troduction

Effective April 1, 2016, the Alberta Energy Regulator (AER) has amended its process for transfers of pipeline licenses in the province of Alberta.1 The pipeline transfer application now requires both the transferor (vendor) and transferee (purchaser) of a pipeline license to make ‘check the box’ compliance statements. The statements confirm the maintenance and transfer of all records required under thePipeline Rules and CSA Z662: Oil and Gas Pipeline Systems, as well as the transferee’s obligation to provide adequate records on request to the AER or incur a noncompliance event. The AER also indicates it will be conducting enforcement initiatives to ensure all required records have, in fact, been transferred.

According to the AER, the compliance statements do not impose new or additional requirements at law and are intended to ensure the transfer of all required records to the new licensee occurs before the pipeline transfer application is approved. However, the statements and targeted compliance enforcement will, in all likelihood, increase time and costs incurred by all parties involved in purchase and sale transactions involving pipelines.

Required compliance statements

Both the transferor and transferee of a pipeline licence must agree to the following statements in the licence transfer application submitted in the Digital Data Submission (DDS) system before the AER will process an application:

Transferor statement: The transferor hereby confirms that it has collected and retained all records required under the Pipeline Rules and CSA Z662. The transferor confirms that it has provided these records to the transferee by the effective date of the licence transfer. 

Transferee statement: The transferee hereby confirms that it has received all records required to be collected and retained under the Pipeline Rules and CSA Z662 from the transferor. The transferee is responsible for producing these records on request by the AER. Failure to do so constitutes a noncompliance of AER requirements.

The risks

The fundamental issue is the allocation of risk between the parties. The vendor can act in good faith and the purchaser can complete its due diligence but a post-closing noncompliance event could still occur. The parties should understand the three new risks posed by these compliance statements before negotiating a purchase and sale agreement involving a pipeline transfer in order to allocate the risks between them on an informed basis.

  1. The transferee (purchaser) effectively assumes legal responsibility for maintaining proper records for the time prior to acquisition

Transferees are responsible for ensuring all records transferred satisfy the applicable requirements. A transferee will be noncompliant if the transferred records are found incomplete and there is no due diligence defence available to shield the transferee from liability. The crux of the problem, simply stated, is that it may be impossible for a transferee to independently verify the completeness of the records for the time the pipeline was under the transferor’s operatorship.2

There are four things that prospective purchasers can do to protect themselves from unwittingly assuming the consequences of the vendor’s noncompliance.

  1. Due diligence

When purchasing a pipeline segment regulated by the AER, purchasers should take commercially reasonable efforts to identify what records are required under the Pipeline Rules and CSA Z662 and perform heightened due diligence of the vendor’s records to satisfy itself that the records are complete. As a pre-closing deliverable and condition precedent to closing, a purchaser could require the vendor to remedy any deficiencies in the records (as identified during the purchaser’s due diligence) to the purchaser’s reasonable satisfaction and at the vendor’s expense.

  1. Use a specific representation and warranty in the purchase and sale agreement

The purchase and sale agreement could have a specific representation and warranty from the vendor that all records required under the Pipeline Rules and CSA Z662 for the pipeline segment are true, accurate and complete for the period of time up to and including closing.

  1. Use an indemnity to protect the purchaser

The above representation and warranty should be backstopped by an indemnity in favour of the purchaser by the vendor which covers both expenses incurred to correct inadequate records transferred by the vendor (such as the completion of an engineering assessment that demonstrates the pipeline is fit for its intended purpose and service), and lost revenue directly resulting from the noncompliance (such as if the AER suspends operation of the pipeline pending its satisfaction that the records for the pipeline segment in question are adequate). The representation and warranty, and indemnity should survive closing for a period covering both the AER’s review and the time to take any remedial actions.

  1. Require all pipeline records are delivered to the purchaser as a closing item

All records for the pipeline included in the sale must be transferred to the purchaser before the application is made to the AER, as the application requires confirmation to that effect. In time-sensitive deals, this will add to the workload of the deal team but should not be left as a post-closing item.

  1. Incomplete records may erode the value received by the vendor for the assets

Post-closing record compliance is a risk inherent in every transaction involving the transfer of pipeline licences which must be negotiated between the parties. However, if the pipeline records maintained by the vendor are determined to be incomplete during early-stage due diligence by a prospective purchaser, the purchaser may insist on substantial provisions (as set out in (b) and (c) above) in the purchase and sale agreement to ensure the vendor ultimately remains responsible for any noncompliance losses and costs. This could diminish the net value received by the vendor for the disposed assets.

A vendor can help maximize value received in the sale by carefully reviewing its required records as part of its pre-disposition readiness, and correct any deficiencies prior to prospective purchasers conducting due diligence. Having complete records in the first instance will help foster the purchaser’s confidence that the risk of noncompliance with the AER is less of a real threat, and conversely provide the vendor with a negotiating position from which it may reasonably request more favourable provisions in the purchase and sale agreement regarding the pipeline records, such as qualifying any representation and warranty to the best of its knowledge and not indemnifying post-closing compliance risks or limiting the indemnified amount through the use of baskets or caps.

  1. The transfer of the pipeline license is a trigger for compliance enforcement by the AER

Parties should be prepared for compliance monitoring when applying to the AER to transfer a pipeline license. The AER has said that it will randomly select license transfer applications for monitoring, as well as conduct compliance monitoring during routine field inspections. It may also target reviews for pipeline segments that are considered high risk (such as where there is a major water crossing), and applications involving specific licensees with a history of noncompliance.3

Conclusion

While the AER maintains the new prescribed statements do not impose additional requirements on the transferor and transferee under the pipeline license transfer process, the practical effect is that the statements and compliance enforcement initiatives will very much add costs and complexities to all parties in purchase and sale transactions involving pipelines.