Ax Continues to Fall on TransCanada Assets, Jobs
TransCanada Pipelines put down the scalpel last week and took up
the ax. Having determined the path toward improved financial health
must involve some painful surgery, the company decided to lop off
15% of its asset base in exchange for expected proceeds of about
$3.6 billion (net $3 billion), which will be used to pay down debt.
It also decided to trim its dividend by a hefty 30% to $0.80/share.
The continued gutting of the company includes its international
and Canadian midstream operations, as well as the Express Pipeline
crude oil transmission system and Cancarb, its carbon thermal black
manufacturing business. Those assets will be accounted for as
discontinued operations in the fourth quarter, and TransCanada will
take a $700 million charge against earnings as a result. It expects
to sell off the assets in large blocks and complete the
divestitures in about 12 months. This latest surgery will mean the
departure of one-third of its workforce by the end of next year.
The move follows the sale of $1 billion in assets earlier this year
and the loss of about 600 jobs.
Investors certainly didn't like this latest restructuring move.
After losing 40% of its value over the past year, TransCanada's
stock price last week reached its lowest level in more than two
years, tumbling nearly 20% following the announcement to end the
day on the New York Stock Exchange on Friday at $8.12/share.
Despite the clear unpopularity of the downsizing, CEO Doug
Baldwin characterized the move as necessary to strengthen the
company's financial position. Since becoming CEO last summer,
Baldwin has put the brakes on multiple unregulated initiatives. The
company now believes its best bet is to refocus on core operations
of gas transmission, power generation and marketing --- "the
businesses... in which we have a distinct competitive advantage.
"In the future, there will be opportunities to grow these
businesses. To capture these opportunities, a significant amount of
financial flexibility will be required, which is something we
clearly do not have today," Baldwin said during a conference call.
"The reality is that we cannot access the incremental capital
market required to successfully build and sustain all of our
business units. Recognizing this, we have very difficult decisions
to make. ...[W]e've decided to pursue a narrower, more focused set
of growth opportunities around our core businesses, opportunities
we believe will ultimately maximize shareholder value."
The company has been in continuous flux over the past two years.
It completed its $11 billion stock-for-stock merger with Nova Corp.
last year, and with its added scale from Nova was branching out
into many unregulated, presumably higher-growth, businesses to
offset losses from competition in its core markets. Many of the
changes, including the merger, were viewed as a response to strong
competition from its new opponent, the 1.3 Bcf Alliance Pipeline,
which is slated for transportation service next November from
northern Alberta and British Columbia to Chicago. However, earlier
this year there was a sudden shift in strategy.
"They have done a complete turn-around, and in part it's because
of a change in management," said Randy Ollenberger, an energy
analyst with Merrill Lynch Canada. "If you went back a couple years
ago, the target of TransCanada was to have 50% of its earnings
coming from non-regulated businesses, and that's why they branched
into all these other ventures, like gas processing, international,
etc. And now, I think, after two years of experience with very poor
earnings performance from those businesses combined with a change
in management and what that management believes TransCanada ought
to be focused on, they have decided to refocus on their core
business, which is pipelines."
Baldwin took over as CEO in July after George Watson announced
plans to retire. Baldwin had been a board member but had retired a
year earlier. He is a former senior vice president of exploration
and production with Imperial Oil, an Exxon subsidiary. "Doug
Baldwin was clearly the key change there." Since Baldwin's arrival,
the company has sold Angus Chemicals to Dow, pawned off its U.S.
midstream facilities and gas liquids marketing and trading business
to Coastal Corp., completed a public offering of units of the new
TC PipeLines LP (which now owns and operates TransCanada's former
U.S. pipelines, including Northern Border), and now is
orchestrating this latest divestiture.
"I think they are making the right move. I think the earnings
performance that they have demonstrated over the last couple of
years has shown that they shouldn't be in these types of
businesses," said Ollenberger. "They had negative earnings out of
the gas processing businesses. The marketing business has not been
performing well, and International hasn't had that great of a
performance either... These guys are pipeliners. They are not
managers of these other types of businesses."
However, the prospects for growth in TransCanada's core business
aren't that great either, he admitted. TransCanada already has
experienced decontracting on about 600 MMcf/d (7%) of its firm
capacity as a result of Alliance and another batch of long-term
contracts is due for renewal in five months. "It's just a question
of how much more comes off the system. The maximum that you would
expect would be the capacity of Alliance, which is 1.3 Bcf/d, but
my expectation is you won't see that much," said Ollenberger.
"You'll see something more or less equal to what they've already
"I think their growth prospects are pretty dim," he added. "What
I'm looking for them to do is just refocus on the pipeline business
and just have a stable earnings stream and try to return to bit of
an income play, which may be tough now that they cut their
Other observers also said the dividend cut was unexpected and
potentially devastating. But several things could help the company
turn things around.
One area for pipeline growth is the Northwest Territories. Part
of the reason behind the divestitures is recognition that currently
TransCanada doesn't have the balance sheet to spend C$3 billion
building a new 800-mile pipe to tap the Mackenzie Delta.
Baldwin also believes that a lot more revenue can be milked from
the existing mainline and provincial transportation systems.
"TransCanada's competitive advantage is in our low cost gas
transmission assets across the northern tier of North America," he
noted. "We have advantages at both ends of our pipeline system. At
one end, we are attached to the most attractive natural gas basin
in North America, the Western Canada Sedimentary Basin and are
strategically positioned to transport northern gas supply. At the
other end, we are linked to the largest energy markets in North
America which continue to demonstrate significant growth
He said the company first needs to "get our financial house in
order." In the meantime, it also will look at increasing its
flexibility in setting transportation rates. Already on file with
the National Energy Board is a plan to establish a regulated floor
on rates for available capacity in order to discourage shipper
migration away from long-term firm contracts to plentiful
interruptible space (see NGI, Dec. 6). But Baldwin said the
pipeline also plans to request more flexibility in negotiating
terms and conditions of services as well as offering
"We believe shippers and customers are looking for additional
opportunities which can enhance our earnings... We believe that we
have the opportunity to see significantly above what I call 'base
tolls' in certain applications for certain shippers who want the
flexibility to have short-term service. I'd expect to see a 25-30%
premium. That's typical of what we see with the pipes that
currently operate in that type of environment in the United States
today. And in reality, those pipes generate significant returns
above their regulated rates." Baldwin said a move toward a more
flexible tariff would take place over the next couple of years.
He also said TransCanada would focus on building its energy
marketing position and its power generation operations. It
currently has 10 power plants with about 1,000 MW of capacity in
three Canadian provinces and two Northeastern U.S. states.