KML- IPO Not your average Pipeline



Regulated natural monopolies like railways, transmission lines and pipelines are typically understood to be stable, low risk investments: large capital assets that earn a steady rate of return with little volatility.  As Warren Buffet famously said: “you don’t invest in them to get rich, you invest in them to stay rich.”

Here’s the thing about Kinder Morgan’s Trans Mountain Expansion Project – it is not your typical pipeline. In fact, it is not a low-risk investment at all. Here are a few reasons why:

The political uncertainty following the BC election, where over 60% of voters supported parties opposed to the pipeline should not be underestimated. Further, the 21,000 signatories to the Coast Protector’s pledge to do “whatever it takes” to stop the pipeline, and First Nations leaders from across Canada talking about “20 Standing Rocks” should send chills down all but the most risk seeking investor’s spines.

But there is an additional risk that is misunderstood, one that has already stopped a major oil sands pipeline dead in it’s tracks: First Nations legal challenges that invoke powerful constitutional rights and have the potential to overturn federal and provincial approvals.

That is why we have released a new legal brief outlining the legal risk for the project.

With over $40B in debt, Kinder Morgan couldn’t afford to borrow the money to pay for the new pipeline. They tried, unsuccessfully, to get a big investor to partner on the project. Turns out no sophisticated funds, including those who specialize in pipelines and infrastructure, thought it was worth the premium that Kinder Morgan wanted. In the end, they have formed a new public company to see if the market will support it, through an initial public offering (IPO).

The big question is whether investors will bite on Kinder Morgan’s hook. Like a fishing lure, it may look shiny at first glance, but look a little closer, and it’s just cheap plastic and feathers concealing a barbed hook. Will investors take the bait?

The recently confirmed results of the BC election, confirming a fragile minority Liberal government, increases the political risk significantly. Many commenters have discussed this over the last two weeks.

Public opposition in BC remains high. Over 21,000 people have signed the Coast Protector pledge to do “whatever it takes” to stop the project. However, no one wants to see a repeat of what happened in Standing Rock. That is why many First Nations have launched legal challenges against the various Kinder Morgan approvals. Like Enbridge Northern Gateway before it, these legal cases could stop the project in its tracks.

The legal challenges (19 in all) represent material risk for Kinder Morgan investors. The territories of the Indigenous Peoples who have filed the legal challenges total more than half of the pipeline and tanker route.

These legal challenges highlight issues of constitutional, administrative, procedural, and statutory law. They allege, among other issues, that a) the government failed to address concerns raised repeatedly by First Nations, constituting a breach of the constitutional duty to consult and accommodate; b) the NEB report was flawed due to breaches of the principles of procedural fairness; c) the government unjustifiably infringed claimed Aboriginal rights and title; and d) the government breached its fiduciary duty to the affected First Nations; and (d) that the NEB and Cabinet failed to comply with the statutory requirements of the Canadian Environmental Assessment Act 2012.

Each of the First Nation’s’ legal challenges at the Federal Court of Appeal argues that the highest level of consultation is required, and that to date, the level of consultation has been inadequate. In many cases, the fFederal government has conceded that the duty to consult is at the high end of the legal spectrum. Two of the applicant First Nations have had fishing rights confirmed by the Supreme Court of Canada (SCC) in waters affected by the Project. Most of the legal challenges assert that the First Nation has unextinguished Aboriginal title or rights over the proposed pipeline and tanker route. In the landmark Tsilhqot’in decision, the SCC stated:

if the Crown begins a project without consent prior to Aboriginal title being established, it may be required to cancel the project upon establishment of the title if continuation of the project would be unjustifiably infringing.

Kinder Morgan has stated that the success of the new company is “substantially dependent” on the construction and operation of the new pipeline. They state that “[T]hese [legal] claims, if successful, could result in the total stoppage of the Trans Mountain Expansion Project, which stoppage would have a material adverse effect on the Business.” (p.37)


Potential impacts of negative public opinion or reputational issues may include delays or stoppages in project execution, legal or regulatory actions or challenges, blockades, increased regulatory oversight, reduced support of the federal, provincial or municipal governments for, delays in, challenges to, or the revocation of regulatory approvals, permits and/or Land Agreements and increased costs and/or cost overruns in respect of the TransMountain Expansion Project and/or the loss or degradation of business of the Business generally. (p.37)

During the Burnaby Mountain standoff, which resulted in over 100 people getting arrested, Kinder Morgan stated in an affidavit that: “the loss of revenue to Trans Mountain due to the delay in Project start-up is likely to exceed $88,000,000.00 per month of delay.”

Investors are taking note. One commenter called the IPO a “dog with fleas.” Another risk scorecard, rated the TMEP as high risk, with a score of 3.8/5.

Whether it’s a dog with fleas, or a shiny fishing lure, investors need to understand the financial risk related to this project. And that is why we have released our new report. You can read it here:

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