40-F 1 a2196596z40-f.htm FORM 40-F
QuickLinks -- Click here to rapidly navigate through this document

U.S. Securities and Exchange Commission
Washington, D.C. 20549

Form 40-F


o

 

REGISTRATION STATEMENT PURSUANT TO SECTION 12 OF THE SECURITIES EXCHANGE ACT of 1934

OR

ý

 

ANNUAL REPORT PURSUANT TO SECTION 13(a) OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2009        Commission File Number 1-8887

TRANSCANADA PIPELINES LIMITED
(Exact Name of Registrant as specified in its charter)

Canada
(Jurisdiction of incorporation or organization)

4922, 4923, 4924, 5172
(Primary Standard Industrial Classification Code Number (if applicable))

Not Applicable
(I.R.S. Employer Identification Number (if applicable))

TransCanada Tower, 450 - 1 Street S.W.
Calgary, Alberta, Canada, T2P 5H1
(403) 920-2000
(Address and telephone number of Registrant's principal executive offices)

TransCanada PipeLine USA Ltd., 717 Texas Street
Houston, Texas, 77002-2761; (832) 320-5201
(Name, address (including zip code) and telephone number (including area code)
of agent for service in the United States)

Securities registered pursuant to section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: 
None

For annual reports, indicate by check mark the information filed with this Form:
ý    Annual Information Form   ý    Audited annual financial statements

Indicate the number of outstanding shares of each of the issuer's classes of capital or common stock as of the close of the period covered by the annual report.

At December 31, 2009, 4,000,000 Cumulative Redeemable First Preferred Shares, Series U
and 4,000,000 Cumulative Redeemable First Preferred Shares, Series Y
were issued and outstanding
All of the Registrant's common shares are owned by TransCanada Corporation

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    Yes ý            No o


The documents (or portions thereof) forming part of this Form 40-F are incorporated by reference into the following registration statements under the Securities Act of 1933, as amended:

Form
  Registration No.  

F-9

    333-154961  

F-9

    333-163641  


AUDITED CONSOLIDATED ANNUAL FINANCIAL STATEMENTS AND
MANAGEMENT'S DISCUSSION & ANALYSIS

A.    Audited Annual Financial Statements

For audited consolidated financial statements, including the report of the independent chartered accountants, see pages 89 through 142 of the TransCanada PipeLines Limited ("TCPL") 2009 Management's Discussion and Analysis and Audited Consolidated Financial Statements included herein. See the related supplementary note entitled "Reconciliation to United States GAAP" for a reconciliation of the differences between Canadian and United States generally accepted accounting principles, including the auditors' report, attached as document 13.4, and the related comments by auditors for United States readers on Canada — United States reporting differences, attached as document 99.1.

B.    Management's Discussion & Analysis

For management's discussion and analysis, see pages 2 through 88 of the TCPL 2009 Management's Discussion and Analysis and Audited Consolidated Financial Statements included herein.

For the purposes of this Report, only pages 2 through 88 and 89 through 142 of the TCPL 2009 Management's Discussion and Analysis and Audited Consolidated Financial Statements shall be deemed incorporated herein by reference and filed, and the balance of such 2009 Management's Discussion and Analysis and Audited Consolidated Financial Statements, except as otherwise specifically incorporated by reference in the TCPL Annual Information Form, shall be deemed not filed with the U.S. Securities and Exchange Commission (the "Commission") as part of this Report under the Exchange Act.

C.    Management's Report on Internal Control Over Financial Reporting

For information on management's internal control over financial reporting, see:

    i.
    "Report of Management" included in TCPL's Audited Consolidated Financial Statements on page 89;

    ii.
    the section entitled "Management's Annual Report on Internal Control Over Financial Reporting" under the heading "Controls and Procedures" in Management's Discussion and Analysis on page 73 of the TCPL Management's Discussion and Analysis and Audited Consolidated Financial Statements; and

    iii.
    Management's Report on Internal Control Over Financial Reporting attached as document 13.5.


UNDERTAKING

The Registrant undertakes to make available, in person or by telephone, representatives to respond to inquiries made by the staff of the Commission, and to furnish promptly, when requested to do so by the Commission staff, information relating to: the securities registered pursuant to Form 40-F; the securities in relation to which the obligation to file an Annual Report on Form 40-F arises; or transactions in said securities.


DISCLOSURE CONTROLS AND PROCEDURES

For information on disclosure controls and procedures, see "Controls and Procedures" in Management's Discussion and Analysis on page 73 of the TCPL 2009 Management's Discussion and Analysis and Audited Consolidated Financial Statements.

2



AUDIT COMMITTEE FINANCIAL EXPERT

The Registrant's board of directors has determined that it has at least one audit committee financial expert serving on its audit committee. Mr. Kevin E. Benson has been designated an audit committee financial expert and is independent, as that term is defined by the New York Stock Exchange's listing standards applicable to the Registrant. The Commission has indicated that the designation of Mr. Benson as an audit committee financial expert does not make Mr. Benson an "expert" for any purpose, impose any duties, obligations or liability on Mr. Benson that are greater than those imposed on members of the audit committee and board of directors who do not carry this designation or affect the duties, obligations or liability of any other member of the audit committee.


CODE OF ETHICS

The Registrant has adopted codes of business ethics for its President and Chief Executive Officer, Chief Financial Officer, Controller, directors, employees and contractors. The Registrant's codes are available on its website at www.transcanada.com. No waivers have been granted from any provision of the codes during the 2009 fiscal year.


PRINCIPAL ACCOUNTANT FEES AND SERVICES

For information on principal accountant fees and services, see "Corporate Governance — Audit Committee — External Auditor Service Fees" and "Corporate Governance — Audit Committee — Pre-Approval Policies and Procedures" on page 27 of the TCPL Annual Information Form.


OFF-BALANCE SHEET ARRANGEMENTS

The Registrant has no off-balance sheet arrangements, as defined in this Form, other than the guarantees and commitments described in Note 24 of the Notes to the Audited Consolidated Financial Statements attached to this Form 40-F and incorporated herein by reference.


TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS

For information on Tabular Disclosure of Contractual Obligations, see "Contractual Obligations" in Management's Discussion and Analysis on page 57 of the TCPL 2009 Management's Discussion and Analysis and Audited Consolidated Financial Statements.


IDENTIFICATION OF THE AUDIT COMMITTEE

The Registrant has a separately-designated standing Audit Committee. The members of the Audit Committee are:

  Chair:
Members:
  K.E. Benson
D.H. Burney
E.L. Draper
P.L. Joskow
J.A. MacNaughton
D.M.G. Stewart

3



FORWARD-LOOKING INFORMATION

This document, the documents incorporated by reference, and other reports and filings made with the securities regulatory authorities may contain certain information that is forward-looking and is subject to important risks and uncertainties. The words "anticipate", "expect", "believe", "may", "should", "estimate", "project", "outlook", "forecast" or other similar words are used to identify such forward looking information. Forward-looking statements in this document are intended to provide TCPL's securityholders and potential investors with information regarding TCPL and its subsidiaries, including management's assessment of TCPL's and its subsidiaries' future financial and operational plans and outlook. Forward-looking statements in this document may include, among others, statements regarding the anticipated business prospects and financial performance of TCPL and its subsidiaries, expectations or projections about the future, strategies and goals for growth and expansion, expected and future cash flows, costs, schedules, operating and financial results and expected impact of future commitments and contingent liabilities. All forward-looking statements reflect TCPL's beliefs and assumptions based on information available at the time the statements were made. Actual results or events may differ from those predicted in these forward-looking statements. Factors that could cause actual results or events to differ materially from current expectations include, among others, the ability of TCPL to successfully implement its strategic initiatives and whether such strategic initiatives will yield the expected benefits, the operating performance of TCPL's pipeline and energy assets, the availability and price of energy commodities, capacity payments, regulatory processes and decisions, changes in environmental and other laws and regulations, competitive factors in the pipeline and energy sectors, construction and completion of capital projects, labour, equipment and material costs, access to capital markets, interest and currency exchange rates, technological developments and the current economic conditions in North America. By its nature, forward-looking information is subject to various risks and uncertainties, which could cause TCPL's actual results and experience to differ materially from the anticipated results or expectations expressed. The Company's material risks and assumptions are discussed further in TCPL's Management's Discussion and Analysis filed as document 13.2 hereto including under the headings "Pipelines — Opportunities and Developments", "Pipelines — Business Risks", "Energy — Opportunities and Developments", "Energy — Business Risks" and "Risk Management and Financial Instruments". Additional information on these and other factors is available in the reports filed by TCPL with Canadian securities regulators and with the Commission. Readers are cautioned to not place undue reliance on this forward-looking information, which is given as of the date it is expressed in this document or otherwise, and to not use future-oriented information or financial outlooks for anything other than their intended purpose. TCPL undertakes no obligation to update publicly or revise any forward-looking information, whether as a result of new information, future events or otherwise, except as required by law.

4



SIGNATURES

Pursuant to the requirements of the Exchange Act, the Registrant certifies that it meets all of the requirements for filing on Form 40-F and has duly caused this Annual Report to be signed on its behalf by the undersigned, thereto duly authorized, in the City of Calgary, Province of Alberta, Canada.

    TRANSCANADA PIPELINES LIMITED

 

 

Per:

 

/s/ GREGORY A. LOHNES

Gregory A. Lohnes
Executive Vice-President and
Chief Financial Officer

 

 

 

 

Date: February 26, 2010

DOCUMENTS FILED AS PART OF THIS REPORT

  13.1   TCPL's Annual Information Form for the year ended December 31, 2009.
  13.2   Management's Discussion and Analysis (included on pages 2 through 88 of the TCPL 2009 Management's Discussion and Analysis and Audited Consolidated Financial Statements).
  13.3   2009 Audited Consolidated Financial Statements (included on pages 89 through 142 of the TCPL 2009 Management's Discussion and Analysis and Audited Consolidated Financial Statements).
  13.4   Related supplementary note entitled "Reconciliation to United States GAAP" and the auditors' report thereon.
  13.5   Management's Report on Internal Control Over Financial Reporting.
  13.6   Report of the Independent Registered Public Accounting Firm on the effectiveness of TCPL's Internal Control Over Financial Reporting, as at December 31, 2009.
  99.1   Comments by Auditors for United States Readers on Canada-United States Reporting Differences.

EXHIBITS

  23.1   Consent of KPMG LLP, Chartered Accountants.
  31.1   Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  31.2   Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  32.1   Certification of Chief Executive Officer regarding Periodic Report containing Financial Statements.
  32.2   Certification of Chief Financial Officer regarding Periodic Report containing Financial Statements.

 

 

 

 

 

 

 

 

TRANSCANADA PIPELINES LIMITED

 

 

 

 

ANNUAL INFORMATION FORM

 

 

 

 

 

 

 

 

February 22, 2010

 

 

 

 



 

TRANSCANADA PIPELINES LIMITED      i

 

 

TABLE OF CONTENTS

 

TABLE OF CONTENTS

i

PRESENTATION OF INFORMATION

ii

FORWARD LOOKING INFORMATION

ii

TRANSCANADA PIPELINES LIMITED

1

Corporate Structure

1

Intercorporate Relationships

1

GENERAL DEVELOPMENT OF THE BUSINESS

2

Developments in the Pipelines Business

2

Developments in the Energy Business

7

Financing Activities

9

BUSINESS OF TCPL

11

Pipelines Business

11

Regulation of the Pipeline Business

13

Energy Business

14

GENERAL

16

Employees

16

Social and Environmental Policies

16

Environmental Protection

17

RISK FACTORS

17

Environmental Risk Factors

17

Other Risk Factors

19

DIVIDENDS

19

DESCRIPTION OF CAPITAL STRUCTURE

19

Share Capital

19

Debt

20

CREDIT RATINGS

20

DBRS Limited (DBRS)

20

Moody’s Investors Service, Inc. (Moody’s)

21

Standard & Poor’s (S&P)

21

MARKET FOR SECURITIES

21

Common Shares

22

Series 1 Preferred Shares

22

Series U Preferred Shares and Series Y Preferred Shares

22

DIRECTORS AND OFFICERS

22

Directors

23

Board Committees

24

Officers

24

Conflicts of Interest

25

CORPORATE GOVERNANCE

25

AUDIT COMMITTEE

26

Relevant Education and Experience of Members

26

Pre-Approval Policies and Procedures

27

External Auditor Service Fees

27

INDEBTEDNESS OF DIRECTORS AND EXECUTIVE OFFICERS

27

SECURITIES OWNED BY DIRECTORS

27

COMPENSATION OF DIRECTORS

28

DIRECTOR COMPENSATION TABLE

29

RETAINERS AND FEES PAID TO DIRECTORS

29

2009 Retainers and Fees

30

Minimum Share Ownership Guidelines

31

Share Unit Plan for Non-Employee Directors

31

COMPENSATION DISCUSSION AND ANALYSIS

31

LEGAL PROCEEDINGS AND REGULATORY ACTIONS

31

MATERIAL CONTRACTS

31

TRANSFER AGENT AND REGISTRAR

32

INTEREST OF EXPERTS

32

ADDITIONAL INFORMATION

32

GLOSSARY

33

SCHEDULE “A” - METRIC CONVERSION TABLE

A-1

SCHEDULE “B” - DISCLOSURE OF CORPORATE GOVERNANCE PRACTICES

B-1

SCHEDULE “C” - CHARTER OF THE AUDIT COMMITTEE

C-1

SCHEDULE “D” - DESCRIPTION OF BOARD COMMITTEES AND THEIR CHARTERS

D-1

SCHEDULE “E” - CHARTER OF THE BOARD OF DIRECTORS

E-1

SCHEDULE “F” - COMPENSATION DISCUSSION AND ANALYSIS

F-1

 



 

TRANSCANADA PIPELINES LIMITED  ii

 

 

PRESENTATION OF INFORMATION

 

Unless the context indicates otherwise, a reference in this Annual Information Form (“AIF”) to “TCPL” or the “Company” includes TCPL’s parent, TransCanada Corporation (“TransCanada”) and the subsidiaries of TCPL through which its various business operations are conducted and a reference to “TransCanada” includes TransCanada Corporation and the subsidiaries of TransCanada Corporation, including TCPL.  Where TCPL is referred to with respect to actions that occurred prior to its 2003 plan of arrangement with TransCanada, which is described below under the heading “TransCanada PipeLines Limited — Corporate Structure”, these actions were taken by TCPL or its subsidiaries.  The term “subsidiary”, when referred to in this AIF, with reference to TCPL means direct and indirect wholly owned subsidiaries of, and entities controlled by, TransCanada or TCPL, as applicable.

 

Unless otherwise noted, the information contained in this AIF is given at or for the year ended December 31, 2009 (“Year End”). Amounts are expressed in Canadian dollars unless otherwise indicated.  Financial information is presented in accordance with Canadian generally accepted accounting principles (“Canadian GAAP”).

 

Certain portions of TCPL’s Management’s Discussion and Analysis dated February 22, 2010 (“MD&A”) are incorporated by reference into this AIF as stated below.  The MD&A can be found on SEDAR at www.sedar.com under TCPL’s profile.

 

The Accounting Standards Board (“AcSB”) of the Canadian Institute of Chartered Accountants has announced that Canadian publicly accountable enterprises are required to adopt International Financial Reporting Standards (“IFRS”), as issued by the International Accounting Standards Board, effective January 1, 2011.  Effective January 1, 2011, TCPL will begin reporting under IFRS.  TCPL’s conversion plan includes obtaining skilled people, providing education and training, analyzing the impact on TCPL of key differences between Canadian GAAP and IFRS, and developing and executing a phased approach to conversion and implementation.  For more information on TCPL’s conversion project, see TCPL’s MD&A under “Accounting Changes – International Financial Reporting Standards”.

 

Information relating to metric conversion can be found at Schedule “A” to this AIF.  Terms defined throughout this AIF are listed in the Glossary found at the end of this AIF.

 

FORWARD LOOKING INFORMATION

 

This AIF, the documents incorporated by reference into this AIF, and other reports and filings made with the securities regulatory authorities may contain certain information that is forward looking and is subject to important risks and uncertainties. The words “anticipate”, “expect”, “believe”, “may”, “should”, “estimate”, “project”, “outlook”, “forecast” or other similar words are used to identify such forward looking information.  Forward-looking statements in this document are intended to provide securityholders and potential investors with information regarding TCPL and its subsidiaries, including management’s assessment of TCPL’s and its subsidiaries’ future financial and operational plans and outlook.  Forward-looking statements in this document may include, among others, statements regarding the anticipated business prospects and financial performance of TCPL and its subsidiaries, expectations or projections about the future, strategies and goals for growth and expansion, expected and future cash flows, costs, schedules, operating and financial results and expected impact of future commitments and contingent liabilities.  All forward looking statements reflect TCPL’s beliefs and assumptions based on information available at the time the statements were made.  Actual results or events may differ from those predicted in these forward-looking statements. Factors that could cause actual results or events to differ materially from current expectations include, among others, the ability of TCPL to successfully implement its strategic initiatives and whether such strategic initiatives will yield the expected benefits, the operating performance of the Company’s pipeline and energy assets, the availability and price of energy commodities, capacity payments, regulatory processes and decisions, changes in environmental and other laws and regulations, competitive factors in the pipeline and energy sectors, construction and completion of capital projects, labour, equipment and material costs, access to capital markets, interest and currency exchange rates, technological developments and economic conditions in North America.  By its nature, forward looking information is subject to various risks and uncertainties, including those material risks discussed in this AIF under “Risk Factors”, which could cause TCPL’s actual results and experience to differ materially from the anticipated results or expectations expressed.  Additional information on these and other factors is available in the reports filed by TCPL with Canadian securities regulators and with the U.S. Securities and Exchange Commission (“SEC”).  Readers are cautioned to not place undue reliance on this forward looking information, which is given as of the date it is expressed in this AIF or otherwise, and to not use future-oriented information or financial outlooks for anything other than their intended purpose.  TCPL undertakes no obligation to update publicly or revise any forward-looking information, whether as a result of new information, future events or otherwise, except as required by law.

 



 

TRANSCANADA PIPELINES LIMITED     1

 

 

TRANSCANADA PIPELINES LIMITED

 

Corporate Structure

 

TCPL’s head office and registered office are located at 450 - 1st Street S.W., Calgary, Alberta, T2P 5H1.

 

TCPL is a Canadian public company. Significant dates and events are set forth below.

 

Date

 

Event

March 21, 1951

 

Incorporated by Special Act of Parliament as Trans-Canada Pipe Lines Limited.

April 19, 1972

 

Continued under the Canada Corporations Act by Letters Patent, which included the alteration of its capital and change of name to TransCanada PipeLines Limited.

June 1, 1979

 

Continued under the Canada Business Corporations Act.

July 2, 1998

 

Certificate of Arrangement issued in connection with the Plan of Arrangement with NOVA Corporation (“NOVA”) under which the companies merged and then split off the commodity chemicals business carried on by NOVA into a separate public company.

January 1, 1999

 

Certificate of Amalgamation issued reflecting TCPL’s vertical short form amalgamation with a wholly owned subsidiary, Alberta Natural Gas Company Ltd.

January 1, 2000

 

Certificate of Amalgamation issued reflecting TCPL’s vertical short form amalgamation with a wholly owned subsidiary, NOVA Gas International Ltd.

May 4, 2001

 

Restated TransCanada PipeLines Limited Articles of Incorporation filed.

June 20, 2002

 

Restated TransCanada PipeLines Limited By-Laws filed.

May 15, 2003

 

Certificate of Arrangement issued in connection with the plan of arrangement with TransCanada. TransCanada was incorporated pursuant to the provisions of the Canada Business Corporations Act on February 25, 2003. The arrangement was approved by TCPL common shareholders on April 25, 2003 and following court approval, Articles of Arrangement were filed making the arrangement effective May 15, 2003. The common shareholders of TCPL exchanged each of their TCPL common shares for one common share of TransCanada. The debt securities and preferred shares of TCPL remained obligations and securities of TCPL. TCPL continues to hold the assets it held prior to the arrangement and continues to carry on business as the principal operating subsidiary of the TransCanada group of entities.

 

Intercorporate Relationships

 

The following diagram presents the name and jurisdiction of incorporation, continuance or formation of TCPL’s principal subsidiaries as at December 31, 2009.  Each of these subsidiaries has total assets that exceeded 10% of the total consolidated assets of TransCanada or revenues that exceeded 10% of the total consolidated revenues of TransCanada as at and for the year ended December 31, 2009.  TCPL owns, directly or indirectly, 100 per cent of the voting shares of each of these subsidiaries.

 

 



 

TRANSCANADA PIPELINES LIMITED    2

 

 

The above diagram does not include all of the subsidiaries of TCPL.  The assets and revenues of excluded subsidiaries in the aggregate did not exceed 20% of the total consolidated assets or total consolidated revenues of TCPL as at and for the year ended December 31, 2009.

 

GENERAL DEVELOPMENT OF THE BUSINESS

 

The general development of TCPL’s business during the last three financial years, and the significant acquisitions, dispositions, events or conditions which have had an influence on that development, are described below.

 

TCPL’s reportable business segments are Pipelines and Energy. Pipelines are principally comprised of the Company’s pipelines in Canada, the U.S. and Mexico and its regulated natural gas storage operations in the U.S. Energy includes the Company’s power operations and the non-regulated natural gas storage business.

 

Developments in the Pipelines Business

 

TCPL’s strategy in Pipelines is focused on both growing its North American natural gas and crude oil transmission network and maximizing the long-term value of its existing pipeline assets.  Summarized below are significant developments that have occurred in TCPL’s Pipelines business over the last three years.

 

2010

 

 

Pipeline Developments

 

 

 

 

·

January 29, 2010. TCPL announced that the proposed Alaska pipeline project (the “Alaska Pipeline Project”) filed its plan with the United States Federal Energy Regulatory Commission (“FERC”) to obtain approval to conduct an open season. If approval is granted, an open season offering is expected to be provided to potential shippers at the end of April 2010 for their assessment until July 2010. The Alaska Pipeline Project is a 4.5 billion cubic feet per day (“Bcf/d”) natural gas pipeline that would extend 2,737 kilometres (“km”) (1,700 miles) from a new natural gas treatment plant at Prudhoe Bay, Alaska to Alberta.

 

 

 

 

Regulatory Matters

 

 

 

 

·

February 19, 2010. TCPL filed an application with the National Energy Board (“NEB”) for approvals to construct and operate the proposed Horn River pipeline project (“Horn River Project”), a 158 km (98 mile) pipeline and related facilities to connect new shale gas supply in the Horn River basin north of Fort Nelson, B.C., to TCPL’s natural gas transmission system in the province of Alberta (the “Alberta System”). The Horn River Project will consist of approximately 74 km of new pipelines and the purchase and use of an existing pipeline in the Horn River area and will transport sweet natural gas to a tie in point on the Alberta System. The project is expected to cost approximately $307 million.

 

2009

 

Pipeline Developments

 

·             February 26, 2009.  TCPL announced the successful completion of a binding open season, securing support for firm transportation contracts of 378 million cubic feet per day (“MMcf/d”) for the Horn River Project.  Total contractual commitments for the Horn River Project increased to 503 MMcf/d by 2014 as a result of newly contracted volumes from a recently announced natural gas processing facility that will be located in the Horn River area.

 

·             May 7, 2009.  TCPL announced that it was the successful bidder on a contract to build, own and operate a US$320 million pipeline in Mexico, which is supported by a twenty-five year contract for its entire capacity with Comisión Federal de Electridad, Mexico’s state-owned electric power company.  The proposed pipeline, known as the Guadalajara Pipeline, is an approximately 305 km (190 mile) pipeline capable of transporting 500 MMcf/d of natural gas, and is proposed to extend from a liquefied natural gas terminal under construction near Manzanillo on Mexico’s Pacific Coast to Guadalajara, the second largest city in Mexico.  Regulatory approvals were received in December 2009 and construction is under way with an expected in-service date of first quarter 2011.

 

·             June 11, 2009.  TCPL reached an agreement with ExxonMobil Corporation to jointly advance the Alaska Pipeline Project.  A joint project team is developing the engineering, environmental, aboriginal relations and commercial work.

 



 

TRANSCANADA PIPELINES LIMITED    3

 

 

·             July 1, 2009.  TCPL completed the sale of North Baja Pipeline, LLC (“North Baja”) to its affiliate TC PipeLines, LP.  As part of the transaction, TCPL agreed to amend its incentive distribution rights with TC PipeLines, LP. Under the amendment, TCPL received additional common units in exchange for a resetting of its incentive distribution rights at a lower percentage which escalates with increases in TC PipeLines, LP distributions.  The aggregate consideration received from the partnership included a combination of cash and common units totaling approximately US$395 million.  With the close of the transaction, TCPL’s ownership of the partnership increased to 42.6 per cent.  TCPL continued to operate North Baja following the transfer of ownership.  The system is a 129 km (80 mile) natural gas pipeline that extends from southwest Arizona to a point on the California/Mexico border and connects with a natural gas pipeline system in Mexico.  TCPL’s ownership in TC PipeLines, LP was subsequently reduced to 38.2 per cent in November 2009 after TC PipeLines, LP completed a public issuance of common units.

 

·             August 14, 2009.  TCPL became the sole owner of the 3,456 km (2,147 mile) Keystone Oil Pipeline project that will transport crude oil from Alberta to markets in the United States (the “Keystone Oil Pipeline”) through the purchase of ConocoPhillips’ remaining approximately 20 per cent interest for US$553 million and the assumption of US$197 million of short-term debt.  TCPL also assumed the responsibility for ConocoPhillips’ share of the capital investment required to complete the project resulting in an incremental commitment of approximately US$1.7 billion through the end of 2012.

 

·             September 28, 2009.  TCPL began work on the final phase of the North Central Corridor natural gas pipeline, a 300 km (186 mile) extension of the northern section of the Alberta System.  This 160 km Red Earth section is expected to be complete by April 2010.  The 140 km North Star section has been completed and two 13 Megawatt (“MW”) compressor units at the Meikle River compressor station were operational on May 15, 2009 and August 21, 2009, respectively.

 

·             December 2009.  A Joint Review Panel of the Canadian government released a report on environmental and socio-economic factors relating to the Mackenzie Gas Pipeline Project, a proposed 1,200 km (746 mile) natural gas pipeline to extend from a point near Inuvik, Northwest Territories to the northern border of Alberta, where it will connect to the Alberta System.  The report has been submitted to the NEB as part of the review process for approval of the project.  A decision is currently expected by fourth quarter 2010.  TransCanada continues funding of the Mackenzie Valley Aboriginal Pipeline Limited Partnership for its participation in the Mackenzie Gas Pipeline Project.

 

Regulatory Matters

 

·             February 26, 2009.  The NEB approved TCPL’s application for federal regulation of its Alberta System, which regulation became effective April 29, 2009. The Alberta System was previously regulated by the Alberta Utilities Commission (“AUC”).  Under federal regulation, TCPL is able to apply to the NEB for approval to extend the Alberta System across provincial borders, allowing the Company to provide service to producers outside of Alberta.

 

·             March 20, 2009.  TransCanada Québec & Maritimes Pipeline Inc. (“TQM”) received the NEB’s decision on its cost of capital application for 2007 and 2008, which requested an 11 per cent return on 40 per cent deemed common equity.  The NEB set a 6.4 per cent after-tax weighted average cost of capital for each of the two years, which equates to a 9.85 per cent return on 40 per cent deemed common equity in 2007 and a 9.75 per cent return on 40 per cent deemed common equity in 2008.  Prior to the decision, TQM was subject to the NEB return on equity formula of 8.46 per cent and 8.71 per cent for 2007 and 2008, respectively, on deemed common equity of 30 per cent.  In June 2009, the NEB approved TQM’s final tolls for 2007 and 2008, which reflected the 6.4 per cent after-tax weighted average cost of capital.

 

·             May 2009.  Portland Natural Gas Transmission System (“Portland System”) reached a settlement with its customers on certain short-term issues contained in its general rate case filed with the FERC in April 2008, which proposed a rate increase of approximately six per cent as well as other changes to its tariff.  The partial settlement was filed with the FERC for approval and a decision is expected in 2010.  The remaining issues were litigated and the initial decision from the administrative law judge was issued in December 2009.  Participants in the rate case have an opportunity to respond to the initial decision.  The FERC is expected to issue its final decision on the litigated portion of the rate case in fourth quarter 2010.

 

·             September 2009.  The NEB held a hearing to review TCPL’s application regarding the Canadian portion of the planned expansion and extension of the Keystone Oil Pipeline, which expansion is expected to provide additional capacity in 2013 of 500,000 barrels per day (“Bbl/d”) from Western Canada to the United States Gulf Coast, near existing terminals in Port Arthur, Texas.  The expansion, when completed, is expected to increase the capacity of the Keystone Oil Pipeline system from 591,000 Bbl/d to approximately 1.1 million Bbl/d.  The NEB is expected to issue a decision in first quarter 2010.  Permits for the U.S. portion of the expansion are expected by fourth quarter 2010.

 



 

TRANSCANADA PIPELINES LIMITED     4

 

 

Construction of the expansion facilities is expected to commence in first quarter 2011 subject to the receipt of the necessary regulatory approvals.

 

·             October 8, 2009.  The NEB determined that its RH-2-94 decision would no longer be in effect.  The RH-2-94 decision pursuant to the National Energy Board Act (Canada) established a return on equity formula tied to the Government of Canada bond yields that had formed the basis for determining tolls for certain pipelines under NEB jurisdiction since January 1, 1995.  The NEB decided that the cost of capital would be determined by negotiations between pipeline companies and their shippers or by the NEB if a pipeline company filed a cost of capital application.  The decision affects the calculation of future tolls for TCPL’s NEB-regulated natural gas pipelines.  In November 2009, the Canadian Association of Petroleum Producers and the Industrial Gas Users Association sought leave to appeal the October 2009 NEB decision to the Federal Court of Appeal and named the NEB as the sole respondent.  In January 2010, TCPL was granted respondent status in the matter and in February 2010 filed its submission opposing the leave application.

 

·             November 2009.  The NEB concluded a public hearing process on TCPL’s application for approval to construct and operate the Groundbirch pipeline, which is comprised of a 77 km (48 mile) natural gas pipeline and related above ground facilities.  TCPL has entered into firm transportation agreements with Groundbirch customers that are expected to increase to 1.1 Bcf/d by 2014.  The Groundbirch pipeline, if approved, would be an extension of the Alberta System and would connect natural gas supply primarily from the Montney shale gas formation in northeast British Columbia to existing infrastructure in northwest Alberta.  Construction of the Groundbirch pipeline is expected to commence in July 2010 with completion anticipated in November 2010.  The NEB is expected to issue a decision in first quarter 2010.

 

·             November 2009.  The FERC initiated an investigation to determine whether rates on the Great Lakes system, a natural gas pipeline system running from northwestern Idaho, through Washington and Oregon to the California border (the “Great Lakes System”) are just and reasonable.  In response, Great Lakes filed a cost and revenue study with the FERC on February 4, 2010.  A hearing is scheduled to commence on August 2, 2010, and an initial decision is required in November 2010.  The impact of the investigation on the Great Lakes System’s rates and revenues is unknown at this time.

 

·             November 27, 2009.  TCPL filed a combined application with the NEB for approvals of both a new Alberta System Rate Design Settlement, and the integration of Canadian Utilities Limited (“ATCO Pipelines”).  The rate design was negotiated with all key stakeholders and addresses the evolving nature of the Alberta System and the integration of ATCO Pipelines. It also incorporates a single delivery service for all delivery points resulting from the amalgamation of current intra-Alberta and export delivery services.  TCPL reached a proposed agreement with ATCO Pipelines to provide integrated natural gas transmission service to customers on September 8, 2008.  If approved by the regulatory authorities, the two companies will combine physical assets under a single rates and services structure with a single commercial interface with customers but with each company separately managing assets within distinct operating territories in the province.  TCPL and ATCO Pipelines continue to work towards obtaining the necessary regulatory approvals to provide integrated service to shippers on the Alberta System and the ATCO Pipelines system. The integration of the Alberta System and ATCO Pipelines system will create the effect of a single integrated natural gas transmission system in Alberta resulting in a more efficient delivery of service to customers.

 

·             December 2009.  The NEB approved TCPL’s application for 2010 final tolls for its Canadian gas pipeline system (the “Canadian Mainline”) transportation service, effective January 1, 2010.  The 2010 calculated ROE for the Canadian Mainline will be 8.52 per cent, a decrease from 8.57 per cent in 2009.  The Canadian Mainline will continue to base its return on the NEB’s return on equity formula for 2010 and 2011 in accordance with the terms of the current Canadian Mainline tolls settlement.  Reduced throughput and greater use of shorter distance transportation contracts has resulted in an increase in Canadian Mainline tolls for 2010 compared to 2009.  This situation, coupled with the ongoing development and growth of competitive alternative natural gas supply and infrastructure from the United States shale gas regions, is increasing competitive pressures on the Canadian Mainline.  As a result, TCPL indicated that it will develop solutions, involving possible changes to business model, rate design, and services that would be designed to increase throughput and revenue in order to reduce tolls.  TCPL is also pursuing the connection of new sources of U.S. gas supply to the existing Canadian Mainline infrastructure to maintain its existing markets and competitive position.

 

·             December 2009.  The FERC issued a Final Environmental Impact Statement (“FEIS”) for the Bison Pipeline Project (“Bison”), a proposed 487 km (303 mile) pipeline from the Powder River Basin in Wyoming to the Northern Border Pipeline system in Morton County, North Dakota.

 



 

TRANSCANADA PIPELINES LIMITED     5

 

 

2008

 

Pipeline Developments

 

·             February 2008. In 2005, certain subsidiaries of Calpine Corporation (“Calpine”) filed for bankruptcy protection in both Canada and the U.S.  The Portland System and Gas Transmission Northwest Corporation (“GTNC”) reached agreement with Calpine for allowed unsecured claims in the Calpine bankruptcy of US$125 million and US$192.5 million, respectively. Creditors were to receive shares in the re-organized Calpine and these shares would be subject to market price fluctuations as the new Calpine shares began to trade.  In February 2008, the Portland System and GTNC received partial distributions of 6.1 million shares and 9.4 million shares, respectively. Subsequently, these shareholdings were sold into the market.  Claims of NOVA Gas Transmission Limited (“NGTL”) and Foothills Pipe Lines (South B.C.) Ltd., both wholly-owned subsidiaries of TransCanada, for $31.6 million and $44.4 million, respectively, were received in cash in January 2008 and were passed on to shippers on these systems.

 

·             March 14, 2008.  TransCanada Keystone Pipeline, LP (“Keystone U.S.”) received a Presidential Permit authorizing the construction, maintenance and operation of facilities at the United States and Canada border for the transportation of crude oil between the two countries.  The Presidential Permit was a significant regulatory approval required to begin construction of the Keystone Oil Pipeline.  The Presidential Permit was issued following the issuance by the U.S. Department of State of the FEIS on January 11, 2008 for the construction of the Keystone U.S. pipeline and its Cushing extension.  The FEIS stated the pipeline would result in limited adverse environmental impacts.  Construction of the Keystone Oil Pipeline began in May 2008 in both Canada and the United States.  Commissioning of the segment to Wood River and Patoka commenced in late 2009 with commercial operations expected to follow in mid-2010.  Commissioning of the segment providing service to Cushing is expected to commence in late 2010.

 

·             April 2008.  An expansion to TCPL’s Alberta System in the Fort McMurray area, comprising a total of approximately 150 km (93 miles), was placed in service on its projected on-stream date.

 

·             July 16, 2008.  TCPL announced plans to expand and extend the Keystone Oil Pipeline system and provide additional capacity in 2013 of 500,000 Bbl/d from Western Canada to the United States Gulf Coast, near existing terminals in Port Arthur, Texas.

 

·             September 3, 2008.  TCPL acquired Bison Pipeline LLC from Northern Border Pipeline Company (“NBPL”) for US$20 million.  The assets of Bison Pipeline LLC included executed precedent agreements as well as regulatory, environmental and engineering work on Bison.

 

·             October 29, 2008.  TCPL announced that the Keystone Oil Pipeline system successfully conducted an open season for expansion and extension to the United States Gulf Coast by securing additional firm, long-term contracts on the system.

 

·             December 5, 2008.  The Alaska Commissioner of Revenue and Natural Resources issued the Alaska Gasline Inducement Act (“AGIA”) license to TCPL to advance the Alaska Pipeline Project, following the approval by the Alaska Senate on August 1, 2008 of TCPL’s application for the license.  TCPL has committed under the AGIA to advance the Alaska Pipeline Project through an open season and subsequent FERC certification.  TCPL has commenced the engineering, environmental, field and commercial work.  Under AGIA, the State of Alaska has agreed to reimburse a share of the eligible pre-construction costs to TCPL to a maximum of US$500 million.

 

·             TCPL agreed to increase its equity ownership in Keystone U.S. and TransCanada Keystone Pipeline Limited Partnership (“Keystone Canada”) up to 79.99 per cent from 50 per cent with ConocoPhillips’ equity ownership being reduced concurrently to 20.01 per cent through sole funding of cash calls.

 

Regulatory Matters

 

·             January 2008.  GTNC, a wholly-owned subsidiary of TransCanada, filed a Stipulation and Agreement with the FERC on October 31, 2007 comprised of an uncontested settlement of all aspects of its 2006 General Rate Case.  On January 7, 2008, the FERC issued an order approving the settlement. The settlement rates were effective retroactive to January 1, 2007.

 

·             March 18, 2008.  TCPL filed an application with the NEB to increase the interim tolls on the Canadian Mainline previously approved in December 2007.  This toll increase was a result of a significant decrease in forecasted flows on the Canadian Mainline and was intended to allow TCPL to meet its 2008 revenue requirement.  On March 28, 2008, the NEB approved the amended interim tolls for transportation service effective April 1, 2008.

 



 

TRANSCANADA PIPELINES LIMITED     6

 

 

·             June 17, 2008.  TCPL filed an application with the NEB to establish federal regulation for TCPL’s Alberta System.  An oral hearing to discuss this matter began on November 18, 2008, concluded on November 28, 2008 and a decision was issued on February 26, 2009.

 

·             June, 2008.  The NEB approved TCPL’s application for additional pumping facilities required to expand the Canadian portion of the Keystone Oil Pipeline project from a nominal capacity of approximately 435,000 Bbl/d to 591,000 Bbl/d to accommodate volumes to be delivered to the Cushing markets, after holding an oral hearing on April 8, 2008.  The hearing and decision followed on an application filed by Keystone Canada with the NEB in November 2007.

 

·             October 10, 2008.  The AUC approved TCPL’s application for a permit to construct the North Central Corridor expansion, at a cost of approximately $925 million.  Construction on the project began in October 2008.  The decision followed on a non-routine application filed with the Alberta Energy and Utilities Board (“EUB”) on November 20, 2007.

 

·             December 17, 2008.  The AUC approved NGTL’s 2008-2009 Revenue Requirement Settlement Application as filed, in its entirety.  As part of the settlement, fixed costs were established for operation, maintenance and administration costs, return on equity and income taxes.  Any variances between actual costs and those agreed to in the settlement accrue to TCPL, subject to a return on equity and income tax adjustment mechanism, which accounts for variances between actual and settlement rate base and income tax assumptions.  The other cost elements of the settlement are treated on a flow-through basis.  The AUC also approved the 2008 interim rates of NGTL on a final basis for the period January 1, 2008 to December 31, 2008.

 

·             December 2008.  Palomar Gas Transmission LLC applied to the FERC for a certificate to build the 349 km (217 mile) Palomar pipeline which would extend from the GTN System (as defined below) in central Oregon to the Columbia River northwest of Portland.  The proposed Palomar pipeline is a 50/50 joint venture of GTNC and Northwest Natural Gas Co.  Palomar is currently in discussions with potential shippers to secure additional shipping commitments for the project.

 

2007

 

Pipeline Developments

 

·             February 9, 2007.  TCPL received approval from the NEB to transfer a section of its Canadian Mainline transmission facilities to the Keystone Oil Pipeline project to transport crude oil from Alberta to refining centres in the U.S. Midwest and to construct and operate new oil pipeline facilities in Canada.  TCPL announced in January 2007 the start of a binding open season for an expansion and extension of the proposed Keystone Oil Pipeline.  The purpose of the open season was to obtain binding commitments to support the expansion of the proposed Keystone Oil Pipeline from approximately 435,000 Bbl/d to 591,000 Bbl/d and the construction of a 468 kilometre extension of the U.S. portion of the pipeline.

 

·             February 22, 2007. TCPL closed its acquisitions of American Natural Resources Company and ANR Storage Company (collectively, “ANR”) and acquired an additional 3.6 per cent interest in Great Lakes Gas Transmission Limited Partnership (“Great Lakes”) from El Paso Corporation for a total of US$3.4 billion, subject to certain post-closing adjustments, including approximately US$491 million of assumed long-term debt.  Additionally, TCPL increased its ownership in TC PipeLines, LP to 32.1 per cent in conjunction with the TC PipeLines, LP acquisition of a 46.4 per cent interest in Great Lakes.  The acquisition was financed partly through an offering of 39,470,000 subscription receipts at $38.00 per subscription receipt, which resulted in gross proceeds to TCPL of approximately $1.725 billion including the exercise of an over-allotment option granted to the underwriters.  Upon closing of the acquisition of ANR, the subscription receipts were automatically exchanged, without the payment of any additional consideration by the subscribers, on a one-to-one basis for common shares of TransCanada (“Common Shares”).

 

·             December 2007. ConocoPhillips contributed $207 million to acquire a 50 per cent ownership interest in the Keystone Oil Pipeline.

 

Regulatory Matters

 

·             February 2007. TCPL received approval from the NEB to integrate its natural gas pipeline system in southern British Columbia with its natural gas pipeline systems in southern Alberta and southwestern Saskatchewan (collectively, the “Foothills System”) effective April 1, 2007.

 


 

TRANSCANADA PIPELINES LIMITED      7

 

 

·             May 2007. TCPL’s five-year settlement with interested stakeholders for the years 2007 to 2011 on its Canadian Mainline was approved by the NEB.  The settlement reflects, among other things, a deemed common equity ratio of 40 per cent.

 

Further information about developments in the Pipelines business can be found in the MD&A under the headings “TCPL’s Strategy”, “Pipelines – Highlights”, and “Pipelines – Opportunities and Developments”.

 

Developments in the Energy Business

 

TCPL has built a substantial energy business over the past decade and has achieved a major presence in power generation in selected regions of Canada and U.S. More recently, TCPL has also developed a substantial non-regulated natural gas storage business in Alberta.  Summarized below are significant developments that have occurred in TCPL’s energy business over the last three years.

 

2009

 

Energy Developments

 

·             February 19, 2009.  The FERC approved two separate applications filed by TCPL on December 19, 2008 requesting approval to charge negotiated rates and to proceed with an open season in the spring of 2009 for each of the Zephyr (“Zephyr”) and Chinook (“Chinook”) transmission line projects.  Both projects are proposed 500 kilovolt high voltage direct current transmission projects.  Zephyr is a proposed 1,760 km (1,100 mile) transmission line that would originate in Wyoming, and Chinook is a proposed 1,600 km (1,000 mile) project that would originate in Montana.  Both projects would terminate in Nevada, and it is anticipated that each would deliver primarily wind generated electricity to markets in the southwestern United States.  The open seasons commenced on October 13, 2009 and closed in December 2009.  A comprehensive review of the bids submitted for each project will be undertaken.

 

·             April 2009.  Portlands Energy Centre, a natural gas fired combined-cycle power plant near downtown Toronto, Ontario (“Portlands Energy Centre”) was fully commissioned, ahead of time and under budget.  Portlands Energy Centre, which is 50 per cent owned by TCPL, is able to provide 550 MW of electricity under a 20 year Accelerated Clean Air Supply contract with the Ontario Power Authority.

 

·             June 9, 2009.  Hydro-Québec Distribution notified the Régie the L’énergie that it would exercise its option to extend the suspension of all electricity generation from TCPL’s 550 MW Bécancour cogeneration power plant near Trois-Rivières, Québec (“Bécancour”) through 2010.  This followed on TCPL’s agreement with Hydro-Québec Distribution to temporarily suspend all electricity generation from Bécancour during 2009. TCPL will continue to receive payments under the agreement similar to those that would have been received under the normal course of operation.

 

·             July 2009.  Bruce Power and the Ontario Power Authority amended certain terms and conditions included in the Bruce Power Refurbishment Implementation Agreement.  The amendments are consistent with the intent of the agreement, originally signed in 2005, and recognize the significant changes in Ontario’s electricity market.  Under the original agreement, Bruce Power A L.P. (“Bruce A”) committed to refurbish and restart the currently idle Units 1 and 2, extend the operating life of Unit 3 and replace the steam generators on Unit 4.  An amendment in 2007 provided for a full refurbishment of Unit 4, which will extend the expected operating life of the unit.  This most recent amendment included amendments to the Bruce Power L.P. (“Bruce B”) floor price mechanism, the removal of a support payment cap for Bruce A, an amendment to the capital cost-sharing mechanism, and provision for deemed generation payments to Bruce Power at the contract prices under circumstances where generation from Bruce A and Bruce B is reduced due to system curtailments on the Independent Electricity System Operator controlled grid in Ontario.  The Bruce A Unit 1 and 2 refurbishment and restart project continues.  Unit 2 is expected to be restarted in mid-2011 with the Unit 1 restart to follow approximately four months later.  TCPL expects its share of the capital costs to complete the project to be approximately $2 billion.  Bruce Power continues to advance an initiative to further extend the operating lives of Units 3 and 4.  Unit 4 is now expected to continue to operate beyond 2018 and plans are in place to implement an extensive maintenance program that, if successful and approved by the Canadian Nuclear Safety Commission, would result in the life of Unit 3 being extended for a similar period of time.

 

·             August 2009.  TCPL began construction of the US$500 million Coolidge Generating Station (“Coolidge”), a 575 MW simple-cycle natural gas-fired peaking power generation station to be located 72 km (45 miles) southeast of Phoenix in Coolidge, Arizona.  The facility is expected to be placed in service in second quarter 2011.

 



 

TRANSCANADA PIPELINES LIMITED      8

 

 

·             September 30, 2009.  The Ontario Power Authority advised TCPL that it was awarded a 20-year clean energy supply contract to build, own and operate the 900 MW Oakville Generating Station in Oakville, Ontario.  TCPL expects to invest approximately $1.2 billion in the natural gas fired combined cycle plant which is scheduled to be in service in first quarter 2014.  Commencement of construction of the project is dependent on receipt of permits and approvals from the municipal authority and on approval from the Ministry of Environment on impacts such as air quality and noise.

 

·             October 9, 2009.  Operations began at the Kibby Wind Power Project in northern Franklin County, Maine, with half of the project’s 44 wind turbines operational by October 30, 2009.  The second phase is under construction and is expected to be in service in third quarter 2010.  The Kibby Wind Power Project is expected to have the capacity to produce 132 MW.  Capital cost is expected to be approximately US$320 million.

 

·             Third quarter 2009.  Construction activity began on the 212 MW Gros-Morne and 58 MW Montagne-Sèche wind farms.  These are the fourth and fifth Québec–based wind farms of a wind energy project contracted by Hydro- Québec Distribution in the Gaspé Region of Québec (the “Cartier Wind Energy Project”), which is 62 per cent owned by TCPL.  The Montagne-Sèche project and phase one of the Gros-Morne project (101 MW) are expected to be operational by 2011.  Phase two of the Gros-Morne project (111 MW) is expected to be operational by 2012.

 

Regulatory Matters

 

·             April 13, 2009.  The United States Secretary of Commerce issued its decision denying the appeal filed by Broadwater Energy, LLC on the ruling by the New York State Department of State (“NYSDOS”) regarding the Broadwater liquefied natural gas (“LNG”) project (“Broadwater”).  A joint venture with Shell U.S. Gas & Power LLC, Broadwater is a proposed offshore LNG facility in Long Island Sound, New York, which received approval by FERC in March 2008. In April 2008, NYSDOS determined that construction and operation of the project would not be consistent with the state’s coastal zone policies.  Broadwater Energy, LLC filed the appeal on the decision of the NYSDOS on June 6, 2008, asking the Secretary of Commerce to override the NYSDOS decision on the basis that the project meets the criteria for approval under the Coastal Zone Management Act and applicable regulations.

 

2008

 

Energy Developments

 

·             January 2008. A milestone in the Bruce A Units 1 and 2 refurbishment and restart project was completed when the sixteenth and final new steam generator was installed.  This process was expected to result in a further increase in the total project cost to complete the Unit 1 and 2 restart. Project cost increases are subject to the capital cost-sharing mechanism under the agreement with the Ontario Power Authority, as amended in July 2009.  Bruce A Units 1 and 2 are expected to produce 1,500 MW when completed.

 

·             February 2008. The potential anchor LNG supplier for the Cacouna LNG project (“Cacouna”) terminal in Québec announced it would no longer be pursuing the development of its LNG supply as originally planned. Although Cacouna received its primary regulatory approvals, project development has been suspended until alternate LNG supply is acquired and the North American market for LNG grows.

 

·             April 2008.  A comprehensive review of costs to complete the Bruce A Units 1 and 2 refurbishment and restart project was completed.  Based on this assessment, the capital cost for the restart and refurbishment of Bruce A Units 1 and 2 was expected to be approximately $3.4 billion, up from an original 2005 cost estimate of $2.75 billion.  TCPL’s share was expected to be approximately $1.7 billion compared to an original estimate of $1.4 billion.

 

·             May 12, 2008.  TCPL announced that the Phoenix, Arizona based utility, Salt River Project Agricultural Improvement and Power District, signed a 20 year power purchase agreement to secure 100 per cent of the output from Coolidge.  In December 2008, the Arizona Corporation Commission granted a Certificate of Environmental Compatibility approving Coolidge.

 

·             July 9, 2008.  TCPL announced that the Kibby Wind Power Project received unanimous final development plan approval from Maine’s Land Use Regulation Commission.  Construction on the project began in July 2008.  Commissioning of the first phase occurred in October 2009.

 

·             August 26, 2008.  TCPL completed its acquisition of the 2,480 MW Ravenswood Generating Station (“Ravenswood”) located at Queen’s, New York for US$2.9 billion, subject to certain post-closing adjustments.  The acquisition was completed pursuant to a purchase agreement with KeySpan Corporation and certain subsidiaries.  The acquisition was financed through a combination of equity and term debt offerings, funds drawn on a newly established bridge loan facility and cash on hand (see “Financing Activities” below).

 



 

TRANSCANADA PIPELINES LIMITED      9

 

 

·             November 22, 2008.  The Carleton wind farm, the third of five phases of the Cartier Wind Energy Project, went into service and is capable of generating 109 MW of power.

 

·             In fourth quarter 2008, Bruce Power completed a review of the end of life estimates for Units 3 and 4.  As a result of the review, Unit 3 was expected to be in commercial service until 2011, providing an additional two years of generation before refurbishment.  After the refurbishment, the end of life estimate for Unit 3 was to be extended to 2038.  The review also showed that Unit 4 was expected to remain in commercial service until 2016, providing seven years of generation before refurbishment after which the end of life estimate for Unit 4 was expected to be extended to 2042.

 

Regulatory Matters

 

·             January 11, 2008.  The FERC issued its FEIS for Broadwater.  The FEIS confirmed project need, supported the location of the project with acknowledgement of its target market and delivery goals, and found safety and security risks to be limited and acceptable.  The FEIS concluded that with adherence to federal and state permit requirements and regulations, Broadwater’s proposed mitigation measures and the FERC’s recommendations, the project would not result in a significant impact on the environment.

 

·             March 24, 2008.  FERC authorized the construction and operation of Broadwater, subject to the conditions reflected in the authorization.  On April 10, 2008, the NYSDOS determined that construction and operation of the project would not be consistent with the state’s coastal zone policies.  As a result of this unfavourable decision, TCPL wrote down $27 million after tax of costs for Broadwater that had been capitalized to March 31, 2008.  On June 6, 2008, Broadwater Energy, LLC filed an appeal with the United States Secretary of Commerce.

 

2007

 

Energy Developments

 

·             June 2007.  Following public hearings in 2006, the Québec government granted a provincial decree approving Cacouna.  Cacouna also received federal approvals pursuant to the Canadian Environmental Assessment Act.

 

·             September 2007.  Cacouna announced that it was delaying the planned in-service date for the regasification terminal from 2010 to 2012. This delay resulted from a need to assess impacts of permit conditions, to review the facility design in light of escalating costs and to align the schedule with potential LNG supply facilities.

 

·             November 2007.  The second phase of the Cartier Wind Energy Project, the 101 MW Anse-à-Valleau wind farm, was placed into service.  In addition, the Cartier Wind Energy Project began construction of a third project, the 109 MW Carleton wind farm.

 

Further information about developments in the Energy business can be found in the MD&A under the headings “TransCanada’s Strategy”, “Energy – Highlights” and “Energy – Opportunities and Developments”.

 

Financing Activities

 

2009

 

·             January 6, 2009.  TCPL entered into an underwriting agreement with a syndicate of underwriters led by Citigroup Global Markets Inc. and HSBC Securities (USA) Inc. under which the underwriters agreed to purchase from TCPL and sell to the public US$750 million and US$1.25 billion of Senior Unsecured Notes maturing on January 15, 2019 and January 15, 2039, respectively, and bearing interest at 7.125 per cent and 7.625 per cent, respectively.  The offering was completed on January 9, 2009.  The proceeds from this offering were used to partially fund TCPL’s capital projects, retire maturing debt obligations and for general corporate purposes.  These notes were issued by way of prospectus supplement under a US$3.0 billion debt base shelf prospectus filed on January 2, 2009.

 

·             February 17, 2009.  TCPL completed the issuance of $300 million and $400 million of Medium-Term Notes maturing on February 14, 2014 and February 17, 2039, respectively, and bearing interest at 5.05 per cent and 8.05 per cent, respectively.  The proceeds from these notes were used to fund the Alberta System and Canadian Mainline rate bases.  These notes were issued by way of pricing supplements under a $1.5 billion debt base shelf prospectus filed in March, 2007.

 

·             June 16, 2009.  TransCanada entered into an underwriting agreement with a syndicate of underwriters led by RBC Capital Markets, BMO Capital Markets and TD Securities Inc. under which the underwriters agreed to purchase from

 



 

TRANSCANADA PIPELINES LIMITED      10

 

 

TransCanada 50,800,000 common shares of TransCanada (referred to in this section as “Common Shares”) and sell the Common Shares to the public at a purchase price of $31.50 per Common Share.  The underwriters were also granted an over-allotment option to purchase an additional 7,620,000 Common Shares at the same price.  The offering was completed on June 24, 2009 and, together with the full exercise of the over-allotment option by the underwriters, 58,420,000 Common Shares were issued resulting in gross proceeds to TransCanada of approximately $1.84 billion which were used to partially fund capital projects, including the acquisition of the remaining interests in the Keystone Oil Pipeline system, for general corporate purposes and to repay short-term indebtedness.  These shares were issued by way of prospectus supplement to a $3.0 billion base shelf prospectus dated July 2, 2008.

 

·             September 22, 2009.  TransCanada entered into an underwriting agreement with a syndicate of underwriters led by Scotia Capital Inc. and RBC Capital Markets, under which the underwriters agreed to purchase from TransCanada 22,000,000 cumulative redeemable first preferred shares, series 1 (“Series 1 Preferred Shares”) and sell the Series 1 Preferred Shares to the public at a purchase price of $25.00 per share.  The offering was completed on September 30, 2009 resulting in gross proceeds to TransCanada of $550 million which were used by TransCanada to partially fund capital projects, for general corporate purposes and to repay short-term indebtedness.  These shares were issued by way of prospectus supplement to a $3.0 billion base shelf prospectus dated September 21, 2009.

 

·             December 2009.  TransCanada PipeLine USA Ltd. established a US$1.0 billion committed, syndicated revolving credit facility maturing December 2012, with a one year term extension at the option of the borrower.  This facility is guaranteed by TCPL and was fully available at December 31, 2009.

 

2008

 

·             May 5, 2008.  TransCanada entered into an underwriting agreement with a syndicate of underwriters led by BMO Nesbitt Burns Inc., RBC Dominion Securities Inc., and TD Securities Inc. under which the underwriters agreed to purchase from TransCanada 30,200,000 Common Shares and sell the Common Shares to the public at a purchase price of $36.50 per Common Share.  The underwriters were also granted an over-allotment option to purchase an additional 4,530,000 Common Shares at the same price.  The offering was completed on May 13, 2008 and together with the full exercise of the over-allotment option by the underwriters, 34,730,000 Common Shares were issued resulting in gross proceeds to TCPL of approximately $1.27 billion to be used to partially fund acquisitions and capital projects of TCPL including, amongst others, the acquisition of Ravenswood, the construction of the Keystone Oil Pipeline, and for general corporate purposes.  These Common Shares were issued by way of prospectus supplement under a $3.0 billion base shelf prospectus filed in January, 2007.

 

·             June 27, 2008.  TCPL executed an agreement with a syndicate of banks for a US$1.5 billion, committed, unsecured, one-year bridge loan facility which was extendible by the Company for an additional six month term.  On August 25, 2008, TCPL used US$255 million from this facility to fund a portion of the Ravenswood acquisition and cancelled the remainder of the commitment.  In February 2009, the US$255 million was repaid and the facility was cancelled.

 

·             August 6, 2008.  TCPL entered into an underwriting agreement with a syndicate of underwriters led by Citigroup Global Markets Inc. and J.P. Morgan Securities Inc. under which the underwriters agreed to purchase from TCPL and sell to the public US$850 million and US$650 million of Senior Unsecured Notes maturing on August 15, 2018 and August 15, 2038, respectively, and bearing interest at 6.50 per cent and 7.25 per cent, respectively.  The offering was completed on August 11, 2008.  The proceeds from these notes were used to partially fund the Ravenswood acquisition and for general corporate purposes.  These notes were issued by way of prospectus supplement under a US$2.5 billion debt base shelf prospectus filed in September, 2007.

 

·             August 20, 2008.  TCPL completed the issuance of $500 million of Medium-Term Notes maturing in August 2013 and bearing interest at 5.05 per cent.  The proceeds from these notes were used to partially fund the Alberta System’s capital program and for general corporate purposes.  These notes were issued by way of a pricing supplement under a $1.5 billion debt base shelf prospectus filed in March, 2007.

 

·             November 17, 2008.  TransCanada entered into an underwriting agreement with a syndicate of underwriters led by RBC Dominion Securities Inc., BMO Nesbitt Burns Inc., and TD Securities Inc. under which the underwriters agreed to purchase from TransCanada 30,500,000 Common Shares and sell the Common Shares to the public at a purchase price of $33.00 per Common Share.  The underwriters were also granted an over-allotment option to purchase an additional 4,575,000 Common Shares at the same price.  The offering was completed on November 25, 2008 and resulted in gross proceeds to TCPL of approximately $1 billion to be used by TCPL to partially fund its capital projects, including the Keystone Oil Pipeline, for general corporate purposes and to repay short-term indebtedness.  The syndicate of underwriters fully exercised the over-allotment option on December 5, 2008 for additional gross

 



 

TRANSCANADA PIPELINES LIMITED      11

 

 

proceeds to TCPL of $151 million.  The Common Shares were issued by way of prospectus supplement under a $3.0 billion base shelf prospectus filed in July 2008.

 

·             November 2008.  Keystone U.S. established a US$1.0 billion committed, syndicated revolving credit facility, guaranteed by TCPL, maturing November 2010 but extendible to November 2011 at the option of the borrower.  The facility was fully available at December 31, 2009 and supports a commercial paper program dedicated to funding a portion of expenditures for Keystone U.S. and for Keystone U.S. general partnership purposes.

 

Further information about financing activities can be found in the MD&A under the headings “Short-Term Debt Financing Activities”, “2009 Long-Term Debt Financing Activities”, “2008 Long-Term Debt Financing Activities”, “2007 Long-Term Debt Financing Activities”, “2009 Equity Financing Activities”, “2008 Equity Financing Activities” and “2007 Equity Financing Activities”.

 

BUSINESS OF TCPL

 

TCPL is a leading North American energy infrastructure company focused on pipelines and energy.  At Year End, Pipelines accounted for approximately 53 per cent of revenues and 67 per cent of TCPL’s total assets and Energy accounted for approximately 47 per cent of revenues and 28 per cent of TCPL’s total assets.  The following is a description of each of TCPL’s two main areas of operation.

 

The following table shows TCPL’s revenues from operations by segment, classified geographically, for the years ended December 31, 2009 and 2008.

 

 Revenues From Operations (millions of dollars)

 

2009

 

 

2008

 

 Pipelines

 

 

 

 

 

 

Canada - Domestic

 

$2,389

 

 

$2,005

 

Canada - Export(1)

 

755

 

 

1,123

 

United States

 

1,585

 

 

1,522

 

 

 

4,729

 

 

4,650

 

 Energy(2)

 

 

 

 

 

 

Canada - Domestic

 

2,788

 

 

2,594

 

Canada - Export(1)

 

1

 

 

2

 

United States

 

1,448

 

 

1,373

 

 

 

4,237

 

 

3,969

 

 Total Revenues(3)

 

$8,966

 

 

$8,619

 

 

(1)          Exports include pipeline revenues attributable to deliveries to U.S. pipelines and power deliveries to U.S. markets.

 

(2)          Revenues include sales of natural gas.

 

(3)          Revenues are attributed to countries based on country of origin of product or service.

 

Pipelines Business

 

TCPL is a leader in the responsible development and reliable operation of North American energy infrastructure including natural gas pipelines, regulated gas storage facilities and projects related to oil pipelines.  TCPL’s network of wholly owned pipelines extends more than 60,000 km (37,282 miles), tapping into virtually all major gas supply basins in North America.

 

TCPL has substantial Canadian and U.S. natural gas pipeline and related holdings, and one oil pipeline project, including those listed below.  The following pipelines are owned 100 per cent by TCPL unless otherwise stated.

 

Canada

 

·             TCPL’s Canadian Mainline is a 14,101 km (8,762 mile) natural gas transmission system in Canada that extends from the Alberta/Saskatchewan border east to the Québec/Vermont border and connects with other natural gas pipelines in Canada and the U.S.

 

·             TCPL’s Alberta System is a natural gas transmission system in Alberta which gathers natural gas for use within the province and delivers it to provincial boundary points for connection with the Canadian Mainline and the Foothills System and with third party natural gas pipelines.  The 23,905 km (14,854 mile) system is one of the largest carriers of natural gas in North America.

 



 

TRANSCANADA PIPELINES LIMITED      12

 

 

·             Keystone Oil Pipeline is a 3,456 km (2,147 mile) crude oil pipeline project that will initially transport crude oil from Hardisty, Alberta to U.S. Midwest markets at Wood River and Patoka, Illinois, and to Cushing, Oklahoma.  Commissioning of the segment to Wood River and Patoka began in late 2009 and commercial operation is expected to commence in mid-2010.  Commissioning of the segment to Cushing is expected to begin in late 2010 and operations expected to commence in first quarter 2011.  Pending regulatory approval, an expansion to the United States Gulf Coast is expected to be completed and in service in first quarter 2013, adding approximately 2,720 km (1,690 miles) of pipe to the system.  In August of 2009, TCPL became the sole owner of the Keystone Oil Pipeline system.

 

·             TCPL’s Foothills System is a 1,241 km (771 mile) natural gas transmission system in Western Canada which carries natural gas for export from central Alberta to the U.S. border to serve markets in the U.S. Midwest, Pacific Northwest, California and Nevada. Effective April 1, 2007, the B.C. System was integrated into the Foothills System.

 

·             TransCanada Pipeline Ventures LP owns a 161 km (100 mile) pipeline and related facilities that supply natural gas to the oilsands region of northern Alberta as well as a 27 km (17 mile) pipeline that supplies natural gas to a petrochemical complex at Joffre, Alberta.

 

·             TQM is 50 per cent owned by TCPL. TQM is a 572 km (355 mile) pipeline system that connects with the Canadian Mainline and transports natural gas from Montréal to Québec City in Québec, and connects with the Portland System. TQM is operated by TCPL.

 

United States

 

·             TCPL’s ANR System (“ANR System”) is a 17,000 km (10,563 mile) natural gas transmission system which transports natural gas from producing fields located primarily in Texas and Oklahoma on its southwest leg and in the Gulf of Mexico and Louisiana on its southeast leg.  The system extends to markets located mainly in Wisconsin, Michigan, Illinois, Ohio and Indiana. ANR’s natural gas pipeline also connects with other natural gas pipelines providing access to diverse sources of North American supply, including Western Canada, and the mid-continent and Rocky Mountain supply regions, and a variety of markets in the Midwestern and northeastern U.S.

 

·             Underground gas storage facilities owned and operated by ANR provide regulated gas storage services to customers on the ANR System and the Great Lakes System in upper Michigan.  In 2008, ANR completed its storage enhancement project and added 14 billion cubic feet (“Bcf”) of storage.  In total, the ANR business unit operates sixteen underground natural gas storage facilities throughout the State of Michigan with total natural gas storage capacity of 250 Bcf.

 

·             The GTN System (“GTN System”) is TCPL’s natural gas transmission system which extends 2,174 km (1,351 miles) and links the Foothills System and Rocky Mountain sourced natural gas with third party natural gas pipelines in Washington, Oregon and California, and with the Tuscarora Gas Transmission Company (“Tuscarora”) pipeline.

 

·             Bison pipeline is a proposed 487 km (303 mile) natural gas pipeline from the Powder River Basin in Wyoming connecting to the Northern Border Pipeline System in North Dakota.  The FERC issued a FEIS for Bison in December 2009 and the project is in the final stages of the regulatory approval process.  TCPL expects to begin construction in May 2010.  The Bison pipeline has shipping commitments for approximately 407 MMcf/d and is expected to be placed in-service in fourth quarter 2010.

 

·             The Great Lakes System is owned 53.6 per cent by TCPL and 46.4 per cent by TC PipeLines, LP. The 3,404 km (2,115 mile) Great Lakes System serves markets primarily in Central Canada and the Midwestern U.S.  TCPL operates the Great Lakes System and effectively owns 71.3 per cent of the system through its 53.6 per cent ownership interest and its indirect ownership, which it has through its 38.2 per cent interest in TC PipeLines, LP.

 

·             The Northern Border Pipeline System (“NBPL System”) is 50 per cent owned by TC PipeLines, LP and is a 2,250 km (1,398 mile) natural gas transmission system, which serves the U.S. Midwest. TCPL operates and effectively owns 19.1 per cent of the NBPL System through its 38.2 per cent interest in TC PipeLines, LP.

 

·             Tuscarora is 100 per cent owned by TC PipeLines, LP and has a 491 km (305 mile) pipeline system transporting natural gas from the GTN System at Malin, Oregon to Wadsworth, Nevada (the “Tuscarora System”) with delivery points in northeastern California and northwestern Nevada.  TCPL operates the Tuscarora System and effectively owns 38.2 per cent of the system through its 38.2 per cent interest in TC PipeLines, LP.

 

·             North Baja is 100 per cent owned by TC PipeLines, LP and is a natural gas transmission system which extends 129 km (80 miles) from Ehrenberg in southwestern Arizona to a point near Ogilby, California on the California/Mexico

 



 

TRANSCANADA PIPELINES LIMITED     13

 

 

border and connects with a third party natural gas pipeline system in Mexico.  TCPL operates the North Baja system and effectively owns 38.2 per cent of the system through its 38.2 per cent interest in TC PipeLines, LP.

 

·             The Iroquois Gas Transmission System (“Iroquois System”) connects with the Canadian Mainline near Waddington, New York and delivers natural gas to customers in the northeastern U.S. TCPL has a 44.5 per cent ownership interest in this 666 km (414 mile) pipeline system.

 

·             The Portland System is a 474 km (295 mile) pipeline that connects with TQM near East Hereford, Québec and delivers natural gas to customers in the northeastern U.S. TCPL has a 61.7 per cent ownership interest in the Portland System and operates this pipeline.

 

·             TCPL holds a 38.2 per cent interest in TC PipeLines, LP, a publicly held limited partnership of which a subsidiary of TCPL acts as the general partner. The remaining interest of TC PipeLines, LP is widely held by the public.  TC PipeLines, LP owns a 50 per cent interest in the NBPL System, 46.4 per cent in the Great Lakes System, 100 per cent of Tuscarora and 100 per cent of North Baja.

 

International

 

TCPL also has the following natural gas pipeline and related holdings in Mexico and South America:

 

·             TransGas is a 344 km (214 mile) natural gas pipeline system which runs from Mariquita in the central region of Colombia to Cali in the southwest of Colombia. TCPL holds a 46.5 per cent ownership interest in this pipeline.

 

·             Gas Pacifico is a 540 km (336 mile) natural gas pipeline extending from Loma de la Lata, Argentina to Concepción, Chile. INNERGY is an industrial natural gas marketing company based in Concepción that markets natural gas transported on Gas Pacifico.  TCPL holds a 30 per cent ownership interest both in Gas Pacifico and INNERGY.

 

·             Tamazunchale is a 130 km (81 mile) natural gas pipeline in east-central Mexico which extends from the facilities of Pemex Gas near Naranjos, Veracruz to an electricity generating station near Tamazunchale, San Luis Potosi.

 

·             The proposed Guadalajara Pipeline is under construction and when completed will extend approximately 305 km (190 miles) from Manzanillo on Mexico’s Pacific coast to Guadalajara.

 

Further information about TCPL’s pipeline holdings, developments and opportunities and significant regulatory developments which relate to pipelines can be found in the MD&A under the headings “Pipelines”, “Pipelines – Opportunities and Developments” and “Pipelines – Financial Analysis”.

 

Regulation of the Pipeline Business

 

Canada

 

CANADIAN MAINLINE, TQM, FOOTHILLS AND ALBERTA SYSTEMS

 

Under the terms of the National Energy Board Act (Canada), the Canadian Mainline, TQM, Foothills, and Alberta Systems (collectively, the “Systems”) are regulated by the NEB (the Alberta System became subject to federal jurisdiction on April 29, 2009 following NEB approval of an application by TransCanada).  The NEB sets tolls which provide TCPL the opportunity to recover projected costs of transporting natural gas, including the return on the average investment base for each of the Systems.  In addition, new facilities are approved by the NEB before construction begins and the NEB regulates the operations of each of the Systems.  Net earnings of the Systems may be affected by changes in investment base, the allowed return on equity, the level of deemed common equity and any incentive earnings.

 

KEYSTONE OIL PIPELINE

 

The NEB regulates the terms and conditions of service, including rates, and the physical operation of the Canadian portion of the Keystone Oil Pipeline.  NEB approval is also required for facility additions, such as the Canadian portion of the proposed Gulf Coast expansion project, which was sought through an application in 2009.  The NEB is expected to issue a decision in first quarter 2010.

 



 

TRANSCANADA PIPELINES LIMITED     14

 

 

United States

 

TCPL’s wholly owned and partially owned U.S. pipelines, including the ANR System, the GTN System, the Great Lakes System, the Iroquois System, the Portland System, the NBPL System, North Baja and the Tuscarora System, are “natural gas companies” operating under the provisions of the Natural Gas Act of 1938 and the Natural Gas Policy Act of 1978, and are subject to the jurisdiction of the FERC.  The Natural Gas Act of 1938 grants the FERC authority over the construction and operation of pipelines and related facilities.  The FERC also has authority to regulate rates for natural gas transportation and interstate commerce.

 

The FERC also regulates the terms and conditions of service, including rates, on the U.S. portion of the Keystone Oil Pipeline. However, primary approvals for any facility additions to the Keystone Oil Pipeline are obtained from state agencies.

 

Energy Business

 

The Energy segment of TCPL’s business includes the acquisition, development, construction, ownership and operation of electrical power generation plants, the purchase and marketing of electricity, the provision of electricity account services to energy and industrial customers, the development, construction and ownership and operation of non-regulated natural gas storage in Alberta.

 

The electrical power generation plants and power supply that TCPL has an interest in, including those under development, in the aggregate, represent more than 11,700 MW of power generation capacity.  Power plants and power supply in Canada account for approximately 63 per cent of this total, and power plants in the U.S. account for the balance, being approximately 37 per cent.

 

TCPL owns and operates the following facilities:

 

·             Ravenswood, located in Queen’s, New York, is a 2,480 MW power plant that consists of multiple units employing steam turbine, combined cycle and combustion turbine technology.  Ravenswood has the capacity to serve approximately 21 per cent of New York City’s peak load.

 

·             TC Hydro, TCPL’s hydroelectric facilities located in New Hampshire, Vermont and Massachusetts on the Connecticut and Deerfield Rivers consists of 13 stations and associated dams and reservoirs with a total generating capacity of 583 MW.

 

·             Ocean State Power, a 560 MW natural gas-fired, combined-cycle facility in Burrillville, Rhode Island.

 

·             Bécancour, a 550 MW natural gas-fired cogeneration power plant located near Trois-Rivières, Québec. The entire power output is supplied to Hydro-Québec Distribution under a 20-year power purchase contract expiring in 2026.  Steam is also sold to an industrial customer for use in commercial processes.  Since 2008, electricity generation at the Bécancour power plant has been temporarily suspended due to an agreement entered into with Hydro-Québec.  Under this agreement, TCPL continues to receive payments similar to those that would have been received under the normal course of operation.

 

·             Natural gas-fired cogeneration plants in Alberta at Carseland (80 MW), Redwater (40 MW), Bear Creek (80 MW) and MacKay River (165 MW).

 

·             Grandview, a 90 MW natural gas-fired cogeneration power plant located on the site of the Irving Oil Limited oil refinery in Saint John, New Brunswick.  Irving Oil Limited is under a 20 year tolling arrangement that expires in 2025, to supply fuel for the plant and to contract 100 per cent of the plant’s heat and electricity output.

 

·             Cancarb, a 27 MW facility located in Medicine Hat, Alberta fuelled by waste heat from TCPL’s adjacent thermal carbon black facility.

 

·             Edson, an underground natural gas storage facility connected to the Alberta System near Edson, Alberta.  The facility’s central processing system is capable of maximum injection and withdrawal rates of 725 MMcf/d of natural gas. Edson has a working natural gas storage capacity of approximately 50 Bcf.

 

TCPL has the following long-term power purchase arrangements in place:

 

·             TCPL has the rights to 100 per cent of the generating capacity of the 560 MW Sundance A coal-fired power generation facility under a Power Purchase Agreement (“PPA”) that expires in 2017.  TCPL also has the rights to 50 per cent of the generating capacity of the 706 MW Sundance B facility under a PPA, which expires in 2020 (“Sundance”).  The Sundance facilities are located in south-central Alberta.

 


 

TRANSCANADA PIPELINES LIMITED      15

 

 

·             The Sheerness facility, which consists of two 390 MW coal-fired thermal power generating units, is located in southeastern Alberta.  TCPL has the rights to 756 MW of generating capacity from the Sheerness PPA that expires in 2020 (“Sheerness”).

 

TCPL has interests in the following:

 

·             Two nuclear power generating stations, Bruce A, which is owned 48.8 per cent by TCPL and has four 750 MW reactors, of which two are currently operating and two are being refurbished, and Bruce B, which is owned 31.6 per cent by TCPL and has four operating reactors with a combined capacity of approximately 3,200 MW.  Bruce Power is two partnerships with generating facilities and offices located on 2,300 acres northwest of Toronto, Ontario on which are housed Bruce A and Bruce B.

 

·             A 60 per cent ownership in CrossAlta, which is a 68 Bcf underground natural gas storage facility connected to the Alberta System near Crossfield, Alberta.  The facility’s central processing system is capable of maximum injection and withdrawal rates of 550 MMcf/d of natural gas.

 

·             A 62 per cent interest in the Carleton (109 MW), Anse-à-Valleau (101 MW), and Baie-des-Sables (110 MW) wind farms, the first three phases of the Cartier Wind Energy Project, which commenced commercial operation in November 2008, November 2007 and November 2006, respectively.

 

·             The Portlands Energy Centre, a 550 MW, combined-cycle natural gas generation power plant located in Toronto, Ontario is 50 per cent owned by TCPL. The plant went into service in simple-cycle mode, capable of delivering 340 MW of electricity in the summer of 2008 and was fully commissioned in April of 2009.  This facility provides power under a 20 year Accelerated Clean Energy Supply contract with the Ontario Power Authority.

 

TCPL owns the following facilities which are under construction or development:

 

·             Oakville Generating Station, a proposed 900 MW natural gas fired combined cycle plant in Oakville, Ontario.  TCPL was awarded a 20-year clean energy supply contract to build, own and operate the Oakville Generating Station in September 2009.  TCPL expects to invest approximately $1.2 billion in the project which is scheduled to be in service in first quarter 2014.

 

·             The Cartier Wind Energy Project consists of five wind projects in the Gaspé region of Québec contracted by Hydro-Québec Distribution representing a total of 590 MW when all five wind projects are complete.  Three of the wind farms are constructed and in service as noted above, and two are currently under construction.  The two remaining projects are expected to be placed in service at the end of 2011 and 2012, respectively and have a generating capacity of 270 MW, subject to the necessary approvals.  Cartier Wind is 62 per cent owned by TCPL.  All of the power produced by Cartier Wind Energy Project is sold to Hydro-Québec Distribution under a 20-year power purchase agreement.  In fourth quarter 2009, the proposed 150 MW Les Méchins wind farm project was cancelled due to unavailability of cost-effective wind turbines and difficulty reaching acceptable agreements with private landowners.  This decision has no impact on the other Cartier Wind Energy projects.

 

·             A 683 MW natural gas-fired power plant near the town of Halton Hills, Ontario is under construction and is expected to be placed in service in the third quarter of 2010.  All of the power produced by the facility is contracted to be sold to the Ontario Power Authority under a 20-year clean energy supply contract.

 

·             The Coolidge generating station is a simple-cycle, natural gas-fired peaking power generation station under development in Coolidge, Arizona.  Based on optimal operating conditions, TCPL expects an electrical output of approximately 575 MW from this facility, designed to provide a quick response to peak power demands.  The project has received its required permits, construction commenced in August 2009 and the project is expected to be placed in service in second quarter 2011.  The power output will be supplied to the Phoenix, Arizona based Salt River Project Agricultural Improvement and Power District under a 20-year power purchase contract.

 

·             The 132 MW Kibby wind power project is under construction and is planned to include 44 turbines located in Kibby and Skinner townships in Maine.  Construction began in July 2008 and commissioning of the first phase occurred in October 2009 with half the turbines operational and a generating capacity of 66 MW, and the second phase which consists of the remaining 22 turbines is expected to go into service in 2010 with a generating capacity of 66 MW.

 

Further information about TCPL’s energy holdings and significant developments and opportunities relating to energy can be found in the MD&A under the headings “Energy”, “Energy – Highlights”, “Energy –Financial Analysis”, and “Energy – Opportunities and Developments”.

 



 

TRANSCANADA PIPELINES LIMITED      16

 

 

GENERAL

 

Employees

 

At Year End, TCPL had approximately 4,165 full time active employees, substantially all of whom were employed in Canada and the U.S., as set forth in the following table.

 

Western Canada (excluding Calgary)

444

 

Calgary

1,832

 

Eastern Canada

258

 

U.S. West Coast

150

 

U.S. Mid West

476

 

U.S. Northeast

408

 

U.S. Southeast/Gulf Coast

201

 

Houston

387

 

Mexico and South America

9

 

Total

4,165

 

 

Social and Environmental Policies

 

Health, safety and environment (“HS&E”) are top priorities in all of TCPL’s operations and activities in these areas are guided by the Company’s HS&E Commitment Statement (the “Commitment Statement”).  The Commitment Statement outlines guiding principles for a safe and healthy environment for TCPL’s employees, contractors and the public, and for TCPL’s commitment to protect the environment.  All employees are held responsible and accountable for HS&E performance.  TCPL is committed to being an industry leader in conducting its business so that it meets or exceeds all applicable laws and regulations, and minimizes risk to people and the environment.  TCPL is committed to tracking and improving its HS&E performance, and to promoting safety on and off the job, in the belief that all occupational injuries and illnesses are preventable.  TCPL endeavors to do business with companies and contractors that share its perspective on HS&E performance, and to influence them to improve their collective performance.  TCPL is committed to respecting the diverse environments and cultures in which it operates, and to supporting open communication with the public, policy makers, scientists and public interest groups.

 

TCPL is committed to ensuring compliance with its internal policies and legislated requirements.  The HS&E Committee of TCPL’s board of directors (the “Board”) monitors compliance with the Company’s HS&E corporate policy through regular reporting.  TCPL’s HS&E management system is modeled on the International Organization for Standardization’s (“ISO”) standard for environmental management systems, ISO 14001, and focuses resources on the areas of significant risk to the organization’s HS&E business activities. Management is informed regularly of all important HS&E operational issues and initiatives through formal reporting processes.  TCPL’s HS&E management system and performance are assessed by an independent outside firm every three years.  The most recent assessment occurred in December 2009 and did not identify any material issues.  The HS&E management system also is subject to ongoing internal review to ensure that it remains effective as circumstances change.

 

In 2009, employee and contractor health and safety performance continued to be a top priority.  TCPL’s objective is a health and safety performance consistent with top quartile companies in its sectors.  Overall, the safety frequency rates in 2009 continued to be better than most industry benchmarks.

 

The safety and integrity of TCPL’s existing and newly developed energy infrastructure also continued to be top priorities.  All new assets are designed, constructed and commissioned with full consideration given to safety and integrity, and are not brought into service until all necessary requirements are satisfied.  The Company expects to spend approximately $181 million in 2010 for pipeline integrity on its wholly owned pipelines, which is $10 million higher than in 2009 primarily due to increased levels of in-line pipeline inspection on all systems.  Under the approved regulatory models in Canada, pipeline integrity expenditures on NEB regulated pipelines are treated on a flow-through basis and, as a result, have no impact on TCPL’s earnings.  Under the Keystone Oil Pipeline contracts, pipeline integrity expenditures are recovered through the tolling mechanism and, as a result, have no impact on TCPL’s earnings.  Expenditures for the GTN System may also be recovered through a cost recovery mechanism in its rates.  TCPL’s pipeline safety record in 2009 continued to be above industry benchmarks.  TCPL experienced three pipeline breaks in 2009.  The first occurred in a remote part of northern Alberta.  The other two occurred in rural parts of northern Ontario.  The breaks resulted in minimal impact with no injuries and only minor property damage in one of the incidents.  All three incidents were subject to a Level 3 investigation by the Transportation Safety Board of Canada.  Spending associated with public safety on the Energy assets is focused primarily on TCPL’s hydro dams and associated equipment, and is consistent with previous years.

 



 

TRANSCANADA PIPELINES LIMITED      17

 

 

Environmental Protection

 

TCPL’s facilities are subject to various federal, provincial, state and local statutes and regulations regarding environmental quality and pollution control.  TCPL has ongoing inspection programs designed to keep all of its facilities in compliance with environmental requirements and TCPL is confident that its systems are in material compliance with the applicable requirements.

 

In 2009, TCPL conducted environmental risk assessments and remediation work, as well as various retirement, reclamation and restoration activities on its Canadian and U.S. facilities.  At December 31, 2009, TCPL had recorded liabilities of approximately $91 million (2008 - $86 million) for remediation obligations and compliance costs associated with greenhouse gas (“GHG”) legislation, including contingencies.  The Company believes it has considered all necessary contingencies and established appropriate reserves for environmental liabilities, however, there is the risk that unforeseen matters may arise requiring the Company to set aside additional amounts.

 

TCPL is not aware of any material outstanding orders, claims or lawsuits against the Company in relation to the release or discharge of any material into the environment or in connection with environmental protection.

 

North American climate change policy continues to evolve at regional and national levels. In 2009, TCPL owned assets in three Canadian provinces where regulations exist to address industrial GHG emissions.  TCPL has put in place procedures to address these regulations.

 

In Alberta, under the Specified Gas Emitters Regulation, industrial facilities are required to reduce GHG emissions intensities by 12 per cent effective July 2007.  TCPL’s Alberta-based facilities are subject to this regulation, as are the Sundance and Sheerness coal-fired power facilities with which TCPL has power purchase agreements.  As an alternative to reducing emissions intensities, compliance can be achieved through the retirement of offsets or payments to a technology fund at a cost of $15 per tonne of carbon dioxide (“CO2”) emissions in excess of the mandated reduction.  A program is in place to manage the compliance costs incurred by these assets as a result of regulation. Compliance costs on the Alberta System are recovered through tolls paid by customers.  Recovery of compliance costs at TCPL’s power generation facilities in Alberta is dependent ultimately on market prices for electricity.  TCPL has estimated and recorded costs of $17 million for 2009.  These costs will be finalized when compliance reports are submitted in March 2010.

 

The hydrocarbon royalty in Québec is collected by the natural gas distributor on behalf of the Québec government through a green fund contribution charge on gas consumed. In 2009, the cost pertaining to the Bécancour facility arising from the hydrocarbon royalty was less than $1 million as a result of an agreement between TransCanada and Hydro-Québec to temporarily suspend the facility’s power generation. The cost is expected to increase substantially when the plant returns to service.

 

British Columbia’s carbon tax, which came into effect in mid-2008, applies to CO2 emissions arising from fossil fuel combustion. Compliance costs for fuel combustion at the Company’s compressor and meter stations in British Columbia are recovered through tolls paid by customers. Costs related to the carbon tax in 2009 were $3 million.  The cost per tonne of CO2 was $15 in 2009 and will increase to $20 per tonne and $25 per tonne in 2010 and 2011, respectively.

 

Northeastern U.S. states that are members of the Regional Greenhouse Gas Initiative (“RGGI”) implemented a CO2 cap and trade program for electricity generators effective January 1, 2009.  Under the RGGI, both the Ravenswood and Ocean State Power generation facilities will be required to submit allowances by December 31, 2011.  TCPL participated in the quarterly auctions of allowances for the Ravenswood and Ocean State power generation facilities and incurred related costs of $8 million in 2009.  These costs were generally recovered through the power market and the net impact on TCPL was not significant.

 

RISK FACTORS

 

Environmental Risk Factors

 

Environmental risks from TCPL’s operating facilities typically include: air emissions, such as nitrogen oxides, particulate matter and greenhouse gases; potential impacts on land, including land reclamation or restoration following construction; the use, storage or release of chemicals or hydrocarbons; the generation, handling and disposal of wastes and hazardous wastes; and water impacts such as uncontrolled water discharge.  Environmental controls including physical design, programs, procedures and processes are in place to effectively manage these risks and TCPL believes it has considered all necessary contingencies and established appropriate reserves for environmental liabilities.  However, there is the risk that unforeseen matters may arise requiring TCPL to set aside additional monies.

 



 

TRANSCANADA PIPELINES LIMITED      18

 

 

As mentioned above, TCPL’s operations are subject to various environmental laws and regulations that establish compliance and remediation obligations.  Compliance obligations can result in significant costs associated with installing and maintaining pollution controls, fines and penalties resulting from any failure to comply, and potential limitations on operations.  Remediation obligations can result in significant costs associated with the investigation and remediation of contaminated properties, some of which have been designated as Superfund sites by the United States Environmental Protection Agency under the Comprehensive Environmental Response, Compensation and Liability Act, and with damage claims arising out of the contamination of properties.  It is not possible for TCPL to estimate the amount and timing of all future expenditures related to environmental matters due to:

 

·             uncertainties in estimating pollution control and clean up costs, including at sites where only preliminary site investigation or agreements have been completed;

 

·             the potential discovery of new sites or additional information at existing sites;

 

·             the uncertainty in quantifying liability under environmental laws that impose joint and several liability on all potentially responsible parties;

 

·             the evolving nature of  environmental laws and regulations, including the interpretation and enforcement thereof; and

 

·             the potential for litigation on existing or discontinued assets.

 

In addition to those climate change policies already in force and which are described above under the heading “Environmental Protection”, there are also several federal (Canada and U.S.), regional and provincial initiatives currently in development.  While recent political and economic events may significantly affect the scope and timing of new measures that are put in place, TCPL anticipates that most of the Company’s facilities in Canada and the United States are or will be captured under federal and/or regional climate change regulations to manage industrial GHG emissions.  Certain initiatives are outlined below.

 

The Canadian government has continued to express interest in pursuing a harmonized continental climate change strategy.  In January 2010, Environment Canada listed a revised target to the United Nations Framework Convention on Climate Change as part of its submission for the Copenhagen Accord.  The submitted target represents a 17 per cent GHG emissions reduction by 2020 relative to 2005 levels. The submission states that Canada will align with the final economy-wide emissions targets of the United States in enacted legislation.  TCPL expects that pipeline and power generation facility emissions will be subject to the reduction targets for industrial emitters.

 

Climate change is a strategic issue for the United States government and federal policy to manage domestic GHG emissions continues to be a priority.  The Environmental Protection Agency has released an endangerment finding regarding GHG emissions under the Clean Air Act.  This finding was to determine whether the six types of GHGs in the atmosphere threaten the health and welfare of current and future generations.  The United States House passed a climate bill in June and the Senate is deliberating on a series of climate bills.

 

At a regional level, TCPL has assets located in provinces where members of the Western Climate Initiative (WCI) have drafted regulations that apply to industrial GHG emitters.  The Canadian WCI members include B.C., Manitoba, Ontario and Québec. The draft climate change strategies are expected to come into effect in 2012 and are expected to affect TCPL’s pipeline and power facilities.  The details of how these provincial programs will align with the Canadian government’s climate change policies remain uncertain.

 

Seven western U.S. states, along with the four Canadian provinces discussed above, are focused on the implementation of a cap and trade program under the WCI.  Members of the WCI have set a GHG emission target of 15 per cent below 2005 levels by 2020. California, a WCI founding member, has released draft cap and trade regulations that, if enacted, are anticipated to have an impact on the Company’s pipeline assets in the state.  The financial implications are not expected to be material. Under the current form of draft regulations in Washington and Oregon it is expected that there will not be a significant cost of compliance in these states.  TCPL will continue to monitor these developments.

 

Participants in the Midwestern Greenhouse Gas Reduction Accord, which involves six U.S. states and the province of Manitoba, are developing a regional strategy for reducing members’ GHG emissions that will include a multi-sector cap and trade mechanism.  Draft recommendations have been released but as yet not formally endorsed by participant states and Manitoba.

 

TCPL monitors climate change policy developments and, when warranted, participates in policy discussions in jurisdictions where the Company has operations.  The Company is also continuing its programs to manage GHG emissions from its facilities and to evaluate new processes and technologies that result in improved efficiencies and lower GHG emission rates.

 



 

TRANSCANADA PIPELINES LIMITED      19

 

 

Other Risk Factors

 

A discussion of the Company’s risk factors can be found in the MD&A under the headings “Pipelines - Opportunities and Developments”, “Pipelines - Business Risks”, “Pipelines – Outlook”, “Energy - Opportunities and Developments”, “Energy - Business Risks”, “Energy – Outlook” and “Risk Management and Financial Instruments”.

 

DIVIDENDS

 

All of TCPL’s common shares are held by TransCanada and as a result, any dividends declared by TCPL on its common shares are paid to TransCanada.  TCPL’s Board has not adopted a formal dividend policy.  The Board reviews the financial performance of TCPL quarterly and makes a determination of the appropriate level of dividends to be declared in the following quarter.  Provisions of various trust indentures and credit arrangements to which TCPL is a party, restrict TCPL’s ability to declare and pay dividends to TransCanada and preferred shareholders under certain circumstances and, if such restrictions apply, they may, in turn, have an impact on TransCanada’s ability to declare and pay dividends on its common and preferred shares.  In the opinion of TCPL management, such provisions do not currently restrict or alter TCPL’s ability to declare or pay dividends.

 

The holders of the first preferred shares, Series U are entitled to receive as and when declared by the Board, fixed cumulative preferential cash dividends at an annual rate of $2.80 per share, payable quarterly.  The dividends declared per share during the past three completed financial years are set forth in the following table.

 

 

 

2009

 

2008

 

2007

 

 Dividends declared on common shares(1)

 

$1.62

 

$1.49

 

$1.39

 

 Dividends declared on preferred shares, Series U

 

$2.80

 

$2.80

 

$2.80

 

 Dividends declared on preferred shares, Series Y

 

$2.80

 

$2.80

 

$2.80

 

 

(1)          TCPL dividends on its common shares are declared in an amount equal to the aggregate cash dividend paid by TransCanada to its public shareholders. The amounts presented reflect the aggregate amount divided by the total outstanding common shares of TCPL.

 

DESCRIPTION OF CAPITAL STRUCTURE

 

Share Capital

 

TCPL’s authorized share capital consists of an unlimited number of common shares, of which 649,552,723 were issued and outstanding at Year End, and an unlimited number of first preferred shares and second preferred shares, issuable in series. There were 4,000,000 Series U and 4,000,000 Series Y first preferred shares issued and outstanding at Year End.  The following is a description of the material characteristics of each of these classes of shares.

 

Common Shares

 

As the holder of all of TCPL’s common shares, TransCanada holds all the voting rights in those common shares.

 

First Preferred Shares, Series U

 

Subject to certain limitations, the Board may, from time to time, issue first preferred shares in one or more series and determine for any such series, its designation, number of shares and respective rights, privileges, restrictions and conditions. The first preferred shares as a class, have, among others, provisions to the following effect.

 

The holders of the first preferred shares, Series U are entitled to receive dividends as set out above under “Dividends”.

 

The first preferred shares of each series shall rank on a parity with the first preferred shares of every other series, and shall be entitled to preference over the common shares and any other shares ranking junior to the first preferred shares with respect to the payment of dividends, the repayment of capital and the distribution of assets of TCPL in the event of a liquidation, dissolution or winding up of TCPL.

 

TCPL is entitled to purchase for cancellation, some or all of the first preferred shares, Series U outstanding at the lowest price which such shares are obtainable, in the opinion of the Board, but not exceeding $50.00 per share plus costs of purchase. Furthermore, TCPL may redeem, on or after October 15, 2013, some or all of the first preferred shares, Series U upon payment for each share at $50.00 per share.

 



 

TRANSCANADA PIPELINES LIMITED      20

 

 

Except as provided by the Canada Business Corporations Act or as referred to below, the holders of the first preferred shares will not have any voting rights nor will they be entitled to receive notice of or to attend shareholders’ meetings unless and until TCPL fails to pay, in the aggregate, six quarterly dividends on the first preferred shares, Series U.

 

The provisions attaching to the first preferred shares as a class may be modified, amended or varied only with the approval of the holders of the first preferred shares as a class.  Any such approval to be given by the holders of the first preferred shares may be given by the affirmative vote of the holders of not less than 66 2/3 per cent of the first preferred shares represented and voted at a meeting or adjourned meeting of such holders.

 

First Preferred Shares, Series Y

 

The rights, privileges, restrictions and conditions attaching to the first preferred shares, Series Y are substantially identical to those attaching to the first preferred shares, Series U except that the first preferred shares, Series Y are redeemable by TCPL after March 5, 2014.

 

Debt

 

The following table sets out the issuances by TCPL of senior unsecured notes, medium term unsecured note debentures and junior subordinated notes with terms to maturity in excess of one year, during the 12 months ended December 31, 2009.

Date Issued

 

Issue Price per
$1,000 Principal
Amount of Notes

 

Aggregate
Issue Price

 

January 9, 2009

 

US$999.77(1)

 

US$749,827,500

 

January 9, 2009

 

US$991.48(1)

 

US$1,239,350,000

 

February 17, 2009

 

$995.29

 

$389,116,000

 

February 17, 2009

 

$997.17

 

$299,151,000

 

 

(1)          These notes were issued under the same prospectus supplement.  Notes maturing in 2019 were issued at 99.977% and notes maturing in 2039 were issued at 99.148%.

 

There are no provisions associated with this debt that entitle debt holders to voting rights. From time to time, TCPL issues commercial paper for terms not exceeding nine months.

 

CREDIT RATINGS

 

The following table sets out the credit ratings assigned to those outstanding classes of securities of TCPL which have been rated by DBRS Limited (“DBRS”), Moody’s Investors Service, Inc. (“Moody’s”) and Standard and Poor’s (“S&P”):

 

 

 

DBRS

 

Moody’s

 

S&P

 

Senior Unsecured Debt

 

 

 

 

 

 

 

Debentures

 

A

 

A3

 

A-

 

Medium-Term Notes

 

A

 

A3

 

A-

 

Junior Subordinated Notes

 

BBB (high)

 

Baa1

 

BBB

 

Preferred Shares

 

Pfd-2 (low)

 

Baa2

 

P-2

 

Commercial Paper

 

R-1 (low)

 

-

 

-

 

Trend/Rating Outlook

 

Stable

 

Stable

 

Stable

 

 

Credit ratings are intended to provide investors with an independent measure of credit quality of an issue of securities.  Credit ratings are not recommendations to purchase, hold or sell securities and do not address the market price or suitability of a specific security for a particular investor.  There is no assurance that any rating will remain in effect for any given period of time or that any rating will not be revised or withdrawn entirely by a rating agency in the future if, in its judgment, circumstances so warrant. A description of the rating agencies’ credit ratings listed in the table above is set out below.

 

DBRS Limited (DBRS)

 

DBRS has different rating scales for short and long-term debt and preferred shares. “High” or “low” grades are used to indicate the relative standing within a rating category. The absence of either a “high” or “low” designation indicates the rating is in the “middle” of the category.  The R-1 (low) rating assigned to TCPL’s short-term debt is in the third highest of ten rating categories and indicates satisfactory credit quality.  The overall strength and outlook for key liquidity, debt and profitability ratios are still respectable. Any qualifying negative factors that exist are considered manageable, and the entity is normally of sufficient size to have some influence in its industry.  The A rating assigned to TCPL’s senior unsecured debt is in the third highest of ten categories for long-term debt. Long-term debt rated A is of satisfactory credit quality.  Protection of interest and principal is still substantial,

 



 

TRANSCANADA PIPELINES LIMITED      21

 

 

but the degree of strength is less than that of AA rated securities.  While a respectable rating, entities in the A category are considered to be more susceptible to adverse economic conditions and have greater cyclical tendencies than higher rated entities.  The BBB (high) rating assigned to junior subordinated notes is in the fourth highest of the ten categories for long-term debt.  Long-term debt rated BBB is of adequate credit quality.  Protection of interest and principal is considered acceptable but there may be other adverse conditions present which reduce the strength of the entity and its rated securities.  The Pfd-2 (low) rating assigned to TCPL’s and TransCanada’s preferred shares is in the second highest of six rating categories for preferred shares.  Preferred shares rated Pfd-2 are of satisfactory credit quality. Protection of dividends and principal is still substantial; however, earnings, the balance sheet and coverage ratios are not as strong as Pfd-1 rated companies.

 

Moody’s Investors Service, Inc. (Moody’s)

 

Moody’s has different rating scales for short and long-term obligations.  Numerical modifiers 1, 2 and 3 are applied to each rating classification, with 1 being the highest and 3 being the lowest.  The A3 rating assigned to TCPL’s senior unsecured debt is the third highest of nine rating categories for long-term obligations.  Obligations rated A are considered upper medium grade and are subject to low credit risk.  The Baa 1 and Baa2 ratings assigned to TCPL’s junior subordinated debt and preferred shares, respectively, are in the fourth highest of nine rating categories for long-term obligations, with the junior subordinated debt ranking slightly higher within the Baa rating category with a modifier of 1 as opposed to the modifier of 2 on the preferred shares.  Obligations rated Baa are subject to moderate credit risk, are considered medium-grade, and as such, may possess certain speculative characteristics.

 

Standard & Poor’s (S&P)

 

S&P has different rating scales for short and long-term obligations. Ratings may be modified by the addition of a plus (+) or minus (-) sign to show the relative standing within a particular rating category.  The A- rating assigned to TCPL’s senior unsecured debt is in the third highest of ten rating categories for long-term obligations.  An A rating indicates the obligor’s capacity to meet its financial commitment is strong; however, the obligation is slightly more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher rated categories.  The BBB and P-2 ratings assigned to TCPL’s junior subordinated notes and TCPL’s and TransCanada’s preferred shares exhibits adequate protection parameters.  However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation.

 

MARKET FOR SECURITIES

 

TransCanada holds all of the common shares of TCPL and these are not listed on a public market. During 2009, 51,536,066 common shares of TCPL were issued to TransCanada as set out in the following table:

 

Date

 

Number of TCPL Common Shares

 

Price per TCPL Common Share

 

Aggregate Issuance Price

January 30, 2009

 

2,205,006

 

$33.56

 

$74,000,000

April 30, 2009

 

1,727,575

 

$30.10

 

$52,000,000

July 31, 2009

 

17,973,856

 

$30.60

 

$550,000,000

Sept. 23, 2009

 

29,629,629

 

$33.75

 

$1,000,000,000

 

TransCanada’s common shares are listed on the Toronto Stock Exchange (“TSX”) and the New York Stock Exchange (“NYSE”). TransCanada’s Series 1 Preferred Shares have been listed for trading on the TSX since September 30, 2009.  The following tables set forth the reported monthly high, low, and month-end closing trading prices and monthly trading volumes of the common shares of TransCanada on the TSX and the NYSE and the Series 1 Preferred Shares on the TSX for the period indicated:

 


 

TRANSCANADA PIPELINES LIMITED      22

 

 

Common Shares

 

 

 

TSX (TRP)

 

NYSE (TRP)

 

Month

 

High
($)

 

Low
($)

 

Close
($)

 

Volume
Traded

 

High
(US$)

 

Low
(US$)

 

Close
(US$)

 

Volume
Traded

 

December 2009

 

36.49

 

33.51

 

36.19

 

28,627,985

 

34.59

 

32.15

 

34.37

 

6,351,654

 

November 2009

 

34.13

 

31.92

 

34.13

 

37,471,954

 

32.54

 

29.66

 

32.27

 

7,399,434

 

October 2009

 

33.95

 

32.31

 

33.16

 

31,079,808

 

32.90

 

29.86

 

30.54

 

7,941,688

 

September 2009

 

34.00

 

31.81

 

33.37

 

39,471,205

 

31.74

 

28.88

 

31.02

 

6,821,758

 

August 2009

 

32.76

 

30.78

 

32.60

 

33,574,588

 

30.29

 

28.05

 

29.68

 

8,761,058

 

July 2009

 

31.47

 

30.19

 

30.64

 

37,841,226

 

28.77

 

25.88

 

28.45

 

5,345,338

 

June 2009

 

34.40

 

30.25

 

31.32

 

60,066,715

 

30.93

 

26.17

 

26.91

 

9,109,155

 

May 2009

 

32.86

 

29.68

 

32.38

 

36,231,746

 

29.94

 

24.94

 

29.74

 

7,608,353

 

April 2009

 

30.76

 

29.34

 

29.78

 

35,458,519

 

25.63

 

23.20

 

24.97

 

10,426,740

 

March 2009

 

32.29

 

28.86

 

29.83

 

53,753,101

 

26.19

 

22.24

 

23.65

 

15,520,736

 

February 2009

 

34.24

 

29.61

 

30.90

 

30,216,886

 

28.05

 

20.01

 

24.06

 

15,409,226

 

January 2009

 

35.00

 

32.08

 

32.98

 

29,712,401

 

29.01

 

25.51

 

26.85

 

11,211,484

 

 

Series 1 Preferred Shares

 

 

 

TSX (TRP.PR.A)

 

 

 

 

 

 

 

Month

 

High
($)

 

Low
($)

 

Close
($)

 

Volume
Traded

 

 

 

 

 

 

 

December 2009

 

26.20

 

25.51

 

26.00

 

917,214

 

 

 

 

 

 

 

November 2009

 

25.90

 

25.35

 

25.56

 

914,033

 

 

 

 

 

 

 

October 2009

 

25.50

 

25.01

 

25.40

 

1,866,602

 

 

 

 

 

 

 

September 2009

 

25.03

 

24.91

 

25.00

 

896,387

 

 

 

 

 

 

 

 

In addition, TCPL’s Cumulative Redeemable First Preferred Shares, Series U (the “Series U Preferred Shares”) and Series Y (the “Series Y Preferred Shares”) are listed on the TSX.  The following table sets forth the reported monthly high and low trading prices and monthly trading volumes of the Series U Preferred Shares and the Series Y Preferred Shares.

 

Series U Preferred Shares and Series Y Preferred Shares

 

 

 

Series U (TCA.PR.X)

 

Series Y (TCA.PR.Y)

 

Month

 

High
($)

 

Low
($)

 

Close
($)

 

Volume
Traded

 

High
($)

 

Low
($)

 

Close
($)

 

Volume
Traded

 

December 2009

 

50.45

 

49.40

 

50.45

 

34,599

 

49.99

 

49.26

 

49.80

 

32,439

 

November 2009

 

49.58

 

49.11

 

49.55

 

29,933

 

49.60

 

49.00

 

49.59

 

24,082

 

October 2009

 

49.70

 

48.90

 

49.17

 

29,957

 

49.75

 

49.00

 

49.15

 

31,441

 

September 2009

 

50.42

 

49.00

 

49.19

 

39,035

 

49.99

 

48.8

 

49.02

 

60,600

 

August 2009

 

50.49

 

47.01

 

50.00

 

47,658

 

50.49

 

47.5

 

49.99

 

41,895

 

July 2009

 

47.50

 

46.26

 

47.49

 

69,091

 

47.55

 

46.05

 

47.55

 

48,308

 

June 2009

 

47.05

 

46.56

 

46.56

 

65,081

 

47.59

 

46.26

 

46.30

 

37,667

 

May 2009

 

47.05

 

46.52

 

47.05

 

51,101

 

47.50

 

46.76

 

47.50

 

29,011

 

April 2009

 

47.25

 

46.25

 

47.05

 

58,459

 

47.50

 

46.07

 

47.00

 

41,581

 

March 2009

 

47.25

 

46.06

 

46.25

 

117,121

 

48.00

 

46.00

 

46.23

 

58,081

 

February 2009

 

47.25

 

44.79

 

47.00

 

53,474

 

47.50

 

45.80

 

47.00

 

24,332

 

January 2009

 

46.50

 

41.62

 

45.79

 

50,212

 

47.00

 

41.42

 

45.44

 

76,276

 

 

DIRECTORS AND OFFICERS

 

As of February 22, 2010, the directors and officers of TransCanada as a group beneficially owned, or exercised control or direction, directly or indirectly, over an aggregate of 504,537 Common Shares of TransCanada.  This constitutes less than one per cent of TransCanada’s Common Shares.  TransCanada collects this information from its directors and officers but otherwise has no direct knowledge of individual holdings of its securities.

 



 

TRANSCANADA PIPELINES LIMITED      23

 

 

Directors

 

Set forth below are the names of the thirteen directors who served on the Board at Year End, together with their jurisdictions of residence, all positions and offices held by them with TCPL and its significant affiliates, their principal occupations or employment during the past five years and the year from which each director has continually served as a director of TCPL. Positions and offices held with TransCanada are also held by such person at TCPL.  Each director holds office until the next annual meeting or until his or her successor is earlier elected or appointed.

 

Name and
Place of Residence

 

Principal Occupation During the Five Preceding Years

 

Director Since

Kevin E. Benson(1)
DeWinton, Alberta
Canada

 

President and Chief Executive Officer, Laidlaw International, Inc. (transportation services) from June 2003 to October 2007. Director, Emergency Medical Services Corporation.

 

2005

Derek H. Burney(2), O.C.
Ottawa, Ontario
Canada

 

Senior strategic advisor at Ogilvy Renault LLP (law firm), Chair, Canwest Global Communications Corp. (communications) and Chair, International Advisory Board for Garda World Consulting & Investigation, a division of Garda World Security Corporation. Director, Canwest Global Communications Corp. Lead director at Shell Canada Limited (oil and gas) from April 2001 to May 2007.

 

2005

Wendy K. Dobson
Uxbridge, Ontario
Canada

 

Professor, Rotman School of Management and Co-Director, Institute for International Business, University of Toronto. Director, the Toronto-Dominion Bank. Vice Chair of the Canadian Public Accountability Board until February 2010 and Chair of the audit committee of the same organization from 2003 to 2009.

 

1992

E. Linn Draper
Lampasas, Texas
United States

 

Director, Alliance Data Systems Corporation (data processing and services), Lead Director, Alpha Natural Resources, Inc. (mining), Director, NorthWestern Corporation (conducting business as NorthWestern Energy) (oil and gas) and Lead Director of Temple-Inland Inc. (materials).

 

2005

The Hon. Paule Gauthier,
P.C., O.C., O.Q., Q.C.
Québec, Québec
Canada

 

Senior Partner, Stein Monast LLP (law firm). Director, Metro Inc., RBC Dexia Investor Services Trust and Royal Bank of Canada. Director, Cossette Inc. until December 23, 2009. Director, Institut Québecois des Hautes Études Internationales, Laval University from 2002 until 2009.

 

2002

Kerry L. Hawkins
Winnipeg, Manitoba
Canada

 

Director, NOVA Chemicals Corporation until July 6, 2009. President, Cargill Limited (agricultural) from September 1982 to December 2005.

 

1996

S. Barry Jackson
Calgary, Alberta
Canada

 

Chair of the Board, TransCanada since April 2005. Director, Nexen Inc. (oil and gas). Director, WestJet Airlines Ltd. Chair of Resolute Energy Inc. (oil and gas) from January 2002 to April 2005 and Chair of Deer Creek Energy Limited (oil and gas) from April 2001 to September 2005.

 

2002

Paul L. Joskow
New York, New York
United States

 

Economist and President of the Alfred P. Sloan Foundation. On leave from his position as Professor of Economics and Management, Massachusetts Institute of Technology (“MIT”) where he has been on the faculty since 1972. Trustee of Yale University since July 1, 2008 and member of the Board of Overseers of the Boston Symphony Orchestra since September 2005. Director of the MIT Center for Energy and Environmental Policy Research from 1999 to 2007 and Director of National Grid plc from 2000 to 2007. Director of Exelon Corporation (energy) since July 2007. Trustee of Putnam Mutual Funds.

 

2004

Harold N. Kvisle
Calgary, Alberta
Canada

 

President and Chief Executive Officer of TransCanada since May 2003 and TCPL since May 2001. Director, Bank of Montreal and ARC Energy Trust.

 

2001

John A. MacNaughton(3), C.M.
Toronto, Ontario
Canada

 

Chair of the Business Development Bank of Canada and of CNSX Markets Inc. (formerly the Canadian Trading and Quotation System Inc.) (stock exchange). Director, Nortel Networks Corporation and Nortel Networks Limited (the principal operating subsidiary of Nortel Networks Corporation) (technology). Chair of the Independent Nominating Committee of the new Canada Employment Insurance Financing Board since 2008. Founding President and Chief Executive Officer of the Canada Pension Plan Investment Board from 1999 to 2005.

 

2006

David P. O’Brien(4)
Calgary, Alberta
Canada

 

Chair, EnCana Corporation (oil and gas) since April 2002 and Chair, Royal Bank of Canada since February 2004. Director, Molson Coors Brewing Company, Enerplus Resources Fund and C.D. Howe Institute. Chancellor, Concordia University and a member of the Science, Technology and Innovation Council of Canada.

 

2001

 



 

TRANSCANADA PIPELINES LIMITED      24

 

 

Name and
Place of Residence

 

Principal Occupation During the Five Preceding Years

 

Director Since

W. Thomas Stephens
Greenwood Village, Colorado
United States

 

Chair and Chief Executive Officer of Boise Cascade, LLC from November 2004 to November 30, 2008. Director, Boise Inc.

 

2007(5)

D. Michael G. Stewart
Calgary, Alberta
Canada

 

Director, Canadian Energy Services & Technology Corp., Pengrowth Corporation and Orleans Energy Ltd. Chairman and a trustee of Esprit Energy Trust (oil and gas) from August 2004 to October 2006; and a director of Creststreet Power & Income General Partner Limited, the General Partner of Creststreet Power & Income Fund L.P. (wind power) from December 2003 to February 2006.

 

2006

 

(1)   Mr. Benson was President and Chief Executive Officer of Canadian Airlines International Ltd. from July 1996 to February 2000. Canadian Airlines International Ltd. filed for protection under the Companies’ Creditors Arrangement Act (Canada) and applicable bankruptcy protection statutes in the U.S. on March 24, 2000.

 

(2)   Canwest Global Communications Corp. (“Canwest”) voluntarily entered into, and successfully obtained an Order from the Ontario Superior Court of Justice (Commercial Division) commencing proceedings under the Companies’ Creditors Arrangement Act on October 6, 2009.  Following the filing, Canwest shares were de-listed from trading on the TSX and now trade on the TSX Venture Exchange.

 

(3)   Nortel Networks Limited is the principal operating subsidiary of Nortel Networks Corporation (collectively referred to as “Nortel”).  Mr. MacNaughton became a director of Nortel on June 29, 2005.  Nortel was subject to a management cease trade order on April 10, 2006 issued by the Ontario Securities Commission (“OSC”) and other provincial securities regulators.  The cease trade order related to a delay in filing certain of Nortel’s 2005 financial statements.  The order was revoked by the OSC on June 8, 2006 and by the other provincial securities regulators very shortly thereafter.  On January 14, 2009, Nortel, and certain of Nortel’s other Canadian subsidiaries filed for creditor protection under the Companies’ Creditors Arrangement Act (Canada).

 

(4)   Mr. O’Brien was a director of Air Canada in April 2003 when Air Canada filed for protection under the Companies’ Creditors Arrangement Act (Canada) and applicable bankruptcy protection statutes in the U.S.  Mr. O’Brien resigned as a director of Air Canada on November 26, 2003.

 

(5)   Mr. Stephens previously served on the Board from 2000 to 2005.

 

Board Committees

 

TCPL has four committees of the Board: the Audit Committee, the Governance Committee, the Health, Safety and Environment Committee and the Human Resources Committee.  The voting members of each of these committees, as of Year End, are identified below:

 

Audit Committee

Governance Committee

Health, Safety & Environment
Committee

Human Resources Committee

Chair:

K.E. Benson

Chair:

J.A. MacNaughton

Chair:

E.L. Draper

Chair:

W.T. Stephens

Members:

D.H. Burney

Members:

K.E. Benson

Members:

W.K. Dobson

Members:

W.K. Dobson

 

E.L. Draper

 

D.H. Burney

 

P. Gauthier

 

P. Gauthier

 

P.L. Joskow

 

P.L. Joskow

 

K.L. Hawkins

 

K.L. Hawkins

 

J.A. MacNaughton

 

D.P. O’Brien

 

W.T. Stephens

 

D.P. O’Brien

 

D.M.G. Stewart

 

D.M.G. Stewart

 

 

 

S.B. Jackson

 

 

 

S.B. Jackson

 

 

 

 

 

The charters of the Audit Committee, Governance Committee, the Health, Safety & Environment Committee and the Human Resources Committee can be found on TransCanada’s website under the Corporate Governance - Board Committees page located at www.transcanada.com.  Information about the audit committee can be found in this AIF under the heading “Audit Committee”.

 

Further information about the Board committees and corporate governance can also be found on TransCanada’s website.

 

Officers

 

All of the executive officers and corporate officers of TCPL reside in Calgary, Alberta, Canada.  Current positions and offices held with TCPL are also held by such person at TransCanada.  As of the date hereof, the officers of TCPL, their present positions within TCPL and their principal occupations during the five preceding years are as follows:

 



 

TRANSCANADA PIPELINES LIMITED      25

 

 

Executive Officers

 

Name

 

Present Position Held

 

Principal Occupation During
the Five Preceding Years

Harold N. Kvisle

 

President and Chief Executive Officer

 

President and Chief Executive Officer

Russell K. Girling

 

Chief Operating Officer and President, Pipelines

 

Prior to July 2009, President, Pipelines. Prior to June 2006, Executive Vice-President, Corporate Development and Chief Financial Officer

Gregory A. Lohnes

 

Executive Vice-President and Chief Financial Officer

 

Prior to June 2006, President and Chief Executive Officer of Great Lakes Gas Transmission Company

Dennis J. McConaghy

 

Executive Vice-President, Pipeline Strategy and Development

 

Prior to June 2006, Executive Vice-President, Gas Development

Sean McMaster

 

Executive Vice-President, Corporate and General Counsel and Chief Compliance Officer

 

Prior to October 2006, General Counsel and Chief Compliance Officer. Prior thereto, General Counsel since June 2006. Prior to June 2006, Vice-President, Transactions, Power Division, TCPL and concurrently, prior to August 2005, President TransCanada Power Services Ltd., general partner of TransCanada Power, L.P.

Alexander J. Pourbaix

 

President, Energy and Executive Vice-President, Corporate Development

 

Prior to July 2009, President, Energy. Prior to June 2006, Executive Vice-President, Power

Sarah E. Raiss

 

Executive Vice-President, Corporate Services

 

Executive Vice-President, Corporate Services

Donald M. Wishart

 

Executive Vice-President, Operations and Major Projects

 

Prior to July 2009, Executive Vice-President, Operations and Engineering

 

Corporate Officers

 

Name

 

Present Position Held

 

Principal Occupation During
the Five Preceding Years

Ronald L. Cook

 

Vice-President, Taxation

 

Vice-President, Taxation

Donald J. DeGrandis

 

Corporate Secretary

 

Prior to June 2006, Associate General Counsel, Corporate

Garry E. Lamb

 

Vice-President, Risk Management

 

Vice-President, Risk Management

Donald R. Marchand

 

Vice-President, Finance and Treasurer

 

Vice-President, Finance and Treasurer

G. Glenn Menuz

 

Vice President and Controller

 

Prior to June 2006, Assistant Controller

 

Conflicts of Interest

 

Directors and officers of TCPL and its subsidiaries are required to disclose the existence of existing or potential conflicts in accordance with TCPL policies governing directors and officers and in accordance with the Canada Business Corporations Act. Although some of the directors sit on boards or may be otherwise associated with companies that ship natural gas on TCPL’s pipeline systems, TCPL, as a common carrier in Canada, cannot, under its tariff, deny transportation service to a credit worthy shipper.  Further, due to the specialized nature of the industry, TCPL believes that it is important for its Board to be composed of qualified and knowledgeable directors, so some of them must come from the oil and gas producer and shipper community; the Governance Committee monitors relationships among directors to ensure that business associations do not affect the Board’s performance.  In a circumstance where a director declares an interest in any material contract or material transaction being considered at a meeting, the director generally absents himself or herself from the meeting during the consideration of the matter, and does not vote on the matter.

 

CORPORATE GOVERNANCE

 

The Board and the members of TCPL’s management are committed to the highest standards of corporate governance.  TCPL’s corporate governance practices comply with the governance rules of the Canadian Securities Administrators (“CSA”), those of the NYSE and of the SEC applicable to foreign issuers, and those mandated by the U.S. Sarbanes Oxley Act of 2002.  As a non-U.S. company, TCPL is not required to comply with most of the NYSE corporate governance listing standards; however, except as summarized on our website at www.transcanada.com, the governance practices followed are in compliance with the NYSE standards for U.S. companies in all significant respects.  TCPL is in compliance with the CSA’s National Instrument 52-110 pertaining to audit committees; National Policy 58-201, Corporate Governance Guidelines; and National Instrument 58-101, Disclosure of Corporate Governance Practices.  Further information about TCPL’s corporate governance can be found on TransCanada’s website at www.transcanada.com under the heading “Corporate Governance” or at Schedule “B” to this AIF.

 



 

TRANSCANADA PIPELINES LIMITED      26

 

 

AUDIT COMMITTEE

 

TCPL has an Audit Committee which is responsible for assisting the Board in overseeing the integrity of TCPL’s financial statements and compliance with legal and regulatory requirements and in ensuring the independence and performance of TCPL’s internal and external auditors.  The Charter of the Audit Committee can be found in Schedule “C” of this AIF and on TransCanada’s website under the Corporate Governance - Board Committees page, at www.transcanada.com.

 

Relevant Education and Experience of Members

 

The members of the Audit Committee at Year End were Kevin E. Benson (Chair), Derek H. Burney, E. Linn Draper, Paul L. Joskow, John A. MacNaughton and D. Michael G. Stewart.

 

The Board believes that the composition of the Audit Committee reflects a high level of financial literacy and expertise.  Each member of the Audit Committee has been determined by the Board to be “independent” and “financially literate” within the meaning of the definitions under Canadian and U.S. securities laws and the NYSE rules.  In addition, the Board has determined that Mr. Benson is an “Audit Committee Financial Expert” as that term is defined under U.S. securities laws.  The Board has made these determinations based on the education and breadth and depth of experience of each member of the Audit Committee.  The following is a description of the education and experience, apart from their respective roles as directors of TCPL, of each member of the Audit Committee that is relevant to the performance of his or her responsibilities as a member of the Audit Committee:

 

Kevin E. Benson

 

Mr. Benson earned a Bachelor of Accounting from the University of Witwatersrand (South Africa) and was a member of the South African Society of Chartered Accountants.  Mr. Benson was the President and Chief Executive Officer of Laidlaw International, Inc. until October, 2007.  In prior years, he has held several executive positions including one as President and Chief Executive Officer of Canadian Airlines International Ltd. and has served on other public company boards and on the audit committees of certain of those boards.

 

Derek H. Burney

 

Mr. Burney earned a Bachelor of Arts (Honours) and Master of Arts from Queen’s University.  He is currently a senior strategic advisor at Ogilvy Renault LLP.  Mr. Burney previously served as President and Chief Executive Officer of CAE Inc. and as Chairman and Chief Executive Officer of Bell Canada International Inc. Mr. Burney was the lead director at Shell Canada Limited until May 2007 and is the Chairman of Canwest Global Communications Corp.  He has served on one other organization’s audit committee.

 

E. Linn Draper

 

Dr. Draper holds a Bachelor of Science in Chemical Engineering from Rice University and a Ph.D. in Nuclear Science and Engineering from Cornell University.  Dr. Draper was Chairman, President and Chief Executive Officer of American Electric Power Co., Inc. until 2004.  He previously served as Chairman, President and Chief Executive Officer of Gulf States Utilities Company.  Dr. Draper has served and continues to serve on several other public company boards.

 

Paul L. Joskow

 

Mr. Joskow earned a Bachelor of Arts with Distinction in Economics from Cornell University, a Masters of Philosophy in Economics from Yale University, and a Ph.D. in Economics from Yale University.  He is currently the President of the Alfred P. Sloan Foundation and on leave from his position as a Professor of Economics and Management, MIT.  He has served on the boards of several public companies and other organizations and on the audit committees of certain of those boards.

 

John A. MacNaughton

 

Mr. MacNaughton earned a Bachelor of Arts in Economics from the University of Western Ontario. Mr. MacNaughton is currently the Chairman of the Business Development Bank of Canada and of CNSX Markets Inc. (formerly Canadian Trading and Quotation System Inc.) In prior years, he has held several executive positions including founding President and Chief Executive Officer of the Canadian Pension Plan Investment Board and President of Nesbitt Burns Inc. He has served on the audit committee of other public companies.

 


 

TRANSCANADA PIPELINES LIMITED     27

 

 

D. Michael G. Stewart

 

Mr. Stewart earned a Bachelor of Science (Honours) in Geological Science from Queen’s University.  Mr. Stewart has served and continues to serve on the boards of several public companies and other organizations and on the audit committees of certain of those boards.  He has been active in the Canadian energy industry for over 36 years.

 

Pre-Approval Policies and Procedures

 

TCPL’s Audit Committee has adopted a pre-approval policy with respect to permitted non-audit services.  Under the policy, the Audit Committee has granted pre-approval for specified non-audit services.  For engagements of $25,000 or less which are not within the annual pre-approved limit, approval by the Audit Committee is not required, and for engagements between $25,000 and $100,000, approval of the Audit Committee Chair is required, and the Audit Committee is to be informed of the engagement at the next scheduled Audit Committee meeting.  For all engagements of $100,000 or more, pre-approval of the Audit Committee is required.  In all cases, regardless of the dollar amount involved, where there is a potential for conflict of interest involving the external auditor to arise on an engagement, the Audit Committee Chair must pre-approve the assignment.

 

To date, TCPL has not approved any non-audit services on the basis of the de-minimus exemptions.  All non-audit services have been pre-approved by the Audit Committee in accordance with the pre-approval policy described above.

 

External Auditor Service Fees

 

The following table provides information about the fees paid by the Company to KPMG LLP, the external auditor of the TransCanada group of companies, for professional services rendered for the 2009 and 2008 fiscal years.

 

Fee Category

 

2009

 

2008

 

Description of Fee Category

 

 

(millions of dollars)

 

 

Audit Fees

 

$7.14

 

$6.69

 

Aggregate fees for audit services rendered for the audit of the annual consolidated financial statements or services provided in connection with statutory and regulatory filings or engagements, the review of interim consolidated financial statements and information contained in various prospectuses and other offering documents.

Audit Related Fees

 

$0.15

 

$0.08

 

Aggregate fees for assurance and related services that are reasonably related to performance of the audit or review of the consolidated financial statements and are not reported as Audit Fees. The nature of services comprising these fees related to the audit of the financial statements of certain pension plans.

Tax Fees

 

$1.13

 

$0.14

 

Aggregate fees rendered for tax planning and tax compliance advice. The nature of these services consisted of domestic and international tax planning advice and tax compliance matters including the review of income tax returns and other tax filings.

All Other Fees

 

$0.43

 

$0.37

 

Aggregate fees for products and services other than those reported elsewhere in this table. The nature of these services consisted primarily of advice and training primarily related to compliance with IFRS.

Total

 

$8.85

 

$7.28

 

 

 

INDEBTEDNESS OF DIRECTORS AND EXECUTIVE OFFICERS

 

As at the date hereof and since the beginning of the most recently completed financial year, no executive officer, director, or former executive officer or director of TCPL or its subsidiaries, no proposed nominee for election as a director of TCPL, or any associate of any such director, executive officer or proposed nominee has been indebted to TCPL or any of its subsidiaries.  There is no indebtedness of any such person to another entity that is the subject of a guarantee, support agreement, letter of credit or other similar arrangement or understanding provided by TCPL or any of its subsidiaries.

 

SECURITIES OWNED BY DIRECTORS

 

The following table sets out the number of each class of securities of TCPL or any of its affiliates beneficially owned, directly or indirectly, or over which control or direction is exercised and the number of deferred share units credited to each director, as of February 22, 2010.

 



 

TRANSCANADA PIPELINES LIMITED     28

 

 

Director

TransCanada
Common Shares
(1)

Deferred Share
Units
(2)

K. Benson

13,000

27,230

D. Burney

4,227

24,904

W. Dobson

6,000

40,904

E.L. Draper

0

27,602

P. Gauthier

2,000

35,405

K. Hawkins(3)

5,013

54,276

S.B. Jackson

39,000

50,101

P.L. Joskow

5,000

19,833

H. Kvisle(4)(5)

1,111,899

N/A

J. MacNaughton

50,000

20,339

D. O’Brien

51,177

36,649

W. T. Stephens

1,470

8,327

D.M.G. Stewart(6)

11,402

11,003

 

(1)          The information as to shares beneficially owned or over which control or direction is exercised, not being within the knowledge of TCPL, has been furnished by each of the nominees. Except as indicated in these notes, the nominees have sole voting and dispositive power with respect to the securities listed above. As to each class of shares of TCPL, its subsidiaries and affiliates, the percentage of outstanding shares beneficially owned by any one director or nominee or by all directors and officers of TCPL as a group does not exceed 1% of the class outstanding.

 

(2)          The value of a deferred share unit is tied to the value of TransCanada’s common shares. A deferred share unit is a bookkeeping entry, equivalent to the value of a TransCanada common share, and does not entitle the holder to voting or other shareholder rights, other than the accrual of additional deferred share units for the value of dividends. A director cannot redeem deferred share units until the director ceases to be a member of the Board. Canadian directors can then redeem their units for cash or shares while U.S. directors can only redeem their units for cash.

 

(3)          The shares listed include 3,500 shares held by Mr. Hawkins’ wife.

 

(4)          Securities owned, controlled or directed include common shares that Mr. Kvisle has a right to acquire through the exercise of stock options that are vested under the Stock Option Plan, which is described elsewhere in this AIF. Directors as such do not participate in the Stock Option Plan. Mr. Kvisle, as an employee of TCPL, has the right to acquire 1,025,847 Common Shares under vested stock options, which amount is included in this column.

 

(5)          Mr. Kvisle is an employee of TCPL and participates is the ESU program; he does not participate in the DSU program.

 

(6)          The shares listed include 518 shares held by Mr. Stewart’s wife.

 

COMPENSATION OF DIRECTORS

 

Unless as otherwise defined in the following sections, all capitalized terms used from herein shall have the same meaning ascribed to them in TransCanada’s Management Proxy Circular (the “Proxy Circular”), dated February 22, 2010.

 

TransCanada’s directors also serve as directors of TCPL. An aggregate fee is paid for serving on the Boards of TransCanada and TCPL.  Since TransCanada does not hold any assets directly, other than the common shares of TCPL and receivables from certain of TransCanada’s subsidiaries, all directors’ costs are assumed by TCPL according to a management services agreement between the two companies. The meetings of the boards and committees of TransCanada and TCPL run concurrently.

 

TCPL’s director compensation practices are designed to reflect the size and complexity of TCPL and to reinforce the emphasis we place on shareholder value by linking a significant portion of directors’ compensation to the value of common shares.  As a result, directors’ compensation consists of annual retainers and meeting fees paid in cash and in equity-based compensation known as deferred share units (“DSUs”).

 

The Governance Committee assesses the market competitiveness of our director compensation on an annual basis against publicly traded autonomous Canadian companies in the Comparator Group (as defined under the heading “Compensation Discussion and Analysis”) and a general industry sample of Canadian companies, using an analysis provided by an outside consultant.  Its goal is to provide total compensation to directors that is generally targeted at the median of our peers in both level and form in order to attract and retain qualified individuals.  This goal is reflected in the current compensation paid to directors.  The compensation philosophy for directors’ compensation is different than that for the executive officers discussed under the heading “Compensation Discussion and Analysis” in that it is not directly based on the performance of the Company.

 



 

TRANSCANADA PIPELINES LIMITED     29

 

 

DIRECTOR COMPENSATION TABLE

 

The following table sets forth the total compensation paid by TCPL to directors in 2009.

 

Name
(a)

Fees Earned(1)
($)
(b)

Share-based
Awards
(2)
($)
(c)

All Other Compensation
($)
(d)

Total
($)
(e)

K.E. Benson

126,891

77,134

-

204,025

D.H. Burney

113,500

72,000

-

185,500

W.K. Dobson

113,843

72,000

-

185,843

E.L. Draper

122,000

72,000

-

194,000

P. Gauthier

115,000

72,000

-

187,000

K.L. Hawkins

118,000

72,000

-

190,000

S.B. Jackson(3)

213,000

180,000

29,007

393,000

P.L. Joskow

109,000

72,000

-

181,000

J.A. MacNaughton

120,157

72,000

-

192,157

D.P. O’Brien

109,000

72,000

-

181,000

W.T. Stephens

123,500

72,000

-

195,500

D.M.G. Stewart

112,000

72,000

-

184,000

 

(1)          Includes all annual Board and committee retainers and meeting fees paid in cash.

 

(2)          These amounts reflect the portion of the Board retainer ($72,000) and the Board Chair retainer ($180,000) that is required to be paid in DSUs.  Each director may choose to receive all or some of the balance of their fees in DSUs and in such event, these amounts have been included in this column, “Fees Earned”.  Directors may also be granted share-based awards in the form of DSUs as additional directors’ compensation under the DSU Plan.  There were no DSUs awarded to directors in separate grants in 2009.

 

(3)          The Chair was reimbursed for certain office and other expenses of approximately $29,007 in 2009.

 

RETAINERS AND FEES PAID TO DIRECTORS

 

Annual board and committee retainers are paid to each director who is not an employee of TCPL in quarterly installments, in arrears, and are pro-rated from the date of the director’s appointment to the Board and the relevant committees.  Each committee chair is entitled to claim a per diem for time spent on committee activities outside of the committee meetings.  TCPL pays a travel fee of $1,500 per meeting for which round trip travel time exceeds three hours, and reimburses the directors for out-of-pocket expenses incurred in attending such meetings.  The retainers and fees paid to non-employee directors in 2009 are set forth in the following table. Directors who are U.S. residents are paid the same amounts as outlined below in U.S. dollars.  There were no changes to directors’ fees in 2009.

 

Board Chair retainer

$360,000 per annum ($180,000 in cash + $180,000 value of DSUs)(1)(2)

Board Chair meeting fee

$3,000 per Chaired Board meeting(1)

Board retainer

$142,000 per annum ($70,000 cash + $72,000 value of DSUs)(2)

Committee retainer

$4,500 per annum

Committee Chair retainer

$5,500 per annum

Board and Committee meeting fee

$1,500 per meeting

Committee Chair meeting fee

$1,500 per meeting

 

(1)          The Chair is paid only the Board Chair retainer fee, the Board Chair meeting fee and the travel fee.  The Chair does not receive any other retainers or meeting fees.

 

(2)          The $180,000 portion of the Board Chair retainer paid in DSUs and the $72,000 portion of the Board retainer paid in DSUs are equal to an aggregate of 5,537 DSUs and 2,214 DSUs, respectively, which were granted quarterly, in arrears, based on the closing price of the common shares of TransCanada at the end of each quarter in 2009 of $29.83, $31.32, $33.37 and $36.19, respectively.

 

Directors are entitled to direct all or a portion of their cash retainers, meeting fees and travel fees to be paid in DSUs.  In 2009, Mr. Benson, Mr. Burney, Dr. Draper and Mr. Hawkins directed all of their retainers, meeting fees and travel fees to be paid in DSUs. Ms. Gauthier directed her Committee retainers, Committee meeting fees and travel fees to be paid in DSUs.  Mr. MacNaughton directed his Board and Committee retainers, Board meeting fees and travel fees to be paid in DSUs.  Mr. O’Brien directed his Board retainers to be paid in DSUs.  In addition, Mr. Jackson directed the cash portion of his Chair retainer as well as his Board

 



 

TRANSCANADA PIPELINES LIMITED     30

 

 

Chair meeting fee and travel fees to be paid in DSUs. For further information on the plan for DSUs, see the description under the heading “Share Unit Plan for Non-Employee Directors” below.

 

2009 Retainers and Fees

 

The following table sets out the total fees paid in cash and the value of the DSUs awarded or credited for each non-employee director in 2009 as at the date of the grant, unless otherwise stated. Mr. Kvisle, as an employee of TCPL, receives no cash fees or DSUs as a director.

 

Name

Board
Retainer

($)

Committee
Retainer

($)

Committee
Chair
Retainer

($)

Board
Meeting

Fee
($)

Committee
Meeting
Fee
(1)
($)

Travel
Fee
($)

Strategic
Planning
Sessions

($)

Total Fees
Paid in
Cash

($)

Total
Value of
DSUs
Credited
(2)
($)

Total Cash
& Value of
DSUs
Credited
(3)
($)

K.E. Benson(4)

152,125

7,813

5,892

14,524

17,281

4,890

1,500

0

204,025

204,025

D.H. Burney

142,000

9,000

N/A

12,000

13,500

7,500

1,500

0

185,500

185,500

W.K. Dobson(5)

142,000

9,000

1,843

12,000

15,000

4,500

1,500

113,843

72,000

185,843

E.L. Draper(6)(7)

142,000

9,000

5,500

10,500

16,500

9,000

1,500

0

194,000

194,000

P. Gauthier(8)

142,000

9,000

N/A

13,500

13,500

7,500

1,500

85,000

102,000

187,000

K.L. Hawkins(9)

142,000

9,000

N/A

13,500

13,500

10,500

1,500

0

190,000

190,000

S.B. Jackson(10)

360,000

N/A

N/A

27,000

N/A

3,000

3,000

0

393,000

393,000

P.L. Joskow(6)

142,000

9,000

N/A

10,500

10,500

7,500

1,500

109,000

72,000

181,000

J.A. MacNaughton(5)

142,000

9,000

3,657

13,500

15,000

7,500

1,500

15,000

177,157

192,157

D.P. O’Brien

142,000

9,000

N/A

13,500

12,000

3,000

1,500

39,000

142,000

181,000

W.T. Stephens(6)

142,000

9,000

5,500

12,000

16,500

9,000

1,500

123,500

72,000

195,500

D.M.G. Stewart(11)

142,000

9,000

N/A

13,500

15,000

3,000

1,500

112,000

72,000

184,000

 

(1)

Amounts shown represent $1,500 per meeting attended paid to each committee member, including the committee chair, plus $1,500 per meeting attended and chaired paid to committee chairs.

 

 

(2)

Amounts shown include the minimum required amount of Board retainers paid in DSUs ($180,000 value of DSUs for the Chair, $72,000 value of DSUs for other Board members) plus the value of the retainers, meeting fees and travel fees elected to be received in DSUs.

 

 

(3)

Fees are aggregate amounts respecting duties performed on both TransCanada and TCPL Boards.

 

 

(4)

Mr. Benson became a member of the Governance Committee on April 30, 2009. He was paid a pro-rated committee retainer reflecting this new membership for the second quarter. As of April 15, 2009, Mr. Benson relocated to Canada from the U.S.; for the period January 1 to April 14, 2009, Mr. Benson’s fees and retainers were paid in U.S. dollars and as of April 15, 2009 his fees and retainers were paid in Canadian dollars. Any retainers and fees that were originally paid to Mr. Benson in U.S. dollars prior to April 15, have been converted to Canadian dollars and are included in the above amounts.

 

 

(5)

On April 30, 2009, Dr. Dobson ceased to be the Chair of the Governance Committee when Mr. MacNaughton became Chair and, as a result, their committee retainers have been pro-rated accordingly. On April 30, 2009, Dr. Dobson became a member of the Health, Safety and Environment Committee.

 

 

(6)

Directors who are U.S. residents are paid or credited these amounts, including DSU equivalents, in U.S. dollars.

 

 

(7)

Dr. Draper was a member of the Human Resources Committee until April 30, 2009 when he became a member of the Audit Committee.

 

 

(8)

Ms. Gauthier was a member of the Audit Committee until April 30, 2009 when she became a member of the Human Resources Committee.

 

 

(9)

Mr. Hawkins chaired the September 14, 2009 Human Resources Committee meeting in Mr. Stephens’ absence. He was paid the fee of $1,500 for chairing the meeting.

 

 

(10)

Mr. Jackson’s Board meeting fee includes the fee of $3,000 for each Board meeting he chaired.

 

 

(11)

Mr. Stewart chaired the February 2, 2009 Audit Committee meeting in Mr. Benson’s absence. He was paid the fee of $1,500 for chairing the meeting. Mr. Stewart was a member of the Health, Safety and Environment Committee until April 30, 2009 when he became a member of the Governance Committee.

 



 

TRANSCANADA PIPELINES LIMITED     31

 

 

Minimum Share Ownership Guidelines

 

The Board believes that directors can more effectively represent the interests of shareholders if they have a significant investment in the common shares of TransCanada, or their economic equivalent. As a result, TCPL requires each director (other than Mr. Kvisle who is subject to executive share ownership guidelines) to acquire and hold a minimum number of common shares, or their economic equivalent, equal in value to five times the director’s annual cash portion of their Board retainer. Directors have a maximum of five years to reach this level of ownership.  The level of ownership can be achieved by direct purchase of common shares, by participation in the TransCanada Dividend Reinvestment Plan or by directing all or a portion of their retainer fees, attendance fees and travel fees into DSUs as described under the heading “Share Unit Plan for Non-Employee Directors” below.  Should a director’s shareholdings fall below the minimum threshold at any time after having met such threshold, the director is expected to ensure he or she re-attains the minimum threshold within a reasonable amount of time as determined and reviewed by the Governance Committee.

 

As of February 22, 2010, all of the directors have achieved the minimum share ownership requirement other than Mr. Stephens who has until 2012 (five years from the date he became a director) to achieve the minimum share ownership requirement.

 

Share Unit Plan for Non-Employee Directors

 

The Share Unit Plan for Non-Employee Directors (the “DSU Plan”) was established in 1998.  Pursuant to the DSU Plan, Board members are permitted to elect to receive in DSUs any portion of their retainers and meeting fees (including travel fees) regularly paid in cash.  The DSU Plan also allows the Governance Committee in its discretion, to grant units as additional compensation for directors.

 

Initially the value of a DSU is equal to the market value of a common share at the time the directors are credited with the units.  The value of a DSU, when redeemed, is equivalent to the market value of a common share at the time the redemption takes place. In addition, at the time dividends are declared and paid on the common shares, each DSU accrues an amount equal to such dividends, which amount is then reinvested in additional DSUs at a price equal to the then market value of a common share.  DSUs cannot be redeemed until the director ceases to be a member of the Board. Canadian directors may redeem DSUs for cash or common shares at their option.  U.S. directors may only redeem DSUs for cash.

 

COMPENSATION DISCUSSION AND ANALYSIS

 

Information relating to TCPL’s executive compensation is provided in Schedule “F” to this AIF. The information is excerpted from TransCanada’s Proxy Circular.  Board and committee meetings of TransCanada and TCPL run concurrently.  TCPL is the principal operating subsidiary of TransCanada.

 

Executive officers of TCPL also serve as executive officers of TransCanada.  An aggregate remuneration is paid for serving as an executive of TCPL and for service as an executive officer of TransCanada.  Since TransCanada does not hold any material assets directly other than the common shares of TCPL and receivables from certain of TransCanada’s subsidiaries, all executive employee costs are assumed by TCPL according to a management services agreement between the two companies.

 

LEGAL PROCEEDINGS AND REGULATORY ACTIONS

 

TCPL and its subsidiaries are subject to various legal proceedings and regulatory actions arising in the normal course of business. While the final outcome of such legal proceedings and regulatory actions cannot be predicted with certainty and there can be no assurance that such matters will be resolved in TCPL’s favour, it is the opinion of TCPL’s management that the resolution of such proceedings and regulatory actions will not have a material impact on TransCanada’s consolidated financial position, results of operations or liquidity.

 

MATERIAL CONTRACTS

 

The underwriting agreement between TCPL and Citigroup Global Markets Inc., HSBC Securities (USA) Inc., Deutsche Bank Securities Inc., J.P. Morgan Securities Inc., Mitsubishi UFJ Securities International plc, Mizuho Securities USA Inc., and SG Americas Securities, LLC, as underwriters, dated January 6, 2009 as described in this AIF under the heading “General Development of the Business – Financing Activities” is available on SEDAR at www.sedar.com under TCPL’s profile.

 



 

TRANSCANADA PIPELINES LIMITED     32

 

 

TRANSFER AGENT AND REGISTRAR

 

TCPL’s transfer agent and registrar is Computershare Trust Company of Canada with its Canadian transfer facilities in the cities of Vancouver, Calgary, Winnipeg, Toronto, Montréal and Halifax.

 

INTEREST OF EXPERTS

 

TCPL’s auditors, KPMG LLP, have confirmed that they are independent within the meaning of the Rules of Professional Conduct of the Institute of Chartered Accountants of Alberta.

 

ADDITIONAL INFORMATION

 

1.                                       Additional information in relation to TCPL may be found under TCPL’s profile on SEDAR at www.sedar.com.

 

2.                                      Additional financial information is provided in TCPL’s audited consolidated financial statements and MD&A for its most recently completed financial year.

 


 

 

TRANSCANADA PIPELINES LIMITED     33

 

 

GLOSSARY

 

AcSB

Accounting Standards Board

 

IFRS

International Financial Reporting Standards

AGIA

Alaska Gasline Inducement Act

 

Iroquois System

A natural gas pipeline system in New York and Connecticut

AIF

Annual Information Form of TransCanada Pipelines Limited dated February 22, 2010

 

ISO

International Organization of Standardization

Alaska Pipeline System

A 4.5 Bcf/d natural gas pipeline that would extend 2,737 km (1,700 miles) from a new natural gas treatment plant at Prudhoe Bay, Alaska to Alberta

 

Keystone Canada

TransCanada Keystone Pipeline Limited Partnership

Alberta System

A natural gas transmission system throughout the province of Alberta

 

Keystone Oil Pipeline

A 3,456 km (2,147 mile) oil pipeline project currently under construction

ANR

American Natural Resources Company and ANR Storage Company

 

Keystone U.S.

TransCanada Keystone Pipeline, LP

ANR System

A natural gas transmission system which extends approximately 17,000 km from producing fields in Louisiana, Oklahoma, Texas and the Gulf of Mexico to markets in Wisconsin, Michigan, Illinois, Ohio and Indiana

 

LNG
MD&A

Liquefied Natural Gas
TCPL’s Management’s Discussion and Analysis dated February 22, 2010

ATCO Pipelines

A subsidiary of Canadian Utilities Limited

 

MMcf/d

Million cubic feet per day

AUC

Alberta Utilities Commission

 

Moody’s

Moody’s Investors Service, Inc.

Bbl/d

Barrels per day

 

MW

Megawatts

Bcf

Billion cubic feet

 

NBPL

Northern Border Pipeline Company

Bécancour

A natural gas-fired cogeneration plant near Trois-Rivières, Québec

 

NBPL System

A natural gas transmission system located in the upper Midwestern portion of the U.S.

Bison

The Bison Pipeline Project, a proposed 302-mile pipeline from the Powder River Basin in Wyoming to the NBPL System

 

NEB

National Energy Board

Board

TransCanada’s Board of Directors

 

NGTL

NOVA Gas Transmission Limited

Broadwater

A proposed offshore LNG facility in Long Island Sound, New York

 

North Baja

A natural gas pipeline in southern California

Bruce A

Bruce Power A L.P.

 

NYSDOS

New York Department of State

Bruce B

Bruce Power L.P.

 

NYSE

New York Stock Exchange

Cacouna

The proposed Cacouna Energy LNG facility in Cacouna, Québec

 

Portland System

A natural gas pipeline that runs through Maine and New Hampshire into Massachusetts

Calpine

Calpine Corporation

 

Portlands Energy Centre

A natural gas-fired combined-cycle power plant near downtown Toronto, Ontario

Canadian Mainline

A natural gas pipeline system running from the Alberta border east to delivery points in eastern Canada and along the U.S. border

 

PPA

Power Purchase Arrangement

Cartier Wind Energy Project

Five wind energy projects contracted by Hydro-Québec Distribution representing a total of 590 MW in the Gaspé region of Québec

 

Ravenswood

Ravenswood Generating Station, a natural gas and oil-fired generating located in Queens, New York

Chinook

A proposed 500 Kilovolt high voltage direct current transmission project, originating in Montana and extending 1,600 km to Nevada

 

Ravenswood Agreement

The membership interest and stock purchase agreement between KeySpan Corporation and TransCanada Facility USA Inc. dated March 31, 2008

CO2

Carbon dioxide

 

RGGI

Regional Greenhouse Gas Initiative

Common Shares

Common shares of TransCanada

 

S&P

Standard and Poor’s

Coolidge

Coolidge Generating Station

 

SEC

United States Securities and Exchange Commission

CSA

Canadian Securities Administrators

 

Series 1 Preferred Shares

Cumulative, redeemable, first preferred shares, series 1, of TransCanada

DBRS

DBRS Limited

 

Sheerness

A power plant consisting of two 390 MW coal-fired thermal powered generating units

EUB

Alberta Energy and Utilities Board

 

Sundance

Two coal fired electrical generating facilities which produce 560 MW and 706 MW, respectively

FEIS

Final Environment Impact Statement

 

TCPL

TransCanada PipeLines Limited

FERC

Federal Energy Regulatory Commission (USA)

 

TQM

Trans Québec & Maritimes Pipeline Inc.

 

 

 

 

 

Framework

The Regulatory Framework for Air Emissions

 

TransCanada or the Company

TransCanada Corporation

Foothills System

A natural gas pipeline system in southeastern B.C., southern Alberta and southwestern Saskatchewan

 

TSX

Toronto Stock Exchange

GHG

Greenhouse gas

 

Tuscarora

Tuscarora Gas Transmission Company

GTNC

Gas Transmission Northwest Corporation

 

Tuscarora System

A natural gas pipeline that runs from Oregon through northeast California to Reno, Nevada

GTN System

A natural gas transmission system running from northwestern Idaho, through Washington and Oregon to the California border

 

U.S.

United States

Great Lakes

Great Lakes Gas Transmission Limited Partnership

 

WCI

Western Climate Initiative

Great Lakes System

A natural gas pipeline system in the north central U.S., roughly parallel to the Canada-U.S. Border

 

Year End

December 31, 2009

Horn River Project

A proposed 158 km (98 mile) pipeline to connect new shale gas supply in the Horn River basin north of Fort Nelson, B.C., to the Alberta System

 

Zephyr

A proposed 500 Kilovolt high voltage direct current transmission project, originating in Wyoming and extending 1,760 km to Nevada

HS&E

Health, Safety and Environment

 

 

 

 



 

TRANSCANADA PIPELINES LIMITED     A-1

 

 

SCHEDULE “A”

 

METRIC CONVERSION TABLE

 

 

The conversion factors set out below are approximate factors. To convert from Metric to Imperial multiply by the factor indicated. To convert from Imperial to Metric divide by the factor indicated.

 

Metric

Imperial

Factor

Kilometres (km)

Miles

0.62

Millimetres

Inches

0.04

Gigajoules

Million British thermal units

0.95

Cubic metres*

Cubic feet

35.3

Kilopascals

Pounds per square inch

0.15

Degrees Celsius

Degrees Fahrenheit

to convert to Fahrenheit multiply by 1.8,
then add 32 degrees; to convert to Celsius

subtract 32 degrees, then divide by 1.8

 

*                                          The conversion is based on natural gas at a base pressure of 101.325 kilopascals and at a base temperature of 15 degrees Celsius.

 



 

TRANSCANADA PIPELINES LIMITED     B-1

 

 

SCHEDULE “B”

 

DISCLOSURE OF CORPORATE GOVERNANCE PRACTICES

 

 

The Board and the members of TCPL’s management are committed to the highest standards of corporate governance. TCPL’s corporate governance practices comply with the governance rules of the Canadian Securities Administrators (“CSA”), those of the New York Stock Exchange (“NYSE”) and of the U.S. Securities and Exchange Commission (“SEC”) applicable to foreign private issuers, and those mandated by the United States Sarbanes Oxley Act of 2002 (“SOX”).  As a non-U.S. company, TCPL is not required to comply with most of the NYSE corporate governance listing standards; however, except as summarized on our website at www.transcanada.com, the governance practices followed are in compliance with the NYSE standards for U.S. companies in all significant respects. TCPL is in compliance with the CSA’s National Instrument 52-110 pertaining to audit committees (“Canadian Audit Committee Rules”); National Policy 58-201, Corporate Governance Guidelines; and National Instrument 58-101, Disclosure of Corporate Governance Practices (collectively, the “Canadian Governance Guidelines”).  At TCPL, we believe that the principal objective in directing and managing the company’s business and affairs is promoting the best interests of TCPL in a manner that will ultimately maximize long-term shareholder value and enhance stakeholder relations. TCPL believes that effective corporate governance improves corporate performance and benefits all shareholders.  We believe that honesty and integrity are vital factors in ensuring good corporate governance.  The discussion that follows relates primarily to the Canadian Governance Guidelines and highlights various elements of the Company’s corporate governance program. It has been approved by the Governance Committee and by the Board.

 

Board of Directors

 

The Board believes that, as a matter of policy, there should be a majority of independent directors on TCPL’s Board.  The Board is charged with making this determination based on the annual review conducted by the Governance Committee.  The Board is currently comprised of 13 directors, of whom 12 (92%) were determined by the Board in 2010 to be independent directors. Thirteen nominees are being put forward for election at the Annual and Special Meeting of holders of common shares of TransCanada to be held on April 30, 2010, 12 (92%) of whom are independent.  The Board annually determines the independent status of each of its members and each nominee for election, based on a written set of criteria developed in accordance with the definition of “independent” in the Canadian Audit Committee Rules and the Canadian Governance Guidelines.  The independence criteria also conform to the applicable rules of the SEC, the NYSE and those set out under SOX.  The Board has determined that none of the nominees for director, with the exception of Mr. Kvisle, have a direct or indirect material relationship with TCPL that could interfere with their ability to act in the best interests of TCPL.  Mr. Kvisle, as the President and CEO of TCPL, is not independent.

 

The Governance Committee reviews, at least annually, the existence of any relationship between each director and TCPL to ensure that the majority of directors are independent of TCPL.

 

Further, the Board considered whether directors serving on boards of non-profit organizations which receive donations from TCPL pose any potential conflict.  The Board determined that such relationships, where they exist, do not interfere with any such director’s ability to act in the best interests of TCPL, as all decisions on making donations to non-profit organizations are made by a management committee on which no directors serve.  The Board also considered family relationships and possible associations with companies which have relationships with TCPL, in its determination of independence.

 

Although some of the proposed nominees sit on boards or may be otherwise associated with companies that ship natural gas on TCPL’s pipeline systems, TCPL as a common carrier in Canada cannot, under its tariff, deny transportation service to a credit worthy shipper.  Further, due to the specialized nature of the industry, TCPL believes that it is important for its Board to be composed of qualified and knowledgeable directors, so some of them must come from the oil and gas producer and shipper community; the Governance Committee monitors relationships among directors to ensure that business associations do not affect the Board’s performance.  In a circumstance where a director declares an interest in any material contract or material transaction being considered at a meeting, the director will absent himself or herself from the meeting during the consideration of the matter, and does not vote on the matter.

 

All reporting issuers of which the nominees are presently directors of, are set out in the table in TransCanada’s Proxy Circular under the heading “Nominees for Election to the Board of Directors” under the headings “Other Public Board Directorships” and “Other Public Board Committee Memberships”.  TCPL believes that due to the specialized nature of the industry, it is important for its Board to be composed of qualified and knowledgeable directors.

 



 

TRANSCANADA PIPELINES LIMITED     B-2

 

 

In 2009, independent directors of the Board met separately before and after every regularly scheduled and special meeting. There were eight regularly scheduled meetings and one special meeting during 2009.  In addition, all of the directors are available to meet with management as required.

 

Mr. Jackson has served as the non-executive Chair of TCPL since April 30, 2005. He has also acted as chair person for Deer Creek Energy Limited (from 2001 to 2005) and Resolute Energy Inc. (from 2002 to 2005).

 

Director attendance at Board and committee meetings has been excellent and during 2009, all directors demonstrated a strong commitment to their roles and responsibilities.  The overall attendance rate was 96% at Board meetings and an average of 93% at committee meetings.  Specific attendance statistics are set out with each director’s biography in TransCanada’s Proxy Circular under the heading “Nominees for Election to the Board of Directors”.

 

Board Mandate

 

The Board discharges its responsibilities directly and through committees.  At regularly scheduled meetings, members of the Board and management discuss a broad range of issues relevant to TCPL’s strategy and business interests and the Board is responsible for the approval of TCPL’s strategic plan.  In addition, the Board receives reports from management on TCPL’s operational and financial performance.  The Board had eight scheduled meetings in 2009. Unscheduled meetings are held from time to time as required; there was one unscheduled meeting of the Board in 2009.  There were also two strategic issue sessions and one full-day strategic planning session of the Board held in 2009.

 

The Board operates under a written charter while retaining plenary power.  Any responsibility not delegated to management or a committee of the Board remains with the Board.  The Charter of the Board of Directors addresses Board composition and organization, and the Board’s duties and responsibilities for managing the affairs of TCPL and its oversight responsibilities with respect to: management and human resources; strategy and planning; financial and corporate issues; business and risk management; policies and procedures; compliance reporting and corporate communications; and general legal obligations, including the ability to use independent advisors as necessary.  The charter is available on TransCanada’s website at www.transcanada.com and is attached to TCPL’s AIF as Schedule “E”.

 

The Board also closely oversees any potential conflicts of interest between the Company and its affiliates including TC PipeLines, LP, a NASDAQ listed master limited partnership.

 

Charters have been adopted for each of the committees outlining their principal responsibilities.  The Board and each committee reviews its charter annually to ensure it is in line with the current developments in corporate governance.  The Board and each committee is responsible to update its respective charter.  All charters are available on TransCanada’s website at www.transcanada.com.

 

Position Descriptions

 

The Board has developed written position descriptions for its chair, the chair of each of the Board committees and for the CEO. The responsibilities of each committee chair are set out in each respective committee’s Charter.  The written position descriptions and the committee charters are available on TransCanada’s website at www.transcanada.com.

 

The Human Resources Committee and the Board annually review and approve the CEO’s personal performance objectives and review with him his performance against the previous year’s objectives. The Human Resources Committee’s compensation discussion and analysis can be found attached to TCPL’s AIF at Schedule “F” under the heading “Compensation Discussion and Analysis”.

 

Orientation and Continuing Education

 

New directors are provided with an orientation and education program that includes a directors’ manual containing information about the duties and obligations of directors, the business and operations of TCPL, copies of governance charters, copies of past public filings and documents from recent Board meetings.  New directors are given additional historical and financial information, a session on corporate strategy, are provided opportunities to visit TCPL’s facilities and project sites, and are provided with opportunities for meetings and discussions with the executive leadership team and other directors.  New directors also meet with the Vice President, Strategy who provides an overview of the different areas of operation within TCPL and identifies key areas of interest to the individual director.  Briefing sessions are also held for new committee members, as appropriate.  The directors’ manual and the director induction and continuing education process are reviewed annually by the Governance Committee.  The details of the orientation of each new director are tailored to each director’s individual needs and expressed areas of interest. 

 



 

TRANSCANADA PIPELINES LIMITED     B-3

 

 

Examples of past activities and visits include a power trading floor tour and discussions with the Western power group business leaders, a visit to the Bruce Power site in Kincardine, Ontario, a tour of the Fort McMurray oil sands development, a tour of the pipeline operations control room and a tour of the Ravenswood generating station in Queens, New York.

 

Senior management as well as external experts make presentations to the Board and to its committees periodically on various business related topics and on changes in legal, regulatory and industry requirements.  Directors tour certain TCPL operating facilities and project sites on an annual basis.  In 2009, directors participated in a site visit of two of ANR Pipeline Company’s Gulf of Mexico facilities.  Directors also held a summit in Washington, DC in September of 2009 which included distinguished speakers on a variety of topics of interest to TCPL related to its U.S. investments and Canada/U.S. relations.  Ongoing director education also includes strategic issues sessions, of which three were held in 2009.  Topics for the strategic issues sessions, and locations for site visits are determined by the Governance Committee annually based on current issues and corporate objectives.  TCPL encourages continuing education for its directors, periodically suggests programs which may be relevant to the directors and provides funding for director education where appropriate.  For further detail regarding director education in 2009, refer to “2009 Director Education” in TransCanada’s Proxy Circular.  All Canadian directors are members of the Canadian Institute of Corporate Directors, which provides many opportunities for director education.  In 2008, Audit Committee members received a special tutorial in International Financial Reporting Standards from outside consultants and members of management.

 

Board Access to Senior Management

 

Board members have complete access to the Company’s management, subject to reasonable advance notice to the Company and reasonable efforts to avoid disruption to the Company’s management, business and operations.  The Board encourages management to include key managers in Board meetings who can share their expertise on matters before the Board.  This also enables the Board to gain exposure to key managers with future potential in the Company.

 

Ethical Business Conduct

 

The Board has formally adopted and published a set of Corporate Governance Guidelines, which affirms TCPL’s commitment to maintaining a high standard of corporate governance.  The guidelines address the structure and composition of the Board and its committees and also provide guidance to both the Board and management in clarifying their respective responsibilities.  The Board’s strengths include: an independent, non-executive Chair; well informed and experienced directors who ensure that standards exist to promote ethical behaviour throughout TCPL; an effective board size; alignment with shareholders through director share ownership requirements; and annual assessments of Board, committee and individual director effectiveness. TCPL’s Corporate Governance Guidelines are available on TransCanada’s website at www.transcanada.com.

 

The Board has also adopted a code of business ethics for directors which incorporates as its basis, principles of good conduct and highly ethical behaviour.  TCPL has adopted a code of business ethics for its employees and separate codes applicable to its CEO, Chief Financial Officer and Controller, all of which are certified on an annual basis. Compliance with the Company’s various codes is monitored by the Audit Committee and reported to the Board. Any waiver of the codes of business ethics by executive officers or directors must be approved by the Board or appropriate committee and disclosed.  There have been no material departures from these codes in 2009. TCPL’s codes of business ethics may be viewed on TransCanada’s website at www.transcanada.com.

 

Nomination of Directors

 

The Governance Committee, which is composed entirely of independent directors, is responsible for proposing new nominees to the Board, which in turn is responsible for identifying suitable candidates for election by the shareholders.  The Governance Committee annually reviews the qualifications of persons proposed for election to the Board and submits its recommendations to the Board for consideration.  The objective of this review is to maintain the composition of the Board in a way that provides the best mix of skills and experience to guide TCPL’s long-term strategy and ongoing business operations.  New nominees must have experience in the industries in which TCPL participates or experience in general business management of corporations that are a similar size and scope to TCPL, the ability to devote the time required, and a willingness to serve.  The Governance Committee also advises the Board on the criteria for, and determination of, the independence of each director.

 

The Governance Committee regularly assesses the skill set of current board members against a list of potentially desirable skills and experience to be sought when recruiting new directors to the Board.

 

The Board has determined that no person shall stand for election or re-election to the Board if he or she attains the age of 70 years on or before the date of the annual meeting held in relation to the election of directors; provided however, that if a director attains the age of 70 before serving a full seven consecutive years on the Board, that director may stand for re-election, upon the recommendation of the Board each year until that director has served a full seven years on the Board.

 



 

TRANSCANADA PIPELINES LIMITED     B-4

 

 

Further information relating to the Governance Committee can be found attached to TCPL’s AIF at Schedule “D” under the heading “Board Committees and Their Charters - Governance Committee”.

 

Compensation

 

The Governance Committee, which is composed entirely of independent directors, reviews the compensation of the directors on an annual basis, taking into account such matters as time commitment, responsibility, and compensation provided by comparable companies, and makes an annual recommendation to the Board for consideration.  Towers Watson provides an annual report on directors’ compensation paid by comparable companies to facilitate the Governance Committee’s review of director compensation. Directors may receive their annual retainer, committee and/or chair fees in the form of cash and/or Deferred Share Units.  With the exception of Mr. Kvisle, who follows the Share Ownership Guidelines for executives, Directors must hold a minimum of five times their annual cash retainer fee in common shares or related Deferred Share Units of TransCanada.  Directors have a maximum of five years from the time they join the Board to reach this level of share ownership. The value of ownership levels is recalibrated when the annual cash retainer is increased.

 

The Human Resources Committee, which is composed entirely of independent directors, is accountable on behalf of the Board to determine the compensation for the executive officers of TCPL and to recommend to the Board the remuneration package for the CEO and, for 2010, the Executive Leadership Team which includes all Named Executive Officers.  The Human Resources Committee reviews the executive compensation disclosure prior to publicly disclosing this information.  The process the Human Resources Committee uses for these determinations can be found attached to TCPL’s AIF at Schedule “F” under the heading “Compensation Discussion and Analysis”.

 

Further information relating to the Human Resources Committee can be found attached to TCPL’s AIF at Schedule “D” under the heading “Board Committees and Their Charters - Human Resources Committee”.

 

Information relating to compensation consulting services provided by Towers Watson during the 2009 financial year can be found attached to TCPL’s AIF at Schedule “F” under the heading “Compensation Discussion and Analysis – The Role of the External Compensation Consultant”.

 

Other Board Committees

 

The Board has the following Committees: Audit; Health, Safety and Environment; Governance; and Human Resources. Details relating to these committees can be found attached to TCPL’s AIF at Schedule “D” under the heading “Description of Board Committees and Their Charters”.

 

Assessments

 

The Governance Committee is responsible for making an annual assessment of the overall performance of the Board, its committees and its individual members, and reporting its findings to the Board. An annual questionnaire and/or in-person interview is utilized as part of this process.  The questionnaire is circulated to each of the directors and administered by the Corporate Secretary.  In person interviews are conducted by the Chair with each member of the Board individually.

 

The annual assessment examines the effectiveness of the Board as a whole, and of each committee, and solicits input on areas of potential vulnerability or areas that members believe could be improved or enhanced to ensure the continued effectiveness of the Board and its committees.  The annual assessment also includes questions regarding personal and peer individual performance. Each committee also conducts an annual self-assessment.

 

When utilized, responses from the annual questionnaire are compiled by the Corporate Secretary and provided to the Chair, and responses from the in-person interviews are compiled by the Chair.  Results are distributed to directors and discussed at the Board.  The annual assessment and individual director’s terms of reference are then used in the evaluation of the contribution of individual directors.

 

Formal interviews with each member of TCPL’s executive leadership team are carried out annually by the Chair.  The Chair of the Governance Committee also interviews each director annually on his or her assessment of the Chair’s performance.  Each of these assessments are reported annually to the full Board.  The Governance Committee monitors and discusses external assessments of Board governance and regularly monitors the literature on evolving best practice in corporate governance.

 



 

TRANSCANADA PIPELINES LIMITED     B-5

 

 

Financial Literacy of Directors

 

The Board has determined that all of the members of its Audit Committee are financially literate.  An individual is financially literate if he or she has the ability to read and understand a set of financial statements that present a breadth and level of complexity of accounting issues that are generally comparable to the breadth and complexity of the issues that can reasonably be expected to be raised by TCPL’s financial statements.

 

Majority Voting for Directors

 

TransCanada has adopted a policy whereby, at any meeting where the number of nominees for election is the same as the number of director positions on the Board, if proxy votes withheld for the election of any particular director are greater than 5% of the votes cast by proxy, a ballot pertaining to the election of each of the directors will be held at that meeting.  A director is required to tender his resignation if the director receives more votes “withheld” than “for” that director’s election when such ballot is held. In the absence of extenuating circumstances, the Board is expected to accept that resignation within 90 days.  The Board may fill a vacancy in accordance with TCPL’s by-laws and the Canada Business Corporations Act.  The policy does not apply in the event of a proxy contest with respect to the election of directors.  This policy is part of TCPL’s Corporate Governance Guidelines which are published on its website at www.transcanada.com.

 


 

 

TRANSCANADA PIPELINES LIMITED     C-1

 

 

SCHEDULE “C”

 

CHARTER OF THE AUDIT COMMITTEE

 

1.                                      Purpose

 

The Audit Committee shall assist the Board of Directors (the “Board”) in overseeing and monitoring, among other things, the:

 

·                  Company’s financial accounting and reporting process;

 

·                  integrity of the financial statements

 

·                  Company’s internal control over financial reporting;

 

·                  external financial audit process;

 

·                  compliance by the Company with legal and regulatory requirements; and

 

·                  independence and performance of the Company’s internal and external auditors.

 

To fulfill its purpose, the Audit Committee has been delegated certain authorities by the Board of Directors that it may exercise on behalf of the Board.

 

2.                                      Roles and Responsibilities

 

I.                                        Appointment of the Company’s External Auditors

 

Subject to confirmation by the external auditors of their compliance with Canadian and U.S. regulatory registration requirements, the Audit Committee shall recommend to the Board the appointment of the external auditors, such appointment to be confirmed by the Company’s shareholders at each annual meeting.  The Audit Committee shall also recommend to the Board the compensation to be paid to the external auditors for audit services and shall pre-approve the retention of the external auditors for any permitted non-audit service and the fees for such service.  The Audit Committee shall also be directly responsible for the oversight of the work of the external auditor (including resolution of disagreements between management and the external auditor regarding financial reporting) for the purpose of preparing or issuing an audit report or related work.  The external auditor shall report directly to the Audit Committee.

 

The Audit Committee shall also receive periodic reports from the external auditors regarding the auditors’ independence, discuss such reports with the auditors, consider whether the provision of non audit services is compatible with maintaining the auditors’ independence and the Audit Committee shall take appropriate action to satisfy itself of the independence of the external auditors.

 

II.                                   Oversight in Respect of Financial Disclosure

 

The Audit Committee, to the extent it deems it necessary or appropriate, shall:

 

(a)         review, discuss with management and the external auditors and recommend to the Board for approval, the Company’s audited annual financial statements, annual information form including management discussion and analysis, all financial statements in prospectuses and other offering memoranda, financial statements required by regulatory authorities, all prospectuses and all documents which may be incorporated by reference into a prospectus, including without limitation, the annual proxy circular, but excluding any pricing supplements issued under a medium term note prospectus supplement of the Company;

 

(b)        review, discuss with management and the external auditors and recommend to the Board for approval the release to the public of the Company’s interim reports, including the financial statements, management discussion and analysis and press releases on quarterly financial results;

 

(c)         review and discuss with management and external auditors the use of “pro forma” or “adjusted” non-GAAP information and the applicable reconciliation;

 

(d)        review and discuss with management and external auditors financial information and earnings guidance provided to analysts and rating agencies; provided, however, that such discussion may be done generally (consisting of discussing the types of information to be disclosed and the types of presentations to be made).  The Audit Committee need not discuss in advance each instance in which the Company may provide earnings guidance or presentations to rating agencies;

 

(e)         review with management and the external auditors major issues regarding accounting and auditing principles and practices, including any significant changes in the Company’s selection or application of accounting principles, as

 



 

TRANSCANADA PIPELINES LIMITED    C-2

 

 

well as major issues as to the adequacy of the Company’s internal controls and any special audit steps adopted in light of material control deficiencies that could significantly affect the Company’s financial statements;

 

(f)           review and discuss quarterly reports from the external auditors on:

 

(i)      all critical accounting policies and practices to be used;

 

(ii)                                  all alternative treatments of financial information within generally accepted accounting principles that have been discussed with management, ramifications of the use of such alternative disclosures and treatments, and the treatment preferred by the external auditor;

 

(iii)                               other material written communications between the external auditor and management, such as any management letter or schedule of unadjusted differences;

 

(g)        review with management and the external auditors the effect of regulatory and accounting initiatives as well as off-balance sheet structures on the Company’s financial statements;

 

(h)        review with management, the external auditors and, if necessary, legal counsel, any litigation, claim or contingency, including tax assessments, that could have a material effect upon the financial position of the Company, and the manner in which these matters have been disclosed in the financial statements;

 

(i)            review disclosures made to the Audit Committee by the Company’s CEO and CFO during their certification process for the periodic reports filed with securities regulators about any significant deficiencies in the design or operation of internal controls or material weaknesses therein and any fraud involving management or other employees who have a significant role in the Company’s internal controls;

 

(j)            discuss with management the Company’s material financial risk exposures and the steps management has taken to monitor and control such exposures, including the Company’s risk assessment and risk management policies;

 

III.                              Oversight in Respect of Legal and Regulatory Matters

 

(a)         review with the Company’s General Counsel legal matters that may have a material impact on the financial statements, the Company’s compliance policies and any material reports or inquiries received from regulators or governmental agencies.

 

IV.                               Oversight in Respect of Internal Audit

 

(a)         review the audit plans of the internal auditors of the Company including the degree of coordination between such plan and that of the external auditors and the extent to which the planned audit scope can be relied upon to detect weaknesses in internal control, fraud or other illegal acts;

 

(b)        review the significant findings prepared by the internal auditing department and recommendations issued by the Company or by any external party relating to internal audit issues, together with management’s response thereto;

 

(c)         review compliance with the Company’s policies and avoidance of conflicts of interest;

 

(d)         review the adequacy of the resources of the internal auditor to ensure the objectivity and independence of the internal audit function, including reports from the internal audit department on its audit process with associates and affiliates;

 

(e)          ensure the internal auditor has access to the Chair of the Audit Committee and of the Board and to the Chief Executive Officer and meet separately with the internal auditor to review with him any problems or difficulties he may have encountered and specifically:

 

(i)    any difficulties which were encountered in the course of the audit work, including restrictions on the scope of activities or access to required information, and any disagreements with management;

 

(ii)                                  any changes required in the planned scope of the internal audit; and

 

(iii)                               the internal audit department responsibilities, budget and staffing;

 

and to report to the Board on such meetings;

 



 

TRANSCANADA PIPELINES LIMITED    C-3

 

 

V.                                    Insight in Respect of the External Auditors

 

(a)          review the annual post audit or management letter from the external auditors and management’s response and follow up in respect of any identified weakness, inquire regularly of management and the external auditors of any significant issues between them and how they have been resolved, and intervene in the resolution if required;

 

(b)         review the quarterly unaudited financial statements with the external auditors and receive and review the review engagement reports of external auditors on unaudited financial statements of the Company;

 

(c)          receive and review annually the external auditors’ formal written statement of independence delineating all relationships between itself and the Company;

 

(d)         meet separately with the external auditors to review with them any problems or difficulties the external auditors may have encountered and specifically:

 

(i)    any difficulties which were encountered in the course of the audit work, including any restrictions on the scope of activities or access to required information, and any disagreements with management; and

 

(ii)                                  any changes required in the planned scope of the audit;

 

and to report to the Board on such meetings;

 

(e)          review with the external auditors the adequacy and appropriateness of the accounting policies used in preparation of the financial statements;

 

(f)            meet with the external auditors prior to the audit to review the planning and staffing of the audit;

 

(g)         receive and review annually the external auditors’ written report on their own internal quality control procedures; any material issues raised by the most recent internal quality control review, or peer review, of the external auditors, or by any inquiry or investigation by governmental or professional authorities, within the preceding five years, and any steps taken to deal with such issues;

 

(h)         review and evaluate the external auditors, including the lead partner of the external auditor team;

 

(i)             ensure the rotation of the lead (or coordinating) audit partner having primary responsibility for the audit and the audit partner responsible for reviewing the audit as required by law, but at least every five years;

 

VI.                               Oversight in Respect of Audit and Non Audit Services

 

(a)          pre-approve all audit services (which may entail providing comfort letters in connection with securities underwritings) and all permitted non audit services, other than non audit services where:

 

(i)    the aggregate amount of all such non audit services provided to the Company constitutes not more than 5% of the total fees paid by the Company and its subsidiaries to the external auditor during the fiscal year in which the non audit services are provided;

 

(ii)                                  such services were not recognized by the Company at the time of the engagement to be non audit services; and

 

(iii)                               such services are promptly brought to the attention of the Audit Committee and approved prior to the completion of the audit by the Audit Committee or by one or more members of the Audit Committee to whom authority to grant such approvals has been delegated by the Audit Committee;

 

(b)         approval by the Audit Committee of a non audit service to be performed by the external auditor shall be disclosed as required under securities laws and regulations;

 

(c)          the Audit Committee may delegate to one or more designated members of the Audit Committee the authority to grant pre-approvals required by this subsection.  The decisions of any member to whom authority is delegated to pre-approve an activity shall be presented to the Audit Committee at its first scheduled meeting following such pre-approval;

 

(d)         if the Audit Committee approves an audit service within the scope of the engagement of the external auditor, such audit service shall be deemed to have been pre-approved for purposes of this subsection;

 

VII.                          Oversight in Respect of Certain Policies

 

(a)          review and recommend to the Board for approval the implementation and amendments to policies and program initiatives deemed advisable by management or the Audit Committee with respect to the Company’s codes of business ethics and Risk Management and Financial Reporting policies;

 



 

TRANSCANADA PIPELINES LIMITED    C-4

 

 

(b)         obtain reports from management, the Company’s senior internal auditing executive and the external auditors and report to the Board on the status and adequacy of the Company’s efforts to ensure its businesses are conducted and its facilities are operated in an ethical, legally compliant and socially responsible manner, in accordance with the Company’s codes of business conduct and ethics;

 

(c)          establish a non traceable, confidential and anonymous system by which callers may ask for advice or report any ethical or financial concern, ensure that procedures for the receipt, retention and treatment of complaints in respect of accounting, internal controls and auditing matters are in place, and receive reports on such matters as necessary;

 

(d)         annually review and assess the adequacy of the Company’s public disclosure policy;

 

(e)          review and approve the Company’s hiring policies for partners, employees and former partners and employees of the present and former external auditors (recognizing the Sarbanes-Oxley Act of 2002 does not permit the CEO, controller, CFO or chief accounting officer to have participated in the Company’s audit as an employee of the external auditors’ during the preceding one-year period) and monitor the Company’s adherence to the policy;

 

VIII.                     Oversight in Respect of Financial Aspects of the Company’s Pension Plans, specifically:

 

(a)          provide advice to the Human Resources Committee on any proposed changes in the Company’s pension plans in respect of any significant effect such changes may have on pension financial matters;

 

(b)         review and consider financial and investment reports and the funded status relating to the Company’s pension plans and recommend to the Board on pension contributions;

 

(c)          receive, review and report to the Board on the actuarial valuation and funding requirements for the Company’s pension plans;

 

(d)         review and approve annually the Statement of Investment Policies and Procedures (“SIP&P”);

 

(e)          approve the appointment or termination of auditors and investment managers;

 

IX.                               Oversight in Respect of Internal Administration

 

(a)          review annually the reports of the Company’s representatives on certain audit committees of subsidiaries and affiliates of the Company and any significant issues and auditor recommendations concerning such subsidiaries and affiliates;

 

(b)         review the succession plans in respect of the Chief Financial Officer, the Vice President, Risk Management and the Director, Internal Audit;

 

(c)          review and approve the policy and guidelines for the Company’s hiring of partners, employees and former partners and employees of the external auditors who were engaged on the Company’s account;

 

X.                                    Oversight Function

 

While the Audit Committee has the responsibilities and powers set forth in this Charter, it is not the duty of the Audit Committee to plan or conduct audits or to determine that the Company’s financial statements and disclosures are complete and accurate or are in accordance with generally accepted accounting principles and applicable rules and regulations.  These are the responsibilities of management and the external auditors.  The Audit Committee, its Chair and any of its members who have accounting or related financial management experience or expertise, are members of the Board, appointed to the Audit Committee to provide broad oversight of the financial disclosure, financial risk and control related activities of the Company, and are specifically not accountable nor responsible for the day to day operation of such activities.  Although designation of a member or members as an “audit committee financial expert” is based on that individual’s education and experience, which that individual will bring to bear in carrying out his or her duties on the Audit Committee, designation as an “audit committee financial expert” does not impose on such person any duties, obligations or liability that are greater than the duties, obligations and liability imposed on such person as a member of the Audit Committee and Board in the absence of such designation.  Rather, the role of any audit committee financial expert, like the role of all Audit Committee members, is to oversee the process and not to certify or guarantee the internal or external audit of the Company’s financial information or public disclosure.

 

3.                                      Composition of Audit Committee

 

The Audit Committee shall consist of three or more Directors, a majority of whom are resident Canadians (as defined in the Canada Business Corporations Act), and all of whom are unrelated and/or independent for the purposes of applicable Canadian and United States securities law and applicable rules of any stock exchange on which the Company’s shares are listed.  Each member of the Audit Committee shall be financially literate and at least one member shall have accounting or related financial management expertise (as those terms are defined from time to time under the requirements or

 



 

TRANSCANADA PIPELINES LIMITED    C-5

 

 

guidelines for audit committee service under securities laws and the applicable rules of any stock exchange on which the Company’s securities are listed for trading or, if it is not so defined as that term is interpreted by the Board in its business judgment).

 

4.                                      Appointment of Audit Committee Members

 

The members of the Audit Committee shall be appointed by the Board from time to time, on the recommendation of the Governance Committee  and shall hold office until the next annual meeting of shareholders or until their successors are earlier appointed or until they cease to be Directors of the Company.

 

5.                                      Vacancies

 

Where a vacancy occurs at any time in the membership of the Audit Committee, it may be filled by the Board on the recommendation of the Governance Committee.

 

6.                                      Audit Committee Chair

 

The Board shall appoint a Chair of the Audit Committee who shall:

 

(a)         review and approve the agenda for each meeting of the Audit Committee and as appropriate, consult with members of management;

 

(b)        preside over meetings of the Audit Committee;

 

(c)         make suggestions and provide feedback from the Audit Committee to management regarding information that is or should be provided to  the Audit Committee;

 

(d)        report to the Board on the activities of the Audit Committee relative to its recommendations, resolutions, actions and concerns; and

 

(e)          meet as necessary with the internal and external auditors.

 

7.                                      Absence of Audit Committee Chair

 

If the Chair of the Audit Committee is not present at any meeting of the Audit Committee, one of the other members of the Audit Committee present at the meeting shall be chosen by the Audit Committee to preside at the meeting.

 

8.                                      Secretary of Audit Committee

 

The Corporate Secretary shall act as Secretary  to the Audit Committee.

 

9.                                      Meetings

 

The Chair, or any two members of the Audit Committee, or the internal auditor, or the external auditors, may call a meeting of the Audit Committee.  The Audit Committee shall meet at least quarterly.  The Audit Committee shall meet periodically with management, the internal auditors and the external auditors in separate executive sessions.

 

10.                               Quorum

 

A majority of the members of the Audit Committee, present in person or by telephone or other telecommunication device that permit all persons participating in the meeting to speak to each other, shall constitute a quorum.

 

11.                               Notice of Meetings

 

Notice of the time and place of every meeting shall be given in writing or facsimile communication to each member of the Audit Committee at least 24 hours prior to the time fixed for such meeting; provided, however, that a member may in any manner waive a notice of a meeting.  Attendance of a member at a meeting is a waiver of notice of the meeting, except where a member attends a meeting for the express purpose of objecting to the transaction of any business on the grounds that the meeting is not lawfully called.

 

12.                               Attendance of Company Officers and Employees at Meeting

 

At the invitation of the Chair of the Audit Committee, one or more officers or employees of the Company may attend any meeting of the Audit Committee.

 

13.                               Procedure, Records and Reporting

 

The Audit Committee shall fix its own procedure at meetings, keep records of its proceedings and report to the Board when the Audit Committee may deem appropriate but not later than the next meeting of the Board.

 



 

TRANSCANADA PIPELINES LIMITED    C-6

 

 

14.                               Review of Charter and Evaluation of Audit Committee

 

The Audit Committee shall review its Charter annually or otherwise, as it deems appropriate, and if necessary propose changes to the Governance Committee and the Board.  The Audit Committee shall annually review the Audit Committee’s own performance.

 

15.                               Outside Experts and Advisors

 

The Audit Committee is authorized, when deemed necessary or desirable, to retain and set and pay the compensation for independent counsel, outside experts and other advisors, at the Company’s expense, to advise the Audit Committee or its members independently on any matter.

 

16.                               Reliance

 

Absent actual knowledge to the contrary (which shall be promptly reported to the Board), each member of the Audit Committee shall be entitled to rely on (i) the integrity of those persons or organizations within and outside the Company from which it receives information, (ii) the accuracy of the financial and other information provided to the Audit Committee by such persons or organizations and (iii) representations made by Management and the external auditors, as to any information technology, internal audit and other non-audit services provided by the external auditors to the Company and its subsidiaries.

 



 

TRANSCANADA PIPELINES LIMITED    D-1

 

 

SCHEDULE “D”

 

DESCRIPTION OF BOARD COMMITTEES AND THEIR CHARTERS

 

The Board has four standing committees: the Audit Committee; the Governance Committee; the Health, Safety and Environment Committee; and the Human Resources Committee.  The Board does not have an Executive Committee. The Audit, Human Resources and Governance committees are required to be composed entirely of independent directors.  The Health, Safety and Environment Committee is required to have a majority of independent directors.

 

Each of the committees has the authority to retain advisors to assist in the discharge of its respective responsibilities.  Each of the committees reviews its respective charter at least annually and, as required, recommends changes to the Governance Committee and to the Board. Each of the committees also reviews its respective performance annually.

 

Each of the committees has a charter which is published on TransCanada’s website at www.transcanada.com.

 

CHAIR’S PARTICIPATION IN COMMITTEES

 

Mr. S.B. Jackson, the Chair of the Board, is an independent director.  The Chair is appointed by the Board and serves in a non-executive capacity.  The Board adopted the practice of holding simultaneous meetings of certain committees and, as a result, the Chair is a voting member of the Governance and Human Resources Committees but is not a member of the Audit and Health, Safety and Environment Committees.  The simultaneous sitting of certain committees allows more time to be available for each committee to focus on its respective responsibilities.

 

AUDIT COMMITTEE

 

Chair:  K.E. Benson

Members:  D.H. Burney, E.L. Draper, P.L. Joskow, J.A. MacNaughton, D.M.G. Stewart

 

This committee is comprised of six independent directors and is mandated to assist the Board in monitoring, among other things, the integrity of the financial statements of TCPL, the compliance by TCPL with legal and regulatory requirements, and the independence and performance of TCPL’s internal and external auditors.  The committee is also mandated to review and recommend to the Board approval of TCPL’s audited annual and unaudited interim consolidated financial statements and related management discussion and analysis, and other corporate disclosure documents including information circulars, the annual information form, all financial statements in prospectuses and other offering memoranda, any financial statements required by regulatory authorities and all prospectuses and documents which may be incorporated by reference into a prospectus, before they are released to the public or filed with the appropriate regulatory authorities.  In addition, the committee reviews and recommends to the Board the appointment and compensation of the external auditor, oversees the accounting, financial reporting, control and audit functions, and recommends funding of TCPL’s pension plans.

 

Audit Committee information as required under the Canadian Audit Committee Rules (as defined in Schedule “D” of TransCanada’s Proxy Circular) is contained in TCPL’s Annual Information Form for the year ending December 31, 2009 in the section “Audit Committee”.  Audit committee information includes the charter, committee composition, relevant education and experience of each member, reliance on exemptions, financial literacy of each member, committee oversight, pre-approval policies and procedures, and external auditor service fees by category.  The Annual Information Form is available on SEDAR at www.sedar.com under TCPL’s profile and is published on TransCanada’s website at www.transcanada.com.

 

The committee oversees the operation of an anonymous and confidential toll-free telephone number for employees, contractors and the public to call with respect to perceived accounting irregularities and ethical violations, and has set up a procedure for the receipt, retention, treatment and regular review of any such reported activities.  This telephone number is published on TransCanada’s website at www.transcanada.com, on its intranet for employees and in the Company’s Annual Report to shareholders.

 

The committee reviews the audit plans of the internal and external auditors and meets with them at the time of each committee meeting, in each case both with and without the presence of management.  The committee annually receives and reviews the external auditor’s formal written statement of independence delineating all relationships between itself and TCPL and its report on recommendations to management regarding internal controls and procedures, and ensures the rotation of the lead audit partner having primary responsibility for the audit as required by law.  The committee pre-approves all audit services and all permitted non-audit services.  In addition, the committee discusses with management TCPL’s material financial risk exposures and the

 



 

TRANSCANADA PIPELINES LIMITED    D-2

 

 

actions management has taken to monitor and control such exposures, reviews the internal control procedures to oversee their effectiveness, monitors compliance with TCPL’s policies and codes of business ethics, and reports on these matters to the Board.  The committee reviews and approves the investment objectives and choice of investment managers for the Canadian pension plans and considers and approves any significant changes to those plans relating to financial matters.

 

There were six meetings of the Audit Committee in 2009.

 

GOVERNANCE COMMITTEE

 

Chair:  J.A. MacNaughton

Members:  K.E. Benson, D.H. Burney, P.L. Joskow, D.P. O’Brien, D.M.G. Stewart

 

This committee is comprised of six independent directors and is mandated to enhance TCPL’s governance through a continuing assessment of TCPL’s approach to corporate governance.  The committee is mandated to identify qualified individuals to become Board members, to recommend to the Board nominees for election as directors at each annual meeting of shareholders and to annually recommend to the Board placement of directors on committees.  The committee annually reviews the independence status of each director in accordance with written criteria in order to provide the Board with guidance for its annual determination of director independence and for the placement of members on committees.  The committee also oversees the risk management activities of TCPL.  The committee monitors, reviews with management and makes recommendations related to TCPL’s risk management programs and policies on an ongoing basis.

 

The committee reviews and reports to the Board on the performance of individual directors, the Board as a whole and each of the committees, in conjunction with the Chair of the Board, set forth in TransCanada’s “Disclosure of Corporate Governance Practices”, in Schedule “B” of TCPL’s Annual Information Form.  The committee also monitors the relationship between management and the Board, and reviews TCPL’s structures to ensure that the Board is able to function independently of management.  The committee chair, in consultation with directors, annually reviews the performance of the Chair of the Board and reports the results to the Board. The committee is also responsible for an annual review of director compensation, for the administration of the DSU Plan and establishing, reviewing and assessing the minimum share ownership guidelines for directors.

 

The committee monitors best governance practice and ensures any corporate governance concerns are raised with management. The committee ensures the Company has a best practice orientation package and monitors continuing education for all directors as set forth in more detail in TCPL’s “Disclosure of Corporate Governance Practices”, in Schedule “B” of TCPL’s Annual Information Form.  For a summary of the continuing education sessions attended by directors in 2009, refer to the table under the section entitled “2009 Director Education” in TransCanada’s Proxy Circular.  The committee also has responsibility for oversight of the Company’s Strategic Planning process.

 

There were three meetings of the Governance Committee in 2009.

 

HUMAN RESOURCES COMMITTEE

 

Chair:  W.T. Stephens

Members:  W.K. Dobson, P. Gauthier, K.L. Hawkins, D.P. O’Brien

 

This committee is comprised of five independent directors and is mandated to review the Company’s human resources policies and plans, monitor succession planning and to assess the performance of the Chief Executive Officer and other senior executive officers of TCPL against pre-established performance objectives.  A report on senior management development and succession is prepared annually for presentation to the Board which the committee reviews on an annual basis. The committee reports to the Board with recommendations on the remuneration package for the senior executive officers of TCPL, including the Chief Operating Officer (“COO”) and the CEO.  The committee approves all longer-term compensation including stock options and any major changes to TCPL’s company-wide compensation and benefit plans.  The committee considers and approves any changes to TCPL’s pension plans relating to benefits provided under these plans.  The committee is also responsible for the review of the executive share ownership guidelines.

 

The committee recognizes the importance of maintaining good governance practices for the development and administration of executive compensation and benefit programs, and has instituted processes that enhance the committee’s ability to effectively carry out its responsibilities.  Examples of processes that the committee uses include:

 



 

TRANSCANADA PIPELINES LIMITED    D-3

 

 

·                                         holding in-camera sessions without Company management present prior to and following every regularly scheduled committee meeting;

 

·                                         hiring external consultants and advisors and requiring their attendance at specified committee meetings;

 

·                                         annually approving a checklist that sets out the timetable of all regularly occurring accountabilities for the committee which provides context for the discussion of related items; and

 

·                                         using a two-step review process where items are provided for the committee’s initial review at a meeting prior to the approval meeting.

 

There were five meetings of the Human Resources Committee in 2009 (four regularly scheduled and one special meeting).

 

HEALTH, SAFETY AND ENVIRONMENT COMMITTEE

 

Chair:  E.L. Draper

Members:  W.K. Dobson, P. Gauthier, K.L. Hawkins, W.T. Stephens

 

This committee is comprised of five independent directors and is mandated to monitor the health, safety, security and environmental practices and procedures of TCPL and its subsidiaries for compliance with applicable legislation, conformity with industry standards and prevention or mitigation of losses.  The committee also considers whether the implementation of TCPL’s policies related to health, safety, security and environmental matters are effective, including policies and practices to prevent loss or injury to TCPL’s employees and its assets, networks or infrastructure from malicious acts, natural disasters or other crisis situations.  The committee reviews reports and, when appropriate, makes recommendations to the Board on TCPL’s policies and procedures related to health, safety, security and the environment.  This committee meets separately with officers of TCPL and its business units who have responsibility for these matters and reports to the Board on such meetings.

 

There were three meetings of the Health, Safety and Environment Committee in 2009.

 


 

 

TRANSCANADA PIPELINES LIMITED     E-1

 

 

SCHEDULE “E”

 

CHARTER OF THE BOARD OF DIRECTORS

 

I.              INTRODUCTION

 

A.    The Board’s primary responsibility is to foster the long-term success of the Company consistent with the Board’s responsibility to act honestly and in good faith with a view to the best interests of the Company.

 

B.    The Board of Directors has plenary power.  Any responsibility not delegated to management or a committee of the Board remains with the Board.  This Charter is prepared to assist the Board and management in clarifying responsibilities and ensuring effective communication between the Board and management.

 

II.            COMPOSITION AND BOARD ORGANIZATION

 

A.    Nominees for directors are initially considered and recommended by the Governance Committee of the Board, approved by the entire Board and elected annually by the shareholders of the Company.

 

B.    The Board must be comprised of a majority of members who have been determined by the Board to be independent.  A member is independent if the member has no direct or indirect relationship which could, in the view of the Board, be reasonably expected to interfere with the exercise of a member’s independent judgment.

 

C.    Directors who are not members of management will meet on a regular basis to discuss matters of interest independent of any influence from management.

 

D.    Certain of the responsibilities of the Board referred to herein may be delegated to committees of the Board.  The responsibilities of those committees will be as set forth in their Charter, as amended from time to time.

 

III.           DUTIES AND RESPONSIBILITIES

 

A.            Managing the Affairs of the Board

 

The Board operates by delegating certain of its authorities, including spending authorizations, to management and by reserving certain powers to itself.  Certain of the legal obligations of the Board are described in detail in Section IV.  Subject to these legal obligations and to the Articles and By-laws of the Company, the Board retains the responsibility for managing its own affairs, including:

 

i)      planning its composition and size;

 

ii)     selecting its Chair;

 

iii)        nominating candidates for election to the Board;

 

iv)   determining independence of Board members;

 

v)    approving committees of the Board and membership of directors thereon;

 

vi)   determining director compensation; and

 

vii)       assessing the effectiveness of the Board, committees and directors in fulfilling their responsibilities.

 

B.            Management and Human Resources

 

The Board has the responsibility for:

 

i)      the appointment and succession of the Chief Executive Officer (CEO) and monitoring CEO performance, approving CEO compensation and providing advice and counsel to the CEO in the execution of the CEO’s duties;

 

ii)     approving a position description for the CEO;

 

iii)        reviewing CEO performance at least annually, against agreed-upon written objectives;

 

iv)   approving decisions relating to senior management, including the: