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22nd of July 2018

Politics



Kinder Morgan will get up to $1 billion to restart pipeline construction

Kinder Morgan Canada plans to restart construction on the Trans Mountain pipeline in August.

But to do that, it needs cash that doesn’t come from its own coffers, since the company halted spending on the project in April and will sell it to the federal government within the coming months.

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READ MORE: Trans Mountain outlines construction plans for next 6 months in Alberta, B.C.

How much cash exactly?

Up to $1 billion, according to an official from the Department of Finance, and it will not need to be repaid by the company.

Instead, the money will be made available in a fund backstopped by Export Development Canada that the company can draw from as it encounters costs from restarting work on the project.

Here’s what you need to know about how that $1 billion breaks down, what it will be spent on, and how it will likely be repaid.

How does this actually work?

On May 29, Finance Minister Bill Morneau announced the federal government would spend $4.5 billion to buy all of Kinder Morgan Canada’s Trans Mountain-related assets.

That includes the existing pipeline, the management team attached to the expansion project, and the Burnaby terminal at the end of the pipeline’s route.

WATCH BELOW: Morneau talks about when and how they would sell Trans Mountain pipeline

Along with that, his department also said the government had reached an agreement with Kinder Morgan to restart construction on the project this summer.

“The Government of Canada will guarantee financing for the 2018 summer construction season, through a loan guarantee from Export Development Canada,” read briefing materials provided by journalists at the announcement.

“This guarantee will ensure that construction work on the project is restarted without delay.”

READ MORE: Pipeline protesters rappel from Ironworkers Memorial Bridge, blocking tanker

What that means is Kinder Morgan did not want to have to pay for any further work on a project it is walking away from.

But the government has faced criticism that continued delays will cost construction jobs this summer for workers who were expected to have jobs in Alberta and B.C. as the project broke ground.

A loan guarantee means Kinder Morgan can restart work without having to pay for that work itself.

However, the details of exactly how much would be provided through that loan guarantee had not previously been made clear.

Who is paying for this?

To make the money available to Kinder Morgan, the government is setting up what’s known as a construction credit facility.

Such facilities are commonplace with construction projects, said Richard Masson, CEO of the Alberta Petroleum Marketing Commission and former vice-president for risk management at Nexen, because it limits risk to the company doing the work.

“It’s essentially a way to take away the risks from Kinder for doing work this summer that the federal government wants to see done to keep the pipeline on track,” he said.

WATCH BELOW: Morneau says Trans Mountain pipeline deal ‘has value’ and can be sold

Normally, the company doing the work would provide the backstop for the credit facility.

If the project could not be completed, it would then repay the costs it withdrew from the facility itself.

READ MORE: Study predicts Trans Mountain pipeline purchase will add to federal deficit

But the Trans Mountain expansion is different — Kinder Morgan has thrown up its hands and said it is no longer willing to invest more money in the project.

Having Export Development Canada backstop the loan guarantee for the credit facility is “a little bit abnormal,” Masson said, and shows Kinder Morgan wasn’t willing to take the risk itself.

The structure and amount, however, are not out of the ordinary for the industry, he said.

WATCH BELOW: Morneau says decision to buy Trans Mountain was to meet goals of project

“A construction credit facility would be a very common thing. What that means is there’d be a syndicate of banks, probably three to five, maybe seven banks in this billion-dollar facility. Most of them already have relations with Kinder Morgan — they’re all the big Canadian banks, typically,” he said.

Masson said once the money is borrowed from the facility, a bond can be issued into the market by the government.

“They’ll use the proceeds of that to pay down the construction facility,” he said. “Then they’ll keep drawing on the construction facility again until they get to the billion dollars.”

Masson said while he worked at Nexen, the company used the same approach to finance construction of its Sturgeon refinery in Edmonton.

The construction facility for that project was $3.5 billion.

“It’s the most flexible way to get the cash you need and then periodically, you finance that either by issuing bonds or the federal government just puts direct money into it,” he said.

What will happen next?

According to the filings made by Kinder Morgan Canada with the National Energy Board on Tuesday, work on the expansion will begin in Alberta in August.

Work in the North Thompson region of British Columbia will start in late September.

It will not only be manual labour that the company can draw from the construction facility to fund, though.

“The 2018 work plan includes a variety of activities required to construct the Expansion Project, including the work to acquire needed permits, finalize aspects of design, complete construction contracts, and clear land as needed,” the finance official said.

All of those things, Masson noted, are part of the usual range of activities considered in the construction phase of a project.

As well, once the government buys the pipeline — or finds another buyer — the construction facility will likely remain in place until the work is completed.

“Trans Mountain Pipeline L.P. entered into a credit agreement for the EDC-guaranteed lending facility on June 14, 2018,” the official said.

“Construction lending facilities are typically drawn down as required by work plans.”

Kinder Morgan’s original timeline for the project aimed to complete construction by the end of 2020.

Despite the kerfuffle, Masson said the plans submitted to the National Energy Board appear to suggest things remain on track.

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