CALGARY – The Canadian federal government will end up spending much less than the initially reported $4.5-billion price to buy the Trans Mountain pipeline system and expansion project from Kinder Morgan Inc., once the company pays the government capital gains taxes.
Documents filed with the U.S. Securities and Exchange Commission by pipeline giant Kinder Morgan show the company considers the net purchase price for the pipeline to be $4.175 billion because it needs to pay Ottawa $325 million in capital gains taxes.
That’s 7 per cent less than the $4.5 billion price Finance Minister Bill Morneau announced on May 29 to purchase the Trans Mountain pipeline system and the delayed expansion project from the Houston-based company.
At the time, Kinder Morgan CEO Steve Kean said during a conference call that the agreement marked “a great day not only for our company but also for Canada.”
The call offered few details on how the deal between the two sides came together but the company’s SEC filings show a drawn-out negotiation in which Kinder Morgan initially asked for $6.5 billion for the 300,000 barrels per day pipeline and the 590,000-bpd expansion connecting landlocked Alberta to tidewater.
The negotiations began April 8 when Kinder Morgan announced it would suspend all non-essential spending on the Trans Mountain expansion project. It delivered the federal government an ultimatum at that time: provide operational and financial assurances or the company would walk away.
Morneau had both privately and publicly offered to indemnify the company if its $7.4-billion expansion project encountered delays as a result of B.C. Premier John Horgan’s opposition to the project.
Eventually, however, the SEC documents show that Morneau countered the company’s $6.5-billion ask with a $3.85 billion offer on May 22 – just a week before Kinder Morgan’s end-of-May deadline.
Kinder Morgan declined the offer during a prolonged back-and-forth negotiation the next day, May 23.
“The board decided that a C$4.5 billion pre-tax valuation, which when considered together with the financial analysis of the retained business prepared by TD Securities and anticipated capital gains taxes… was the lowest price at which the board would recommend a transaction,” the filing stated.
It was at that point Kinder Morgan told the federal government’s negotiation team that it anticipated a $325 million capital gains tax bill, so it’s lowest acceptable net purchase price was $4.175 billion.
A source in the Ministry of Finance said the deal is structured such that Ottawa will pay Kinder Morgan $4.5 billion in full, but Kinder Morgan is required to pay their $325 million in taxes at the end of the year.
The source declined to explain how the federal government came to the $3.85-billion figure it presented as its counter-offer to Kinder Morgan.
In an email, Trans Mountain’s press team said the $4.175 billion price represents a $12 per share value to Kinder Morgan Canada shareholders after capital gains.
Over the course of that day, and “after breaking for several hours,” Ottawa agreed in so long as Kinder Morgan definitively agreed to the $325-million tax bill and consented to restart work on the project using money from its covered credit facility, among other items.
Toward the end of that same day, May 23, Kinder Morgan asked TD Securities to prepare an opinion on the terms of the deal.
On May 28, the company’s board met and approved the transaction. Early the next day, federal cabinet including Prime Minister Justin Trudeau reviewed and voted to approve the deal for the government and back-to-back announcements were made by the company and the government.
“Some of these SEC documents read like spy novels,” said Dennis McConaghy, a former TransCanada Corp. executive and pipeline industry insider.
McConaghy also said the documents show what happens when a country like Canada runs out of options for new export pipelines given cancellations of both TransCanada Corp.’s Energy East and Enbridge Inc.’s Northern Gateway projects to move Canadian oil to the country’s coasts.
The documents also show Kinder Morgan “had a real observation of how recalcitrant the governments of B.C. and Burnaby were,” McConaghy said.
The documents spell out exactly how Horgan’s NDP government caused so much panic for Kinder Morgan.
The company’s filing states that B.C.’s announced intention to restrict the flow of diluted bitumen through the province and its decision to submit a reference case to the courts to establish its bitumen-restricting authority gave rise to “increased concern.”
The company was also concerned that B.C.’s government “would strategically” use jurisdiction “to impose incremental and unexpected regulations directed at its opposition (to the pipeline expansion) that may have the effect of delaying construction of the (project) indefinitely or impairing the company’s ability to operate.”
In addition, the company said local authorities were not acting to create “a safe working environment” in Burnaby, where the company operates and was trying to expand its marine terminal but where protestors have set up encampments and blocked workers from accessing the site.
Horgan’s office did not respond to a request for comment on how these actions led to the company suspending all non-essential spending on the project until it reached an agreement with Ottawa.
In addition to the purchase price, Ottawa will still need to fund more than $6 billion in remaining construction costs for the $7.4-billion Trans Mountain expansion project, which the Alberta government has agreed to indemnify in exchange for an equity stake for up to $2 billion if there are cost overruns.
Work on the pipeline route will begin in Alberta in August and in B.C. in September.
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