Photo: Kinder Morgan



Kinder Morgan Canada Limited (KML) is preparing for a September 2017 start on its $7.4 billion Trans Mountain pipeline expansion, company officials said this week.

The company said it has initiated its first pipeline order and expects to finalize contracts with its general contractor by mid-August

Most of the activity this fall will involve work such as site preparation and terminal work in preparation for the start of major construction next year and that was always the plan, Ian Anderson, president of KML, said in a conference call following the release of second quarter 2017 results. “The permit acquisition and the priority of permitting activity is built around that.”

Trans Mountain continues to need a good number of local permits from Alberta and British and Columbia related to utility and road crossings and access to Crown land, he said. The company is continuing to file them and advance permits and “we feel comfortable with that in line with our construction plans.”

Asked about B.C.’s new NDP government which has opposed the project, the KML president said he wouldn’t speculate on “what an NDP government might do in British Columbia at this stage in order to advance their views.”

Anderson said he remains “very confident” in the federal decision to approve the project and its federal jurisdiction. “I have worked co-operatively with several federal and provincial governments over the years in the development of this project and I want to do the same with Premier [John] Horgan’s government,” he said. “I look forward to meeting with him soon and updating him on the project and on our ongoing commitments to engage with communities and First Nations.”

The expansion, which will increase Trans Mountain capacity to 890,000 bbls per day from 300,000 bbls a day, is expected to be in service at the end of 2019.

Financial results

"Overall, we had a good second quarter as KML demonstrated the resiliency of its cash flows, generated by a diversified portfolio of fee-based assets," Steve Kean, KML board chairman and chief executive officer, said in the conference call. The results for the three months ended June 30, 2017 were the first for KML as a standalone company following an initial public offering by KML Inc. (KMI) of all its Canadian assets.

Kean said that while KMI does not intend to sell down additional shares of KML Canada from its interest, KML may do primary offerings to help raise the capital needed to fund its expansion.

KMI also believes that KML “is a good currency” and there are opportunities on the mergers and acquisition area that it would like to consider, he said. “We think there are some good opportunities up there and we like a lot of the assets that we see in Western Canada.”

KML reported second quarter net income of $25.1 million, down from $51.7 million in the second quarter of 2016, driven by intercompany foreign exchange. The company had a foreign exchange loss in the quarter of $16 million versus a gain of $5.8 million in the second quarter of 2016. These were largely the result of the impact of currency fluctuations on intercompany loans with KMI, the principal amounts of which were settled during the quarter.

The company also reported lower total distributable cash flow of $79.4 million versus $85.6 million for the comparable period in 2016. This was primarily attributable to lower contributions from the Pipelines segment driven by higher operating costs on the Canadian portion of the Cochin system resulting from integrity work accelerated into the first half of the year, as well as lower throughput on the Puget Sound Pipeline system, said KML.

In the 32 days following the completion of the offering, KML generated earnings per restricted voting share for the quarter of 11 cents, and produced distributable cash flow of $8.5 million per restricted voting share relative to its declared 5.71 cents per restricted voting share dividend, resulting in $2.6 million of excess distributable cash flow above the company's dividend.

For 2017, KML expects to generate adjusted EBITDA of just under $400 million, distributable cash flow of approximately $320 million, and declare a prorated dividend of 38 cents per restricted voting share (or 65 cents per restricted voting share on an annualized basis).

Additionally, from a total project cost, which includes capitalized financing costs and capital spent to date, the Trans Mountain expansion project has remaining estimated cash spend to completion of approximately $6.1 billion as of the end of the second quarter of 2017.

Pipelines

The pipelines segment's EBDA (earnings before depreciation and amortization) for the second quarter of 2017 was down 17 per cent to $54.2 million from $65.1 million period during 2016.

While Cochin pipeline volumes were higher, the system had greater integrity work expense compared to the same period in 2016. KML said it expects the Cochin integrity expense to be lower than had been planned for the remainder of 2017 given the work completed in the first two quarters.

On Trans Mountain, contributions were down due to operating expense and a 21 per cent decrease in volumes to Washington state as shippers chose British Columbia destinations.

Terminals

The Terminals segment experienced strong performance at its Edmonton area terminals, which benefited from record volume and rail car loading activity. EBDA climbed to $52.3 million from $51.5 million.

Across the Edmonton area tank storage and rail facilities, volume for the quarter was up almost 12 million bbls, or 70 per cent versus the second quarter of 2016, driven by increased demand for product takeaway capabilities and optionality, said John Schlosser, KML Terminals president. "While the take or pay nature of our contracts largely insulates KML from short-term volume fluctuations, the high degree of utilization of these assets is a testament to their importance."

The segment's Vancouver Wharves terminal benefited from enhancements made to its agricultural product handling system to accommodate growing export demand, with agricultural product volume for the quarter up nearly 244,000 metric tonnes, or 123 per cent compared to the second quarter of 2016. Facility earnings for the quarter were offset by elevated maintenance and other operating costs.

Construction continues at KML's and Keyera Corp.’s Base Line Terminal, a 50-50 joint venture crude oil merchant storage terminal being developed in Edmonton. The 12-tank, 4.8 million bbl new-build facility is fully contracted with long-term, firm take-or-pay agreements with strong, creditworthy customers. KML's investment in the joint venture terminal is approximately $366 million.

Commissioning is expected to begin in the first quarter of 2018 with tanks phased into service throughout that year. The facility is projected to be on schedule and on budget.

Financing

In June, indirectly through its affiliates, KML entered into definitive agreements establishing a total of $5.5 billion in credit facilities. The credit facilities have a term of five years and are guaranteed by KML, KML Canada Limited Partnership and other operating entities comprising KML's business.

Dividend

The KML board of directors has declared a prorated dividend for the second quarter of 5.71 cents per restricted voting share, payable on Aug. 15, 2017, to restricted voting shareholders of record as of July 31, 2017. The initial dividend represents the dividend payable for the period between May 30, 2017, the day KML closed its initial public offering and the end of the quarter. On a full quarter basis, the dividend amounts to 16.25 cents per restricted voting share (or 65 cents per restricted voting share on an annualized basis).

KML corporate

KML also announced the election of three independent members to its board of directors: Daniel Fournier, a former lawyer with Blake, Cassels & Graydon LLP; Gordon Ritchie, retired vice-chairman of RBC Capital Markets and Brooke Wade, president of Wade Capital Corporation.

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