Kinder Morgan's fairy tale
By Judith Lavoie, January 2015
The Houston-based pipeline company says it’s a good corporate citizen but its record in Canada doesn’t support that claim.
The complexities of corporate tax law rarely make compelling reading, but Robyn Allan believes British Columbians will be fascinated and outraged if they take a close look at her analysis of how Kinder Morgan is sucking money out of Canada and paying minimal taxes.
Allan is a thorn in the corporate paw of Kinder Morgan, which wants to twin the Trans Mountain pipeline and triple the flow of bitumen from Alberta’s oil sands to Burnaby. While opposition to the planned pipeline has been strong, what sets Allan apart is a background that makes it tough for critics to discount her in-depth financial investigations.
The independent economist is a former president and CEO of the Insurance Corporation of BC and her many private and public sector executive positions have included a stint as senior economist for BC Central Credit Union and financial vice-president of Parklane Ventures Ltd.
The path tracing how Kinder Morgan avoids paying Canadian taxes is labyrinthine, but the nub is that Houston-based Kinder Morgan was set up in the US as a Master Limited Partnership, an entity that does not exist in Canada.
“It’s a different kind of company…it’s traded publicly on the stock exchange and you could buy a unit and then have the right to receive income from its activities, including the Trans Mountain pipeline,” Allan said in an interview.
Instead of creating net income, a Master Limited Partnership creates cash flow, which is distributed to unit holders and, as a bonus, avoids most US taxes because it derives its income from the development and transportation of minerals or natural resources.
Kinder Morgan consolidated its tax position in August by restructuring, something that the company announced to investor analysts in Houston would “realize over 20 billion dollars in cash tax savings over the next 14 years.”
Allan believes Kinder Morgan’s corporate culture of minimizing taxes spills over into the company’s Canadian dealings and she discovered from poring over documents that, despite the company’s profits and sizeable Canadian interests, Trans Mountain has paid an average of only $1.5 million annually over the last five years in federal and provincial taxes and received Canadian tax refunds in 2009 and 2011.
For example, Trans Mountain generated $167 million in distributable cash flow in 2013, but received a Canadian tax refund of $4.2 million, Kinder Morgan Canada president Ian Anderson told analysts in Houston.
Allan points out that represents a siphoning off of resources from the Canadian economy to be given to US shareholders. “And that flies in the face of the fairy tale they want to tell us about how much they contribute to the economy,” she says. “They suck money out, which is why I asked Revenue Canada for an audit. I have serious concerns that this tax planning they are engaged in may not be appropriate under the law or in the spirit of the law…I have a feeling they are making decisions on avoiding taxes,”
Calls from Focus to Trans Mountain were referred to Kinder Morgan Canada external relations, but there was no response before our deadline.
Meanwhile, Allan has not heard whether Canada Revenue Agency will agree to conduct an audit and CRA spokeswoman Colette Turgeon said in an emailed response to Focus’ questions that confidentiality provisions of the Income Tax Act prevent the CRA from confirming if an audit is planned or ongoing. Turcotte noted that individual cases relating to Master Limited partnerships cannot be discussed, but Canadian legislation has a basic requirement of a 25 percent withholding tax on certain payments to non-residents. “A tax treaty may reduce the amount, but not to zero.”
The oil and gas sector is considered one of Canada’s significant industry sectors, Turgeon wrote. “To effectively manage the tax-related risks of the sector, the CRA has established an Oil and Gas Industry Coordinating Office, where industry specialists provide technical advice to oil and gas specialized auditors.”
Corporations can claim federal and provincial tax credits if they meet the criteria, which helps make Canada an increasingly attractive place to do business, Turgeon said. “Corporate tax credits are part of this system.”
Kinder Morgan, with an enterprise value of more than $100 billion, has a history linked to Enron Corp, best known for its massive accounting fraud and subsequent bankruptcy. Founder and CEO Richard Kinder is a former Enron president, who left in 1996 after he was passed over for the position of CEO—a job handed to Jeffrey Skilling, who is now serving a 24-year prison sentence after being convicted in 2006 of multiple federal felony charges related to Enron’s financial collapse.
Kinder Morgan was formed in 1997 when Kinder and William Morgan acquired Enron Liquids Pipeline for $40 million. The company, relying heavily on Master Limited Partnerships, grew rapidly and, through numerous partnerships and subsidiaries, now owns or operates 180 terminals and about 83,000 kilometres of pipelines, including more than 4000 kilometres in Canada.
Kinder takes a salary of only $1 a year, but, according to financial journals, collected $380 million in dividends from his companies in 2013.
Allan believes it is common for energy companies that want to build pipelines or terminals to overestimate the amount of taxes they will be contributing to the local economy, but she is convinced Kinder Morgan is taking the exaggeration to levels that amount to misinforming Canadians.
“Here’s what concerns me most, as an intervener at the [National Energy Board] hearings, that they say they are great contributors to the fiscal purse when the exact opposite is true. It’s most troubling,” she said. “It doesn’t make sense to me whatsoever that a company that pays that kind of benefits to US shareholders can have such a minimal [tax] obligation in Canada.”
The Province failed to ask economic questions at the hearings and the lack of information was exacerbated by the National Energy Board, which, operating under new rules, refused to order Kinder Morgan to answer Allan’s economic questions.
“Kinder Morgan said they were irrelevant and the board said it agreed with Kinder Morgan. I was shocked,” said Allan, who then went to other sources to obtain information about the company’s finances and tax plans.
“It shows the absurdity of the National Energy Board process. The public thinks the NEB is looking at something and they’re not,” said Allan. She believes policy changes brought in by the Harper government, including time restrictions, mean the NEB process favours companies rather than a fair and balanced review.
Allan worries that, especially with the backdrop of arrests of pipeline opponents on Burnaby Mountain, once people discover they are being given misleading information about financial benefits, they will start to distrust the system and that could undermine civil society.
One of those who believe the public trust has already been undermined is Nathalie Chambers of Madrona Farm in Saanich, whose activism is usually centred on protecting farmland and the Agricultural Land Reserve.
Chambers, who was among those demonstrating on Burnaby Mountain, said she has come to believe that energy and farmland issues are linked. “Everywhere I turn, big oil is coming up. The ALR is being dismantled because the regulations are getting in the way of oil and gas development,” she explained.
Chambers feels that with 2015 being a federal election year it is extraordinarily important that Canadians educate themselves about how the Harper government is supporting tar sands development and the major energy companies while muzzling scientists.
“We need political reform. We need to be able to trust the science and we need to be able to finance [opposition]. We are up against the deepest, deepest pockets,”said Chambers.
Adding to public suspicion of Kinder Morgan is the company’s history of accidents and critics have accused the company of focusing on increasing dividends for shareholders rather than spending resources on pipeline maintenance.
Burnaby Mayor Derrick Corrigan, an implacable opponent of the pipeline twinning, told Vancouver council last year that the company’s reaction to a 2007 spill that damaged 50 houses and dumped 250,000 litres of crude oil into Burrard Inlet convinced him that Kinder Morgan is not a good partner. “They underestimate risks, they constantly trivialize risks, they continually talk about the remoteness of odds in those risks and then they work to limit their own liability,” Corrigan told council. “If you look at research on them, Kinder Morgan has a history of pipeline accidents all over North America.”
In addition to the 2007 pipeline rupture, Kinder Morgan has seen several smaller spills in BC. In June 2013 a small spill near Kingsvale forced a shutdown of the Trans Mountain pipeline; a 2012 spill at the Sumas terminal in Abbotsford infuriated residents, although the company said the 110,000 litre spill was completely contained; and in 2009 crude oil spilled from a tank at Kinder Morgan’s Burnaby Mountain terminal.
For those who oppose the Trans-Mountain twinning, a temporary respite may come with dropping oil prices, which is forcing energy companies to look carefully at expensive capital projects.
But Allan wants Canadians to take a more philosophical view and question why they have to expend energy fighting the company.
“It’s bad economic strategy, so we should not have to waste time and effort asking about what it will do to the environment. The pipeline expansion will not bring financial or economic benefits to Canada,” she said emphatically.
Judith Lavoie has won four Webster awards and has been nominated for a National Newspaper Award and a Michener Award. Twitter @LavoieJudith.