Copyright of the Daily Oil Bulletin 2018
Trans Mountain Expansion Delayed Further; Kinder Morgan Canada’s Q4 Earnings Up
Kinder Morgan Canada Limited says the in-service date of the Trans Mountain pipeline expansion project will be delayed further and now projects a December 2020 start-up as further permitting delays prolong the start of full-on construction.
That date is subject to regulatory, permit and legal approvals. The company has noted that every month of delay amounts to a $75 million loss in anticipated earnings.
As it stands now, the project has been delayed at least a year more than prior expectations. The company had initially expected the C$7.4 billion project, which will carry crude from Alberta to Burnaby, B.C. to be in service by December 2019, but the company in October pushed that back to September 2020 because of the difficulty in obtaining permits.
On a positive note, during the fourth quarter of 2017 the project received a favourable ruling from the National Energy Board (NEB) with respect to certain permits in Burnaby, Steve Kean, board chairman and president, said during a fourth quarter conference call Wednesday.
"We expect the NEB to issue another decision in the near future on establishing a fair, transparent and expedited backstop process for resolving any similar delays in other provincial and municipal permitting processes, but at this stage we are still pursuing a primarily permitting strategy for the project, and are now projecting an unmitigated delay to a December 2020 in-service date,” he said.
In a statement, Ian Anderson, KML president, said the need for the project remains very real and well supported.
"We hear every day from our customers and other stakeholders about how critical this project is,” he said.
"We look forward to seeing further progress on regulatory approvals and judicial reviews and remain committed to delivering the project in an environmentally responsible way that respects our extensive and meaningful consultations with Indigenous Peoples, communities and individuals."
Added Kean: “From the pipeline’s perspective, the conditions supporting its construction or the need for it have improved from an economic standpoint. It’s worth repeating that this is a much needed project that has the key approvals from, and the support of, the federal government.”
When asked by an analyst on the conference call what would make the project “untenable,” Kean offered the following: “We don’t expect to find ourselves in an untenable position, but we made that point in the filing seeking the relief that we’ve asked for from the regulator.
“We have made some progress working with the provincial authorities in British Columbia on clarifying requirements and time frames of permits and authorizations. We’re still working on this, but we’ve made some progress.
“It is essential for us to know we can move forward, even when local governments are opposed or are declining to act on permits.”
At year-end 2017, the Trans Mountain expansion project spend totaled approximately $930 million, of which approximately $385 million was incurred by KML post-IPO.
Another $1.8 billion is expected to be spent in 2018, providing Kinder Morgan Canada can resolve “uncertainties” with permitting and court challenges that have continued to plague progress, Kean said.
“We’ve been executing on what we call as primarily permitting plan, and here’s what we’re accomplishing with that. First, it’s the prudent thing to do for our shareholders. We’re managing spend at a lower level than full construction and much lower than what we had planned in 2017 until we have greater clarity on permitting,” he said.
“We have the capacity to ramp up to full construction spending when that appears prudent. Just as importantly, Ian and the team have been working actively with the authorities seeking the actions that would provide the needed clarity and making sure that we’re getting them what they need from us.”
KML reported fourth quarter net income of $46.4 million, up from $17.8 million in the fourth quarter of 2016, and distributable cash flow (DCF) of $82.7 million, 23 per cent greater than the comparable period in 2016.
DCF for the quarter benefited from greater contributions from both the Pipelines and Terminals business units versus the fourth quarter of 2016, partially offset by an increase in general and administrative expenses and the payment of preferred share dividends compared to the previous period.
Net income was further impacted by a reduction in certain items in the period. Certain items in 2016 were from currency fluctuations on U.S. dollar denominated intercompany loans with parent company Kinder Morgan, Inc., that were settled in connection with the KML initial public offering.
For 2017, KML generated net income of $160.7 million, adjusted EBITDA of $388 million and DCF of $323 million.
The company’s board of directors has declared a dividend for the fourth quarter of 2017 of $0.1625 per restricted voting share ($0.65 annualized), payable on Feb. 15, 2018, to restricted voting shareholders of record as of Jan. 31, 2018. KML's restricted voting share dividends are eligible dividends for Canadian income tax purposes.
Review of business segments
The Pipelines and Terminals segments' combined performance for the fourth quarter of 2017 was 18 per cent higher than the same period during 2016. Pipelines segment performance was driven by higher capitalized equity financing costs (recognized in other income) due to spending on the expansion project.
Demand for the company’s pipelines continues to be strong with its Trans Mountain system once again oversubscribed each month during this past quarter.
"Notwithstanding a modest decline in volumes, earnings at the Edmonton-area terminals were up year-over-year owing to escalations in our predominantly fixed, take-or-pay terminalling contracts and a $6.1 million true-up in terminal fees in connection with a favourable arbitration ruling,” said John Schlosser, KML terminals president.
Volumes at the Terminals segment's Edmonton area terminals were down 1.3 million bbls, or four per cent compared to fourth quarter of 2016, nearly half of which was attributable to a supply chain disruption isolated to the anchor customer at its Alberta Crude Terminal crude-by-rail joint venture.
Utilization of the company’s terminal and rail facilities remains high overall, driven by demand for its product takeaway capabilities and optionality.
The segment's Vancouver Wharves terminal benefited from strong gains in the volume of sulphur and ores and metals handled as well as continued strong agricultural product volumes owing to enhancements made to its agricultural product handling system to accommodate growing export demand.
Service commenced on Jan. 15, 2018, at the first four of 12 crude oil storage tanks, representing 1.6 million bbls of a total 4.8 million bbls at Base Line Terminal, a 50-50 crude oil merchant terminal joint venture between KML and Keyera Corp., in Sherwood Park, Alta.
The remaining eight tanks at the facility, which is fully contracted with long-term, firm take-or-pay agreements with credit-worthy customers, are expected to be phased into service throughout 2018.
Base Line Terminal is connected via pipeline to Kinder Morgan's Edmonton-area terminals and is capable of sourcing the majority of the crude streams handled by KML for delivery to multiple destinations, including but not limited to, KML's Trans Mountain Pipeline, the 50 per cent-Kinder Morgan-owned Alberta Crude and Edmonton Rail terminals, other Edmonton area facilities and major export pipelines.
"Kinder Morgan is pleased to commence operation of the Base Line Terminal and provide the Edmonton market with much needed, additional merchant storage," Schlosser said.
"The project is forecast to be completed on-time and on-budget later in the year, owing to strong co-operation with and support from our contractors and various project stakeholders, including the local community, regulators and government agencies. We are also excited to expand our partnership in the Edmonton-area with Keyera and appreciate their support and involvement in the project."
KML's total investment in the joint venture terminal is approximately $398 million, including costs associated with the construction of a pipeline segment funded solely by KML. Up to an additional 1.8 million bbls may be added in a phase-two expansion of the terminal, depending on future demand.