Canada’s purchase of the Trans Mountain Pipeline: Financial and Economic Considerations – Updated CDEV Financial Reporting (November 2019)

In November 2019, the Canada Development Investment Corporation (CDEV) published its Third Quarter Report for 2019. PBO examined it as part of its ongoing monitoring of financial reporting on the Trans Mountain Pipeline (TMP) and Trans Mountain Expansion Project (TMEP).

Current Operating Results of the Trans Mountain Pipeline System

As presented in Table 1, CDEV has now reported 13 months of operating results for the TMP system (September 2018 to September 2019, inclusive).[1],[2],[3],[4] CDEV presents their reporting under International Financial Reporting Standards (IFRS).

Over the entire period, operating revenues totalled $477 million, arising primarily from transportation tolls from the ongoing operations of the TMP. Operating expenses were $245 million for the same period.

As of September 30, 2019, CDEV held $5.4 billion in outstanding loans to finance the acquisition and construction of the pipeline assets. The loans were financed by the Canada Account, administered by Export Development Canada (EDC), at a 4.7 per cent interest rate. Financing costs for Trans Mountain Corporation totalled $157 million. CDEV also reported a $116 million depletion and depreciation expense on its pipeline assets.

Selected financial metrics of the unexpanded Trans Mountain Pipeline systemIn its first 13 months of public ownership, CDEV-owned Trans Mountain Corp. (TMC) entities reported a total net income of $21 million.

Selected financial metrics of the unexpanded Trans Mountain Pipeline system
Table 1

Figure 1

Source: CDEV Annual Report (2018), First Quarter, Second Quarter and Third Quarter Reports (2019); PBO Calculations
Note: Figures are presented based on International Financial Reporting Standards (IFRS).

Change in corporate tax rate and capitalized interest

In June 2019, the provincial government in Alberta enacted a multi-year corporate income tax reduction from 12% to 8% by 2022. As a result, in the second quarter of 2019, TMC recognized a deferred tax recovery of $52 million due to the reduction in future corporate income taxes payable to the province of Alberta.

In the third quarter of 2019, CDEV implemented a new accounting policy of capitalizing borrowing costs. This was due to a “change in the circumstances that allow capitalizing interest on capital projects with certain impediments to TMEP development being overcome at the beginning of Q3 2019”.[5] Capitalizing interest on borrowings related to construction reduced interest expenses in the quarter by $23 million.

Both the change in corporate income tax rate and the new accounting policy positively impacted net income in the second and third quarter of 2019, respectively.  Without these changes, CDEV would have reported a net loss for TMP entities.

Loans payable

As of September 30, 2019, CDEV had borrowed $5.4 billion to finance its pipeline assets. As reported in Table 2, these outstanding loans include $4.7 billion for the acquisition of the assets. The remaining $685 million has funded construction activities related to TMEP. All loan facilities as of September 2019 are due August 2023.

CDEV has established a loan facility of $4.0 billion that allows it to borrow money as needed to finance construction.[6]

Loan facilities of Trans Mountain Corp. (TMC)
$ Millions
Table 2

Figure 1

Source:        CDEV Annual Report (2018), First Quarter, Second Quarter and Third Quarter Reports (2019); PBO Calculations

Sensitivity Analysis

As part of a goodwill impairment test, CDEV performed a sensitivity analysis based on the assumptions used to estimate the fair value of TMEP in their 2019 Second Quarter Report.  This test was conducted “due to an update in the TMEP execution plan”.[8] The results from this analysis are reported in Table 3. A similar test was not conducted in the 2019 Third Quarter Report as “no indicator of impairment was noted”.[9]

Sensitivity Analysis by CDEV

Change in value of assets, $ Millions

Table 3

Figure 1

 Sources:      CDEV Q2 2019 Report, Note 8 CDEV Annual Report 2018, Note 14

Note:           The results of CDEV’s sensitivity analysis are presented as approximations.

The results of the sensitivity analysis in CDEV’s Second Quarter Report are in the same direction, but of higher magnitude than those presented in their Annual Report 2019. Although it is uncertain what the reason for these changes might be, CDEV has noted changes in the parameters used in their sensitivity analysis. The discount rate used was lowered from 9.0% to 8.6% and the completion timeline for the pipeline was shortened from 2023-2026 to 2022-2023.

PBO has sent an information request to CDEV for the data used to calculate its sensitivity analysis and details of its most recent project execution plan.

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