Canada’s purchase of the Trans Mountain Pipeline: Financial and Economic Considerations – Updated CDEV Financial Reporting – July 2020
In May 2020 the Canada Development Investment Corporation (CDEV) published its Annual Report 2019, and in June 2020, published its First Quarter Report for 2020. PBO examined these documents 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 19 months of operating results for the TMP system (September 2018 to March 2020, inclusive).[^1][^2][^3][^4][^5][^6]
Over the entire period, operating revenues totalled $728 million, arising primarily from transportation tolls from the ongoing operations of the TMP. Operating expenses were $366 million for the same period.
As of March 31, 2020, CDEV held $6.3 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 $223 million. CDEV also reported a $172 million depletion and depreciation expense on its pipeline assets.
In its first 19 months of public ownership, CDEV-owned Trans Mountain Corp. (TMC) entities reported a total net income of $29 million.
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 Annual Report. This test was conducted “due to an update in the TMEP execution plan”.[^11] The results from this analysis are reported in Table 3. A similar test was not conducted in the 2020 First Quarter Report as “no indicators [of impairment] were noted” at March 31, 2020 and “despite changes in the macroeconomic environment, neither TMC’s existing operations nor TMEP construction has been materially impacted to date”.[^12]
CDEV has changed the parameters of its sensitivity analysis in the Annual Report 2019. Previously, a 10% increase in construction costs was considered; this report considers the impact of a $600 million increase in construction costs. Previously, a 1-year delay in construction of the TMEP was considered; this report considers the impact of a 1-year delay and a $600 million increase in construction costs. This is in addition to a previous change in the discount rate used, from 9.0% to 8.6%. The reason for these changes is not disclosed in financial reporting.
In addition, given material changes to both the construction timeline and cost of TMEP, modelling related to the sensitivity analysis would have substantially changed. PBO has sent an information request to CDEV for updated modelling and analysis; this information has not been received as of the publication of this update.