National Post (National Edition)
ONE YEAR AFTER ITS IPO, KINDER MORGAN CANADA SHAREHOLDERS LEFT WITH MUCH SMALLER ENTITY.
Growth will slow with pipeline out of mix
• Kinder Morgan Canada Ltd. listed on the Toronto Stock Exchange on May 30 last year, luring investors with the promise of building the massive Trans Mountain expansion project, but just under a year later shareholders seem to be left with a decidedly low-growth entity in their portfolio after the company’s most prized asset was sold off.
Kinder Morgan Canada said Tuesday it had sold the troubled Trans Mountain pipeline system and expansion project for $4.5 billion after weeks of negotiations between federal Finance Minister Bill Morneau and its Houston-based parent company Kinder Morgan Inc.
The deal will result in each Kinder Morgan Canada shareholder receiving $12 per share after capital gains tax — roughly 75 per cent of the company’s share price. The Canadian company’s stock initially rose, but closed nearly three per cent lower to $16.10 in Toronto.
The TMX expansion would raise the Albertato-b. C. pipeline’s capacity to 890,000 barrels per day from its current level of 300,000 bpd and was expected to cost the company $7.4 billion. The federal government will retain key management and technical personnel within Kinder Morgan Canada to execute the construction project. Kinder Morgan will help Ottawa find other investors, as Morneau said the government was not interested in holding on to the asset.
Kinder Morgan is going to start construction on the pipeline this summer, with Ottawa providing loan guarantees for any money the company spends on the endeavour between now and when the pipeline is sold.
The largest shareholder of the Canadian unit is the Houston-based parent, which retains 70 per cent of the company.
“A decision has not yet been made on the best way to make use of the cash from the transaction,” said Kinder Morgan CEO Steve Kean on a conference call announcing the sale.
Terry Marshall, Moody Investors Service’s senior vicepresident, said the sale was a credit positive for the parent company as it removes the significant risk attached to the expansion, and eliminates at least $6.4 billion — before potential cost overruns — of additional capital to complete the project.
Onmay30,2017,theparent company had spun out 30 per cent of its Canadian business unit Kinder Morgan Canada in an initial public offering that raised $1.75 billion, and was used to pay down the parent company’s debt.
In the company’s IPO prospectus, the Trans Mountain pipeline system and expansion project were listed as the company’s largest asset and biggest growth project.
Kinder Morgan said it expects its share of after-tax proceeds to be approximately $1.25 billion.
However, most analysts that cover the company believe the expansion project was vital for the company.
St. Louis-based Edward Jones senior analyst Jen Rowland said while the deal is a ‘slight positive’ as it helps reduce balance-sheet leverage and removes this significant project execution overhang, “the bad news is KMI’S growth outlook is muted without” the Trans Mountain expansion project.
The company was on pace to grow its earnings at a rate of five per cent with the Trans Mountain expansion project, but would only grow at a rate of two per cent to three per cent without the project, Rowland had said in an interview last week.
National Bank analyst Patrick Kenny believes the overall impact of the sale is ‘slightly negative’ for Kinder Morgan, and plans to revisit the bank’s $19 price target for the company.
While Ottawa’s move is notionally positive for Canadian oil producers, the nationalization of key infrastructure is unlikely to boost investment confidence in Canada, noted GMP First Energy analyst Robert Fitzmartyn.
“We view the announcement as negative for entities considering large resourcefocused capital investments in Canada such as LNG, pipelines or oilsands projects, given the inability for the rule of law and regulatory approvals to allow projects to move forward,” Fitzmartyn said in a note to clients.
RBC Capital Markets analyst Robert Kwan, however, thinks the move was a “positive development” for the company.
The fair value of the remaining assets — plus the $12-per-share after tax proceeds of the sale — is $18 per share, reflecting how sizable the Trans Mountain system was as a portion of Kinder Morgan Canada’s business, Kwan said.
Kean spent a significant amount of time on the conference call highlighting the company’s other assets in Canada, which include its oil storage tanks and crude-oil-by-rail facilities in Edmonton, its Vancouver Wharves Terminal for exporting mineral concentrates from the West Coast and its Cochin pipeline, which sends light oil to the oilsands so it can be blended with bitumen to flow through pipelines.
“This is a great set of assets that we are currently expanding and expect to continue to find opportunities to expand in the future,” Kean said.
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