Pipeline shippers face more risk than bondholders

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Lengthy regulatory and political delays facing Canadian pipeline companies' major project proposals are more of a burden on their shippers than their debt holders.

Contentious projects such as TransCanada Corp.'s Keystone XL and Enbridge Inc.'s Northern Gateway are years beyond their initial schedules, but that is not affecting the pipeliners' credit quality, said Gavin MacFarlane, vice-president and senior analyst at Moody's Investors Service.

"If they build them, it's credit-negative during construction and it's sort of an offset once it comes into service due to long term, stable cash flows," Mr. MacFarlane said. "If they don't build them, it doesn't change the perspective very much for creditors. It's not a situation where they have to grow. It's neutral for the company."

In the case of Keystone XL, the U.S. State Department's decision last month to delay a decision on the project once again came as a disappointment to Canadian oil producers seeking to get their bitumen to the U.S. Gulf Coast in large volumes. TransCanada said customers remained committed to the project, however.

Still, a huge build-up in rail capacity in the past three years has helped the industry avoid a transport crunch to accompany delays in major pipeline projects, according to a report released this week by the credit-rating agency.

For producers, rail shipments are more expensive than moving crude through pipelines, but can have the advantage of reaching markets that afford higher prices, it said.

For multibillion-dollar pipeline projects, the pressure on credit during the construction phase is driven by so-called execution risk, such as the potential for cost overruns and delays.

"To the extent that projects suffer material delays, the contracts may contain terms that allow shippers to walk away from otherwise firm shipping agreements," Moody's said. "However, we believe it is unlikely that shippers would choose to cancel their interest in projects, given limited alternatives."

Both TransCanada and Enbridge have warned that the costs of their major pipelines proposals are increasing. The report said both companies could manage debt-financed billion-dollar overruns in terms of their cash-flow ratios.