By now I should really be used to the bad reporting associated with the Trans Mountain Expansion Project (TMEP). Daily, I see reporters simply repeating talking points presented by Dogwood and Greenpeace employees who are paid to produce a constant stream of negative quotations about the project. But every now and then the reporting gets so egregious that even I sit up and wonder what is going through the media’s minds. This was one such week. Let’s look at a handful of headlines:
- Cost to twin Trans Mountain pipeline now $1.9B higher, Kinder Morgan says (Global TV)
- Cost to twin Trans Mountain pipeline could be $1.9B higher, Kinder Morgan says (CTV TV)
- Cost to expand Trans Mountain Pipeline now $1.9 billion higher, Kinder Morgan says (the Canadian Press)
The problem with these headlines is that they are all completely false. Now to give credit where credit is due, in the Global TV piece Keith Baldrey explained a lot of what I will discuss below, but his clarification failed to make it into many of the written reports. As well some articles (like the Globe and Mail) came a lot closer to the truth but even the Globe headline missed the mark. It also doesn’t help that the $9.3 billion is exactly what activists like Robyn Allan and Dogwood are claiming but this information is simply not true. Because it is late and I am short on time I am only going to do a quick short-take to explain what Kinder Morgan actually said.
This story all goes back to Kinder Morgan’s United States Securities Commission document for shareholders (called a “proxy statement”) about the proposed sale of the TMEP to the Canadian Government. The document is required for shareholders in cases like this to provide shareholders with a comprehensive understanding of the company’s financial position so shareholders can make an informed decision about whether to approve or decline the sale of the TMEP to the Canadian Government.
Part of the financial documentation is an examination of the books to provide shareholders an understanding of what they would be looking at under a number of different plausible scenarios. To ensure independence Kinder Morgan had TD Securities do the analysis as presented on page 25 of the proxy statement:
TD Securities performed a net present value analysis (“NPV”) on the assets that are the subject of the Transaction, which estimates the present value of projected future free cash flows.
Now for those of you not familiar with the term an NPV is a sort of stress test. It looks at how cash flow will vary under various scenarios. As a measure of conservatism the NPV normally looks at worst-case scenarios to see if the company is able to handle the costs when major projects go sideways. The reason they use stressful scenarios is not because that is what the auditors expect but rather because the normal scenarios have already been well-examined by this point in a business cycle. We already know that if the pipeline is built on-time and on-budget it will be profitable for the shareholders.
The three scenarios presented were (page 26 of the proxy statement):
TD Securities considered the following three scenarios: (1) a base line scenario where TMEP does not proceed, (2) a scenario which assumes the completion of TMEP based on capital costs of CDN $8.4 billion and an in-service date of December 31, 2020 and (3) a scenario which assumes the completion of TMEP based on capital costs of CDN $9.3 billion and an in-service date of December 31, 2021.
Now look at the language there. The proxy statement does not say that Kinder Morgan expects the TMEP to cost $9.3 billion, TD Securities simply used that number as a worst-case scenario to see how that expense and timeline would affect the company’s cash flow. The conclusion of the analysis was that the company would have sufficient cash flow under all three scenarios but would have differing stock values. That is it. The analysis made it clear to the shareholders what the company’s stock would be worth under the three adverse scenarios to decide whether the stock price they were being offered in the sale was a fair price.
As for the actual expected cost of the project TD Securities was explicitly clear in their analysis
The Company did not update its original cost and schedule estimate for the TMEP because of uncertainty affecting the TMEP during the period preceding the announcement of the Transaction.
I don’t know how the proxy statement could be any clearer. Kinder Morgan did not provide an update of its original cost or schedule for this analysis. What this means is that a headlines that says: “Cost to twin Trans Mountain pipeline now $1.9B higher, Kinder Morgan says” is a complete misrepresentation of what the proxy statement said. Frankly it is exactly the opposite of the what the proxy statement says.
I can’t repeat this enough: the proxy statement explicitly says that Kinder Morgan did not provide an update of the costs and anyone who claims otherwise is spreading misinformation. I know Ms. Allan continues to claim that TD Securities wouldn’t pick numbers out of the sky (or “numbers that have no bearing on reality” in her words)…and they didn’t…they looked at a worst-case scenario. That is what a stress test does and what TD Securities was paid to look at. The NPV evaluates the worst cases not the best. For anyone to look at a worst-case scenario and say: this is the expected cost and costs could go much higher…is simply slinging unsubstantiated mud.
Now I realize that journalists are busy and reporters don’t get to write the headlines but let’s make a basic assumption in this case. Journalists, if your story simply repeats what is being claimed by Dogwood or Greenpeace (or their proxies) then it is pretty safe to say that the story is not complete and it is time to either look at the documents yourself or talk to someone else who has looked at the documents.
Thanks for this, from the reporting I saw I was lead to believe it was going to cost $1.9 billion more and take a year longer to build. Disappointing reporting at best.
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Thanks, Blair. Amazing how easily media can be had when an inflammatory headline is fed them.
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While stress test numbers are not “picked out of the sky” they are not factual either. They are numbers invented by analysts to test scenarios which are entirely hypothetical, i.e., made up. They start with the idea “what if…”.