Canada’s purchase of the Trans Mountain Pipeline – Financial and Economic Considerations - Update
This note responds to additional questions raised by parliamentarians following the release of our report. To ensure equal dissemination, we decided to incorporate our responses in this posting.
Specifically, we examine the current operating results of the existing Trans Mountain Pipeline system; the inclusion of capital gains tax revenue in the assets’ valuation; an alternate specification for the fiscal sensitivity of construction delays; and, the certainty of shipper contracts.
Current Operating Results of the Trans-Mountain Pipeline System
The Government of Canada reports current operating results from the existing pipeline system and related infrastructure as part of the Canada Development Investment Corporation’s (CDEV’s) quarterly and annual financial reports.
As noted during our briefing, the Government has only reported one month of results (Table 1). According to CDEV, operating revenues were $33 million, arising primarily from transportation tolls. Operating expenses were reported to be $17 million.
CDEV’s 2018 Third Quarter Report indicates that the pipeline purchase was financed through a $5.2 billion loan from Export Development Canada at a 4.7 per cent interest rate. Reported interest expenses for the one-month period were $21 million.
Finally, CDEV reported a $10 million depreciation expense on its pipeline assets.
It is unclear whether this single month of data is representative of ongoing results. As such, PBO will continue to monitor CDEV’s financial reports.
| Metric | Value | Description |
|---|---|---|
| Operating revenues | 33 | $27 million from pipeline transportation tolls; the balance from leases of tanks in Edmonton and other revenue. |
| Operating expenses | (17) | Excluding interest and depreciation. |
| Interest | (21) | CDEV funded the Trans Mountain purchase with a $5.2 billion loan bearing 4.7 per cent interest. |
| Depreciation | (10) | Depreciation on a straight-line basis over the useful life of the asset. |
Parliamentary Budget Officer using reported data from CDEV’s Third Quarter Report
Parliamentary Budget Officer using reported data from CDEV’s Third Quarter Report
Results from September 2018, the first month the Trans Mountain assets were under public ownership.
Inclusion of the Capital Gains Tax Revenue in the Valuation
PBO believes that the estimated $325 million in capital gains tax revenue on the sale of the Trans Mountain assets should not be included as part of the value of the assets.
The assets’ value was derived by assessing the future expected cash flows of the assets. The capital gains tax does not affect those flows, and so does not intrinsically contribute to the value of the assets. In addition, had Kinder Morgan sold the Trans-Mountain assets to another buyer, the Government of Canada would still collect the capital gains tax revenue.
Alternate Specification for Construction Delays
Tables 2 and 3 provide supplementary sensitivity analysis on the impact of different discount rates (Table 2), construction costs (Table 3), and in-service dates (both Tables) on the value of the Trans Mountain Expansion Project (TMEP).
Tables 2 and 3 assume later in-service dates are due to delays in the initiation of construction activities.
| In-service date | 8 per cent | 9 per cent | 10 per cent | 11 per cent | 12 per cent |
|---|---|---|---|---|---|
| Dec 31st 2020 | 3,712 | 2,684 | 1,812 | 1,068 | 430 |
| Dec 31st 2021 | 3,384 | 2,403 | 1,581 | 890 | 306 |
| Dec 31st 2022 | 3,133 | 2,204 | 1,437 | 802 | 274 |
| Dec 31st 2023 | 2,901 | 2,022 | 1,307 | 723 | 244 |
Parliamentary Budget Officer using data from Kinder Morgan 14-A filings.
Parliamentary Budget Officer using data from Kinder Morgan 14-A filings.
These figures are calculated assuming a $9.3 billion construction cost. Changes to the in-service date may have an additional impact on NPV through toll adjustments due to interest charges during construction. This analysis does not incorporate the impact of these toll adjustments.
| In-service date | 8.4 billion (10 per cent lower costs) | 9.3 billion (Base scenario) | 10.4 billion (10 per cent higher costs) |
|---|---|---|---|
| Dec 31st 2020 | 2,305 | 1,812 | 1,318 |
| Dec 31st 2021 | 2,034 | 1,581 | 1,128 |
| Dec 31st 2022 | 1,853 | 1,437 | 1,029 |
| Dec 31st 2023 | 1,681 | 1,307 | 923 |
Parliamentary Budget Officer using data from Kinder Morgan 14-A filings
Parliamentary Budget Officer using data from Kinder Morgan 14-A filings
These figures are calculated assuming a 10 per cent discount rate. Construction costs for the TMEP have a capped (76 per cent) and uncapped (24 per cent) portion. Uncapped costs are passed on the shippers in the form of increased tolls. PBO’s sensitivity analysis of construction costs take this into account, assuming symmetric impacts (that is, a 10 per cent change in construction costs would affect only 7.6 per cent of distributable cash flows.
Certainty of Shipper Contracts
PBO’s revenue projections for the TMEP are predicated on 80 per cent of the capacity being committed – that is, shippers are contractually obligated to ship their committed volume of petroleum, or else pay for that capacity if shippers do not use it. However, NEB filings specify that shippers have the right to terminate their contracts if construction costs rise above a certain expected amount, specifically if the Certificate of Public Convenience and Necessity (CPCN) Cost Estimate and subsequent Revised Toll exceed the Initial Cost Estimate by approximately $1.4 billion.[^1]
It is yet to be determined whether construction costs will rise above the threshold at which shippers could terminate their contracts. PBO will continue to monitor NEB filings on costs and contracted capacity.