Continues to Pursue Primarily Permitting Strategy on Trans Mountain Expansion Project;
Made Progress on Permitting in the Fourth Quarter;
Ends 2017 with No Outstanding Debt
CALGARY, Jan. 17, 2018 /CNW/ – The Kinder Morgan Canada Limited (TSX: KML) board of directors has declared a dividend for the fourth quarter of 2017 of $0.1625 per restricted voting share ($0.65 annualized), payable on February 15, 2018, to restricted voting shareholders of record as of January 31, 2018. KML’s restricted voting share dividends are eligible dividends for Canadian income tax purposes.
“In the fourth quarter, the Trans Mountain Expansion Project (TMEP) received a favorable ruling from the National Energy Board (NEB) with respect to certain permits in Burnaby,” said KML Board Chairman and CEO Steve Kean. “We expect the NEB to issue another decision in the near future on establishing a fair, transparent and expedited backstop process for resolving any similar delays in other provincial and municipal permitting processes, but at this stage we are still pursuing a primarily permitting strategy for the project, and are now projecting an unmitigated delay to a December 2020 in-service date.”
“We hear every day from our customers and other stakeholders about how critical this project is,” said KML President Ian Anderson. “We look forward to seeing further progress on regulatory approvals and judicial reviews and remain committed to delivering the project in an environmentally responsible way that respects our extensive and meaningful consultations with Indigenous Peoples, communities and individuals.”
“KML had another strong quarter due to its diverse portfolio of fee-based assets and resilient cash flows,” said Kean. KML reported fourth quarter net income of $46.4 million, up from $17.8 million in the fourth quarter of 2016, and distributable cash flow (DCF) of $82.7 million, 23 percent greater than the comparable period in 2016. DCF for the quarter benefited from greater contributions from both the Pipelines and Terminals Business Units versus the fourth quarter of 2016, partially offset by an increase in general and administrative expenses and the payment of preferred share dividends compared to the previous period. Net income was further impacted by a reduction in Certain Items in the period. Certain Items in 2016 were from currency fluctuations on US dollar denominated intercompany loans with Kinder Morgan, Inc., that were settled in connection with the KML initial public offering. Please refer to “About KML” below for a description of KML’s minority interest in its assets.
In the fourth quarter, KML generated earnings per restricted voting share of $0.11, and produced DCF of $0.23 per restricted voting share relative to our declared $0.1625 per restricted voting share dividend, resulting in $7.3 million of excess DCF coverage above the company’s dividend.
For 2017, KML generated net income of $160.7 million, Adjusted EBITDA of $388 million and DCF of $323 million. At year-end 2017, Trans Mountain Expansion Project spend totaled approximately $930 million, of which approximately $385 million was incurred by KML post-IPO.
Overview of Business Segments
The Pipelines and Terminals segments’ combined performance for the fourth quarter of 2017 was 18 percent higher than the same period during 2016. Pipelines segment performance was driven by higher capitalized equity financing costs (recognized in other income) due to spending on TMEP. Demand for our pipelines continues to be strong with our Trans Mountain system once again oversubscribed each month during this past quarter.
“Notwithstanding a modest decline in volumes, earnings at the Edmonton-area terminals were up year-over-year owing to escalations in our predominantly fixed, take-or-pay terminalling contracts and a $6.1 million true-up in terminal fees in connection with a favorable arbitration ruling. Volumes at the Terminals segment’s Edmonton Area terminals were down 1.3 million barrels, or 4 percent compared to fourth quarter of 2016, nearly half of which was attributable to a supply chain disruption isolated to the anchor customer at our Alberta Crude Terminal crude-by-rail joint venture. Utilization of our terminal and rail facilities remains high overall, driven by demand for our product takeaway capabilities and optionality,” noted John Schlosser, KML Terminals President.
The segment’s Vancouver Wharves terminal benefited from strong gains in the volume of sulphur and ores and metals handled as well as continued strong agricultural product volumes owing to enhancements made to its agricultural product handling system to accommodate growing export demand.
For 2018, KML’s budget contemplates a dividend of $0.65 per restricted voting share, achieve DCF (including capitalized equity financing costs) of approximately $349 million ($0.96 per restricted voting share) and Adjusted EBITDA of $474 million. KML also budgeted to invest approximately $1.9 billion in expansion projects and other discretionary spending, of which approximately $1.8 billion is associated with TMEP and the balance with Base Line Terminal. KML expects to end the year with a Net Debt-to-Adjusted EBITDA ratio of approximately 2.7 times. For 2018, KML estimates that every $0.01 change in the Canadian-to-U.S. dollar exchange rate would impact DCF by approximately $1 million.
We do not provide forecasted net income (the GAAP financial measure most directly comparable to the non-GAAP financial measures distributable cash flow and Adjusted EBITDA) due to the impracticality of quantifying certain amounts required by GAAP, such as realized and unrealized foreign currency gains and losses and potential changes in estimates for certain contingent liabilities.
On Dec. 15, 2017, KML completed its offering of cumulative redeemable minimum rate reset preferred shares, Series 3 (the “Series 3 Preferred Shares”) for aggregate gross proceeds of $250 million. The Company issued 10,000,000 Series 3 Preferred Shares with a coupon rate of 5.20 percent, including 2,000,000 Series 3 shares issued due to the full exercise of the underwriter’s option, as a result of strong investor demand. KML ended the year with no outstanding debt by carefully managing shareholder funds while seeking clarity on the permitting, regulatory and judicial approval processes for TMEP.
KML’s Board of Directors declared a dividend of $0.3281 per Series 1 Preferred Share ($1.3125 annualized) and $0.22082 per Series 3 Preferred Share ($1.3000 annualized), each payable on February 15, 2018 to Series 1 and Series 3 preferred shareholders of record as of the close of business on January 31, 2018.
TMEP was approved by Order in Council on Dec. 1, 2016, with 157 conditions. The Province of BC stated its approval of the Project on Jan. 11, 2017, with 37 conditions. Trans Mountain has made filings with the NEB and BC Environment with respect to all of the federal and provincial conditions required prior to general construction. The BC Environmental Assessment Office (EAO) has now released all condition filings required prior to general construction. The NEB has released sufficient approvals for proceeding with Westridge Terminal and Temporary Infrastructure work phase. Trans Mountain is now in receipt of a number of priority permits from regulatory authorities in Alberta and British Columbia, including access to British Columbia northern interior Crown lands. Trans Mountain continues to make progress on approvals from the NEB, government of BC and government of Alberta. However, as of the end of 2017, even with this progress, TMEP has yet to obtain numerous provincial and municipal permits and federal condition approvals necessary for construction.
On Dec. 4, 2017, KML announced that TMEP had made incremental progress during 2017 on permitting, regulatory condition satisfaction and land access. However, the scope and pace of the permits and approvals received to date does not allow for significant additional construction to begin at this time. KML also stated that it must have a clear line of sight on the timely conclusion of the permitting and approvals processes before it will commit to full construction spending. Consistent with its primarily permitting strategy and to mitigate risk, KML set its 2018 budget assuming TMEP spend in the first part of 2018 will be focused 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. KML 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. As stated in Trans Mountain’s 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.” As a result, the previously announced unmitigated delay to a September 2020 in-service date could extend beyond September 2020, depending upon progress on regulatory, permit and legal approvals. KML now projects an unmitigated delay to a December 2020 in-service date. Further, as stated in both the November 14 motion, and in our December 4, 2017 press release, 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.” Trans Mountain continues to proceed in water work at Westridge Terminal.
On Dec. 7, 2017, following the filings to the NEB referenced in the Dec. 4, 2017 announcement, the NEB granted KML’s motion to resolve the Burnaby delays and indicated that Trans Mountain is not required to comply with two sections of the city’s bylaws, thereby allowing Trans Mountain to start work at its pipeline terminals subject to other permits or authorizations that may be required. The NEB indicated it would release its reasons for the decision at a later date. The NEB has not yet issued a decision on establishing a fair, transparent and expedited backstop process for resolving any similar delays in other provincial and municipal permitting processes.
Hearings were held in October and November 2017 related to two judicial reviews underway in the British Columbia Supreme Court with respect to the environmental certificate granted to TMEP by the province of British Columbia. Judicial reviews pending in the Federal Court of Appeal (FCA) challenging the process leading to the federal government’s approval of TMEP were heard by the court from Oct. 2 to Oct. 13, 2017. Decisions from the courts are expected in the coming months. KML is confident that the National Energy Board, the Federal Government and the BC Government properly assessed and weighed the various scientific and technical evidence through a comprehensive review process, while taking into consideration varying interests on the Project. The approvals granted followed many years of engagement and consultation with communities, Aboriginal groups and individuals.
Service commenced on Jan. 15, 2018 at the first four of twelve crude oil storage tanks, representing 1.6 million barrels of a total 4.8mm barrels at Base Line Terminal, a 50-50 crude oil merchant terminal joint venture between KML and Keyera Corp., in Sherwood Park, Alberta (near Edmonton). The remaining eight tanks at the facility, which is fully contracted with long-term, firm take-or-pay agreements with credit-worthy customers, are expected to be phased into service throughout 2018.
Base Line Terminal is connected via pipeline to Kinder Morgan’s Edmonton-area terminals and is capable of sourcing the majority of the crude streams handled by KML for delivery to multiple destinations, including but not limited to, KML’s Trans Mountain Pipeline, the 50 percent-Kinder Morgan-owned Alberta Crude and Edmonton Rail terminals, other Edmonton area facilities and major export pipelines.
“Kinder Morgan is pleased to commence operation of the Base Line Terminal and provide the Edmonton market with much needed, additional merchant storage,” said John Schlosser, President of Kinder Morgan Canada Terminals. “The project is forecast to be completed on-time and on-budget later in the year, owing to strong cooperation with and support from our contractors and various project stakeholders, including the local community, regulators and government agencies. We are also excited to expand our partnership in the Edmonton-area with Keyera and appreciate their support and involvement in the project.”
KML’s total investment in the joint venture terminal is approximately $398 million, including costs associated with the construction of a pipeline segment funded solely by KML. Up to an additional 1.8 million barrels may be added in a phase-two expansion of the terminal, depending on future demand.
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
Please join KMI and KML at 4:30 p.m Eastern Time on Wednesday, January 17, 2018, at www.kindermorgan.com for a LIVE webcast conference call that will include a discussion of KML’s fourth quarter earnings.