MARKET ACITIVITY/TRADING NOTES FOR DAY ENDING WEDNESDAY, APRIL 8, 1998 (3)
TOP STORIES
Gas Producer Deal Smooths Way For TCPL-Nova Union
The Financial Post
TransCanada PipeLines Ltd. and Nova Corp. signalled yesterday their merged company is prepared to live alongside the proposed Alliance pipeline project after receiving a blessing for their marriage from natural gas producers.
George Watson, president and chief executive of TCPL, said his company and Nova will withdraw most of their objections before the National Energy Board to the $3.7-billion Alliance project, after producers said yesterday they will support the merger.
Watson said the two firms now plan to modify their opposition to the producer-backed Alliance "to be consistent with this agreement" with the producers.
Alliance president and CEO Dennis Cornelson welcomed the news.
"We both can now turn our attention from this life and death struggle ... where we were constantly trying to knock the other guy out, to serving the needs of our customers," he said.
The agreement TCPL and Nova signed with producers late Tuesday removes a major hurdle for their $16-billion merger and is expected to speed up hearings, the longest in the NEB's history, into the Alliance project.
The TCPL-Nova merger must still get approval from the Alberta Energy & Utilities Board, Revenue Canada and the Competition Bureau, but Watson said resolving many of the "thorny issues" with producers should bode well.
Nova and TCPL said they both plan to present the merger proposal to shareholders on June 29.
In the deal with the Canadian Association of Petroleum Producers and the Small Explorers & Producers Association of Canada, Nova and TCPL have agreed to support competition for pipeline capacity from Western Canada, but at the same time steps will be taken to minimize duplication of capacity.
Nova has already been talking with Alliance about some interconnections between the two lines. Alliance could use or buy some of Nova's underused laterals, small gathering lines, to feed into its larger pipeline. This would offset some of the stranded costs Nova will face with the new competition.
Producers have also agreed to pay some of those stranded costs as well as their tolls.
"This agreement is the stepping stone to finally achieving the competitive environment producers desire," said David Manning, president of CAPP, which represents producers of 95% of Canada's natural gas and crude oil. "In this context, we see benefits from the Nova-TransCanada merger."
The deal did not come as a surprise to analysts, who were expecting Nova and TCPL to take a more conciliatory approach to Alliance in order to gain support for their union.
"It was only a matter of time before this surfaced. The market will view this as positive," said Winfried Fruehauf, a Toronto analyst with L‚vesque Beaubien Geoffrion Inc. "Still, the battle is never over until it's over."
Watson said the deal resolves most of Nova and TCPL's objections to Alliance, except for the issue of safety. The pipeline companies will submit new evidence to the NEB.
Canada Gas Producers
After squabbling for years, Canadian natural gas producers and pipeline firms reached a sweeping accord on Wednesday to bolster competition in the industry.
The pact should also smooth the way for TransCanada PipeLines Ltd. and NOVA Corp. to complete their merger.
The Canadian Association of Petroleum Producers (CAPP) and Small Explorers and Producers Association of Canada (SEPAC), industry lobby groups that represent about 700 companies, said they would throw their support behind the proposed C$14-billion NOVA-TransCanada merger in return for several key concessions from the pipeliners.
These include pledges to stop trying to block potential competitors from entering the pipeline industry and to work toward increasing pipeline capacity to rich U.S. markets, long sought by producers.
"What we're saying is that it really is a change to a new era where the pipelines accept the new competitive environment," CAPP vice-president Greg Stringham told Reuters.
The agreement represented a major shift in relations in the industry, which had become particularly icy during the current epic Canadian National Energy Board hearing into the proposed C$3.7-billion producer supported Alliance pipeline, which would ship large volumes of Canadian gas to Chicago in competition with TransCanada and NOVA.
Both have argued vigorously at the 3-1/2 month old hearing against the approval of Alliance, owned by several competing North American pipeline firms, including IPL Energy Inc., Westcoast Energy Inc., Coastal Corp. and Duke Energy Corp.
TransCanada Chief Executive George Watson told reporters and analysts his company and NOVA now planned to "modify" their opposition to Alliance "to be consistent with this agreement."
NOVA and TransCanada hope to complete their merger, which would create North America's third-largest natural gas pipeline and energy services firm, by June 29. But the deal still requires approval from Canada's Competition Bureau and Alberta's Energy and Utilities board.
Regulators were expected to look more favorably on the marriage if producers gave it their blessing, said Bruce Simpson, president of NOVA's Alberta gas pipeline unit.
"I think that those boards will take a good deal of comfort in the fact that the customers of these organizations are in a position where they recognize the benefits of the merger and are in fact supporting the merger going ahead," Simpson said.
The steel arteries of NOVA's pipeline division snake throughout gas rich Alberta, transporting 18 percent of North American supply. TransCanada takes 90 percent of that gas and moves it on its pipelines to eastern Canada and U.S. markets.
As part of the deal, NOVA and TransCanada will ask Alliance to consider sharing the capillary-like "lateral""pipelines that move gas to NOVA's mainlines from Alberta's producing fields in hopes of avoiding costs to industry of building duplicate ones.
If Alliance is approved, producers agreed to absorb the costs of any NOVA pipeline facilities that would be "stranded," or underused, as a result of the new system.
In addition, producers agreed to support TransCanada's call to regulators to allow it to increase the length of time some major customers commit to shipping gas on its pipeline system.
Alliance Chief Executive Dennis Cornelson said the accord was positive for the entire industry because the focus will shift from battling at the hearing to attracting customers.
Cornelson also welcomed what appeared to be the end of a regulatory logjam for his project.
"I think implicit in this agreement is that there must be at least one competitor for the new merged company and that can only be us because there is no one else out there," he said.
Analyst Sam Kanes of Scotia Capital Markets agreed the odds of Alliance's approval appeared to improve greatly with the deal. ($1 C$1.42)
More On Subject - Gas Factions Bury Hatchet
Accord between producers, pipelines puts end to bickering
The Globe & Mail
Natural gas producers in Western Canada have signed an accord with two merging pipeline giants, Nova Corp. and TransCanada PipeLines Ltd., setting the stage for big increases in gas exports over the next three years.
The pact, announced yesterday, represents a truce between the producers and the pipeline companies, whose relationship had become strained in the past couple of years as producers complained about the lack of new export lines being built.
Many major gas producers have embraced the proposed $3.7-billion Alliance Pipeline Ltd. project, which would run from northeastern B.C. to Chicago and would be the first large scale incursion into Nova and TransCanada's prime turf in Western Canada.
The accord does not spell out specific targets. Rather, its significance lies in the fact that it marks an end to the bickering that has delayed pipeline construction.
Among the accord's broad "guiding principles" are an endorsement of better pipeline connections and greater pipeline competition. Nonetheless, executives at Nova and TransCanada remained lukewarm toward the Alliance project.
Nova has a stranglehold on major gas routes within Alberta, while TransCanada controls the main line that carries gas from the West to Central Canada, as well as stakes in several connecting routes into the United States.
"In a competitive environment, Avis does not support Hertz, McDonald's does not support Burger King, and TransCanada and Nova are not supporting Alliance," said Robert Reid, a TransCanada senior vice-president who will become president of the transportation division to be created after the merger of TransCanada and Nova in mid-1998.
Dennis Cornelson, president of Calgary based Alliance, welcomed the accord, saying it clears the way for rival pipeline companies to concentrate on building new capacity for producers. "Competition will foster growth in business for both us and Nova-TransCanada," he said.
Yesterday's accord was signed by Nova, TransCanada and two industry groups -- the Canadian Association of Petroleum Producers, which represents 170 major oil and gas companies; and the Small Explorers and Producers Association of Canada, with more than 420 members.
"This has been a terrific win for all of us," said George Watson, TransCanada's president and chief executive officer. Mr. Watson will become president and CEO of the energy services giant arising from the Nova-TransCanada merger announced in January.
Canada produces 16 billion cubic feet a day of gas, including more than eight billion that's exported to the United States. The Alliance route is being designed to carry 1.3 billion cubic feet a day.
New export pipelines are already under construction, including an expansion of the Foothills-Northern Border line, co-owned by Nova and TransCanada, that will carry an additional 700 million cubic feet a day by the end of this year. Other expansions could add 400 million cubic feet a day to export capacity within a year.
With a new era of friendlier relations in store, producers say they will support efforts by Nova and TransCanada, each with a stock market value of about $7-billion, to win regulatory approval for their merger from the Alberta Energy and Utilities Board.
The U.S. Federal Energy Regulatory Commission gave its blessing to the merger this week, as did the U.S. Federal Trade Commission. Nova and TransCanada, both based in Calgary, have U.S. assets.
Nova and TransCanada, which are interveners at hearings by Canada's National Energy Board into the proposed Alliance gas route, are expected to soften their opposition to Alliance and speed up NEB approvals to show their appreciation for producers backing the pipeline merger.
Alliance had originally wanted to open its line by late next year, but industry analysts say the delay, which Alliance attributes to regulatory hurdles, is a blessing in disguise. That's because U.S. pipeline companies need more time to build or expand connecting lines that would transport gas out of the Chicago hub.
The natural gas sector is increasingly gaining prominence in the energy industry. While crude oil prices have been in the doldrums in the past six months, natural gas markets have been healthy. Benchmark Alberta gas prices have hovered above $2.35 for 1,000 cubic feet this week, up 25 per cent from October.
Calgary-based investment dealer FirstEnergy Capital Corp. forecasts that natural gas prices will average $2.40 in this year's fourth quarter, $2.25 in 1999 and $2.40 in 2000.
The Alberta government is watching developments in the natural gas business with much interest because strong gas revenue would help the province keep its books balanced, offsetting predictions of reduced revenue from slumping prices for crude oil. Every increase of 10 cents per 1,000 cubic feet of natural gas would add $209-million in revenue to the province's coffers.
Pipelines Grudgingly Accept Reality
The Globe & Mail
Although the National Energy Board hearing on the Alliance pipeline is still going on, its outcome became even more likely yesterday -- a green light for the $3.7-billion natural gas pipeline from Western Canada into the U.S. Midwest. The catalyst is an unprecedented agreement between Nova Corp., TransCanada PipeLines and the oil and gas industry.
The announcement yesterday by Nova, TransCanada and two industry groups -- the Canadian Association of Petroleum Producers (CAPP) and the Small Explorers and Producers Association of Canada (SEPAC) -- is an attempt to bury the hatchet on a whole range of issues that have kept gas producers and the pipeline companies at loggerheads for the past few years.
Whether the agreement will actually do that, however, is an open question. Certainly the talk by all sides yesterday was of a "win-win" situation for all concerned, a shining new era where producers and pipelines would work together to enhance competition for the benefit of the industry, yadda yadda yadda. Is that even possible? That remains to be seen.
If nothing else, the announcement puts an end to speculation about the outcome of backroom discussions between Nova, TransCanada and CAPP -- discussions that centered on the proposed Nova-TransCanada merger and the confrontational approach the Calgary-based pipelines have taken at the Alliance hearings, and how to reconcile the two.
A big part of the agreement is an admission on the part of Nova and TransCanada that competition in the pipeline industry is healthy and inevitable -- in other words, an admission that Alliance is inevitable. This is an issue Nova has been unwilling to even discuss since the Alliance project was first proposed, and its denial has played a key role in delaying the NEB's decision.
At the press conference announcing Nova and TransCanada's plan to merge, for example, there was a very obvious difference of opinion between TransCanada chief executive officer George Watson and Nova vice-chairman Ted Newall about what stance to take on Alliance. Mr. Newall was adamant that fierce opposition was the only option, while Mr. Watson was more open to the idea of competition.
The TransCanada chief executive assured reporters that at the end of the day, after the Nova-TransCanada deal was consummated, "there will be only one opinion." If it was ever in doubt whose opinion that would be, it has become clear that it is Mr. Watson's. "I can see a lot of Mr. Watson's views in this agreement," Alliance CEO Dennis Cornelson said yesterday.
Mr. Cornelson said the truce proposal was "definitely a win for Alliance" simply because it assumes that the project will go ahead, and that is a big breakthrough in itself. The fact that the agreement would meet with Alliance's approval isn't that much of a surprise, however, since the senior producers who support Alliance are also key players in CAPP.
The name Alliance was virtually absent from the text of the agreement, except for a brief mention. Even though the parties were united in their embrace of competition, neither Nova nor TransCanada could bring themselves to mention their only existing competitor by name. "We do not support Alliance, we support competition," said one spokesman for the pipelines.
Nevertheless, Mr. Cornelson said he had already seen encouraging signs that the two pipeline behemoths might be moderating the hard line stance they have taken in the NEB hearings, and that was important because "actions always speak louder than words." He said he was hopeful the two sides could "get on with competing, the way businesses normally do."
The only mention of Alliance in the agreement comes during the discussion of a crucial point, and that is the prospect of producers having to pay higher tolls to Nova if Alliance proceeds. One of Nova's main criticisms is that Alliance will duplicate Nova facilities, and that the pipeline giant would have to charge producers more to pay for underutilized pipe.
In yesterday's announcement, CAPP agreed it could accept the idea of higher tolls, provided that Nova tried to work out an agreement with Alliance to prevent unnecessary duplication of pipeline connections (this primarily refers to the small "feeder" pipelines that bring gas from the outer regions of the province and connect up with Nova's main line).
But that's not a done deal. Another sticking point is likely to be the flexibility in contract terms that Nova and TransCanada have made a central part of what they want in return for signing the agreement. Producers used to one year contracts will find themselves penalized for not agreeing to 5,10 or even 15 year deals.
These are just a few of the areas where the Barney-style "I love you, you love me" attitude of yesterday's announcement will really be tested. |
