Canada’s National Energy Board (NEB) is forcing Kinder Morgan Canada to maintain a C$500-million standing loan with its Houston-based parent company to cover the short-term costs of containing and cleaning up a future oil spill, throwing a wrench in the U.S. company’s determined efforts to avoid any financial responsibility for the project.
The parent company, Kinder Morgan Inc., “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,” Sightline Institute Energy Finance Director Clark Williams-Derry explains in a blog post this week. In its 2017 annual report, Kinder Morgan Inc. said it expected Kinder Morgan Canada “to be a self-funding entity and does not anticipate making contributions to fund its growth” or cover the cost of the pipeline.
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In other words—the parent company was trying to give its investors all the benefits of a pipeline project with predictable, locked-in profit, with none of the environmental or economic risks.
The NEB set the requirement for the $500-million line of credit in early 2017, Williams-Derry writes. “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.”
The Board denied that request, just days after Kinder Morgan’s April 8 ultimatum to the federal, Alberta, and B.C. governments to give it the “clarity” it needs to carry on with the project.
“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,” Williams-Derry states. “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,” either saddling the company with extra debt or tying up money it would want to use for just about any other purpose.
A key concern for the parent company is a provision in the 2016 Pipeline Safety Act that a company accept unlimited liability for a major oil spill in which it’s deemed at fault or negligent. “Under this law, a major oil spill could trigger a financial crisis for Kinder Morgan, Inc.,” Williams-Derry writes.
“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 the 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.”
For a company with its own “tarnished” safety record, he adds, the requirement “may prove to be one of the deciding factors that sours Kinder Morgan on the long-term prospects for the pipeline.”