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Energy

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 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 
(1) Other revenue includes sales of natural gas, sulphur and thermal carbon black.
(2) Other commodity purchases resold includes the cost of natural gas sold.
Western Power Sales Volume
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.

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-à-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.

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 
(1) Includes Carleton, Ravenswood, Anse-à-Valleau, Baie-des-Sables and Bécancour effective November 2008, August 2008, November 2007, November 2006 and September 2006, respectively.
(2) Other revenue includes sales of natural gas.
(3) Other commodity purchases resold includes the cost of natural gas sold.
Eastern Power Sales Volumes(1)
Year ended December 31 (GWh)
  2008 2007 2006
Supply      
Generation 5,043 8,095 4,700
Purchased 6,183 6,986 3,091
  11,226 15,081 7,791
Contracted vs. Spot      
Contracted 10,990 14,505 7,374
Spot 236 576 417
  11,226 15,081 7,791
(1) Includes Carleton, Ravenswood, Anse-à-Valleau and Baie-des-Sables effective November 2008, August 2008, November 2007 and November 2006, respectively. Bécancour is included in Eastern Power effective September 2006 through December 2007.

Operating income was $338 million in 2008, $83 million higher than the $255 million earned in 2007. The increase was primarily due to increased water flows from the TC Hydro generation assets and higher realized prices on sales to commercial and industrial customers in New England, incremental income from the first full year of operations from the Anse-à-Valleau wind farm and the start-up of the Carleton wind farm in November 2008. On December 31, 2008, Ravenswood fulfilled its obligation under a tolling agreement with Hess Corporation that was in place at the time of acquisition. In 2009, TCPM will manage the marketing output of the Ravenswood plant in a manner consistent with its other U.S. northeast portfolio of assets. The agreement to temporarily suspend generation at the Bécancour facility beginning January 2008 resulted in decreases to power revenues, plant operating costs and other, generation volumes and contracted sales in 2008. The temporary suspension agreement has not materially affected Eastern Power's operating income due to capacity payments received pursuant to the agreement with Hydro-Québec. The agreement to suspend generation at the Bécancour facility was extended for one year to December 31, 2009.

Eastern Power's power revenues were $1,254 million in 2008, a decrease of $227 million from $1,481 million in 2007. This was primarily due to the temporary suspension of generation at the Bécancour facility and decreased sales to commercial and industrial customers in the New England market, partially offset by higher realized prices in New England, increased water flows through the TC Hydro generation assets, and incremental revenue from Ravenswood. Other revenue and other commodity purchases resold increased year-over-year as a result of an increase in the quantity of natural gas purchased and resold under OSP's and TCPM's natural gas supply contracts. Power commodity purchases resold and purchased power volumes were lower in 2008 due to the impact of decreased sales volumes to commercial and industrial customers, lower overall cost per GWh on purchased power volumes and increased power generation from the TC Hydro assets, which reduced the requirement to purchase power to fulfill contractual sales obligations. Plant operating costs and other, which includes fuel gas consumed in generation, were lower in 2008 primarily due to the temporary suspension of generation at the Bécancour facility, partially offset by incremental operating costs from Ravenswood.

Operating income was $255 million in 2007, $68 million higher than the $187 million earned in 2006. The increase was primarily due to incremental income from the first full year of operations from the Bécancour facility and the Baie-des-Sables wind farm, as well as the start-up of the Anse-à-Valleau wind farm in November 2007. Also contributing to the increase were payments received under the start-up of the FCM in New England and higher sales volumes to commercial and industrial customers in 2007. Partially offsetting these increases was the impact of reduced water flows from the TC Hydro generation assets in 2007, compared to the above-average water flows experienced in 2006 following higher precipitation in the surrounding area.

Bruce Power

As at December 31, 2008, TransCanada and BPC Generation Infrastructure Trust (BPC), a trust established by the Ontario Municipal Employees Retirement System, each owned a 48.9 per cent interest in Bruce A (2007 — 48.7 per cent). The remaining 2.2 per cent interest in Bruce A is owned by the Power Workers' Union Trust, the Society of Energy Professionals Trust and Bruce Power Employee Investment Trust. The Bruce A partnership subleases Bruce A Units 1 to 4 from the Bruce B partnership. TransCanada continues to own 31.6 per cent of Bruce B, which consists of Units 5 to 8 and the supporting site infrastructure.

The following Bruce Power financial results reflect the operations of six of the eight Bruce Power units:

Bruce Power Results
Year ended December 31 (millions of dollars)
  2008   2007  2006 
Bruce Power (100 per cent basis)      
Revenues      
Power
2,064   1,920  1,861 
Other(1)
96   113  71 
  2,160   2,033  1,932 
Operating expenses      
Operations and maintenance(2)
(1,066) (1,051) (912)
Fuel
(139) (104) (96)
Supplemental rent(2)
(174) (170) (170)
Depreciation and amortization
(151) (151) (134)
  (1,530) (1,476) (1,312)
  630   557  620 
TransCanada's proportionate share:      
Bruce A (48.9%) 62   24  91 
Bruce B (31.6%) 158   161  137 
  220   185  228 
Adjustments (19) (18)
TransCanada's operating income from Bruce Power 201   167  235 
Bruce Power — Other Information      
Plant availability      
Bruce A 82%   78%  81% 
Bruce B 87%   89%  91% 
Combined Bruce Power 86%   86%  88% 
Planned outage days      
Bruce A 91   121  81 
Bruce B 100   93  65 
Unplanned outage days      
Bruce A 27   17  37 
Bruce B 65   32  31 
Sales volumes (GWh)      
Bruce A — 100 per cent 10,580   10,180  10,650 
Bruce A — TransCanada's proportionate share 5,159   4,959  5,158 
Bruce B — 100 per cent 24,680   25,290  25,820 
Bruce B — TransCanada's proportionate share 7,799   7,992  8,159 
Combined Bruce Power — 100 per cent 35,260   35,470  36,470 
TransCanada's proportionate share 12,958   12,951  13,317 
Results per MWh      
Bruce A power revenues $62   $59  $58 
Bruce B power revenues $57   $52  $48 
Combined Bruce Power revenues $59   $55  $51 
Combined Bruce Power fuel $4   $3  $3 
Combined Bruce Power total operating
expenses(3)
$42   $41  $35 
Percentage of output sold to spot market 23%   45%  35% 
(1) Other revenue includes Bruce A fuel cost recoveries of $61 million in 2008 (2007 — $35 million; 2006 — $30 million). Other revenue also includes unrealized losses of $6 million as a result of changes in fair value of held-for-trading derivatives in 2008 (2007 — $47 million gain; 2006 — nil).
(2) Includes adjustments to eliminate the effects of inter-partnership transactions between Bruce A and Bruce B.
(3) Net of fuel cost recoveries.

TransCanada's operating income from Bruce Power was $201 million in 2008 compared to $167 million in 2007. TransCanada's proportionate share of operating income in Bruce A increased $38 million to $62 million in 2008 compared to 2007 primarily due to higher realized prices and higher volumes associated with a decrease in outage days in 2008. TransCanada's proportionate share of operating income in Bruce B decreased $3 million to $158 million in 2008 compared to 2007 primarily due to higher operating costs and lower volumes associated with an increase in outage days in 2008, and unrealized gains in 2007 from changes in the fair value of power swaps and forwards. Partially offsetting these decreases were higher realized prices reflecting a higher proportion of volumes sold at higher contract prices.

Combined Bruce Power prices, which are based solely on power revenues, were $59 per MWh in 2008 compared to $55 per MWh in 2007, reflecting higher prices on both contracted volumes and uncontracted volumes sold into the spot market. Bruce Power's combined operating expenses (net of fuel cost recoveries) increased to $42 per MWh in 2008 from $41 per MWh in 2007 primarily due to higher operating costs in 2008.

The Bruce units ran at a combined average availability of 86 per cent in 2008, which was consistent with the average availability in 2007.

TransCanada's operating income from its combined investment in Bruce Power was $167 million in 2007 compared to $235 million in 2006. The decrease of $68 million was primarily due to lower output and higher operating costs associated with an increase in planned outage days, partially offset by higher overall realized prices.

Adjustments to TransCanada's interest in Bruce Power's income before income taxes were lower in 2008 and 2007 than in 2006 primarily due to lower positive purchase price amortizations related to the expiry of power sales agreements.

The overall plant availability percentage in 2009 is expected to be in the low 90s for the four Bruce B units and the mid-80s for the two operating Bruce A units. An approximate six week maintenance outage of Bruce B Unit 8 is scheduled to begin in mid-April 2009 and an approximate six week maintenance outage of Bruce B Unit 6 is scheduled to begin in early October 2009. An approximate six week maintenance outage of Bruce A Unit 4 is scheduled to start in early March 2009 and an approximate one-month outage of Bruce A Unit 3 is expected to commence in mid-March 2009.

Bruce A

Income from Bruce A is affected by overall plant availability, which in turn is affected by planned and unplanned maintenance. As a result of a contract with the Ontario Power Authority (OPA), all of the output from Bruce A is effectively sold at a fixed price per MWh, adjusted for inflation annually on April 1. In addition, fuel costs are recovered from the OPA. In accordance with a 2007 contract amendment, effective April 1, 2008, the fixed price for output from Bruce A was $63.00 per MWh, an increase of $2.11 per MWh, subject to inflation adjustments from October 31, 2005.

Bruce A Fixed Price

per MWh
April 1, 2008 – March 31, 2009 $63.00
April 1, 2007 – March 31, 2008 $59.69
April 1, 2006 – March 31, 2007 $58.63

Support payments received pursuant to the OPA contract are equal to the difference between the fixed prices under the OPA contract and spot market prices and are capped at $575 million for the period ending on the commercial in-service date of the later of the restarted Unit 1 and Unit 2. As at December 31, 2008, Bruce A had received $368 million towards this cap. Post-refurbishment prices will also be adjusted for capital cost variances associated with the refurbishment and restart projects.

Bruce B

Income from Bruce B is directly affected by fluctuations in wholesale spot market prices for electricity and overall plant availability, which in turn is affected by planned and unplanned maintenance.

As part of Bruce Power's contract with the OPA, sales from the Bruce B Units 5 to 8 are subject to a floor price adjusted annually for inflation on April 1.

Bruce B Floor Price

per MWh
April 1, 2008 – March 31, 2009 $47.66
April 1, 2007 – March 31, 2008 $46.82
April 1, 2006 – March 31, 2007 $45.99

Payments received pursuant to the Bruce B floor price mechanism may be subject to a recapture payment dependent on annual spot prices over the term of the contract. Bruce B net earnings to date have not included any amounts received pursuant to this floor mechanism. To further reduce its exposure to spot market prices, as at December 31, 2008, Bruce B had entered into fixed price sales contracts to sell forward approximately 12,460 GWh for 2009 and 7,100 GWh for 2010.

Plant Availability

Power Plant Availability (excluding Bruce Power)

Weighted average power plant availability for all plants, excluding Bruce Power, was 79 per cent in 2008 compared to 93 per cent in 2007 and 2006. Plant availability represents the percentage of time in a year that the plant is available to generate power whether actually running or not. Western Power's plant availability was affected negatively throughout 2008 and in late 2007 by an outage at the Cancarb power plant. Eastern Power achieved plant availability of 78 per cent in 2008, 18 per cent lower than 2007 as a result of outages experienced on Units 10 and 30 at Ravenswood throughout fourth quarter 2008 and a longer than expected outage at OSP in late 2008. Additionally, Bécancour, which had an availability of 97 per cent in 2007, is not included in Eastern Power's 2008 availability measurement as a result of a temporary suspension of power generation from the plant throughout 2008.

Weighted Average Plant Availability
Year ended December 31
  2008 2007 2006
Western Power 87% 90% 88%
Eastern Power 78% 96% 95%
Bruce Power 86% 86% 88%
All plants, excluding Bruce Power 79% 93% 93%
All plants 83% 91% 91%

Natural Gas Storage

TransCanada owns or has rights to 120 Bcf of natural gas storage capacity in Alberta, including a 60 per cent ownership interest in CrossAlta, an independently operated storage facility. TransCanada also has contracts for long-term, Alberta-based storage capacity from a third party, which expire in 2030, subject to early termination rights in 2015.

Natural Gas Storage Capacity
  Working Gas
Storage Capacity
(Bcf)
Maximum Injection/
Withdrawal Capacity
(mmcf/d)
Edson 50 725
CrossAlta(1) 32 288
Third-party storage 38 630
  120 1,643
(1) Represents TransCanada's 60 per cent ownership interest in CrossAlta, a 54 Bcf, 480 mmcf/d facility.

TransCanada believes the market fundamentals for natural gas storage remain unchanged. The Company's gas storage capability helps balance seasonal and short-term supply and demand, and adds flexibility to the delivery of natural gas to Alberta and the rest of North America. The increasing seasonal imbalance in North American natural gas supply and demand has increased natural gas price volatility and the demand for storage services. Alberta-based storage will continue to serve market needs and could play an important role should additional gas supplies be connected to North American markets. Energy's natural gas storage business operates independently from TransCanada's regulated natural gas transmission business and from ANR's regulated storage business, which is included in TransCanada's Pipelines segment.

TransCanada manages the exposure of its non-regulated natural gas storage assets to seasonal natural gas price spreads by economically hedging storage capacity with a portfolio of third-party storage capacity contracts and proprietary natural gas purchases and sales.

TransCanada offers a broad range of injection and withdrawal storage alternatives tailored to customer needs in short-term to multi-year contracts. Market volatility frequently creates arbitrage opportunities and TransCanada's storage operations offer solutions to capture value from these short-term price movements. Earnings from third-party storage capacity contracts are recognized over the term of the contract. At December 31, 2008, TransCanada had contracted approximately 70 per cent of the total 120 Bcf of working gas storage capacity in 2009 and 57 per cent of storage capacity in 2010.

Proprietary natural gas storage transactions are comprised of a forward purchase of natural gas to be injected into storage and a simultaneous forward sale of natural gas for withdrawal at a later period, typically during the winter withdrawal season. By matching purchase and sales volumes on a back-to-back basis, TransCanada locks in future positive margins, thereby effectively eliminating its exposure to natural gas seasonal price spreads.

These forward natural gas contracts provide highly effective economic hedges but do not meet the specific criteria for hedge accounting and, therefore, are recorded at their fair values based on the forward market prices for the contracted month of delivery. Changes in the fair value of these contracts are recorded in Revenues. Effective April 2007, TransCanada adopted an accounting policy to record proprietary natural gas inventory held in storage at its fair value using the one-month forward price for natural gas. Changes in the fair value of inventory are recorded in Revenues. Changes in the fair value of proprietary natural gas inventory in storage and natural gas forward purchase and sales contracts are excluded in determining comparable earnings as they are not representative of amounts that will be realized on settlement.

Natural Gas Storage operating income was $135 million in 2008, a decrease of $11 million compared to 2007. The decrease was primarily due to lower average storage values realized by CrossAlta, partially offset by higher earnings from the sale of proprietary natural gas at Edson in 2008. There were no net unrealized gains or losses in 2008 from changes in the fair value of proprietary natural gas forward purchase and sales contracts compared to net unrealized gains of $10 million in 2007.

Natural Gas Storage operating income was $146 million in 2007, an increase of $53 million compared to 2006. The increase was primarily due to income earned from the first full year of operations from the Edson facility.