Week Ending June 1, 2018

Canadian Government to Buy Trans Mountain Project From Kinder Morgan for $4.5 Billion

This Article Appears as Published in Foster Report No 3201

In a stunning development that angered some Canadians and illustrated federal support for the Trans Mountain oil pipeline expansion, the Canadian Government agreed to purchase the pipeline system from Kinder Morgan Canada Ltd. (KML) for (Canadian) $4.5 billion and seek a third-party buyer.

KML said the federal government will work with the company to seek a buyer through July 22, though sources expect the government to be owning the project until the expansion is built and the provincial disputes between Alberta and British Columbia are resolved.

Even those that support the project say it should not have come to this and that the move will hinder private sector investment in Canada. The need for federal government intervention and use of taxpayer money exposes flaws in the regulatory system at all levels of government, said a broad coalition of business interests dubbed Confidence in Canada.

Members of the group, which include the Business Council of British Columbia, the Canadian Federation of Independent Business and the Independent Contractors and Businesses Association (ICBA) of British Columbia, blamed B.C. Premier John Horgan for forcing Canada to nationalize a project KML was willing to build. The company and project supporters had won 16 straight court victories, but Horgan’s opposition put KML and federal leaders in a difficult position to see that the expansion is built, Chris Gardner, president of ICBA, said in an interview.

Canadian Prime Minister Justin Trudeau, Finance Minister Bill Morneau, Natural Resources Minister Jim Carr and others said Cabinet members approved the transaction, which is subject to KML shareholder approval, regulatory approval and expected to close in the third quarter or early fourth quarter of 2018.

The timing of the deal will allow summer construction to ramp up after work was halted earlier this year by KML due to the opposition of Horgan and B.C. agencies’ legal challenges to the expansion project.

KML had set a May 31 deadline for government officials to provide certainty on the status of the project due to the provincial opposition from B.C. leaders and legal challenges in court. Trudeau previously had expressed support for some sort of equity stake by the federal government in order to have the expansion built, but buying the entire Trans Mountain network – which includes the existing pipeline system and the expansion – is a big move for the government.

Trudeau posted statements on his Twitter feed that the agreement with KML will protect thousands of jobs in Alberta and B.C. and restart construction of the Trans Mountain expansion, which he deemed “a vital project in the national interest.”

Canadians opposed to the project blasted the decision on social media based on views against the Trans Mountain expansion and the use of taxpayer money to buy a pipeline from a private company.

KML, federal leaders and supporters, meanwhile, praised the deal as a necessary move given the provincial fighting between Alberta and B.C. The oil pipeline expansion, which has been approved by the National Energy Board and was under construction, has pitted the province of B.C. against Alberta and national leaders that support the project. B.C. leaders approved the expansion as it was going through the NEB approval process, but provincial elections brought in Horgan with a thin majority and opposition to the expansion.

“It must be built and it will be built,” Morneau said during a May 29 press conference in Ottawa. The federal government in Canada was prepared to take action because it was faced with “an exceptional situation” involving the provincial dispute, he said.

The decision to buy the assets from KML will ensure Canadian oil can be sent to global markets and ensures investors that Canada is a place that respects the rule of law and can see that important infrastructure can be built, Morneau said. The assets “have significant commercial value” and represent “a sound investment opportunity,” he said.

The Canadian government will work with investors to try and find a new owner or owners for the Trans Mountain facilities, Morneau said. “We’ve had expressions of interest,” he said. “We realize the value of this project” and the goal is to have both the original pipeline and the expansion in the hands of a private company or companies, he said during the press conference. When asked what would happen if no buyer comes forward, Morneau said leaders do not see that as a likely outcome.

Due to the B.C. opposition and provincial dispute, “the federal government is going to have this asset for many years,” Gardner said. Once the expansion is built and all legal challenges are resolved, there would be a fairly predictable revenue stream that will attract interested buyers. But no company will buy the Trans Mountain facilities until those hurdles are cleared, he said.

“It’s unfortunate for Canada,” because “people are shaking their head that it came to this,” said Gardner. He supports the federal government stepping in as it did because it did not have much choice, but lamented that “this is not how you attract international investors.” Investors have been leaving Canada due to the regulatory challenges and an inability to build new infrastructure, “and this doesn’t help,” he said.

For KML, the agreement with the government represents the best opportunity to complete the expansion and realize economic benefits for Canada and the company, said Steve Kean, chairman and CEO of KML. “We’ve agreed to a fair price for our shareholders,” with the proceeds amounting to about $12/share after capital gains taxes, Kean said during a conference call with financial analysts. The company has not made a decision on how it may use the proceeds from a sale, but it will focus on providing value to shareholders, he said.

While KML will work with the government to try and find a third-party buyer for the facilities, the company will be paid $4.5 billion even if a third-party buyer is not found, Kean said.

The sale will be subject to a shareholder vote, he said, adding that the pipeline expansion will enhance the value of Canadian terminal facilities and midstream assets to support oil exports from Western Canada. Proceeds to KML after taxes are expected to be about (Canadian) $1.25 billion, with about (U.S.) $2 billion going to Kinder Morgan Inc. (KMI). “In addition to the benefit of the sale proceeds, our remaining portfolio of assets represents a strong platform for the company and shareholders now and in the future,” Kean said of KML.

At KMI, the company expects to meet or exceed its 2018 distributable cash flow per share target despite what would be the loss of earnings associated with the Trans Mountain system, Kean said. The deal is forecast to have a positive impact on the KMI balance sheet.

KMI expects a 2018 dividend of 80 cents/share, followed by a $1/share in 2019 and $1.25/share in 2020. “We will provide additional financial guidance after the transaction closes,” Kean said.

The judicial appeals of B.C. could continue, but that is a risk that KML will no longer be subject to if the deal closes as planned, company officials said.

An important part of the transaction is that the staffing and personnel put together to build the expansion is included with the deal, Kean said. The transition services and details will be worked out between now and the closing of the deal, he said.

The expansion would increase the amount of crude oil transported from Alberta to a port in Burnaby, B.C. It has been the source of tension between Alberta and B.C. for some time. The original Trans Mountain pipeline was built in 1953 and continues to operate. The expansion would essentially install a second pipeline along the existing path from Edmonton, Alberta, to Burnaby, increasing the capacity of the total system from 300,000 barrels/day to 890,000 b/d. It also involves new pump stations, additional storage tanks and three new berths for loading tankers at the Westridge Marine Terminal in Burnaby.

Besides legal challenges, Horgan has expressed concerns about increased tanker traffic and sought a ruling on whether B.C. can limit the amount of oil being transported through the province while the government reviews oil spill safety issues.

The deal with the Canadian government does not change the environmental risks that B.C. is concerned about to protect coastal and inland waters and land from the catastrophic effect a spill of diluted bitumen would have in the province, Horgan said in a May 29 statement. “It does not matter who owns the pipeline. What matters is defending our coast — and our lands, rivers and streams — from the impact” of an oil spill, he said.

“Our government is determined to defend British Columbia’s interests within the rule of law and in the courts. We will continue our reference case, to determine our rights within our provincial jurisdiction,” Horgan said.

In a May 24 statement on two B.C. Supreme Court decisions, B.C. Attorney General David Eby noted that the court petitions were filed by the Squamish Nation and the City of Vancouver regarding the Environmental Assessment Certificate for the project.

“The court has made clear that these rulings have no bearing on the ongoing federal Court of Appeal case challenging the federal approval of the project,” Eby said, adding that provincial officials are reviewing the decisions.

The Canadian Association of Petroleum Producers (CAPP) said it is pleased that construction on the expansion will be underway thanks to the government’s political and financial backing.

“These are exceptional circumstances and should not be considered the norm. Now that this project has the full backing of the highest level of government in the country, we expect Ottawa to be committed to overcome any legal, political, or activist barriers that may remain,” CAPP said in a statement.

The NEB, which included more than 150 conditions on construction of the expansion, also issued a statement that it is unable to speculate on any regulatory requirements that might change due to the transaction until more information is available. The announcement of the deal does not change the NEB’s focus, however, it said.

“We will continue our work regulating the existing Trans Mountain pipeline to make sure that it is safe for the environment and the public. We will continue to oversee the construction of the Trans Mountain Expansion Project, to ensure that all applicable conditions are met,” the NEB said.

By Tom Tiernan TTiernan@fosterreport.com


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