Declines in oil investment, housing, consumer spending to halve Canadian GDP growth: report

CALGARY – A triple threat of falling consumer spending, a potential pullback in residential housing investment and anemic levels of oil and gas expenditures could cut Canada’s economic growth rate in half for the next 15 years, a new Boston Consulting Group report warns.

“We’ve gotten used to sustained growth that is the envy of a lot of other G7 and advanced countries,” Keith Halliday, director of BCG Centre for Canada’s Future, told the Financial Post. “Past performance is no guarantee of future performance and if these downside scenarios materialize, it will mean lower incomes, fewer business opportunities and less government tax revenue for social programs than we would expect.”

In a report released Tuesday, the consultancy said it expects Canada’s GDP growth rate to fall from a historical average of 2.4 per cent between 1995 and 2016 – a level of growth that outpaced all other G7 countries – to an average of just 1.2 per cent between now and 2030.

The decline in GDP growth will be led by a 0.9 per cent fall in consumer spending, another 0.3 percentage point decline in residential housing investment and a 0.1 per cent decline in oil and gas related capital expenditures, the report said.

“If you express these ideas as fractions of a percentage point, it doesn’t seem like very much, but compounded over 20 or 30 years, the impact is quite significant,” the Toronto-based Halliday said.

The report states that oil and gas makes up 18 per cent of the country’s GDP, 12 per cent of its jobs and 27 per cent of its exports, and “no matter how you slice it, the energy and mining sector makes up a significant portion of economic activity in Canada.”

BCG said that after capital expenditure “plummeted after the oil shock” of 2014, the Canadian economy has lost a major driver of future growth.

Data from the Canadian Association of Petroleum Producers shows capital investment in the oil and natural gas industry declined 62 per cent from $81 billion in 2014 to $31 billion in 2016, the last year for which data is available.

The BCG report warns that the 50 per cent fall in Canadian GDP growth would have significant consequences for the country’s economy and income levels.

If the current growth rate of 2.4 per cent growth persists, Canadian GDP per capita would rise to $60,000 by 2030 from $50,000 per person today. However, the expected 1.2 per cent average growth rate would leave Canadians GDP per capita stagnant at $50,000, over the same period given population growth forecasts.

Halliday and BCG managing director Vinay Shandal said they were not calling for a consumer spending bubble or a housing bubble in Canada to pop, but published the report to highlight the implications of what would happen if a slowdown in consumer spending materialized as expected.

Many watchdogs including The Organisation of Economic Co-operation and Development have also warned about rising household debt and inflated home prices in key Canadian cities that could lead to financial shocks.

At least in the short term, Canadian economic growth forecasts continue to trend closer to the historical average. A recent Scotiabank economic forecast pegged Canada’s real GDP growth rate at 3.0 per cent for 2017, 2.2 per cent for 2018 but predicted a fall to 1.5 per cent for 2019.

Similarly, the most recent long-term economic forecast from the Conference Board of Canada released last year expected Canadian economic growth in excess of 2 per cent in the near future but “over the long term, potential output will be limited to annual growth below 2 per cent as the aging of the population puts downward pressure on labour force growth.”

To boost Canadian economic growth long-term, the BCG report suggests two changes. First, Canada should complete “overdue reforms” like the elimination of trade barriers between provinces. Second, it should chase “big ideas” and emerging trends like robotics and artificial intelligence to boost Canada’s economy.

Financial Post

gmorgan@nationalpost.com

TransCanada looking to file amended Keystone pipeline application in Nebraska

TransCanada Corp. is seeking consent from Nebraska regulators to amend its Keystone XL pipeline application in a bid to tackle concerns over the alternative route that was approved.

In a hearing with the state’s Public Service Commission on Tuesday, a lawyer for the Calgary-based company said an amended plan would address issues that weren’t in the original application and that are unique to the alternative route. He didn’t specify what kind of issues, while stressing that TransCanada “strongly believes in this project.”

The commission ruled in favour of TransCanada’s project on a three-to-two vote last month — but for a different route through the state than the company had sought. While the decision seemed to remove a key hurdle to construction of the US$8 billion, 1,179-mile (1,897-kilometre) conduit, opponents have said they believe it will let them challenge the project because the new route wasn’t vetted at the same level as the original.

At Tuesday’s proceeding, a representative of environmental group Sierra Club and a lawyer for landowners argued that if the application was never denied, it cannot be amended. Opponents also noted that the separate set of landowners along the approved route haven’t had a chance to voice any concerns they may have about the project.

TransCanada and the U.S. government are facing a lawsuit challenging the decision to permit the project to cross the U.S.-Canada border. In November, a U.S. district judge rejected arguments to dismiss the lawsuit.

Even with Nebraska’s decision in hand, TransCanada still must formally decide whether to build the line, which would send crude from Hardisty, Alberta, through Montana and South Dakota to Nebraska, where it will connect to pipelines leading to U.S. Gulf Coast refineries.

 

Bloomberg.com

Solar is getting sick of being shunned by equity markets

Add Canadian Solar Inc. to the growing list of panel manufacturers looking to ditch public markets and go private.

The company’s chief executive officer, Shawn Qu, said Monday he’s offering US$18.47 in cash for all common shares that he and his wife don’t already own. In March, rival Trina Solar Ltd. finished a US$1.1 billion privatization deal. JA Solar Holdings Co., the world’s third-biggest publicly traded solar manufacturer, agreed last month to be taken private.

Consider them the start of what could prove to be a global trend as solar manufacturers, which have fought somewhat unsuccessfully for years to be valued more in Wall Street’s eyes, grapple with high levels of debt and volatility in demand.

“Investors in general have struggled to value solar stocks, and now you have the U.S. market up in the air” because of tax reforms that threaten the solar industry, Bloomberg Intelligence analyst Kit Konolige said. “The point of being in the public markets is you have more financing available on better terms. If you don’t have that, what’s the point of being public?”

Since the beginning of 2010, spot prices for solar modules have plummeted 83 per cent, averaging just 31.4 cents a watt as of Dec. 6, according to PVinsights pricing data compiled by Bloomberg. The slide, driven largely by more efficient manufacturing and capacity in China, have been squeezing panelmakers’ profits, making them increasingly difficult to value.

So is the U.S. tax plan that threatens to cripple a tax-equity investment vehicle that the industry has relied on for years to finance projects.

Another Listing?

For another reason Qu may be trying to take Canadian Solar private, consider Longi Green Energy Technology Co., a silicon wafer maker listed in China that has a market value in excess of US$10 billion. Canadian Solar has a market capitalization of about US$1 billion.

“One answer is Shawn Qu becomes a much richer man,” said Gordon Johnson, an analyst at Axiom Capital Management. “If I simply delist from the U.S. stock exchange and relist on the Chinese stock exchange, the value of my stock will probably increase substantially.”

That could also be the reason Trina went private and JA Solar agreed to — they’re both based in China. Qu grew up in China and built some of his company’s operations there. David Pasquale, a spokesman for Canadian Solar, declined to comment beyond the company’s statement on Monday.

Motivations aside, Qu’s offer price may prove too low to entice shareholders, according to Brad Meikle, a renewable energy analyst at Coker & Palmer Inc. It’s below US$32 a share, Meikle’s estimate for what Canadian Solar is worth, and well below his US$45 upside target.

Shares of Canadian Solar rose as much as 6.7 per cent to US$18.40 on Monday before closing at US$17.79 in New York. The company’s board has formed a special committee of independent and what it described as “disinterested” directors to consider the proposal.

JPMorgan Chase & Co. downgraded Canadian Solar to the equivalent of sell from hold and maintained its US$15 price target, according to a research note Tuesday.

“The stock has traded through our price target and we believe is now likely capped by the CEO’s take-private offer of US$18.47,” according to the note. “We do not believe a higher, competing offer is likely and there could still be risks associated with the deal itself.”

There are industrywide implications to Canadian Solar going private, Guggenheim Securities said in a research note late Monday: “We expect that the move may spur investor expectations of similar acquisitions of other publicly traded” solar companies.

Bloomberg.com

PepsiCo reserves 100 Tesla Semis, likely at $20,000 a pop

Reuters reported on Tuesday that PepsiCo had recently placed 100 reservations for Tesla Semis. The order is the largest public one to date and may have cost the food and beverage manufacturer as much as $200,000. (The Wall Street Journal reported in November that Tesla had bumped the price of reservations from $5,000 each to $20,000 each.) However, PepsiCo did not comment on how much it actually paid Tesla or whether its reservations were to buy the trucks outright or lease them.

PepsiCo told Reuters that it plans to use the trucks to distribute sodas and snack foods to retailers within a 500-mile radius of its manufacturing centers. The company said it is analyzing routes to find the optimal use case—either sending lighter snack loads longer distances or shipping heavy beverages shorter distances.

PepsiCo’s US fleet currently relies on 100,000 conventional semis, but the company has promised to reduce greenhouse gas emissions across its supply chain by 20 percent by 2030. That distant deadline may play into PepsiCo’s willingness to wait at least two years for Tesla’s electric trucks. Tesla CEO Elon Musk has promised that the semis will arrive in 2019. But the CEO has a history of being overly ambitious on estimated delivery time. (The company’s budget vehicle, the Tesla Model 3, suffered delays and poor production numbers even after the car was supposed to hit mass production this summer.)

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Canadian financial companies pledge $2.9 billion to overseas coal plants as feds push phase-out

OTTAWA — Canada’s national pension fund manager is among a group of Canadian companies that are undermining the federal government’s international anti-coal alliance by investing in new coal power plants overseas, an environmental organization says.

Friends of the Earth Canada joined with Germany’s Urgewald to release a report Monday looking at the top 100 private investors putting money down to expand coal-fired electricity — sometimes in places where there isn’t any coal-generated power at the moment.

The report lists six Canadian financial companies among the top 100 investors in new coal plants in the world. Together, Sun Life, Power Corporation, Caisse de depot et placement du Quebec, Royal Bank of Canada, Manulife Financial and the Canada Pension Plan Investment Board have pledged $2.9 billion towards building new coal plants overseas.

Urgewald tracks coal plants around the world and reports there are 1,600 new plants in development in 62 nations, more than a dozen of which don’t have any coal-fired plants now.

While Environment Minister Catherine McKenna is claiming to be a global leader on phasing out the dirtiest of electricity sources, private investors are “undermining that commitment,” says Friends of the Earth senior policy adviser John Bennett.

Canada and the United Kingdom last month teamed up to launch the Powering Past Coal Alliance, trying to bring the rest of the world on side with a campaign pledge to phase out coal as a power source entirely by 2030 for the developed world and 2050 for everyone else.

Twenty national governments and at least seven subnational governments — five of them from Canada — signed onto the alliance last month. The hope is to grow the number to 50 by the time the United Nations 24th climate change conference takes place in November 2018.

McKenna will meet with leaders and officials from the alliance this week in Paris, where French President Emmanuel Macron is hosting a climate change meeting to mark the two year anniversary of the Paris climate change accord. This meeting is largely focused on international climate finance as the world tries to meet the goal to have $100 billion a year to invest in climate change mitigation and adaptation projects in the developing world by 2020.

The accord commits the world to keeping the average global temperature from rising more than two degrees Celsius over pre-industrial levels by the end of the century. To do that, scientists suggest global carbon emissions have to start dropping in less than three years, and the only way that is going to happen is by shutting down coal plants.

Coal is responsible for almost half of global carbon dioxide emissions.

McKenna’s office did not respond to a request for comment.

Last week, McKenna was in China where she said she was talking about phasing out coal. While China is trying to cut its own coal use, it uses more coal to make power than the rest of the world combined. Hence, McKenna said it’s currently impossible to expect China to commit to eliminating it.

McKenna said she wasn’t planning to raise the issue of China investing in new plants outside its borders. Urgewald’s data show Chinese-owned companies are behind about 140 new coal plants in development outside China.

Turns out Canadian money is also financing international coal plants, through private investors.

Dale Marshall, national program manager for Environmental Defence, said the Paris meeting this week has a lot of work to do trying to figure out how national governments can increase their commitments but also leverage more from the private sector.

Erin Flanagan, director of federal policy for the Pembina Institute, said Canada can do more to discourage Canadians from investing in coal and encourage investments in clean energy. That could include a national requirement for investment companies to include climate change risks when publishing decisions about investment opportunities.

Energy Secretary Perry agrees to extension on pro-coal, nuclear rulemaking

On Friday afternoon, Energy Secretary Rick Perry said the US energy regulator could take an extra 30 days to make a decision on a proposed rule that would boost struggling coal and nuclear power in the US.

Perry proposed a rule in late September that would require grid operators to change how they value “reliability and resilience attributes” in energy generation. Specifically, generation plants with such attributes were defined by the Energy Secretary as plants that could keep a 90-day supply of fuel onsite. Although the proposed rule was written to appear energy-agnostic, it clearly favors coal and nuclear plants. Natural gas tends to be delivered by pipeline and is rarely stored onsite in large quantities, and wind and solar energy have free but variable fuel sources, though pioneers in the field are trying to mitigate this with the help of stationary storage.

Without government intervention, coal has become more expensive to burn compared to natural gas in many areas. It’s also a major contributor to climate change, something the president has falsely called a hoax.

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NEB rules in favour of Trans Mountain on Burnaby bylaw impasse

CALGARY — The National Energy Board ruled that Kinder Morgan Canada Inc. could ignore the City of Burnaby’s bylaws and start construction in the municipality on its stalled Trans Mountain expansion project.

In an announcement Thursday, the NEB issued an order declaring the company was not required to comply with two sections of the British Columbia city’s bylaws related to preliminary plan approvals and to tree cutting permits.

“This decision allows the company to begin work at its temporary infrastructure site near the Westridge Marine Terminal, and some work at the Burnaby Terminal, subject to any other permits or authorizations that may be required,” the NEB said in a statement.

May appeal

Gregory McDade, Burnaby’s lawyer, said the municipality will consider an appeal.

“We think the evidence was clear the municipality was regulating in good faith,” he said in an interview. “The NEB has ruled yet again in favour of the company, against the interest of the municipality, and that is a great concern to us.”

The regulators held two days of hearings in Calgary after the company complained the municipality, a staunch opponent of the $7.4 billion project, used stalling tactics to delay it, and putting it in jeopardy. The tactics included saying its staff was too busy, requesting time-consuming and unnecessary studies, duplicating information requests, and refusing to provide timelines.

On Monday, Kinder Morgan said a lack of clarity around municipal permit processes and related judicial process could swell startup delays beyond the previously expected nine months. The company says that it expects to lose about $75 million before certain deductions for every month the in-service date is pushed back.

The company promised the NEB it would follow the spirit of the bylaws, but could no longer wait for Burnaby to issue permits under a process it described as opaque and arbitrary. Six months after applying for them, it said it had yet to receive a single one and that it was in the dark about what it was required to do.

Without NEB action, the company said it would be impossible to predict when the project could be built.

The request triggered a constitutional question about whether a single municipality could stop construction of an inter-provincial pipeline approved and deemed in the public interest by the federal government.

The hearings were attended by lawyers representing the governments of Alberta and Saskatchewan, which sided with Trans Mountain, and representing B.C., which sided with Burnaby after its NDP government promised to use every tool at its disposal to ensure the Trans Mountain project never moves forward.

At the hearing, the city denied it was giving the company the run around and blamed its incompetence for the delays. It said the pipeline project was subject to the same rules as every one else and that proponents should have known how to meet its requirements.

Burnaby can seek leave to appeal at the Federal Court of Appeal.

“We are pleased with the decision we have received from the NEB today, as it reinforces our view this federally approved project is in the national interest,” Ian Anderson, president of Kinder Morgan Canada, said in a statement.

Financial Post
ccattaneo@nationalpost.com

NEB rules in favour of Trans Mountain on Burnaby bylaw impasse

CALGARY — The National Energy Board ruled that Kinder Morgan Canada Inc. could ignore the City of Burnaby’s bylaws and start construction in the municipality on its stalled Trans Mountain expansion project.

In an announcement Thursday, the NEB issued an order declaring the company was not required to comply with two sections of the British Columbia city’s bylaws related to preliminary plan approvals and to tree cutting permits.

“This decision allows the company to begin work at its temporary infrastructure site near the Westridge Marine Terminal, and some work at the Burnaby Terminal, subject to any other permits or authorizations that may be required,” the NEB said in a statement.

May appeal

Gregory McDade, Burnaby’s lawyer, said the municipality will consider an appeal.

“We think the evidence was clear the municipality was regulating in good faith,” he said in an interview. “The NEB has ruled yet again in favour of the company, against the interest of the municipality, and that is a great concern to us.”

The regulators held two days of hearings in Calgary after the company complained the municipality, a staunch opponent of the $7.4 billion project, used stalling tactics to delay it, and putting it in jeopardy. The tactics included saying its staff was too busy, requesting time-consuming and unnecessary studies, duplicating information requests, and refusing to provide timelines.

On Monday, Kinder Morgan said a lack of clarity around municipal permit processes and related judicial process could swell startup delays beyond the previously expected nine months. The company says that it expects to lose about $75 million before certain deductions for every month the in-service date is pushed back.

The company promised the NEB it would follow the spirit of the bylaws, but could no longer wait for Burnaby to issue permits under a process it described as opaque and arbitrary. Six months after applying for them, it said it had yet to receive a single one and that it was in the dark about what it was required to do.

Without NEB action, the company said it would be impossible to predict when the project could be built.

The request triggered a constitutional question about whether a single municipality could stop construction of an inter-provincial pipeline approved and deemed in the public interest by the federal government.

The hearings were attended by lawyers representing the governments of Alberta and Saskatchewan, which sided with Trans Mountain, and representing B.C., which sided with Burnaby after its NDP government promised to use every tool at its disposal to ensure the Trans Mountain project never moves forward.

At the hearing, the city denied it was giving the company the run around and blamed its incompetence for the delays. It said the pipeline project was subject to the same rules as every one else and that proponents should have known how to meet its requirements.

Burnaby can seek leave to appeal at the Federal Court of Appeal.

“We are pleased with the decision we have received from the NEB today, as it reinforces our view this federally approved project is in the national interest,” Ian Anderson, president of Kinder Morgan Canada, said in a statement.

Financial Post
ccattaneo@nationalpost.com