Canada’s purchase of the Trans Mountain Pipeline: Financial and Economic Considerations – Updated CDEV Financial Reporting – May 2021

In April 2021, the Canada Development Investment Corporation (CDEV) published its Annual Report for 2020. PBO examined this document as part of our 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 28 months of operating results for the TMP system (September 2018 to December 2020, inclusive).^[1],[2],[3]

Over the entire period, operating revenues totalled $1,045 million, arising primarily from transportation tolls from the ongoing operations of the TMP. Operating expenses were $546 million for the same period.

As of December 31, 2020, CDEV held $9.1 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 $262 million. CDEV also reported a $251 million depletion and depreciation expense on its pipeline assets.

In its first 28 months of public ownership, CDEV-owned Trans Mountain Corp. (TMC) entities reported a total net income of $40 million.

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

Loans payable

As of December 31, 2020, CDEV had borrowed $9.1 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 $4.4 billion has funded construction activities related to TMEP. All loan facilities are due August 2023. The interest rate charged is 4.7%.

CDEV established a loan facility that allows it to borrow money as needed to finance construction. The limit of this loan facility was $2.6 billion until the end of 2019, which then increased to $4.0 billion on January 1, 2020. A Second Amending Agreement was executed on October 1, 2020, increasing the available credit to $5.1 billion, with an additional increase to $6.1 billion on January 1, 2021.[4]

Outstanding amounts by loan facility
(Table 2)

$ Millions

CDEV performed a goodwill impairment test as of the end of 2020 and determined that it did not result in an impairment charge. CDEV notes that “despite changes in the economic environment due to the impact of the global COVID-19 pandemic, neither TMC’s existing operations nor TMEP construction has been materially impacted to date.”[6]

As part of this goodwill impairment test, CDEV conducted a sensitivity analysis based on the assumptions used to estimate the fair value of the pipeline system.[7] Table 3 outlines the results from the sensitivity analysis, and compares it to the results from their 2019 Annual report and PBO’s December 2020 report on the Trans Mountain Pipeline system.[8]

Sensitivity analysis of the value of the pipeline system
(Table 3) 

$ Millions

For both the increase in construction costs as well as the 1-year delay and increase in construction costs, the impact on the fair value of the pipeline system is consistent with the results in the PBO report.  

There is a variation between CDEV and PBO’s analysis on the impact of a change in the discount rate. It is possible that some of the variation is a result of the difference in the methodologies used to calculate the value of the pipeline system. CDEV included a terminal value after twenty years of the TMEP being in service (with a growth rate of 2%), while PBO’s analysis only included cash flows for 40 years after TMEP’s in-service date.^[9],[10]  CDEV has also further decreased the discount rate used from 8.6% at the end of 2019 to 8.1% at the end of 2020.