Alaskan Pipeline Presents Risk for TransCanada Bondholders

A natural gas pipeline connecting northern Alaska to the civilized world could be decades away, and that’s on top of the decades that have already passed since the idea first surfaced.  The Alaskan government has given TransCanada (TRP) the thumbs up, with a possible C$500-million in support, to proceed with the regulatory process. 

Bondholders should be scared, according to Laurie Conheady, an analyst at BMO Capital Markets.

She said:

We believe there is little, if any, upside for TransCanada PipeLines’ bondholders in this announcement or the prospect of TransCanada building the pipeline.  On the contrary, we see the potential for significant downside risk for the debt providers as the company moves to develop the pipeline project.

At last guess, the price tag rings in at $26-billion.  But many are already predicting $30-billion. Others are also noting a projects such as this pipeline regularly run over budget.

She said:

To put the magnitude of the proposed pipeline into perspective, TransCanada’s Corp.’s total market capitalization currently stands at about C$23-billion. 

TransCanada will be burdened with a list of risks: execution, contract, regulatory, financing and construction, Ms. Conheady says in a note to clients.

We believe TransCanada will offload much of the risk involved in the project; however, it is difficult to envisage a situation where even the residual risk involved will not increase the company’s credit risk profile and put pressure on its ratings and spreads.

Her call? At best, investors should hold a sector weight exposure to TransCanada PipeLines.

In view of uncertainty about longer-term credit quality and spread levels, we believe investors would be best served restricting their exposure to the short end of the issuer’s credit curve.

Comments

[bbowen7:]

Risk is one thing, particularly for the bonds, as opposed to the stock. The gas is there; we need it here; Alaska has chosen TRP. Seems like the author is betting against the engineers in the company without any analysis of their capabilities or track record.

2008 Aug 06 12:44 PM

[User 226629:]

The Engineering consortum is the key to a successful completiom of the project. It's hoped that the Betchel Corporation is not the winning engineering firm. Betchel is notorious for incomplete and ambiguous engineering drawings and specifications. It is not unusual for a Betchel project to double in scope and delays that effect the final cost of their projects.

2008 Aug 09 12:17 PM