A new report, released by West Coast Environmental Law, says the government is misleading Canadians about the scale of the debt the federally owned Trans Mountain Corporation is racking up as construction continues on its controversial waterfront expansion project. pipeline, and calculates that the government will have to cancel at least $17 billion in debt owed to Canadian taxpayers.

Since the federal government purchased the pipeline from Kinder Morgan Canada for $4.5 billion in 2018, the estimated cost of the expansion project has risen from $7.4 billion to $12.6 billion and, more recently at $21.4 billion. The costs come as the pipeline expansion project adds a second “twin” pipeline to the existing pipeline, which connects Edmonton to Burnaby, British Columbia.

Report author Robyn Allan said hill time the federal government has been aware of Trans Mountain’s deep and growing financial problems for years, but has used opaque corporate structures and disclosure strategies “to hide the magnitude of the problem” from the Canadian public.

“Trans Mountain has not been profitable since Ottawa bought it in 2018. And the expansion is not commercially viable. What my report attempts to do is show how Ottawa is hiding this information,” Allan said.

Allan is an independent economist who was formerly president and CEO of the Insurance Corporation of British Columbia and an expert intervenor in the National Energy Board’s regulatory hearings on the Trans Mountain expansion project.

Robyn Allan, author of the new West Coast Environmental Law report, was an expert intervener in the regulatory hearings on the Trans Mountain expansion project. Photo courtesy of Robyn Allan

Eugene Kungstaff attorney at West Coast Environmental Law and editor of the October 6 reportTold hill time that the report calls into question two key promises that Finance Minister Chrystia Freeland (University—Rosedale, Ont.) made on February 18, 2022, the day Trans Mountain announced that the cost estimate for its expansion project of the pipeline went from $12.6 billion to $21.4 billion. billion.

After recognizing the abrupt retirement of long-term Trans Mountain CEO Ian Anderson, Freeland said the government would no longer invest public money in Trans Mountain Corporation, but also maintained that the controversial expansion project was still commercially viable.

The report disputes both statements, using regulatory filings and documents obtained through freedom of information requests to highlight what it describes as Trans Mountain’s true indebtedness, for question government accounting practices, and cast doubt on the long-term commercial viability of the project. The report argues that the government is laying the groundwork to cancel more than $17 billion in debt owed to Canadian taxpayers.

Long-term contracts are the ‘Achilles heel’ of Trans Mountain’s commercial viability, report says

Allan’s report says the “Achilles heel” of Trans Mountain’s commercial viability lies in the 20-year contracts that the company’s former owner, Kinder Morgan Canada, signed in 2012 with its customers, the oil companies that pay to ship their product along the pipeline.

These “shipping contracts” which only come into effect after the completion of the expansion project, limit the extent to which cost overruns of the expansion project can be passed on to oil companies through an increase in toll rates . That leaves Trans Mountain holding the bag for much of the multi-billion dollar cost overruns.

Allan said the contracts made economic sense when they were signed, when the cost estimate for the expansion project was $5.4 billion. At that time, Allan said the toll rates the shippers had agreed to were sufficient to cover the cost of the expansion project while providing Kinder Morgan with a 12-15% return in as the owner of the pipeline.

But the expansion project’s cost estimate continued to rise, and Allan said the project’s commercial viability “started to erode” once the estimate topped $7.4 billion. She said that was the main reason Kinder Morgan walked away from the project.

Then-Finance Minister Bill Morneau announces on May 29, 2018 that the federal government is purchasing the Trans Mountain pipeline and expansion project from Kinder Morgan Canada for $4.5 billion. Hill Times photograph by Andrew Meade

Allan has already said hill time that the federal government‘s decision to step in and buy Trans Mountain for $4.5 billion in 2018, after Kinder Morgan decided to wash its hands of the project, was both a bailout for the oil industry and a boon for Kinder Morgan.

Allan said documents obtained through freedom of information requests show that the government knew when it bought Trans Mountain that the toll rates set out in the long-term contracts would not be enough to cover the costs.

“They should have renegotiated the contracts at that time,” she said, because the oil companies “badly needed the pipeline” and would have been motivated enough to agree to pay higher toll rates for it. cover rising costs. But the government did not renegotiate the contracts when it bought the pipeline, and the costs of the expansion project continued to rise.

Report focuses on TMP Finance, a “corporate shell” without employees

Kung described TMP Finance, an intermediary company that owns the current pipeline company, as a “corporate shell” that the government uses to hide the pipeline company’s losses in order to “maintain the illusion of commercial viability”.

TMP Finance is a wholly-owned subsidiary of Canada Development Investment Corporation (CDEV), the Crown corporation set up by the government to manage its investments. TMP Finance in turn owns the pipeline company Trans Mountain Corporation. But the report points out that TMP Finance, which was set up to finance and advise Trans Mountain Corporation, has no employees and that its three directors are all senior CDEV executives.

“There was no reason to start TMP Finance,” Allan said.

Allan explained that CDEV and Trans Mountain Corporation publish publicly available financial reports, but TMP Finance, which acts as an intermediary between the two, does not. Its financial results are consolidated in CDEV’s financial reports, which makes it difficult to monitor its operations.

Allan’s analysis of TMP Finance’s operations alleges that it exists to hide its subsidiary’s losses and lack of financial viability from public view, allowing the pipeline company to issue financial reports that focus on the most positive aspects of its operations and its long-term prospects term.

According to the report, when the government lends money to Trans Mountain, as it has done to the tune of billions through Export Development Canada, those loans are screened by TMP Finance, which amounts to $55. out of 100 loaned to Trans Mountain Corporation as debt. , and the other 45 in equity.

The end result, according to Allan, is that Trans Mountain Corporations’ debt to the federal government looks much smaller than it actually is, with the remaining 45% hidden in TMP Finance’s more opaque financial results.

Finance Canada says Trans Mountain ‘is in the national interest’

In an email to hill time, Finance Canada spokeswoman Caroline Thériault reaffirmed Freeland’s February 2022 commitments that no additional public money would be spent on the project and that Trans Mountain Corporation should obtain the remaining funds needed to complete the expansion project. by approaching banks and other private lenders.

Thériault pointed out that, when engaged by the government to provide advice on Trans Mountain’s finances, BMO Capital Markets and TD Securities both confirmed that, “despite the increased cost estimate and schedule for completion, the project remains commercially viable”.

“This project is in the national interest and will make the Canadian economy more resilient,” Thériault said.

Canadian National Observer reported on June 24, 2022, that BMO Capital Markets and TD Securities’ analysis was based on the assumption that the pipeline would be in use for 100 years, which Trans Mountain critics dismissed as unreasonably long.

The WCEL report points out that, by comparison, Kinder Morgan set a 20-year limit for its own analysis of the viability of the project, while the Parliamentary Budget Office set a 40-year limit in a Analysis of June 2022 which concluded that Trans Mountain was no longer a profitable business.

The federal government has made it clear that it plans to sell at least part of the pipeline to Indigenous groups, and senior officials are meeting with representatives of these organizations. But the government’s public statements on this process usually specify that the project will first have to be “de-risked”, without specifying what this means.

Allan said this risk reduction could be interpreted as a reference to the debt the project carries, which she called “huge, huge risk”.

She said no buyer would acquire a stake in the project until the current owner, the government, settled the debt.

“Everything suggests that Ottawa is writing this $17 billion cut and taxpayers are funding it.

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hill time

Editor’s note: This article was updated at 5 p.m. EDT on October 6, 2022, with material from an interview with Robyn Allan.

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