Is it possible to read too much into a corporate press release? If so, CBC News (and other media outlets) may be over-estimating Kinder Morgan’s optimism with regard to the fate of its planned tar sands Trans Mountain pipeline expansion from Edmonton, Alberta to Burnaby B.C.
On May 31, CBC News reported: “Kinder Morgan is signing contracts with construction companies and plans to start building its new $7.4 billion pipeline in September. At the same time, a new NDP-Green party partnership could form government in B.C. and start acting on election campaign promises to kill the project. Both the company and the politicians made announcements on Tuesday making it clear they are not backing down in this fight. ‘This is an exciting day,’ said Ian Anderson, the head of Kinder Morgan Canada, in a news release announcing that the company had completed its Initial Public Offering [IPO] and had made the final investment decision on the project. No matter that the shares fell as the market opened and no mention of the possible change in government.” [1]
CBC News predicted that there “could be quite the clash this summer,” with “a battle of the wills between a big energy company with billions of dollars on the line versus an upstart political duo that make take a slim hold on power and have something to prove.” [2]
But Bloomberg reported that “Kinder Morgan Canada Ltd. shares fell seven percent in its trading debut Tuesday,” which according to Bloomberg data was “on pace for the worst first day of trading” for a sizable Canadian IPO since 2009. [3]
Indeed, the more we know about this IPO, the weaker (and weirder) it looks.
The IPO
Despite long-standing public opposition to the project, the federal Trudeau government approved Kinder Morgan’s Trans Mountain project in November 2016, with the B.C. government of Christy Clark approving it in January 2017.
After gaining these approvals, Houston, Texas-based Kinder Morgan Inc. (the biggest U.S. pipeline company) initially considered financing the project by selling a 50 per cent stake through a joint venture. It hired Toronto Dominion Bank as an adviser to help arrange financing, with a Kinder Morgan spokesman telling Thomson Reuters in February, “We’re confident in the interest from the investment community and we’re continuing to move forward with all aspects of planning in order to begin construction in September 2017.” [4]
But the investment community, including private equity firms, did not express much interest in Trans Mountain – likely because of the 19 lawsuits already filed against it – so Kinder Morgan tried to interest several Canadian public pension funds in investing in the project, thereby raising the ire of many Canadians across the country.
By mid-May Kinder Morgan decided (as Seeking Alpha put it) “to IPO the company’s Canadian assets,” spinning off Kinder Morgan Canada Ltd. as a newly formed company with 30% of its shares (102.9 million) to be offered on the open markets. [5]
Initially, the shares were to be offered in a price range of $19 -$22, but then the Kinder Morgan parent cut the IPO offer price to $17 per share, reportedly to get the offering off the ground. Meanwhile, outfits like The Motley Fool were warning investors that “Kinder Morgan Canada’s IPO is a dog with fleas,” and “under no circumstances should you buy any shares in this IPO” because of the company’s debt and the “political nature” of this investment. [6]
First Nations Opposition
First Nations in B.C. also stepped up their opposition to the project by issuing a warning to investors about financial risk. A legal brief prepared by the coastal Tsleil-Waututh Nation and the West Coast Environmental Law Association argued in advance of the IPO that court challenges create “significant uncertainty” around the Trans Mountain pipeline. The legal brief was sent to major banks, brokerage houses and institutional investors in the U.S. [7] The Tsleil-Waututh Nation had previously met with Kinder Morgan’s largest institutional shareholders (representing over $15 billion in shares) and including: Goldman Sachs, JP Morgan, Morgan Stanley, CitiBank, TIAA-CREF, Miller Howard, Vanguard, State Street and Fidelity. [8]
In May the Treaty Alliance Against Tar Sands Expansion also launched a divestment campaign against 17 banks that fund tar sands pipeline, including CIBC, BMO, Scotiatbank, TD Bank and RBC. [9]
If before such actions investors had been unaware of the controversy surrounding Kinder Morgan’s Trans Mountain expansion project, which would triple the amount of diluted bitumen (dilbit) shipped from Alberta to B.C. tidewater, they certainly got informed by these actions.
Meanwhile, Kinder Morgan and its advisers designed a unique IPO that has not received much attention.
The Bundling
As far as I can determine, only one source detailed what else was included in the IPO, while most simply focused on Trans Mountain as the “major asset” in the offering.
Seeking Alpha noted on May 12, “Kinder Morgan (NYSE:KMI) just announced its plans to IPO basically all its Canadian assets including the Trans Mountain pipeline system (including related terminals assets), the Puget Sound pipeline [serving the U.S. Pacific Northwest], the Jet Fuel pipeline system [serving Vancouver International Airport], the Canadian portion of the Cochin pipeline system [from Alberta to Windsor, Ontario], the Vancouver Wharves Terminal and the North 40 Terminal, as well as three jointly controlled investments: the Edmonton Rail Terminal, the Alberta Crude Terminal and the Base Line Terminal.” [10]
While most of the media attention was on Trans Mountain as the primary component of the IPO, the reality was somewhat different. As Dean Orrico (Chief Investment Officer with Middlefield Capital) told Business News Network about the IPO, “We all know it’s been off to a very rocky start all because of Trans Mountain, and the deal got repriced, as we all know, in the last few days,” he said. “For Kinder Morgan Canada, Trans Mountain is only a portion of it: there’s really a business there, a very valuable business. Based on the repricing [to $17 per share], you’re basically getting Trans Mountain for free.” [11]
Noting the controversy about Trans Mountain, Orrico explained that “value-focused foreign investors may sort through the noise and take a flyer on the IPO due to the other assets bundled into the offering. It tells them, this is a project, not necessarily a sector, but this is a project that is at risk and this company is going to be at risk,” he said. “But value investors, and there’s a lot of foreign value investors, should look at this and say ‘This is still a pretty good opportunity’ given the fact that you’re not paying for Trans Mountain.” [12]
So the Trans Mountain pipeline expansion was apparently not even considered a major asset in the new company’s IPO. As far as investors were concerned, any interest would be in the other (non-controversial) assets.
In fact, the Financial Post stated that the IPO “could also be seen as an indication that Houston-based Kinder Morgan is reducing its exposure to the pipeline from Edmonton to Burnaby, B.C., while recouping hundreds of millions invested so far to obtain regulatory approvals.” [13]
Indeed, on the day the IPO was offered (May 30), the Financial Post quoted Canoe Financial portfolio manager Rafi Tahmazian: “In addition to the political uncertainty, Tahmazian said Houston-based Kinder Morgan Inc.’s plan to use the proceeds of the IPO of its Canadian division to pay down the parent company’s debt was not well received by the market. ‘The thing did not pitch well,’ he said.” [14]
So if the Kinder Morgan parent is using the IPO for “reducing its exposure” to the pipeline and for paying down its own debt, then it’s difficult to see the company as being committed to Trans Mountain.
Canoe’s Rafi Tahmazian told CBC News that “between two and three dollars of Kinder Morgan Canada’s share price is associated with the value of the Trans Mountain expansion,” which seems remarkably low. “This is a company that has clearly calculated a budget of what they are willing to spend and potentially lose,” said Tahmazian. “That has all been calculated in their capital budget to the dollar, so there’s a certain degree of spending they will do to move this forward, but at some point they’re going to have to decide if this drags on too long.” [15]
After the IPO was concluded, the Financial Post reported: “The IPO, underwritten and co-led by TD Securities and RBC Capital Markets, raised $1.75 billion but shares fell as investors fretted over the fate of the newly-minted company’s flagship project.” [16] But just how “flagship” is this pipeline project, if IPO investors were basically investing in everything but Trans Mountain (i.e., getting it for free)?
The Canada Pension Plan Investment Board (CPPIB) has yet to disclose whether or not it purchased any shares in the IPO. As of March 31, 2017, the CPPIB holds 1,714,000 shares in the Kinder Morgan parent, worth C$50 million.
Footnotes:
[1] Kyle Bakx & Tracy Johnson, “What B.C. can and cannot do to stop the Kinder Morgan pipeline,” CBC News, May 31, 2017.
[2] Ibid.
[3] Natalie Obiko Pearson, Bloomberg & Scott Debeau, Bloomberg, Calgary Herald, “Kinder Morgan Canada shares fall in debut as pipeline foes align,” Calgary Herald, May 30, 2017.
[4] Thomson Reuters, “Kinder Morgan reported in talks on $6.8B Trans Mountain pipeline financing,” CBC News, February 17, 2017.
[5] “Kinder Morgan Pulls A Rabbit Out Of Its Hat,” Seeking Alpha, May 12, 2017.
[6] Will Ashworth, “Don’t Be Kinder Morgan Inc.’s Patsy,” The Motley Fool Canada, May 25, 2017.
[7] Shawn McCarthy and Jeff Lewis, “Trans Mountain faces new risk from NDP, Greens,” The Globe and Mail, May 30, 2017.
[8] “Kinder Morgan a ‘Risky Investment’ Warns First Nation ahead of Tuesday IPO,” Press Release from Tsleil-Waututh Nation Sacred Trust, Vancouver (Coast Salish Territory), May 29, 2017.
[9] Ian Bickis, “Trans Mountain IPO comes at awkward time for energy giant Kinder Morgan,” The Canadian Press, May 21, 2017.
[10] “Kinder Morgan Pulls A Rabbit Out Of Its Hat,” op. cit.
[11] Ian Vandaelle, “Ground shifts under $7.4B Trans Mountain pipeline amid NDP-Green alliance in B.C.,” Business News Network, May 30, 2017.
[12] Ibid.
[13] Claudia Cattaneo, “A minority government in British Columbia means political risk just skyrocketed for resource projects,” Financial Post, May 26, 2017.
[14] Geoffrey Morgan, “’It got done but it wasn’t pretty’: Kinder Morgan Canada shares slide on debut amid ‘really ugly storm’ in B.C. politics,” Financial Post, May 30, 2017.
[15] Bakx & Johnson, op. cit.
[16] Geoffrey Morgan, op. cit.
