Kinder Morgan Canada Inc. is being paid handsomely for its Trans Mountain pipeline and its well-publicized troubles expanding it.
By one major bank’s calculation, Kinder Morgan will pocket $1.2-billion more than the worth of the existing transport system and the money it has already spent on the expansion. Meanwhile, it jettisons all of the risks.
That’s the calculus Kinder Morgan faced as it shifted from seeking government protection against more legal and physical roadblocks to selling the pipeline and its approved expansion for $4.5-billion to Canadian taxpayers.
Finance Minister Bill Morneau and Natural Resources Minister Jim Carr were adamant about the national importance of completing the expansion, including its role in creating jobs and being a tonic to the health of Alberta’s oil industry.
The operating pipeline, which ships up to 300,000 barrels a day to the Pacific Coast from Alberta, is valued by Royal Bank of Canada at $2.3-billion, or $7 a share of Kinder Morgan Canada. The company has spent more than $1-billion, about $3 a share, on the expansion project to date, RBC said. Based on those numbers, it indicates a cushion of at least $1.2-billion, or $2 a share, for Kinder Morgan Canada, which pegged the per-share value of the deal at $12 after tax.
The sale marks a new chapter for Canada’s energy industry, which has preached a free market for operations and sale of products, but now welcomes an emergency nationalization of a conduit to the ocean to end years of heavy price discounts on its oil-sands-derived crude. Now, the federal government, backed by Alberta, will try to push the effort forward on the industry’s behalf in the face of legal challenges from the B.C. government and others.
For the sale, Kinder Morgan is giving up about $200-million a year in annual earnings before interest, taxes, depreciation and amortization (EBITDA) from the pipeline, which routinely operates full out as the only route from Alberta to the Vancouver area. That money will flow to the government, or any future buyer of the assets if a hunt Ottawa and Kinder Morgan are conducting bears fruit.
But the real prize is the $1.1-billion in EBITDA that could flow from tariffs charged to oil shippers on the expansion, said Terry Marshall, senior vice-president at Moody’s Investors Service. Under the approved design, throughput of Alberta oil would nearly triple to 890,000 barrels a day.
"That’s a pretty significant number,” Mr. Marshall said. “It would have been terrific for Kinder Morgan had they been able to stay in this and achieve that. But the problem was, when was that actually going to be built and placed into service, and how much was it going to cost to get there? And that’s the great unanswerable question.”
The current price tag for completing the project is $7.4-billion, although that is widely expected to rise, and even with government ownership, there are no guarantees that legal challenges will not upend the expansion plans, or force more delays and costs.
Kinder Morgan Canada entered the country in 2005 with the acquisition of Vancouver-based Terasen Inc. It is 70 per cent owned by Houston-based Kinder Morgan Inc., and went public in a $1.75-billion deal a year ago, partly to provide a funding vehicle for the expansion. Besides Trans Mountain, it also owns crude-oil storage and rail terminals in Alberta, the Vancouver Wharves Terminal and the Cochin condensate pipeline system. Mr. Marshall said the proceeds from the sale could benefit both the parent company and the Canadian subsidiary in the form of increased spending or debt reduction.
There is no word yet on whether a private-sector player or consortium of pipeline companies or pension funds is interested in buying the assets, and even then it is expected the government would provide ways to shield them from the risks.
Despite the hefty sale proceeds, the episode will likely not be seen as a happy one for Kinder Morgan, said Hal Kvisle, the former chief executive officer of TransCanada Corp., and now a director of Cenovus Energy Inc.
The company has invested no small effort and sums of money to advance the project when it could have put the funds to use in the United States, and it ends up on the sidelines, Mr. Kvisle said.
“They’re not in business to exit assets,” he said. “So I don’t think it’s a good outcome for Kinder Morgan, though I would applaud Kinder Morgan for making the very best out of a bad situation by getting this money and leaving the scene.”