TransCanada Corp. (TSX: TRP) (NYSE: TRP) has filed a notice of intent to initiate a claim under Chapter 11 of the North American Free Trade Agreement (NAFTA) in response to the US Administration's decision to deny a presidential permit for the Keystone XL pipeline on the basis that the denial was arbitrary and unjustified.
TransCanada also has filed a lawsuit in the US Federal Court in Houston, Texas, asserting that the President Obama's decision to deny construction of Keystone XL exceeded his power under the US Constitution.
Further, as a result of the permit denial, TransCanada is reviewing the approximate C$4.3 billion (US$3.1 billion) carrying value invested in the project and related assets, and expects that an estimated $2.5 billion to $2.9 billion after-tax write-down will be recorded in the company's fourth-quarter results. The non-cash charge will reflect anticipated asset recoveries, as well as the recognition of certain income tax benefits and will not impact the company's “A” grade credit ratings. Additional tax benefits of up to $0.4 billion may be realized in the future under certain circumstances. TransCanada also intends to stop capitalizing interest on the project effective Nov. 6, 2015, being the date of the permit denial. The company continues to expect its common share dividend to grow at an average annual rate of 8–10% through 2020.
TransCanada's legal actions challenge the foundation of the US Administration's decision to deny a presidential border crossing permit for the project. In its decision, the US State Department acknowledged that the denial was not based on the merits of the project. Rather, it was a symbolic gesture based on speculation about the perceptions of the international community regarding the Administration's leadership on climate change and the president's assertion of unprecedented, independent powers.
The US State Department concluded that the Keystone XL pipeline would not significantly increase global greenhouse gas (GHG) emissions and that, in fact, alternative methods of oil transportation were more GHG intensive.
Through the NAFTA claim, TransCanada will be seeking to recover more than US$15 billion in costs and damages that it has suffered as a result of the US Administration's breach of its NAFTA obligations.
The NAFTA claim asserts that TransCanada had every reason to expect that its application would be granted, as the application met the same criteria the US State Department applied when approving applications to construct other similar cross-border pipelines – including the existing Keystone pipeline, which was approved in under two years, in contrast with the seven years that the Administration took to make a decision on Keystone XL. The Keystone Pipeline System has now transported more than 1.1 billion barrels of Canadian and American oil through Canada and the US.
Furthermore, in the federal court filing, TransCanada asserts that the Administration's action was contrary to Congress' power under the US Constitution to regulate interstate and international commerce. While the president has traditionally granted permits on narrow, established grounds, any such power does not exist when Congress has acted to the contrary or when the decision is based on the unprecedented and symbolic grounds that are the foundation of the denial in this case. In early 2015, both houses of Congress passed a bipartisan bill approving the construction of Keystone XL, which the president later vetoed.