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TransCanada Corporation (NYSE:TRP)

CIBC Institutional Investor Conference Call

January 23, 2014 7:05 PM ET

Executives

Russ Girling – President and CEO

Analysts

Paul Lechem – CIBC

Paul Lechem – CIBC

All right well we’re going to get started with the next presentation. Again my name is Paul Lechem Pipeline and Utility Analyst at CIBC. It’s my pleasure to introduce TransCanada as our next presentation. We have Russ Girling the President and CEO. I’m sure most of you know about TransCanada but just very quickly they had quite a busy year last year. They announced the $12 billion Energy East Project. They completed refurbishment of the Bruce nuclear reactors and returned them to service. They completed most of the work on the Gulf Coast project which is now in service and they implemented a new tolling structure on the Mainline. So a very busy year so to tell us all about that and to discuss other things, we have Russ. So over to you. Thank you.

Russ Girling

Thanks, Paul and I guess I probably don’t need presentation let’s get to the questions. Some quick comments first the way that this structured I understand couple quick comments from myself, sort of where we are and how we did in 2014 and where we’re going from here and then you’ll have Paul have some questions from you which I’m here mostly to do this to hear from you and answer every question that you might have. Before I get started, as always the large small font disclaimer about risks and uncertainties and you can look at our filings to get more information about those as well a disclaimer around us using terms like EBITDA and other non-accounting terms that may not be comparable to others that’s small print all talks about. And again you can look at our other filings as to what our definitions are. So to start with quickly, I’ve got four five slides here, the first one here who are we? And this is continually evolving getting to a place where we want to get to.

Our vision is to be the leading energy infrastructure company in North America. Our focus is around pipelines and power generation at different points in the cycle we’re investing different things. We want to stay in regions where we have a competitive or can develop a competitive advantage fairly straightforward. And our focus is on large scale things, things that move the needle for us, long life assets that are going to be in the ground for a long time, assets that last 20, 30, 40, 50 and in some cases with our River Hydro in Northeast United States. We’ve got assets that have been on the ground for over 100 years and I suspect we’ll continue to generate energy for another 100 years. Enterprise value about $60 billion. Today we got about 70,000 kilometers of gas pipe in the ground. It moves about 15 Bcf/d 14-15 Bcf/d it’s about 20% of the supply that moves in North America. We’re large storage provider tough business right now, with storage spread collapsing, but I think long term 406 Bcf of storage capacity throughout North America. We have about 20 power plants producing somewhere in the neighborhood of 11,000 megawatts. It does make us the largest private sector power company in Canada. And we’ve recently entered into the crude oil transportation business with a fairly large project being the Keystone project, it’s moving about 530,000 barrels a day. From the news reports you wouldn’t think that we actually have a pipeline of service but we do, it’s moved over 0.5 billion barrels already to the United States over the last three years.

So it’s a very large, diversified portfolio of assets. It is critical to the North American energy infrastructure delivery which is where we want to be. As I said, in the terms of being leading we want to make sure we have assets that people want to use for long period of time and it also provides with a pretty good platform for growth. Talk about 2014 for a couple of minutes. As Paul mentioned, there is -- we had some pretty significant headwinds over the last 12 months to 18 months that we needed to get through and we’ve done that over this last year, we’ve made some significant advancements. Firstly, we have placed about $5.8 billion of new assets in this service that includes the Gulf Coast project that went into operation yesterday. We started delivering crude oil to the Gulf Coast. Bruce Power units went in too, came online this last year, a tough project it was a couple of years late, but nonetheless I think an excellent project that will deliver a emission-less energy to the residence of Ontario for a number of decades yet to come. We’ve brought on some solar facilities for them in Ontario and we expanded our NGTL system. So a pretty good year on the construction front.

We did advance the Keystone XL pipeline. I’ll talk a little bit more about that in a minute, I suspect you might have some questions about timing but we remain optimistic that we’ll see presidential permits in 2014 and we’ll be able to get on with construction there. Probably one of the biggest highlights for me on the year was the explosion and need for new infrastructure, very strong credit counterparties are coming to the table, wanting us to build infrastructure. We were able to secure $19 billion of new projects in the last 12 months, the biggest one being the Energy East project where we’ve underpinned it with over 900,000 barrels a day, a firm 20 year contract to take oil from Albert right through to Saint John in New Brunswick. We’re able to capture the $5 billion Prince Rupert gas transmission project, the project sponsored by Petronas which is now progressed to move gas from Western Canada, liquefy t and move it into Asian markets. So I think a good year on that front. We had various other things that we’ve captured throughout the year that gets you that total of $19 billion but again all secured by long-term contracts.

As Paul alluded to, our Canadian Mainline, it was a concern at the beginning of the year I would say that with the National Energy Board decision that they issued in April of last year, we implemented that decision. As a result of the implementation of that decision, we’ve seen contracts increase on our system our firm contracts in our system are almost doubled about 1.2 1.3 billion cubic feet a day to about 2.5 billion cubic feet a day, a firm contract on that system. Throughout the last month or two, we’ve actually been moving something closer to 3 Bcf to 4 Bcf/day every day on that system. So, I think we’re in a position where 2013-2014 are pretty solid and we were able to negotiate the settlement with our customers. It’d take us from 2015 right through to 2030. So I think again a major accomplishment from the company and at the same time, we were able to negotiate the term settlement with our shippers on the NGTL system.

On the power side, they had the Sundance facility that went down a year before. We had some issues in terms of trying to get that back that into service. It is now back in service at the end of last year and producing power back into our portfolio. And throughout the years, we’ve raised about $5.5 billion and I think that’s pretty attractive rates, historic lows for us as a company. So by any measure, I think a great year which sets us in a good place for moving forward. Returning to what’s on the horizon is $38 billion of new projects. They’re listed on this chart. They are all difficult project but what I’d say is that they’re all very, very solid projects underpinned by long-term contracts. It includes about $23 billion of crude projects migrating to where -- I think there are better returns in the liquid hydrocarbon business, but there’s about $13 billion of new gas projects both in Canada, The United States and Mexico and about $2 billion of power projects in portfolio. They’ll add about 3,000 kilometers to our gas business that’s with transferring out about 3,000 kilometers of pipeline for our oil business, about 7,500 kilometers of oil pipe and about 1,000 megawatts of power. So just say those are the three areas that we’re focused on. I guess to emphasize again, all underpinned by long-term take or pay contracts or the cost of service. As a result of that the cash flow and earnings are somewhat predictable. The capital cost risks have been managed through, capital cost risks sharing or through costs of service agreements, such that we can’t predict where our EBITDA is going to be where earnings are going to be and how long out in the future that goes.

So obviously our focus as we move into 2013-2014 is to put these projects into service job one, execution, execution, execution. This is just a chart where I’ve kind of blocked what those projects are and what we expect to do. So the first lump of projects there if you will, it’s about $3.5 billion of projects. It does include the Gulf Coast project and between today and yesterday that will migrate from project that needs to get done to one that is done but we’re starting about 300,000 barrels a day. We’ll ramp up throughout the year, we’ll probably exit the year around 700,000 barrels a day somewhere in that kind of neighborhood. But as well we got to complete the Tamazunchale extension in Mexico some of the NGTL build outs that we’re currently working on. All of those will contribute to cash flow and earnings in 2014, assuming that we get them online.

Looking out certainly beyond that is what advanced 7.5 billion buckets of projects that have come on in on ‘15 ‘16. They include things like our Grand Rapids project, the Heart & TC Terminals projects as well as our Northern Korea project on the oil side and the expansion of the NGTL system to meet increased gas or supply requirements, but as well demand requirements in the Fort McMurray area and projects in Mexico that we’ll bring online or start construction in 2014 hopefully we’ll bring those online in 2016. And then we’ve got a power project and a Napanee project. We’re just about at the point getting our permits for that. So hopefully by the midpoint of this year we’ll actually be under construction on that project as well. The third bucket Keystone XL what can I say is we’re going to work to try to get that permit in place so that we can get under construction there. I’ll save that for the Q&A. I suspect the next large bucket which is the Energy East bucket the plan is to put an application by National Energy Board by midyear probably July August-ish we’re thinking. It’s a very large project but we are on the ground collecting the data that we need to make these filings. I said it’s secured by long term contracts we fully expect that once we make the energy application we’ll be on our way to getting approval for that project. And then the last blue bar is there are two West Coast projects which our focus right now is getting them to point where we have the permits for the pipeline that’s our job through 2014. I think we’ll be able to obtain our permits in 2014, then the proponents of those project has to move to making their final investment decision which will be first or second quarter of 2015. From what I can say about those projects is those proponents are spending considerable amounts of capital in order to position themselves for a positive final investment decision sometime in early 2015.

So where does that take us? If we get all of that done, we’ll essentially close the double with sides of the company moving from what is about $50 billion company today to about an $80 billion company. But I’d say more importantly for me the size is the predictability of the cash flow that’s associated with these and the diversity of the platform. You can see that we still have a business that is gas is a large portion of our business but oil becomes a considerable larger portion of our business balanced by gas. You translate that into EBITDA terms, this is where we’re really trying to do our earnings cash flow and our dividends. If we’re able to do that because of the predictability of the streams we’re just sort of stacked each of those projects on top of each other, based on what we think the contracted level of cash flow is and you can see a doubling of cash flow by 2020. That’s what our objective is. Over that period of time, there is something just slightly greater than a 10% compound growth rate through to the end of the decade, that’s what we’re going to try to accomplish. As I said, we’re reducing the volatility and once we get out there to 2020 about 95% of that cash flow bar is secured by long-term contract in terms of revenue or it’s regulated in the cost of service kind of basis. So that gives me confidence that the gain funds will grow from operations, it gives us the ability to continue to pay for this capital growth, but probably more importantly, the growth earnings and grow sustainable dividend.

So as I said I would try to be brief here just a quick summary. I think we are positioned to be the leading energy infrastructure company in North America. Our base portfolio is very solid and what we’re finding is even if including things like the Mainline as I’ve always said these are important piece of infrastructure and we’re chalk the block full today in the Eastern zone of our system. The gas prices in Toronto are about 80 bucks, gas prices in New York are 135 bucks and they’re leading on our system every day to deliver gas and we don’t have enough capacity to deliver them gas. So I think every piece of system is being used, it’s going to be used differently and it’s a great base to work from. We got $38 billion of new things that are highly contracted solid projects with A grade credit counterparties and I think we have the expertise to actually pull this off. So I’m extremely confident that we continue to grow cash flows, earnings, dividends as we have over the last decade well into the next decade. We see these projects take as well into past 2020. Getting back to today, I mean our focus obviously for 2014 is around getting this done. So execution, execution, execution, that’s my inside the company that’s what we’re focused on and that’s what we’re going to do.

So that’s the end of sort of the prepared and we’re happy to take your questions and again thank you very much for taking the time today to listening to our story.

Paul Lechem – CIBC

Thanks, Russ. Well may be I can kick off with some questions and then as I said hop in if you have any questions just raise your hand. Just starting on Energy East just for a change from previous years I mean we may have started on Keystone XL, but on Energy East I think you mentioned here that you hope to have the regulatory filings in by July August is that correct? It seems to be a little bit of a slip from previously additionally you were hoping end of ‘13 and beginning of ‘14 and may be midyear ‘14. So if you get them in by that time, at the timeframes that you laid out in terms of completion end of 2017 to go back end of 2018 to Saint John. Are those still pertinent? Could you still make those timeframes or does that slip the whole project?

Russ Girling

That’s our objective. So when we originally set out those timeframes, what we built into the schedule we thought that first to start with why is there been in the regulatory filing and it’s primarily related to the scope. We had originally thought about a project that got us all the way through Quebec City, Montreal and less new bills if you will. And in order to fill that new pipeline all the way to New Brunswick and to upscale, upsize it from about 800,000 barrels a day to 1.1 million barrels a day, the bottom line is that we need more underground data in our filings. So we’ve got people on the ground collecting soil samples all they can. So it just takes time because the scope increased so much than our original sort of position or proposal was. So that just takes us to that sort of midyear kind of timeframe. But we built into you the schedule was a 24 month regulatory process being I think conservative but I think our thinking is that with Bill C-38, the new process the 18 month accountability timeframe for the National Energy Board to make a decision, if we get a full application in place we’ll be adhered to. I think that’s what we’re hearing from all parties that that’s the desire. Nobody wants to skirt environmental review but 18 months is about all anybody wants to kind of take you to review these things. So that puts us at the end of ‘15 again for regulatory approval and then two years of construction towards the end of ‘17 we’re delivering crude oil to Montreal and Quebec City, and then 2018 into New Brunswick which was our original timeframe. Now obviously that’s all very tight, but we’re going to work as hard as we can and we’re getting great cooperation sort of across the board in terms of getting these approvals and that sort of thing.

Paul Lechem – CIBC

Okay. As you’ve done the work, the initial work here on the submission, have you made any changes -- have you seen any changes either to the financial scope of the project, the physical scope of the project is there anything really changed in terms of what you’re seeing now versus what you really saw last year?

Russ Girling

I think the answer is probably, there would be major changes made it’s $12 billion so what is material to add the $12 billion. We’ve done two or three major reroutes of where our original proposal was, which is part of the timeframe for regulatory approval as well. We moved our Quebec Terminal from Quebec City downstream to place called Cacouna where we decided to put an LNG facility a number of years ago. It just seemed like a better place than sort of in the heart of Quebec City. Those kinds of things will cost us a bit more, but I would say that, that would be material but as we sort of move through the estimated process the way we set up our capital cost risk sharing such that we will take the full burden of those.

But I expect at the end of the day, with all of these projects the whole list of energy projects you see in North America today, they are going to cost more than we’re anticipating today. You can just see what’s on the horizon with tightness of supply, tightness of the labor market those kinds of things they are going to cost more. So sort of a heads up not to be surprised about those things, but at the same time what we tried to do in all of our projects is mitigate that risk by ensuring that we have the capital cost risk sharing formula. So in every one of them we have an ability to either lay that off to a contractor that’s going to fixed pricing kind of contracted -- something like the Napanee project, capital cost risk sharing on Energy East with our West Coast project those are 100% capital cost flow through as long as they are prudently incurred to the proponents of those projects.

Paul Lechem – CIBC

Okay. Beyond that regulatory the NEB regulatory process, Ontario and Quebec are both signaled, their intent to perform their own reviews and then of course there is engagement with the First Nations ongoing I would imagine. Can you give us a bit of a sense of where you’re at in all of those discussions and any major roadblocks you see?

Russ Girling

I think in both Quebec and Ontario, they’ve signaled that they want to in case of Ontario they have -- the government has asked the OEB to inform them as to what issues they need to raise with the National Energy Board in the process. We see that as a very positive and I mean if they’re not trying to duplicate the process, they want to ensure that the scope of the NEB process incorporates what their concerns are. So they’ve asked the OEB, tell us what our concerns should be and then we can make sure those are incorporated in the NEB process. So I see that as being very positive thing similar kinds of conversations are going on in Quebec. You mentioned First Nations, along this route about 180 First Nations so it’s different in British Columbia in some ways. I mean that the whole title issue is more certain, but that said, these communities want exactly the same kind of opportunities as communities which are working with our BC project. So I mean we have to carefully manage to those, but we have a 60 year history with most of these First Nations right through to Quebec as well as we’re right away they’re going to be following is somewhat similar to the TQM right away that we operate today. So these are communities where we have a relationship today and we’re engaged with them as you expect. In terms of the roadblocks, obviously there will be the regular anti-oil activists that we’ll see out there creating pushback on various fronts, but at the end of the day people see that these kind of project is international interest foreseeing support right across the political spectrum for it. But I think the key issue is pipeline safety and ensuring that we can build and operate these things safely and that’s what we’ll focus our time and effort.

Paul Lechem – CIBC

One of the -- so recently Enbridge offered that Line 9 reversal conditional group of in the Quebec government one condition that was imposed on it was it that they would have to deliver crude oil only into Quebec refineries. Is that an issue you won’t be serving the safety only the Quebec market, you’ll be serving [Inaudible] Do you take that as a positive sign that Line 9 got petition approval or a negative?

Russ Girling

I actually don’t think it’s related to us I mean their application was set up to deliver oil to the refineries in Quebec and that became an issue. We proposed ours as a pipeline that will deliver to both domestic refineries in Canada and that means in Quebec but also in New Brunswick. Here are being refineries is our supporter of this project but as well there would be export terminals built and one of those export terminals would be in built in Quebec. So from what we’ve seen in terms of the scope of our project, we had no push back on that. I think that as I think about Quebec for example, their opportunity to participate in that commerce, both in terms of export terminals and the jobs that will be created plus the throughput right through Quebec there will be jobs created in each of those communities as well as tax revenue and those kind of things would go right through Quebec. I think it’s a bit different and we can provide benefits to Quebec sort of across the system and then there greater Canadian benefits that come with which all Canadians will be able to participate in including Quebecers.

Paul Lechem – CIBC

Okay. Let me just may be pause and see if there are any other questions from anyone.

Question-and-Answer Session

Unidentified Analyst

[Question Inaudible]

Russ Girling

Yeah I think that obviously the market has spoken and the way I view it is Line 9 is supported I understand by long term contracts where the producing agents and the refining communities said yeah we need this project. And in our case the producing and refining communities stepped up and signed in overnight 100,000 barrels a day contract 20 year firm binding, no votes kind of contract, it says that they want this capacity in place. So if you think about it Eastern Canada is currently importing about 700,000 barrels a day of crude oil, Line 9 will satisfy a portion of that but certainly won’t satisfy all of that, the lion share of that still is unsatisfied and so we do need more capacity into that market just to serve the Canadian component of it. Then you look at the Eastern Seaboard in United States they’re importing somewhere close to 1 million barrels a day of oil from elsewhere and the proximity of a terminal at Saint John for example can easily feed that market as well. So there is this lots of demand for both projects.

Paul Lechem – CIBC

Well moving on to Keystone XL just briefly because we’d feel cheated otherwise. I mean you said you had some thoughts about may be movement in 2014 there seems to be unnamed sources in the U.S. would make certain comments. Can you give your take on where we’re at and what the next steps are?

Russ Girling

Our understanding is as we work through the actual sort of underground working process with the Department of State, we believe that the environmental review has come to an end. They’re not asking us for any more information or any more questions. That gives us an indication that we’re probably pretty much close to being done and to report itself easily in the final stages of being written. So I think that’s a positive thing. We would hope to see that I mean if further rumors are out there that we can see that shortly. We continue to believe that that’s probably the case that we’ll see an issue into the final environmental impact statement relatively soon. I think that will set the direction and tone for what’s to follow. There is an up to 90 day National Interest Determination period given how long this has taken I suspect that this is likely they will take that full 90 days even though they say up to 90 days. And then there is some record of decision and other process timeframes that kind of get us probably three or four months from them it’s probably been released before we see a decision.

Paul Lechem – CIBC

So there is a 90 day absolute limit on the National Interest Determination period that once it ends we have a firm timeframe?

Russ Girling

There is nothing absolute about the process. The 90 days comes from an executive order from the President of United States that it’s up to 90 day process, but I suspect they can issue another executive order that says it might be longer.

Paul Lechem – CIBC

Fair enough. Okay switching gears to the Southern part of that though there the good news here the Gulf Coast portion is in service. Can you give us some sense given that we don’t have the Northern part of Keystone XL feeding into that, what does that mean to the Southern part? Where are you getting -- where are you sourcing the crude for the Southern portion? What are the economics around that? And if Keystone XL Northern part never comes into service what does that mean for the Gulf Coast portion?

Russ Girling

I think first of all I think you look at the capacity relative to the capital that we spent. We spent about $2.3-ish billion on building it, we got about 830,000 barrels a day of capacity. So it’s a very competitive pipe to move from Cushing to the Gulf Coast relative to the competition in market. So I think sort of a standalone it’s a good pipe and it has different sources of contractual support if you will. Firstly the Cushing market link project that was part of Keystone project those who aren’t familiar, we set aside a 200,000 250,000 barrels a day the capacity that line for Cushing day shippers. So those folks are still there wanting to ship. It is connected to base Keystone system. So we have 530,000 barrels a day upstream of that, some of those folks have diversion rights to get to the Gulf Coast and based on differentials do they want to deliver their heavy crude to Patoka and Wood River or do they want to take it right through the Cushing and even right through the Gulf Coast. And then we have deliveries to Cushing Oklahoma as well and then there is this other sort of folks that are interested in moving growing production out of Eagle Ford and other places or down the Gulf coast.

So there is various sources of both contractual support and there will be some spot moving on that. So I think what we said is that, we think that returns are probably similar under both scenarios to the company. One will be sort of heavily contracted if we end up with Keystone if we’re connected we are 100% sold out on the system it includes Bakken crude, it includes the Cushing market it includes the base Keystone. So it all gets sold out right through the Gulf Coast. But I would say that if Keystone doesn’t get built, we would work on building on the basic contracts that we have currently for the system which is 100% of the capacity and reselling that to get up to 100% of capacity. And given its competitiveness in the marketplace, our hope would be to actually contract it up fully.

Paul Lechem – CIBC

Okay. Switching gears again given where we’re at in BC, can you just give us some thoughts I think you quickly mentioned the LNG pipelines. What are the specifics in terms of submissions or anything else on the regulatory front you can enter into 2014 that we should look forward to?

Russ Girling

So I think the milestones for us is that we’re hoping to -- the permitting process for the pipelines are BC based processes, because they are all built within the confines of the British Columbia. So those processes are underway and we would expect to receive probably towards year end our permits for both of those pipelines. So that adds a trigger point. One of the pieces of information that the proponents needs before they’d be looking for regulatory approval support, the building up of their LNG facilities and various other things that they need in that sort of first second quarter when they make their FID decisions. So towards the end of this year, early next year so the milestones is how are we making out the key issues there are environmental and our aboriginal negotiations and we’re moving both down the parallel path. And to-date, they’re complex but no showstoppers in either of those forums at the current time.

Paul Lechem – CIBC

Okay. Any other questions here? Sebastian?

Unidentified Analyst

[Question Inaudible]

Russ Girling

My belief is that there is a very high probability that it will be built second question is when? But what we see is we see growing production in Alberta. The single largest group refining market in the world is the US Gulf coast. It imports 4.5 million barrels a day. Its largest chunk of that is heavy oil, we produce heavy oil in Canada so you got companies like ExxonMobil who hasn’t slowed down on accrual. They’ve announced new development in the oil sands US base multinationals who have refining capacities in the Gulf Coast. They want a hardwire connection between the two. In the you will see them rail, they’ll add rail cars but eventually we will build a pipeline between Canada and Gulf Coast. Keystone is already on the go we are at the right way, all the pipes are on the ground, the pumps are in warehouses. In my view it’s just a matter of time and really what we’re talking about is that the link across the border. So it will get built I just can’t be definitive about the timeframe.

Paul Lechem – CIBC

One more question?

Unidentified Analyst

[Question Inaudible]

Russ Girling

Here’s what my view would be the way that we’re structured as opposed to say an MLP structure in the US is that from a cash perspective our payout ratio is 30-ish or 35%. And if that doesn’t change we increase the dividend on a continuous basis throughout the periods are going to stay in that kind of range which gives us ample capital. But the capital we’re taking away from growth is immaterial. So the capital for the growth will be the free cash flow that’s 60 odd 65% that we generate plus the debt capacity that we generate with earnings on an annual basis and retained earnings that we have that gives us more debt capacity. We’ll look to our MLP as a source of capital. We have about $3.5 billion of book value of US pipeline assets can be dropped into our MLP.

Beyond that, if we need more capital we’d look to the rest of our portfolio, we can monetize things inside of our portfolio. At the very end of that sort of stack, we would look at obviously mezzanine capital like we did here this week with some preferred share we can max that out. If you max all of those other things out, then you go to equity but the capacity that we have is quite substantial as I look at that capital portfolio and the levers we have to pull before we look at common equity. So, we pull out all those levers first. So I think what you can expect to see is actually doing issue the preferred shares we’ve doing that. You’ll see us may be with hybrid offerings, you’ll see us with more drop, we did a drop down into MLP last year about $800 million drop down. We can do it about in those size of chunks so you will see us doing more of that in 2014. Assuming that our projects sort of line themselves up, we get regulatory approval, we need the cash you’ll see us moving pulling those kind of levers to fund the program.

Paul Lechem – CIBC

Okay. Well we’re out of time. Russ, thank you very much for being here today.

Russ Girling

Thank you.

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