Trans Mountain given more billion-dollar lifelines as debt costs, risks to taxpayers soar

The federal government has quietly guaranteed between $1.75 billion and $2 billion in new commercial bank loans for the Trans Mountain Corporation so it will have enough cash to complete its long-delayed and massively over budget West Coast pipeline expansion.

If that money is borrowed, the project’s total cost to the government will now sit at around $35 billion, seven times more than what Ottawa paid in 2018 to acquire the existing Kinder Morgan pipeline that was built in the 1950s as well as plans for its future expansion project.

The new loans – which will ensure the corporation has enough cash to complete construction; put the new pipeline in service; and start carrying greater volumes of oil later in 2024 – are guaranteed through the “Canada Account” at the Export Development Corporation (EDC). The information was posted to the website of the EDC, a federal Crown corporation, on the Friday before Christmas.

The Canada Account is a federal-government vehicle used to fund political projects that “are determined by the Minister for International Trade to be in Canada’s national interest,” according to the EDC’s website.

Canada Account loans often involve projects that commercial banks wouldn’t otherwise finance or approve without government backstopping because the projects carry too much financial and other risks for private lenders to assume alone.

The new loan guarantees come at the same time Trans Mountain quietly wrote off over $1 billion on the $4.7 billion which the government paid to acquire the company in 2018, Global News has learned.

It calls this a “goodwill impairment expense.”

The write off and new loans come as the Liberal government is preparing to put the expanded pipeline into service in the spring of 2024 and then try to sell part or all of its pipeline later this year.

Possible acquirers include Indigenous investors, pension funds and or other pipeline companies, or even a combination of those three types of investment groups.

But some potential buyers have already dialed back their enthusiasm for a partial or complete ownership stake of Trans Mountain, citing the government-backed venture’s ongoing operational uncertainties and growing pile of debt.

Scott Burrows, the chief executive officer of Pembina Pipeline Corp., told investment analysts during a conference call in November that his company needs Trans Mountain to resolve construction, regulatory and tolling issues while displaying more operational and financial certainty before making any kind of offer for the government company.

“Pembina, like any other prudent commercial purchaser, requires the many outstanding issues related to the project to crystallize in order to prudently and appropriately assess the opportunity and determine next steps,” Burrows added.

Paul Poscente, the executive director of a non-profit called Nesika Services, told Global News in an email this week that he was no longer interested in working with Trans Mountain.

As interested buyers shuffle to the sidelines, the government’s new loan guarantees represent the equivalent of a massive new mortgage tied to the pipeline’s future, all bankrolled by taxpayers.

The actual market value of the pipeline, two experts say, is now projected to be worth less than half the value of all the loans taken out to complete its construction. The Parliamentary Budget Officer has agreed, saying in June 2022 that Ottawa’s “2018 decision to acquire, expand, operate, and eventually divest of the Trans Mountain assets will result in a net loss for the federal government.”

This means that, depending on how a sale is structured and whom the buyers are, the feds may have to absorb as a loss the difference between the construction costs and eventual sale price. That gap could then be absorbed by each and every Canadian.

“The debt is guaranteed by the government of Canada,” says Stephen Ellis, an analyst with Morningstar. “Absent the guarantee, I question whether anyone would lend the project capital, as presumably, they can also work out that the project is worth around $15 billion.”

In a statement to Global News, Trans Mountain stated that the $1-billion goodwill write-off was triggered by “increased domestic interest rates and significant factors related to the commencement of the Expansion Project.”

Robyn Allan, an independent economist whose decade-long cost projections on Trans Mountain have proven extremely accurate, argues that the goodwill writeoff is because the market value of the pipeline has become far less than the debt being accrued to build it.

Duff Conacher, of the Democracy Watch citizens’ non profit group, said the Trans Mountain expansion project has become a socio-political “white elephant” for the Liberal government because it is trying to appease diametrically opposed stakeholders among different voter groups.

“They are willing to waste and sacrifice billions of dollars of taxpayers’ money to show foreign investors and the business community that we can complete big projects while not abandoning the fossil fuel industry,” Conacher said.

Because the Liberals have backed and bailed out a pipeline, the Conservatives now can’t accuse them of being anti-big oil, Conacher said. “It’s going to cost way more, I expect.”

Soaring Debt 

The troubled Trans Mountain pipeline expansion is being financed with two kinds of loans.

The first is the money borrowed directly from the federal government through the EDC’s Canada Account. In its last quarterly report, the Crown corporation that owns Trans Mountain, the Canada Development Investment Corporation, reported this debt to be $16.5 billion.

There are also loans from a syndicate of Canada’s big banks, which have formed a group to make the loans that are now also guaranteed by the federal government. It’s unclear exactly which banks have lent how much.

The bank loan debt at last report was sitting at around $14.4 billion before Christmas, with a $16-billion debt ceiling or credit limit.

Though not indicated in the latest financial statements, it is likely that the value of the debt has risen beyond the $16 billion limit, prompting the pre-Christmas credit limit increase of $2 billion.

Interest in kind

In 2022, Finance Minister Chrystia Freeland, whose department oversees the Trans Mountain Expansion Project’s finances, said Ottawa would no longer bankroll the massive project.

“There will be no additional public money invested in [Trans Mountain Corporation],” the Minister announced at the time. “TMC will secure necessary funding to complete the project through third-party financing,” she said.

Allan, the economist, says Ottawa’s insistence that it will not advance any more public funds to Trans Mountain is not entirely accurate, because the government is backstopping additional loans and interest charges.

For example, on April 28, 2022, the feds quietly announced that interest payments on Trans Mountain’s debt would be paid “in kind.”

This tweak, made quietly with the stroke of a pen, means that interest is charged — but not actually paid until the loan becomes due. It’s essentially a lifeline for Trans Mountain that lets the company preserve cash.

It means that Trans Mountain can continue accruing debt, but will not have to repay that debt until the loan term is up, which at this point, is in August 2025, a federal election year.

In a statement, an official from the Department of Finance rejected the notion that Ottawa was throwing more public money at the project. Moreover, the official added, “the company is paying a fee to the Government of Canada for the loan guarantees.”

The Liberal government – and some business commentators – remain bullish on the new pipeline’s potential to increase Canadian oil exports to Asia and boost prices Canadian oil fetches in that region, pointing to a Bank of Nova Scotia report from last summer.

The Scotiabank report predicted that Trans Mountain might generate a before interest and taxes profit of $2.4 billion in 2025, and $2.6 billion in 2026, after the extra Alberta oil starts gushing through the expanded pipeline to tanker ships on Canada’s West Coast.

The Scotiabank analyst, Robert Hope, even suggested Trans Mountain was worth $26 to $29 billion, but that was before a whole new series of problems arose and the pipeline project took its $1 billion write-off.

More cash needed for the project

It’s unclear why Trans Mountain needs more cash to finish a project that it says is 98 per cent complete.

The last time it announced a cost overrun, in March 2023, the pipeline giant blamed a range of factors, including supply chain challenges, soaring inflation, challenging terrain, less productive rookie labourers and unforeseen weather events (wildfires and floods), for the skyrocketing costs.

One possible explanation for the need for more funds is a 2.3-kilometre stretch of construction in B.C.’s Fraser Valley that is causing the company a considerable delay.

Last fall, the company went before Canada’s energy regulator to argue that its original construction method of drilling an underground pipe through this stretch had hit snags due to hard rock formations in the area.

In its original application, Trans Mountain’s engineers had recommended a 36-inch pipe be drilled. But last fall, it reversed course, arguing that a narrower pipe would work as well.

But the energy regulator rejected that application five days before Christmas, citing unconvincing evidence from Trans Mountain that it could get the job done safely.

“The Commission of the Canada Energy Regulator has determined that Trans Mountain did not adequately address concerns about pipeline integrity and related environmental protection impacts,” the regulator stated in its reasons for rejecting the application.

(Trans Mountain re-applied to the energy regulator and a second hearing on the pipe size variance is scheduled for today, January 12).

Prior to that ruling, Trans Mountain had warned of a “catastrophic” two-year delay, and untold billions in additional losses, should the energy regulator reject the pipe size variance application.

It’s not unusual for the proponents of big infrastructure projects to go to the feds, or to the banks, cap-in-hand.

Ottawa gave the massively over-budget Lower Churchill Hydroelectric project in Labrador loan guarantees on $9.2 billion in bond debt borrowed from 2013 to 2017, debt which is still partly owing.

The feds are also handing out billions more to bankroll electric battery manufacturing plants, wind farms, and all sorts of other energy-related projects too.

Yet Trans Mountain’s case is precarious as experts say the company will only be able to pay off its debts with the tolls or fees that it is charging oil shippers in the future. Without increases to current tolls, the experts say, future toll revenues generated would only cover half the project’s costs.

(Global News has independently verified the claim that tolls, as currently established, would only pay for about half of the pipeline’s ballooning cost).

The energy companies that pay the tolls, meanwhile, are challenging Trans Mountain’s plans to impose large increases to them, arguing they are too high and they didn’t know about or approve them. If the toll increases are rejected, nobody knows what will happen.

As for the recent $2 billion loan guarantee increase, it is impossible to know whether the request had anything to do with the construction hassles in the Fraser Valley that Trans Mountain noted would result in “catastrophic” delays.

But the Export Development Corporation’s approval of the additional $2-billion loan guarantees came just two weeks after the energy regulator rejected Trans Mountain’s bid to change its construction method along the contentious stretch.