Trans Mountain price tag shrinks
Kinder Morgan will pay $325 million in capital gains taxes on pipeline deal
CALGARY The federal government will end up spending much less than the agreed-upon $4.5 billion to buy the Trans Mountain pipeline system and expansion project from Kinder Morgan Inc., once capital gains taxes are factored in.
Documents filed with the U.S. Securities and Exchange Commission by pipeline giant Kinder Morgan show the firm considers the net purchase price for the pipeline to be $4.175 billion because it needs to pay the federal government $325 million in capital gains taxes.
That’s seven 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 set of negotiations in which Kinder Morgan initially asked for $6.5 billion for the 300,000-barrels-perday 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 project, delivering the federal government an ultimatum to provide operational and financial assurances or it would walk away.
Morneau had both privately and publicly offered to indemnify the company if the $7.4-billion expansion project encountered delays as a result of B.C. Premier John Horgan’s opposition to the project.
Eventually, however, 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, the SEC documents show. Kinder Morgan declined that offer during a prolonged backand-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 SEC 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 the government 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 government came to the $3.85-billion figure it presented as its counteroffer to Kinder Morgan.
In an email, Trans Mountain said the $4.175 billion price represents a $12 per share value to Kinder Morgan Canada shareholders after capital gains.
On May 23, the federal Liberals agreed on the condition that Kinder Morgan commit to the $325-million tax bill and restart work on the project using money from its covered credit facility, among other items. The same day, Kinder Morgan asked TD Securities to prepare an opinion on the terms of the deal. On May 28, its board met and approved the deal.
On May 29, 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.
He also said the documents provide a sense of what the federal government faced as it ran out of options for new export pipelines, following the cancellations of both Transcanada Corp.’s Energy East and Enbridge Inc.’s Northern Gateway projects. They also show Kinder Morgan “had a real observation of how recalcitrant the governments of B.C. and (city of ) Burnaby were,” he said.
Indeed, the SEC report spells out exactly how Horgan’s NDP government caused so much panic for Kinder Morgan.
The filing states that B.C.’S announced intention to restrict the flow of diluted bitumen and its decision to submit a reference case to the courts to establish its bitumen restricting authority gave rise to “increased concern.”
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.