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Executives

David Moneta - VP, IR and Communications

Harold N. Kvisle - President and CEO

Gregory A. Lohnes - Executive Vice-President and CFO

Glenn G. Menuz - Vice-President and Controller

Alexander J. Pourbaix - President, Energy

Russell K. Girling – Chief Operating Officer

Analysts

Sam Kanes - Scotia Capital

Tim Durbin – Goldman Sachs

Matthew Akman - CIBC World Markets

Andrew Kuske - Credit Suisse

Robert Kwan - RBC Capital Markets

Chad Friess – UBS

Bob Hastings - Canaccord Adams

Andrew Fairbanks – Bank of America

Barry Klein – Citi

Linda Ezergailis - TD Newcrest

Craig Shere – Tuohy Brothers

Justin Amoa – Argus Media

TransCanada Corporation (TRP) Q1 2010 Earnings Call April 30, 2010 3:00 PM ET

Operator

Welcome to the TransCanada Corporation 2010 first quarter results conference call. I would now like to turn the meeting over to Mr. David Moneta, Vice President of Investor Relations and Communications. Please go ahead, Mr. Moneta.

David Moneta

Thanks very much. Good afternoon everyone. I'd like to welcome you TransCanada’s 2010 first quarter conference call. With me today are Hal Kvisle, President and Chief Executive Officer; Greg Lohnes, Executive Vice President and Chief Financial Officer; Russ Girling, Chief Operating Officer; Alex Pourbaix, President of Energy and Executive Vice President Corporate Development, and Glenn Menuz, Vice President and Comptroller.

Hal and Greg will begin today with some opening comments on our financial results and other general issues pertaining to TransCanada. Please note that a copy of the presentation is available on our website for download at transcanada.com. It can be found in the investor section under the heading Conference Calls & Presentations.

I would just highlight briefly at this point we may be experiencing some slight problems with the webcast. If we are you can certainly listen via teleconference and as I mentioned the slides will be available for download.

Following prepared remarks from both Hal and Greg we will turn the call over to the conference coordinator for your questions. During the question and answer period, we will take questions from the investment community first followed by the media. In order to provide everyone with an equal opportunity to participate, we ask that you limit yourself to two questions. If you have additional questions, please reenter the queue.

Also, we ask that you focus your questions on our industry, our corporate strategy, recent developments and key elements of our financial performance. If you have detailed questions relating to some of our smaller operations for your detailed financial models, Myles and I would be pleased to discuss them with you following the call.

Before Hal begins, I would like to remind you that our remarks today will include forward-looking statements that are subject to important risks and uncertainties. For more information on these risks and uncertainties please see the reports filed by TransCanada with Canadian securities regulators and with the U.S. Securities and Exchange Commission.

Finally, I would also like to point out that during this presentation we will refer to measures such as comparable earnings, comparable earnings per share, earnings before interest, taxes, depreciation or amortization (EBITDA), comparable EBITDA and funds generated from operations. These measures do not have any standardized meaning under GAAP and are therefore considered to be non-GAAP measures. As a result, these measures are unlikely to be comparable to similar measures presented by other entities. These measures have been used to provide you with additional information on the company's operating performance, liquidity and its ability to generate funds to finance its operations.

With that, I will now turn the call over to Hal.

Harold Kvisle

Thank you, David. Good afternoon everyone and thank you for joining us on a Friday afternoon. I intend to keep my remarks fairly short today. Russell Girling and I provided a fulsome update at the annual General Meeting this morning. If you are interested, a webcast replay of the meeting is available on TransCanada.com in the Investor Center under Conference Calls and Presentations.

I will take a few minutes now to talk about our first quarter 2010 results and recent developments in our business and I will then turn the call over to our Chief Financial Officer, Gregory Lohnes, who will review our financial results in more detail.

TransCanada’s pipeline power and gas storage businesses posted strong results against a backdrop of an economy that is slowly moving towards recovery. The company’s disciplined low risk approach produced comparable earnings of $328 million, within 5% of our earnings for the first quarter of last year. Comparable EBITDA for the first quarter was $1 billion and funds generated from operations in the first quarter were $723 million.

This quarter we invested another $1.3 billion bringing our total investments to $11 billion invested in capital growth projects that will generate growing cash flow and earnings as these projects come into service. We are now about half way through our large capital growth program and we continue to fund it with strong internally generated cash flow, the dividend reinvestment program and our continued access to the capital markets.

To that point TransCanada successfully issued $350 million of preferred shares in the first quarter of 2010. We continue to make excellent progress on our suite of major projects that are part of our $22 billion current capital program.

I will now expand on some recent developments that occurred in our business in the first quarter. In March the national Energy Board approved our application to construct and operate the Canadian portion of the Keystone Gulf Coast Expansion project. This was a significant milestone in advancing the project. The Keystone Expansion will be the first pipeline to directly connect a growing and reliable supply of Canadian crude oil to the largest refining market in North America.

On base Keystone line fill and commissioning of the first phase extending from Hardisty, Alberta to Wood River and from Patoka, Illinois continued in the first quarter 2010 and as of today line fill is over 60% complete with over 5.5 million barrels of oil in the system and we have now moved crude oil across the border well into the United States. I believe that front is in South Dakota today. Commercial in service of the first phase of Keystone is expected to commence late in the second quarter of 2010.

Progress also continues on our large Northern Development Projects. The open season for the Alaska Pipeline Project was launched today. The results of the open season are expected to be announced near the end of 2010. Closer to home on our Alberta Gas Pipeline system we had several positive developments this quarter.

First, the $800 million North Central Corridor pipeline is now operating. This 300 km expansion of the Alberta system provides needed capacity to accommodate increasing natural gas supply in northwest Alberta and northeast B.C. with growing markets in Alberta and beyond. The project was completed ahead of schedule and notably under budget. We also received National Energy Board approval to construct and operate the 77 km Groundbirch pipeline connecting new natural gas supplies in the Montney shale formation near Dawson Creek in Northeast B.C.

Construction is expected to be completed on the Groundbirch project by November 2010. Groundbirch has firm transportation contracts that will reach 1.1 billion cubic feet per day by 2014 and I just underscore that number. We have 1.1 billion cubic feet per day of Groundbirch gas contracted on the TransCanada system.

Our Horn River Pipeline project which is also connecting shale gas to northeast B.C. is making good progress. The NEB scheduled a hearing for October of 2010. Subject to approvals the project is expected to be operational in the second quarter of 2012 with firm transportation contracts ramping up to 503 million cubic feet per day. Together Groundbirch and Horn River will connect 1.6 billion cubic feet per day of new shale gas to the TransCanada system.

The ultimate potential of the Western Canada Sedimentary Basin has improved dramatically with the development of shale gas resources. While near-term production is not as robust as it once was, optimism on the medium and long term natural gas supply picture in Western Canada continues because of this growing unconventional supply.

Finally in pipelines the Bison project received Federal Energy Regulatory Commission Certificate in April. Construction is expected to commence in the second quarter of 2010 with an expected in-service of fourth quarter 2010. Bison has long-term shipping commitments for 407 million cubic feet per day. It is an excellent project and further strengthens and diversifies Northern Border’s natural gas supply mix.

I would now like to turn to our energy business. Construction of the 680 mw Halton Hills generating station in Ontario is now substantially complete. Commission activities have begun and the facility is on schedule to begin operating in the third quarter of 2010. Progress also continues on the Cartier Wind Project in Quebec, the Kibby Wind Project in Maine, the Coolidge Generating Station in Arizona and the Bruce Nuclear Restart Project in Ontario.

In summary, TransCanada’s capital growth program continues as planned and will build long-term value for our shareholders.

As I close, as many of you know this will be my last quarterly conference call as the CEO of TransCanada Corporation. Russell Girling will succeed me as CEO on July 1 and I will retire as an employee of TransCanada on the first of September. It has been a pleasure working with all of you in the financial community and in the media over the years. I give my best wishes to you all.

With that I will turn the call over to Gregory Lohnes who will provide additional details on our first quarter 2010 results. Greg?

Gregory Lohnes

Thanks Hal. Good afternoon everyone. As Hal mentioned, earlier today we released our first quarter results.

Starting with slide 10 comparable earnings in the first quarter were $328 million compared to $343 million for the same period in 2009. The decrease in first quarter comparable earnings is due to lower power prices in Alberta. This was partially offset by lower interest expense due to increased capitalization of interest related to TransCanada’s large capital growth programs.

On a per share basis, comparable earnings also decreased quarter-over-quarter due to the dilutive impact of an 11% increase in the average number of shares outstanding as a result of a common share issuance in second quarter 2009. The proceeds of this share issue were partially used to fund our $22 billion capital program including the acquisition of additional interests in Keystone and other capital projects. The carrying costs and dilution associated with this prudent approach to the financing will continue to have a near-term impact on our earnings per share and cash flow. That being said each project is expected to generate significant long-term earnings and cash flow as they commence operations.

I will now briefly review the first quarter results for our business segments at the EBITDA level beginning with Pipelines on slide 11. The pipelines business generated comparable EBITDA of $768 million during the first quarter of 2010 compared to $871 million in the same period last year. The decrease is primarily due to the negative impact of a weaker U.S. dollar on U.S. pipeline results and increased business development costs related to the Alaska Pipeline Project partially offset by higher earnings from the Alberta system.

Energy generated comparable EBITDA of $259 million in the first quarter of 2010 compared to $290 million in the same period last year. The decrease was primarily due to the reduced realized power prices in Alberta, lower volumes and higher operating costs at Bruce A and lower contracted earnings at Becancour. These decreases were partially offset by increased capacity payments at Ravenswood, higher third party storage revenues for natural gas storage and incremental earnings from the Portlands Energy Center which went into service in April 2009.

Now looking at items below EBIT on the income statement on slide 12. First quarter 2010 interest expense of $182 million was a decrease of $113 million compared to the first quarter last year. The decrease in interest expense reflects increased capitalized interest to finance TransCanada’s large capital program in 2010 including Keystone construction. Interest expense also decreased due to a reduction in U.S. dollar denominated interest expense as a result of the impact of a weaker U.S. dollar in the first quarter 2010.

Turning to cash flow on slide 13, funds generated from operations were $723 million in the first quarter 2010. Capital expenditures in the first quarter 2010 of approximately $1.3 billion related primarily to a number of growth opportunities including construction progress on Keystone and other capital projects.

Now looking at slide 14, at the end of the first quarter 2010 our balance sheet consisted of 50% debt, 3% junior subordinated notes, 3% preferred shares and 44% common equity. We have an A grade credit rating with a stable outlook. Our working relationships with all three credit rating agencies are strong. At the end of the first quarter 2010 we had over $700 million of cash on hand along with additional committed revolving bank lines of $4.3 billion.

In March 2010 we completed a public offering of preferred shares resulting in gross proceeds of approximately $350 million at a 4% dividend rate. TransCanada is well positioned to fund its existing capital program through internally generated cash, its dividend reinvestment program and continued access to the capital markets. We will also continue to examine opportunities for portfolio management including a greater role of TC Pipelines LP and financing our capital programs.

That concludes my prepared remarks. I will now turn the call back to David for the question and answer period. David?

David Moneta

Thanks Gregory. A reminder before I turn it over to the conference coordinator we will take questions from the financial community first. Once we have completed that we will turn it over to the media. With that I will turn it back over to the conference coordinator for your questions.

Question and Answer Session

Operator

(Operator Instructions) The first question comes from the line of Sam Kanes - Scotia Capital.

Sam Kanes - Scotia Capital

Congratulations Hal. I hope you enjoy your retirement. You are too young to retire frankly so I hope you have a lot of active opportunities in front of you. Balance sheet, taxes current went up to $81 million from $54 million and only $20 million was forward. With all of this CapEx I would have thought it would have been the opposite and you would be heading towards zero. Is there something unusual going on there with respect to current versus future taxes?

Glenn Menuz

There is nothing special really going on there. I think your thought pattern is right on the mark. What you will see is as the capital goes into service, so once construction is completed and it is into service, that is usually when the deductions will begin. So as assets go into service you should see more of that.

Sam Kanes - Scotia Capital

So it is upon completion is the only time you recognize it?

Glenn Menuz

Yes and the other thing you do see impacting that is the change in the regulatory deferrals. That has a fairly good impact on the current tax profile.

Sam Kanes - Scotia Capital

There is something else there in terms of regulatory deferrals, that should flip over I would think to near zero current right as time goes on?

Glenn Menuz

Especially as Keystone comes into place yes.

Sam Kanes - Scotia Capital

Western Power was down significantly to $42 million EBITDA from $93 million. Was that 100% due to your 33% exposure to spot markets or were there other things?

Gregory Lohnes

I think it is almost entirely due to exposure to the very low prices we saw in the first quarter.

Harold Kvisle

Thank you very much for your kind comments. I appreciate the work we have done together.

Operator

The next question comes from the line of Tim Durbin – Goldman Sachs.

Tim Durbin – Goldman Sachs

A question in terms of what is next on the regulatory timeline for Keystone Gulf Coast. Just walk us through the process here and sort of the timing you are thinking about.

Gregory Lohnes

The next major regulatory hurdle is the Department of State Presidential permits. We are in the environmental process. There has been a draft environmental report issued. Now that report is out for comment. We would expect given the process we went through for the base Keystone we would see approval of that permit sometime towards the end of this year. That is the last sort of major regulatory hurdle and obviously we have some state approvals and some land acquisition and those types of things yet to do. We would hope to commence construction sometime in the first half of 2011.

Tim Durbin – Goldman Sachs

A question in terms of an update on your capital financing program. Your thoughts on using preferred stock versus common versus debt. You [maybe] investor appetite for preferred stock and thinking about your leverage metrics and things like that.

Gregory Lohnes

I think we feel we are in good position here to finance the rest of our current capital program. As I mentioned we have continued to use our dividend reinvestment program and we had a high participation rate, over 30%, this quarter. We expect that trend to continue as we move forward. Obviously we had a very successful preferred share offering so that is the second one we have done in a number of months here. That market remains open for us so we continue to monitor that market. We feel the markets are fairly stable and we have some flexibility around timing. Obviously we are sitting on a fair bit of cash right now.

We have lots of room under our CP program we are drawn down to the tune of about $500 million on our $2 billion available backstop credit facility there. So we have some flexibility. To watch the timing in the market we think this is probably a pretty reasonable time out there in the bond market with rates and spreads where they are so we continue to monitor that market particularly on the U.S. side because of our requirement for U.S. dollars as we continue with the large growth program for Keystone and then other levers we look at include as I mentioned continued participation of our LP.

We did a very successful drop down last year followed by a November equity issue and that is considered 100% consolidated equity on our balance sheet. With regard to the metrics, as you have seen from the reports from the ratings agencies our metrics are challenged right now due to the size of the capital program but due to the certainty of the cash flow and the fact it is fairly near in term and starting to come online we think we are in a good position with our rating agencies.

Operator

The next question comes from the line of Matthew Akman - CIBC World Markets.

Matthew Akman - CIBC World Markets

There is a mention of incidental natural gas and condensate sale in A&R. Could you quantify that please? The other question I have is what was the Ravenswood prior year adjustments that came into earnings in the quarter?

Glenn Menuz

On the first one on gas and condensate it really wasn’t that material. It was really a laundry list of a number of small items that added up. There is nothing big there. It was just a few million dollars. With respect to the Ravenswood adjustment from last year probably the better part of $0.01.

Operator

The next question comes from the line of Andrew Kuske - Credit Suisse.

Andrew Kuske - Credit Suisse

Hal you took on the role of CEO about 10 years ago or nearly 10 years ago now and the company was in much different shape than when you are leaving it. If you could just essentially give us a little bit of an idea as to directionally where you see the company going? If Russ could also give us some commentary on the outlook beyond 2012 for your capital program because between now and then it looks pretty much locked and loaded.

Harold Kvisle

I think it is. We have a fairly well defined capital program over the next couple of years. One interesting challenge we face over the next 10 years is proceeding with the Alaska project which I do believe is going to go ahead this time. Back in the year 2002 when we were talking to the large producers they pointed out that TransCanada was not nearly big enough to play a leading role in that project and we didn’t agree with the comment at the time because of our capability on the building side but we did acknowledge that on the financial side we needed a bigger balance sheet to be able to do projects like that.

I think we are there today. By the time we go ahead with something like Keystone TransCanada will be three times as big a company as it was 7-8 years ago. So I think our ability to pursue these big projects just gets better as time goes on. The company gets financially stronger. I think you will see in the years ahead we are bringing Keystone to a conclusion here. We have many different power projects under construction today. Those will be coming on stream in the next 3 years. The Bruce nuclear project will be complete just roughly a year from now. The first reactor will be coming up. So I think one thing that may shift and one challenge Russ may have that will be different than the last couple of years is dealing with a very large increase in cash flow and making choices about how much of that to direct towards dividends and how much to direct towards further debt reduction.

We have really reduced the debt leverage on the balance sheet and as a result TransCanada has a lot of dry powder today. That is going to be very useful I think to the management team going forward. We could significantly increase our earnings per share if we ramped up leverage. To some extent that might be the right thing to do but it might also be a good time to look at other opportunities for that financial capability.

Those would be my very broad comments. I will turn it to Russ and he can add his thoughts.

Russell Girling

As I said at the annual meeting, I don’t know if you had a chance to listen to that webcast, but we have been planning this for a long time. For the last 5-10 years we have built a significant portfolio of high quality projects we have in our development portfolio. There is currently about $60 billion of those kinds of things today. I think they are all built off of our three solid platforms for growth. That is what will drive sort of our future investment opportunities. As Hal said we will have lots of cash flow.

To be a little bit more specific around the gas side of things obviously we see new supplies coming online, shale gas supplies in Western Canada as well as the on-shore Gulf Coast shale gas in eastern Canada and the eastern U.S. will lead to capital investment opportunities for us. It has already led to that through the Groundbirch and Horn River as well as its connections into our ANR system.

LNG into Mexico obviously is another large place for potential new investment in our gas pipeline business. Longer term we have our Northern Frontier portfolio both Alaska and Mackenzie which our view is the North American market is going to continue to need that gas in the decades to come. So I think the gas business is pretty solidly positioned for reinvestment going forward. Our oil platform is just getting stated. You have seen us build out four new phases in a very short period of time where we have gone from a program that was envisioned at about 450,000 barrels per day to Patoka and Wood River to Cushing and then onto the Gulf Coast and expansion on top of it.

I see further extension of that system both upstream and downstream to connect new supply and market. As you know those investments come in $500 million to $1 billion chunks as well as terminaling and storage and those kinds of things that are sort of offshoots of that business. Our view is Canadian oil production will continue to grow with both the advancements of the [oil sent] and the same horizontal drilling technology that is now being applied to old oil fields where they are going back and recovering substantially more crude than they have in the past.

Again, I think we are well positioned in front of that potential growth platform. Then on the Power side obviously we had a fair bit of success in the Ontario market where that market has been migrating away from the higher carbon intensive fuels. They have been getting off coal. We have been able to directly benefit from that by investing in a lot of gas fired facilities as well as the Bruce nuclear expansion. We expect that to continue. Then as North America migrates itself to a lower carbon intensive footprint from a power generation perspective we have skills in wind, nuclear, natural gas and hydro, all of those fuels will replace the coals as we move forward. I would say all three of our business platforms are very well positioned and we are going to have the luxury, I believe, of selecting the very best opportunities out of those to reinvest our free cash flow.

Andrew Kuske - Credit Suisse

So when you think about all of the cash you will have beyond 2012 and all of the platforms you could possibly invest in do you see any meaningful change in the way you think about capital allocation today and from a hurdle rate perspective or really expected targeted IRRs?

Russell Girling

I would say our hurdle rates have been fairly consistent for the last decade. Unless we see some major change in cost of capital in the marketplace I would expect them to continue going forward. What we know is for the kind of assets we build and construct and operate, we work in the lower risk end of the spectrum and that sort of 8 percentish return is what is required to attract capital to those projects. So I would say that will continue to be a hurdle rate. Then we will look to optimize those assets and see if we can get a return a few hundred basis points above that and that is what provides a good return for our shareholders. I don’t see any change in discount rate on the horizon.

The marketplace hasn’t changed in the way it operates. When it needs infrastructure the contracting party whether that be a regulated entity or an authority of the government like the Ontario Power Authority or our large scale energy users or producers when they need to build the connecting infrastructure they are willing to step up to the table and sign long-term contracts. I don’t expect that to change going forward.

Operator

The next question comes from the line of Robert Kwan - RBC Capital Markets.

Robert Kwan - RBC Capital Markets

I am wondering if you can comment, I know we are a little early in the year but just where you are on the mainline in terms of cash collection in tolls versus what was planned as part of the toll settlement?

Russell Girling

We are collecting less than anticipated. I would say that number in the first part of the year would be in a neighborhood of 10% or 15% or something like that under collected at this point in time.

Robert Kwan - RBC Capital Markets

Are there any thoughts on is there something you might be doing mid-year or are you going to wait until 2011?

Russell Girling

In terms of the under collection?

Robert Kwan - RBC Capital Markets

Yes.

Russell Girling

We have had periods of time where we have had over collection and under collection before. We won’t adjust that until the end of the year though being an under collection and the question will be as we collect that in current year tolls or do we defer that over a longer period of time. Depending on the magnitude we have done different things with our shippers in the past. Mind you it is probably we will likely defer that over a longer period of time and then a one-year period. That would be dependent upon what the other elements of the revenue requirements are for 2011 but that is something we will work out with our shippers when we get there.

Robert Kwan - RBC Capital Markets

On the Alberta power price outlook have you had any changes since the last quarter? You seemed pretty bullish and I think you mentioned you might even consider buying back 2011 hedges. It looks like you might have modestly added to it. Any changes in the outlook here?

Alexander Pourbaix

I think we are seeing particularly balance of year 2010 is up quite significantly from Q1 We are sort of in the mid to high 50’s now for balance of 2010. 2011 and 2012 have come up a bit but we would probably still look at those and not really consider it good value to be selling a lot into those markets.

Operator

The next question comes from the line of Chad Friess – UBS.

Chad Friess – UBS

I was wondering if you could provide some comments on the relative strength of your contracts at Keystone given that we saw earlier in recent headlines that a few U.S. refiners were trying to extricate themselves from their contracts?

Russell Girling

I am not sure what you mean by relative strength of contracts but we have as you know 910,000 barrels per day firm contracts with shippers. The average term of that is 20 years. These are shipper paid contracts.

Chad Friess – UBS

I am asking could you provide some comments on whether their complaints or their filing has any basis in terms of the contracts you have signed already.

Russell Girling

Our view is they don’t have any basis. They are without merit. Obviously we will continue to try and work with those shippers to try and find resolution to their issues but at the end of the day our contracts are firm contracts and we believe they will prevail at the end of the day.

Chad Friess – UBS

Has there been anybody else that has signed onto the contracts that has expressed displeasure with the tolls or the cost of the project?

Russell Girling

No the only parties that have expressed concern are those three parties that have been cited. They are about 10% of our overall volume on our system. The other 90% had actually encouraged us to keep going and to get to the Gulf Coast as quickly as we possibly can. All of those other contracts are firm and we have no issues with those shippers.

Chad Friess – UBS

I wonder if you could talk about the size and perhaps timing of the potential drop down to TC PipeLines in the context of what is left to fund on the capital program prior to 2011?

Gregory Lohnes

The LP Market continues to improve. So we are seeing larger transactions being done, assets being dropped down and the ultimate equity being raised. So we feel good about that market. It appears to be continuing to strengthen. So we monitor that market. With respect to the pricing of the units we like to see the Great Lakes settlement sorted out and the Great Lakes rate case settled out and get that out in the public domain. We think prices of those units should improve with some of that uncertainty removed. We then would look at the potential assets we have.

So we are always looking at our portfolio for mature, stable assets that would be a good fit for the LP and we continue to do that. We are working on a number of fronts but I would say it is probably towards the later part of the year.

Operator

The next question comes from the line of Bob Hastings - Canaccord Adams.

Bob Hastings - Canaccord Adams

Just to follow-up on that Great Lakes comment in the first quarter you booked earnings now but the settlement is not out there in public. Can you give us some idea how you might have accounted for those results? In effect could there be a step up later in the year or do you think they are accurately reflected in the settlement?

Russell Girling

I believe they are accurately reflected. The rate settlement doesn’t come into effect until May 1. That is the retroactive date if we come to a conclusion. It looks like we are headed down that path. To date we have booked earnings consistent the way we have done it in the past and there will be no adjustments to those.

Bob Hastings - Canaccord Adams

Back in the quarter there was some statement net income was down but I would have thought that was a flat capacity payment.

Alexander Pourbaix

I had thought I had made a comment about this at probably the last meeting. I’m not sure I did. The original contract with Hydro Quebec has sort of a 3-year element of cyclicality to it. What happened is every third year the EBITDA experiences a not insignificant pop and that would have occurred in 2009. So I would think when you look at 2010 I would go back to kind of a 2008 would be a good year to look at in terms of what 2009 should produce. Sorry, 2010 should produce.

Bob Hastings - Canaccord Adams

On the Keystone we are not going to start booking EBITDA until the fourth quarter correct?

Gregory Lohnes

Correct.

Bob Hastings - Canaccord Adams

And of course we are capitalizing interest on the expenditures up until you do that and I think there was some uncertainty you mentioned a few quarters ago about how you do the depreciation and some other things. Can you confirm the net impact of all of those moving parts with Keystone and how they come to into earnings on the bottom line?

Gregory Lohnes

I think it will be from an earnings perspective relatively flat through the end of the year. We have capitalized both the interest costs as well as the cash flow we generate form the facility until we are in a place where we can sort of commence operations and start providing service on our long-term contracts. That is kind of where we are looking for the changeover. I am looking at Glenn right now, I think the impact on earnings over the year is going to be relatively flat to slightly positive or negative.

Glenn Menuz

It is relatively flat. As Russ eluded to, until Keystone is ready for its intended use and currently we are under the start up volumes, until that has lifted we will continue to capitalize the cash flow that starts from that. As noted, that is expected to start within the next few months so we will see the economic benefit coming in on the cash flow but we just won’t have booked the earnings until that restriction is lifted.

Bob Hastings - Canaccord Adams

So on a quarterly basis the first meaningful contribution to the bottom line earnings for Keystone will be Q1 of next year?

Russell Girling

Yes. There might be some in Q4 and we will be able to give you a better update of that as the oil gets to Wood River at the end of June here and we have a better feel for what our operational issues are going to be over the summer. So we will be able to give you a better sort of update on that in the next conference call. After Q2.

Operator

The next question comes from the line of Andrew Fairbanks – Bank of America.

Andrew Fairbanks – Bank of America

Hal I wanted to congratulate you on where you have taken the company during your stewardship. I hope you enjoy your retirement. My question was just around LNG and what you all see as potential opportunities in LNG either in re-gas as you have looked at previously or potentially then gasification or being part of a gasification scheme going forward?

Harold Kvisle

First, thanks for your comment. On regas in North America we kind of lost interest in that side of it. We did have a difficult experience with probably the best LNG regas project that was presented by anyone in Long Island Sound and the decision by the governor of the State of New York to turn us down. That was very disappointing. That would be an example of an LNG regas project that would work and would make sense even in a relatively more well supplied North American [inaudible] market. That one would make sense because of the nature the New York market.

More broadly than that I think it is safe to say we won’t have much interest at least in the near-term. On the Kitimat project as far as liquefaction goes I think I will turn to Russ and let him talk a little bit about that. Just suffice to say I have been involved in different liquefaction projects at Kitimat Prince Rupert the years and the first one back in 1984. They look good from time to time and then inevitably they seem to fade and their attraction, LNG export project out of Kitimat has to compete with the North American market that is connected by increasingly cost effective pipelines as the pipelines depreciate and it just makes it tougher and tougher to justify the building of new pipe capacity to get from northeast B.C. out to Kitimat.

But Russ has thought about that maybe more than I have. So let me turn it to him.

Russell Girling

My thoughts are consistent with Hal. Obviously the global LNG market is also very competitive and so if North American gas is going to compete with hat marketplace it has to do so on a cost basis. I think the production costs in North America probably is equivalent to a lot of places around the globe. But what we find is from a resource cost, LNG for the most part has a much lower cost structure than the costs in North America and as well there is a fairly robust market so the opportunity cost if you will of gas in North America is pick a number between $5-8 as being the current forecast in the marketplace. You have to take that $5-8 gas, transport it to an export point on the water and then you have to liquefy it and all of that is very expensive.

So the question is how does the cost of all of that compete with LNG that is already out there in the marketplace? There are other sources whether that be Qatar or other places around the world that would be cheaper, or Australia. That is what we are up against and the market will sort of tell [inaudible] that the market will dictate which direction gas flows and our view right now is those kinds of projects would be difficult. Obviously in our Alaska open season we have included an option to move the gas developees and that would provide an opportunity for someone to build a liquefaction facility and we will get an indication of whether or not those producers see that as an opportunity.

Certainly we see the resource costs and the opportunity costs of that resource being less than the lower 48 or even Canadian production source and therefore it is likely to be more competitive internationally. We will see whether or not that gas moves that direction. To date the producers have all indicated to us that it is the lower 48 market they are going after with that supply. The open season will give us a little bit of insight into that. The market will dictate where gas flows.

Operator

The next question comes from the line of Barry Klein – Citi.

Barry Klein – Citi

The volumes on the pipes were down at least on the Canadian side quite a bit. What was the impact on earnings from the decline in pipeline volume?

Russell Girling

The earnings aren’t impacted on our pipeline system. It’s a cost to serve the system and so when the volumes decline the tolls actually increase and that is done on a lag basis so if there is any under collection, if you will, on the current year that goes into a regulatory deferral account and that is delayed into future years so there is no impact on net income as a result of changing volumes up or down on our system, the Canadian systems.

Barry Klein – Citi

On the American side was there any impact from volumes?

Russell Girling

Not in the first quarter there wasn’t. They were pretty close to where we anticipated they would be. The volumes were pretty close to where we anticipated they were going to be.

Barry Klein – Citi

What is the tariff you have applied for the U.S. portion of Keystone to Wood River, Cushing and eventually to the Gulf?

Russell Girling

I am not familiar with the exact numbers in those filings but roughly I think you would be looking at something like $4-4.50 to the markets Patoka Wood River and $5-5.50 into $6 into Cushing and probably $1 more than that in the Gulf Coast. In that kind of range. So those are the kinds of tariffs that we have filed. I don’t have the exact numbers though but if you want them Dave or Myles can provide you with that.

Operator

The next question comes from the line of Linda Ezergailis - TD Newcrest.

Linda Ezergailis - TD Newcrest

First of all Hal congratulations on a successful decade stewarding TransCanada and all the best on your retirement. A few questions on the Bruce side. What was the magnitude of the payment that Bruce B made to Bruce A on 100% basis with the contract reset on the OPA? I guess further to that, on a percentage basis we have to know how much TransCanada now owns of Bruce A.

Alexander Pourbaix

The percentage basis has not changed as a result of this. This was merely just a reflection of the amendments that were made to the contract with OPA and it was more of a sharing of costs related to the contract. So there has been no change in ownership either by TransCanada or by the partners in either of the respective entities.

Linda Ezergailis - TD Newcrest

Yes but over time as your CapEx increases your ownership creeps up. I have lost track of that.

Alexander Pourbaix

Bear with me, it is about 48%. But each partner generally would contribute proportionately into this so it moves just a little bit but not too much. 48.8% at the end of the year.

Linda Ezergailis - TD Newcrest

Then what was the payment on the 100% basis that Bruce B made to Bruce A?

Russell Girling

We were just double checking on that. I am not sure we have that number available.

David Moneta

Not off the top but as we said the only impact to us because we are an owner in both is just difference in ownership.

Linda Ezergailis - TD Newcrest

I guess I will wait for the [Camco] release to find that out. Can you describe the nature of the unplanned outage at Bruce A?

Russell Girling

On Bruce A when we were doing some overhaul maintenance work on units 3 first we found out there was a problem with stroking the valves that are involved in shutting down nuclear reaction in the event of a safety concern. Because it was a safety concern what we had to do was shut both units down over a period of time for reasonably significant period in order to rehabilitate those valves. Technically we found there was a buildup of magnetite in those valves and as a result they weren’t stroking properly so we had to replace them.

Linda Ezergailis - TD Newcrest

When is the last time you have inspected your stroke vales in Bruce B?

Russell Girling

They have all been inspected.

Linda Ezergailis - TD Newcrest

It was kind of a one-time thing?

Russell Girling

It was a one-time situation.

Operator

The next question comes from the line of Craig Shere – Tuohy Brothers.

Craig Shere – Tuohy Brothers

Hal best of luck with your retirement.

Harold Kvisle

Thank you Craig.

Craig Shere – Tuohy Brothers

I just want to revisit, I know it is really far out there but the Alaska Pipeline Project question I think you stressed appropriately the important significant off take you all have developed from the western shale plays and how important that is. I think I have heard some numbers based on EURs and cost of wells. It is very far south of $1 cost per MCF for some of these prolific shale plays. I just wonder at $4 Henry Hub gas and new shale plays in Western Canada well under $1 costs, TransCanada may be ready for very large projects like the Alaska Pipeline Project but is the market really ready right now?

Harold Kvisle

I think just to put it in context, North America produces and consumes about 75 Bcf/d and we continue to see 20-25 and 30% declines in that kind of a volume every year. At 20% which is the absolutely minimum you need 15 Bcf/d of new supply every year just to stay flat. You look at that over an 8-year period, 15 Bcf/d you need to bring on 120 Bcf/d of new sources of supply over that period, most of which begin declining the day after they come on. You think about over an 8-year period needing to bring on 120 Bcf/d one B of that might come from Mackenzie. 4 B of that might come from Alaska. That leaves you with about 115 Bcf/d that has to come from either shale sources or conventional.

In our view and it is a view shared by many of the more experienced upstream companies it is going to be a very big challenge to maintain flat production and in fact we see the need to grow production by about 10 Bcf/d to 85 Bcf/d just to meet the demand from the large and growing gas fired power sector that as a number of these coal plants reach end of life and increasingly we think they won’t be replaced with coal plants. They will be replaced with gas fired generation.

The other point you raised that I will comment on directly, the cost structure of finding, developing and then producing shale gas out of the plays in Canada and the U.S. I think that $1 in MCF as a finding and development cost is quite optimistic. The best numbers I have seen from the best companies across the whole play as opposed to well by well would be more in the $2.40 range. Then you add $0.60 to $1 in operating and compression and processing costs to that. So in our view even the very best shale plays require gas prices approach $4 in order for a return on capital employed to be achieved.

Now there are some places, some really extraordinary top [desile] portions of some of these shale plays that will come in cheaper than that. I will acknowledge that. On average, we don’t think $4 is going to be enough because like any play the portions of the play that are below average are much more extensive than the portions that are above average. So there is a relatively small number of wells that really drags up the average on any play.

So we stick by our outlook that the gas price has to go back and forth sort of in a $5-7 range in order for most of this stuff to work. I point out our analysis indicates that of the 15 Bcf/d of new gas that is required every year to maintain flat supply and demand still above 2/3 of it will be coming from plays other than shale plays and they are much, much more expensive than that. We don’t think shale at the margin is actually setting the price of gas. Sorry for the detail but that is the way I understand it.

Operator

There are no further questions registered from analysts. We will now take questions from the media.

(Operator Instructions) The first question from the media is from the line of Justin Amoa – Argus Media.

Justin Amoa – Argus Media

Is there any more detail you can provide on the specific period Keystone is expected to start deliveries to Wood River and Patoka? I am assuming from your comments today we are late June to early July. Is that right?

Russell Girling

That is correct.

Justin Amoa – Argus Media

What is the process in determining whether North Dakota crude will be able to move on Keystone XL and can you outline how that will be determined and how that would work?

Russell Girling

I think for the most part it is determined by commercial arrangements between ourselves and those producers in North Dakota. Those discussions are underway and if we can come to some resolution on commitment because obviously we have to build infrastructure to tie that crude oil into either the Keystone base system or into the Keystone XL system there is actually a number of different options we are looking at depending on where the producers are in that play.

So like any connection of new supply we have to work through those details. Then there is obviously some regulatory issues we need to deal with in terms of getting permits and regulatory approval to build, construct and operate under a tariff basis with that production but those wouldn’t be out of the ordinary. I think it can all be done. It is all dependent upon whether or not those producers want to make a significant enough commitment for us to tie in that crude oil.

Justin Amoa – Argus Media

Has there been any discussion yet about how TransCanada would mitigate the effects of the heavy crudes on XL or Keystone with the light crudes moving out of Montana and North Dakota?

Russell Girling

We had to operate a batch system. So we would obviously collect batches of different quality crudes, store them in tanks and we inject them into the pipeline when we accumulate a large enough batch. If we have to do it in the middle part of the pipeline we can slow down the upper end of the pipeline and inject the batch into it from another location. That is pretty standard pipeline operations in the crude oil business is that you collect batches, if you will, of 200,000-400,000 barrels next to each other of different quality crudes we have in the pipeline. That is why you use the tankage for it at both the front end and the back end of the pipeline to accumulate the batch and then take the batch off and separate and maintain the integrity of the quality of each kind of crude we have in the system.

Operator

There are no further questions registered. I would like to turn the meeting back to Mr. Moneta.

David Moneta

Thank you very much. Thanks to everyone participating this afternoon. Just a couple of quick things. To the extent we did experience any technical difficulties. We apologize. We are just coming to you from our AGM location this afternoon. A rebroadcast or archive version of this should be available later today. Finally, Myles, Terry and I will be available for any of your further detailed questions. We will be quickly making our way back to the office and we would be happy to talk to you later this afternoon if need be. On that note again we thank you again for your participation and we look forward to talking to you soon. Bye for now.

Operator

The conference call has now concluded. Please disconnect your lines at this time and we thank you for your participation.

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Source: TransCanada Corporation Q1 2010 Earnings Call Transcript
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