Good morning from Japan. I have some thoughts on the Kinder Morgan deal and the perfect being the enemy of the good. First, lets's get some things out of the way about Kinder Morgan and their situation. 1/N
Kinder Morgan had a window here, between last April and the time at which they would have all the construction permits in place, where they could exit the project and pass most costs to shippers, taking on a couple of hundred million in losses themselves. 2/N
Kinder had clearly made the decision that the downside risks of carrying on with the project were too high - that they would rather eat a ~$200M loss on existing spend then take the risks of a much larger loss - for them, the pipeline had become a lottery with bad odds. 3/N
For reference, look at TransCanada's experience with KXL and/or with Energy East. Both times, TRP got caught in contract windows where they had to take on a lot of costs due to project cancellation and/or lack of permits, which became multi-billion dollar write downs.
On the other side of the table, you have the Government of Canada which has made a commitment to getting this pipeline built, but also to the process by which is has been approved. The government needed not only to preserve the project, but preserve the process.
By providing an offer to purchase, KM now basically has a hedge - it is guaranteed a better return than the multi-million dollar loss on the expansion and continued ownership of TM, but perhaps not the return they want overall.
Think of it as getting a mortgage rate lock-in from your bank. You know you can afford the house, and the locked-in rate lets you make the offer, but you might still shop for a better rate - the contract is binding on the bank but not on you.
The government, on the other hand, does not wish to have a pipeline company, it just wants to get TMX built. It's therefore advantageous for the government to allow some time for the signal of just how serious they are about backstopping this pipe to percolate in the market.
So, the structure of the deal makes sense - give KM a backstop and let them chase a buyer willing to pay more which would be an advantage for govt and KM.
New thread coming on other aspects.
