December 10, 2018 Read More →

Trans Mountain pipeline costs are adding up for Canadian government

National Observer:

The Trans Mountain oil pipeline is costing a Canadian Crown corporation some staggering interest expenses that cast doubt on strong revenues from the infrastructure touted in the federal government’s recent economic update.

The interest expenses were $20 million over a single month in September, right after Prime Minister Justin Trudeau’s government purchased the pipeline and related assets from Texas energy company Kinder Morgan for $4.5 billion. As part of the purchase, the government also had to set aside an additional $500 million as a security deposit in case of environmental damage, and this appears to be part of the interest expenses.

If the interest expenses continue to pile up at that rate over the year, they will come to represent a larger sum than the amount of money that the government has said the pipeline is on track to raise this year primarily from toll charges.

Oil pipelines earn revenues by charging tolls to companies that are shipping fuels on the infrastructure. The Trudeau government has said that the proposed Trans Mountain expansion project, if completed, would generate more revenues and could be sold back to the private sector, along with existing assets, as a profitable venture.

In a new quarterly report, the Canada Development Investment Corporation (CDEV), the Crown corporation that now owns and operates the pipeline through a network of subsidiaries, said it incurred $21.27 million in interest expenses related to Trans Mountain during the third quarter ending Sept. 30.

The pipeline from the oil patch to the west coast and its related expansion project was acquired by Ottawa in a deal that cleared Aug. 31. These two dates represent approximately a month’s worth of expenses, or $255.24 million over the year. That is well above the “over $200 million” that Finance Minister Bill Morneau’s fall fiscal update said the pipeline was on track to make in “earnings before interest, taxes, depreciation and amortization,” or EBITDA, a type of metric used in finance to show a performance snapshot. EBITDA doesn’t include things like capital investment costs or expenses linked to debt.

Tom Sanzillo, director of finance at the Institute for Energy Economics and Financial Analysis, co-authored a report in June with Kathy Hipple, a financial analyst at the institute and corporate finance lecturer at Bard College, stating that the Canadian government was facing at least $11.6 billion in costs to complete the pipeline. “This transaction and the cost of further planning and construction could add a $6.5 billion unplanned expenditure to Canada’s budget during FY 2019,” the report states, boosting Canada’s projected deficit by 36 per cent.

Sanzillo told National Observer that while it is not uncommon for a government economic development transaction to keep revenues, capital costs and operational expenses separate, the interest expenses and fiscal update numbers represent an incomplete picture. “For a project of this size and importance,” said Sanzillo, “the executive has a responsibility to also produce an all-in-one, true and accurate inclusive project accounting that answers the question: ‘How much is this costing the Canadian taxpayer?’ These financial disclosures are partial, and absent a full accounting, are irrelevant. Because it is only a partial explanation, it says nothing about the financial viability of the project.”

More: The Trudeau government’s Trans Mountain purchase has triggered staggering interest expenses

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