As it is a gas pipeline and a power generation company, it's only natural that TransCanada Corp. would see a bright future in gas-fired power plants. New environmental regulations, emerging gas shale plays and coal-fired plant retirements are a positive for the company, but near-term gas throughput on the company's mainline presents a challenge, executives disclosed last week.
TransCanada currently has C$60 billion worth of projects under development, CEO Harold N. Kvisle told financial analysts. And they're big projects, too, such as the proposed Alaska and Mackenzie Valley gas pipelines, the Bruce Power Plant refurbishment and the Chinook and Zephyr power transmission lines.
"Hundreds and hundreds of small projects don't get us anywhere," Kvisle said. "We are a company that needs to pursue large projects, and we're focused on that."
He added that TransCanada looks at all of North America when it comes to pipeline projects but focuses on three or four regions where power is concerned. On the natural gas side, the company has witnessed declining throughput on its mainline, which will necessitate an increase in tolls next year, COO Russell K. Girling disclosed.
"We have seen supply declines and demand increase in Alberta...That drop [in pipeline throughput] was sharper than we anticipated so we had an undercollection [of tolls] in 2009 that has to be added to 2010 tolls," Girling said.
However, as conventional production declines in Alberta, production from the unconventional Montney and Horn River plays in British Columbia is expected by Girling and others to take up the slack (see related story).
"In the longer term we would expect Montney and Horn River gas to come on and for these [throughput] volumes to stabilize and actually grow over time as we move out of the undercollection scenario from 2009 to 2010 and into growing volumes," Girling said. "We would expect our tolls to again decline."
TransCanada is not exposed to volume risk on its mainline, and despite the pending hike in tolls, Girling said shippers like the existing toll structure as it offers the company the lowest cost of capital and shippers the lowest transportation costs in the long run.
"I don't think anybody wants us to change that model," Girling said. "That model leads to the lowest cost of capital and the lowest overall cost of running that pipeline. It's critical infrastructure that needs to run for a long period of time. From the macro perspective, they want the lowest possible cost. So there isn't any great cry for us to change the model...We won't be taking volume risk on this pipeline."
Spare capacity on its system isn't necessarily a bad thing as it creates a barrier to entry for those that would seek to construct a competing system, Kvisle noted. He said TransCanada can take shorter-term contracts and smaller volumes than a competitor seeking to construct a new line would be able to. This is important, he said, as the company's Alberta system is well positioned to take volumes from the proposed Mackenzie Gas Project (see NGI, April 13), as well as from the Alaska gas pipeline that TransCanada has been chosen by the state of Alaska to construct.
On the power side of TransCanada's business, Kvisle noted that the company is also well positioned to benefit from proposed regulations that would limit emissions of carbon dioxide. Only about 14% of TransCanada's generating capacity is coal-fired, and that's all through power purchase agreements. "We expect that percentage to continue to shrink every year," Kvisle said.
Part of what will replace shrinking coal capacity is more natural gas fired plants, which already account for 55% of TransCanada's generating capacity.
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