The ongoing battle over Kinder Morgan’s plans to twin the Trans Mountain Pipeline has reached the level of tragic farce.
Canada’s two NDP Premiers appear to be consciously trying to show who among them is more clueless about basic economics.
Alberta Premier Rachel Notley moved completely into the realm of socialist fantasyland with the ludicrous claim that she is looking at an outright government purchase of the Trans Mountain Pipeline.
No Clue About the Costs of A Project of this Nature
The NDP government are showing just how out of their depth they are in the basic fundamentals of economics with their outrageous claims.
As a CPA I am confident the following estimates of the total costs provides readers with a much more rigorous financial analysis than anything that was conducted to accompany Notley’s announcement.
The most recent estimate of the total costs for the Trans Mountain expansion is $7.6 billion, despite the $7.4 billion figure that accompanies the reporting on Notley’s announcement. Of the $7.6 billion total project costs, Kinder Morgan has already spent $1.1 billion. The Alberta government would have to spend $6.5 billion in additional cash to complete the project.
Buying More Than the Expanded Pipeline
There is no business case for Kinder Morgan to sell just the expansion project. No corporation acting in the best interest of their shareholders would sell the upgraded pipeline while continuing to operate the older pipeline with half the capacity. The only rational step for Kinder Morgan to take if the Alberta government wanted to enter into negotiations would be to buy all of the assets of Kinder Morgan Canada Limited (TSX:KML).
The scope of the assets involved in such a purchase is staggering.
In addition to Trans Mountain, KML operates the Canadian portions of the Cochin pipeline that originates in Fort Saskatchewan, just east of Edmonton. Cochin heads southeast through Saskatchewan and six U.S. states before terminating in Windsor. KML operates the Trans Mountain jet fuel pipeline to the Vancouver Airport and the Puget Sound pipeline to terminals in the Seattle area. The network of KML’s terminals would be included in this sale.
KML’s current market capitalization is $5.6 billion. The valuation of the company has been depressed because of the ongoing regulatory struggles with the Trans Mountain approval process. A very conservative estimate of the cost to the Alberta government to purchase KML would be $6.5 billion. The share price of KML would undoubtedly rise if the Government of Alberta and Kinder Morgan entered into formal negotiations of for a sale of KML.
That valuation is truly conservative and could be much higher.
While Alberta Party MLA Rick Fraser rightly stated that the Alberta government has no idea about the full cost of a potential purchase.
The Numbers Make No Sense
Combining the costs of acquiring assets and construction costs to be incurred the most conservative estimate of the total costs of Alberta completing the Trans Mountain expansion is a staggering $13 billion.
This figure includes conservative estimates of $6.5 billion to complete the project and $6.5 billion to purchase KML.
To put this number in perspective the total financial assets of the Government of Alberta as at March 31, 2017, was $66.3 billion.
Notley cannot seriously believe her government would be prudent in completing a purchase for the sake of a single project that would be equal to approximately 20% of the provinces total financial assets.
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