January 8, 2017
Seeking Alpha by David Alton Clark
Kinder Morgan has a solid plan to get out from under its huge mountain of debt.
The successful completion of Trans Mountain Expansion Project is a key part of that plan.
While performing further due diligence I uncovered key concerns that alarmed me greatly. In the following article I reveal my concerns for your review and analysis.
Kinder Morgan (NYSE: KMI) has a solid plan to get out from under its huge mountain of debt. The successful completion of Trans Mountain Expansion Project is a key part of the plan. While performing further due diligence I uncovered key points that are of great concern to me.
Snowballing cost at the break point
The price tag has increased by 26% from $5.4 billion to $6.8 billion CAD since 2012. Additional requirements imposed and delays are the primary culprits. Many seem unaware of the major risk to the entire project exceeding the $6.8 billion CAD price tag entails.
The Trans Mountain pipeline expansion project is getting more and more expensive by the day. Kinder Morgan Canada President Ian Anderson now estimates the price tag at $6.8 billion CAD, up from the initial cost of $5.4 billion CAD. The $5.4 billion CAD estimate was made in 2012.
Tunneling through Burnaby Mountain, changes in scope, thicker pipe, routing changes, and the strong dollar are listed as the primary culprits.
Nonetheless, there is nothing out of the ordinary with delays and cost overruns. Massive projects like this almost always come in late and over budget. It’s the nature of the beast. Hidden costs materialize while expected synergies vanish. Yet, why is the $6.8 billion CAD number so important?
$6.8 billion cost ceiling
Not exceeding the $6.8 billion limit is critical to the viability of the project. $6.8 billion represents the upper limit of costs the project can incur while still maintaining contracts with shippers. You see, the catch is the pipeline’s customers have the ability to back out of their contracts, or renegotiate rates with Kinder Morgan if the cost goes over $6.8 billion CAD or the regulatory approval is pushed past the end of 2017.
Here is the issue
The project price tag has already reached the upper limit of $6.8 billion. What’s more, we are nowhere near tallying up all the costs yet. There is still a great divide between the two provinces at present regarding two main issues – an environmental plan for marine mammals and financial agreement.
The battle lines are drawn
Even though the project has already been approved by Trudeau, Kinder Morgan is not out of the woods just yet. The Mayors of Vancouver, Victoria and Burnaby still oppose the project. Many First Nations oppose it as well and have already filed multiple lawsuits. Furthermore, Greenpeace Canada, Sierra Club BC and Raincoast Conservation also oppose the project.
The recent defeat by Washington tribes of a major coal-export terminal at Cherry Point and the successful stoppage of Enterprise Transfer Partner’s (NYSE: ETP) Dakota Access oil pipeline by the Standing Rock Sioux tribe in North Dakota has embolden the Trans Mountain opposition.
If the protestors succeed in significantly delaying the project, it may fail under its own weight. ETP states they expect to lose nearly $84 million each month the Dakota Access pipeline is delayed. Furthermore, ETP states the delay could cause them to lose shippers which could result in the projects cancellation altogether, according to a court filing. The cancellation of the Trans Mountain project would essentially be a death knell for Kinder Morgan.
Trans Mountain is key to Kinder Morgan’s future
The pipeline expansion is very important to Kinder Morgan’s growth and more importantly its cash flow. Many are not aware the Trans Mountain expansion represents an increase in cash flow of six times what it currently generates on only a threefold increase in capacity. The financial windfall for Kinder Morgan was approved by the NEB and effectively doubled the toll rates charged on the current pipeline volume. So it’s very important to increasing Kinder Morgan’s ability to dig its way out of debt.
Previously, the company suggested it would reduce the debt load with cash flow generated when the expansion came on line in 2017. Now the in service date is in 2019. The project is currently two years behind schedule. Presently, the project represents almost 60 percent of the capital spending Kinder Morgan identified for 2017 and beyond. The company is still in the process of pinning down more accurate figures once the final determinations are made regarding open environmental and financial agreements.
Current TMEP Timeline
I believe the Trans Mountain pipeline will be completed at some point. As Trudeau noted, Canada is a resource country. It would be a fool not to reap the rewards of the oil sands find. Yet, I seriously question the current projected cash flows from the project and the completion date. I expect a substantial revision downward of the project’s distributable cash flow once it’s all said and done, particularly if a joint venture partner is brought in.
I believe Kinder Morgan must implement a de-leveraging strategy as soon as possible. The cash flow from the Trans Mountain pipeline is of high importance. A six-fold increase in cash flow would go a long way to paying down the debt. This would allow the company the leeway to increase the dividend.
Unfortunately, the cat is out of the bag I surmise at this point. News of a windfall travels fast. Once everyone receives their “fair share” of the profit pie, there may not be as much left over for Kinder Morgan as originally forecast. That may be why Kinder Morgan has decided to sell up to half the cash flows off. I remain on the sidelines for now.
Those are my thoughts on the matter. I look forward to reading yours! Do you believe the Trans Mountain project will be completed on time? What do you think the final price tag will be? Do you believe the project will still represent a six fold increase in cash flow once it’s all said and done? Is Kinder Morgan a buy right now for dividend growth and income investors?
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