Presentation on theme: "TransCanada Business Model"— Presentation transcript:
1 TransCanada Business Model Good Afternoon.My name is Stuart Kampel. I am General Manager of Mexico Business Development for TransCanada.It is my pleasure to be here today to speak at this conference.I have been asked today to provide you with some perspective on how TransCanada approaches its business development and project initiatives.International Pipeline ConferenceNovember 12, 2009
2 Agenda About TransCanada TransCanada’s North America Business Model Guadalajara Pipeline ProjectFor today’s presentation, I will provide a brief overview of TransCanada for those who are not familiar with us;I will provide a summary of the North America natural gas business model and how TransCanada is positioned within inandFinally I will close with an overview of one of the natural gas pipeline projects that we are currently working on here in Mexico, the Guadalajara pipeline project.
3 Natural Gas Pipelines59,000 km (36,500 mi) of wholly owned natural gas pipelineInterests in an additional 7,800 km (4,800 mi) of natural gas pipeline250 Bcf of regulated natural gas storage capacityUnparalleled connections from traditional and emerging basins to growing marketsAverage daily volume of approximately 15 BcfTransCanada is the largest pipeline owner / operator in North America, with over $40 billion in assets. We employ approximately 4,000 professionals across our system.We own over 59,000 kilometers of large diameter natural gas pipeline connecting the largest natural gas supply basins to the largest gas markets.On an average day, TransCanada transports approximately 15 billion cubic feet of natural gas, which is equivalent to about 20% of North America’s natural gas use.In addition to our pipeline assets, TransCanada is the 2nd largest natural gas storage operator in North America, with supply area storage located in Alberta, and market area storage located in Michigan.3
4 Power Generation 19 plants, 10,900 megawatts Diversified portfolio consists primarily of:Long-term power purchase arrangements with stable, predictable earningsLow-cost, base-load generationKey power infrastructure assets in attractive marketsThe second major line of business for TransCanada is in Power Generation.TransCanada owns or controls approximately 11,000 megawatts of power generation in various locations in North America. This is equivalent to approximately 20% of the generation capacity of Mexico.Our assets are located primarily in western Canada, the Northeast United States and in the province of Ontario.Our portfolio is highly diversified, including:Nuclear GenerationNatural GasCoalHydroAnd more recently wind generation4
5 TransCanada’s History in Mexico 1998, built the first privately owned pipeline in Mexico, the Energia Mayakan pipeline1999, built the El Bajio pipeline in Bajio region2006, built the Tamazunchale pipeline in eastern MexicoCD JuarezNogalesMexico CityMéridaTolucaTuxpanNacoLázaro CárdenasGuadalajaraAltamiraMayakan PipelineEl Bajío PipelineManzanilloGuaymasChihuahuaValladolidReynosaMonterreyTijuanaAcapulcoTopolobampoMazatlánMexicaliCancunPemex PipelinePrivate Open Access PipelineTamazunchale PipelineProposed LNG TerminalLegendTransCanada’s history in Mexico goes back to the mid 1990s, when Mexico was restructuring its natural gas regulations and policies.In 1998, TransCanada built the first non-Pemex pipeline in Mexico, the Energia Mayakan project to the Yucatan.Later we built the El Bajio pipeline and in 2006 built the first phase of the Tamazunchale pipeline under a contract with CFE.Our history here in Mexico continues with the upcoming Guadalajara pipeline project, which I will speak more about later.
6 TransCanada’s North American Business Model I was asked to provide you with some comments on how TransCanada approaches its business and how we position ourselves within in.To provide some context, I will provide an overview of the North America gas business model.6
7 The Natural Gas Transportation System This graphic depicts the Natural gas transportation system from wellhead through to the end use market.For TransCanada, we have chosen to participate and focus on two specific areas of this system.TransCanada focuses only on long haul natural gas transportation and underground storage. This segment of the business fits our business style of a capital intensive investment with a very small labor requirement.TransCanada takes gas downstream of the gas processing plants and transports that gas long distances to the market areas. At that point, we hand off control of the gas to industrials, natural gas distribution companies and power generation facilities.Source: AGA
8 Natural Gas Value Chain – Considerations of Participants ProducersMarketersPipelinesLocal UtilityConsumersIndependent, MajorShell, BP, Exxon, ConocoPhilipsGas well gasOil well gasNoProduct reserves,Generate cashAffiliated, IndependentJP Morgan, EncanaSupply aggregation, Logistics managementNoMargin on gas, Margin on servicesInterstate, IntrastateTransCanadaTransportation, StorageYesFee for service, Return on capitalInvestor owned, MunicipalPacific Gas & Electric, OneokSupply aggregation,TransportationYesFee for service, Return on capitalResidential, Industrial, CommercialHomes, stores, plantsMarket for gas, Market for servicesNoSecure supply, Minimum costTypeExampleContributionIn terms of the natural gas value chain, depicted here, TransCanada positions itself in the middle of the chain. The considerations and needs of participants in the chain vary widely across this value chain.Producers, whether big or small, focus their efforts on finding and developing new natural gas reserves both to maintain but also increase their production. The producers take commodity price risk and their objective is to achieve the highest price possible.Marketers try to help manage pricing risk for producers and the end use market by creating a trading market, similar to a stock exchange. They can speculate on price, but usually take a margin on transactions.Pipelines provide the conduit to move the gas from the well to the market on a fee for service basis. Since it is such a capital intensive business, with recovery of capital over a 20 to 30 year period, it comes under regulatory scrutiny, with a focus on a reasonable return on capital employed.The local utility takes that gas and makes it available to households. It is also a fee for service business and is regulated. Consumers, of course, demand reliable service and low prices.Price RegulatedObjectives
9 Natural Gas Value Chain – Activities of Participants ProducersMarketersPipelinesLocal UtilityConsumersGenerate cash flowEnsure access to marketObtain best priceMatch supplies to marketAvoid imbalance penaltiesCost vs benefit of selling further down the channelSeasonal arbitrageCommodity price risk (hedging)Achieve margin (spread)Avoid imbalance penaltiesManage price risksSeasonal arbitrageGeographic arbitrageProfit opportunities in managing risks for othersGenerate transport/storage revenueExtract value for service provided (swing)Impose discipline on shippers (receipt vs delivery imbalances)Account for ownership of gas in pipeline custodyOptimize system operationsCommodity salesService obligationSupply security/costTransport revenuePipeline/storage capacity accessPipeline imbalancesImbalances on local distribution companyCommodity price riskType of service (sale or transport, firm or interruptible)Supply securityCommodity priceAccess to alternativesHedgingImbalancesThis chart depicts the main activities of the value chain participants.Because the objectives of the producers and the end users are so different (one side wants high prices and the other side wants low prices), it is usually up to the regulated entities to enforce discipline on the system.At the same time, the marketers are always attempting to manipulate the market in order to squeeze additional revenue for themselves.The pipeline needs to ensure that gas quality standards are met, and that operational tolerances remain relatively constant. The rules that govern the operations of the pipeline system are therefore very strict and are usually consistent across the pipeline industry.The role of the regulator is very important to keep the system operating in an efficient and consistent manner.Source: AGA
10 Broad Trends – Gas Demand Bcf/dHistoryForecastResidential & CommercialOtherIndustrialElectric GenerationSince the construction of pipelines is such a capital intensive business, with recovery of capital over a long period of time, it is very important to ensure that the market will exist over a long period of time.It is important that we understand the market fundamentals and any changes that are coming forward in the industry.One thing we look at is future trends of gas supply and demand.Shown here is our forecast of North America gas demand. We expect to see a continued and growing need for natural gas over the next 25 years.We see demand growth primarily in the power generation sector.This is particularly true for Mexico as the economy here should grow at a relatively faster pace than in the United States and Canada.Demand led by Electric Generation sector
11 Broad Trends – Gas Supply Gulf of Mexico + U.S. OtherWCSBU.S. RockiesEastern CanadaBcf/dNorthLNGMexicoDemandHistoryForecastU.S. ShaleBC Unconv.To meet this demand, we see continued growth in domestic natural gas production, supplemented with competitively priced LNG. We expect that Mexico natural gas production will also be a key contributor to supply growth.The biggest change from previous years, that we are watching very closely, is the emergence of shale gas production onto the supply scene, shown in yellow.As recently as two years ago we had forecasts that relied much more on imports of LNG than we have today.The change in expectation from LNG back to Shale gas can have a dramatic impact on the value of our pipeline systems.Domestic North America gas supply to remain strong
12 Building for Tomorrow: Developing a Portfolio of Future Growth Opportunities Our Approach:Maintain complete analysis of market conditionsCapitalize on the need for new and more efficient energy infrastructure in North AmericaFocus on regions and businesses where we can build genuine competitive advantageCarefully select opportunities with long-term upsideMaintain long list of project opportunitiesPursue projects when conditions are rightNegotiate contract structure acceptable to our risk toleranceSo, in terms of our business planning, we need to constantly analyse new supply and demand trends.Once we identify a trend we attempt to capitalize on it by focusing on the regions where we have a competitive advantage.We select opportunities that have long term fundamentals that will ensure recovery of our capital.We try to have a long list of project opportunities and select the ones that best reflect our risk and return expectations.In commercializing the opportunities, we attempt to negotiate terms that appropriately reflect the risk of the project.
13 Building for Tomorrow: Risk / Return Trade off This slide depicts the risk / return trade off. For any change in the weighting on one side of the scale, there is a corresponding change in the weighting on the other side of the scale.For example, if the market is not willing to offer long term contracts, the required rate of return must increase to compensate for the risk of capital recovery in the future.Other types of risks that affect return include the construction cost risks, the strength of the counterparty and even political risk when dealing with certain jurisdictions.Required ReturnCapital StructureExternal FinancingFinancial Market situationCorporate StrengthProject RisksConstruction costContract TermCounterparty ExposureRegulatory/Political
14 Track Record of Investing in Attractive Low-Risk Assets $19 Billion* (1999 – 2008)Canadian Regulated Pipelines $2.6(14%)U.S. Regulated Pipelines $8.7Power – Long-term PPAs / Capacity Payments $4.7(45%)For TransCanada, we have shown a consistent track record of investing in projects that offer long term contract and regulatory security.Over the last ten years, we have invested approximately 19 Billion dollars in US and Canadian regulated pipelines, power plants with long term purchase agreements and if we cannot achieve that, then we look to be the lowest cost service supplier into that region.(25%)Power – Low-cost Base-load $2.1Other $0.9(11%)(5%)* Includes acquisitions and completed greenfield projects
15 Capital Cost Estimate* Current ProjectsProjectPipelinesKeystoneCanadian RegulatedU.S. RegulatedBisonGuadalajaraEnergyBruce Power Units 1 & 2 (50%)Halton HillsKibby WindCartier Wind Phases 4 – 6 (62%)CoolidgeCapital Cost Estimate*($Billions)126.96.36.199.60.3188.8.131.52.821.1In-ServiceDate2010 – 20122009 – 20112010 – 2011201120102009 – 2010Revenue StreamContracted and SpotCost of serviceContractedFully contractedThis is a list of TransCanada’s current project portfolio.We plan to invest over $20 billion in projects over the next 3 years.As you see in the last column, these projects are all secured by long term contracts with very large and stable counter parties.* TransCanada share in CAD dollars. Assumes a US$ to CAD$ exchange rate of 1.1. Approximately $3.5 billion was spent by the end of 2008 on multi-year projects.
16 Keystone Oil Pipeline Approx. US$12 billion Keystone 3,456 km Gulf Coast Expansion 3,200 kmCapacity 1,090,000 Bbl/d910,000 Bbl/d committed for an average term of 18 years (83% of total capacity)Strong counterparties operating in upstream and downstream segments of the oil businessA good example of how we put our business model into action is the Keystone Oil pipeline that we are currently constructing.This project will transport crude oil from the rapidly growing oil sands area of Alberta to the refining markets in the US Midwest and Gulf Coast. The oil sands investments are typically long life mining and extraction businesses that match well with pipeline requirements. The system is underpinned with long term contracts with major oil producers and refiners.We are currently constructing the first phase of the Keystone pipeline that will move 435,000 barrels per day of oil from Alberta to the midwest United States. We expect this phase of the project to be placed into service late this year.The second phase of the project will see a line extending to the Cushing Oklahoma market. That phase will be placed into service in 2010 and will increase the capacity of the system to 590,000 barrels per day.Phases 1 and 2 extend 3,456 km from Alberta to the US Midwest. (30 and 36”)The final phase of the project is expected to be in-service in That is represented by the dotted line on the map. That 2,700 km pipeline will bring Alberta oil to the Houston area. (36”)Once complete, the system will have the capacity to move over 1 million barrels of crude oil from Alberta’s oil sands to the United States market.
17 Alberta System North Central Corridor 300 km of 42-inch pipe 26 MW of compressionApproximately $925 millionIn-service 2010Groundbirch Pipeline ProjectCommitments for 1.1 Bcf/d by 201477 km 36-inch pipeApproximately $250 millionExpected in-service Q4 2010Horn River Pipeline ProjectCommitments for 378 MMcf/d in 2013155 km combination of NPS 30 and existing pipeApproximately $340 millionExpected in-service 2012Here is another project example in Canada on the natural gas side.We are currently building pipelines to reach the new Shale gas supplies in Northeast British columbia, meeting that emerging gas trend.The North Central Corridor pipeline will connect the east and west sides of our Alberta system and increase the utilization of our pipeline system.PipelinesProposed PipelinesGas Storage Facilities
18 Bison Pipeline 297-mile natural gas pipeline 407 MMcf/d contracted Initial capacity 400 MMcf/d to 500 MMcf/dFuture expansion up to 1.0 Bcf/d and extension potentialApproximately $US610 millionConnects growing Rockies supply to Northern Border Pipeline with access to Chicago and area marketsExpected in-service date late 2010Our Bison pipeline in the United States has long term contracts with Rocky Mountain gas producers. This pipeline will connect to another one of our pipelines, increasing its utilization and ensuring long term value for us.
19 Mexico Assets Guadalajara Pipeline 310 km, 30-inch diameter Expected in-service Q2 2011Initial capacity 500 MMcf/dFuture expansion up to 900 MMcf/dApproximately US$320 million25-year ship or pay contract with CFETamazunchale Pipeline130 km, 36-inch diameterInitial capacity 170 MMcf/dayFuture expansion up to 430 MMcf/dayIn-service late 200626-year ship or pay contract with CFEHere in Mexico, TransCanada follows a very similar business approach.TransCanada seeks long term investments in growing regions. We seek long term contracts with stable contractual structures.The projects that we engage in fit our core competencies of financial management, construction management and long term operations.Currently we own the Tamazunchale gas pipeline in eastern Mexico. This pipeline is underpinned by a 26 year contract with the Comision Federal de Electricidad.We are about to begin construction on our second pipeline here in Mexico, which is the Manzanillo to Guadalajara gas pipeline. Again, this pipeline is underpinned by a long term contract with the CFE.
20 TransCanada’s Guadalajara Pipeline I thought I’d provide some additional information o20
21 Guadalajara Pipeline Awarded in May, 2009 Approximately 300 km in length30” diameter pipelineWill deliver up to:500 MMcf/d of natural gas to CFE’s Manzanillo power plant;320 MMcf/d of natural gas to the Pemex system near GuadalajaraIn-service: March 2011The Guadalajara pipeline will be a 30” diameter pipe, extending from the Manzanillo LNG terminal 300 kilometers to Guadalajara.The pipeline will connect to Pemex’s national pipeline system near Guadalajara, allowing the LNG gas to have access to the centre region of the country.Initially, the pipeline will have a capacity to Guadalajara of 320 million cubic feet per day.
22 Project SummaryThe pipeline project is part of a larger energy infrastructure program undertaken by CFELNG Supply acquisition (2007) (supplies from Peru)LNG Regasification (2008) (owned by Korea Gas and Mitsui)Refurbishment of Manzanillo Power plant to natural gas (CFE)Gas for new power plants in Guadalajara and for power generation in central Mexico (through the Pemex pipeline)Pipeline linking LNG terminal to power plant and Pemex pipeline systemThe overall program willServe Mexico’s growing electric demandDiversify Mexico’s natural gas supplyImprove efficiency of CFE’s power generationEnsure natural gas supply in Central and Western MexicoThe pipeline is but one component of a larger undertaking managed by the CFE.The overall program includes:An LNG supply contract with supplies contracted from PeruA regasification terminalRepowering of the Manzanillo power plantNew power generation near Guadalajara and further inlandThe pipeline to GuadalajaraThe overall program is intended to serve Mexico’s growing power demand.By purchasing LNG in the Pacific basin, CFE will diversify its gas supply options. Having optionality for purchasing LNG from both the Pacific and Atlantic supply basins will no doubt pay off in the future.
23 CFE Multi-Phase Program LNG Terminal To guarantee the future supply of natural gas to thermoelectric power plants through means of purchasing liquefied natural gas (LNG). This LNG will be stored and regasified in a newly constructed Storage and Regasification Terminal in the state of Colima.As mentioned, CFE will be being LNG from Peru. We believe that CFE obtained an excellent pricing structure for the LNG, with a direct linkage and discount to the Henry Hub price.Securing the gas contract was no easy task for CFE. During 2006 / 2007, the world economy was booming and LNG was in very high demand.The regasification terminal contract was awarded in Again, we believe that CFE obtained an excellent contract during a world wide infrastructure boom, where prices of materials and labor were steadily rising and difficult to predict.
24 CFE Multi-Phase Program Manzanillo Power Plant Upgrade Upgrade and improve the thermoelectric power plant in ManzanilloOne key driver for the project is the refurbishment of CFE’s power plant in Manzanillo. CFE plans to convert this large power plant from fuel oil to cleaner burning natural gas.With the conversion, the efficiency of the power plant will be vastly improved. In addition the air quality in the region of Manzanillo will see a significant improvement.
25 CFE Multi-Phase Program Guadalajara Pipeline Transport natural gas from the Storage and Regasification Terminal through the construction of the Guadalajara PipelineThis gas pipeline links natural gas between the states of Colima and Jalisco, and also increases the security of natural gas supply to Central and Western MexicoThe link between the regas terminal and the Pemex national pipeline system will be the Guadalajara pipeline.With this pipeline, gas supply security to the western part of the country will be vastly improved.
26 Project Timeline – Key Dates LNG Gas Supply Contract September 28, 2007LNG Regasification Contract Awarded March 7, 2008Guadalajara PipelineCFE ITB Issued October 14, 2008Bid Submission April 14, 2009Contract Award May 4, 2009Contract Execution May 20, 2009Construction Commencement Q1, 2010Target Completed Q1, 2011Commercial In-service March 30, 2011In terms of the pipeline,The bids were submitted on April 14 of this year.TransCanada was awarded the contract on May the 4th and the contract was signed on May 20.We plan to begin construction soon with completion in early 2011.Relative to projects that we have worked on in the United States and Canada, the process will completed in a relatively short amount of time.22 months from date of contract to commercial operations
27 Guadalajara Pipeline Construction Challenges Congested Rights of WayFibre opticsOverhead power linesHighwaysUrban structuresHere are some unique attributes of the pipeline.Congested rights of way with multiple users in the corridors
28 Guadalajara Pipeline Construction Challenges Difficult construction areas with limited alternatives to re-route.Difficult construction areas with limited alternatives to reroute
29 Guadalajara Pipeline Construction Challenges Difficult crossings of canyons, rivers and gorgesDifficult crossings of canyons and gorges
30 Guadalajara Pipeline Construction Challenges Anticipating future development along the pipeline, such as highway expansion plans and land use changesAnticipating future highway expansion plans
31 Guadalajara Pipeline Construction Challenges Working in and around environmentally protected areasWorking in and around environmental protected areas
32 Guadalajara Pipeline Construction Challenges Working in a high seismic and volcanic area.In fact this area of the country is one of the most siesmically active regions in the country. This will represent some unique challenges that we don’t typically face in other areas of North America.Active nearby volcanic and seismic activity
33 TransCanada’s Formula for Success Long History of ConstructionExperienced Project TeamsExtensive database of past projects including costs, risk variablesWell developed project management tools and expertiseStrong supplier and contractor baseDisciplined Approach to BusinessMarket IntelligenceRisk AnalysisComprehensive Due DiligenceFinancial StructuringWe have:A long history in pipeline construction, with Experienced project teams, an extensive database of past projects including costs and risk variablesAndWell developed project management tools and expertiseWe engage in a Comprehensive Due Diligence process, have recent construction experience in Mexico and through our various projects, have a strong supplier and contractor base from which to work