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TransCanada's Post-Merger Strategy Still a Work in Progress

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 (ROE)."

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 so."

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 goal."

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.

John Norris

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