For Kinder Morgan, the decision made by Canada’s National Energy Board has a deep—and disturbing—financial impact in several ways
On April 8, Kinder Morgan Canada held an unusual Sunday conference call to announce an immediate halt to all non-essential spending on the controversial Trans Mountain pipeline, threatening to pull the plug on the project completely unless the escalating political conflicts over the pipeline could be resolved by May 31.
Kinder Morgan’s announcement set off a furor of finger-pointing and political posturing. Alberta’s premier threatened trade retaliation against British Columbia for standing in the way of the pipeline, Canadian premier Justin Trudeau hinted that he could complete the project with taxpayer money, and BC’s premier dug in his heels, recommitting his government to defending the coast from the risk of an oil spill.
But a few days later—and lost in the hubbub following the announcement—Canada’s National Energy Board (NEB) quietly issued a decision that must have given Trans Mountain executives a serious case of heartburn: the parent corporation of Kinder Morgan Canada, the Houston-based Kinder Morgan, Inc., would have to set aside a half-billion dollars to cover the costs of a potential oil spill.
In early 2017, the National Energy Board required Kinder Morgan Canada to maintain a line of credit of $500 million Canadian with its corporate parent to cover short-term costs to contain and clean up oil spills. But Kinder Morgan had petitioned to replace this cash guarantee with a “credit facility”—akin to a corporate credit card—that it had arranged with a consortium of Canadian banks. If the NEB had agreed to this request, the pipeline’s corporate parent would no longer have to keep a half-billion dollars of ready cash on hand to deal with spills.
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But the NEB ruled that Kinder Morgan’s effort to shift responsibility for cleanup off their books simply did not meet the Board’s legal requirements:
“The Contingent Credit Facility does not provide Trans Mountain with funds on demand and at its sole discretion … is not irrevocable … [and] not meet the requirements of automatically renewing and remaining in force.”
Because the board deemed the proposed credit facility inadequate, it ordered the company to keep its original line of credit in place—meaning that Kinder Morgan, Inc. must continue to keep at least a half a billion dollars available to be spent on a moment’s notice to deal with a Trans Mountain oil spill.
For Kinder Morgan, this move has a deep—and disturbing—financial impact in several ways:
It complicates KMI’s finances
For the moment, KMI must continue to extend a $500 million credit line to its subsidiary. This either saddles the company with extra credit costs, or ties up capital that the company otherwise would prefer to use for new capital projects, reducing debt, or paying back investors. In January 2017, the NEB acknowledged the company’s claim that securing “a parental/affiliate guarantee from Kinder Morgan could … increase Trans Mountain’s cost of borrowing.” Kinder Morgan, Inc. was hoping to sidestep those costs and free up its credit—but the NEB has squashed that option.
It undermines KMI’s “pay nothing” strategy for Trans Mountain
KMI had been working for years to build a financial firewall around its Canadian subsidiary and the risky and controversial Trans Mountain pipeline, pledging to investors that it would not use its own capital to build the pipeline. For example, the company’s 2017 annual report says:
“Subsequent to its IPO, KML has obtained a credit facility and completed two preferred share offerings. KMI expects KML to be a self-funding entity and does not anticipate making contributions to fund its growth or specifically to fund the TMEP.” [Emphasis added.]
The NEB denial now forces Kinder Morgan to remain financially responsible for its subsidiary, throwing a monkey wrench into its plan to put no capital on the line for the pipeline.
It signals massive oil spill liability for the parent company
Kinder Morgan Canada’s annual report lists the daunting financial requirements the company faces to meet oil spill cleanup standards under Canadian law, including absolute liability of up to $1 billion regardless of fault as well as $500 million of short-term cash on hand to pay for cleanup. Most important, the law holds the company accountable for unlimited—yes, unlimited—payouts for damages and cleanup costs if found at fault for a spill. Kinder Morgan itself lays out the situation:
“In June 2016, the Pipeline Safety Act, which enshrines in law the “polluter pays” principle, came into force in Canada. Under the Pipeline Safety Act, in the event that an environmental incident occurs with respect to one of our pipeline assets, we will have unlimited liability if we are determined to be at fault or negligent.” [Emphasis added.]
Under this law, a major oil spill could trigger a financial crisis for Kinder Morgan, Inc. To guard against this, the company has attempted to use subsidiaries and shell corporations to wall off the Trans Mountain project, and its Canadian subsidiary as a whole, from the rest of the company’s assets. But NEB’s requirement that the parent company keep a half-billion in cash on hand may signal the potential for Kinder Morgan, Inc. to remain on the hook for full cleanup costs—raising serious concerns for the parent firm’s finances in the event of a catastrophic spill.
Now, more than ever, Kinder Morgan has excellent reason to pull the plug on Trans Mountain. The upside of the project is limited by law; the NEB specifies a tariff rate that ensures that the company can only realize modest profits from the project. But the downside is quite literally unlimited: a single spill could potentially bankrupt the company. And for a company with a safety record as tarnished as Kinder Morgan’s, the financial downside of a spill—including a $500 million cash fund just to ante up for the Trans Mountain game—may prove to be one of the deciding factors that sours Kinder Morgan on the long-term prospects for the pipeline.
It would be so refreshing if the financing side of this project actually killed it. Capitalism eating itself, what a concept.
To understand the destructiveness of a toxic, tar sands spill, Google and read, “Michigan oil spill effects could be repeated here”, by Michelle Borland -Smith. What happened to the Kalamazoo River, we do not want to happen to the Fraser River watershed. Dump KM, to save beautiful BC.
After the tragedy of Lac Megantic, the public rightly expects public liability for large losses to be covered by proponents. There, the Canadian taxpayers would up on the hook for several hundred million dollars . The Federal Government quietly spent $75-million to settle with victims and creditors, and has refused to say how many hundreds of millions it spent to rebuild the town centre destroyed by an entity with only $25 million in public liability coverage.
With the explosion at the Husky Energy Refinery at Superior Wisconsin last Friday we see the fragility of the residents of Burnaby. A stand pipe must have blown off an Oil Storage Tank spewing oil right over the Containment Berm. This facility is near Lake Superior, it necessitated the Evacuation in a 4 mile radius elongated by 10 miles south because of the toxic plume. There was an expected wind shift towards the City of Duluth MN with a population of 80 K.
This is a wake-up call for having explosive Infrastructure near residential areas.
We’re all cavemen without oil. All the bleeding hearts need to come to terms with that. Your car, house, computer, clothes on your back, the pavement that you love to drive on, the tar shingles on the roof of your house and the roof over your head couldn’t exist without oil. Get over it.
If we don’t start changing our ways now, our children, and grandchildren will be stuck with the financial, and environmental cost of our greed. I personally refuse to leave that kind of legacy for them, and I find it sad that you are willing to risk their future.
You talk as if there are not alternatives for all the product you mentioned. We are a smart species, what we lack is the will, and the selflessness.
The 500 million is only for a spill on the pipeline route overland. I do not believe the tanker lines are required to maintain a half billion oil spill fund. Someone spilled a couple thousand litres of bunker fuel oil into Vancouver harbor and didn’t bother to show up for court. Can’t even collect a fine. God help us if there is a spill on the coast we got world class nothing in terms of clean up the ocean. KM not on the hook for that.
Dr. Lola Jean Stewart
Thoroughly thoughtful move by the NEB. Since the Transmountain pipeline leaked 6 times in Jasper National Park, leaks are to be expected. In the past, pipeline companies have pleaded poverty to avoid cleanup costs.
A good day for Canada.
According to CBS, “Exxon spent more than $3.8 billion in clean up costs, fines and compensation. But in 1994, an Anchorage jury found Exxon acted recklessly and awarded victims of the spill $5 billion in punitive damages. An appeals court later cut that award in half… But after nearly 15 years in appeals, the case finally reached the U.S. Supreme Court last year. The justices reduced that $2.5 billion in punitive damages to just more than $507 million.”
ExxonMobil made $295 billion in profits from 2001-09 and more than $6 billion in the first quarter of 2010.
Excellent! The polluter pay principle as applied in the case of the Kalamazoo spill cost the company $10 billion but it is still not cleaned up.
One estimate of a major spill in the Salish Sea from an oil tanker would cost up to $40 billion in direct and indirect costs recently. The company Kinder Morgan would be liable though.
Kinder Morgan may already be on the hook for all those miles and miles of pipes they are stockpiling. With more than 600 applications for the rest of the permits still needing to be submitted and approved, the pipes metal composition was also not submitted nor approved. They had no data because it was a guess to get the order in BEFORE the tariffs Trump has threatened to impose on Canada. It could affect prices all around. Now it will only cost the shareholders. Is that why Kinder Morgan’s selling price went up to $10 billion from last weeks $7.4 billion cost?
Im smiling big time.
These events as outlined have me smiling from ear to ear.
Km parent company worked too hard to spend nothing.
I love this