TransCanada PipeLines Limited posted C$202 million or C$0.42 per share net income from continuing operations for the second quarter 2002, compared to second quarter 2001 net earnings of C$175 million or C$0.37 per share. The company noted that second quarter 2002 results include $25 million of earnings related to the recent Fair Return Application decision by the National Energy Board (NEB) for the period Jan. 1, 2001 to June 30, 2002.

“TransCanada’s second quarter results demonstrate our disciplined and steady approach to maintaining and utilizing our strong financial position,” said Hal Kvisle, TransCanada’s CEO. “The strategic moves we’ve made over the past couple of years have positioned us as a strong, financially stable company. And in a time when unstable financial markets are resulting in many of our peers experiencing difficulty, TransCanada continues to deliver solid value and returns for its shareholders.”

In early 2001, TransCanada said it would exit the natural gas marketing business to focus on its core natural gas transmission and power businesses in Canada and the northern tier of the United States (see Daily GPI, May 9, 2001 ). In September and October of that year, the company entered into separate sale agreements with Mirant Corp. and BP Gas & Power for its gas marketing and trading businesses (see Daily GPI, Sept. 24, 2001; Oct. 12, 2001).

Kvisle said there are many opportunities in the pipeline and power generation business because many of TransCanada’s competitors are currently experiencing financial difficulties, in part, due to significant exposures to marketing and trading activities. “TransCanada exited its natural gas marketing business in 2001, before industry conditions reached their current difficult state,” he said. “Now, our strong balance sheet positions us to pursue and acquire high-quality natural gas pipeline and power assets in preferred American markets — swiftly, strongly and decisively. We are enthused by many of the current prospects, but we continue to approach each opportunity cautiously and with discipline.

“By continuing to focus on our five key strategies, we’re staying the course toward our ultimate goal to be a leader in natural gas transmission and electric power in the northern tier of North America,” Kvisle added.

TransCanada said its five key strategies are to:

Speaking on Canada’s current pipeline environment, Kvisle noted that TransCanada’s return on capital over the past six years for the majority of its Canadian regulated pipelines (not including the Alberta System) has declined from more than 7% to approximately 5.8%, through the workings of a bond-indexed formula adopted by the NEB in 1995. By comparison, returns across the broader North American pipeline industry continue to average more than 7%, he said.

Although TransCanada was seeking a 7.5% return on Canadian Mainline capital of approximately $9 billion, the NEB awarded TransCanada a return of approximately 5.8% in late June (see Daily GPI, June 28). Kvisle said that the percentage equates to a return on common equity of 9.53% on a deemed common equity ratio of 33%.

“We are disappointed with the NEB’s decision because it does not recognize the long-term business risks of our Canadian Mainline, particularly the portion of the system that transports natural gas east from Winnipeg,” Kvisle commented. “TransCanada needs to operate this portion of the system for at least 30 more years in order to recover its equity investment and repay the associated debt. And we are concerned that western Canadian gas may not flow to markets served by this portion of the Canadian Mainline for an equal amount of time. We do not believe the NEB has recognized this substantial business risk, as evidenced by the low return on capital it awarded TransCanada.”

Due to the NEB’s action, TransCanada said earlier in the week that it had started discussions with its customers regarding possible changes in depreciation or ownership of a 20% portion of its mainline stretching from Winnipeg, MB, east to points north of Toronto (see Daily GPI, July 25). One extreme option would be to shut down that part of the system entirely, but the company said that would not occur for many years and would only happen after all else failed.

Despite NEB’s decision, Kvisle said that TransCanada remains committed to the Canadian pipeline business. “Our Alberta System, our BC System and the western portion of the Canadian Mainline have better risk/reward characteristics than the eastern portion (east of Winnipeg) of the Canadian Mainline. Today, TransCanada is much more than just the Canadian Mainline, which now makes up approximately 40 percent of our total asset base. And because the eastern portion of the Canadian Mainline now comprises only approximately 20 percent of our total assets, we are optimistic that the associated risks can be managed.

“We are currently discussing alternative business models with our customers that would enable us to reduce our risk on the Canadian Mainline by recovering our capital over a shorter period of time. Through this process, we would work to reach agreement on a return on capital that is appropriate for a lower business risk on the Canadian Mainline.”

In strengthening its balance sheet, TransCanada said that funds generated from continuing operations for the second quarter 2002 increased approximately C$80 million, compared to the same period last year. For the first six months of the year, funds generated from continuing operations were C$932 million compared to C$814 million for the same period in 2001, an increase of approximately 14%.

Deliveries of natural gas on TransCanada’s systems averaged:

TransCanada’s net earnings for the first six months were C$388 million or $0.81 per share, compared to C$345 million or $0.73 per share for the comparable period in 2001.

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