Kinder Morgan just told its shareholders how it persuaded the Trudeau government to pay billions for a pipeline no one else wanted to buy

August 8th 2018

The Trudeau government made financial overtures to Texas energy giant Kinder Morgan more than a month before the pipeline operator issued an ultimatum that drove Ottawa to offer billions to take over the troubled Trans Mountain project, according to a new document released by the company this week.

These previously secret overtures began even though the government had made it clear, during its early negotiations with the Texas multinational, that it didn't want to buy the pipeline and oil tanker expansion project, says the document, a proxy for shareholders that was filed with the United States Securities and Exchange Commission on Tuesday.

But a timeline included in the proxy shows how the company systematically rejected the government's negotiating position, driving Ottawa to eventually agree at the end of May to buy the rights to the Trans Mountain expansion project and an existing 65-year old pipeline system for $4.5 billion.

If built, Kinder Morgan's Trans Mountain expansion would increase the capacity of heavy oil and other petroleum product shipments from Alberta to Burnaby in metro Vancouver.

The proxy document highlights how far the federal government was willing to go to stop the company from abandoning its plans, starting with a trip to Houston early in 2018.

At the time, former natural resources minister Jim Carr and his chief of staff Zoë Caron travelled to the Texas city on March 6, 2018 and offered a “resolution” to concerns that the company and its shareholders were about to lose billions of dollars if they continued spending money on the project without guarantees they could complete or even operate it under tough provincial regulations.

At that point, the company had already spent about $1.1 billion on the expansion, and was expecting to lose all of that money until the government came through with its $4.5 billion offer to purchase the existing Trans Mountain pipeline, some related assets and the rights to build the expansion.

An international news agency, Reuters, has described the government offer as a "billion-dollar bailout" for the Texas company.

Trudeau government kept Canadians in the dark, says Robyn Allan

Robyn Allan, an independent economist who has spent years tracking and studying developments about the proposed pipeline, told National Observer in an interview that the new details in the proxy show that the Trudeau government kept Canadians in the dark about the true nature of its negotiations with the Texas multinational and what it knew about the company’s Trans Mountain expansion project’s escalating costs.

The Trans Mountain expansion has become a flashpoint in Canada's climate change policy efforts. The federal and Alberta governments argue that it is essential to ensure a path forward on a plan to reduce greenhouse gas emissions and shift to a greener economy. Thousands of opponents in B.C. have pledged to do whatever it takes to stop it, arguing that the new oil pipeline infrastructure would lead to irresponsible growth and expansion of Canada's oilsands sector in Alberta, leading to spills and pushing the country's international climate change goals out of reach.

Several have already been fined for violating an injunction that ordered protesters to stop disrupting construction activity, including Green Party Leader Elizabeth May and former NDP MP Kennedy Stewart. On Wednesday, two faith leaders, Emilie Smith and Steve Heinrichs, were also found guilty of violating the injunction and sentenced by B.C. Supreme Court Justice Kenneth Affleck to serve seven days in jail.

A majority of affected First Nations on the pipeline route are also opposed to the project proceeding.

Alberta holds the world's third largest reserves of crude oil, after Saudi Arabia and Venezuela, and its oilsands sector is Canada's fastest-growing source of greenhouse gas emissions. The federal government has also estimated that the oilsands represent about two per cent of the Canadian economy.

Kinder Morgan originally estimated that the project, formally approved by Prime Minister Justin Trudeau’s cabinet in November 2016, would cost $4.1 billion. In recent months, this estimate has risen to $7.4 billion, until the new documents this week estimated that the cost could be as high as $9.3 billion until construction is expected to be completed in 2021.

This total would not include the $4.5 billion offer from the federal government to buy the project, which would mean that taxpayers are now on the hook for spending up to $13.8 billion, with no other investors attempting to take on the risky project.

Allan, a former chief executive at the Insurance Corporation of British Columbia, said this cost would likely be even higher since the company is only doing pre-construction work right now, and has yet to sign construction contracts needed to install the pipeline in the ground.

She has estimated the pipeline and tanker expansion could wind up costing up to $20 billion to complete.

“It appears as though (the federal government) deliberately withheld information about the costs because it would have shocked Canadians at the time,” Allan said in an interview with National Observer. “If they didn’t know, they should have known.”

Several meetings, including those involving the prime minister’s office and federal finance officials, occurred weeks before Trudeau publicly announced at an April 15 news conference that he had “instructed” Finance Minister Bill Morneau “to initiate formal financial discussions with Kinder Morgan” to resolve the uncertainty surrounding the Trans Mountain expansion project.

Trudeau's office declined to answer questions about Trudeau's remarks in April, referring them to Morneau's office, which said that the project must proceed since it is in Canada's interest.

"The Government of Canada made the decision to make sure this project is built only after completing a detailed analysis, and with the full understanding of the project's economics and future benefits to Canadians," said Morneau's spokesman Pierre-Olivier Herbert, in an email to National Observer. "This is a project with significant commercial value, and represents a sound investment opportunity for Canadians."

The Kinder Morgan proxy says that in that first March 6 meeting, company officials told Carr and Caron that they wanted the federal government to show more “support” for the company so that it could begin construction, “including legislation that would provide a ‘once and for all’ approval of the federally approved undertakings, rendering B.C.’s initiatives to stop the project ineffective.”

Trudeau moved Carr to a new portfolio in a summer cabinet shuffle on July 18. Carr is now responsible for international trade. The prime minister appointed Amarjeet Sohi as the new natural resources minister, giving him instructions to oversee the completion of the Trans Mountain project. Caron, a long-time environmentalist, will continuing to serve as the new natural resource minister's chief of staff.

Herbert initially declined to answer further questions about the proxy, referring National Observer to contact Kinder Morgan's Canadian subsidiary, Trans Mountain. The company said in an email that it was unable to provide further information beyond what was in the proxy statement.

Mackenzie Radan, a spokesman for Sohi, said that the decision on the Trans Mountain expansion was based on facts, evidence and what's in the national interest.

"Our government made the right decision when we approved this federally-regulated project and we stand by that decision," Radan said.

This position has been contradicted by several public servants who did the research prior to the government's decision, alleging that they were instructed to find a way to approve the project, before the government had concluded its consultations with affected First Nations.

Constitutional issues 'could take years to resolve'

Many pipeline supporters, including the Government of Alberta, have accused the B.C. government of going too far in its regulatory and legal efforts to slow down or stop the project. However, the Kinder Morgan filing notes that B.C. could “strategically use its shared jurisdiction over certain matters, including those involving coastlines, local health and safety and environmental matters (including regulation of hazardous substances)” to cause delays and impair the pipeline’s operations, once constructed.

The proxy also mentions that "constitutional and jurisdictional issues facing [Trans Mountain] could take years to resolve and that the consequences of an adverse ruling after the company had incurred substantial indebtedness to fund project spending on the [project] would be disastrous to the company."

But it makes no mention of one of the specific issues being reviewed by the courts, prompted by First Nations who say that the federal government violated their rights and failed in its constitutional duty to consult them about the project.

A lawyer for one of the directly affected nations, the Tsleil-Waututh, has said it could use evidenceuncovered by National Observer that the government had made a decision to approve the project before concluding its consultations with First Nations as grounds for an appeal to the Supreme Court, as part of its case to terminate the project. The case is currently under review at the Federal Court of Appeal, which rejected the news articles as "hearsay."

Timeline

The proxy for shareholders details different steps in the negotiations through a series of meetings between Canada's federal government and representatives of the Texas multinational.

March 21 and 24

After Carr and Caron's March 6 meeting in Houston, and despite all of these legal and regulatory obstacles, federal government representatives continued to meet with Kinder Morgan officials over the next few weeks, including conference calls involving officials from the Finance Department as well as from Trudeau’s office on March 21 and March 24.

In those meetings, the company provided an undisclosed estimate of how much it would want in compensation if the project got cancelled. It also proposed an option that would allow the government to buy five per cent of its Trans Mountain subsidiary if the new expansion project was completed.

March 26 and 27

Then on March 26 and 27, company officials met again with federal finance officials and Trudeau’s office in Ottawa “to discuss potential ways in which the (government) could provide the company with sufficient support to permit it to continue advancing (the Trans Mountain expansion) including a backstop… or a potential equity investment…”

At those meetings, Kinder Morgan representatives said they were concerned that a backstop might leave the company on the hook for billions of dollars in costs for a terminated project “if the current or a subsequent government were to take a different view of the project in the future.”

Trudeau’s office and other officials responded in that meeting by saying that they were willing to pay the company, subject to numerous conditions, for a portion of its costs and “potentially step into ownership” of the project in order to complete it.

“The company emphasized the urgency of the matter and that a decision by the company would be forthcoming in a matter of days if resolution of a path forward was not obtained.”

April 8

Kinder Morgan then issued its ultimatum publicly on April 8, suspending non-essential spending on the project and setting a May 31, 2018 deadline to reach a deal to either save or cancel the project.

Carr would later say he knew at that point that the government would likely wind up buying the pipeline. He learned the news through a phone call to his hotel room during a business trip to New York City, The Canadian Press reported in June.

"When that phone call came, I knew there was a reasonable chance that they would pull out and at the same time there was a possibility Canada would step in," Carr said.

April 10

Two days later, on April 10, the government proposed to buy a 51 per cent stake in Kinder Morgan’s Trans Mountain subsidiary.

Then on April 13, Kinder Morgan once again noted that it wasn’t sure if it could operate the pipeline, even if it was built, proposing to Ottawa that the two sides “focus on a 100 per cent sale scenario.”

April 15

Prime Minister Trudeau interrupted a foreign trip, returning to Ottawa on April 15 to discuss the issue with B.C. Premier John Horgan and Alberta Premier Rachel Notley.

It was at this point that Trudeau said he had instructed Morneau, his finance minister, to initiate formal financial negotiations.

April 17

On April 17, the company says talks resumed, including the Alberta government in the discussions.

Another meeting occurred on April 19, including Gordon Ritchie, the company’s independent lead director, in which Kinder Morgan continued to press for a 100 per cent sale.

“During these and subsequent conversations over the next few days, the purchaser noted that it had not yet decided on a specific structure and was continuing to evaluate both a backstop and a sale option, though the purchaser was clear that its strong preference was not to purchase TM Pipeline LP and that it believed the backstop was the better way for the purchaser to support the (Trans Mountain expansion).”

April 25 and 27

The company’s board met in Calgary on April 25 and 27 and agreed that it preferred to sell its assets instead of getting a backstop.

Dax Sanders, the company’s chief financial officer, told the government in a conference call on April 30 about the board’s position, and offered to sell the assets for $6.5 billion, or $23 per share for all of the company’s common equity. This latter option may have included some other Kinder Morgan assets in Canada and the U.S. that were later dropped from the negotiations.

May 8

Finance Minister Bill Morneau met with Ritchie and other company officials in Houston on May 8 with two options, including a backstop as well as a $3.3 billion offer to purchase the project.

May 9

KM's board of directors unanimously rejected Morneau's offer on May 9.

One day later, Morneau had a phone call with Kinder Morgan chairman and chief executive officer Steven Kean. Kean disagreed about the merits of the government’s offer but agreed to pursue negotiations.

The National Post's John Ivison later reported that Kean was "said to have played hardball" with Morneau in that meeting.

May 16

The board met on May 16 in Calgary and agreed at that point that they would be unlikely to conclude a transaction before the May 31 deadline. This would require the board to order the termination of all work related to the Trans Mountain expansion. The board also decided to prepare a new set of conditions that it would want Ottawa to deliver on, were it to pursue construction.

On the same day, Morneau summoned reporters in Ottawa to a news conference, stressing that the federal government would compensate the company for any losses due to regulatory actions by the B.C. government. In his remarks, Morneau also urged new investors to consider this and step forward.

“We think plenty of investors would be interested in taking on this project, especially knowing that the federal government...is willing to provide indemnity to make sure it gets built,” said Morneau.

May 18

On May 18 in Houston, the board developed its framework, including a backstop arrangement to ensure the “certainty” of construction through B.C. and protect its shareholders. Kean and Morneau spoke about both options for a backstop and a purchase on the same day.

The company sent a formal copy of its proposal to the government on May 21.

May 22

Morneau met with Ritchie and others the next day. The government rejected the offer, calling the conditions demanded by Kinder Morgan to be “unacceptable.”

Morneau offered a new deal worth $3.85 billion, including funding of additional costs, depending on certain government approvals that would likely take until the end of 2018 to obtain. This estimate was based on an independent financial analysis prepared by an international advisory firm, Greenville & Co.

The company’s board said that this delay wasn’t acceptable, and countered that it needed at least $4.5 billion to close the deal, while noting that $325 million of that total would go back to the government in the form of capital gains taxes.

May 23

They met again on the morning of May 23, reaching an agreement in principle, with details to be negotiated over the next week at the offices of Kinder Morgan’s Calgary lawyers.

Some of those details to be negotiated included provisions that would require the company to restart construction activities, before the purchase was completed, as well as regarding the retention of key employees.

After the deal closed, the company announced that two of its executives, Ian Anderson and David Safari, were being offered $1.5 million in bonuses if they could stay on for two years.

Carr would later say that these bonuses were none of Canada's business. Morneau's office declined to say whether he knew about the bonuses.

May 29

Kean told his company's shareholders about the deal on the morning of May 29, calling it a "great day" for his company and for Canada. Trudeau's cabinet approved the deal on the same day.

Moments later, Morneau told reporters at a news conference in Ottawa that the $4.5 billion investment "represents a fair price for Canadians, and for shareholders of the company, and will allow the project to proceed under the ownership of a Crown corporation.”

“Canada will work with investors to transfer the project, and related assets, to a new owner or owners in a way that ensures that the project’s construction and operation will proceed in a manner that protects the public interest,” he said, on May 29.

When pressed about various issues raised in the new proxy document, including details about the retention of key staff, bonuses for executives, and potential delays in getting permits, Morneau'sspokesman Herbert said that construction was on track.

"Kinder Morgan has published their 2018 work schedule and we are on track with that schedule," said Morneau's spokesman Herbert. "As you know, Kinder Morgan still owns the project and the government is not involved in the compensation of any Kinder Morgan employees.

Aug. 30 vote determines future of sale

The company is now recommending that its shareholders accept the federal government’s offer at a special meeting in Calgary on Aug. 30, listing 17 reasons why it got a good deal that will allow its other remaining Canadian assets – including a crude oil tank storage and rail terminals business, and a pipeline used to transport a liquid needed to ship heavy oil from the oilsands – to become “more valuable” if the government completes the expansion project.

But it would be difficult for the company to find anyone else interested in the Trans Mountain assets and willing to pay the same price as the federal government, Kinder Morgan said in its proxy.

“The board’s judgment, after discussions with the company’s financial advisor and management, (is) that there were few potentially interested and capable alternative counterparts to the company that would be willing and able to compete with the financial terms proposed by the purchaser by the May 31 deadline imposed by the company."

[Top photo: Natural Resources Minister Jim Carr listens to a question from Winnipeg Free Press reporter Dylan Robertson in Ottawa on April 8, 2018, in a Nissan Leaf driven by the minister's chief of staff, Zoe Caron. Photo by Alex Tétreault]