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Alliance Gas Pipeline: Early, Late, or Just in Time?

A story of big gambles, big assumptions, and spark spreads now turned upside down.
Fortnightly Magazine - November 15 2000

investors demand higher earnings growth. Hence, normal profits have increased in the gas industry. That necessarily increases the cost of supplying gas to market.

Not surprisingly, producing companies in late 1998 and early 1999 were reluctant to commit funds to additional gas development. Prices still were not high enough. Instead they looked for alternative ways to invest in the ever-expanding world economy. Luckily, Alliance already was in development after several years of intense review.

The Players: Some at Risk More Than Others

An interesting mix of companies holds an equity interest in Alliance. Four of the five companies are well-known energy companies: Westcoast Energy, Enbridge, The Williams Companies, and Coastal Corp., soon to be part of El Paso Energy. 3

Equity interests for Westcoast and Enbridge, the Canadian companies, are about 24 percent, and for Williams and Coastal, the U.S. companies, about 14 percent. These last two companies, especially when Coastal is considered part of El Paso, already are known for their enormous strategic stakes in natural gas infrastructure. Williams also has a major position in communications-in particular, the soaring fiber optics industry.

Williams and El Paso Gas together own about 40 percent of the miles of pipe and deliver about 40 percent of the natural gas delivered in interstate commerce in the United States. These are the two major pipelines in terms of deliveries and miles of pipe in the United States, and, along with Enron, they account for more than 50 percent of deliveries and pipe miles on U.S. soil. These three companies also account for about 50 percent of pipe capacity. In addition, Alliance extends Williams' reach in the liquids business, where it has impressive stakes. Its stake in the risky chemicals industry has increased significantly in the last year, which may explain the volatility of its stock price this year .

Westcoast, in addition to being the gatherer and transporter of most gas in British Columbia, also owns Toronto-based Union, a major utility in North America. Westcoast has a 37.5 percent interest in Maritimes & Northeast, a 50 percent interest in Foothills Pipeline, and a 50 percent interest in Empire State Pipeline. Thus, in addition to having its hand in the pocket of the WCSB with Alliance, it has a hand in Sable Island gas on the East Coast, and pipes engaged in the export of Alberta gas into the North Central and Northeastern parts of the United States.

Enbridge is the owner of the largest gas utility in Canada, Consumers Gas in Toronto (70 percent of its revenues are obtained from this source), and also operates the world's largest oil and liquids pipeline system. It is the major transporter of Canadian oil into the United States. In recent years, its major new investments have been in natural gas pipelines.

Into the future of the gas industry, the roles of Williams and El Paso seem secure. These companies continue to demonstrate an ability to grow persistently in a changing environment, and, perhaps, are viewed by investors as having much control over their corporate destiny. Significant cash flows are