Canada would see annual returns excluding debt costs of about C$1 billion per year from its purchase of Kinder Morgan Inc.'s Trans Mountain pipeline, even if an expansion project is delayed or goes over budget, according to a filing related to the C$4.5 billion sale of the crude-carrying network.
The line would have unlevered free cash flow of between C$936 million and C$1.34 billion annually from 2022 to 2040, even if the cost of the project rises to C$9.3 billion and takes an extra year to complete, an analysis by the Canadian bank TD Securities Inc. found. The analysis examined scenarios that included a C$1 billion addition and a C$1.9 billion addition to the expansion's C$7.4 billion estimated cost. The results of the analysis were included in a Kinder Morgan filing related to the sale. If the expansion project does not proceed, the owner would see annual unlevered free cash flow of C$84 million to C$162 million annually on the existing Trans Mountain system.
Canada's government is paying Kinder Morgan approximately C$4.5 billion for the system, which links Alberta's oil sands region with a marine terminal in British Columbia. The system went into service in the 1950s and has a capacity of 300,000 barrels per day. The expansion, which would lift capacity to 890,000 bbl/d, has been delayed by legal challenges and inter-government squabbles, which led Kinder Morgan Canada Ltd. to sell the pipeline network to Canada's government. The final price could change as the government reimburses Kinder Morgan for work that has been done on the project. The government is looking for a buyer or investor for Trans Mountain.
The proposed Trans Mountain expansion.
The analysis by TD, which is contained in an Aug. 7 Kinder Morgan proxy filing with U.S. regulators, defines unlevered cash flow as "the cash flow available to the company assuming the company is without debt and has no interest expense." Canada's government has not revealed how it would fund the transaction but is expected to create a government-owned Crown corporation that would oversee its operation. The transaction is expected close in late 2018, Kinder Morgan said.
The proxy filing, which informed shareholders of details of the transaction, including its valuation, said the TD analysis put the implied value of Trans Mountain at C$4.5 billion, or C$12.94 per Kinder Morgan Canada share, if the transaction were not completed and the expansion project not built. If the expansion proceeds as planned, TD estimated, the value of Trans Mountain would be C$5.7 billion, or C$16.43 per share. Shareholders will vote on the proposed transaction at a meeting in Calgary, Alberta, on Aug. 30.