Trans Mountain Expansion Project Pursuing a “Primarily Permitting” Spend Strategy
CALGARY, Dec. 4, 2017 /CNW/ – Kinder Morgan Canada Limited (TSX: KML) today announced its preliminary 2018 financial projections.
“We expect 2018 to be a good year for Kinder Morgan Canada Limited businesses,” said KML Chairman and CEO Steve Kean. “KML’s extensive network of strategic assets includes the existing Trans Mountain Pipeline system, the only Canadian crude oil and refined products export pipeline with North American West Coast tidewater access. Other KML assets include one of the largest integrated networks of crude tank storage and rail terminals in Western Canada, the largest merchant terminal storage facility in the Edmonton region, the largest origination crude by rail loading facility in North America, and the largest mineral concentrate export/import facility on the west coast of North America. Those assets will continue to generate substantial value for KML shareholders in 2018,” continued Kean.
“With respect to the Trans Mountain Expansion Project (TMEP), we made some progress during 2017 on permitting, regulatory condition satisfaction and land access,” said Kean. “Unfortunately, the scope and pace of the permits and approvals received does not allow for significant additional construction to begin at this time.”
“KML must have a clear line of sight on the timely conclusion of the permitting and approvals processes before we will commit to full construction spending,” said KML President Ian Anderson. “To that end, we have filed motions with the National Energy Board (NEB) to resolve existing delays as they relate to the City of Burnaby, and to establish an open NEB process that will backstop provincial and municipal processes in a fair, transparent and expedited fashion.”
Below is a summary of KML’s expectations for 2018:
- Generate $474 million of Adjusted EBITDA, and $349 million of distributable cash flow (DCF), respectively, with growth due primarily to the phased in-service of tanks at the new Base Line Terminal during the year and higher capitalized equity financing costs (or allowance for equity used during construction (AEDC)) associated with spending on TMEP (recognized in other income). Excluding AEDC, Adjusted EBITDA and DCF are budgeted to be $403 million and $278 million, respectively. Actual AEDC earnings will vary depending on the amount and timing of TMEP expenditures. Adjusted EBITDA excluding AEDC is slightly higher than our IPO forecast. Adjusted EBITDA including AEDC is lower than our IPO forecast due to lower spend in 2017 and expected lower spend in 2018.
- Generate DCF (including AEDC) to restricted voting shareholders of $0.96 per restricted voting share, with an expected declared dividend of $0.65 per restricted voting share.
- Invest $1.9 billion on expansion projects and other discretionary spending, of which $1.8 is associated with TMEP and the balance is associated with the Base Line Terminal.
- End 2018 with a Net Debt-to-Adjusted EBITDA ratio of approximately 2.7 times.
- In order to prudently manage shareholder capital, the 2018 budget assumes TMEP spending in the first part of 2018 is primarily on advancing the permitting process, rather than spending at full construction levels, until KML has greater clarity on key permits, approvals and judicial reviews. We previously announced a potential unmitigated delay to project completion of nine months (to September 2020) due primarily to the time required to file for, process and obtain necessary permits and regulatory approvals. Potential mitigation measures require obtaining greater clarity early in 2018 with respect to key permits, approvals and judicial reviews and continued planning with TMEP contractors to assess options to start or accelerate work in certain areas.
- Construction delays entail increased costs due to a variety of factors including extended personnel, equipment and facilities charges, storage charges for unused material and equipment, extended debt service, and inflation, among others. Because those costs are highly uncertain at this stage of the project and the extent of a delay, if any, is currently unknown, Trans Mountain is not updating its cost estimate at this time.
- In order to help achieve the necessary clarity with respect to permits and approvals, Trans Mountain has filed motions with the National Energy Board (NEB) to resolve existing delays and to establish an NEB process that will backstop provincial and municipal processes in a fair, transparent and expedited fashion. As stated in the November 14, 2017 motion presented to the NEB, “it is critical for Trans Mountain to have certainty that once started, the Project can confidently be completed on schedule.” If uncertainty around permitting and judicial processes extends further into 2018, TMEP would expect to reduce its 2018 budgeted spend. As a result, the previously announced unmitigated delay to a September 2020 in-service date could extend beyond September 2020. Further, as stated in the November 14 motion, if TMEP continues to be “faced with unreasonable regulatory risks due to a lack of clear processes to secure necessary permits . . . it may become untenable for Trans Mountain’s shareholders . . . to proceed.”
- While the exact length of delay is uncertain at this time, assuming an unmitigated delay of nine months, estimated incremental Adjusted EBITDA attributable to three months of service in 2020 would be approximately $225 million (excluding the impact of AEDC, which can be difficult to calculate given the requirement of specific project spend schedules). Our original estimate of incremental 2020 Adjusted EBITDA attributable to the project was $900 million (or $776 million including the impact of our original estimate of $124 million for 2018 AEDC), each of which was based on an anticipated full year of service in 2020. We would expect to receive the full incremental $900 million of Adjusted EBITDA plus partial year tariff escalation in 2021, as our current estimate of total Adjusted EBITDA from the project has not changed. Each month of change in our in-service date is expected to result in a change of approximately $75 million of Adjusted EBITDA. The above figures exclude any utilization of spot volumes, which could add more than $200 million of Adjusted EBITDA annually.
About Kinder Morgan Canada Limited (TSX: KML). KML manages and is the holder of a minority interest in a portfolio of strategic energy infrastructure assets across Western Canada. The financial results of the entire suite of assets held by Kinder Morgan Canada Limited Partnership (Business) have been consolidated into the financial results of KML. KML investors are reminded that KMI holds a majority voting interest in KML and a corresponding majority economic interest in the entirety of the business contributing to financial results discussed in this new release. Therefore, unless the context otherwise requires, references to KML in this news release are references to the Business in which the holders of restricted voting shares of KML have a minority interest. The Trans Mountain Pipeline system, with connections to 20 incoming pipelines and current transportation capacity of approximately 300,000 barrels per day (based on throughput of 80 percent light oil and refined products and 20 percent heavy oil), is the only Canadian crude oil and refined products export pipeline with North American West Coast tidewater access. In Alberta, KML has one of the largest integrated networks of crude tank storage and rail terminals in Western Canada and the largest merchant terminal storage facility in the Edmonton market. KML also operates the largest origination crude by rail loading facility in North America. In British Columbia, KML controls the largest mineral concentrate export/import facility on the west coast of North America through its Vancouver Wharves Terminal. Through its Puget Sound pipeline system, KML ships crude oil to refineries in Washington state and its Cochin Pipeline system transports light condensate originating from the United States to Fort Saskatchewan, Alberta. For more information please visit www.kindermorgancanadalimited.com.