Bigger is better

TransCanada is making the jump from natural gas pipeline company to global force in all energy markets. David Nusbaum reports

TRANSCANADA PIPELINES has global ambitions by necessity. Addressing shareholders this April, TransCanada's president and chief executive officer George Watson left no doubt that becoming a world-class energy services company is the way it has to go. " It' s the direction in which the energy services business is heading."

Canada's pre-eminent natural gas transmission company is well positioned to grow into a global giant in energy transmission, electric power generation and energy marketing. It already ranks highly in many North American energy categories: number three in natural gas liquids (NGLs) production, number five in natural gas marketing (the largest marketer of Canadian natural gas), and a top twenty player in electricity marketing. It also markets nearly 500,000 barrels a day of petroleum and petroleum products.

This spring TransCanada also opened a new trading room with space for 115 traders at its Calgary, Alberta, headquarters.

TransCanada's risk management operations have also grown, along with its trading and marketing operations. Its Market Risk Management Group (MRMG), created in 1995 with a staff of just four, now has 18 employees reporting directly to TransCanada chief financial officer Bob Hodgins. "We buy and sell all forms of energy, from natural gas and crude oil to power and everything in between," says Cliff Howe, general manager of MRMG. "We have an active forward portfolio up to five years out. We try to add value along the way, whether it's lease gathering, balancing our books or offering different types of pricing structures to customers or producers. We use various risk management tools, whether other physical contracts or derivatives, to balance our portfolio,"

As TransCanada has developed expertise across many energy markets, the company is always looking for arbitrage opportunities in the way it manages positions arising from marketing activities. "If we want to have the position we'll keep it," Howe says. "But we may decide to lay it off, either through structuring another physical deal that will balance the portfolio or by using a derivative - a swap, option or futures contract.

Of course, deliberately exposing yourself to market risk mandates caution, he adds. TransCanada's risk management philosophy is "to make sure we have the systems and procedures in place to monitor exactly what out traders and marketers are doing, exactly what our open positions are and whether we are making money on those positions.Once you capture all these deals and keep track of what you are doing, you start to evolve into looking for opportunities or developing market views, and actually taking positions to enhance your marketing profit".

TransCanada quantifies its risk using value-at-risk (VAR), a single number estimate of the largest loss the company could suffer.

Howe adds:"Obviously we look at our exposure in a lot more detail than just one number." Once a week an exposure committee for the whole company, made up of seven senior managers, considers the combined positions of all divisions in order to locate risk. The committee also manages risk within an overall corporate limit that applies to TransCanada's energy marketing activities.

TransCanada divides its energy portfolio into three primary books - natural gas, petroleum products and electric power - and then further divides it by product and region into an additional 20 books of varying sizes managed by 20 traders. Each trader has a team of marketing and supply people familiar with TransCanada's physical capabilities and the market segment.

The books have exposure limits on the size of open positions they can take - and VAR limits. The MRMG monitors these daily. Up to those limits, traders have complete flexibility to take positions they consider prudent. Giving traders freedom within limits may be a policy common to many energy marketers, but Howe says TransCanada has less bureaucracy than others, particularly in the way there is easy access to the exposure committee.

"What tends to happen in some organizations is that either traders have flexibility but without the controls in place, or there are so many controls in place that traders don't have flexibility," Howe says. "We seem to have struck a comfortable balance." TransCanada uses a combination of mostly internally developed software systems to manage risk. It has a number of similar systems tailored to calculate exposure and mark to market positions for each individual business unit. It then combines this information into a consolidated database and conducts firm-wide reporting, sensitivity analysis, stress testing and VAR calculations, using Axiom Software Laboratories' RiskMonitor System.