TransCanada PipeLines is predicting earnings growth of between7% and 10% in 2001 based on stable revenue resulting from a newmainline transmission settlement, the performance of its powerbusiness, and projected cost savings from numerous divestitures,including a cut back in gas marketing.

The Calgary-based energy company said during a conference callthat it is limiting gas marketing in a significant number of areasso that the unit only performs “a supporting role for our pipelineand power businesses.”

The natural gas marketing sector did not fare as well last year,recording a $129 million loss, based mainly on after-tax net lossesof $124 million paid to get out from under long term fixed-pricecontracts for gas. The long-term contracts had been signed “tosupport various corporate initiatives, including pipelineinvestments and downstream pipeline expansions,” the company saidin its financial statement. “The profitability of these contractswas predicated on sustained historical price differentials betweennatural gas supply and market points. Over the past two years, theprice differentials have narrowed.” Last year, TransCanada’s gassales volumes decline 3% from the year prior to 6.4 Bcf/d.

“This is a business where margins have been competed away toever thinner levels and I think we have to be increasinglyselective about just which parts of the gas marketing business wewant to be in,” said CEO Doug Baldwin. “Where margins used to be 2or 3 cents on $1.50 gas, today they are a quarter of a cent on $7gas and that’s a much different value proposition than it was 10 or12 years ago. We’re being increasingly selective but we try tofocus on those regions where there might be benefits to our muchlarger investments in the pipeline business.”

Speculative trading will be off limits for the company, headded. “In the volatility of the last couple years in the gasmarket it’s become clear to us that this is simply a business thatis beyond anybody’s ability to predictably make money in, and it’sa business that I think we have clearly withdrawn from.”

TransCanada reported net income from continuing operations of$605 million in 2000 compared to $505 million in 1999. Earnings pershare were $1.28 for 2000 compared to $1.08 in 1999. The Canadianpipeline giant disposed of $3.45 billion in assets during the pastyear, booking $2.3 billion of sale proceeds by Dec. 31 and applyingmuch of the proceeds to retiring long-term debt and repurchasingpreferred shares. TransCanada repaid or retired $2.5 billion ofterm debt and preferred share obligations during 2000.

It increased its foothold in the power business by raisingownership interest in its two largest power investments, OceanState Power and TransCanada Power L.P. Gains in power marketing andtrading led to net earnings for the power sector of $105 million,more than double the $40 million recorded in 1999. And in Januarythe company purchased the electricity generated by the 560 MWSundance A power plant in Alberta and began construction of an 80MW natural gas-fired power plant near Carseland, AB, and a 40 MWnatural gas-fired plant near Redwater, AB.

On the pipeline front, TransCanada reached a new settlement withtransmission stakeholders for 2001 and 2002 on Canadian mainlinetolls and all other issues except cost of capital, which theparties agreed would be determined in a different forum.

The settlement will form the basis of a formal agreement betweenthe parties. Once TransCanada and the parties have completed theagreement (anticipated by the end of this March), TransCanada willapply to the National Energy Board for approval of the agreement.

After a one-month reprieve during January, shippers are alreadypaying a 12% increase in TransCanada tolls to C$1.13 (US$78 cents)per gigajoule that was approved as an interim measure by the NEBfollowing a short, sharp feud with dissenters. The hike wassupported — as the lesser of two evils on the horizon — by amajority including the Canadian Industrial Gas Users Association,Enbridge Consumers Gas, Union Gas Ltd., the Canadian Association ofPetroleum Producers, BP Canada Energy and Imperial Oil.

The shippers agreed that if the NEB did eventually find that thepipeline deserved the raise, it spelled an even stiffer hike if itall had to be collected in the last few months of this year. A”rate shock” was forecast, with tolls potentially rising 30-50% toC$1.30-$1.50 (US$0.90-$1.03).

The complex regulatory cases and negotiations center on howservices and tolls should be adjusted to permit competitivebehavior to regain traffic lost as a result of additions to thelong-distance gas delivery grid since 1998, including expansions byTransCanada and affiliated Foothills Pipe Lines Ltd. as well ascompletion of the new Alliance Pipeline to Chicago and VectorPipeline from there to southern Ontario. TransCanada has borne thebrunt of a glut of excess pipeline capacity estimated at 1-2 Bcf/d.

Baldwin has suggested that TransCanada should be allowed todevelop a service menu which includes a pipeline counterpart tohotel or airline discounts for frequent customers, with gasshippers earning savings on tolls by taking out long transportationcontracts. TransCanada has also sought — unsuccessfully so far ina hard-fought case before the NEB — a new right to vary minimumcharges for interruptible delivery services depending on itsreading of gas and transportation market conditions. Shippers,especially trading houses and independent power generators, haveresisted changes they read as liable to pass on anything buttemporary, reasonable shares of TransCanada revenue losses due topipeline competition.

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