Trudeau government to buy troubled Trans Mountain pipeline for $4.5 billion

The federal Liberal government plans to spend $4.5 billion to buy Kinder Morgan Canada's existing Trans Mountain pipeline and its troubled expansion project, which the company called a "great day for Canada, for our customers and for our employees."

The project, which is expected to cost $7.4 billion to build, would triple capacity of a pipeline traveling from the Alberta oilsands to the coast of British Columbia, but has been beset by political Indigenous and environmental opposition.

"We have agreed to a fair price for our shareholders and we have found a way forward for this national interest project,” Steve Kean, the CEO of both Kinder Morgan and its Canadian subsidiary, said on a conference call with journalists and analysts.

He said the company and Ottawa had also agreed to work together to seek a third-party buyer for the pipeline and the project between now and July 22.

In a press conference in Canada's capital, Finance Minister Bill Morneau said 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.

Morneau says the federal government does not plan to be a long-term owner and is in negotiations with interested investors, including Indigenous communities, pension funds and the Alberta government. For Indigenous groups, the minister said, "we’ll make sure that existing profit-sharing or other agreements established with Kinder Morgan remain in effect."

Company will use government money to start construction

Kean said the company would restart construction using federal government funds before the closing of the deal, expected late in the third quarter or early in the fourth quarter of 2018.

The deal for the bulk of the Canadian subsidiary of Texas-based Kinder Morgan was about $12 per share after capital gains taxes, he said.

That is a steep discount to Monday's closing stock price of $16.59. Shares in the company jumped higher at the open, hitting a high of $18 before falling back to $16.83 by mid-morning.

The parent company, Kinder Morgan Inc, expects to collect around $1.25 billion after tax from its share of the sale.

The sale does not include the Cochin pipeline, crude storage facilities in Edmonton, or the Vancouver Wharves terminal facility, and the company has not yet decided what to do with the proceeds beyond paying down a roughly $100 million debt.

Kinder Morgan Canada's pipeline business earned $63.6 million before depreciation and amortization in the three months to the end of March, compared to earnings of $53.6 million for its terminal business.

As part of the deal, Morneau said that Kinder Morgan will go ahead with its original plan to twin the pipeline this summer while the sale is finalized, which likely won't happen until August.

“To guarantee the summer construction season for the workers who are counting on it, and to ensure the project is built to completion in a timely fashion, the federal government has reached an agreement with Kinder Morgan to purchase the existing Trans Mountain pipeline, and the infrastructure related to the Trans Mountain expansion project," Morneau told reporters in Ottawa.

Once the sale is complete, Canada will continue the construction on its own, with a view to eventually selling the whole thing down the road, once market conditions would allow it to get the best price.

Morneau presented the options during an early-morning cabinet meeting today before ministers made a decision to approve the project.

Export Development Canada will finance purchase

Export Development Canada will finance the purchase, which includes the pipeline, pumping stations and rights of way along the route between Edmonton and Vancouver, as well as the marine terminal in Burnaby, B.C., where oil is loaded onto tankers for export.

Alberta has also agreed to provide funding for any unexpected costs that arise during construction.

The plan — similar to how Canada financed and managed shares in General Motors and Chrysler in 2009 during the financial crisis — will include a new Crown corporation to manage the project.

The deal brings some certainty to an expansion project that has been on the rocks ever since B.C. went to court in hopes of blocking it, fearing the impact of a spill of diluted bitumen, the raw output from Alberta's oilsands.

Ottawa has the constitutional authority to build interprovincial projects like pipelines, but B.C. Premier John Horgan has gone to court to get a judge to weigh in on whether B.C.'s jurisdiction for the environment would allow him to regulate what flows through the pipeline.

The ensuing uncertainty, paired with vociferous opposition from environmental groups and some Indigenous communities in B.C., prompted Kinder Morgan to halt investment until the federal government could inject some certainty into the project.

Government slammed by critics

The government was immediately slammed from all sides for its stunning move.

"This move sets a terrible precedent and signals to other prospective investors that large projects such as pipelines cannot be built by private industry in Canada," said Aaron Wudrick, federal director of the Canadian Taxpayers Federation, a right-leaning group that advocates for lower taxes.

"Worst of all, the cost and risk of a $7 billion project that was going to be willingly financed entirely by a private company will now be unnecessarily transferred onto the backs of Canadian taxpayers.”

Environmentalists said Prime Minister Justin Trudeau was taking Canada in the wrong direction and turning it into a fossil fuel company.

“In a single mandate, Justin Trudeau transformed from a climate champion into a Big Oil CEO," said Aurore Fauret, a campaigner with 350.org.

"He had an opportunity to walk away from pipeline politics and get on with the real work of leading Canada, and the world, in a 100 per cent renewable energy revolution, but instead he’s opted to ignore science, Indigenous rights and the voices of people across Canada and bailed out a dangerous, unwanted pipeline with public money."

Ottawa is pressing ahead, firmly of the opinion there is no doubt about its jurisdiction. It is also confident it will prevail in a Federal Court of Appeal challenge by some Indigenous communities over its approval of the pipeline, a ruling on which is due any day.

Several First Nations have alleged in court that Trudeau's approval of the project was not legal since the government failed in its constitutional duty to consult them.

They have also asked the court to reopen its evidentiary record, more than six months after hearings concluded, to consider new evidence uncovered by a National Observer investigation that revealed public servants were instructed to find a way to approve the project before the government had concluded consultations with First Nations.

A Finance Department official says that as a Crown project in the national interest, Canada has special allowances to proceed that may not be available to a private-sector company.

Canada approved the project in November 2016, following an expanded environmental review process that included additional consultations with Indigenous communities and assessing the amount of additional emissions likely to result from additional production.

Trudeau has long insisted the project is in Canada's national interest and is a pivotal part of the country's economic future.

Canada loses $15 billion every year on the sale of oil because the U.S. remains its only export customer, resulting in a lower price, Trudeau argues. A lack of capacity in pipelines or in rail cars to ship oil produced in Alberta is also hurting Canada's energy sector.

-with files from Carl Meyer and The Canadian Press

Editor's note: This article was updated at 11:05 a.m. and again at 11:30 a.m. on May 29, 2018, with additional quotes and background.