Kinder Morgan CEO calls $4.5B from pipeline buyout ‘a great problem to have’

CALGARY — Financial analysts grilled Kinder Morgan Inc. executives on how the company would use the proceeds from its $4.5-billion sale of the Trans Mountain pipeline and expansion project to the federal government.

“This is a significant amount of money. It’s a great problem to have. We want to make sure that we handle that in the best way for our shareholders,” Kinder Morgan CEO Steve Kean said on an earnings call Wednesday. “It’s a big piece of this company, so we want to be thoughtful about it.”

The windfall comes after an intense two-month negotiation between the Houston-based pipeline giant and Finance Minister Bill Morneau, which culminated in Ottawa buying the Trans Mountain pipeline and troubled $7.4-billion expansion project between Alberta and B.C. on May 29. The deal is expected to close in the late summer or early fall, and the company has begun deliberating how it will use the cash.

Kean, CEO of both Kinder Morgan Inc. and its Calgary-based subsidiary Kinder Morgan Canada Ltd., explained that the parent company intended to use its share of the deal to pay down debt but hasn’t settled on what to do with the subsidiary’s portion.

“While all options are on the table, we generally don’t think it’s attractive to shareholders for us to sit on a pile of cash while management looks for a transaction to use it on,” he said, shooting down questions from analysts about whether Kinder Morgan Canada could acquire other assets.

The picture is much clearer for the Houston-based parent, which has been taking steps to reduce debt. The sale of Trans Mountain is expected to reduce indebtedness by another US$2 billion.

“We intend to use KMI’s share of the proceeds generated from the sale of the Trans Mountain pipeline for $4.5 billion Canadian to pay down debt,” Kinder Morgan founder and executive chairman Rich Kinder said, referring to the parent by its stock ticker, KMI.

Both Kinder and Keane said they were pleased with the deal and outlined various growth projects the company planned to undertake in Texas.

In the months leading up to the deal, Kean had repeatedly said Kinder Morgan needed assistance from the federal government for the expansion, given opposition from the NDP government in B.C., which had implemented additional regulations aimed at halting the expansion.

Since Ottawa purchased the project, lawyers for Trans Mountain have requested a larger injunction zone around its worksites and the company has announced construction would begin in Alberta in August and in B.C. in September.

The City of Burnaby handed a 72-hour eviction notice Wednesday to Trans Mountain protesters that have built an encampment called Camp Cloud near the gates of Kinder Morgan’s marine terminal, demanding that “all structures at Camp Cloud must be removed immediately, including buildings tents, enclosures, and tarps.”

In a regulatory filing last month, Kinder Morgan said it had been concerned that Burnaby was not ensuring the work sites were safe, as protesters frequently breached the injunctions to disrupt activity.

In financial disclosures Wednesday, the company announced it had now spent $1.3 billion on the expansion project. The company also cancelled the credit facilities it planned to tap to finance the remainder of the project.

The company also announced the Trans Mountain pipeline system had been over-subscribed each month in the second quarter of the year as Canadian oil production currently outstrips available pipeline capacity.

Kinder Morgan Canada reported net earnings of $13.7 million for the second quarter, a decline of 45 per cent from the $25.1 million in the same quarter a year earlier.

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‘He’s going to earn his pay’: New energy minister Sohi in line of fire amid Trans Mountain, Bill C-69 overhaul

OTTAWA — Amarjeet Sohi will take over the energy file just as Ottawa wraps up its purchase of Trans Mountain pipeline next month, a crucial juncture for the government as it also looks to carry out a dramatic overhaul of Canada’s review process for major projects.

Sohi, formerly the infrastructure minister, was named minister of natural resources in a cabinet shuffle Wednesday. His predecessor Jim Carr was moved to the international trade diversification file.

The member for parliament for Edmonton—Mill Woods will assume the position just as Ottawa prepares to buy the Trans Mountain pipeline and related assets from Kinder Morgan Inc. for $4.5 billion, apart from roughly $6 billion to build the expansion pipelines, which will likely require recruiting other investors.

The decision effectively nationalized the pipeline, placing Canada’s pipeline politics front and centre as the federal government aims to balance its ambitious environmental goals with Canada’s dependence on fossil fuels.

“It’s going to be a really challenging portfolio for him,” said Martha Hall Findlay, president and CEO of the Calgary-based Canada West Foundation.

“Minister Sohi now is facing not only the fact that resources are clearly hugely important in Canada, but it’s also intertwined with the environmental agenda of the government,” she said.

In an interview with reporters Wednesday, Sohi said he had “big shoes to fill” as energy minister and repeated Ottawa’s pledge to build the pipeline.

“That’s the commitment that we made to Canadians, and we’re going to make sure that we have markets expanded other than (to) non-U.S. markets.”

Frank McKenna, deputy chairman of Toronto-Dominion Bank and former New Brunswick premier, said he welcomed having another minister from the prairies take over the file, after Carr who represents Winnipeg South Centre.

“I think that’ll be well received in Alberta,” he said.

McKenna says Ottawa was slow to get behind the Trans Mountain project, and only intervened after Kinder Morgan threatened to halt all non-essential spending on the project in April.

“It was my sense there was no full commitment until the time the project started to go off the rails,” McKenna said.

The purchase of Trans Mountain comes as pipeline capacity constraints continue to weigh on oil producers.

In a report Tuesday, consultancy firm IHS Markit lowered its forecast for oilsands production compared to its 2017 estimate, largely due to delays in building pipelines. It said further delays could continue to tamp down output as major oilsands players defer project expansions.

“Should advancing pipeline projects face additional delay, the investment outlook and IHS expectations could be negatively impacted,” the report said.

Sohi’s appointment also comes as Ottawa’s environmental assessment legislation for major projects, Bill C-69, enters the senate.

Findlay and others have been critical of the bill, saying it gives the environment minster added discretionary power over whether a project goes ahead, and introduces uncertainty around major projects.

Some observers have said C-69 should have been more of an equal effort between several ministries, but was instead led by the Ministry of Environment and Climate Change and therefore imbued with a more environmentally-conscious bent. The bill was reviewed by the House environment committee rather than the energy committee, and only had minimal witness hearings from the energy department, Findlay said.

“Frankly, natural resources (ministry) wasn’t involved at all.”

Doug Black, an independent senator representing Alberta, who has been critical of Bill C-69, says the minster will likely receive a “daily barrage” of criticism due to the highly politicized nature of the file.

“I think that he’s going to earn his pay,” Black said.

Black said he approves of Sohi’s appointment as the natural resources minister, but noted that he thinks too much emphasis has been placed on the environmental rather than oil and gas interests.

“We have a government currently whose focus is on environmental issues, and business issues or prosperity issues come second, third, or fourth.”

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The front-line fighters of the financial crisis are getting nervous about the next one

Federal Reserve policy makers appear confident that they have the weapons they’ll need to fight the next financial crisis. Some of their predecessors on the front lines are not so sure.

Ben Bernanke, Timothy Geithner and Henry Paulson all voiced varying degrees of concern about America’s ability to combat another financial meltdown 10 years after they played prominent roles battling the last one.

While agreeing that the banking system is a lot stronger than it was back then, they saw some weak spots in the country’s crisis-fighting arsenal that didn’t exist a decade ago. The trio also decried the nation’s ballooning budget deficits in a joint briefing with reporters.

“We’ve got better defences against the more mild, typical sets of shocks that happen to economies and financial systems but in the extreme crisis probably less degree of freedom, more constraints than would be ideal,” former Treasury Secretary and New York Federal Reserve Bank President Geithner said.

The U.S. instituted a raft of reforms after the last crisis drove the economy into its worst recession since the Great Depression. Some were designed to fortify the country’s biggest banks and make it easier to shut them down so they wouldn’t have to be rescued by the government if they ran into trouble.

Others though limited the discretionary power of the Fed, the Treasury and the Federal Deposit Insurance Corp. to provide financial institutions with support as lawmakers responded to a public backlash against bailouts and Wall Street.

Fed Vice Chairman for Supervision Randal Quarles acknowledged in April that the tools available to regulators in an emergency had changed. But he told a conference in Washington, “I wouldn’t be too negative about our ability to respond in the future.”

His boss, Fed Chairman Jerome Powell, has voiced confidence in the government’s ability to shut down a failing financial institution in a crisis without having to sink money in it, telling lawmakers in November that no bank is too big to fail.

Geithner, who is president of private equity firm Warburg Pincus LLC, argued that the emergency powers that proved so essential a decade ago are “somewhat weaker” today.

Congressional Limits

Former Treasury Secretary Paulson agreed, pointing in particular to the limits that Congress placed on the FDIC and the Treasury’s Exchange Stabilization Fund.

“There is some concern there,” said former Fed Chairman Bernanke, who is now a distinguished fellow at the Brookings Institution in Washington, though he also noted that regulators are now more attuned to potential systemic risks.

The former Fed chief, who was nominated by George W. Bush and given a second term by Barack Obama, criticized the deficit-ballooning tax cuts and spending increases agreed to by President Donald Trump and Congress as ill-timed. Bernanke noted that they come as the country is at or near full employment. He also voiced concern about the longer-term consequences of rapidly rising government debt.

“If we don’t act, that is the most certain fiscal or economic crisis we will have,” said Paulson, who chairs his own institute in Chicago. “It will slowly strangle us.”

The enlarged deficits and debt also mean that the government has less room to pump up demand than it did during the last crisis, when Obama pushed through a massive stimulus package, Geithner said.

Publicly-held federal debt now stands at 77 per cent of gross domestic product, double what it was in 2007.

The Fed, too, has less scope to act as interest rates are lower, Geithner said. The central bank’s benchmark rate target is now 1.75 to 2 per cent. It was 5.25 per cent in July 2007.

Bernanke though noted that the U.S. central bank is better positioned to respond than other advanced economies. The European Central Bank, for instance, has a benchmark interest rate of zero.

The former Fed chairman said the U.S. had made “a lot of progress” toward being able to resolve failing financial institutions without having to bail them out.

Paulson basically agreed, with one big proviso. In the midst of a crisis, policy makers may have to provide temporary support so that a collapsing institution can be liquidated over time — even if that proves politically difficult to do.

“It’s nice to have this authority but somebody has got to be prepared to use it and use it in controversial ways,” he said.

Asked if policy makers and politicians would be able to set aside their differences to tackle any future turmoil given the toxic atmosphere in Washington, Paulson replied that the answer is “unknowable.”

But, he added, “it’s the right question to ask.”

Trump says he’s ‘getting closer’ to reaching a bilateral trade deal with Mexico

U.S. President Donald Trump said he may prioritize a bilateral trade deal with Mexico over Canada and that he’s building a good rapport with Mexican President-elect Andres Manuel Lopez Obrador.

The U.S. and Mexico are “getting closer” to reaching a trade deal, and the administration may advance separate talks with Canada later, Trump told reporters at the start of a cabinet meeting in Washington on Wednesday. The president added that he and newly elected Lopez Obrador are “doing great.”

The Mexican peso reversed Wednesday’s losses and advanced to a session high of 18.8264 per dollar after Trump’s comments.

Trump said earlier this year he may break up talks for a new North American Free Trade Agreement into separate tracks with Canada and Mexico. The three countries have failed to nail down a deal to revamp the pact over almost a year of talks, with wide differences remaining over key issues like auto-content rules and a sunset clause.

Top Trump administration officials visited Mexico City last week to meet the current and incoming administrations, providing the first chance for Lopez Obrador to set a tone for U.S.-Mexico ties after the July 1 election. The visitors included Secretary of State Michael Pompeo, Treasury Secretary Steve Mnuchin, Secretary of Homeland Security Kirstjen Nielsen and White House senior adviser Jared Kushner. Lopez Obrador takes office Dec. 1.

White House economic adviser Larry Kudlow on Wednesday said that there’s been “good progress” in talks with Mexico, which are paving a “promising avenue.” He declined to elaborate on specific issues. “We’re having very productive talks with Mexico,” Kudlow said at the CNBC Institutional Investor Delivering Alpha conference in New York on Wednesday.

–With assistance from Jenny Leonard.

Shop talk with Joe Mimran: The importance of affordable fashion and the secret to Amazon’s success

Fashion designer Joe Mimran is partnering with U.S. grocer Kroger to consult on an apparel line branded “Dip.” Mimran’s experience with fashion brands Club Monaco, Pink Tartan and Joe Fresh – created for Canadian grocer Loblaw — make him a natural fit for Kroger’s vision. Mimran sat down with Financial Post’s Larysa Harapyn to talk about his next foray into fashion and how Amazon Prime will be bigger than Black Friday and Cyber Monday.

Breaking down trade barriers between provinces an urgent priority, Chamber of Commerce tells premiers

Canada’s provincial premiers should cut red tape on trade at home and maintain solidarity with Prime Minister Justin Trudeau in the face of U.S. “protectionist attacks,” the head of a major business group says.

With premiers beginning a meeting Wednesday, Chamber of Commerce President Perrin Beatty is urging them to make it easier to do business and break down stubborn trade barriers between provinces that hurt growth.

“The competitiveness of Canadian businesses is eroding,” Beatty wrote in a letter to the incoming chairman of the premiers’ group, New Brunswick Premier Brian Gallant. “The issue has become even more urgent as a result of U.S. tax and regulatory reforms and of the attack on our trading relationship with our largest customer.”

Given the uncertainty over U.S. trade policy, trading within Canada is more important than ever, Beatty wrote. “Barriers to the free flow of goods and services between provinces are self-inflicted wounds that penalize consumers, make our businesses less competitive and undermine economic growth,” he said, adding too little has changed despite the adoption of an internal Canadian Free Trade Agreement that kicked in last year.

It’s a message that Trudeau himself echoed. “You can understand it’s kind of frustrating, not just for Canadians but for me, to see continued barriers to internal trade in Canada,” the prime minister told reporters Tuesday in Nova Scotia. To demonstrate the merits of trade, “we need to do a better job of doing it here in Canada.”

Avison Young to buy European real estate company after $250-million investment from Caisse

Avison Young Canada Inc. will use a new, $250 million (US$190 million) investment by a big Canadian pension fund to recruit talent and make global acquisitions, including the purchase of a European real estate services company, Chief Executive Officer Mark Rose said.

The Toronto-based firm announced Monday that Caisse de Depot et Placement du Quebec, Canada’s second-largest pension fund manager, had made a preferred-equity investment in Avison Young. Caisse will be entitled to designate three members of the company’s nine-member board of directors.

The investment will produce “significant activity” in the coming years, Rose said in a phone interview on Tuesday. That includes the European acquisition, likely to be announced by the end of the month, and an expansion of Avison Young’s presence in major European and Asian markets such as Paris, Madrid, Dublin, Singapore, Hong Kong and Tokyo, he said. He declined to give the European company’s name or the size of the deal.

The commercial real estate services company’s growth strategy has been to attract the best industry leaders and take operations global, Rose said. The company has increased its revenue about 15-fold over the past decade, from about $40 million to more than $650 million, he said, and the additional capital will help it take its revenue into the billions. Cushman & Wakefield Inc. is among its main competitors.

“The focus for us is going to be innovating at light speed on the tech front,” Rose said, citing investment in artificial intelligence-based technology. “The tech for real estate led by AI isn’t here today. I fully expect it’s going to be here in 2021.”

Avison Young will also expand its investments in the Canadian market, as demand remains higher than supply in markets like Vancouver and Toronto amid job growth and strong investment, he said.

“Canada really has been the country that focuses on the credit and covenants of tenants probably better than any country out there, so real returns on a risk-adjusted basis are really fantastic in Canada, and that’s what invites global investment here,” Rose said.

Trudeau still optimistic on NAFTA, says Canadians’ support key to getting a good deal

Justin Trudeau kept up his optimism for a renewal of NAFTA, and praised Canadians for showing solidarity during tensions with the U.S.

“We know we are going to be able to get to a good trade deal that is beneficial to Canada, to Mexico and to the United States,” the prime minister said Tuesday in Antigonish, Nova Scotia, where he was attending a community cookout. “We are going to do it by staying strong and united, and being there for each other when we are hitting challenges. So thank you to Canadians.”

Trudeau didn’t mention any specific areas of progress or stumbling blocks during his brief remarks at St. Francis Xavier University. Earlier this month Canada retaliated against the U.S. for tariffs on steel and aluminum, after giving President Donald Trump’s administration a month to reconsider. Trudeau and his foreign minister Chrystia Freeland have said disputes such as those over metals and lumber should remain separate from work on a new North American Free Trade Agreement.

The Liberal prime minister has solid support for his handling of Trump and the trade file ahead of the scheduled general election next year. A poll conducted last month by Nanos Research on behalf of Bloomberg found 41 per cent of Canadians said Trudeau is the best party leader to deal with the White House, compared with 20 per cent who said Conservative Leader Andrew Scheer would be best-suited.

Trudeau met earlier with Nova Scotia Premier Stephen McNeil, head of the provincial Liberal Party. The prime minister said the broad support he’s received from Canadians on trade has been helpful during negotiations.

“We have all stood together during the trade conversation with the United States,” he said. “We know that staying strong, leaning on each other, being there to defend the interest of Canadians, is what we do.”