TransCanada Puts Marketing Business on the Block

Sixteen years, a complete reorganization and a string of losses later,Canada's biggest natural gas transporter has decided to follow a recommendation by the nation's top economists to stop trying to also be the top marketer.

TransCanada PipeLines Ltd. declared intentions to shed its marketing business. The action puts on the market Canada's biggest gas supply pool with sales exceeding 6 Bcf/d under a web of contracts with 700 producers contributing reserves of 13 Tcf. While a strong presence on domestic markets, the TransCanada affiliate stands out as the nation's top exporter to the United States with annual sales in the 600 Bcf range.

No takers stepped forward immediately, although industry sources recited a list of potential buyers with designs on growth on the Canadian scene, such as Duke Energy, PG&E Energy Trading and Southern Company Energy Marketing. Interest was also believed to be present among senior producers with strong marketing organizations of their own, such as BP Canada, which earlier took over the ProGas export agency.

The news came almost a year-and-a-half after the company embarked upon a $3.45 billion divestiture program as part of a strategic restructuring (see NGI, Dec. 13, 1999; Oct. 16, 2000).

For the industry, TransCanada president Hal Kvisle's announcement was an historic step. The pipeline has dominated Canadian gas markets since its creation in the 1950s as a dual monopoly on eastbound transportation and sales. The double power was the original stimulus for the creation of Nova to build and operate the Alberta gas grid, with a charter enacted by the provincial legislature, as a counterweight intended to ensure production could reach other combination long distance pipelines and marketers.

Challenges to the dual role were leveled as soon as deregulation surfaced as a possibility on the Canadian scene. In February of 1985, the Economic Council of Canada called for the marketing role to be taken away from TransCanada as a prerequisite for truly competitive markets, employing open pipelines. The council said "the operator of the pipeline should be a neutral party." Similar recommendations soon followed from the industry- and government-supported Canadian Energy Research Institute. Rather than shed its merchant role, TransCanada declared it saw no conflict of interest, and expanded its sales side in changed form by creating a wholly-owned affiliate called Western Gas Marketing. The operation later became known as TransCanada Gas Services.

The decision to drop out of marketing is part of the continuing aftermath of TransCanada's merger with Nova two years ago, largely in response to the producer-sponsored Alliance project's bypass of both systems to build a direct route to Chicago and introduce competition into the grid. The merger prompted a prolonged paring of assets and staff. Kvisle said the decision is part of opting "to focus on infrastructure projects with stable returns from significant capital investments in regulated and non-regulated businesses . . . we will focus our strengths in the pipeline and power businesses." The TransCanada president said the combination with Nova needs predictable cash flows to maintain the balance sheet, credit rating and dividends expected by investors.

"In contrast, a gas marketing business requires significant equity capital, a tolerance for volatility and high transactional volumes, as well as a willingness to absorb both positive and negative financial performance."TransCanada's ability to stomach negative performance has been sorely tested for more than a year by the marketing operation. For 2000, the pipeline booked a C$129 million (US$86-million) loss on gas marketing. It was a sharp reversal from the preceding two years of lower but stabler prices,when TransCanada made marketing profits of C$5 million (US$3.3 million)for 1999 and C$24 million (US$16 million) in 1998. The red ink continued into first-quarter 2001, when TransCanada marketers turned in a loss of C$6 million (US$4 million).

The reversals were blamed on a combination of volatile markets, old contracts that had to be unloaded at a loss, and narrowing price differentials between Canadian and U.S. trading points due to expansion of the long distance pipeline grid.

TransCanada considered options for continuing its gas marketing business, including refocusing and downsizing the business. The company, however, concluded the business would be more valuable if it was divested as a going concern to a more appropriate owner. TransCanada intends to begin the divestiture process within the next couple of months, it said.

The company said there are approximately 150 employees directly associated with the marketing business. "We recognize our employees bring the most value to the gas marketing business, so we will negotiate with prospective buyers to maximize opportunities for these employees," said Mr. Kvisle. "We will work with all affected employees to ease their transition through this process."

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