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October 12, 2001 


Mirant Becomes No. 2 Gas Marketer; 
New Acquisition Cements Canada as Top Spot for Gas Resources 



By Will McNamara
Director, Electric Industry Analysis 


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[News item from PR Newswire] Mirant Corp. (NYSE: MIR) announced on Oct. 11 that it intends to acquire the majority of the gas marketing business of Calgary-based TransCanada Pipelines Limited, a move that would make the company the largest natural-gas marketer in Canada, the largest natural-gas exporter to the United States and the number-two gas marketer in North America. Terms of the purchase were not disclosed, although it is expected to close in the fourth quarter of this year, pending approvals from regulators, producers and customers. 

Analysis: It's nothing short of amazing the number of natural-gas transactions that have taken place between U.S. integrated energy firms and Canadian gas companies in 2001 alone. As is often the case, what seemed like a trend now appears to be an industry standard, as those U.S. power firms consolidating in the natural-gas sector look northward to Canada for acquisition targets. Canada, which offers seemingly abundant natural-gas resources, has attracted such U.S. energy companies Calpine, Devon and Duke, which have also bought gas outlets in the Great White North this year. This particular acquisition is significant because it positions Mirant, which already had assets in the Western part of Canada, as the largest gas marketer in Canada and right behind Enron elsewhere in North America, especially in the U.S. Midwest and Northeast. Further, the purchase of TransCanada gives Mirant a decided edge on the increasing exports of natural gas from Canada to the United States, adding upon its already-significant portfolio. 

As always when discussing a merger or acquisition, I like to first establish the key elements of the deal before addressing the larger strategic gains of the parties involved. Mirant is of course the recently spun off, former subsidiary of Southern Company which over the last year has become one of the most aggressive and visible energy companies operating in the unregulated wholesale sector. The company's business model is founded on building a huge arsenal of generating assets, particularly based in natural gas, which can be marketed and traded in strategic regions. Even before the announcement of this acquisition, Mirant owned an estimated 96 billion cubic feet of proven oil and gas reserves, 82 percent of which are natural gas. According to the company, a substantial portion of its 38 million cubic feet equivalent per day that is in current production is contracted to be sold at an average fixed price of $4/MMBtu through 2002. Further, Mirant has established a solid reputation as a leading gas marketer and trader in North and South America, Europe, and Asia. The purchase of TransCanada's gas marketing business will add 5.1 billion cubic feet per day of gas reserves to Mirant's existing volumes (based on TransCanada's 2000 trading volumes), which as noted significantly elevates Mirant's stature in the gas-marketing space. 

The most important thing to note about TransCanada's business model is that the company has established a strong niche in transporting natural gas from Alaska's Prudhoe Bay and Canada's Mackenzie Delta into the growing North American marketplace, supporting two separate pipelines (one from each basin). This has been a slow-growth business for TransCanada, and in fact has lost money over the last year, but is positioned for strong growth in the future given the projected increase in demand for natural gas in North America. TransCanada has been attempting to sell its gas marketing business for some time in an effort to focus more exclusively on its North American gas transmission and electrical power services. Last month, the company sold another chunk of its U.S. natural-gas marketing and trading operations to BP Gas and Power. Some of the motivation for TransCanada to focus exclusively on this business might have arisen from concerns about perceived conflicts between its marketing / shipping business and pipeline systems. 

From a broad perspective, this is a good move for Mirant. As noted, the company already has assets in Western Canada, where it has operated since June 2000 through its management of the natural-gas marketing operations of Pan-Alberta Gas Ltd. and CanWest Gas Supply, Inc. The purchase of core businesses of TransCanada extends Mirant's presence into Eastern Canada by gaining control over TransCanada's Quebec and Ontario operations. Specifically, Mirant gains control over TransCanada's natural-gas trading and marketing business and the related transportation and storage contracts, with business contracts in the Midwest and Northeast United States. In addition, TransCanada has agreed to sell its "netback pool," or the part of its operation that has aggregated gas supply from about 550 natural-gas producers. As noted, the aggregated supply should increase Mirant's marketable reserves by 5.1 billion cubic feet per day. Although financial terms were not disclosed, a Mirant executive indicated that the acquisition would enable the company to establish a leading market position through minimal investment. 

The acquisition of TransCanada is by no means a surprise as it factors in very well to Mirant's growth strategy. Just this week, Mirant announced that it had acquired an interest in 18 natural-gas and oil producing fields as well as 206,000 acres of mineral rights in South Louisiana from Castex Energy. This purchase followed purchases announced last August in which Mirant agreed to acquire two power plants in Florida and Georgia from El Paso Corporation. The additional generating capacity from the El Paso facilities would bring Mirant closer to its aggressive target of owning or controlling 35,000 MW in North America by 2005. Mirant is acquiring from El Paso a 640-MW natural gas-fired power plant in Thomaston, Ga., and a 480-MW natural gas-fired plant in New Port Richey, Fla., north of Tampa. The agreement is expected to close this month, pending regulatory and third-party approvals. 

As noted, Mirant is just the latest in a string of U.S. energy companies that have made purchases of Canadian gas companies. Driven by what appear to be abundant natural-gas reserve fields in Canada, and uncertain resources in more traditional areas such as the Gulf of Mexico, the gas consolidation movement among U.S. energy companies includes acquiring those firms that are involved in both production and transportation of natural gas. Some recent reports I've seen have indicated that, since 1991, natural-gas imports to the United States (mostly coming from Canada) have doubled to about 10 billion cubic feet per day, while domestic production has increased only 4 percent (although it still averages 52 billion cubic feet per day). Further, according to the Department of Energy, U.S. imports of natural gas from Canada have averaged about 15 percent of total U.S. usage (during 2000, the United States consumed 22.8 Tcf and imported about 3.6 Tcf, mostly from Canada). The other factor driving this interest in Canadian natural-gas firms is the relatively lower valuations of Canadian energy stocks. 

Worth noting in this movement is Duke Energy, which announced its purchase of Canada's Westcoast Energy for $3.5 billion in late September. Westcoast Energy owns the main pipeline that transports natural gas into the United States, which is a booming market for natural-gas demand given its use in new power plant projects. The acquisition should give Duke control over natural-gas supply in Canada and the pipelines needed to export it. It is important to note that Duke has found its niche in the Canadian natural-gas market by focusing on the transportation of the commodity. Mirant is taking a different approach by focusing on the marketing side of the business. Also worth noting in the Canadian market is Devon Energy, which is buying Anderson Exploration, which reportedly will position it as the largest independent producer of oil and natural gas in North America. 

Ironically, this increased interest in Canadian natural-gas firms is taking place at a time when Canadian natural-gas storage levels could be much higher than reported, bringing prices down to (CAN) $1.75 per million cubic feet over the next few weeks. In fact, natural-gas prices in Canada have dropped about 80 percent since the beginning of 2001, with Alberta's benchmark AECO-C Hub prices dropping more than 40 percent in the past two months. In addition to the high storage levels, mild weather, a drop in consumption of natural gas and the struggling North American economy are also considered to be factors in the drop in prices. However, this does appear to be a temporary trend, and companies such as Mirant are betting that prices will once again increase, starting with the imminent winter season. 

Moreover, as noted the purchase of TransCanada will reportedly make Mirant the second-largest gas marketer in North America. According to the most current data available, based on 2000 sales, Enron Wholesale Services remains the largest natural-gas marketer in North America, with 28.3 billion cubic feet / day of sales in 2000, representing an 82.6-percent increase over 1999 levels. Duke Energy Trading and Marketing, Dynegy Marketing and Trade, Coral Energy, and Reliant Energy round out the top companies. Interestingly, Mirant was not even listed on the year-2000 sales ranking because it did not fully spin off from parent Southern Company until late in the year. Consequently, the ascendance into the top tier of natural-gas marketers that Mirant should achieve through this single purchase of TransCanada is quite impressive. 


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