TC Energy Corp (TRP) 2002 Q3 法說會逐字稿

All participants, please stand by. Your meeting is ready to begin.

Good afternoon, ladies and gentlemen. Welcome to the TransCanada Pipelines third quarter results conference call.

I would now like to turn the meeting over to Mr. David Moneta, Director of Investor Relations. Please go ahead, Mr. Moneta.

Thanks very much. Good afternoon, everyone.

I'd like to take this opportunity to welcome everyone this afternoon, including those of you who are joining us through the Worldwide Web. We are pleased to provide the investment community, the media and all other interested parties with an opportunity to discuss our 2002 third quarter financial results and other general issues concerning TransCanada.

With me today are Hal Kvisle, President and Chief Executive Officer; Russ Girling, Executive Vice President and Chief Financial Officer; and Lee Hobbs (ph), our Vice President and Controller.

Hal will begin today with some brief comments on our results and other general issues pertaining to TransCanada. Russ will follow with a more detailed review of our third quarter results. Excuse me.

A question-and-answer period will follow their remarks. During the question-and-answer period, we will accept questions from the investment community first, followed by questions from the media.

Before Hal begins, I'd like to remind you that certain information in this presentation is forward-looking and is subject to important risks and uncertainties. The results or events predicted in this information may differ from actual results or events.

Factors which could cause actual results or events to differ materially from current expectations include, among other things, the ability of TransCanada to successfully implement its strategic initiatives, and whether such initiatives will yield the expected benefits; the availability and price of energy commodities; regulatory decision; competitive factors in the pipeline and power industry sectors; and the prevailing economic conditions in North America.

For other - for additional information on these and other factors, see the reports filed by TransCanada with Canadian securities regulators and with the United States Securities and Exchange Commission.

TransCanada disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

With that I'll now turn the call over to Hal Kvisle.

HAROLD N. Hal Kvisle, PRESIDENT & CEO, TRANSCANADA PIPELINES LTD.: Thank you, David. Good afternoon, everyone, and thank you for joining us today.

At a volatile time for the energy industry, TransCanada is pleased to report continued solid earnings for the third quarter.

As detailed in our third quarter report to shareholders, net income applicable to common shares from continuing operations increased 10 percent to $175 million, or 37 cents per share. This compares to third quarter 2001 net earnings of $159 million, or 33 cents a share.

On a year-to-date basis, our net income applicable to common shares from continuing operations was $567 million or $1.19 per share. This represents an increase of 47 million, or 10 cents per share over the first nine months last year.

TransCanada's board of directors today declared a quarterly dividend of 25 cents per share for the quarter ended December 31st, 2002, on the outstanding common shares. This is the 156th consecutive quarterly dividend paid by TransCanada on its common shares.

Our disciplined business approach and our strong asset base are key factors in our continued strong financial position. Complementing these factors is our unwavering commitment to the pursuit of an operational excellence model. This is one of our five key strategies that I've talked about in previous quarters.

I'll talk briefly about some of the highlights of our third quarter, and then I'll turn the call over to Russ Girling, who will provide more detail on our financial results.

In the current North American environment, our strong earnings, strong cash flow and strong balance sheet position us well. There is much talk of the abundance of opportunities to acquire assets, and as we've stated before, we are pursuing growth strategies for both our pipeline and power businesses.

However, while we are in the enviable position of having the financial capacity to act, we will only do so when the time and the opportunity are right. We will continue to be disciplined in our approach to acquisitions, and we will not compromise our strong financial position. I believe our disciplined and strategic approach was evident in the two acquisitions we made in the third quarter.

In August, TransCanada acquired a general partnership interest in Northern Border Partners, L.P., a publicly-held U.S. limited partnership, through a $19 million acquisition from the Williams Companies. The acquisition provides TransCanada with a 17.5 percent vote on the policy committee of Northern Border Partners, L.P., and further increases TransCanada's indirect ownership interests in the Northern Border Pipeline Company.

We consider Northern Border Pipeline to be one of the preferred routes to move gas from northern frontier areas to markets in the future. Although this was not a large-scale acquisition, it enhances our ability to move northern natural gas to the growing North American marketplace.

In the power business, we signed an agreement in September for the acquisition of a 300-megawatt ManChief power plant for US$127 million. We expect to complete this acquisition by the end of November.

The ManChief acquisition fits with our strategy of expanding our power business in growing North American markets. We view this acquisition as a source of a very stable stream of net cash flow, as the entire capacity of the plant is sold under long-term tolling contracts that expire in the year 2012.

The ManChief plant will bring the total number of plants TransCanada owns, controls or has under construction to 17, with a total generating capacity of more than 2,550 megawatts. That's enough power to meet the needs of nearly 2.5 million average households.

On the regulatory front, TransCanada filed an application with the National Energy Board in September for tolls on the Canadian Mainline natural gas transmission system. Our application proposes further structural change to the Canadian Mainline rates and services, in response to changing natural gas markets and pipe-on-pipe competition. We have requested the tolls be effective January 1st, 2003, upon the expiry of currently approved tolls.

TransCanada has also filed a request with the NEB for a review and variance of the NEB's RH-4-2001 decision on TransCanada's Fair Return application.

Over the past two years, we at TransCanada consistently applied diligence and discipline to the management and growth of our pipeline and power businesses. It's an approach that's working well. We've thrived during difficult markets, and we continue to deliver solid results for our shareholders.

I'd like to reiterate that we intend to maintain our prudence as we go forward. As I've stated before, we do not want to grow simply for growth's sake. We will continue to evaluate both assets and businesses in pipelines and power with a focus on select acquisitions that enhance and maintain shareholder value.

I'd now like to ask Russ Girling to provide you with the details of our third quarter financial results - Russ.

Thank you, Hal, and good afternoon, everybody.

As Hal said, we are very pleased to report another quarter of strong operating results from our natural gas transmission and power businesses.

At a time when many others in our industries are - in our industry are - being negatively impacted by a number of issues, TransCanada continues to generate solid earnings and cash flow by operating and developing and acquiring large-scale energy infrastructure assets.

As reported earlier today, net income applicable to common shares from continuing operations for the three months ended September 30th, 2002, was $175 million, or 37 cents per share. That's an increase of 10 percent over net earnings of $159 million, or 33 cents per share, for the same period last year.

On a year-to-date basis, net income applicable to common shares from continuing operations was $567 million, or $1.19 per share, compared to $520 million, or $1.09 per share last year.

As you know, in June we received the National Energy Board decision on our Fair Return application to determine the cost of capital to be included in the calculation of 2001 and 2002 final tolls on the Canadian Mainline. The Fair Return decision included an increase in the deemed common equity ratio from 30 percent to 33 percent effective January 1st, 2001.

The NEB also decided that the return on equity as calculated, based on the NEB formula, continued to be appropriate for the Canadian Mainline, which results in an approved rate of return on common equity of 9.61 percent for 2001, and 9.53 percent for 2002.

Therefore, TransCanada's results for the nine months ended September 30th, 2002 include after-tax net earnings of $30 million, or 30 - or six cents per share, representing the impact of the Fair Return decision for the period January 1st, 2001 through to December 30th, 2002. This includes $60 million, or three cents per share for the year ended December 31st, 2001, and $14 million, or three cents per share, for the nine months ended September 30th, 2002.

In September, TransCanada filed a request with the NEB for a review and variance of its RH-4-2001 decision on the Fair Return application. As Hal mentioned, TransCanada also filed a 2003 tolls application with the National Energy Board for tolls for the Canadian Mainline effective January 1st, 2003.

In that application, TransCanada is seeking approval of a new southwest tolling zone, an increase in the bid oil price for interruptible transportation, and an increase in depreciation rates in addition to the continuation of certain operating incentives. TransCanada also requested that the National Energy Board approve a fair return for 2003 that reflects the decision on the review and variance application.

You should also note that effective September 30th, 2002, TransCanada adopted accrual accounting for energy trading contracts in its continuing operations, changing from its previous policy of mark-to-market accounting for these contracts.

The changes to TransCanada's financial statements are minor. But given the heightened awareness around these types of issues, I will give you a full explanation of the changes.

TransCanada adopted mark-to-market accounting for energy trading contracts for Canadian GAAP in the fourth quarter of 2001, due to the gas marketing business, which was a trading-based operation. With the sale of the gas marketing business in 2001, TransCanada examined discontinuing the use of mark-to-market accounting for Canadian GAAP purposes in the first quarter of 2002.

At that time, there were indications that the Canadian accounting standard-setters were considering moving towards adopting U.S. GAAP type standards for mark-to-market accounting. With this potential harmonization in mind, we decided not to proceed with the change at that time.

However, due to recent problems encountered in the U.S. with mark-to-market accounting, Canada is currently not expected in the foreseeable future to adopt similar accounting standards. In fact, U.S. regulators and the accounting standard-setters are currently making changes to the application of mark-to-market accounting. These changes are not known at this time.

In addition, it is our opinion that the accrual accounting results result in higher quality - in a higher quality of reported earnings, and better reflects the underlying performance of our power operations, which uses marketing to support its power generation assets and power purchase arrangements.

In aggregate, these developments resulted in our decision to adopt accrual accounting for energy trading contracts in our continuing business, effective September 30th, 2002. This accounting change has been applied retroactively with a restatement of prior periods.

The adoption of this policy resulted in a $1 million increase to previously reported first quarter 2002 net earnings, and a $3 million increase to previously reported second quarter 2002 net earnings.

I will now review third quarter results for each of our segments beginning with transmission.

The transmission business generated net earnings of $154 million for the three months ended September 30th, compared to $145 million for the same period last year. The increase was primarily driven by positive results from wholly-owned pipeline systems.

The Alberta System contributed net earnings of $56 million in the third quarter compared to $52 million last year. The increase is primarily due to an interest refund of $4 million relating to prior year income tax reassessment.

The Canadian Mainline contributed net earnings of $72 million in the third quarter compared to $68 million for the same period last year. The increase reflects the impact of the fair rate of return decision, as previously discussed. Excluding this adjustment, results from the Canadian Mainline for the third quarter were consistent with the same period in 2001.

And finally, with respect to our transmission segment, our share of earnings in the third quarter from investments in North American pipeline ventures was $25 million, an increase of $1 million over last year.

In August, we continued to grow and expand our pipeline business by acquiring a general partner interest in the Northern Border Partners, L.P., for $19 million. As Hal pointed out, as a result of this transaction, TransCanada is entitled to a 17.5 percent vote on the partnership policy committee of Northern Border Partners, which owns 70 percent of Northern Border. This acquisition allows TransCanada to participate in Northern Border Partners' cash distributions as well.

Next I'll talk about power.

The power business contributed net earnings of $35 million in the third quarter compared to $33 million for the same period last year. We are pleased with these results in light of the difficult North American power market. TransCanada Power, L.P. contributed $9 million in operating and other income in the third quarter, which is the same as last year.

Operating and other income from the north - from our northeastern U.S. operations for the third quarter was $27 million, a decrease of $9 million compared to last year. The decrease is primarily due to lower revenues under long-term power sales arrangements compared to the same period last year.

Operating and other income from our western operations for the third quarter was $40 million, an increase of $16 million compared to last year. The results for 2002 include contributions from the Sundance B power purchase arrangement acquired at the end of 2001, and income from the commercial startup of the Redwater and Carseland plants in January 2002, and lower contract prices on the sale of output from the Sundance A power purchase arrangement.

General and administrative and support costs of $17 million were $7 million higher, due to the continued growth of the power business. On a year-to-date basis, power contributed net earnings of $160 million, a decline of $17 million compared to last year.

As we've said before, in the first half of last year, we were able to capitalize on opportunities created by power price volatility. Our results for the year so far reflect a decline in opportunistic type transactions. However, our outlook for power, as I've said before, has never based on the belief that the market conditions we experienced in the first half of 2001 would be repeated.

Going forward, our objective is to grow our asset-based power business in a manner that contributes to stable, long-term earnings and cash flow growth. We will continue to pursue projects and manage our power portfolio in a manner that fits our desired risk profile, with a focus on low-cost supply, low volatility, stable returns and long-term contracts with strong counterparties.

We will continue to leverage our strengths and extensive market knowledge, strong technical expertise, deregulation experience and risk management skills to continue to grow our power business in the same manner that has led to its success to-date.

To that end, we are progressing on schedule with the construction of our Bear Creek and MacKay River cogeneration plants. And as Hal mentioned, in the third quarter we signed an agreement with El Paso for the acquisition of a 300-megawatt power plant called ManChief near Brush, Colorado. The entire capacity of that plant is sold under long-term tolling contracts to the Public Service Company of Colorado. We have received FERC approval, and currently expect to complete the US$120 million transaction in November.

Next I'll talk about the corporate segment.

Net expenses in the corporate segment were $14 million for the three months ended September 30th, 2002, compared to $19 million for the same period last year. The decrease is primarily due to the positive impact of lower interest rates.

With respect to our discontinued operations, as described previously, TransCanada remains contingently liable pursuant to obligations under certain energy trading contracts that relate to the divested cash marketing business.

At September 30th, we reviewed the provision for loss and discontinued operations, including the approximately $100 million of deferred after-tax gains, and remain - and the remaining obligations related to the gas marketing business, and concluded the provision and the continued deferral of the gains was appropriate. As a result, there was no earnings impact related to discontinued operations for the third quarter of 2002.

Now turning to cash flow and our balance sheet, funds generated from continuing operations for the third quarter were $463 million, an increase of $14 million compared to the same period last year. On a year-to-date basis, funds generated from continuing operations were approximately $1.4 billion, an increase of $132 million, or approximately 10 percent over last year.

The increase is primarily due to an increase in net income from continuing operations as previously discussed, higher regulated depreciation expense and an increase in future income taxes.

Capital expenditures for the nine months ended September 30th, 2002, were $416 million, related mostly to maintenance and capacity capital in the transmission business and the construction of two new power plants. In addition to strong cash flow, our balance sheet is also - also continues to improve.

The company retired $230 million of term debt and reduced notes payable by $228 million in the first nine months of the year. Today we had a strong balance sheet consisting of 58 percent term debt, six percent preferred securities, two percent preferred shares, and 34 percent common equity.

To summarize, the company's earnings and cash flow combined with a strong balance sheet provides TransCanada with the financial flexibility to make disciplined investments in its core businesses. As we said previously, we will continue to make profitable investments in natural gas transmission and power. In recent months, the number of opportunities has increased. But be assured that our evaluation approach will remain disciplined and focused to ensure we continue to enhance shareholder value.

We will continue to work on establishing a new regulated business model that makes us more competitive, and allows us to earn a fair return. We will continue to focus on operational excellence, and we will continue to maintain our strong financial position.

Successful execution of these strategies will result in continued earnings and cash flow growth in the years ahead, and build value for our shareholders.

That concludes my prepared remarks, and I'll turn the call back to David.

Thanks very much, Russ. That, obviously, concludes our prepared remarks. I'll now turn the call back over to the conference coordinator.

Just a reminder that during the question-and-answer period, we'll accept questions from the investment community first, followed by questions from the media.

With that, I'll turn it over to the coordinator.

Thank you, gentlemen. We will now take questions from the analyst community.

If you have a question, please press one on your telephone keypad. If you are using a speakerphone, please lift the handset and the press one. If at any time you wish to cancel your question, please press the pound sign.

Please press one at this time if you have a question. There will be a brief pause while the participants register for questions. Thank you for your patience.

Our first question is from Bob Hastings of Raymond James. Please go ahead.

BOB Bob Hastings, RAYMOND JAMES: Thank you. The cap ex numbers so far this year and for where your expectations are for 2002, can you give a little bit more of a breakout? Excluding acquisitions, of course?

Lee, you want to answer that? I would be - the numbers probably split evenly between maintenance capital and the construction of the new power plants. But we'll get you that number here, Bob. Is that the only question?

No, the - just looking at - you're also, I guess, looking at $3.5 billion worth of money under shelf prospectuses. Wondering if you, if there's any of that's been committed yet? Or is that just all in case an acquisition comes along?

That's all in case acquisition comes along, or other needs. You know, part of those shelf prospectuses are, obviously gives us the ability to manage our debt profile over time.

In Canada and the U.S., we'd have the ability to continue to issue debt on an ongoing basis. And sort of current practice is to include in that, to go to the universal shelf approach, giving us the ability to issue debt or equity on a more expedited basis.

So at this point in time, there is no - none of those facilities are dedicated to any perspective acquisition.

And you're not looking at doing anything that would change your capital structure?

Not sure if I understand that question.

The point (ph) of, you wouldn't raise $3.5 billion of debt.

That - certainly not contemplating that at this point in time.

OK. And just a clarification, while we're looking at that number, the NEB decision you said added a fair amount of money over that period. But in the third quarter there would be nothing that was non-recurring, would there? There's no catch-up provision in the third quarter?

No. It's all - the run rate's somewhere around $4 to $5 million a quarter, and that's all that's captured in the third quarter results. I think Lee has got an answer to your first question here.

Bob, it's Lee here. Just on the cap ex for the nine months, about $140 million of that's on the Alberta System. A majority of that would be maintenance, and then clearly some capacity capital as well.

Canadian Mainline's about $30 million. B.C. System's about $30 million, mostly capacity capital. Power is about $117 of $120 million. Most of that would be capacity on the new generation plants. Plus, of course, the $19 million for the Northern Border acquisition. And probably about $30 or $40 million just from our joint ventures on our proportionate consolidation basis.

And they (ph), is that - and the fourth quarter there's nothing that I couldn't trend out. There's no big cap ex number coming in?

No, the only thing that might raise that a bit would be ManChief closing in the fourth quarter, Bob.

Lee Hobbs (ph): Yes. No, but barring the acquisition. OK. Thank you very much.

Thanks, Bob.

Thank you. Our next question is from Peter Case of CIBC World Markets. Please go ahead.

Thank you. Hal and Russ, you've talked a little bit about approach to looking at acquisitions. But can you give us a little more flavor in terms of what you're seeing in the market? Are some of the potential sellers getting a little keener to do a deal before year-end? What do you see in terms of indicative pricing, you know, maybe multiples of (inaudible) - that kind of thing?

Peter, it's Hal. I'll make a couple of comments, and then Russ may add to them.

I guess we see right now that there's an awful lot of activity in the North American infrastructure sector. There's a lot of talk and a lot of debt problems, a lot of credit weighting issues.

But there's also a lot of reasons why companies can't actually move forward and do transactions at this time. In some cases they've got bankruptcy or near bankruptcy problems that will delay things. In other cases, they haven't yet gotten to the point where they've decided that they wish to actually sell the assets that we would be interested in.

So we continue to talk to a lot of parties. And we continue to make our interest in quality assets known and clear.

But we're not pushing too hard where counterparties just simply aren't ready to do deals at this point. We're patient, and we're willing to wait.

There are also a lot of assets that we see going by that are either not geographically attractive to us, that don't have the fundamental quality we're looking for, or have some element of volatility or risk that does not appeal to us.

In the power sector, there's the very interesting situation where an awful lot of plants were constructed using 70 or 80 percent debt leverage. And with the changes in the fundamental market, largely driven by much higher gas prices, some of these plants are not nearly as attractive as many people would have seen them a year ago. And so there's much in the way of asset value available for sale there, but an awful lot of it that we're not interested in.

Russ, I don't know if you wish to add anything to that.

No, I think that, you know, as you say, it's a - it's a fluid environment that we're working in. Obviously, the assets that we're interested are usually the ones that are most coveted by others, plus the potential sellers also don't have a desire to sell those core assets, which we would covet.

And so it makes for an interesting environment, but as Hal said, we're, you know, we're intent on buying only those things that we feel fit our profile, and aren't going to jump in just because somebody's selling their non-core assets, but they don't fit our profile.

I think some of the sellers are - the liquidity concerns and squeeze is getting a little more intense. Do you expect that we're going to see a flurry of activity before year-end? Not necessarily TransCanada buying something, but just some of the hold-outs caving in and selling some of these assets.

I think the bigger issue, Peter, might be when the creditors to some of these entities come to the realization that their debt may not be worth 100 cents on the dollar, and they start settling in divestments for less than 100 cents on the dollar.

And I don't see that that is really going to come to a head between now and the end of the year.

Yes, I don't think - I would agree with Hal. It would be - the end of the year isn't a driving factor. On the one side, what I would call the strong cash flowing assets, the ones that we would most like, are difficult, because these companies, like - as you pointed out - they have liquidity problems. Their liquidity problems are exacerbated by selling the high cash flowing assets.

For those that aren't high cash flowing and are in that position - as Hal pointed out, where potentially the debt is greater than the equity - realization of that in the current environment, again, just accelerates some of those liquidity issues and rating agency issues.

So, they're sorting through those issues, and I don't think that the end of the year has any sort of significance in terms of a catalyst.

OK. That's helpful. One, just sort of a number question. Russ, you talked about corporate expense in the quarter compared to last year. But if I recall, it's up versus Q2. Any particular reason?

Well, Lee's just going to take a look and see if we can get you some details around that. I don't think it's up significantly. But, do you have any questions while Lee looks that up? Or can we come back to that one, Peter.

Why don't you come back to that one. I'm done. Thank you.

OK. Thanks, Peter.

Thank you. Our next question is from Karen Taylor of BMO Nesbitt Burns. Please go ahead.

Thank you. Well, you always leave me one question anyway. The power in gigawatt sales for the quarter was how much? And how much was sold in Q3 of '01?

Go ahead, Lee. We actually have a cheat sheet prepared for you, Karen.

Oh, good.

Lee Hobbs (ph): Well, in gigawatts, for third quarter 2002, 4,794. Q3 of last year, 3,398.

I'm sorry, 3,398?

Lee Hobbs (ph): Correct.

OK.

Lee Hobbs (ph): And on the year-to-date basis 2002, 14,298. And the year-to-date 2001, 10,711.

OK. Let me just make sure I have no other questions.

So, the mark-to-market change, that was simply the machinations of the GAAP standard in Canada evolving? And that's why you did not implement at your - at the beginning of the year?

Yes. It's essentially - and Lee might be able to answer this better than I - but essentially, when we sold the gas marketing business last year, we wanted to make the change at that point in time.

The advice that we were given was that, directionally, the Canadian standards were moving towards the U.S. standard of moving to mark-to-market accounting for GAAP purposes. As a result of the happenings in the U.S. over the last year, our advisors have told us that that is no longer likely to be the case in the near term. And there's no reason to hold off changing back to accrual accounting.

Lee, want to add to that?

Lee Hobbs (ph): Yes, I think we were in the position in the first quarter, was just looking at the landscape on the accounting standards in Canada was, there's always a view that the harmonization with the U.S. is a good thing. And this was one area where we felt that harmonization could occur, and we didn't want to get in a situation where we ended up restating in the year 2000 again and 2002, and potentially again in the next year or two.

Clearly, since then, a lot has happened in the U.S. standards where we derive our mark-to-market rules. And they are clearly moving away from what they're doing down there.

And I think the indication is in Canada that there is no appetite right now to move towards a U.S. type of standard for energy trading contracts. And we just decided, if that's the case, then we would go back to original thought process, which was that accrual accounting actually better fits the model that we have in the power business.

As you can see by the changes, Karen, in the numbers, they're minimal. And basically, our mark-to-market accounting was, you know, pretty close to mirroring what would happen on an accrual basis. And probably the, you know, the largest place where that occurs is in our accounting for the power purchase contracts.

Essentially, you know, our mark-to-market was zero on those for all intents and purposes. And so, moving to accrual accounting made no difference. But we were essentially accounting for them on a lower of cost or market, at that current time, anyway. So that, you know, the actual changes to the financial statements are minimal.

OK. The G&A costs on the power segment have increased, not only sequentially, but quarter over quarter. So if I look back at Q2, I think the costs were 13 or 14 million in this segment. Again, those both quarters were up versus the second and third quarter of '01.

So, if I was to look at a run rate for O&M - or rather G&A - in that segment, what should I be looking at? And why is project development so very expensive on a year-over-year basis?

Lee Hobbs (ph): I would say, if I look back at what I've got here for the first three quarters of the year, it looks like we're doing something like 17 million in the first quarter, 14 in the second quarter, 17 in the third quarter.

And I would say that, I mean, clearly, that's kind of where we're sitting around for this year's, and at (ph) 15 to 16 average for the quarter. That's probably not a bad run rate for purposes of G&A.

OK. And the Mountain Energy bankruptcy proceeding in the U.S., I understand that that's winding down, and there is talk that you will get US$5 million of the 23 million that you claimed. Is that part of the discontinued gas marketing business? Or is that wrapped up somehow in the Mainline?

And has it been recognized in the third quarter?

Lee Hobbs (ph): It has not been recognized at this point. Once we do receive cash, it will be recognized. It will end up going through our discontinued loss and provision. And we will look at that in the context of the larger provision to see if any release, et cetera, is required.

Terrific. Thank you.

Thank you. Our next question is from Maureen Howe of RBC Capital Markets. Please go ahead.

Thanks. I only have a couple of questions. The first question has to do with the northeastern U.S. power operations.

You've got $27 million in this quarter, which is down from a year ago. But more concerning that it's down from Q2 materially - $19 million. And, I mean, I guess I would have thought the summer would have been a stronger quarter.

You talk about - you talk about, you know, long term contracted prices. But if they're long term, why would there be such a material drop in consecutive quarters?

We can probably piece this one together. You have several questions in there. I'll take the first one, which is the, you know, the long term - the nature of the long-term contracts.

The long-term contracts have a fuel adder, when - they're essentially what's called the standard offer contracts in the northeast, which were the result of the power purchase buyouts.

In those, we get paid a fixed price for providing the standard offer. But when fuel prices rise, we get an additional kicker in the fuel price adjustment mechanism. And when that fuel - when fuel prices fall again, gas prices fall again, that goes away.

So that's the reason for what I call the one-way volatility in contractive - long-term contractive prices. Now what we ask - answer some of the other questions.

Lee Hobbs (ph): Yes. Just in addition, that's also a lag at the 12-month rolling average. So there's always a lag between when the underlying gas and oil prices move on the indicator to where it actually shows up in the revenue, because of the 12-month rolling average on that.

The other aspect, probably in the third quarter you'd ask about is often in the northeast. That is the hottest quarter of the year weather-wise. And what happens is, because we are sort of fixed generation, sometimes we do have to go out and buy power, and it does tend to be at a slightly higher price in the third quarter.

So, of the $19 million drop quarter-over-quarter, how much would be attributed to the fuel adder, the reduced fuel adder? And how much is from having to buy power?

And did one of your - was one of your plants operating below capacity?

Can you ask that last question again?

Was one - I mean, if you were out there buying power, did you have, you know, did you have a plant that wasn't operating at its contracted capacity?

No. It's always been, you know we were at capacity as far as I'm aware, in the quarter. And then you asked one question before that which I didn't catch the whole question.

Well, first of all, if we just come back to that, if you were at capacity, why would you be buying power?

It's with respect to the ability - there is movement in the standard offer of contracts in terms of volume. Is that the volume adjusts with market demand, which doesn't necessarily always equal our output from our plants. So we have to meet that by buying power in those peak periods.

With respect to your other question, I think was the, you know, the difference between quarter-on-quarter, and if we break that our, it's just - there's a number of things, and we haven't broken that out. There's a number of pluses and minuses in there.

So, and I guess the other question, Russ, was the difference between, you know, approximately how much was the reduction in the fuel adder? And approximately how much was having to purchase power?

Yes, and I don't have a breakout of that number.

OK. So - just so I understand, because it is, you know, it's a big drop, $19 million. I mean, fuel adder, you're saying this is rolling. So is this due to - is this something we're going to see going forward with a reduction in gas costs presumably? Or ...

Lee Hobbs (ph): It's - on quarter-on-quarter, it will move depending upon sort of a previous 12-month rolling average of the gas price.

Oh, yes. It will move.

So, in Q4, do you expect it to be similar to this quarter? Or do you expect it to be similar to a year ago?

Yes, I think more similar to the third quarter. We should see the fourth quarter being more similar to the third quarter - is our current expectations.

OK. And - excuse me - the other question I had had to do with the interest refund in the Alberta System. The $4 million that you mentioned that was in this quarter, is that a before-tax number, or an after-tax number?

Lee Hobbs (ph): That is an after-tax number.

OK. That's great. Thank you.

Thank you. Once again, if you have a question, please press one.

Our next question is from Sam Kanes of Scotia Capital. Please go ahead.

We've talked a bit about the U.S. assets for sale. How about yours? Is anything active any more for sale that you have left to go? Or you formally shut down all selling processes?

We've still got some assets for sale internationally. We've got some things in South America, still. Gas Pacifico, specifically, as well as our power plant interests in Indonesia, the Paiton power plant. And those processes continue on.

Both suffer from partner issues and contractual issues that haven't - we haven't had the ability to, you know, to assemble them for sale yet, but those processes are ongoing.

I think in Canada, anything left that you can think of Hal. I'm pretty sure that we're done anything. The only thing I'm thinking about is Harmattan.

We've got one minor interest in the gas processing business, Sam, that we're still trying to conclude the sale on at Harmattan, but it's de minimis.

And as far as the rest of our Canadian assets go, they're all part of continuing operations, and we plan to keep them.

OK. Shifting back to other assets in Canada, you had talked before, I guess several quarters ago about that transmission project potential in Alberta, which still is up in the air. I wonder if your interest has waned, or accelerated for that matter, as well as the in-Canada oil pipeline asset sale that's on for this quarter.

On the electricity transmission project - I think that's the one you're referring to.

Yes.

Our interest in that is driven by our interest in developing large-scale cogeneration in the Fort McMurray area, to supply steam to the heavy oil projects there, and electricity for export from that region.

We're much more interested in seeing that transmission line be built than necessarily building it ourselves. We're prepared to put capital into it, if that's what it takes to make it go ahead.

But there's a lot of bigger issues right now related to transmission regulation in Alberta, and how that would be built and by whom and when, and what's the forecast for incremental power development at Fort McMurray.

So, we - our interest has not waned at all. We've always been a supporter of the project. We've always been prepared to play a role in it, and to put capital into it, but investing in that power line is not our primary objective. Our primary objective is to create some way of getting excess electricity out of Fort McMurray.

OK. And on the in Canada oil pipelines?

We're not interested in that. We know the pipelines, and they're good pipelines. But it's just not a line of business that we want to pursue.

Rumors have it that you bid on the Williams pipelines that Warren Buffet bought underneath you at a materially lower price, because he was able to give a line of credit for the Gossett (ph) record (ph), I guess.

Is that something you did in fact bid on, and/or Dynegy's assets?

Which assets are you referring to?

The Kern River pipeline assets under Williams that Warren Buffet bought?

We never did bid on the Kern River assets. We were - we've always been interested in them, and we would have liked to have bid on them, but we heard about it the same time you did.

I guess.

And on the Dynegy, that's the Northern Natural situation.

Yes.

We took a very serious look at that, and we expressed our interest in it, but at the end of the day they went ahead and did a deal with Warren Buffet and ...

And that was that?

Yes.

Last question. CMS, obviously, has their trunk line for sale right now. PG&E has that subsidiary that may or may not be sold. Those seem more logical for your, as well a look at. Are you in fact short-listed on those? And is there a short list yet?

I'm not going to tell you what we're short-listed on and what we aren't, because in many of those cases, you end up signing confidentiality agreements that preclude you from talking about that, but I will say that we are involved in an awful lot of situations right now.

We're looking at many, many different things. We're not at all reluctant to do the detailed work, and really understand these kinds of assets.

And as to whether or not we submit a bid at the end of the day, and whether or not it's a successful bid remains to be seen.

Thank you. Good luck in your search.

Thank you.

Thank you. Our next question is from Andrew Kuske of UBS Warburg. Please go ahead.

Thank you. Good afternoon, gentlemen.

Just if we can circle back on the assets question. In the past you've made comments that you'd like to have a northern tier focus. If the appropriate asset comes up outside of the northern tier, how serious will you be in that asset?

Andrew, it's Hal. Our willingness to explore things outside, or pursue things outside of the northern tier depends really on the magnitude and the asset quality, the size, the location - all of those kinds of factors.

If there was something outside the northern tier that was large enough to justify us expanding our scope beyond the northern tier, and if the assets were of sufficient quality that we found them really interesting, we would take a look at that.

But at this point in time, we're certainly not interested in pursuing run-of-the-mill acquisitions outside the northern tier.

Things that we might do in notionally the $100 million range, all of that kind of stuff you're going to see within the northern tier. If we were to step outside the northern tier, it would have to be in a substantial enough way that we could justify getting involved in a new business environment, and new circumstances. And we're not working on anything like that right now.

OK. I guess that really leads to the follow-up question of, what is large enough to be substantial in your view at this time?

Well, you know, we would have about $20 to $25 billion worth of assets in TransCanada today. Something of less than 10 percent of the company would not be material to me.

So I'd assume that you're really looking at trunk line assets at that point.

They'd have to be pretty big. They'd have to be core, substantial operating entities.

And I think that's, you know, that's a key, is that they have to be a substantial business, as Hal pointed out.

And, you know, we didn't actually anticipate this kind of environment and where those types of assets would come for sale, but obviously, you know, the circumstances in the market have changed considerably. And things that we never thought would become available in terms of base positions in the market, may come available, and we have to consider those things.

And you have preference for individual assets as opposed to entire companies.

Not really. But I would observe that, trying to evaluate entire companies today is a bit difficult sometimes, because equity values can drop dramatically. And what's really at issue are the nature and the terms of the debt, and how much debt is outstanding against the assets.

And, you know, unless somebody puts a company up for sale, we're not prepared to be adventurous and reach conclusions on that just be looking at the public record.

OK. If I may ask another question, just on - in regards to your counterparty risk in both the power sector and also on the transmission side.

Do you have any kind of breakdown as the average credit rating of your counterparties?

No. We have credit policies internally, and in accordance with our tariffs and our regulated business, which dictate, you know, the amount of credit we will advance, and what kind of assurances we ask from various people.

And I think what we report publicly is we're within those policies and guidelines and there's not material exposures outside of those policies and tariffs.

So we, you know, it's something we monitor on a continuous basis and, you know, move our policies as the environment moves.

Now, that environment has moved downward as far credit quality goes, especially among the U.S. players.

Yes.

Have you seen any decline in your own - as far as the counterparties go - a significant decline in the creditworthiness of them?

Well, I think certainly there are some counterparties which unfortunately found themselves in that situation where they're, they've been downgraded. And as a result of that, we have certain abilities under our tariff to ask for additional security. And in those cases, we have asked for additional security, and have been able to obtain it.

OK. Thank you very much.

Thank you. Our next question is from Matthew Akman of Credit Suisse First Boston. Please go ahead.

Thanks. Wanted to go back to the power segment for a minute and follow up on some questions on the northeast section.

If I just understand - am I to understand that when gas prices are rising that you can get a spark spread squeeze on something like Ocean State while that's occurring?

I don't think so. Is it - I think what we were saying is that if gas prices rise, our revenues potentially rise faster than our gas costs, because the fuel adder on the revenue side of those contracts, so actually the spark spread widens as gas prices go up.

And as Lee pointed out to me here, there's a time lag on the contractual time lag. So we're using lag prices in the pricing formulas on both sides of those long-term contracts.

But if there's a - I mean, if there's a reduction in earnings from this, it must mean that there's a lag in how quickly the rise in power prices flows through, not so much a lag in how fast the cost of gas flows through. Is that right?

Lee Hobbs (ph): That's true.

Yes.

But there is a spark spread squeeze.

On some of our northeast businesses. On others, there aren't. You know, in some cases, an absolute decline in the electric power price will reduce earnings without necessarily being linked to natural gas.

So, there's quite a few different factors, and it's difficult for us to give you a simple answer on that.

I guess all I'm trying to derive is, you know, let's say gas prices stabilize. Then, should we see this reverse over time and earnings start to actually rise on this segment?

Yes. I don't think so. Hal - or Lee's just pointing out to me. There is a floor in when the gas price escalator kicks in. So I would expect that where we are right now, is we should remain relatively stable, if prices remain stable.

Lee Hobbs (ph): Yes.

It's when gas prices escalate, it's sort of to a very, very high level that these adders kicked in.

OK. And then just going back to the western part of that segment, there was a significant increase there, and I just want to explore that upside, just on a quarter-over-quarter basis.

And in the write-up you attributed it to some of the PPA contracts that you've bought. But, I mean, those were in place last quarter, as well. And I think that quarter-over-quarter you went from 22 million to 40 million there. I'm just wondering what that is and whether we can get some more detail on that.

It's about $13 million, I guess, somewhere in that neighborhood. And, you know, there's various different contracts that we have that, the way, you know, the way the contracts are priced.

So I, you know, I don't have a breakdown of exactly what that 13 is made up of. Lee, do you want to comment on that?

Lee Hobbs (ph): Yes. Some of that clearly would be due to the Redwater and Carseland having better results in the third quarter. As you know, they were starting up in the first six months and sort of got through the startup phase and did contribute significantly more in the third quarter compared to the first six months, as well.

Oh, OK. And then, just a last question on power. I don't know if you gave us an update somewhere on Bear Creek and MacKay River, in terms of when those might come into commercial operation.

Bear Creek, end of this year, first part of next year. And MacKay River, January '04 or something like that?

Lee Hobbs (ph): Yes. Late '03, very early '04.

Late '03, OK.

Lee Hobbs (ph): I just want to also update on the question of Q2 versus Q3 in the northeast operations. We did a little looking here as well.

The Curtis Palmer plant is down in Q3 compared to Q2, and that's just a seasonality issue. Is there's just - there's just less water in the third quarter than there is in the second quarter. So that also contributes to the decrease.

OK. So there is some significant seasonality relative to that plant, then. OK.

Lee Hobbs (ph): For Curtis Palmer, yes.

OK. Great. Thank you very much. Those are all my questions.

Thank you.

Thank you. Our next question is from Derrick Knee (ph) of Perigee Investment Council. Please go ahead.

Derrick Knee (ph): Thank you. Good afternoon.

I was wondering if one of your acquisition criteria is that acquisitions must be accretive to earnings and cash flow immediately?

It's Hal here. It's certainly one of our criteria that they must be. Whether they must be accretive immediately is a matter of judgment. If an asset is a fairly stable asset with not too much upside to it, then we would obviously acquire accretiveness right out of the chute.

But there are other assets that we look at acquiring where maybe they represent capital investment opportunities for follow-on capital. And obviously, in that case, we couldn't expect accretion right out of the chute.

But generally, earnings accretiveness, or even more importantly, the absence of earnings dilutiveness, those are important criteria to us. Russ, do you want to add anything to that?

Yes, it's that - we're primarily driven by value. And one of the indicators of value is often how quickly it can translate into earnings.

But certainly, if there's a contractual profile that has considerable value for our shareholders, we would forego earnings accretion in the short run, if we were certain of that. And, but it is - one of the criteria that we have is how earnings accretive and how cash flow accretive it is in the short run on a relative basis to other investment opportunities.

But primarily we're driven from a value standpoint, is what is the net present value. And then we look at the other characteristics like the volatility of cash flows and the profile of cash flows and earnings over time.

Derrick Knee (ph): OK. And just one more question. I was just wondering if - is it possible to be more specific when you say maintaining your financial integrity?

Well, I think what our plan is, is to continue, as we've said before, as I think you'll see over time, an equity ratio that continues to improve, directionally moving towards, you know, 35 to 40 percent over time, consistent with our filings with the regulator. We believe that's what's required for the current environment.

So when we say, you know, maintaining it is, well, that's a moving target, is that you have to be sort of mindful of all the events that are happening in the marketplace. And what was considered to be a financially stable A grade credit a year ago has probably changed.

And so, we have to stay on top of that. And I think what we said that we intend to do is to maintain that A grade credit rating, and we will move our balance sheet in a direction that ensures that that happens over time.

Derrick Knee (ph): OK. Thank you very much.

Thank you.

Thank you. Our next question is from Mick Elsiner (ph) of Merrill Lynch. Please go ahead.

Mick Elsiner (ph): My question is along the same lines. But what would you view with regard to potential acquisitions? Is it your current debt capacity, in light of maintaining your ratings, ...

I think ...

Mick Elsiner (ph): ... (inaudible) rating?

I think it's really dependent upon the type of asset that we pursue. If it's the emergent power asset, obviously that's going to require far more equity than a stable power investment that has off-takes with A grade credit companies.

So I think it's really dependent upon how much debt capacity each of the individual assets have, and what impact that has on our total balance sheet, which sort of dictates where our overall balance sheet needs to be.

So, we look at each individual asset on a, you know, from a building block standpoint. What is the debt capacity of each individual asset? And then look at it on an aggregate basis, as what is the aggregate debt capacity of the whole portfolio.

And our intent, as I said, is to maintain a portfolio and a debt/equity ratio that ensures that we maintain an A grade credit.

Mick Elsiner (ph): Do you see the power business growing much, you know, much larger as a percentage of overall revenues? I mean, it's been about 25 percent the past year or so.

I think our plan is, as we've said, is to continue to grow the power business in a consistent manner. If there's a large-scale opportunity in which we employed a considerable amount of capital, you could see that percentage ratio change considerably.

Alternately, we could continue down the road of making smaller, $100 or $200 million acquisitions. And as Hal pointed out, it's really dependent upon the opportunity. We haven't dedicated the capital directionally to either power or pipelines. It's which one has the better opportunities.

And if power happens to have, you know, the better opportunities on a relative basis, that's where we'll dedicate our capital, and you could see that percentage rise. But there's no pre-determined percentage that we're trying to achieve.

I just - it's Hal here - I'd just add to that that the power business is a much larger playing field than the gas pipeline business. And for that reason, we look at power as a significant source of growth going forward.

But if equally good or better opportunities are available on the pipe side, that's a core business for us and we are quite happy to grow that.

Mick Elsiner (ph): And just one final question. Have you updated the rating agencies with some of your plans going forward? Just as an aside. You know, a company also, in Calgary named TransAlta has gone from an A credit down to triple B through the - going more into the generation, non-regulated side of the business.

We're cognizant of that. I can't speak to what their strategy is. But our strategy on the power side, as we've said before, is to ensure that we're in the low end of the cost curve, to ensure that we have stable and steady cash flows, and that the rating agencies understand the stability and predictability of that cash flows and its ability to service debt.

And as we said, we have moved our debt equity ratio in a direction that sort of compensates for the perceived increase in risk in that business. But we do, on a continuous basis discuss our portfolio and our plans with the rating agencies. And to-date, we haven't had, you know, any negative feedback on those plans.

Our objective in power has been to control volatility of earnings of power, either by being at the low end of the cost curve, where we find very wide margins that stabilize things. Or, if we do have some assets that are higher cost, to make sure the inputs and outputs are contracted with high quality credit counterparties.

And through both of those mechanisms, we managed to, you know, minimize volatility in what could otherwise be quite a volatile business.

Mick Elsiner (ph): Thank you.

Thank you. We will now take questions from the media.

I think we had one question left to answer that Peter Case had asked about corporate costs. Did you find an answer to that, Lee?

Lee Hobbs (ph): Yes. If - the difference is about $5 million in quarter two of 2002 to quarter three. There's really no one item in there. It's some pieces in operating expenses and some pieces in other income, but there's no one item that sticks out.

We have a question from William Lacey of FirstEnergy Capital. Please go ahead.

WILLIAM William Lacey, FIRSTENERGY CAPITAL: Just a real quick question for you on the ManChief acquisition. Considering the contractive nature of the facility and the potential accretiveness of this to the TransCanada Power, L.P., what's stopping you from using this vehicle for this particular asset?

There's currently some potential rule changes with respect to the capitalization in cross-border transactions. And I know that sounds complicated. But, you know, it is an asset that could fit there over time, once we get, you know, clarity on how these rules are going to sort themselves out with respect to capitalization of cross-border transactions for limited partnership.

One of the issues we face is that the partnership carries no debt, and to set up a subsidiary in the U.S. which has debt and deemed interest can potentially cause us tax difficulties down the road, and that that interest - those interest costs may be disallowed.

So, those are the, you know, the complicated changes we're looking at. And obviously, that would be an asset that could fit that profile if we were able to structure it in a way that didn't put the unit holders at risk.

Great. Thank you.

Thank you. We will now take questions from the media. If you have a question, please press one at this time.

Once again, if you have a question, please press one.

And at this time, there are no further questions registered. I would like to turn the meeting back over to you, Mr. Moneta.

Thanks very much. Just once again, thank everybody for participating this afternoon. We look forward to talking to you again in the not too distant future.

Bye for now.

The conference call has now ended. Please disconnect your lines. Thank you for your participation and have a nice day.

END