Natural Gas Pipelines

Opportunities and Developments

Introduction

Opportunities for North American natural gas pipeline infrastructure are impacted by the developments in the natural gas exploration and production sector. Rapidly increasing supply of hydrocarbons from shale and other tight or low permeability resource plays, particularly in the past five years, are transforming the domestic natural gas market. These resource plays are being further developed due to the recent wide-spread application of horizontal drilling together with multi-stage hydraulic fracturing (fracking) that is reshaping the natural gas industry. For example, North America has evolved from having numerous projects and proposals in various stages of development for liquefied natural gas (LNG) import facilities as recently as five years ago to the current situation where both the Canadian and U.S. regulators have issued and are considering additional LNG export licenses due to the significant increase in North American natural gas supply.

The abundance of supply resulting in relatively low natural gas prices across North America is supportive of increased reliance on natural gas to meet growing energy demands. A shift to increased natural gas fired power generation is also emerging in the U.S. and Canada. Numerous proposals for development of LNG export facilities from North America is another example of the evolution of the natural gas industry. Persistently high oil prices, particularly relative to North America natural gas prices, have resulted in increased deployment of capital for the exploration and production of liquid-rich hydrocarbon basins, which also tend to produce associated natural gas. A recent announcement by the Mexican government to change its procurement strategy away from LNG imports to infrastructure improvements that facilitate increased access to natural gas supply from the U.S. is further evidence of the increased confidence in the availability of supply at stable prices across North America.

The evolution of the natural gas market is also driving changes to traditional flow patterns across the continental pipeline grid resulting in reassessment of the use and repurposing of existing assets. TransCanada's portfolio of North American natural gas pipeline infrastructure is well positioned to capture investment opportunities from growing natural gas supply as well as opportunities to connect new markets while satisfying increasing demand for natural gas within existing markets.

The following are significant initiatives by TransCanada to capture opportunities in the evolving natural gas industry in North America:

Canadian Mainline

In September 2011, TransCanada filed the Restructuring Proposal, a comprehensive application with the NEB to change the business structure and the terms and conditions of service for the Canadian Mainline. The application included the following components:

  • Extension of the Alberta System footprint to points on the Canadian Mainline in Saskatchewan, and on the Foothills System in Saskatchewan and B.C., thereby reducing the cost to transport gas from the Western Canada Sedimentary Basin (WCSB) to markets served by the Canadian Mainline.
  • Lower depreciation expense and therefore lower tolls resulting from adjustments to the economic planning horizons for the three Canadian Mainline segments and a reallocation of accumulated depreciation to better match consumed service value for each segment.
  • Changes to toll design, services, and pricing resulting in higher revenues and lower overall tolls.
  • A 7.0 per cent ATWACC fair return which is equivalent to an ROE of 12 per cent on deemed common equity of 40 per cent.

In October 2011, TransCanada filed supplementary information on cost of service and the proposed tolls for 2012 and 2013. These applied-for tolls result in a 2012 toll of $1.29 per gigajoule for transportation from Nova Inventory Transfer to the Dawn, Ontario delivery point, which is 38 per cent lower than the comparable toll charged in 2011.

The Restructuring Proposal was developed by TransCanada as an innovative and balanced response to recent and dramatic changes in the business environment of natural gas supply, demand and transportation in North America. The application is intended to enhance the long-term economic viability and sustainability of the Canadian Mainline and the WCSB. A decision regarding the Restructuring Proposal is expected in late 2012 or early 2013.

TransCanada re-filed an application with the NEB in November 2011 that included supplemental information for approval to construct $130 million of new pipeline infrastructure on the Canadian Mainline, to receive Marcellus shale basin gas at the Niagara Falls receipt point for further transportation to Eastern markets. Subject to regulatory approval to construct the facilities, deliveries from Niagara Falls are expected to begin at a rate of 230 MMcf/d in November 2012 and then increase to 350 MMcf/d by November 2013, which may require a subsequent application for additional facilities.

Alberta System

The Alberta System's Horn River natural gas pipeline project was approved by the NEB in January 2011 and commenced construction in March 2011, with a targeted completion date of second quarter 2012 and an estimated capital cost of $275 million. In addition, the Company executed an agreement to extend the Horn River pipeline by approximately 100 km (62 miles) at an estimated cost of $230 million. As a result of the extension, additional contractual commitments of 100 MMcf/d are expected to commence in 2014 with volumes increasing to 300 MMcf/d by 2020. An application requesting approval to construct and operate this extension was filed with the NEB in October 2011. The total contracted volumes for Horn River, including the extension, are expected to be approximately 900 MMcf/d by 2020.

In June 2011, the NEB approved the construction and operation of a 24 km (15 miles) extension of the Groundbirch natural gas pipeline. Construction commenced in August 2011 with an expected in-service date of April 1, 2012 and an estimated cost of approximately $60 million. The project is required to serve 250 MMcf/d of new transportation contracts.

TransCanada continues to advance pipeline development projects in B.C. and Alberta to transport new natural gas supply. The Company has filed applications with the NEB requesting approval for expansions of the Alberta System to accommodate requests for additional natural gas transmission service throughout the northwest and northeast portions of the WCSB. TransCanada has incremental firm commitments to transport approximately 3.4 billion cubic feet per day (Bcf/d) from western Alberta and northeast B.C. by 2014. Further requests for additional volumes on the Alberta System from the northwest portion of the WCSB have been received. In 2011, including the projects discussed above, the NEB has approved natural gas pipeline projects with capital costs of approximately $910 million. Further pipeline projects with a total capital cost of approximately $810 million are awaiting NEB decision. In addition, infrastructure to connect WCSB supply to markets continues to be pursued particularly to support further development of Alberta oil sands production and to supply proposed LNG export facilities on the Pacific Coast.

The Alberta System filed an application in October 2011 with the NEB to implement a new business model to restructure the commercial terms applied to existing natural gas liquids entering the Alberta System. The Natural Gas Liquids Extraction Model (NEXT) implementation date is proposed to be effective November 1, 2013. NEXT is designed to address the inequities caused by the current extraction convention, and improve the competitiveness of the Alberta System and the WCSB.

Commercial integration of the Alberta System and ATCO Pipelines system commenced in October 2011. Under the Agreement, the combined facilities of the two systems are commercially operated as a single transmission system and transportation service is provided to customers by NOVA Gas Transmission Ltd. (NGTL) pursuant to NGTL's Tariff and suite of rates and services. This agreement further identifies distinct geographic areas within Alberta for the construction of new facilities by each of NGTL and ATCO Pipelines. The final stage in this integration project is the swapping of certain pipeline assets of equal value. An application to the NEB for approval of the asset swaps is anticipated in the first quarter 2012.

Canadian Mainline, Alberta System and Foothills 2012 Tolls

TransCanada filed for and received approval to implement interim 2012 tolls on the Canadian Mainline effective January 1, 2012, at the same level as the currently approved 2011 final tolls. In addition, TransCanada filed for interim 2012 tolls on the Alberta System and annual tolls for Foothills to be effective January 1, 2012. These tolls have also been approved on an interim basis pending the outcome of the NEB's decision on the Restructuring Proposal.

U.S. Pipelines

In May 2011, TransCanada closed the sale of a 25 per cent interest in each of GTN and Bison to TC PipeLines, LP for an aggregate purchase price of US$605 million, which included US$81 million or 25 per cent of GTN's debt plus customary closing adjustments.

GTN

GTN executed a settlement agreement with its shippers for new transportation rates to be effective January 2012 through December 2015. The settlement agreement was filed in August 2011 and approved by the FERC in November 2011.

Northern Border

Northern Border operates pursuant to maximum long-term mileage-based rates and seasonal short-term transportation rates approved by the FERC in a January 2007 rate case settlement. A moratorium on the filing of future rate cases under National Gas Act Sections 4 or 5 expired on January 1, 2010. Northern Border is required to file a rate case on or before December 31, 2012.

Tuscarora

Tuscarora Gas Transmission filed a settlement agreement with the FERC in December 2011 that concluded a review of Tuscarora's currently effective rates. The agreement, subject to the FERC approval, will lower shippers' reservation and transportation charges, and preclude another rate case until 2014.

ANR

In September 2011, ANR Pipeline Company filed an application with the FERC to sell its offshore Gulf of Mexico assets and certain related onshore facilities to its wholly-owned subsidiary, TC Offshore LLC. At the same time, TC Offshore LLC requested authorization from the FERC to acquire, own and operate those facilities under the FERC's regulations. These filings are currently pending before the FERC and a decision is expected in second or third quarter 2012.

Alaska Pipeline Project

The Alaska Pipeline Project team continues to work with shippers to resolve conditional bids received as part of the project's open season and is working toward the FERC application deadline of October 2012 for the Alberta option that would extend from Prudhoe Bay to points near Fairbanks and Delta Junction, and then to the Alaska-Canada border, where the pipeline would connect with a new pipeline in Canada. The pipeline in Canada would extend from the Alaska-Canada border to link up with pipeline systems near Boundary Lake, Alberta, providing the capability of transporting natural gas into the continental U.S. TransCanada has commenced initial discussions with Alaska North Slope producers regarding an alternative pipeline route, the LNG option, that would require a pipeline from Prudhoe Bay to LNG facilities, to be built by third parties, located in south-central Alaska. TransCanada has entered into an agreement with Exxon Mobil Corporation (ExxonMobil) to jointly advance the project.

The Mackenzie Gas Project

The MGP received its Certificate of Public Convenience and Necessity in March 2011, marking the end of the Federal regulatory process. The proponents of the 1,196 km, 30 inch pipeline, with an initial capacity of 1.2 Bcf/d, continue to seek the Canadian government's support for an acceptable fiscal framework which would allow the project to progress.

Mexico

The Guadalajara Pipeline in Mexico began commercial operations in June 2011. The US$360 million, 310 km (193 miles) project has capacity to transport 500 MMcf/d of natural gas to a power plant and 320 MMcf/d to the Pemex-owned national pipeline system near Guadalajara. The pipeline is secured under 25-year contracts with the Comisión Federal de Electricidad (CFE), Mexico's federal government owned electrical power company. In 2011, natural gas shipments were limited to support testing and commissioning efforts at the power plant. TransCanada and the CFE have agreed to add a US$60 million compressor station to the pipeline that is expected to be operational in early 2013.