Kinder Morgan Canada Ltd. will pay $325-million in capital gains on the Trans Mountain pipeline assets it is selling to the federal government, somewhat offsetting the $4.175-billion cost, according to a filing of regulatory documents.
The filing with the U.S. Securities and Exchange Commission provides information for a shareholders’ vote on the transaction next month in Calgary, with a closing expected in September or October.
In the document, the company outlined how, after more than two months of negotiation with the federal government, its board decided a sale was the best option for its shareholders and negotiated a purchase price that was lower than its initial $6.5-billion demand, but higher than Ottawa’s opening offer of $3.85-billion.
Kinder Morgan sweetened the pot by noting that the company would have to pay a $325-million capital gains tax on the increased value of the assets which the Houston-based company had purchased in 2005 from Terasen Inc. In the final deal, concluded on May 29, the company made a “definitive representation” that it would pay the tax bill, thereby lowering the effective purchase price.
Ottawa acquired the Trans Mountain pipeline assets and expansion project in order to overcome opposition from British Columbia’s New Democratic Party government which has actively opposed the expansion, arguing the increased tanker traffic would threaten its coast.
All eyes are now on the British Columbia Court of Appeal which heard a number of challenges from First Nations who argued they were not adequately consulted or accommodated, and have requested the court invalidate the federal permit. A ruling in that case is expected this summer.
The federal and Alberta government insist the expanded pipeline is in the national interest because it would provide export capacity for the western Canadian oil industry to new Asian markets and reduce the industry’s reliance on more expensive and risky rail transportation. British Columbia government and First Nations complain the pipeline expansion poses risks to the local environment and will drive up the oil industry’s greenhouse gas emissions, making it harder for Canada to meet its international climate-change commitments.
In its filing, Kinder Morgan Canada says the sale is worth $13 per share – or $12 on an after-tax basis, which is equal to 77 per cent of the share price on May 25. The Trans Mountain pipeline assets account for only half of the company’s earnings in 2018.
Kinder Morgan Canada became concerned about the viability of the expansion project earlier this year. B.C. Premier John Horgan announced in January that his government was looking at new regulations that would potentially impose additional environmental roadblocks for the pipeline expansion, or limit the amount of oil sands crude that could flow through the expanded line.
Company executives met with Natural Resources Minister Jim Carr in Houston in early March and requested support to ensure the pipeline expansion could be completed in the face of mounting opposition from the British Columbia government.
Throughout the more than two months of negotiations, Ottawa pushed a plan to indemnify Kinder Morgan shareholders in the event B.C. succeeded in stalling the project, but Kinder Morgan wanted an iron-clad guarantee that the federal government could quickly and effectively prevent any provincial intervention, the document says.
On April 8, the company announced it was suspending construction activities and would walk away from the project if it did not have the political guarantees and financial support it was demanding by May 31.
At one point, Finance Minister Bill Morneau – who had taken over negotiations – proposed that Ottawa take a 51 per cent stake in the pipeline, but the company’s board decided that such a scenario would leave its shareholders exposed to too much risk, for too little reward.
The federal government, it noted, would reap benefits from a completed project in the form of increased tax and royalty revenue and jobs that would provide incentives for it to continue pursuing and funding the expansion project when a private party would not.
“In other words, the interests of the company and the purchaser {the government]] would not be fully aligned,” it said.