© 2018 The Texas Lawbook.
By Claire Poole
(June 1) – The Houston office of Sidley Austin was involved in a big deal this week, serving as U.S. counsel to Canada Development Investment Corp. on its acquisition of the Trans Mountain pipeline system and development project from Kinder Morgan Canada Ltd. for C$4.5 billion ($3.5 billion).
Canada Development Investment is part of the Canadian government. Kinder Morgan Canada is a publicly traded affiliate of Houston pipeline giant Kinder Morgan Inc.
Sidley energy partner David Asmus led the deal team, which included energy partner Jim Rice. Asmus joined Sidley last year, while Rice was part of the group that opened the Houston office in 2012 (he previously was a partner at Akin Gump Strauss Hauer & Feld).
Sidley specialists on international trade, antitrust, tax and employee benefits issues pitched in from the firm’s offices in Washington, D.C., New York and Chicago.
Borden Ladner Gervais counseled Canada Development Investment on the Canadian side. Kinder Morgan used Blake, Cassells & Graydon in Canada and Weil Gotshal & Manges in the U.S. with lawyers out of New York.
Kinder Morgan’s general counsel is J. Curtis Moffatt, who joined the company in 2014 as deputy general counsel of Kinder Morgan’s natural gas pipeline group and took the top legal job last year. The University of North Carolina-trained lawyer previously was a partner at Van Ness Feldman in Washington, D.C. and legal advisor to the chairman of the Federal Energy Regulatory Commission.
Kinder Morgan announced the deal May 29. The company agreed to work with the Canadian government to seek a third-party buyer for the pipeline and development project, known as TMEP, through July 22, although the deal isn’t predicated on finding a buyer.
As part of the deal, the government agreed to pay for resuming the planning and construction work by guaranteeing the project’s advances under a separate federal government recourse credit facility until the transaction closes.
The deal, which was rumored about before the announcement, is expected to close late in the third quarter or early in the fourth quarter if it clears Kinder Morgan Canada shareholders and regulators.
Jefferies analyst Christopher Sighinolfi said in a note May 29 it’s a good deal for all parties and that the speed and nature of the Canadian government’s action underscores the project’s importance.
“While a perfect world would have seen this project developed by Kinder under a fair and transparent regulatory process, we believe management’s ability to detangle itself from the political morass at a price that recoups invested costs, obtains a market multiple for its existing assets and secures C$650 million to C$700 million for its trouble marks a very fair outcome,” he said. “At the same time, Canada preserves this vital project and the opportunity to profit.”
Sighinolfi believes the transaction offers a potential “blueprint” for federal support of projects that are fought at a local level. He thinks that Kinder Morgan will use the proceeds to pay down debt, fund new projects, pursue acquisitions and buy back stock.
Analysts at Tudor, Pickering, Holt said in a note May 30 that the transaction buys the project more time “but uncertainty remains for the new owner/operators.”
As for the fate of Kinder Morgan Canada, the company could become acquisitive, i.e., buying Enbridge’s British Columbia assets, the TPH analysts said. But the unit’s difficulty getting bigger in the reasonably consolidated Western Canadian Sedimentary Basin market could incentivize Kinder Morgan to entertain a bid for the unit and exit the Canadian market, they said.
Kinder Morgan has worked with federal and provincial governments in Canada for around five years to bring the project into reality, but opposition in British Columbia kept it at bay.
Kinder Morgan said in April it had suspended non-essential activities and related spending and set May 31 as the date by which it required final clarity on the project.
Steve Kean, CEO of both Kinder Morgan and Kinder Morgan Canada, said in a statement that the transaction will benefit the people of Canada, the pipeline’s and shareholders from both companies.
“The outcome reached represents the best opportunity to complete TMEP and thereby realize the great economic benefits promised by that project,” he said.
Despite losing the earnings associated with the system, Kinder Morgan still expects to meet or exceed its distributable cash flow per share target for this year, Kean said. The transaction also will positively impact Kinder Morgan’s consolidated balance sheet, as it expects its 70 percent share of after-tax proceeds to reach $2 billion.
Kean said the company continues to expect an annualized dividend of 80 cents per share in 2018 followed by $1 per share next year and $1.25 per share in 2020, a growth rate of 25 percent annually.
“With respect to future growth, we are confident that KMI will continue to find investment opportunities across its unparalleled network of midstream assets,” Kean said, noting that the company has added $1.3 billion per year on average to its backlog since mid-2015, $2.1 billion in the last 12 months.
Assuming that Kinder Morgan can invest $2 billion per year at an average capital-to-adjusted Ebitda multiple of 7 times, those investments would yield annual Ebitda of $300 million, which would represent more than 4 percent annual Ebitda growth, Kean said.
© 2018 The Texas Lawbook. Content of The Texas Lawbook is controlled and protected by specific licensing agreements with our subscribers and under federal copyright laws. Any distribution of this content without the consent of The Texas Lawbook is prohibited.
If you see any inaccuracy in any article in The Texas Lawbook, please contact us. Our goal is content that is 100% true and accurate. Thank you.