‘Surprise’ Trans Mountain IPO comes at a difficult time for Kinder Morgan
Analysts expected Kinder Morgan management preferred a joint venture an environmental group said the move was a sign that the company was struggling to raise funds
CALGARY—Kinder Morgan’s plan to raise money for its Trans Mountain expansion through an initial public offering could not come at a more awkward time.
In addition to ongoing protests and federal court challenges, a vote recount in B.C. could tilt the balance of power, giving the Greens or NDP a chance to bog down the $7.4-billion project. The recount began May 23.
Alberta’s securities regulator is also reviewing Kinder Morgan’s regulatory filings upon a request from Greenpeace, who said it believes the documents overestimate growth in Asian oil demand and don’t go far enough in disclosing climate change-related risks.
The energy giant faces a big hurdle in its goal of raising $1.75 billion in what would be one of the biggest IPOs ever on the Toronto Stock Exchange. It is expecting to complete the offering in the last week of this month.
Goldman Sachs analyst Theodore Durbin said in a note the IPO move was a “surprise,” since Kinder Morgan management had previously said a joint venture would be preferred.
Adam Scott, a senior campaigner with environmental group Oil Change International, said he took it as a sign that the company was struggling to raise funds when it scrapped plans for a joint venture.
“There’s still substantial legal risk to the project,” said Scott. “There’s also reputational risk. I think that may be why there’s no equity firms willing to step up and take a chunk.”
Kinder Morgan didn’t respond to a request for comment on financing issues, but said it was moving ahead with all aspects of planning for the project. In filings it said the IPO was the “superior path” over the joint venture.
Terry Marshall, senior vice-president of corporate finance at Moody’s Investors Services, said there are advantages for Kinder Morgan with the IPO, including maintaining greater control of the project and the profits that would come from it, as well as likely securing a better valuation.
“It’s economically a very attractive project,” said Marshall. “It’s just getting it built in this environment is challenging.”
Opponents have also expanded their campaign against Trans Mountain, shifting their sights to the financial institutions backing it.
The Treaty Alliance Against Tar Sands Expansion launched a divestment campaign earlier this month against 17 banks that fund oilsands pipelines. Those banks include CIBC, BMO, Scotiabank, TD Bank and RBC.
“I don’t think it scares people away,” said Marshall. “It’s unfortunate, the banks are well aware of it, but I don’t think those protests, in and of themselves, would prevent the financing from being provided.”
Still, Jeffrey Harris, founder of venture capital firm Global Reserve Group, said the potential project risks could change the financial picture for some investors.
“They change their expected rate of return, and because of that, some projects that may have gotten funding may not get funding because people see it as a little more risky,” said Harris.
“I don’t know anybody who says, ‘Oh my God, Canada, don’t go there.’ It’s not that by any means,” he added. “It’s the change in the economics that will attract capital or not.”
Robert Johnston, chief executive of political risk consultancy Eurasia Group, said he sees campaigns targeting the financing of Trans Mountain as more of a nuisance than a serious threat.
“If the case against Kinder Morgan is that there’s no market in Asia, I think that case would be pretty easy to disprove,” he said.
But issues relating to climate change are taking on greater importance at the financial level, Johnston said.
“Carbon disclosure is well beyond a hassle. It’s a material risk,” he said. “It’s something companies have to factor into their cost base and be transparent about.”
Adnan Amin, director-general of the International Renewable Energy Agency, said the risk of fossil fuel infrastructure becoming stranded assets is increasing with the rapid expansion of renewable energy projects.
“Investing in very heavy, long-term expensive infrastructure for the future needs to be reassessed very thoroughly,” said Amin.
Kinder Morgan still has yet to render a final investment decision on the project, which would triple the capacity of an existing pipeline from Edmonton to Burnaby, B.C. But it has said it is aiming to start construction in September.