Fourth Quarter 2008 Highlights

Fourth Quarter 2008 Highlights

Reconciliation of Comparable Earnings, Comparable EBITDA, Comparable EBIT and EBIT to Net Income Applicable to Common Shares

  Pipelines Energy Corporate Total
Three months ended December 31
(unaudited)(millions of dollars
except per share amounts)
2009  2008  2009  2008  2009  2008  2009  2008 
Comparable EBITDA(1) 745  780  248  297  (28) (33) 965  1,044 
Depreciation and amortization (257) (224) (86) (80)   –  (343) (304)
Comparable EBIT(1) 488  556  162  217  (28) (33) 622  740 
Specific items:                
Dilution gain from reduced interest in PipeLines LP
29  –    –    –  29  – 
Fair value adjustment of natural gas inventory in storage and forward contracts
  –  7    –  7 
EBIT(1) 517  556  169  224  (28) (33) 658  747 
Interest expense             (184) (326)
Interest expense of joint ventures             (17) (21)
Interest income and other             22  (4)
Income taxes             (67) (95)
Non-controlling interests             (25) (24)
Net Income             387  277 
Preferred share dividends             (6) – 
Net Income Applicable to Common Shares             381  277 
Specific items (net of tax, where applicable):                
Dilution gain from reduced interest in PipeLines LP
            (18) – 
Fair value adjustment of natural gas inventory in storage and forward contracts
            (5) (6)
Income tax adjustments
            (30) – 
Comparable Earnings(1)             328  271 
Net Income per Share — Basic(2)             $0.56  $0.47 
Net Income per Share — Diluted             $0.56  $0.46 
(1) Refer to the Non-GAAP Measures section in this MD&A for further discussion of comparable EBITDA, comparable EBIT, EBIT, comparable earnings and comparable earnings per share.
(2) For the three months ended December 31
(unaudited) 2009 2008
Comparable Earnings per Share(1) $0.48 $0.46
Specific items (net of tax, where applicable):    
Dilution gain from reduced interest in PipeLines LP
0.03
Fair value adjustment of natural gas inventory in storage and forward contracts
0.01 0.01
Income tax adjustments
0.04
Net Income per Share $0.56 $0.47

TransCanada's net income was $387 million and net income applicable to common shares was $381 million or $0.56 per share in fourth quarter 2009 compared to $277 million or $0.47 per share in fourth quarter 2008. The $104 million increase in net income applicable to common shares reflected:

  • Decreased EBIT from Pipelines primarily due to the negative impact of a weaker U.S. dollar on Pipeline's U.S. operations and increased business development costs related to the Alaska pipeline project. These decreases were partially offset by an $18 million after tax ($29 million pre-tax) dilution gain resulting from TransCanada's reduced ownership interest in PipeLines LP following PipeLines LP's public issuance of common units.
  • decreased EBIT from Energy primarily due to lower power prices in Western Power and U.S. Power, and the impact of a weaker U.S. dollar on Energy's U.S. operations, partially offset by higher contribution from the Natural Gas Storage business due to increased third party storage revenues and increased earnings as a result of the start up of Portlands Energy.
  • decreased interest expense primarily due to increased capitalized interest, reduced losses from changes in the fair value of interest rate derivatives used to manage TransCanada's exposure to fluctuating interest rates and the positive impact of a weaker U.S. dollar. These decreases were partially offset by incremental interest expense for new debt issuances in 2009.
  • increased interest income and other due to the positive impact of a weaker U.S. dollar on working capital balances and changes in the fair value of derivatives used to manage the Company's exposure to foreign exchange rate fluctuations; and
  • decreased income tax expense primarily due to positive income tax adjustments in fourth quarter 2009, including $30 million resulting from a reduction in the Province of Ontario's corporate income tax rates, partially offset by higher pre-tax income.

The increase in earnings per share in fourth quarter 2009 from fourth quarter 2008 was partially offset by a 14 per cent increase in the average number of common shares outstanding, following the Company's issuance of 58.4 million and 35.1 million common shares in second quarter 2009 and fourth quarter 2008, respectively.

Comparable earnings in fourth quarter 2009 increased $57 million or $0.02 per share to $328 million or $0.48 per share, compared to $271 million or $0.46 per share for the same period in 2008. Comparable earnings in fourth quarter 2009 excluded the $18 million after tax dilution gain resulting from TransCanada's reduced ownership in PipeLines LP and the $30 million of favourable income tax adjustments. Comparable earnings in fourth quarter 2009 and 2008 also excluded net unrealized after tax gains of $5 million ($7 million pre-tax) and $6 million ($7 million pre-tax), respectively, resulting from changes in the fair value of proprietary natural gas inventory in storage and natural gas forward purchase and sale contracts.

Pipelines comparable EBIT was $488 million in fourth quarter 2009 compared to $556 million for the same period in 2008. Comparable EBIT excluded the $29 million pre-tax dilution gain resulting from a reduction in TransCanada's ownership interest in PipeLines LP following PipeLines LP's public issuance of common units in fourth quarter 2009.

Canadian Mainline's net income for fourth quarter 2009 decreased $2 million to $72 million from $74 million for the same period in 2008. Net income for fourth quarter 2009 reflected a lower average investment base and a lower ROE set by the NEB at 8.57 per cent in 2009 compared to 8.71 per cent in 2008, partially offset by higher OM&A cost savings.

Canadian Mainline's EBITDA for fourth quarter 2009 of $282 million decreased $18 million compared to the same period in 2008 primarily due to lower revenues as a result of a recovery of lower income taxes and a lower overall return on average investment base in the 2009 tolls, partially offset by higher OM&A cost savings.

The Alberta System's net income was $45 million in fourth quarter 2009 compared to $48 million for the same period in 2008. Earnings in 2009 and 2008 reflected the impact of the 2008-2009 Revenue Requirement Settlement approved by the AUC in December 2008 and by the NEB in December 2009.

The Alberta System's EBITDA was $193 million in fourth quarter 2009 compared to $152 million for the same period in 2008. The increase reflected higher revenues as a result of the recovery of higher depreciation and income taxes, partially offset by lower settlement earnings.

EBITDA from Other Canadian Pipelines was $15 million in fourth quarter 2009 compared to $11 million for the same period in 2008. The increase was primarily due to an adjustment to TQM's cost of capital for 2009.

ANR's EBITDA in fourth quarter 2009 was $84 million compared to $99 million for the same period in 2008. The decrease in EBITDA was primarily due to the negative impact of a weaker U.S. dollar.

GTN's EBITDA in fourth quarter 2009 decreased $9 million from the same period in 2008 primarily due to the negative impact of a weaker U.S. dollar and the sale of North Baja to PipeLines LP.

EBITDA for the remainder of the U.S. Pipelines was $132 million in fourth quarter 2009 compared to $144 million for the same period in 2008. The decrease was primarily due to the negative impact of a weaker U.S. dollar on U.S. Pipelines operations, partially offset by the acquisition of North Baja by PipeLines LP.

Pipelines business development comparable EBITDA losses increased $27 million in fourth quarter 2009 compared to the same period in 2008 primarily due to increased business development costs related to the Alaska pipeline project.

Energy's comparable EBIT was $162 million in fourth quarter 2009 compared to $217 million in fourth quarter 2008. Comparable EBIT in fourth quarter 2009 and fourth quarter 2008 excluded net unrealized gains of $7 million in each period resulting from changes in the fair value of proprietary natural gas inventory in storage and natural gas forward purchase and sale contracts.

Western Power's EBITDA of $61 million and power revenues of $203 million in fourth quarter 2009 decreased $67 million and $95 million, respectively, compared to the same period in 2008. These decreases were primarily due to lower earnings from the Alberta power portfolio resulting from lower overall realized power prices on lower volumes of power sold. The reduction in power prices and sales volumes reflected reduced demand for electricity in Alberta as a result of the North American economic slowdown. Average spot market power prices in Alberta decreased 51 per cent or $49 per MWh in fourth quarter 2009 compared to fourth quarter 2008.

Eastern Power's EBITDA of $56 million in fourth quarter 2009 increased $13 million compared to the same period in 2008. These increases were primarily due to incremental earnings from Portlands Energy which went into service in April 2009.

TransCanada's proportionate share of Bruce Power's comparable EBITDA of $70 million in fourth quarter 2009 was consistent with fourth quarter 2008. Increased revenues from higher realized prices and an annual lease expense reduction at Bruce B were offset by higher non-lease operating expenses and lower volumes caused by an increase in outage days.

TransCanada's proportionate share of Bruce A's comparable EBITDA decreased $28 million to a loss of $29 million in fourth quarter 2009 compared to a loss of $1 million in fourth quarter 2008. The higher loss was due to decreased volumes and higher operating costs as a result of an unplanned extension of the two planned outages which were rescheduled to September 2009 from March 2009. Bruce A's plant availability in fourth quarter 2009 was 47 per cent as a result of 84 outage days compared to an availability of 62 per cent and 63 outage days in the same period in 2008.

TransCanada's proportionate share of Bruce B's comparable EBITDA increased $28 million to $99 million in fourth quarter 2009 compared to fourth quarter 2008 primarily due to higher realized prices resulting from the recognition of payments received pursuant to the floor price mechanism in Bruce B's contract with the OPA, as well as a reduction in annual lease expense. Provisions in the Bruce B lease agreement with Ontario Power Generation allow for a reduction in annual lease expense if the annual Ontario spot price for electricity was less than $30 per MWh.

U.S. Power's comparable EBITDA for fourth quarter 2009 of $29 million decreased $21 million compared to the same period in 2008. The decrease was primarily due to lower overall realized power prices and the impact of a weaker U.S. dollar, partially offset by incremental revenue realized on contract sales in New England. While average spot market power prices in New England decreased in fourth quarter 2009 compared to fourth quarter 2008, the majority of U.S. Power's sales volumes were sold at contracted prices.

Natural Gas Storage's comparable EBITDA in fourth quarter 2009 was $49 million compared to $34 million for the same period in 2008. The $15 million increase was primarily due to increased third party storage revenues as a result of higher realized seasonal natural gas price spreads. Comparable EBITDA excluded net unrealized gains of $7 million in fourth quarter 2009 (2008 — gains of $7 million), resulting from changes in the fair value of proprietary natural gas inventory in storage and natural gas forward purchase and sale contracts.

Corporate EBIT losses in fourth quarter 2009 were $28 million compared to losses of $33 million for the same period in 2008. The decreases in EBIT losses were primarily due to lower support service costs in fourth quarter 2009.

Interest expense in fourth quarter 2009 decreased $142 million to $184 million from $326 million in fourth quarter 2008. The decrease reflected increased capitalized interest to finance the Company's larger capital growth program in 2009, primarily due to Keystone construction, and a decrease in U.S. dollar-denominated interest expense due to the impact of a weaker U.S. dollar in fourth quarter 2009 compared to fourth quarter 2008. Interest expense also decreased due to reduced losses in fourth quarter 2009 compared to 2008 from changes in the fair value of derivatives used to manage the Company's exposure to interest rate fluctuations. These decreases were partially offset by incremental interest expense on new debt issues of US$2.0 billion in January 2009 and $700 million in February 2009.

Interest Income and Other in fourth quarter 2009 was income of $22 million compared to an expense of $4 million for the same period in 2008. The increase in income of $26 million in fourth quarter 2009 was primarily due to the positive impact of a weaker U.S. dollar on working capital balances in fourth quarter 2009 and higher gains from changes in the fair value of derivatives used to manage the Company's exposure to foreign exchange rate fluctuations. These increases were partially offset by lower interest income due to lower interest rates.

Income Taxes were $67 million in fourth quarter 2009 compared to $95 million for the same period in 2008. The decrease was primarily due to positive income tax adjustments in 2009, including a $30 million favourable adjustment resulting from a reduction in the Province of Ontario's corporate income tax rates, partially offset by higher pre-tax income.