TransCanada ‘open-minded’ about funding models for $10B Keystone XL
Joint venture, debt are among options if long-delayed project gets green light
TransCanada Corp. would consider all sources of funding to build its long-delayed Keystone XL pipeline, including a potential joint venture to reduce the risk of the project that was hit by another legal setback last week.
“Should Keystone XL proceed, we will pursue an all-of-the-above funding model,” Don Marchand, TransCanada executive vice-president and chief financial officer, told the company’s investor day presentation in Toronto on Tuesday.
The company is considering using debt, hybrid securities and issuing shares to pay for the $10-billion pipeline between Alberta and the U.S. Gulf Coast.
“We would also consider JV partners — we’re absolutely openminded on that front as well,” Marchand said.
The CFO’s comments come as TransCanada works on “getting back to living within our means,” and is taking a number of initiatives to reduce its debt burden. The Calgary-based pipeline giant was carrying $35 billion in long-term debt at the end of the third quarter.
TransCanada currently has a $36 billion backlog of growth projects even without Keystone XL.
“Realistically, they can’t fund it all,” said Jennifer Rowland, an analyst with Edward Jones in St. Louis. She said she expects other midstream companies — such as Kinder Morgan Inc. — apart from private equity players, could be interested in partnering on the Keystone XL pipeline.
However, the project will have to compete with the federal government-acquired Trans Mountain oil pipeline that would connect Alberta to the West Coast, which is also seeking investors.
“There is quite a bit of private equity money out there,” Rowland said, adding there is a “high probability ” private equity ends up playing a role if the company does pursue a joint venture.
Canaccord Genuity analyst David Galison argues that it makes sense for TransCanada to look for joint-venture partners to fund Keystone XL.
“They’ve got a massive capital budget and interest rates have been rising,” Galison said.
Still, there is a sense of urgency in getting Keystone XL built, or nearly complete, before the next U.S. presidential election as the pipeline was rejected by former president Barack Obama before current President Donald Trump approved it.
“With this project, there is an underlying level of risk in the U.S. if it’s not in the ground and flowing by the time there’s a new election in the U.S. at the executive level,” Galison said.
He said Obama had halted work on the Dakota Access Pipeline months before that project was completed and noted the same thing could conceivably happen to Keystone XL if Democrats retake the White House.
A federal court judge in Montana ordered TransCanada to halt construction on the project until the U.S. State Department has conducted detailed studies on potential spills and cumulative emissions impacts from oilsands pipelines.
“We’re going through the decision,” said Paul Miller, TransCanada president of liquids pipelines, adding that the judge’s demands were “manageable. However, at this point I believe it is too early to determine what impact it will have on our schedule.”
He added the U.S. State Department was “taking the lead” on the file.
Analysts, including at CIBC Capital Markets, have speculated the State Department will need to issue a supplemental environmental impact statement on the project, a process that could take six months.
Miller declined to provide a new cost figure for the 830,000-bpd Keystone XL until all the legal challenges had been cleared.
“There was a short window where people were hopeful (Keystone XL) was going to happen in 2019,” Rowland said, adding that timeline seems difficult now.
“It’s unfortunate for the Canadian producers more so than (TransCanada),” she said, adding that the company has other projects it could pursue as it awaits a decision on the legality of its route through Nebraska and tries to address the deficiencies identified by the judge in Montana.
Canadian oil producers, meanwhile, are forced to accept recordsetting discounts for heavy oil relative to the West Texas Intermediate benchmark — with the discount amounting to US$50 per barrel in October.
Miller called Keystone XL and the existing Keystone pipeline “two very effective bullet lines” that would allow TransCanada to ship 1.4 million barrels of oil per day between Alberta and the U.S. Gulf Coast, which is a premium market for heavy oil.
The discounts for Canadian oil, measured as Western Canada Select, are likely to persist until sufficient pipeline export capacity are built, Miller said.
TransCanada told investors it expects to raise its dividend at an average annual rate of eight to 10 per cent through 2021, an outlook supported by expected growth in earnings and cash flow. Comparable earnings before interest, taxes, depreciation and amortization are expected to grow to about $10 billion in 2021, a 35-per-cent increase from the $7.4 billion in 2017, TransCanada said.