Canada’s purchase of the Trans-Mountain Pipeline: Financial and Economic Considerations – Updated CDEV Financial Reporting

In May 2019, the Canada Development Investment Corporation (CDEV) published its 2018 Annual Report and 2019 First Quarter Report. PBO examined the most recent current operating results of the existing Trans Mountain Pipeline (TMP) system and the newly published sensitivity analysis of goodwill impairment.

Current Operating Results of the Trans-Mountain Pipeline System

CDEV has now reported seven months (September 2018 to March 2019) of operating results for the TMP system (Table 1).1,2 CDEV presents their reporting under International Financial Reporting Standards (IFRS).

Operating revenues totalled $229 million, arising primarily from transportation tolls from the ongoing operations of the TMP. Operating expenses were $132 million.

As of March 31, 2019, CDEV held $4.8 billion in outstanding loans to finance the acquisition and construction of the pipeline assets.3 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 $87 million. CDEV also reported a $61 million depreciation expense on its pipeline assets.

Overall, in its first seven months of public ownership, CDEV-owned Trans Mountain Corp. (TMC) entities reported a net loss of $36 million.

This is consistent with the results CDEV previously reported in its 2018 Third Quarter Report.4

CDEV’s Sensitivity Analysis for Goodwill Impairment

CDEV’s Annual Report also presented the results of a goodwill impairment test (Table 2, columns 1 and 2). Goodwill is recorded when the purchase price of an asset is higher than its fair value. In this specific situation, it primarily reflects the value of the option to expand the existing pipeline.

The test consisted of sensitivity analysis of the fair value of the assets given changes in key assumptions, namely: the discount rate applied; the construction cost of TMEP; and delays in the construction and operation of TMEP.

CDEV’s sensitivity analysis was determined using various unobservable inputs and assumptions. This includes an approximately 9 per cent discount rate and probability-weighted scenarios of various in-service dates for the TMEP, ranging from 2023 to 2026. CDEV also included potential scenarios where TMEP would not be put into service due to construction not being completed.

PBO replicated CDEV’s sensitivity analysis (Table 2, columns 3 and 4). We inputted identical changes in key assumptions into our own financial model, which was based on information from Kinder Morgan’s public filings in August 2018.

Our results are generally consistent with those published by CDEV. That said, our results are less sensitive to changes in discount rates and construction delays, while more sensitive to construction cost overruns.

  1. Canada Development Investment Corporation (2019). Annual Report 2018.
  2. Canada Development Investment Corporation (2019). First Quarter Report 2019.
  3. The $4.8 billion in loans are sourced from two credit facilities: a $4.7 billion loan on an Acquisition Facility to purchase the Trans Mountain Pipeline entities; and a $120 million loan on a Construction Facility to construct the TMEP. Until March 2019, CDEV also held a $500 million loan on a NEB Facility to provide financial assurance required by the NEB.
  4. Canada Development Investment Corporation (2018). Third Quarter Report 2018.
  5. Globe and Mail (2018). “Trans Mountain pipeline construction could restart in 2019 under NEB timeline, CEO says”.
  6. Kinder Morgan reported capital spending on TMEP of $444.7 million from January to August 2018. 
    Kinder Morgan Canada Ltd. (2018). Form 10-Q, Page 39.
    TMC reported capital outlays on TMEP of $184.1 million from September to December 2018. Part of this relates to an accounting concept, allowance for funds used during construction (AFUDC), which pertains to the interest expense associated with financing the pipeline expansion.
    Trans Mountain Corporation (2019). Management Report, Page 6.
    This adds up to $628.8 million in capital spending on TMEP from January to December 2018.

Related posts