Max Fawcett, a freelance writer and columnist with the National Observer, recently tipped me off to some information within the report that I thought I’d go through here.
Last March, TC Energy announced that it was proceeding with constructing the pipeline, after Donald Trump reapproved a permit (following an earlier cancellation by Barack Obama).
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As part of the funding plan that made this construction possible, the Alberta government agreed to invest up to $1.1 billion (in US dollars) in equity towards the construction. Specifically, that equity would be in “certain Keystone XL subsidiaries of TC Energy”.
By the end of 2020, Alberta had invested US$1.033 billion in “class A interests”. It isn’t clear whether these “interests” were new shares issued by TC Energy or whether the government purchased them from other shareholders.
Traditionally, class A shares have provided enhanced benefits to the holder, including priority when dividends are paid out, preferences if the company is sold, and increased voting rights.
According to the annual report, the provincial government’s equity investment in the pipeline ranked above TC Energy’s own investment. In other words, Albertans owned more shares in the pipeline than the parent company of the pipeline did.
And those shares did come with “certain voting rights”. Even so, they were classified as “non-controlling interest”, which is another way of saying “minority interest”. In other words, the government didn’t hold enough voting rights to give them majority control over the direction of the pipeline.
As part of the investment agreement, TC Energy received a “call right” to the class A shares and the Alberta government received a “put right” for the shares.
Basically, this means that TC Energy could buy the shares at a specific price and the government could sell the shares at a specific price, “if certain conditions are met”.
Alberta’s class A interests were entitled to a return, which accrued quarterly and adjusted their carrying value: the cost of the investment minus any accumulated depreciation.
By the end of 2020, TC Energy had reclassified $630 million of Alberta’s class A shares as liabilities in anticipation of exercising the call right I mentioned above. Their contract with the government indicated that they could buy these shares in January 2021.
In addition to the equity purchase, the provincial government had promised US$4.2 billion in loan guarantees, which essentially meant that TC Energy could borrow up to that amount and the government would pick up the tab if they ever couldn’t pay it.
Speaking of the loan guarantee, despite Alberta promising it last March, TC Energy never took advantage of it until just this past January.
In fact, it wasn’t until 4 January 2021, that TC Energy “put in place a US$4.1 billion project-level credit facility to support construction of the Keystone XL pipeline, that is fully guaranteed by the Government of Alberta”.
A credit facility is a type of loan that allows a borrower—usually a business—to take out money over an extended period rather than having to reapply for a loan each time they need money.
Anyhow, that was 16 days before Joe Biden was inaugurated as the 46th president of the United States. Biden had indicated last spring that if he were to be elected, one of his first orders of business would be to stop the construction of the Keystone XL pipeline.
So despite being promised last March that the government would guarantee financing up to US$4.2 billion, the company waited over 9 months to get the financing, 2 months after Biden’s election and nearly 1 month after the electoral college confirmed the election results. Knowing full well that Biden still intended on cancelling the project in a matter of days, the company chose to follow through with the funding anyhow.
Regardless, 4 days after TC Energy got the financing, they took US$497 million of it and repurchased a majority of the Government of Alberta’s class A shares.
Given that the company had reclassified US$630 million of the government’s shares as liabilities, but repurchased only US$497 million worth of shares, it’s unclear how many shares the Alberta government still owns, based on the information available in the annual report.
As expected (and promised), Biden cancelled the pipeline permit on 20 January 2021. That same day, TC Energy suspended construction of the pipeline “while it assesses the implications of the revocation and considers its options along with its partner, the Government of Alberta, and other stakeholders”.
Also effective that day, the company “ceased accruing a return on the Government of Alberta Class A Interests”.
So where does this leave the credit facility? Well, note 30 in the annual report says, in part,
Any principal outstanding under the project-level credit facility is fully guaranteed by the Government of Alberta without recourse to the Company. The suspension of the advancement of the project does not require immediate repayment of the debt as repayment is dependent upon certain other events or decisions specified in the credit facility agreement. While the credit facility remains outstanding, the Company continues to be responsible for ongoing interest charges.
According to the 2021–2022 provincial budget released last week, here is how Alberta’s financial commitment fares as a result of the shutdown of the pipeline construction:
|Equity payment||$0.384 billion|
|Estimate of loan guarantee||$0.892 billion|
|Total forecasted exposure||$1.276 billion|
Furthermore, the budget said the following:
The Government of Alberta is working with TC Energy to explore all options to advance the project and is strongly encouraging the Government of Canada to do the same. If KXL does not proceed, the Alberta government will explore all options to recoup the investment. Budget 2021 does not include any provisions for expense which may be incurred in that pursuit.