Feds nationalize Trans Mountain as Kinder Morgan plans construction restart in the summer

Feds nationalize Trans Mountain as Kinder Morgan plans construction restart in the summer

The federal Liberals say they have reached an agreement to buy the existing Trans Mountain Pipeline, the expansion project (TMEP) and Westridge Marine Terminal from Kinder Morgan Canada (KML) for $4.5 billion. KML says they will resume construction in the summer under a government recourse credit facility, until the transaction closes later this year. The funds will come from Export Development Canada, structured in a similar fashion to the 2009 bail-out of General Motors and Chrysler. 

Once the transaction closes, the federal government will continue construction on its own, funding the remainder of the expansion. Last spring, construction costs for TMEP were pegged at $7.4 billion, with over $1 billion already spent. Internal sources are reporting that number could be higher, although KML declined to provide a revised cost estimate for completing the expansion. Employees working on TMEP will stay with the project.

ALREADY PREPARING EXIT STRATEGY

Federal Finance Minister Bill Morneau says his government has no interest in being a long-term owner of the project. Once construction is completed, the government hopes to find a buyer for the midstream assets, most likely a Canadian pension fund, Indigenous group or someone from the private sector.

Morneau also added that Ottawa has agreed to indemnify the new buyers against financial losses from any further delays imposed by the BC government. The federal Liberals are confident they have legal authority over the project, and firmly believe its approval will stand up in court. The government says TMEP is in the national interest and bickering between provinces "cannot be allowed to fester."

The Government of Alberta has also agreed to contribute up to $2 billion in contingency funds in the event of "unforeseen circumstances". Albertans will be repaid through additional equity or profit sharing.

A GOOD DEAL FOR KINDER MORGAN

Parent-company Kinder Morgan (KMI) owns 70% of its Canadian subsidiary KML. KMI stock plunged 65% in 2015 due to its heavy debt-load, and has yet to recover despite a major improvement in oil prices. The sale of Trans Mountain gives the company a much needed cash injection to improve its balance sheet. 

The $4.5 billion sale represents $12 per share after capital gains. KML expects its after-tax proceeds to be about $1.25 billion, while KMI's net proceeds are closer to US$2 billion. KMI says despite revenue losses from the sale of the existing Trans Mountain line, it still plans to increase its dividend from the current US$0.80 a share, to US$1.00 next year and US$1.25 per share in 2020.

Stripping out the Trans Mountain system, KML's holdings are reduced to the Cochin diluent import pipeline, the Vancouver Wharves Terminal, various storage facilities and a crude-by-rail loading terminal near Edmonton. 

A GOOD DEAL FOR ALL LEVELS OF GOVERNMENT

The move might be a win-win-win for all parties involved. BC Premier Horgan gets to preserve 9,000 good paying jobs and associated tax revenues in his province. BC Green Party Leader Andrew Weaver holds onto power, without needing to make more empty threats to topple the BC government. Alberta gets a pipeline to tidewater, profiting from revenue sharing and higher royalties from a lower heavy oil discount. The federal Liberals prove once and for all they and willing and able to get "big, important, transformational projects" completed.

According to Kinder Morgan, construction and the first 20 years of expanded operations would generate almost $47 billion in government revenues, split $5.7 billion for BC, $19.4 billion for Alberta and $21.6 billion for the rest of Canada.

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