Kinder Morgan reaps reward for handing over Trans Mountain

Texas-based Kinder Morgan will get to walk away from the controversial Trans Mountain pipeline with a decent financial boost but is deprived of significant future earnings growth after Canada’s federal government offered $4.5 billion to take the expansion project (and the existing pipeline) off its hands on Tuesday.

Kinder Morgan acquired the existing Trans Mountain pipeline system as part of its $6.9 billion acquisition of Terasen Inc, which was previously known as BC Gas, in 2005.

The company subsequently sold the natural gas portion of Terasen for $3.7 billion and Terasen’s Corridor Pipeline system for $760 million in early 2007, giving the remaining assets including the existing pipeline a value of around $2.44 billion.

Soon after, Kinder Morgan Inc sold the Trans Mountain pipeline to Kinder Morgan Energy Partners (which it partially owned at the time and later fully acquired) for about US$550 million, according to a document filed with the U.S. Securities and Exchange Commission under the company’s former name, Knight Inc.

Kinder Morgan then raised $1.75 billion from the 2017 initial public offering of a 30 per cent stake in Kinder Morgan Canada, while the company’s 2017 annual report says it had spent a cumulative $930 million on the expansion project, which is expected to add almost 600,000 barrels per day of capacity.

The company said its 70 per cent share of the after-tax proceeds of the sale to be about US$2 billion. But it will also miss out on the significant upside it could have gained if it were able to take the project to completion.

In its IPO documents from May 2017, Kinder Morgan Canada said it expected that when the expansion was operational in 2020 it would be able to collect tolls of between $5 to $7 per barrel (US$4 to $6 per barrel) sending oil from Edmonton to various delivery points.

That would have compared favourably to rail costs of US$18 per barrel to the U.S. Gulf Coast and US$16 per barrel to Los Angeles, the company said.

At that time, Kinder Morgan Canada was expecting to begin construction on the expansion in September 2017 and for it to be operational by late 2019.

IPO documents make risks clear

In 2020, which the company had expected would be the first full year of expanded operations, it was looking at adding $900 million in adjusted earnings before interest, tax, depreciation and amortization (EBITDA) just from the maximum 80 per cent of capacity it was legally allowed to lock in at long-term rates. The remaining 20 per cent of capacity was to be made available to spot shippers at a premium that could add another $200 million a year.

Canada currently ships about 70 per cent of its crude to the United States, with most of the remainder used domestically.

In a presentation to investors dated July 2017, Kinder Morgan Canada said it had an enterprise value of $5.9 billion, with 2016 adjusted EBITDA of $395 million.

Trans Mountain had agreed to pay the B.C. government at least $25 million a year for 20 years, and up to $50 million a year based on spot rates, which the provincial government has said it would use to fund the protection of the environment.

Around $6.2 billion of the roughly $7.4 billion total construction costs (increased from $6.8 billion last year after the federal approval of the pipeline with 157 conditions imposed by the government) were still remaining to be spent as of March 31, 2017.

In those documents it said it expected to initially be able to pay around 65 Canadian cents a year dividend to holders of its restricted voting shares, and that the assets were well-suited to regular and growing payouts.

While the IPO documents made clear that there was significant risk that legal and other challenges could delay or ultimately doom the project, it said even with significant cost increases and schedule delays the project should remain attractive.

The expansion project was structured in such a way that roughly a quarter of total cost variance — for additional community consultations and accommodations, and changes in the price of steel, for example — could be passed on to shippers by way of increased tolls.

Those shippers committed to sending crude on the expansion include BP Canada, Canadian Natural Resources, Cenovus Energy, Imperial Oil, Husky and Suncor.

Pipeline deal compared to Bombardier 'bailout'

The Trudeau government has also offered to cover the losses of any company that buys the project, if the proponent is forced to abandon plans due to a court decision that reverses the federal approval of the project. The biggest case before the courts right now alleges that the government failed in its legal duty to consult affected First Nations.

Some of the nations have also asked the court to consider new evidence, uncovered by National Observer, that suggests the federal government made up its mind to approve the project on or before Oct. 27, 2016, while it was still supposed to be consulting the affected First Nations.

The Trudeau government approved the project with 157 conditions on Nov. 29, 2016.

In Question Period on Wednesday, Prime Minister Justin Trudeau defended the purchase of the pipeline and its associated project against attacks launched by both the opposition Conservative and NDP parties.

Conservative finance critic Pierre Poilievre described the deal as a "bailout," comparing it to the government's $372.5-million loan package announced in February 2017 to transportation company Bombardier.

Tories also argued Trudeau had stifled investment in the energy sector with environmental and regulatory policies and is now spending taxpayer dollars to dig himself out of that program.

Trudeau responded by invoking the name of the late former Alberta premier Peter Lougheed, who assisted oilsands development with public funding, several times. Trudeau said he was standing up for Alberta jobs and the Canadian economy.

NDP members, meanwhile, wondered why a prime minister who championed green causes was suddenly in the pipeline business, and accused him of going back on his word to protect the environment.

NDP MP Nathan Cullen cited Trudeau’s own words that the pipeline project was “too risky” for a commercial entity, and wondered why it wasn’t too risky for Canadian citizens as well.

Trudeau reminded the federal New Democrats that it is an NDP government, headed by Alberta Premier Rachel Notley, that is the major provincial proponent of the pipeline project. Trudeau said Notley’s plan has always been to cap carbon pollution emissions, put a price on carbon, and build a pipeline to new markets.

with files from Carl Meyer
Editor's note: All dollar amounts are in Canadian currency, unless indicated otherwise. This story was updated at 3:55 p.m. ET on May 30, 2018 to add a photo and additional information.