Finance Minister Bill Morneau made the announcement this morning. The plan is to buy the pipeline and pipeline infrastructure assets from Kinder Morgan with cabinet approval already in place and only now subject to a Kinder Morgan shareholder vote.
Morneau said the plan is to eventually seek a sale of forthcoming new Crown Corporation to investors. “Interest has already been expressed from investors in Canada including large pension funds,” said Morneau.
“We plan to exert our jurisdiction over getting this pipeline built by purchasing the pipeline,” Morneau said in response to a question regarding how this will plan will deal with BC still doing everything in the province’s power under Premier John ‘Moonbeam’ Horgan to prevent the pipeline from being built.
“We are purchasing the assets and those assets are required to allow the construction to begin and allows us to have the expansion to be built.”
Kinder Morgan’s shares were up 47 cents or about three per cent at $17.06 in early trading on the Toronto Stock Exchange after going as high as $18.
In a press release Kinder Morgan boss Steve Kean had the following to say: “We are pleased that KML and the Government were able to reach agreement on a transaction that benefits the people of Canada, TMEP shippers and both KMI and KML shareholders. The outcome reached represents the best opportunity to complete TMEP and thereby realize the great economic benefits promised by that project”
“For KMI, despite losing the EBITDA associated with the Trans Mountain system, we still expect to meet or exceed our 2018 distributable cash flow (DCF) per share target. The transaction will also have a positive impact on our consolidated balance sheet, as we expect KMI’s approximately 70 percent share of after tax proceeds to be approximately US$2.0 billion. Additionally, we continue to expect a 2018 annualized dividend of $0.80 per share, followed by $1.00 per share in 2019 and $1.25 per share in 2020, a growth rate of 25 percent annually,” said Kean. “We will provide additional financial guidance after the transaction closes.
“With respect to future growth, we are confident that KMI will continue to find investment opportunities across its unparalleled network of midstream assets. Since mid-2015, we have added on average approximately $1.3 billion per year to our backlog,” continued Kean.
Will it cost more than $4.5 billion?
“We’ve done our due diligence and of course a pipeline is like moving something along a toll meaning the oil companies will effectively pay. We are buying assets that will create value for Canadians,” said Morneau. “It needs to be fair value to Canadians in the purchase of the assets that has significant value to our economy.”
$4.5 billion keep in mind doesn’t include the potential for increased costs as result of the indemnity that Morneau is promising.
“We are going to purchase the assets for the expansion and if there is a future approach with the private sector we will indemnify them.”
There are 157 conditions for the approval for the pipeline which to Morneau and the federal government is “comprehensive.”
“We always have to consider both aspects of the environment and economy at the same time.”
But if it’s not Kinder Morgan involved in the project anymore, who’s going to be putting shovels in the ground? The federal government will be retaining the people and management already in place to enable the start of construction.
“We will take on the people that are integral to completion of project that will allow us to move forward with the existing management team,” continued Morneau. “The assets that we purchased are the exiting pipeline in place since 1953 and all the terminals required and the expansion that has been invested to twin the pipeline and there are a number of assets that Kinder Morgan Canada has retained not integral to the project. We’ve come to a fair price to ensure value is appropriate and presents positive value as we get this project in the Canadian interest built.”
What about the protesters?
“Discussions are happening with the premiers of BC and Alberta and Prime Minister as we speak [7:30 am Mountain time] to work out these issues. This is isn’t first pipeline to be built in Canada. What we know as Canadians are supportive of project in national interest and creates thousands of jobs. We will continue to explain those advantages in the context of our environmental plan that puts a price on carbon and protect our environment very carefully, which we are doing.”
But who exactly will the investors be? That is unclear as Morneau insisted the focus thus far has been on the deal at hand rather than finding future buyers.
“What we’ve focused on is working with Kinder Morgan to get to conclusion to meet our goals which are creating jobs and getting the construction season going and getting the project completed. We’ve not been focused on securing investors. We’ve had expressions of interest however and seek to have it go back to the private sector in the future. We are going to do what we’ve done this morning to ensure the international investor community that Canada is place where the rule of law is respected.”
Will there be any more legislation required?
“No more legislation required for this deal,” said Carr. “We are confident the federal government is acting in federal jurisdiction and reserve the right to look at other pieces of legislation if we think we need to.”
How much will the federal government willing to go above $4.5 billion? Morneau avoided answering how much the government anticipates the construction costs will be and how much of those costs will be passed onto oil and gas companies that will pay for them via tolls.
Any extraordinary costs will be covered together with the province of Alberta. “We’ve come to an agreement with the Alberta government,” said Morneau. “This is a project that will not have a fiscal impact.”
There is no target date to sell the project back to the private sector. “We will consider expressions of interest from potential buyers but will not set a deadline. Our goal is for have this pipeline in the private sector in the near or medium term.”
What happens if no one wants to buy it? “We don’t see that as a likely outcome,” said Morneau. “The asset has value. It’s been operating since 1953 and there will be more value by twinning it. And indemnifying it will secure that value.”