Trans Mountain posts $36 million loss to date

Financing costs total $87 million in first seven months of government ownership

Pipe is being stockpiled in anticipation of a construction start later this summer. | Trans Mountain

The Trans Mountain pipeline posted a $36 million net loss for the federal government in the first seven months that it owned the pipeline, according to the Parliamentary Budget Officer.

A big chunk of that loss is attributable to $87 million in financing – i.e. interest on the debt the government incurred to buy the pipeline from Kinder Morgan Canada (TSX:KML).

Were it not for the interest payments on the debt, the pipeline would have generated $36 million in profits over the seven-month period examined by the PBO.

By the end of this year, Kin Lo, an accounting professor at the University of BC's Sauder School of Business, expects the pipeline could be slightly in the black, thanks to increased toll revenue.

The federal government bought the existing Trans Mountain pipeline and the Trans Mountain Expansion Project (TMEP) in 2018 for $4.4 billion, of which $1.1 billion was for money already spent or committed to the expansion before it was halted by the courts. To make the aqusition, the federal government borrowed $5 billion, at an interest rate of 4.7%.

In the first seven months that the government owned the pipeline, it generated $229 million in operating revenue, according to a PBO analysis of the financial reporting by the Canadian Investment Development Corp. (CDEV), the Crown corporation now responsible for the pipeline assets.

The operating expenses for the pipeline totalled $132 million, and depletion and depreciation costs were $61 million. Financing costs (interest payments on debt) was $87 million.

Lo said operating expenses were lower for the first three months of this year, compared to the September to December period of 2018. He attributes this to the transition after the federal government acquired the pipeline from Kinder Morgan. He said legal costs and staffing adjustments might account for higher operating expenditure in 2018, compared to the first three months of 2019. And he expects a 30% increase in toll charges will improve the pipeline's bottom line, going forward.

"If the expenses in these first three months of 2019 are reflective of the remainder of the year, combined with the 30% higher tariff rates in effect since May 1, I would expect the pipeline to turn in a modest profit of $15-20 million for the year 2019," he wrote in an email to Business in Vancouver.

As a number of observers have pointed out, the real value for the federal government in buying the pipeline lies in its expansion. In a 2018 financial statement, Kinder Morgan Canada estimated the expanded pipeline would generate $900 million in revenue annually.

If, for some reason, the twinning project – estimated to cost between $7.4 billion to $9.4 billion – was never completed, the government would need to write off about $2 billion. That includes money already spent on the expansion and good will payments.