IN THE NEWS / TCPL Faces Up To Life With Alliance Pipeline Project
Tougher Times Ahead: Little short-term growth seen on Canadian mainline
By CAROL HOWES
The Financial Post
While executives at TransCanada Pipelines Ltd. hit the road this week to sell their story to investors, others were measuring the benefits of the National Energy Board's final approval of the $4-billion Alliance Pipeline project.
TCPL is expected to be hard hit when the 3,000-kilometre high-pressure pipeline begins flowing gas between northeastern B.C. and Chicago in October, 2000.
TransCanada stock (TRP/TSE) has bounced around between about $27 and $21 since July, in tandum with Alliance clearing some of its regulatory hurdles and concerns growing about excess pipeline capacity.
The shares fell 5c to close yesterday at $22.15.
Aside from a $400-million, 156-kilometre pipeline expansion in 1999, analysts do not expect TCPL will benefit from any more expansion of its Canadian mainline for at least five to six years.
"It's not the end of the world. It just won't grow for a while," says Sam Kanes, a Toronto-based analyst with ScotiaMcLeod Inc.
A report by RBC Dominion Securities Ltd. says any new major pipeline expansion would likely be on Alliance, which can increase its capacity from 1.3 billion cubic feet a day to 1.8 bcf/d by simply adding relatively low-cost compression.
As it is, with excess pipeline capacity expected for the next two to three years and the potential risk of losing some of its contracts, TCPL will remain focused on maintaining its earnings contribution from its mainline at current levels.
"In the absence of expansion opportunities on the mainline, TransCanada will be forced to look at riskier investments in order to grow its earnings," says the report, which ranks TCPL stock a "hold."
"Further, in light of the size of TransCanada, such investments will need to be very large in order to have material earnings impact."
TCPL executives unveiled their plan this week to analysts in Toronto on how they expect to achieve growth in the wake of Alliance, something they have been tight lipped about since the company merged with Nova Corp.'s transmission business last summer.
TCPL expects earnings growth of $2 a share by 2003 -- a 10% increase each year -- by expanding its businesses, through cost-savings from the merger and disposition of some of its assets, says an analyst, who asked not to be named.
The company has already announced it will eliminate about 600 jobs.
"What they are saying is they believe they can compete with Alliance in their traditional markets," says Randy Ollenberger, a Calgary analyst with Merrill Lynch Canada Inc.
"Their view is they can provide access at a lower cost than other pipelines."
In the meantime, the benefits from the construction of Alliance will have far reaching effects for other investors.
The pipeline already has 98% of its available capacity locked up with 15-year shipping contracts.
Fort Chicago Energy Partners L.P., which has a 26% interest in Alliance, is the most direct vehicle through which investors can buy into the pipeline project. Until now, Fort Chicago has suffered from the perils of uncertainty.
Units of the limited partnership (FCEu/TSE) have a 52-week trading range of $8.25 to $5.35. They closed yesterday up 20c at $6.70.
Mr. Kanes, of ScotiaMcLeod, has a "strong buy" rating on the units, with a one-year target price of $9.
Fort Chicago would have stable cash flow from its investment in the pipeline, but would also have some volatility from its investment in the $300-million (US) Aux Sable liquids plant, a natural gas extraction and fractionation plant located at the termination of the pipeline in Chicago.
Analysts says Fort Chicago would distribute about $1 a unit by 2001. Other companies that would see earnings growth from Alliance include:
Enbridge Energy Inc., which has a 21% interest in Alliance.
The company would invest about $263-million in equity and is expected to get about 32c a share earnings contribution, beginning in 2001, the first full year of the pipeline's operations.
Enbridge shares (ENB/TSE), which have a 52-week trading range of $71.40 to $57.90, closed yesterday down $1.65 at $68.95.
Westcoast Energy Inc., with its $14.5% stake, will invest about $172-million and is expected to receive a contribution of about 14c a share.
Westcoast shares (W/TSE) ($36.35-$27.25) closed yesterday down 5c at $30.10.
Steel suppliers such as Ipsco Inc., pipeline construction companies and firm that build and service compressors, turbines as well as service companies will also gain some benefit from the pipeline project.
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