This year has been nothing less than tumultuous for TransCanadaPipelines, which already has sold $1 billion in assets and cut 600jobs. But the Canadian pipeline giant apparently is just gettingstarted. It announced plans yesterday to unload another 15% of itsholdings for expected net proceeds of about $3 billion. The movewill mean the departure of about one-third of its workforce by theend of next year.

This continued gutting of TransCanada now includes itsinternational and Canadian midstream operations, as well as theExpress Pipeline crude oil transmission system and Cancarb, itscarbon thermal black manufacturing business. Those assets will beaccounted for as discontinued operations in the fourth quarter, andTransCanada will take a $700 million charge against earnings as aresult. The company expects to sell off the assets in large blocksand complete the divestitures in about 12 months. In addition, itwill cut its dividend by 30% to $80 cents/share and eliminate a 5%discount provision of its dividend re-investment plan.

CEO Doug Baldwin characterized the move as an effort tostrengthen the company’s financial position and refocus on coreoperations of gas transmission, power generation and marketing -“the businesses.. in which we have a distinct competitiveadvantage. In the future, there will be opportunities to grow thesebusinesses. To capture these opportunities, a significant amount offinancial flexibility will be required, which is something weclearly do not have today. The reality is that we cannot access theincremental capital market required to successfully build andsustain all of our business units. Recognizing this, we have verydifficult decisions to make. …[W]e’ve decided to pursue anarrower, more focused set of growth opportunities around our corebusinesses, opportunities we believe will ultimately maximizeshareholder 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 continuing tobranch out into unregulated, presumably higher-growth, businessesto offset losses from competition in its core markets. Many of thechanges, including the merger, were viewed as a response to strongcompetition from its new opponent, the 1.3 Bcf Alliance Pipeline,which is slated for transportation service next November fromnorthern Alberta and British Columbia to Chicago. However, earlierthis year there was a sudden shift in strategy.

“They have done a complete turn-around, and in part it’s becauseof a change in management,” said Merrill Lynch Canada energyanalyst Randy Ollenberger. “If you went back a couple years ago,the target of TransCanada was to have 50% of its earnings comingfrom non-regulated businesses, and that’s why they branched intoall these other ventures, like gas processing, international, etc.And now, I think, after two years of experience with very poorearnings performance from those businesses combined with a changein management and what that management believes TransCanada oughtto be focused on, they have decided to refocus on their corebusiness, which is pipelines.”

Doug Baldwin took over as CEO in July after George Watsonannounced plans to retire. Baldwin had been a board member but hadretired a year earlier. He is a former senior vice president ofexploration and production with Imperial Oil, an Exxon subsidiary.”Doug Baldwin was clearly the key change there.” Since Baldwin’sarrival, the company has sold Angus Chemicals to Dow, its U.S.midstream facilities and gas liquids marketing and trading businessto Coastal Corp., and has completed a public offering of units ofthe new TC PipeLines LP, which now owns and operates TransCanada’sformer U.S. pipelines, including Northern Border.

“I think they are making the right move. I think the earningsperformance that they have demonstrated over the last couple ofyears has shown that they shouldn’t be in these types ofbusinesses,” said Ollenberger. “They had negative earnings out ofthe gas processing businesses. The marketing business has not beenperforming well, and International hasn’t had that great of aperformance either… These guys are pipeliners. They are notmanagers of these other types of businesses.”

However, the prospects for growth in TransCanada’s core businessaren’t that great either, said Ollenberger. TransCanada already hasexperienced decontracting on about 500 MMcf/d of its firm capacityas a result of Alliance. “It’s just a question of how much morecomes off the system. The maximum that you would expect would bethe capacity of Alliance, which is 1.3 Bcf/d, and my expectation isyou won’t see that much,” said Ollenberger. “You’ll see somethingmore or less equal to what they’ve already experienced.

“I think their growth prospects are pretty dim,” he added. “WhatI’m looking for them to do is just refocus on the pipeline businessand just have a stable earnings stream and try to return to bit ofan income play, which may be tough now that they cut theirdividend.”

Investors certainly didn’t like this latest restructuring move.After losing 40% of its value over the past year, TransCanada’sstock reached a new 52-week low yesterday, tumbling 16%, or $1.69,to $8.75/share.

But the company could turn things around, and one area forgrowth is the Northwest Territories. Part of the reason behind thedivestitures is a recognition that currently it doesn’t have thebalance sheet to spend C$3 billion building a new 800-mile pipe totap the Mackenzie Delta.

Baldwin also believes, however, that a lot more can be milkedfrom the existing mainline and provincial transportation system.”TransCanada’s competitive advantage is in our low cost gastransmission assets across the northern tier of North America,” henoted. “We have advantages at both ends of our pipeline system. Atone end, we are attached to the most attractive natural gas basinin North America, the Western Canada Sedimentary Basin and arestrategically positioned to transport northern gas supply. At theother end, we are linked to the largest energy markets in NorthAmerica which continue to demonstrate significant growthopportunities.”

He said first the company needs to “get our financial house inorder.” In the meantime, it also will look at increasing itsflexibility in setting transportation rates. “We believe shippersand customer are looking for additional opportunities which canenhance our earnings.. We believe that we have the opportunity tosee significantly above what I call ‘base tolls’ in certainapplications for certain shippers who want the flexibility to haveshort-term service. I’d expect to see a 25-30% premium. That’stypical of what we see with the pipes that currently operate inthat type of environment in the United States today. And inreality, those pipes generate significant returns above theirregulated rates.” Baldwin said a move toward a more flexible tariffwill take place over the next couple of years.

He also said TransCanada will focus on building its energymarketing position and its power generation operations. Itcurrently has 10 power plants with about 1,000 MW of capacity inthree Canadian provinces and two Northeastern U.S. states.

“Robust cash flows, combined with a 50% reduction in capitalspending and the release of capital from non-core activitiesprovides the company significant financial flexibility as itevaluates investment opportunities,” said Mr. Baldwin. “Our plansare ambitious, strategic and achievable.”

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