TransCanada, Enbridge Jockey for $30 Billion Pipeline Deal

(MoneyWatch)  TransCanada Corp. and Enbridge Inc. are throwing hockey-type elbows at each other to procure a state license to work with either ExxonMobil or BP and ConocoPhillips (which on April 8 announced a joint proposal) to build the long-delayed $30 billion-plus North Alaska gas pipeline project, linking Alaska's North Slope with markets in the rest of the United States by 2018.

Although TransCanada retains Canadian rights to an Alaska pipeline from approvals granted 30 years ago when the line was first proposed, industry watchers are placing their bets on Enbridge, believing that a fundamental flaw in the TransCanada's business model was its desire to seek matching state funds (up to $500 million) available to the Canadian pipeline builder if issued a state license, under provisions of the Alaska Gasline Inducement Act (AGIA).

In December 2007, Alaska Gasline Port Authority, AEnergia LLC, TransCanada, Sinopec ZPEB (the second-largest energy company in China), and Alaska Natural Gasline Development Authority submitted proposals seeking state matching funds for the construction of the proposed pipeline.

Contrary to what the pundits think, the financial strength of Enbridge to 'go-it-alone' on the North Slope project is not much better than that of its sister Canadian pipeline operator, TransCanada. Standard & Poor ratings on the senior unsecured debt of both companies is 'A-,' reflecting "mature-but-predictable" revenue streams and operating cash flow being generated by the pipeline operations of both companies. In fiscal 2007, Enbridge and TransCanada generated cash flow from operations of $1.4 billion and $2.6 billion, respectively.

However, the need to constantly raise capital for sizable expenditures related to capacity expansion--through build-out of existing and acquired transportation and gathering operations--constrains the finances of both pipeline operators. In fiscal 2007, Enbridge and TransCanada invested $2.3 billion and $5.9 billion, respectively, on acquisitions and additions to existing operations.

In addition, the visibility of future pipeline construction activities of both operators is equally uncertain, given long-term debt to equity ratios and interest coverage ratios of 1.40 times, 1.75 times and 3.07 times, 6.14 times, respectively.

Alaska Governor Sarah Palin is expected to decide the week of May 19 whether or not to recommend TransCanada's project to the legislature for approval. If a history of delays in expanding the North Slope pipeline is any indication, one should not hold out for a decision anytime soon.