Feds buy Kinder Morgan Trans Mountain Pipeline for $4.5 billion and a whole lot more

Purchase price does not include the full $7.4 billion to build the expansion pipeline

Ottawa, Calgary, Victoria, Edmonton, Regina – With just two days remaining before Kinder Morgan Canada’s deadline of May 31 for assurance that company would be able to actually build its planned Trans Mountain Pipeline expansion project (TMEP), the federal Liberal government made an early morning announcement on May 29 that the government would be buying the whole pipeline and its expansion project for $4.5 billion.

And while that number was the one that saw all the headlines that morning, it did not reflect the cost to actually build the second pipeline, which the federal government committed to do. The project is pegged at a total $7.4 billion, and will run 1,150 kilometres. Over $1 billion dollars has already been spent on the project.

The government and Kinder Morgan would also be working together to find a third party buyer for the project between now and July 22.

As part of the agreement, the Government of Canada has agreed to fund the resumption of TMEP planning and construction work by guaranteeing TMEP’s expenditures under a separate federal Government recourse credit facility until the transaction closes. The parties expect to close the transaction late in the third quarter or early in the fourth quarter of 2018, subject to Kinder Morgan Limited (KML) shareholder and applicable regulatory approvals.

This expansion, also referred to as TMX, will increase daily capacity from 300,000 to 890,000 barrels, while improving market access to the US Pacific Coast and Northeast Asia.

“We are pleased to reach agreement on a transaction that benefits the people of Canada, TMEP shippers and KML shareholders,” said KML Chairman and Chief Executive Officer Steve Kean in a press release. “The outcome we have reached represents the best opportunity to complete TMEP and thereby realize the great national economic benefits promised by that project.

“Our Canadian employees and contractors have worked very hard to advance the project to this critical stage, and they will now resume work in executing this important Canadian project.”

The purchase price alone equates to approximately $13 per restricted voting share on a pre-capital gains tax basis and approximately $12 per restricted voting share after capital gains tax. KML expects its approximately 30 percent share of after-tax proceeds to be approximately C$1.25 billion. The company has not yet decided what to do with the money it receives from the sale.

“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. These assets were budgeted to generate approximately half of KML’s adjusted EBITDA excluding capitalized equity financing costs. We continue to invest in expansions of our Canadian assets and look forward to future growth in the service of our customers and our shareholders,” Kean concluded.

Morneau explains transaction

In making the announcement in Ottawa, federal Finance Minister Bill Morneau said, “Our government's position is clear. TMX is in the national interest.

“Getting the Trans Mountain Expansion Project built will preserve thousands of good, well-paying jobs – the kind of jobs that will strengthen and grow the middle class.

“It will ensure that we are able to safely get Canadian oil resources to world markets, where we can get a fair price for them.

“And it will reassure investors that Canada is a country that respects the rule of law and that gets big, important things done.

“It's important to remember, though, that Canada is also a place where we understand that the environment and the economy go hand-in-hand. The Trans Mountain Expansion Project is no exception,” he said.

Morneau touched on the country’s Oceans Protection Plan, the extensive and ongoing consultations with Indigenous communities, strengthened environmental standards, and the rigour of the approvals process.

He also said that, “Division among provinces – such as the dispute that has arisen between Alberta and BC – cannot be allowed to fester.

“Especially not when the resulting impasse threatens both the livelihood of thousands of workers and Canada's solid reputation as a good place to invest.

Morneau reported several weeks of discussions with Kinder Morgan took place.

“These discussions became necessary when the political uncertainty in British Columbia made it difficult for the company to proceed with construction.

“The uncertainty caused unnecessary delays, put thousands of jobs at risk – including up to 9,000 jobs in BC – and is holding back Canada's economic growth.

“And this is all happening after the Trans Mountain Expansion Project was approved by both the federal government and the province of British Columbia, following the most rigorous process and environmental assessment in this country's history.

“So our message today is simple: when we are faced with an exceptional situation that puts jobs at risk, that puts our international reputation on the line, our government is prepared to take action.

“To guarantee the summer construction season for the workers who are counting on it, and to ensure the project is built to completion in a timely fashion, the federal government has reached an agreement with Kinder Morgan to purchase the existing Trans Mountain pipeline, and infrastructure related to the Trans Mountain Expansion Project.

“The agreement, which is expected to close this August, was approved by Cabinet this morning and is now subject to approval by Kinder Morgan shareholders.

“This $4.5 billion investment represents a fair price for Canadians and for shareholders of the company, and will allow the project to proceed under the ownership of a Crown corporation.

“The core assets required to build the Trans Mountain Expansion Project have significant commercial value, and this transaction represents a sound investment opportunity.

“That's why we chose not to provide a subsidy to Kinder Morgan, but rather to enter into a commercial agreement that will make the most of the economic potential of this project.

“It's an agreement that we believe will deliver a real return on investment – for the benefit of British Columbians, Albertans, and all Canadians.

Morneau added, “It is not, however, the intention of the Government of Canada a to be long-term owner of this project.

“At the appropriate time, Canada will work with investors to transfer the project and related assets to a new owner or owners, in a way that ensures the project's construction and operation will proceed in a manner that protects the public interest.

“For Indigenous groups, we will make sure that existing profit sharing or other agreements established with Kinder Morgan remain in effect.

“Many investors have already expressed interest in the project, including Indigenous groups, Canadian pension funds, and others. To facilitate the transfer of ownership, we will extend the federal indemnity to protect any new owner from costs associated with politically motivated delays. The Province of Alberta will also support the project, providing an emergency fund for any unforeseen costs, if needed. In return, Alberta will receive value commensurate to their contribution.”

“The Trans Mountain Expansion Project will be built,” Morneau concluded.

The federal government said agreement will guarantee the resumption of work for the summer construction season. Federal loan guarantees will ensure that construction continues through the 2018 season, eliminating the uncertainty for families whose financial security relies on this project going ahead this year.

Horgan stands firm

In a statement on Facebook, British Columbia Premier John Horgan said, “Today’s events do not change the risks of a seven-fold increase in tanker traffic.

“This has always been about what's best for British Columbians. It's about defending the interests of the tens of thousands of people who depend on pristine coastal and inland waters for their livelihoods. It's about defending key sectors of our economy.

“It doesn't matter who owns this pipeline, or any pipeline that would increase diluted bitumen over and through our waters. The risks are the same.

“A single spill could threaten tens of thousands of jobs and billions of dollars of economic activity.

“We believe BC should have a say over whether we put our economy and entire communities in harms way.

“That's why we've sent the question of our jurisdiction to the courts.

“We have a duty to make sure the rights of all First Nations who could be affected by an oil spill are respected. This is a key component of reconciliation, and will never change, even if the ownership of a company does.

“I will continue to stand up for the people of this province, and defend our economy and our coast,” Horgan concluded.

Notley speaks

Wearing a lapel button saying “I support Trans Mountain,” Alberta Premier Rachel Notley said in Edmonton, “Today, we take a major step forward for Albertans and all Canadians. The deal announced today puts people to work building this pipeline right away, and creating good jobs. This deal, and this pipeline, will unlock investment in our oilsands, because we are now on the path of getting full value for our energy resources. This deal, and this pipeline, will help us build up the things that matter for working families, like schools and hospitals,” Notley said.

Good jobs and meaningful climate action can go hand-in-hand, she noted.

“Any climate change plan that ignores the needs of working people is a plan that is doomed to fail. And any economic plan that ignores climate change is setting our businesses, our kids, and our future generations up to fail.

“We know we can tackle climate change and still protect our good energy industry jobs,” Notley said.

“Sometimes on big, national projects, the government has to step in and take a role,” Notley said, noting that the last time a major pipeline was built to tidewater, it was the original Trans Mountain pipeline in the 1950s.

Asked where the money is going to come from for building the pipeline, Notley said, “The federal government pays for everything until it is done.”

She wouldn’t speculate on who might buy the pipeline once completed.

Asked if Alberta would still buy the pipeline, Notley said, “At this point, we don’t think that is necessary.”

Notley said a fundamental part of the agreement was that Kinder Morgan get right back to work on building the pipeline.

“Resumption of construction on schedule, was a fundamental part of the agreement that we reached,” Notley said.

Scheer compares energy policy to houses on fire

“Today, the prime minister is forcing Canadian taxpayers to pay for his failure,” said Andrew Scheer, leader of the opposition and leader of the Conservative Party of Canada, in a scrum in the halls of Parliament following the announcement. He added that nothing announced today does anything to overcome the delays facing the project.  

Noting the Trudeau government effectively killed the Enbridge Northern Gateway project and the TransCanada Energy East project, Scheer said, “After setting not one, not two, but three houses on fire, Justin Trudeau expects credit for buying a home.”

Scheer said that protests, debate and opposition picketing are a necessary part of democracy, but it does not allow people to pick and choose which laws they follow and illegally block work on this.

Speaking about confidence in the sector, he said Bill C-69 shattered that, and the carbon tax make these types of projects less competitive.

“Looking at the history, knowing that Northern Gateway and Energy East were both killed after going through that regulatory process, I think that has sent the message to global investors that under Justin Trudeau, Canada is closed for business. It’s closed for investment. And I think Kinder Morgan has decided to pull its investment, like so many other Canadian companies, they are deciding they are not getting out of the energy business. Kinder Morgan is not getting out of the energy business. It’s getting out of the energy business in Canada. And $4.5 billion of Canadian taxpayers’ money is going to shareholders out of this country. We are sending jobs and investment to Texas and the United States and around the world, rather than championing these projects here at home,” Scheer said.

Asked if the announcement moved the project closer to reality, Scheer concluded, “I don’t believe we’re any closer to certainty today than we were a few weeks ago, because the impediments to this project being built are still there. We still have a government in British Columbia doing everything it can to through roadblocks in.

“The government is now proposing a scenario where they’re going to purchase this asset, somehow find partners to get it built, then hope to sell it, in an environment where all the decisions, so far, in the last year-and-a-half, have been to leave the Canadian energy industry. $4.5 billion is the absolute minimum amount of taxpayers’ money that is going to be on the hook here. Justin Trudeau can’t tell us the true costs on this, and he’s asking Canadians to bail him out of his failure. He has chased away the investment on two other major pipelines, Northern Gateway and Energy East. And now he’s asking taxpayers to pay for the third. That is a terrible indictment of Justin Trudeau’s energy policy.”

Moe reacts

Saskatchewan Premier Scott Moe said in a Facebook post, “I hope this works. Today’s announcement actually makes the Trans Mountain pipeline project even more important to all Canadians. Not only is it crucial to our energy sector, market access and jobs, but now billions of taxpayers’ dollars are on the line.

“But today’s announcement that the Trudeau government is buying the Trans Mountain pipeline for $4.5 billion leaves many unanswered questions:

“How does government ownership change the situation in B.C., where the NDP government is actively obstructing construction?

“The $4.5 billion is just the cost of purchasing the existing assets. How much more are taxpayers on the hook for construction costs? (Remember that Kinder Morgan was prepared to build this pipeline at no cost to taxpayers.)

“What signal does this send to private investors about future projects when it now appears that the only way to get an approved pipeline project built is to have the government own it?

“Reporters did a good job asking federal ministers Morneau and Carr all of these questions, but they got no real answers. We will be looking for those answers in the days ahead,” Moe concluded.

Kinder Morgan holds onto other assets

KML will continue to manage a portfolio of strategic infrastructure across Western Canada, including

  • An integrated network of crude tank storage and rail terminals in Alberta that is one of the largest in the region; 
  • The crude terminal facilities constitute the largest merchant terminal storage facility in the Edmonton market and the largest origination crude by rail loading facility in North America;
  • The Vancouver Wharves Terminal, the largest mineral concentrate export/import facility on the west coast of North America; and,
  • The Cochin Pipeline system that transports light condensate originating from the United States to Fort Saskatchewan, Alberta. This pipeline cuts across Saskatchewan, from the Kerrobert area to Alameda.
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