Why is Canada paying Kinder Morgan Inc. (NYSE:KMI) $2 billion more than the Trans Mountain pipeline is worth?
When asked this question earlier this week, Prime Minister Justin Trudeau could have answered, “We’re not.”
But he didn’t, and now it’s a meme: Canada is sending $4.5 billion to Houston, Texas for a pipeline that’s worth half that amount.
“Mr. Speaker, $4.5 billion in taxpayers' money is going directly to Houston, Texas,” Gérard Deltell, Conservative MP for Louis-Saint-Laurent, said June 6 in question period.
“That is eight times more than Kinder Morgan spent on the pipeline. That is $2 billion more than Kinder Morgan itself estimated the pipeline to be worth.”
But that’s not how much is “going directly to Houston,” and even a casual reading of financial documents for both Kinder Morgan (KMI) and Kinder Morgan Canada (TSX:KML) suggests that the $4.5 billion for Kinder Morgan Canada’s Trans Mountain pipeline and associated infrastructure appears to be right on the money in terms of its actual value.
Some of the confusion on the part of Deltell – as well as some media that have picked up on his assertions – may arise from the fact that there are two companies involved: Kinder Morgan (KMI) and Kinder Morgan Canada (KML).
The latter was hived off as a separate Canadian entity through a public offering last year that turned Kinder Morgan Canada into a separate publicly traded company.
That public offering raised $1.7 billion, which was used to acquire 30% ownership of Kinder Morgan’s Canadian assets – i.e. the Trans Mountain pipeline, associated assets and other assets not related to the pipeline.
Kinder Morgan (KMI) still owns 70% of Kinder Morgan Canada.
Kinder Morgan’s most recent financial filings in the U.S. do indeed put the value of Kinder Morgan Canada at just US$2 billion ($2.6 billion Canadian). It puts its total Canadian assets at US$3 billion ($3.9 billion Canadian).
But that’s not what the Canadian assets are worth – that’s the value of Kinder Morgan’s 70% share of Kinder Morgan Canada. Seventy per cent of $4.5 billion is $3.2 billion.
But the acquisition also includes the TMEP – the Trans Mountain Expansion Project. Kinder Morgan has already spent $1.1 billion on TMEP, so that has to be added into the price that Ottawa is paying. So $3.2 billion plus $1.1 billion comes to $4.3 billion.
But all that math isn’t necessary. You can just look at Kinder Morgan Canada’s most recent financial filings.
According to its most recent interim financial statements, Kinder Morgan Canada puts its assets at $4.6 billion.
Canoe Financial puts Kinder Morgan Canada’s market value at $6 billion. That would include both the value of hard assets, plus the value the market places on the company, which is reflected in things like share value, market capitalization and optionality.
Kinder Morgan Canada’s assets include the existing Kinder Morgan pipeline, Westridge Marine Terminal, jet fuel pipeline, Puget Sound pipeline, a bulk commodities terminal in North Vancouver, the Canadian portion of the Cochin pipeline, and rail and storage facilities in Edmonton.
But Ottawa is not buying the non-pipeline assets, so they must be subtracted from the value calculation.
Kinder Morgan doesn’t break down the value of individual assets, so it’s hard to say just how much those non-pipeline assets are worth. But even if you subtracted $1 billion, you have to add the $1.1 billion that is included in the sale price for the money already spent on TMEP, which gets you back in the $4.5 billion range.
“Your numbers add up,” Jihad Traya, an analyst for Solomon Associates, told Business in Vancouver. “Taxpayers did really good on this project.”
The real value isn’t so much in the acquisition of the existing Trans Mountain pipeline – although it remains a money maker – but in the revenue that would be generated through TMEP once the second line is built.
According to the prospectus that was filed last year when Kinder Morgan Canada had its initial public offering, Kinder Morgan calculated that, once the new expanded line was in operation, it would increase the company’s revenue by $900 million annually.
One other criticism of Ottawa’s purchase price is that Kinder Morgan itself only valued the Trans Mountain pipeline at $550 million in 2007.
The company has made a number of upgrades since then, however, including the $443 million Anchor loop project – which added 160 kilometres of new pipeline in a section in Alberta – and the $724 million Baseline Terminal expansion in Alberta, in which it has a 50% share.
And because pipeline capacity is more constrained today than it was 10 years ago, that alone increases the pipeline’s value, Traya said.
“It’s also the intrinsic value of the pipeline has increased because of the commercial viability of it,” he said. “It’s a commercially viable pipeline. It has more value. The optionality value has increased in the past 10 years, regardless of who they’re selling it to.”
@nbennett_biv
