Letter to Shareholders

Letter to Shareholders

Russell K. GirlingRussell K. Girling
President and Chief Executive Officer

Strategies to Ensure Lasting, Long Term Value

A company's vision sets its direction for business planning, drives the right strategy and unites employees in achieving a common goal. But to achieve the vision, it must be executed with passion, hard work, discipline and exceptional decision-making at every level of the organization.

TransCanada's vision is unchanged over the last decade — our goal is to become North America's leading energy infrastructure company. The company has clear priorities to ensure this goal is met — priorities I have shared with the Board of Directors, the financial community and the many other stakeholders of our company. I would like to share with you the significant progress we made during 2010 and some of the opportunities for the years ahead.

Priority #1: TransCanada will focus on maximizing the value of its existing assets and ensure they continue to operate safely and reliably, delivering solid results.

Our base businesses generate approximately $4 billion of earnings before interest, taxes, depreciation and amortization (EBITDA)(1) each year. Our top priority is to protect the long term value of these assets and position them for future growth to ensure they continue to deliver stable and growing cash flow for decades to come.

In our pipeline businesses we continue to connect new supply to growing markets across North America. By maximizing the volume of natural gas and oil flowing through our pipelines we lower our unit costs and enhance our competitiveness and profitability. This year we continued to successfully position our U.S. pipeline network to move U.S. shale gas, contracted approximately 200 MMcf/d of Marcellus gas to our Eastern Canada/U.S. delivery system, contracted approximately 2 Bcf/d of Northeast B.C. shale gas to our Alberta System and added significant U.S. crude oil volumes from the Bakken and Cushing areas to our Keystone pipeline.

We continue to develop new, cost competitive services to attract additional supply and meet our customers' changing needs. Importantly, today we are working with our customers on toll structure changes which will lower tolls, better reflect system usage and flow patterns and improve the competitiveness of the Canadian Mainline and the Western Canadian Sedimentary Basin. The Mainline is critical to moving North American gas supply to market.

In our power business we continue to maximize the long term profitability of our power plants through life extensions, higher plant availability, and increasing the output and the revenue we receive for the electricity we produce. During the year, we were able to implement plans that will significantly extend the operating life of Bruce A Units 3 and 4 and we increased the available capacity of Unit 30 at Ravenswood.

While our low-cost, base-load operations in Alberta and the U.S. Northeast have been impacted over the last few years by lower power prices, they remain very profitable and are well positioned to benefit as the economy recovers and commodity prices improve. In addition, the percentage of fixed price power sold under contract will increase over time as new power projects in our portfolio are completed and placed into service.

Ensuring we receive the maximum value from our assets over the long term requires the optimal balance of continuous cost improvement and reinvestment in maintenance capital to ensure the life of our assets is maximized. Properly done, our assets will be able to provide low cost, reliable service for decades to come. In 2010, we invested approximately $200 million in maintenance capital, at the same time capturing operating cost improvements across our assets from increased automation, improved processes and innovation. I am confident we have the right balance.

Doing all of this safely and without injury is an imperative. Our philosophy is every employee and contractor goes home safe — every day. In 2010, our injury frequency rates were among the lowest in our industry. While we are very proud of this accomplishment, we believe a zero injury rate is possible and we will continue to strive to achieve that objective.

Priority #2: Complete the company's $20 billion capital program on time and on budget and ensure the cash flow associated with these assets comes on stream.

TransCanada is in the midst of an unprecedented $20 billion capital program that will see a number of attractive, low-risk pipeline and power projects placed into service over the next three years.

Today we are about halfway through this program, with approximately $10 billion of assets having recently started or about to commence commercial operations.

Our company's largest and most ambitious project — the Keystone pipeline — took a major step forward as it began flowing oil for the first time to refineries in Illinois in the summer of 2010.

Keystone marked a further milestone in February 2011 as the Cushing extension began transporting oil to market. At the same time Keystone's nominal capacity expanded to 591,000 Bbl/d.

The next step for the US$13 billion project is the U.S. Gulf Coast Expansion or Keystone XL. This portion of the pipeline system is expected to be operational in 2013. When completed, Keystone's overall commercial capacity will rise to 1.1 million Bbl/d — with close to 1.0 million Bbl/d of that capacity contracted for an average term of 17 years. As volumes of Canadian and U.S. supplies grow, Keystone can very economically expand by another 400,000 Bbl/d, resulting in a total capacity of 1.5 million Bbl/d. This enormous project has significant energy security, employment and economic benefits to Canada and the United States and I remain confident we will obtain all major approvals this year.

Early in 2011, the US$630 million Bison pipeline began shipping natural gas from the U.S. Rockies to market. Just a few weeks prior to this, the $155 million Groundbirch pipeline went into service, delivering natural gas from Northeast B.C. through the Alberta System and on to North American markets. And in the spring of 2010, the $800 million North Central Corridor natural gas pipeline was finished on time and under budget.

In the fall of 2010, two major Energy projects were completed — the second phase of the US$350 million Kibby Wind project in Maine and the $700 million Halton Hills Generating Station in Ontario.

Other major projects that are expected to become operational in 2011 include the US$360 million Guadalajara pipeline in Mexico and Arizona's US$500 million Coolidge Generating Station. Both are expected to begin operating in the second quarter. Construction of the remaining stages of the Cartier Wind Energy project in Québec is progressing and they are expected to be operational in late 2011 and 2012.

The Bruce Power refurbishment involving Units 2 and 1 is scheduled to be complete in the first and third quarters of 2012 respectively.

While it has taken significantly longer and cost more to complete the re-start than originally anticipated, we are confident in our current estimates and schedule. In recent months, significant progress has been made and we are now in the home stretch of completing the project. Despite the challenges, once Units 1 and 2 are returned to service they will generate 1,500 MW of much needed, emissions free power for the residents of Ontario and deliver attractive, long-term returns for our shareholders.

Priority #3: Maintain our financial strength and flexibility to ensure we can continue to fund the existing capital program and invest in our growth prospects as we move forward.

In 2010, TransCanada continued to deliver strong financial and operating results. Comparable earnings(1) were $1.4 billion or $1.97 per share. Net income applicable to common shares totalled $1.2 billion or $1.78 per share. Funds generated from operations(1) increased to a record $3.3 billion on the strength of our diverse portfolio of North American energy infrastructure assets.

For the eleventh consecutive year, in February 2011 TransCanada's Board of Directors increased the dividend on common shares. The new quarterly dividend of $0.42 per common share equates to $1.68 per share on an annualized basis — an increase of five per cent over 2010.

Over the past decade, we have continuously strengthened our balance sheet to ensure we have the capacity to fund our capital program and on-going growth in all economic environments. This strategy served the company well during the turbulence of the economic downturn experienced over the past few years and allowed us to maintain 'A' grade credit ratings.

Since the onset of the financial crisis in the second half of 2008, TransCanada has raised approximately $11.5 billion in the capital markets, including $3 billion of common equity, to fund our $20 billion capital program.

Our success in issuing US$2.25 billion of long-term debt and $700 million of preferred shares in 2010 at very attractive rates is a testament to the company's continued financial strength.

While we recognize issuing both debt and equity to fund a long cycle capital program has had an impact on our reported earnings per share over the last two years, these investments will deliver long term growth in cash flow, earnings and dividends.

As we complete our current capital program between now and 2013, we expect to generate an additional $2 billion of EBITDA(1) annually, bringing our forecast total to approximately $6 billion per year.

This, in turn, is expected to lead to a robust increase in discretionary cash flow. By 2013 we expect to generate approximately $4 billion of funds from operations(1) per year. This will provide us with significant financial capacity to invest in our core businesses; continue to increase dividends to shareholders; and to further enhance our financial strength and flexibility. Our decisions will be guided by our desire to maximize long-term shareholder value while 'living within our means'.

Priority #4: Reinvest TransCanada's growing cash flow in high quality, low risk projects.

Going forward, TransCanada has three large platforms for growth — Natural Gas Pipelines, Oil Pipelines and Energy. All three have strong long-term fundamentals.

Over the next decade, the demand for natural gas in North America is expected to grow by approximately 10 Bcf/d, powered by the expected growth in demand for electricity. Today, our pipeline network taps into virtually every major North American natural gas supply basin on the continent and provides our customers with unparalleled access to premium markets. Looking forward, we are very well positioned to connect shale gas, conventional gas, LNG in Mexico and, in the longer term, northern gas to growing markets.

We have captured the pre-eminent position to move growing supplies of crude oil from Western Canada and the Williston Basin in the United States to the largest refining centres in North America.

Western Canadian crude oil supply is expected to grow by approximately 1.1 million Bbl/d over the next decade. At the same time, industry experts project that production from the Williston Basin could grow by as much as 200,000 Bbl/d between now and 2015.

TransCanada is well positioned to move growing oil production from both these areas to large refining centres in the U.S. Midwest and Gulf Coast regions through the Keystone Oil Pipeline and our related Bakken and Cushing Marketlink projects.

In Energy, power demand is expected to grow at an average annual rate of approximately one per cent over the next ten years. While coal, nuclear and hydro will remain key components of the supply mix, it is likely that gas-fired generation, renewables and nuclear refurbishments will play a major role in meeting future demand as the North American market transitions to a less carbon intensive mix. Our proven track record in the development of natural gas, hydro, wind and nuclear will allow us to continue to capture high quality long term opportunities in our core markets.

We have enjoyed tremendous success over the past decade under the leadership of Hal Kvisle. We have focused on businesses in which we have considerable expertise and in geographies where we have distinct competitive advantage. The 4,200 employees of this company are the best in their fields and they deliver superior results — every day. Together, they accomplish big things and they do it safely and with great care. I thank them all for their accomplishments. I am very proud and honoured to have the opportunity to work with them.

Going forward, I believe we have the right people, the right skills, the right assets, the right strategy and the financial capacity to compete and win a significant share of the quality opportunities available in our core markets and ultimately realize our vision to be North America's leading energy infrastructure company. I am very excited about our future. As the TransCanada leadership team, along with its 4,200 employees, moves these priorities forward, we will increase cash flow, increase earnings and grow our dividend — resulting in continued long term, sustainable growth for our shareholders.

Russell K. Girling Signature

Russell K. Girling

President and Chief Executive Officer

(1) Non-GAAP measure that does not have any standardized meaning prescribed by generally accepted accounting principles. For more information see Non-GAAP Measures in the Management's Discussion and Analysis of the 2010 Annual Report.