Fourth Quarter 2010 Highlights

Fourth Quarter 2010 Highlights

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

Three months ended December 31 Natural Gas
Pipelines
Energy Corporate Total
(unaudited)
(millions of dollars
except per share amounts)
2010  2009  2010  2009  2010  2009  2010  2009 
Comparable EBITDA(1) 737  745  301  248  (33) (28) 1,005  965 
Depreciation and amortization (241) (257) (103) (86) —  —  (344) (343)
Comparable EBIT(1) 496  488  198  162  (33) (28) 661  622 
Specific items:                
Valuation provision for MGP (146) —  —  —  —  —  (146) — 
Risk management activities —  —  22  —  —  22 
Dilution gain from reduced interest in PipeLines LP —  29  —  —  —  —  —  29 
EBIT(1) 350  517  220  169  (33) (28) 537  658 
Interest expense             (173) (184)
Interest expense of joint ventures             (15) (17)
Interest income and other             61  22 
Income taxes             (94) (67)
Non-controlling interests             (33) (25)
Net Income             283  387 
Preferred share dividends             (14) (6)
Net Income Applicable to Common Shares             269  381 
Specific items (net of tax where applicable):                
Valuation provision for MGP             127  — 
Risk management activities             (12) (5)
Dilution gain from reduced interest in PipeLines LP             —  (18)
Income tax adjustments             —  (30)
Comparable Earnings(1)             384  328 
Net Income per Share — Basic and Diluted(2)             $0.39  $0.56 
(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) 2010  2009
Comparable Earnings per Share(1) $0.55  $0.48
Specific items (net of tax where applicable):    
Valuation provision for MGP (0.18)
Risk management activities 0.02  0.01
Dilution gain from reduced interest in PipeLines LP —  0.03
Income tax adjustments —  0.04
Net Income per Share $0.39  $0.56

TransCanada's Net Income in fourth quarter 2010 was $283 million and Net Income Applicable to Common Shares was $269 million or $0.39 per share compared to $387 million and $381 million or $0.56 per share, respectively, in fourth quarter 2009.

Comparable Earnings in fourth quarter 2010 were $384 million or $0.55 per share, compared to $328 million or $0.48 per share for the same period in 2009. Comparable Earnings in fourth quarter 2010 excluded the $127 million after-tax ($146 million pre-tax) valuation provision for advances to the APG for the MGP. Comparable Earnings in fourth quarter 2010 also excluded net unrealized gains of $12 million after tax ($22 million pre-tax) (2009 — gains of $5 million after tax ($7 million pre-tax)) resulting from changes in the fair value of proprietary natural gas inventory in storage and certain risk management activities. Comparable Earnings in fourth quarter 2009 also excluded the $30 million of favourable income tax adjustments arising from a reduction in the Province of Ontario's corporate income tax rates and the $18 million after-tax ($29 million pre-tax) dilution gain resulting from TransCanada's reduced ownership interest in PipeLines LP, after a public offering of PipeLines LP common units in fourth quarter 2009. The $56 million increase in Comparable Earnings reflected:

  • increased Comparable EBIT from Natural Gas Pipelines primarily due to lower business development costs and higher earnings from the Alberta System revenue requirement settlement, increased revenues from Northern Border and reduced depreciation expense for Great Lakes, partially offset by lower revenues from the Canadian Mainline and Alberta System for amounts that are recovered on a flow-through basis;
  • increased Comparable EBIT from Energy primarily due to increased power generation at Bruce A, higher capacity revenues, sales volumes and realized prices for U.S. Power, and incremental earnings from the start-up of Halton Hills, which went into service in September 2010, partially offset by lower Bruce B lease expense in 2009, lower realized power prices for Western Power and Bruce B, and decreased proprietary and third-party storage revenues for Natural Gas Storage;
  • increased Comparable EBIT loss from Corporate primarily due to higher support services and other corporate costs;
  • decreased Interest Expense primarily due to increased capitalized interest, relating to Keystone and other capital projects, and the positive impact of a weaker U.S. dollar on U.S. dollar- denominated interest expense, partially offset by incremental interest expense on new debt issues in 2010;
  • increased Interest Income and Other, reflecting higher gains in fourth quarter 2010 compared to fourth quarter 2009 from changes in the fair value of derivatives used to manage the Company's exposure to foreign exchange rate fluctuations on U.S. dollar-denominated income;
  • increased Income Taxes in fourth quarter 2010 compared to fourth quarter 2009 due to positive income tax adjustments that reduced income taxes in fourth quarter 2009, partially offset by lower pre-tax earnings in fourth quarter 2010; and
  • increased preferred share dividends recorded for preferred shares issued in 2010.

Natural Gas Pipelines' Comparable EBIT was $496 million in fourth quarter 2010 compared to $488 million in the same period in 2009. Comparable EBIT in fourth quarter 2010 excluded the $146 million pre-tax valuation provision for advances to the APG for the MGP. Comparable EBIT in 2009 excluded the $29 million pre-tax dilution gain resulting from TransCanada's reduced ownership interest in PipeLines LP, which occurred following public issuance of common units by PipeLines LP in fourth quarter 2009.

Canadian Mainline's net income in fourth quarter 2010 decreased $1 million to $71 million from $72 million for the same period in 2009. Net income in fourth quarter 2010 reflected a lower ROE of 8.52 per cent compared to 8.57 per cent in 2009 on a lower average investment base, partially offset by higher incentive earnings.

Canadian Mainline's Comparable EBITDA in fourth quarter 2010 of $269 million decreased $13 million from $282 million for the same period in 2009, primarily due to lower revenues as a result of lower income taxes and financial charges in the 2010 tolls, which are recovered on a flow-through basis and do not affect net income. The decrease in financial charges was primarily due to higher-cost debt that matured in 2009 and early 2010.

The Alberta System's net income of $53 million in fourth quarter 2010 increased $8 million compared to the same period in 2009. Net income in fourth quarter 2010 reflected an ROE of 9.70 per cent on 40 per cent deemed common equity and a higher average investment base, earned under the Alberta System's 2010 - 2012 Revenue Requirement Settlement, partially offset by lower incentive earnings.

The Alberta System's Comparable EBITDA was $194 million in fourth quarter 2010 compared to $193 million for the same period in 2009. Comparable EBITDA in fourth quarter 2010 reflected the ROE earned under the Alberta System's 2010 - 2012 Revenue Requirement Settlement and an increased average investment base, partially offset by lower revenues as a result of lower financial charges, which are recovered on a flow-through basis, and lower incentive earnings compared to 2009.

Net income and Comparable EBITDA from Foothills in fourth quarter 2010 of $7 million and $33 million, respectively, increased $2 million and $1 million, respectively, compared to fourth quarter 2009. The increase was primarily due to a Foothills 2010 settlement agreement that established an ROE of 9.70 per cent on deemed common equity of 40 per cent for the years 2010 to 2012. Results in 2009 were based on the NEB ROE formula of 8.57 per cent on a deemed common equity of 36 per cent.

Comparable EBITDA from Other Canadian Natural Gas Pipelines was $11 million in fourth quarter 2010 compared to $15 million for the same period in 2009. The decrease in fourth quarter 2010 was primarily due to an adjustment to TQM's cost of capital in 2009.

ANR's Comparable EBITDA in fourth quarter 2010 was US$76 million compared to US$79 million for the same period in 2009. The decrease was primarily due to lower transportation sales and storage revenues as higher regional storage inventories and marginal supply from the U.S. Gulf Coast negatively affected transportation rates and demand for natural gas.

GTN's Comparable EBITDA in fourth quarter 2010 was US$45 million compared to US$41 million for the same period in 2009. The increase was primarily due to incremental proceeds accrued in 2010 relating to the Calpine bankruptcy distributions and lower OM&A costs, partially offset by the write-off of costs related to an unsuccessful information systems project in 2010.

Comparable EBITDA for the remainder of the U.S. Natural Gas Pipelines in fourth quarter 2010 was US$128 million compared to US$126 million for the same period in 2009. The increase was primarily due to the positive impact Northern Border's higher revenues had on PipeLines LP's earnings, partially offset by lower revenues from Great Lakes. U.S. Natural Gas Pipelines was also negatively affected by higher general, administrative and support costs primarily related to the start-up of Keystone.

Natural Gas Pipelines' Business Development Comparable EBITDA losses decreased $15 million to $21 million in fourth quarter 2010 from $36 million for the same period in 2009 primarily due to decreased business development costs related to the Alaska Pipeline Project.

Energy's Comparable EBIT was $198 million in fourth quarter 2010 compared to $162 million in the same period in 2009. Comparable EBIT in fourth quarter 2010 excluded net unrealized pre-tax gains of $22 million (2009 - gains of $7 million) from changes in the fair value of proprietary natural gas inventory in storage and certain risk management activities.

Western Power's Comparable EBITDA of $48 million in fourth quarter 2010 decreased $13 million compared to the same period in 2009, primarily due to lower overall realized power prices. Contracted prices in fourth quarter 2010 contributed positive margins compared to margins realized under spot prices, however, contracted prices were lower than in fourth quarter 2009 due to the continued impact of the North American economic downturn.

Eastern Power's Comparable EBITDA of $77 million in fourth quarter 2010 increased $21 million compared to the same period in 2009 primarily due to incremental earnings from Halton Hills, which went into service in September 2010.

TransCanada's proportionate share of Bruce Power's Comparable EBITDA increased $29 million to $99 million in fourth quarter 2010 from $70 million in fourth quarter 2009.

TransCanada's proportionate share of Bruce A's Comparable EBITDA increased $62 million to $33 million in fourth quarter 2010 from losses of $29 million in fourth quarter 2009 as a result of higher volumes and lower operating expenses due to decreased outage days.

TransCanada's proportionate share of Bruce B's Comparable EBITDA decreased $33 million to $66 million in fourth quarter 2010 from $99 million in fourth quarter 2009 primarily due to higher lease expenses and lower realized prices resulting from the expiry of fixed-price contracts at higher prices.

U.S. Power's Comparable EBITDA in fourth quarter 2010 of US$59 million increased US$31 million compared to the same period in 2009 primarily due to higher capacity revenues, increased realized prices and higher volumes of power sold.

Natural Gas Storage's Comparable EBITDA in fourth quarter 2010 was $37 million compared to $49 million for the same period in 2009. The decrease in Comparable EBITDA in fourth quarter 2010 was primarily due to lower proprietary natural gas and third-party storage revenues as a result of reduced realized natural gas price spreads.

Interest Expense in fourth quarter 2010 decreased $11 million to $173 million from $184 million in fourth quarter 2009. The decrease reflected increased capitalized interest relating to the Company's capital growth program in 2010, primarily due to Keystone construction, the positive impact of a weaker U.S. dollar on U.S. dollar-denominated interest and Canadian dollar-denominated debt maturities in 2009 and 2010. These decreases were partially offset by incremental interest expense on new debt issues of US$1.25 billion in June 2010 and US$1.0 billion in September 2010.

Interest Income and Other in fourth quarter 2010 increased $39 million to $61 million from $22 million in fourth quarter 2009. The increase reflected higher gains in 2010 compared to 2009 from changes in the fair value of derivatives used to manage the Company's exposure to foreign exchange rate fluctuations on U.S. dollar-denominated income.

Income Taxes were $94 million in fourth quarter 2010 compared to $67 million for the same period in 2009. The increase was primarily due to positive income tax adjustments that reduced income taxes in 2009, including $30 million of favourable adjustments arising from a reduction in the Province of Ontario's corporate income tax rates, partially offset by lower pre-tax earnings in 2010.