A surge in cheap natural gas supplies in the eastern U.S., resulting from the rapid expansion of the Marcellus and Utica shale plays, is putting pressure on TransCanada (NYSE:TRP), which is at risk of losing market share in eastern Canada. To get out ahead of this situation, the company has been trying to work with gas producers in Western Canada to get them to commit to long-term volume contracts on its Mainline system. However, those producers have balked at the price, forcing TransCanada to make one last effort to get them on board before a competing pipeline enters service later this year.
Drilling down into the situation
In November, TransCanada pulled the plug on an open season for its Mainline system, because leading western Canadian gas producers such as Encana (NYSE:ECA) and Canadian Natural Resources (NYSE:CNQ) didn't like the terms. That rejection came even though TransCanada offered shippers rates between $0.75 and $0.85 Canadian per gigajoule for capacity on its system under a 10-year term, which was a roughly 40% discount. However, shippers thought the rate was too high because it still made their gas uncompetitive compared with producers in the U.S. that had lower delivery costs because of proximity to eastern Canada.
After talking with shippers, TransCanada is back with a new rate structure that it hopes will win them over. It intends to offer a simplified rate of CA$0.77 per gigajoule for a 10-year term, though shippers can have the option to exit after five years. The company hopes this is enough of a compromise to persuade Encana, Canadian Natural Resources, and others to sign up by the next month's deadline.
TransCanada needs to get shippers on board quickly, because competing capacity is coming down the pipeline from rival Energy Transfer Partners (NYSE:ETP), after its Rover pipeline received approval from the Federal Energy Regulatory Commission earlier in the month. That pipeline would move gas from Pennsylvania into Ontario, giving U.S. shippers access to the eastern Canadian market. The Energy Transfer Partners project, which will cost about $4.2 billion, should be finished by the fourth quarter, assuming no hiccups.
If you can't beat 'em...
While TransCanada is working to ensure that its Mainline system remains utilized, the company has already taken several steps to reduce its reliance on that system. Topping the list was last year's decision to acquire Columbia Pipeline Group and gain a foothold in the fast-growing Marcellus shale. That deal helped offset weakness in its Canadian gas pipeline segment last quarter, enabling TransCanada to finish the year strong. Meanwhile, Columbia also brought with it more than $7 billion of growth projects that will expand TransCanada's U.S. gas pipeline earnings and further mute weakness in its Canadian gas pipeline segment.
Even before making that move, the company proposed to build the CA$15.7 billion Energy East Pipeline, which would convert a significant portion of its underutilized Mainline gas pipeline system between Saskatchewan and Ontario to oil service, giving oil producers in Alberta access to markets in the east. As part of that project, TransCanada would also invest CA$2 billion on an eastern mainline project to ensure that gas customers in the east maintain adequate supplies. While the Energy East project remains a long shot, it shows that TransCanada isn't resting on its laurels.
TransCanada is working hard to keep as much volume flowing through its Mainline system as it can. However, the company can clearly see that competition is on the rise, which is why it's been investing heavily to reduce its reliance on that system. These investments are paying off, putting the company in the position to continue growing at a brisk pace despite some issues in its home country.