Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

David Moneta - VP of IR and Corporate Communications

Russ Girling - President and CEO

Don Marchand - EVP and CFO

Alex Pourbaix - President, Energy and Oil Pipelines

Greg Lohnes - President, Natural Gas Pipelines

Glenn Menuz - VP and Comptroller

Analysts

Sam Kanes - Scotia Capital

Carl Kirst - BMO Capital Markets

Ted Durbin - Goldman Sachs

Bob Hastings - Canaccord Genuity

Matthew Akman - Macquarie

Robert Kwan - RBC Capital Markets

Andrew Kuske - Credit Suisse

Linda Ezergailis - TD Newcrest

Steven Paget - FirstEnergy

Chad Friess - UBS

Matthew Akman - Macquarie

Dan Healing - Calgary Herald

Scott Haggett - Reuters

Justin Amoah - Argus Media

TransCanada Corporation (TRP) Q2 2010 Earnings Call July 29, 2010 3:00 PM ET

Operator

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

David Moneta

Thanks very much and good afternoon everyone. I'd like to welcome you to TransCanada's 2010 second quarter conference call. With me today are Russ Girling, President and Chief Executive Officer; Don Marchand, Executive Vice President and Chief Financial Officer; Alex Pourbaix, President of Energy and Oil Pipelines; Greg Lohnes, President, Natural Gas Pipelines; and Glenn Menuz, our Vice President and Comptroller.

Russ and Don will begin today with some opening comments on our financial results and other general issues pertaining to TransCanada. Please note that a slide presentation will accompany their remarks and a copy of the presentation is available on our website at transcanada.com. It can be found in the Investors section under the heading Events & Presentations.

Following their prepared remarks, we'll turn the call over to the conference coordinator for your questions. And during the question-and-answer period, we'll 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, Terry and I would be pleased to discuss them with you following the call.

Before Russ begins, I'd 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 the U.S. Securities and Exchange Commission.

And finally, I'd 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 and amortization or 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, they may not be comparable to similar measures presented by other entities. These measures are used to provide you with additional information on TransCanada's operating performance, liquidity and its ability to generate funds to finance its operations.

With that, I'll now turn the call over to Russ.

Russ Girling

Thanks, David. Good afternoon, everyone, and thank you very much for joining us. I've spoken to you many times over the last number of years here my role as the CFO, President of Pipelines and most recently as TransCanada's Chief Operating Officer. This is my first opportunity to speak to you in my new role as President and Chief Executive Officer.

TransCanada is a great company, and this is a challenge that I welcome and an opportunity that I'm very excited about. The question that I've been asked most often is how will the direction of the company change under my leadership. And my answer to that has been that the direction won't change. As I said, I've worked on this company's strategy for many years and always with a focus on becoming the leading energy infrastructure company in North America.

We will achieve that outcome by continuing to do things that have made us very successful, a disciplined approach, focusing on growing TransCanada's core businesses. This starts with a focus on running our businesses well and completing our ambitious $22 billion capital program. In the future, we'll continue to reinvest in growth opportunities where we have a competitive advantage, to grow our earnings, our cash flow and deliver long-term shareholder value.

And I'm very fortunate to have an executive team with me to lead our 4,000 skilled and very dedicated TransCanada employees. Last month, I made some adjustments to the executive leadership team to keep the company focused on meetings its goals. It's an experienced team and one that knows our business very well. Alex Pourbaix, Greg Lohnes, Don Wishart, Dennis McConaghy, Sean McMaster and Sarah Raiss are all individuals with expertise and experience to meet our challenges and to get the job done.

I'm also pleased to welcome Don Marchand to this call, TransCanada's new Executive Vice President and Chief Financial Officer. Don has been with TransCanada since 1994 and brings a wealth of knowledge to CFO position mostly recently as Vice President, Finance, and Treasury since 1999. I can tell you that I've worked with Don for a number of years and I have extreme confidence in his abilities.

Don will speak to you in a few moments on our financial results. But before that, I want to review some highlights from the quarter and provide an update on some of our key initiatives.

TransCanada's core business of pipe and energy continued to perform well in the quarter in what I would call a very difficult environment. Net income applicable to common shares for the second quarter was $285 million or $0.41 per share, comparable earnings for $275 million or $0.40. Both of those numbers were reduced by $28 million or $0.04 per share due to losses on derivatives used to manage our economic risk to rising interest rates and foreign exchange fluctuations that do not qualify as hedges for accounting purposes.

In addition, approximately $20 million of net income or about $0.03 per share related to the Alberta System settlement was not recognized in the first six months of 2010, pending the approval of a three-year settlement with our customers. Comparable EBITDA for the second quarter was $928 million and funds generated from operations in the second quarter were $935 million.

Also, today, the Board of Directors declared a quarterly dividend of $0.40 per share for the three months ending September 30, 2010. Over the next 12 months, we will begin to see EBITDA contributions from our many capital projects, as construction is completed and those projects become operational. These projects will generate EBITDA of approximately $1 billion in 2011 as they come online.

As I mentioned earlier, we are focused on executing our $22 billion capital program. This program is the engine that will drive much of our earnings growth through 2014. Progress towards completing the program on time and on budget continues.

We celebrated the start of commercial operations of our Keystone pipeline system just a few weeks ago near St. Louis. Oil is now flowing to refineries in Wood River and Patoka.

Construction of the Keystone system down to Cushing, Oklahoma continues and is now about one-third complete. This section of Keystone should be operational in the first quarter of 2011 and will increase the capacity from about 435,000 barrels a day to 590,000 barrels per day.

Firm binding contracts are in place for 530,000 barrels of crude in the U.S. Midwest, including Cushing, Oklahoma. That's approximately 90% of the initial Keystone's launch capacity. I'll speak a little bit more to the expansion of Keystone into the Gulf Coast in just a moment, but I want to cover some of the construction at some of our other major initiatives throughout North America.

Construction is set to begin this summer on our Groundbirch pipeline in Northeast British Columbia. Groundbirch will connect our Alberta system to prolific shale plays in Northeastern British Columbia. We have firm contracts on Groundbirch for 1.1 billion cubic feet a day of natural gas that comes online between 2011 and 2014.

Our other project in that region, the Horn River project continues through the regulatory process. When you add the 540 million cubic feet per day of contracts on Horn River to our contracts on Groundbirch, we will connect a total of approximately 1.6 billion cubic feet a day to our natural gas system in Canada over the next four years.

This will offset the Western Canadian sedimentary basin supply decline that we've seen recently on all of our pipeline systems. I would also point out that we have request for an additional service of about 1 billion cubic feet a day, and we expect that interest to turn into contracts in the coming months.

So between now and 2014 we could expect to connect upto 2.6 billion cubic feet a day of shale gas to our system from Northeast British Columbia.

Moving to Mexico, in Mexico construction crews continued to make progress on the Guadalajara pipeline. The pipeline is now 25% complete, and gas is expected to begin flowing in the first quarter of 2011.

Construction has also started on our $600 million U.S. Bison pipeline, and is expected to begin delivering natural gas from the U.S. Rockies to markets in the U.S. Midwest in the fourth quarter of this year.

Moving over to the power side, our 683 megawatt power plant in Halton Hills, Ontario is virtually complete. We expect this $700 million plant to be fully operational in the third quarter of this year.

Construction of our 575 megawatt Coolidge generating station is over 60% complete, and the $550 million U.S. power plant should begin producing power in the second quarter of 2011. Both Halton Hills and Coolidge are back by 20-year power purchase agreements.

So in the coming months, we will complete projects that are expected to generate, as I said, about $1 billion of EBITDA in 2011, tangible examples of our disciplined growth strategy producing real results. We are also about halfway through the total program, and that's an investment of about $12 billion.

TransCanada is well positioned to fund the remaining portions of our capital plan. In June, we raised $1.6 billion through senior notes and preferred share issues at what I would call very competitive prices.

As I mentioned earlier, we will continue to look for high quality long term growth opportunities to build our company. One of those opportunities is the Alaska pipeline project, an initiative we are working on with ExxonMobil. The open season for that project ends tomorrow.

This is the first time the Alaska North Slope pipeline in its history has been to the marketplace to test whether or not natural gas is available to move to market.

Working with ExxonMobil, we've taken the steps necessary and the actions required to improve and maximize our chances for success. As with all projects like this one, we expect bids for capacity to have many conditions attached. Assuming we receive bids, we would expect to spend the next few months working to resolve those conditions.

I also want to talk a little bit over our Canadian mainline for a moment. We told you last fall that we are working with shippers to develop a proposal that would improve the competitiveness of the Western Canadian sedimentary basin, while also improving mainline toll stability and certainly.

I can tell you that these talks have been going on for a number of months, and they continue as we discuss a very comprehensive proposal. The mainline is a very important piece of North American infrastructure and we'll indeed need it for many years to come.

The marketplace is changing, and obviously we have to change with it. We will continue to listen to our customers' concerns, understand those concerns in trying to find a very best way of adapting.

TransCanada has a successful track record of working out changes with our customers and adapting our systems to meet a changing environment. Some recent examples include the settlement on the Alberta Foothills system, which we had announced today; the move to have the National Energy Board oversee the Alberta system, which has been very beneficial to our accessing of Northeast British Columbia; and the integration of the ATCO pipeline system into our Alberta system.

And now I want to turn back to Keystone pipeline and our expansion in the Gulf coast.

Now let me start by saying that the market has spoken and the shippers have signed binding long term contracts for 380,000 barrels a day or about 75% of the capacity of the Keystone pipelines initial capacity to deliver oil to refineries along the Gulf coast. The shippers are not only Alberta producers, but they are also Gulf coast refiners who are looking to diversify their sources of crude oil. When combined with the base Keystone system, TransCanada has binding signed contracts with producers and refiners to transport crude oil for an average of 18 years for a volume of 910,000 barrels per day or about 83% of the lines initial 1.1 million barrels a day of capacity. These contracts clearly demonstrate that Keystone is very much needed by the marketplace.

The United States today refines above 14 million barrels a day of oil and consumes about 18 million to 20 million barrels per day. Oil that's used to heat people's homes, operate their cars, ship their goods to market and to run their businesses, over nine million barrels of that crude oil is imported from countries outside the U.S. such as Venezuela, Nigeria, Saudi Arabia, Mexico and Canada. And on a wells-to-wheels basis, Canadian heavy oil greenhouse gas emissions are the same as other sources of heavy crude oil that are currently supplying Gulf coast refineries.

The fact is, U.S. economy relies on oil imports and Canada provides the most friendly, reliable and secure supply of imported oil for our neighbors to the south. We all agree that North America is moving to a less carbon intense environment, but this will take some time. And the U.S. will continue to rely on imported oil for many years to come. And Canada is well positioned to obviously fuel that need.

Pipelines have proven themselves to be by orders of magnitude the safest mode to transport oil to market. The U.S. Department of State concluded this spring in its draft and Environmental Impact Statement that after two years of public consultation, the Keystone expansion would have limited impact on the environment. TransCanada will continue to work with the Department of State through it's extended 90 day comment period following the release of the final Environmental Impact Statement.

We consider this an opportunity to explain the benefits of Keystone XL and the importance of this project to U.S. energy security. Impact on construction is expected to be minimal. We have built-in contingencies, so assuming we receive regulatory approval in Q1 2011, construction could begin shortly thereafter.

In addition to Keystone being safe, reliable and environmentally responsible, they will provide a $20 billion boost to the U.S. economy over $500 million in state and local taxes during construction period and thousands of high paying jobs, all at a time when economic stimulus is required in the United States.

So Keystone makes sense on a number of fronts. We will develop the project in a responsible manner as we have developed all of our projects over the past 50 years for the focus on safety and respect for the environment and the communities where we work.

I will now turn the call back over the Don Marchand, who will provide some additional details on the first quarter financial results. Don?

Don Marchand

Thanks, Russ, and good afternoon, everyone.

I'm pleased to have the chance to speak with you today. It is a privilege to have the opportunity to serve as Chief Financial Officer during such and important time in the company's history. I look forward to meeting and working with you in the months and years ahead.

Earlier today we released our second quarter results from which there are three key messages. First, our core businesses, Pipe and Energy performed well. Second, our consolidated results were impacted by losses on derivatives used to protect against rising interest rates and foreign currency fluctuations that do not qualify for hedge accounting. And third, TransCanada's financial position remains strong and we are well positioned to fund our existing capital program.

I'd like to take the next 10 minuets or so elaborating on these themes and our second quarter 2010 results.

Net income of applicable common shares in the second quarter was $285 million or $0.41 per share compared to $314 million or $0.50 per share for the same period in 2009. Comparable earnings in the period were $275 million or $0.40 per share compared to $319 million or $0.51 per share in 2009. As noted in the quarter, comparable earnings were reduced by $28 million or $0.04 per share due to losses on derivatives and the translation of certain U.S. dollar working capital balances.

In addition, in the first six months of 2010, $20 million of net income or $0.03 per share related to the three year Alberta system settlement has yet to be recorded pending final approval by the national energy board. We expect to receive NED approval in the third quarter of this year at which time the impact settlement from its effective date of January 1, 2010 will be recognized.

Of the notable items affecting comparable earnings in second quarter 2010 were lower contributions from Bruce Power, higher realized power prices in Alberta and lower net interest expense resulting from the capitalization of interest related to the company's large construction program. On a per share basis, comparable earning in the second quarter 2010 were also reduced by approximately $0.05 per share as a result of a 10% increase in the average number of outstanding common shares primarily due to the $1.7 billion common share offering in June 2009.

The dilution associated with this prudent approach to financing our very large multi-year projects in what is proving to be persistently volatile market conditions will continue to have a near-term impact on our EPS. With that being said, our $22 billion capital program is expected to generate significant growth and stable long-term earnings and cash flow, as projects are completed and assets commence operations.

As Russ mentioned, we expect to generate approximately $1 billion of incremental EBITDA next year. With projects such as Keystone, the Halton Hills and Coolidge power generating stations, and the Guadalajara and Bison natural gas pipelines enter full commercial service, and begin contributing to earnings and cash flow.

I'll now briefly describe the business segment results at the EBITDA level. The Pipelines business generated comparable EBITDA of $696 million in the second quarter compared to $747 million in the same period last year. The decrease is primarily for two reasons, the negative impact of the weaker U.S. dollar on U.S. pipelines result. And the reduced revenue requirement in the Canadian Mainlines that does not impact Mainline net income.

I'd note that although the first phase and Keystone is now in commercial service, cash flows will be capitalized until the project is operating at its initial design capacity of 435,000 barrels per day. This is expected to occur in the fourth quarter.

Energy generated comparable EBITDA of $254 million in the second quarter of 2010 compared to $301 million in the same period last year. Higher earnings in Western Power resulting from an increase in realized power prices in Alberta, and higher capacity revenue from Ravenswood were more than offset by lower contribution from Bruce Power, lower natural gas storage revenues and the negative impact of the weaker U.S. dollar.

On a consolidated basis, the impact of the weaker U.S. dollar on both U.S. Pipelines and Energy EBITDA is considerably offset by the positive impact on U.S. dollar denominated interest expense.

Now turning to the income statement items below EBIT, on slide 25. Interest expense in the second quarter was $187 million compared to $259 million in the second quarter last year. This decrease of $72 million is primarily due to increased capitalization of interest related to our sizable capital program, and a reduction in U.S. dollar denominated interest expense as a result of the impact of a weaker U.S. dollar.

Partially offset by higher interest expense from the issuance of U.S. $1.25 billion of senior notes in early June 2010. And losses from derivatives used to match the company's economic exposure to rising interest rates.

Interest income and other in the second quarter 2010 was an expense of $18 million compared to income of $34 million for the same period last year. The decrease was primarily due to loss of some derivatives used to manage the company's economic exposure to U.S. dollar denominated income. And from the translation of certain U.S. dollar working capital balances.

The company seeks to achieve hedge accounting treatment for its derivatives, however, in some circumstances this is not possible. As we have indicated in the past, TransCanada is exposed to movements in exchange rates as a result of its U.S. operations.

Although this exposure is considerable offset by U.S. dollar debt, which serves us natural hedge, our U.S. dollar operating income exceeds U.S. dollar interest expense leaving us with a net long U.S. dollar position. We further manage this result in economic exposure to movements in exchange rates by using derivatives, which do not qualify for hedge accounting.

Similarly the company uses derivatives to manage it's exposure to rising interest rates certain of which also did not qualify for hedge accounting. The combined negative impact of losses in second quarter 2010 for the interest rate and foreign exchange rate derivates did not qualify its hedges for accounting purposes. And the translation of certain U.S. dollar working capital balances amounted to $28 million or $0.04 per share.

Income taxes were $65 million in second quarter 2010 compared to $97 million for the same quarter last year. The decrease was primarily due to produce pre-tax earnings and the net positive impact from income tax rate differentials and other income tax adjustments.

Moving on to review cash flow and capital expenditures on slide 26; funds generated from operations increased to $935 million in the second quarter 2010 compared to $692 million in the same period in 2009. The increase is mainly due to the income tax benefit generated from bonus depreciation for U.S. income tax purposes on Keystone assets placed into service on June 30, partially offset by lower earnings.

Capital expenditures were $1 billion in second quarter 2010, principally related to the construction of Keystone, the Coolidge Power Plant, the Guadalajara and Bison natural gas pipelines, and the Bruce a Restart.

Now looking at slide 27; at the end of the second quarter, our consolidated balance sheet consisted of 51% debt net of cash, 3% junior subordinated notes, 4% preferred shares and 42% common equity.

At the end of the second quarter, we had over $1.2 billion of cash on hand, along with undrawn revolving credit involving committed revolving bank lines of $4 billion. Our two Canadian commercial paper programs remain well supported in an attractive source for short-term finance.

In June 2010, TransCanda issued U.S. $500 million of five year and U.S. $750 million of 30-year senior notes at coupon rates of 3.4% and 6.1% respectively. Also in June, TransCanada completed its second public offering of cumulative redeemable preferred shares this year, resulting in gross proceeds of $350 million at a yield of 4.4%.

With approximately $2 billion of capital raised year-to-date in addition to proceeds from the dividend reinvestment program, TransCanada is well advanced in securing its 2010 funding needs.

Going forward, the company will continue to monitor market conditions and seek to raise additional senior and subordinated capital on both sides of the border. We will also continue to examine opportunities for portfolio management including a role for TC pipelines LP and financing our capital program.

That's the end of my prepared remarks. I'll now turn the call back to Russ for some concluding comments.

Russ Girling

Thanks, Don. And before we turn the call over to Q&A, I'd just like to offer some closing comments. TransCanada remains focused on its core businesses, Pipe and Energy. We remain focused in our approach to completing our capital projects on time and on budget. This is expected to lead to a $2.5 billion increase in annual EBITDA in 2014. And we will continue to reinvest our cash flow in high quality new projects.

Today, we have three platforms for growth, gas pipeline, oil pipeline and power generation. And as we've seen there are numerous opportunities to further expand our oil pipeline business, and we'll continue to pursue those. On the gas side, connecting new conventional gas, shale gas and eventually northern supply to North American markets are opportunities we are actively pursuing in our gas business.

On the power side, there are signals that there will be a migration away from coal to less carbon intensive sources. So that should present further opportunities for natural gas-fired power plants, renewables and nuclear, all of which we are well positioned to compete for.

So as I said at the beginning, our strategies are unchanged. We will maintain our disciplined approached, growing our core businesses, reinvesting in new opportunities. We will focus on increasing TransCanada's cash flow, increasing our earnings and driving dividend growth. The result, in the end a long term, enduring growth and value for our shareholders.

Thank you for listening today and I'll turn it back to David for the Q&A.

David Moneta

Thanks, Russ. Just a reminder before I turn it back over to the conference coordinator, we'll take questions from the investment community first and following that we'll open the lines to the media. With that I'll turn it back to the conference coordinator for your questions.

Question-and-Answer Session

Operator

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

Sam Kanes - Scotia Capital

I'm going to focus on Bruce a bit, not much detail with respect to refurbishment timing, cost estimates and Bruce B just in general, how many contracts are available at above market rates I guess that are about to expire this year? How many expired year-to-date, and what dollar differentials did that mean to Q2?

Alex Pourbaix

Sam, it's Alex. Just with respect to Bruce I and II, I think there hasn't been any real material change to the guidance that we gave earlier in the year, which I think was around $4 billion, slightly over both units back by the end of 2011.

There's always going to be challenges, but I think so far our experience is we're continuing to see improvement in productivity that I think I mentioned at the last conference call. We are actually moving towards commissioning activities.

We're starting to commission a number of systems. We expect to have ACL completely offsite towards the end of January of 2011. And that time we're going to be staffed, the project by both 50%. So I think generally, the guidance is similar to where we were before on that.

With respect to the contracts at Bruce B, we are seeing those contracts are significantly rolling off over this year and next year. I don't have the exact numbers in front of me. Do you have them in front of you, Glenn?

Glenn Menuz

Yes, as far as the realized prices, obviously they're impacted by the floor price on all volumes as well as the contracts over and above that. So the difference in the volume and the pricing of contracts year-over-year was probably above $0.02 to $0.03. But also last year had an amount in there for about $0.01 per share related to Q1 '09. So that's sort of the combined impact on the year-over-year basis and as Alex says, these contracts have continued to roll off.

Operator

Our next question is from Carl Kirst from BMO Capital Markets.

Carl Kirst - BMO Capital Markets

With respect to the Canadian Mainline and the indications that volumes may be I guess about 10% to 15% less than what was originally expected, I guess that won't be impacting earnings this year, but it will from a cash flow standpoint. Should we be thinking of 10% to 15% of roughly the $1.1 billion of EBITDA, or how should we think about that from a cash standpoint?

Greg Lohnes

I think that's the right way to look at it, Carl. And I think as we look forward with the Mainline, summer seems some higher volumes with the heat and the power demand in the east. And we'd hope to, as we start to bring volumes on, start to see that volume starting to rise.

Carl Kirst - BMO Capital Markets

Then just a follow-up also on that and understanding there's probably only limited you can say with respect to the ongoing discussions with your shippers as far as a comprehensive settlement, but I guess the idea is to get everyone onto the same page and then bring that proposal to the NEB by year-end.

And I guess my question is; clearly, it's going to be challenging, given the different shipper interest. Do you have to have everyone on the same page before you approach the NEB, or is it some point where you get maybe two-thirds of the shippers onboard and that's when you approach the NEB? Is there any sense of color you can add there?

Greg Lohnes

Sure, first I'd say that we are working diligently with our shippers. We are pleased that our shippers are engaged and are interested in working towards a settlement. And I think we all recognize, all the customers in TransCanada, that we need to work together in order to develop a total link structure that will support the business as it currently sits and as we expect it to grow with the new shale developments coming on as are outlined in the quarter.

I think we will work to get a unanimous settlement, but with diverse interests it's possible that we may not get a 100% of the way there. But we are committed to filing by the end of the year in the fourth quarter based on support from as many of our constituencies as we can possibly get, and then would work with the NEB on a process to get those proposals approved over the next number of months following that filing.

Operator

The next question is from Ted Durbin from Goldman Sachs.

Ted Durbin - Goldman Sachs

Just coming back to sort of the financing questions again. How are you seeing the market for the preferreds versus maybe potentially needed to issue common equity to finance some of the CapEx, kind of what are you seeing in the market right now for financing?

Russ Girling

The market's strong for most product lines on both sides of the border. We've done 1.25 billion of preferred shares since last fall, and our dividend reinvestment program's running at about a 36% clip now, generating over $300 million a year of equity. So with that and the hybrid market potentially reopening, now that Moody's has released its views of the world and how it's going to treat those, we see all kinds of avenues to keep adding subordinated capital other than a discrete common share issue going forward here.

Ted Durbin - Goldman Sachs

That's helpful. Thanks. And then if you can just go through a little bit more on the presidential permit process here with the State Department? You sort of said the first quarter of 2011; is that kind of the way you're thinking this comes through for Keystone or maybe just a little more detail on what you're thinking there?

Russ Girling

Yes, I think, we are expecting that we would receive a decision either towards the end of this year or very early into next year at the latest.

Operator

Our next question is from Bob Hastings from Canaccord Genuity.

Bob Hastings - Canaccord Genuity

With all the continuing capitalization of Keystone while the volumes ramp-up, when we look out to next year, Russ, you mentioned a billion dollars of additional EBITDA from that and the other projects. Can you give us an idea what that comes down at the bottom line, just from the incremental projects you're doing, maybe give a range or something?

Russ Girling

We haven't provided that guidance. I think that what we are trying to do is give you the capital cost of the projects there. I think you can get a sense of their usual life and their further depreciation, make some tax assumptions. But we haven't ourselves provided any guidance from EBITDA down to earnings.

I think you can assume capital structure Bob, of roughly the capital structure that we've had in the past for these types of projects in that sort of 60-40 kind of range. Our balance sheet will probably remain in that 50-50 kind of range until we get out of the capital building, but I would see the long term, probably 60-40 is kind of a good run rate. And as well, the IRR in these projects, we try to do some back calculation in multiple (inaudible). So hopefully that gives you enough information to try to calculate where earnings are going to be.

Bob Hastings - Canaccord Genuity

I've done that. Thank you. Can you give us a little color then, with the LNG issues in BC, you've got a bunch of contracts signed up now, you've got some others. But sort of how do you see that playing out longer term, alliances to try to get some more of those gas plants? Do you think they're locked in there or there are more opportunities coming? Would you look at any processing?

Russ Girling

I do believe that there is more opportunity for growth. If you believe some of the producer estimates, they are far in excess of what we've contracted to-date or agreed in the indications of interest. As I think I had mentioned in my opening remarks, your current interest level is around that 2.5 billion to 3 billion cubic feet a day for both the Horn River and Montney plays. I don't think you'd see us move in the direction of getting into gas processing, Certainly West Coast and others have done a good job up there. We continue to work with gas processors, whether producers or West Coast directly to provide our services of transporting that gas.

It appears that the market that they like the best today is the Alberta market which provides a significant amount of liquidity. As you know, we remove about 10 billion cubic feet a day, but about 60 billion cubic feet a day trades on our Alberta System. So those producers can instantaneously sell their gas.

We're making very, very minimal balance sheet commitment. Any commitment to move to the LNG market or to other markets requires more financial capacity from their balance sheets, perhaps leads to a worse net back and doesn't have the same liquidity that we have to offer.

Those are the reasons I guess we'd been hearing from them as to why they've been signing up with our system. Where they choose do something different down the road, would be up to them. But I do think those are enduring values of the Alberta System. And then from there they can get to any market in North America, and we have capacity in our system. So depending on where the best net back is on a given day, we can get the gas there.

So as we've been signing up this gas, that's the kind of feedback that we've been getting, and we do have, as we said, more inbound requests for service. So I believe we've got a good product offering, and it seems to be working right now.

Bob Hastings - Canaccord Genuity

Does that improve once Alliance tolls or contracts are over?

Russ Girling

Again, I'm not sure. I've put out a fair number of years to when the Alliance contracts come to an end, and how they will toll their system going forward and what markets they will access. As you know, it's a high pressure system, so it offers a different kind of service than we offer today. And it's a bullet pipeline that goes to essentially one market where you're coming to our system, offers up other things.

Again, I don't know how they'll toll their system at that point in time. What I can tell you is that we're large and that we have the capacity to continue to adapt to competitive market environments, and we would adapt to whatever competitive market was required to compete head-on with folks offering other services.

Operator

Our next question is from Matthew Akman from Macquarie.

Matthew Akman - Macquarie

I have two questions, one on the pipes and one on power. On the pipelines, how would you guys deal with any delay on Keystone XL? Let's say it gets approved but it's delayed, I guess first of all, what kind of delay in the approval would cause the pipeline in-service date to be delayed? And then how would you deal with that from a planning and procurement standpoint?

Alex Pourbaix

I think as we prepared for construction and permitting on this facility Matthew, we certainly built in some slack and we think that for example this 90-day incremental common period that the state department has put forward, we don't really see that as having a material impact. With respect to what kind of a delay, I mean, it would have to be a delay of several months to really have a significant impact on this project.

Matthew Akman - Macquarie

And how do you plan for that, I guess Alex, with ordering materials and lining up contractors and stuff like that?

Alex Pourbaix

Well, that already for the most part has been done. The pipe contracts have been let, the pumping station contracts have been let, most of the construction ones have also been, and they have been put in place in a manner that gives us some flexibility as to when we actually trigger construction.

Matthew Akman - Macquarie

So hopefully, if even in the worst case, let's say it is delayed; hopefully there wouldn't be any other impact other than maybe the timing of it being in service?

Alex Pourbaix

I think that's basically correct. I mean, I guess if it was delayed for a very significant amount of time, which we're not anticipating, I mean you could potentially see some escalation of labor, things like that. But we wouldn't at this point be anticipating that kind of a delay.

Matthew Akman - Macquarie

And I just had one quick question on the power side. It looks like maybe you're around 50% hedged in the West next year for 2011. I'm just wanting to confirm that and then maybe get your philosophy on hedging going forward, since obviously pricing hasn't picked up much?

Alex Pourbaix

We're about two-thirds hedged for the rest of this year. We're pretty close to 50% hedged, and that's up a fair bit. We took the opportunity of those high prices couple of months ago to get off some hedges into 2011 and 2012. Right now, where prices are, kind of $50 for 2011, I think around $53 for 2012, frankly, I don't think there is a lot of upside to be doing a lot more hedging at those prices. I don't think we have a lot of downside, and I'd probably take the view, there's some upside off those prices.

Operator

Our next question is from Robert Kwan from RBC Capital Markets.

Robert Kwan - RBC Capital Markets

Russ, you mentioned earlier, just coming back to Mainline, to quote, the marketplace is changing and that you're going to need to change with it. Can you just elaborate a little bit on that? Is that you being open to a significant change in tolling methodology and maybe one that could cause a bit of softness in earnings in the near-term until some of these additional volumes come online?

Russ Girling

That's a couple of questions Robert. I think the first one is with respect to changing our tolling system to meet the marketplace. That's just what we have to do as a company. The second question you asked was around collection of our revenue requirements and whether we would be willing to forego some of that collection for a period of time. And I think given that there appears to be significantly more gas in North America than we thought 24 months ago, it appears that that gas is recoverable at today's prices, are slightly higher kind of prices.

It appears that we've got abundant supply. On the market side, it appears that we're going to migrate away from coal-fired power for example in North America to more carbon friendly generation sources, of which gas would be one of those. So I would say that that's a positive environment where you would see demand increase.

So those are the things that we're responding to. That would suggest that our facilities are going to be used and useful for a longer period of time. And under that kind of situation, we'd be willing to slow down the depreciation of our systems and collection of capital.

But there is no reason in my mind that I could see that we would need to have a reduction in return on capital that given the market fundamentals that I just talked about that doesn't necessarily make sense. But it does make sense to adjust our return of capital and capital collection to meet I think what is a more robust marketplace in the long term.

Robert Kwan - RBC Capital Markets

So at the end of the day, what you might do going forward is very similar to what you have been doing over the last, call it 12 to 24 months, where you're protecting the earnings stream and that's of paramount importance?

Russ Girling

I didn't say that we're protecting the earnings stream. I would say that what we're doing is, we're trying to adjust our tolls to meet the competitive marketplace. In a regulated business we have the opportunity to recover our cost, and one of those costs is our return on capital.

And there is no reason in my mind right now why we wouldn't be able to continue to collect our cost on this system, whether it be return of capital or other components of the revenue requirement. We just may have to allocate those in different places of the system.

And in the case of depreciation, which is just one of those costs, if it's prudent to reduce those costs and that makes more sense for our customers, we would do that.

Robert Kwan - RBC Capital Markets

Just a quick question on the power side. Do you have what the impact of the Sundance 3 outage would have been if the force majeure had been granted?

Alex Pourbaix

If force majeure had been granted, my recollection is that on a 100% basis, it would have been about $30 million, give or take. So half of that is, like $14 million, $15 million, in that range.

Operator

Our next question is from Andrew Kuske from Credit Suisse.

Andrew Kuske - Credit Suisse

Just a question as it relates to the Oakville plant proposal. And I ask the question in part, because after the market closed, Pristine Power received some news from the government enacting a regulation under the Planning Act, really allowing them to proceed with the York Energy Centre. So I'm just sort of curious as to what you think about Oakville in light of that news and the potential success of that plant.

Alex Pourbaix

I think the Pristine plant in Oakville in many ways is in similar situation. And if anything, the Pristine plant was maybe even a little bit more urgent. But both locations have been identified by the OPA and by the ISO as areas where there is significant transmission congestion and that eventually there will be a risk of blackouts if the power plants aren't constructed.

I think it was perhaps even a little bit more acute in the North York area in that I think they were already operating it significantly below NERC standards. So I think similar situations applied to Oakville. Obviously, it's no secret that certain elements of the community have been very vocally opposed to the project. We are satisfied that at the end of the day, the Southwest GTA area absolutely needs that power in order to keep the lights on in Oakville and other communities in that area.

So we are continuing to push forward with a series of legal claims or issues that we have, trying to attack some of the actions that the municipality has taken in the attempt to stop the plant. But at the end of the day, we're quite comfortable that that area needs a power plant. And we have a contract to build that power plant, and we are relying on that.

Andrew Kuske - Credit Suisse

And a somewhat related question. Do you see any opportunities within the Ontario market for TransCanada to be involved in transmission? Clearly, there is a lot of transmission issues within Ontario. You're not a licensed transmission operator. But given your power generation capacity, does that really preclude you from being involved in the market on transmission basis?

Alex Pourbaix

Given the almost overwhelmingly all of our power in Ontario is either regulated or quasi-regulated, I don't think there would really be any competitive reasons why we couldn't get into the transmission business. We've taken a look at the opportunities. It certainly appears that there is a lot of transmission that needs to be built in that region.

If we were to consider it, I think we'd actually want to hear pretty strongly from the government that they would favor our involvement. And I think at this point, they are considering whether they want to bring in third parties into the transmission game. But they haven't really made any final decisions on that.

Operator

Our next question is from Linda Ezergailis from TD Newcrest.

Linda Ezergailis - TD Newcrest

In light of Moody's coming out with their views on hybrid securities, can you give us an update on your discussions with the rating agencies on how your capital structure might look in terms of maximum percentages of hybrid and preferred type securities in the mix?

Russ Girling

Moody's has come out, and looking at junior subordinated notes, given our base gets 25% equity credit to those types of securities, but the preferred shares we have in our capital structure, they're going to be about 50%. When we look at the hybrids, we recognize there are limitations as to how much of that we can put on our balance sheet. We would think something in the 10% area in total is something that would make sense for us.

Each of the three has distinct circuit breakers on these. We've got maybe a couple of percent left, but probably wouldn't go beyond 10%, 11% of the capital structure.

Linda Ezergailis - TD Newcrest

And just a follow-up question on your actual operations. Can you maybe give us a sense of what the outlook for your natural gas storage business is for the balance of the year?

Russ Girling

As you know, Linda, we are pretty much sold out for the balance of this year, I think probably in the range of around 85% to 90% of our capacity. And all of that is locked up, and the profits are locked up into that.

So I think I can say that if you take a look at what we've done for the first six months of the year, we're probably going to look to do that and maybe a little bit more for the last six months. The summer period is always kind of our soft period, and we do tend to make the lion share of our profits in the winter period.

Operator

Our next is from Steven Paget from FirstEnergy.

Steven Paget - FirstEnergy

Will you be taking advantage of the two-year window to wait on IFRS?

Glenn Menuz

Steven, it's Glenn. Obviously, this just came out this week. We're taking a look at it. But as we've put in our disclosure today, assuming the exposure draft is approved, we would be expected to take advantage of the two-year delay or deferral mainly because of the uncertainty currently at the international board level.

Operator

(Operator Instructions) Our next question is form Chad Friess from UBS.

Chad Friess - UBS

A question for Alex. We've seen a fairly hot summer in the Northeast so far. I was wondering what impact is it having at upfront utilization at Ravenswood and in general. How the Northeast U.S. power market is shaping up for the second half of the year and into 2011?

Alex Pourbaix

It has had obviously a pretty significant impact on the Northeast. Energy prices have been a little stronger or overall not insignificantly stronger than we'd anticipated. Ravenswood has been running particularly through the hot period, running almost all of the units flat-out in non-peak periods. So that's been a good story for us.

If I take a look at the balance of the year, we're probably looking in Zone J at sort of maybe $58, $59; $58 in '11 and then sort of $62, $63 in '12. So I think one of the good things that we've seen with this hot weather is we've actually seen demand, if not meeting all-time peaks, has certainly been getting very close to all-time peaks.

So we are seeing demand has come back pretty strongly. I think New York City demand is up about 3% year-over-year. And I think that knowledge that the demand is still there is moving the forward markets a fair bit.

Operator

Our next question is from Matthew Akman from Macquarie.

Matthew Akman - Macquarie

Just a quick follow-up on Great Lakes. I noticed that there was a settlement there recently of the FERC proceeding. And I was wondering whether that was reflected at all in the second quarter or how that might impact EBITDA going forward?

Greg Lohnes

The settlement is in and the settlement was a 8% reduction in the full toll. I would say that we're seeing some volume increases. We continue to be pleased with the sale of capacity on that line. So we don't overall expect there to be a material impact on the revenues from Great Lakes for the year.

Matthew Akman - Macquarie

Did it reflect in Q2 at all or does it start in Q3 if there is an impact?

Greg Lohnes

I believe it came into effect in May. So there would be a small impact.

Russ Girling

It was recorded in Q2, Matthew, but as Greg mentioned, the impact was not material to us.

Operator

We have no more questions from the investment community. We will now take questions from the media. (Operator Instructions) Our next question is from Dan Healing from Calgary Herald.

Dan Healing - Calgary Herald

Just a quick question on the open season for the Alaska Pipeline ending tomorrow. Can you give me any idea as to how that's been greeted by shippers and what we might expect from that?

Russ Girling

It'd be premature to tell you what we expect from that. We have worked very hard addressing shippers' questions and concerns. I can tell you that there has been a large volume of questions and issues raised. I think that we've done a very good job of addressing those. And we're hopeful that we will see some bids to move gas to market tomorrow.

Dan Healing - Calgary Herald

So the interest has been pretty high then?

Russ Girling

Yes, it has been very high. All of the shippers in the North Slope have been engaged in conversation with us.

Dan Healing - Calgary Herald

My other question was with regard to the pipeline oil spill in Michigan. Do you think this will have any affect as you go forward with the Keystone XL approvals?

Russ Girling

I don't know the answer to that question. Obviously, it's a very unfortunate circumstance and I guess premature to determine whether or not it has any impact on the permitting process for a pipeline system.

Dan Healing - Calgary Herald

I guess it's not related at all, but in terms of public opinion, it's a significant thing. Is that your fear?

Russ Girling

As I said, it's premature we don't know exactly what happened in this case and how it will unfold. So it would be premature for me to make comments on how it would impact our systems.

Operator

Our next question is from Scott Haggett from Reuters.

Scott Haggett - Reuters

Just a question on the U.S. approval process. Is there any sense that the EA's request for a much broader sense of the impacts of the pipeline, including expansion of oil sands projects, does that have the potential to delay further than the 90 days you're anticipating?

Russ Girling

I believe that the Department of State has to determine what the scope of their review is going to be and to-date they have addressed some of those issues. And I would expect that they would address the rest of the questions raised by the EPA. And from what we've been told currently, they are staying on the schedule that they announced here over the last couple of days whereby they will issue their final Environmental Impact Statement and then allow it a 90 day comment period and at this point in time that's what we understand the schedule to be.

Operator

(Operator Instructions) Our next question is from Justin Amoah from Argus Media.

Justin Amoah - Argus Media

I'm wondering what kind of deliveries into Illinois you've been averaging since beginning commercial operations on Keystone?

Alex Pourbaix

I think we declared the commercial and service around the end of June. So we are still in what I would call a ramp up phase. I think it's probably been somewhere in these early days, probably around 100,000 barrels a day.

Justin Amoah - Argus Media

And is that mainly because of the maximum operating pressure restriction or are there other factors in play there?

Alex Pourbaix

No, not at all its really just normal things you go through as we commission the pipe. And we'd expect it to be over 400,000 barrels a day, by the end of the year.

Operator

We have no more questions at this time. I would like to return the meeting over to Mr. Moneta.

David Moneta

Thank you very much and thanks all of you for taking an interest in TransCanada and your time this afternoon. We look forward to talking to you soon. Bye for now.

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: TransCanada Corporation Q2 2010 Earnings Call Transcript
This Transcript
All Transcripts