TransCanada's Post-Merger Strategy Still a Work in Progress
TransCanada promised $70 million in savings to its pipeline
customers last week as part of an ongoing effort to work out
synergies and structural issues caused by last year's merger with
Nova Corp. But while the company is working on its internal
operations, other companies are sizing up TransCanada as a
potential acquisition, according to Jim Oosterbaan, vice president
for the Alberta-based consulting firm Ziff Energy Group.
"I know many companies are looking at TransCanada, but it is
still a little early to be naming names. It's about a C$20 billion
company, which is not beyond the appetites for some of these
suitors. One problem that may deter interested parties is the fact
that TransCanada has such a heavy interest in regulated
transmission, which does not have an overwhelming return on equity
Recent corporate developments, such as the formation of a new
executive leadership team (See NGI, July 26), the placement of
midstream and chemical processing assets on the auction block (See
NGI, July 19) and this past week's announcement of savings, point
to a change in TransCanada's strategy, Oosterbaan said.
"The company is trying to reposition itself. It has been doing
okay, but it could be doing better. For quite a while,
TransCanada's ROE for its transmission operations has been less
than 10%, which is not pleasing anybody. Now it is trying to
redeploy capital into other, more lucrative endeavors on the
unregulated side and changing its corporate culture in order to do
The company's common stock, which peaked near $16 at the time of
the merger, has languished since then, dropping in the last month
to the $12 to $13 range. As of last week, the company has cut about
600 full-time employees and has about 4,500 still on the payroll.
One key factor in determining TransCanada's future endeavors
will be its search for a permanent replacement for CEO George
Watson, who retired in July. "No doubt the lack of a permanent CEO
is having an impact. Whoever they hire will obviously be the driver
for whatever the company does in the future. I don't think,
however, the situation is hindering TransCanada. Doug Baldwin, the
interim CEO, is being very aggressive in reshaping the company."
The $70 million in merger-related savings to its pipeline
customers will result through "targeted operating cost reductions."
An agreement on the reductions was filed with Canada's National
Energy Board and the Alberta Energy and Utilities Board last week.
Under the agreement, TransCanada will begin passing benefits on
to customers in 2001 in the form of a lower operating cost
component of transportation tolls. "TransCanada has a goal to
reduce overall costs by $100 million by the end of 2000 as result
of the merger, with $70 million coming from our regulated pipeline
business," said Baldwin. "This agreement, which provides our
customers with a minimum of $35 million in savings in 2001,
demonstrates our confidence that we're on track to achieve this
TransCanada will pass the first $35 million of the $70 million
in savings to customers through a reduction in the operating cost
component of transportation tolls on its Mainline, Alberta and
British Columbia pipeline systems in 2001. The remaining $35
million will be felt in 2002.