.

In February 2003, we reached a one-year settlement regarding the 2003 revenue requirement for the Alberta System. The settlement, which was the result of a consultative process that included producers, industrial users, consumer groups, marketers, and export groups, was significantly influenced by the NEB decision on the Fair Return application.

The issues TransCanada and our stakeholders face are difficult to address within a single negotiated settlement or regulatory proceeding. However, we have established a new level of dialogue with our customers and we remain optimistic that future negotiations will lead to acceptable outcomes for both TransCanada and our customers. Our goal is to establish a framework that provides flexible, cost-competitive services and allows us to earn a fair risk-adjusted return.

now includes interests in more than 4,000 megawatts of generating capacity located in some of the best markets in North America.

to deliver a combination of quality, price and ease of doing business that no peer can match.

3. Grow Our Power Business

In a year of downturn for the power industry, TransCanada’s power business produced solid results. In 2002:

We started operations at the Redwater and Carseland power facilities and continued construction of the Bear Creek and MacKay River power plants in Alberta

We acquired the ManChief power plant, a 300 megawatt facility in Colorado, and

We announced our acquisition of a 31.6 per cent interest in Bruce Power L.P., the tenant under a lease on the Bruce nuclear power facility in Ontario. This acquisition was completed in mid-February 2003.

The current state of the power industry provides both opportunities and challenges for TransCanada. While the pace of plant construction in North America has slowed, we anticipate a number of quality acquisition opportunities in the coming year, together with niche development opportunities where we can leverage our expertise in cogeneration. We will grow our power portfolio by focusing on low-risk opportunities in markets we know. We will apply business models that benefit from, and support, our strong balance sheet. We will use power marketing to optimize the value of our assets and create stable and predictable income and cash flow.

4. Pursue Operational Excellence

Over the last three years we have achieved significant and sustainable operating cost savings, which, over the longer term, largely accrue to the benefit of our customers. We have also improved the quality and timeliness of customer service. Our objectives are to:

Be the most efficient operator of North American pipe and power assets

Provide the right services at the lowest possible cost

Invest our capital in the right things at the right time, and

Be responsive to our customers.

We relentlessly pursue our commitment to an operational excellence business model, recognizing that our customers count on us to deliver gas and generate power in a low-cost, safe and reliable manner.

5. Maintain and Utilize Our Strong Financial Position

TransCanada’s financial position strengthened during 2002. Today, our balance sheet is stronger than it has been in the past 15 years. Over the last three years, our strong cash flow, together with the proceeds from the sale of non-core assets have allowed us to:

Invest more than $2.5 billion in our core businesses, and

Retire more than $4 billion in term debt and preferred securities.

We expect to generate substantial operating cash flow in 2003 and beyond. Our strong discretionary cash position means we are well positioned for growth and value creation.

on disciplined management and growth of our natural gas transmission and power businesses.

LOOKING AHEAD

In 2003, we will maintain our focus on our core strategies with an emphasis on well planned, well executed growth that creates value for our shareholders without compromising our financial strength.

TransCanada is poised to capture opportunities and create value in a business environment that has challenged many of our competitors. We are driven by shareholder value rather than the size of our asset base – we measure success in terms of profitability, value creation and long-term sustainability.

TransCanada has been participating in North American energy markets for more than 50 years – we’re in this for the long haul. We’ll keep this firmly in mind as we evaluate the opportunities and deal with the challenges of 2003.

Harold N. Kvisle
President and Chief Executive Officer

February 25, 2003