TransCanada PipeLines Ltd., Calgary, has decided to return to its core business by selling all assets not associated with its $21 billion (Can.) pipelining, power generation, and marketing activities in Canada and the northern US. This means the company is exiting its substantial midstream and international businesses.
CEO Doug Baldwin said Trans- Canada's strong suit is low-cost gas transmission across the northern tier of North America with advantages at both ends of the pipeline. He noted that TransCanada's pipeline system ships natural gas from the most attractive gas basin in North America, the Western Canada Sedimentary Basin, and at the other end is linked to the largest energy markets in North America.
TransCanada International will market an extensive list of pipeline and related assets, many of which were picked up in a merger with Nova Corp. more than a year ago. They include oil and gas pipelines, electric generating plants, and related facilities in place or under development in Colombia, Venezuela, Argentina, Chile, Brazil, Mexico, Indonesia, Thailand, Tanzania, Australia, and the Dutch North Sea.
Baldwin said the firm's objective is to release capital from noncore assets and redeploy estimated proceeds of $3 billion to repay debt and enhance the company's balance sheet.
In addition to exiting the international and midstream businesses, TransCanada plans to sell the Express Pipeline System, including the transmission and marketing of crude oil and refined products, and Cancarb Ltd., a carbon black plant in Alberta.
The company has reduced its permanent staff to 4,400 from 5,000 since the Nova merger. It said about one third of current employees are associated with the assets that are to be sold, and it will negotiate with buyers to try and maximize opportunities for those workers.
TransCanada will record a charge against fourth quarter earnings of about $700 million, after-tax, as a result of the restructuring.
TransCanada has already sold about $1 billion worth of assets as part of its retrenchment. This includes the sale of Angus Chemical Co.; the conveyance of its investment in the Northern Border Pipeline system into, and subsequent public offering of units of, TC Pipelines LP; and an agreement to sell its US midstream facilities and US NGL, marketing, and trading businesses to a unit of Coastal Corp., Houston.
Greg Stringham, vice-president of the Canadian Association of Petroleum Producers, says it has taken Trans- Canada and Nova a couple of years to move through the merger process. "Now they are coming closer together, there is the opportunity for them to try and realign and focus back on just the transportation business, like they are doing."
Randy Ollenberger, pipeline analyst for Merrill Lynch, believes TransCanada is trying to optimize its operations before the Alliance pipeline comes into service in late 2000, because Trans Canada knows it is going to lose some volume to Alliance, at least initially.
"Contractual arrangements are such that [producers] can come off the Trans Canada system. They would like to get their house in order to make their tolls low enough to entice people to continue using the system," he says.
Ollenberger added that TransCanada is now on a lot of people's radar screens as a potential buy at $12/ share.
Stringham agrees that Alliance is a problem for TransCanada but thinks it is a small one: "With Alliance and other pipelines coming on, there needs to be a refocus. From our perspective, it's a short-term phenomenon. We're looking at a change in pipeline utilization from 100% to 90%," he said.
"This started with the decision to merge. There are new pipelines coming and still some jurisdictional issues to resolve. It really is a difficult situation for them to go through right now. There are several strategies which could have been taken, and this is the one they have chosen," Stringham said.
Ian Doig, publisher of Doig's Digest, Calgary, says TransCanada's problems can be traced back 5 years to the beginning of the Alliance project. If Alliance had not come along, TransCanada would have gone on its way, and NOVA would still be alive, he says. And in the 18 months since the merger, TransCanada's market capitalization has declined by about $9 billion.
A rate of return of 9.9% on its regulated business, awarded to TransCanada by the National Energy Board, is less than it would get for a US pipeline, says Doig. And some observers think that, because the majority of TransCanada's assets are regulated, this may provide a safety net against a possible takeover.
Doig predicts that there will be a takeover offer at some point but sayssovereignty will not be an issue. He says Canadian producers don't seem to understand that one of their main assets for getting gas to market is pretty well "walking wounded" now and is going to need some capital.