TransCanada promised $70 million in savings to its pipelinecustomers last week as part of an ongoing effort to work outsynergies and structural issues caused by last year’s merger withNova Corp. But while the company is working on its internaloperations, other companies are sizing up TransCanada as apotential acquisition, according to Jim Oosterbaan, vice presidentfor the Alberta-based consulting firm Ziff Energy Group.

“I know many companies are looking at TransCanada, but it isstill a little early to be naming names. It’s about a C$20 billioncompany, which is not beyond the appetites for some of thesesuitors. One problem that may deter interested parties is the factthat TransCanada has such a heavy interest in regulatedtransmission, which does not have an overwhelming return on equity(ROE).”

Recent corporate developments, such as the formation of a newexecutive leadership team (See NGI, July 26), the placement ofmidstream and chemical processing assets on the auction block (SeeNGI, July 19) and this past week’s announcement of savings, pointto a change in TransCanada’s strategy, Oosterbaan said.

“The company is trying to reposition itself. It has been doingokay, but it could be doing better. For quite a while,TransCanada’s ROE for its transmission operations has been lessthan 10%, which is not pleasing anybody. Now it is trying toredeploy capital into other, more lucrative endeavors on theunregulated side and changing its corporate culture in order to doso.”

The company’s common stock, which peaked near $16 at the time ofthe merger, has languished since then, dropping in the last monthto the $12 to $13 range. As of last week, the company has cut about600 full-time employees and has about 4,500 still on the payroll.

One key factor in determining TransCanada’s future endeavorswill be its search for a permanent replacement for CEO GeorgeWatson, who retired in July. “No doubt the lack of a permanent CEOis having an impact. Whoever they hire will obviously be the driverfor whatever the company does in the future. I don’t think,however, the situation is hindering TransCanada. Doug Baldwin, theinterim CEO, is being very aggressive in reshaping the company.”

The $70 million in merger-related savings to its pipelinecustomers will result through “targeted operating cost reductions.”An agreement on the reductions was filed with Canada’s NationalEnergy Board and the Alberta Energy and Utilities Board last week.

Under the agreement, TransCanada will begin passing benefits onto customers in 2001 in the form of a lower operating costcomponent of transportation tolls. “TransCanada has a goal toreduce overall costs by $100 million by the end of 2000 as resultof the merger, with $70 million coming from our regulated pipelinebusiness,” said Baldwin. “This agreement, which provides ourcustomers with a minimum of $35 million in savings in 2001,demonstrates our confidence that we’re on track to achieve thisgoal.”

TransCanada will pass the first $35 million of the $70 millionin savings to customers through a reduction in the operating costcomponent of transportation tolls on its Mainline, Alberta andBritish Columbia pipeline systems in 2001. The remaining $35million will be felt in 2002.

John Norris

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