Despite experiencing a slight decline in income from its natural gas transmission business, TransCanada PipeLines Ltd. on Friday said its first quarter 2003 earnings marked an 11% increase over the company’s first quarter 2002 results. The company attributed the higher earnings to the strong performance of the power business and reduced net expenses in the corporate segment, partially offset by lower earnings from the transmission segment.

The company posted net income for the first quarter of C$208 million (C$0.43 per share), compared to C$187 million (C$0.39 per share) for the first quarter 2002. Despite the notable increase in income, TransCanada said funds generated from operations for the first quarter were only C$457 million, compared to C$455 million for the same period last year.

The company’s C$0.43/share handily beat an average estimate of C$0.39/share from analysts polled by Thomson First Call.

“Our strong financial performance this quarter continues to be a direct result of our focus and discipline in implementing our key strategies,” said Hal Kvisle, TransCanada’s CEO. “We will continue to maintain and utilize our strong financial position as a solid platform for growth and value creation in our core businesses.”

The quarter included a number of additions plus a few setbacks for the Calgary-based company. During the quarter, TransCanada acquired a 31.6% interest in Bruce Power LP. for approximately C$376 million plus closing adjustments. TransCanada also funded a one-third share (C$75 million) of a C$225 million accelerated deferred rent payment to Ontario Power Generation. Bruce Power LP. is a tenant under a lease on the Bruce nuclear power facility in Ontario. The lease expires in 2018 with an option to extend the lease by up to 25 years.

Bruce consists of two nuclear plants. Bruce B has four reactors currently generating a total of 3,140 MW. Bruce A consists of four 769 MW reactors which are not operating, however, two units are currently undergoing restart activities.

“Our investment in Bruce Power LP. is an excellent example of our focused and disciplined approach to growth,” Kvisle added. “Bruce is one of the largest and most efficient power generation facilities in North America and located in one of the largest power markets. Our Bruce investment is consistent with our objective of building a balanced portfolio of low-cost power generation assets.”

Kvisle noted that strong power prices and operating performance contributed significantly to solid first quarter results from Bruce Power LP. Since the acquisition in February 2003, the investment has contributed C$27 million after tax of equity income to TransCanada while achieving an average selling price of C$63/MWh.

In February, TransCanada, through its subsidiary NOVA Gas Transmission Ltd. (NGTL) reached a one-year settlement regarding the 2003 revenue requirement for TransCanada’s Alberta System. The settlement establishes NGTL’s fixed revenue requirement for 2003 (C$1.277 billion for 2003 versus C$1.347 billion in 2002.) As a result, TransCanada estimates this change will decrease net earnings on the Alberta System by approximately C$40 million after tax, as compared to 2002 net earnings of C$214 million.

The settlement currently sits before the Alberta Energy and Utilities Board for approval together with the Alberta System 2003 Tariff Settlement, which includes proposed modifications to rate design and an application for a new service.

“We believe negotiations leading to this settlement were significantly influenced by the June 2002 National Energy Board (NEB) decision on our Canadian Mainline Fair Return application,” said Kvisle. “While there remain many complex issues in the current regulatory environment, we are committed to working collaboratively with our customers to try and resolve those issues and move forward.”

Last month, TransCanada applied to the Federal Court of Appeal for leave to appeal the NEB’s RH-R-1-2002 Decision issued February 20. In its decision, the NEB dismissed TransCanada’s September 2002 request for a Review and Variance of the NEB’s June 2002 RH-4-2001 Decision on the company’s Fair Return application.

“We continue to be concerned with the effect of the NEB Decision on TransCanada’s ability to obtain a fair return on our investment in our Canadian Mainline,” Kvisle said.

The quarter also included TransCanada’s Board of Directors unanimously recommending common shareholders vote in favor of a proposal to create a new holding company — TransCanada Corp. — to become the parent of TransCanada PipeLines Limited. On Friday, common shareholders voted in favor of the change.

TransCanada said it is scheduled to appear before the Court of Queen’s Bench of Alberta on Monday (April 28) to seek approval of the arrangement to establish TransCanada Corp. If court approval is received, the arrangement will become effective May 15.

In the segment breakdown, TransCanada’s power unit contributed net earnings of C$63 million for the quarter, marking a C$22 million jump over the same period in 2002. The company attributed the increase to strong earnings from the recently acquired interest in Bruce and the addition of the ManChief plant in late 2002. Operating and other income from Western Operations of C$43 million was C$9 million higher than the same period in 2002 mainly due to the acquisition of the ManChief facility in November 2002 and lower electricity transmission tariffs.

TransCanada’s transmission business generated net earnings of C$158 million in the first quarter of 2003, a slight decline from the C$163 million posted for the first quarter 2002. The Alberta System’s net earnings of $42 million in first quarter 2003 decreased $8 million compared to $50 million in the same quarter of 2002 as a result of the one-year 2003 revenue requirement settlement which includes the fixed revenue requirement component. The Canadian Mainline’s net earnings increased $3 million on the quarter due to the NEB’s decision on TransCanada’s Fair Return application, which included an increase in the deemed common equity ratio from 30 to 33%.

“TransCanada is embarking on the rest of the year and the future with a strong balance sheet, clear strategies and a capable and enthusiastic team,” Kvisle said. “We look forward to maintaining our focus on our core strategies with an emphasis on well-planned, well-executed growth that creates value for our shareholders while preserving our financial strength.”

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