By Andrew Nikiforuk, TheTyee.ca, April 20, 2018
Due diligence required before we sink money into a corporation with poor stock performance and repeated legal violations.
Prime Minister Justin Trudeau has instructed Finance Minister Bill Morneau to begin a series of discussions about a bailout for Kinder Morgan’s Trans Mountain project that will take place in Calgary, Toronto, Houston and New York, but the talks “won’t happen in public.”
Kinder Morgan, which has invested approximately $1 billion in the expansion of the project to date, stopped all essential work on the project on April 8 citing delays and uncertainty about the project’s economic future due to sustained legal, economic and political opposition.
Trudeau’s decision to invest in the $7.4-billion project with the object of “derisking” the expansion to move diluted bitumen to the coast has been derided by both project proponents and critics alike as “a terrible idea.”
In contrast investors have noted that it won’t be the end of the world if Kinder Morgan pulls out of the project.
“The company would have a very strong balance sheet and other potential options to deploy capital, so it wouldn’t be a disaster for them, or us as investors,” Jim Hall, chairman of Mawer Investment Management, told Reuters.
Trudeau says the bailout is in the “national interest” but has provided no independent economic analysis on pouring tax dollars into a US corporation.
Here’s a quick rundown on what Canadian taxpayers, potential Kinder Morgan investors, should know about the US pipeline giant and its financial health.
History: An Enron spin-off
Kinder Morgan, which runs what founder and Texas billionaire Richard Kinder calls an “unsexy, dirty business,” started off as an offshoot of the US corporate giant Enron in 1996. That’s when a pair of senior Enron executives, Richard Kinder and Bill Morgan, joined up to purchase a couple of pipelines from Enron. Kinder and Morgan parlayed that investment into a North American pipeline empire while Enron collapsed in a spectacular fraud scandal in 2001.
To this day Kinder rarely speaks about the Enron scandal even though Kinder Morgan’s senior management team includes many prominent Enron executives, including Jordan Mintz and Steve Kean.
Kinder Morgan works like a utility and makes its money by charging shipping fees or tolls for moving gas, oil, CO2 and other petroleum products on its pipeline network. The company has pipelines extending to every major shale oil and gas field in North America and is a major mover of condensate, an essential diluent for bitumen, to Alberta’s oil sands. The company has a vast footprint and owns an interest in or operates approximately 137,000 kilometres of pipelines and 152 terminals.
Kinder, chair of the company, has a net worth of approximately $8 billion, which is about the cost of the entire Trans Mountain pipeline. Forbes magazine once described Kinder and his team as glorified toll takers.
“If you own a toll road, you don’t care how many passengers are in each car or what kind of car it is,” Kinder told Forbes. “You just want as many cars to move down the road as possible, and you make damn certain they pay their tolls, OK?”
Poor Stock Performance
The company has been in the financial doldrums for years due to poor earnings (the smallest dividend yields in the industry) and high debt.
Originally structured as a master limited partnership, which doesn’t pay corporate taxes, the company restructured in 2014 and became a corporation. In recent years master limited partnerships have been big money losers “as the energy crash has exposed earlier excesses in terms of leverage and bad investments,” explained a recent article in Bloomberg.
Due to high debt levels ($37 billion, or nearly a third of the value of the company) and low oil prices, the company has lost half of its stock value since 2015. Analysts credit the company’s poor stock performance to “poor business execution and way too much debt.”
There have been other issues. In 2013 Kevin Kaiser, a Wall Street analyst at Hedgeye Risk Management, accused the company of failing to properly maintain its pipeline infrastructure while boosting stock prices. Kaiser even described the firm as ”a house of cards, completely misunderstood and mispriced.”
Two years later Kaiser still described KMI as “a capital intensive, cyclical conglomerate with low-to-no growth and an over-levered balance sheet.”
In recent years the company’s poor stock performance has helped to invent a new verb. When Kinder promised to boost dividends in 2014 but then cut dividends by 75 percent, investors complained that they had been “kindered.”
Troubled Pipeline Financing
During the controversial 2014 NEB Trans Mountain hearings, Houston-based Kinder Morgan Inc. said it would provide 100 percent of the debt and equity for the pipeline. But the oil price collapse combined with rising debt levels put the company’s largest capital project on shaky ground. Investor interest waned, and Kinder Morgan Inc. had trouble raising debt or equity in the US markets. Nor could it find a joint-venture partner.
As a result, the job of raising money for the high-risk project fell to Kinder Morgan Canada.
In 2017 an initial public offering by Kinder Morgan Canada raised $1.6 billion, but the money did not go to finance the Trans Mountain expansion project. Instead it was used to pay off debts of the parent company, Kinder Morgan Inc. Kinder explained the move in a conference call with investors: “So we were able to strengthen KMI’S balance sheet using the IPO proceeds to pay down debt….”
Kinder Morgan Canada has arranged $5.5 billion in construction facility loans from Canadian banks – but only if Kinder Morgan raises $2 billion in equity for the project. The federal government is now holding private conversations with Kinder Morgan about financial support.
An Active Political Player
Kinder Morgan yields political power in a variety of ways and has always been a keen supporter of the Republican Party.
In 2016 Kinder donated more than $1.1 million to the Jeb Bush presidential campaign as well as other Republican candidates in Texas.
In Canada the company has actively lobbied provincial and federal politicians since 2009. According to the Office of the Commissioner for Lobbying, representatives of Kinder Morgan Canada have been extremely busy lobbying 19 different federal agencies, including the PMO’s office, on technical tax issues, support for Trans Mountain expansion and promotion of international oil tanker shipping.
Since 2009 Anderson, the president of Kinder Morgan Canada, has had 226 “communications” with the federal government including nine “communications” in 2018 alone.
According to a study by the Corporate Mapping Project, the combined lobbying of politicians in British Columbia and Ottawa resulted in a total 826 contacts with government officials between 2011 and 2016: “This amounts to about one contact every two business days during that period.” That’s more contact than the average Canadian will ever have with their governments.
Rising Tolls Mean Rising Gas Prices for BC
The National Energy Board has allowed Kinder Morgan to double toll rates on the Trans Mountain’s expansion even though the project is being built solely to serve foreign markets.
It used to cost $2.50 a barrel to move petroleum products in the pipeline, but with the new toll rates Kinder Morgan will be able to charge $5.90 a barrel and reap profits of nearly $1 billion a year on shipping tolls.
Even Suncor, one of Canada’s largest bitumen producers, strenuously objected to these increased toll rates during a 2013 hearing on toll rates.
According to Suncor, Kinder Morgan’s new rates would secure the company an average projected return-on-equity of 28.3 percent over a 20-year contract period.
Such a high level of profit was “in excess of [return on equity] of other pipelines in Canada,” testified Greg Matwichuk, a Calgary-based chartered accountant hired by Suncor.
Economist Robyn Allan argues that NEB’s decision to allow a doubling of tolls works as a perversion of market signals.
“What this means is that not only will pump prices rise if Trans Mountain’s expansion is built, more than $100 million a year will be siphoned away from the BC economy to help pay for a new pipeline that provides the local economy with no market enhancement benefit.”
In other words, BC citizens will pay for the cost of building the project with higher gasoline prices.
Tax avoider
Economist Allan has detailed in The Tyee how Kinder Morgan avoids taxes and liabilities by setting up a complicated network of corporations based in several provinces. Thanks to these tax avoidance schemes, Kinder Morgan Canada paid no taxes in 2017. Just download the company’s presentation to Toronto investors on March 6 to 7 and check out page 36.
For the three years prior to that year Kinder Morgan Canada paid less than one percent on distributable cash flow (Kinder Morgan’s metric for profits) of an average of $246 million a year, reported Allan.
Highly Subsidized
In the United States, Kinder Morgan Inc. is adept at securing subsidies from state and federal governments. According to Good Jobs First, a US website dedicated to making economic development subsidies more accountable, Kinder Morgan obtained more than $62 million in federal tax credits and grants including $8 million from individual US states since 2000. Federal loans, loan guarantees and bailouts totaled $488 million for the same period.
Canada has already granted Kinder Morgan several subsidies. In 2011 the NEB granted Kinder Morgan a special fee of approximately $1.45 a barrel to help fund the company’s participation in the regulatory review of the Trans Mountain pipeline.
By 2014 Kinder Morgan confirmed that it had collected $132 million in fees. Economist Allan has described the approval of Kinder Morgan’s firm service fee by the board as unprecedented.
“The NEB effectively granted Kinder Morgan a right to guaranteed shipper surcharges in order to build a regulatory approval process ‘war chest’ available to the pipeline company to draw on, when and as needed, to fund capacity expansion applications for its Trans Mountain pipeline system.”
Allan also counts Trudeau’s promise to fund a $1.5 billion ocean protection plan to cope with increased oil tanker traffic if the pipeline is built as another clear taxpayer subsidy for Kinder Morgan.
Repeated Violator of the Law
Kinder Morgan has a long and detailed record of violating both environmental and financial laws resulting in penalties of $162 million since 2000 in the United States. Key offences include environmental violations ($119 million) such as pipeline spills and explosions, energy market manipulation ($20 million fine), pipeline safety violations and repeated labour violations. In 2011 the US Department of Labor sued Kinder Morgan for underpaying nearly 4,600 workers for overtime for at least two years. The company resolved the lawsuit by paying out $830,000 in back wages.
The company has also violated the Foreign Corrupt Practices Act. In 2007 the El Paso Corporation, a subsidiary of Kinder Morgan, agreed to pay $7.7 million “to settle allegations that it indirectly paid nearly $5.5 million in illegal surcharges to Iraq in connection with its purchases of crude oil from third parties under the United Nations Oil for Food Program.” El Paso never admitted nor denied the allegations.
According to the Houston Chronicle, “the Houston federal court has become one of the busiest in the nation for cases involving foreign bribery cases in large part because of the concentration of energy companies that do business around the world.”
A 2014 report by Sightline has documented the company’s history of law-breaking and pollution.
As recently as this year the NEB disclosed that Kinder Morgan aerial patrols of its 1,200-kilometre long Cochin pipeline from Alberta to Ontario to be non-compliant on 12 different counts.
Canadian Investors
Eight large Canadian investors own nearly $2 billion worth of shares in Kinder Morgan Inc., a company whose pipeline and terminal network is valued at $81 billion.
These organizations include the Canadian Imperial Bank of Commerce, Brookfield Asset Management, CI Financial Corp, Manulife Financial Corp, Royal Bank of Canada, Power Corporation of Canada, Province of Quebec and the Ontario Teachers’ Pension Fund.
Climate Change
A company statement says the firm believes that climate change is real. However, it believes one of the best solutions lies in pursuing Kinder Morgan’s “leading status in delivering natural gas to consumers.” Anderson, the president of Kinder Morgan Canada, has said that he doesn’t know if petroleum-powered humans are causing climate change. “I’ve read the science on both sides and I don’t pretend to be smart enough to know which is right.”
Kinder, the Texas billionaire and US Republican donor, has a much more definite vision on the issue: “I think that for any of our lifetimes fossil fuels are going to be the primary source of energy in this world…. I’m a huge believer in the genius of mankind, and I think we’ll continue to find new ways to utilize, explore for and produce more and more fossil fuels.”
Andrew Nikiforuk is an award-winning journalist who has been writing about the energy industry for two decades and is a contributing editor to The Tyee. On April 7, he protested at the gates of Kinder Morgan’s worksite as a civic duty. Kinder Morgan did not enforce the injunction that day and there were no arrests due to the presence of Grand Chief Stewart Phillip.
Our Comment
One of the most pressing reasons for electoral reform has to be the degree to which the present system accommodates the practice of behind-the-public’s-back decision making.
Can we be confident that our Prime Minister knows the “facts about Kinder Morgan Canadian taxpayers need to know”?
From what point of view is the bailout in the “national interest,” one wonders. (Might the question, “Whose national interest” be pertinent?)
Andersons’s comment on climate change is illuminating.
Kinder’s “vision”?
Élan
