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Trans Mountain’s financial problem is becoming harder to hide behind positive cash flow. The Crown-owned pipeline company has negotiated a settlement with its oil-company customers that cuts contracted tolls by roughly 10 per cent. That matters because the existing toll framework already recovered only about 45 per cent of the $34.5-billion construction cost, according to analysis filed by Tsleil-Waututh Nation with the Canada Energy Regulator.
The new settlement pushes the central question in one direction: how much of the project’s cost will the Canadian public never get back?
I interviewed Eugene Kung of West Coast Environmental Law, who helped prepare the Tsleil-Waututh filing. His argument is that Trans Mountain’s public reporting confuses two very different ideas. A pipeline can generate billions of dollars of revenue and still destroy value if that revenue is insufficient to recover the capital used to build it.
That distinction matters because Trans Mountain now says the negotiated tolls can support an internal rate of return of 5.5 to 6 per cent. Yet the company previously put commercial return thresholds in the range of roughly 12 to 15 per cent. The new filing does not, in Kung’s view, provide enough underlying financial modelling to explain either how the lower return was calculated or why the benchmark has changed so dramatically.
There is another consequence. Any future buyer of Trans Mountain will value the asset according to the cash flow its tolls can generate. Lower tolls may provide shippers with certainty and improve contracted utilization, but they also lower the revenue stream attached to the asset. That can translate directly into a lower sale price and a larger public write-off.
This would already be an important argument if TMX were an isolated case. Unfortunately, it’s not.
Ottawa and Alberta are now considering another West Coast oil pipeline that could cost tens of billions of dollars. If governments use TMX as the financing model, Canadians need to understand what that model actually produced.
Kung’s formulation is useful: Trans Mountain should be treated as a red flag, not a blueprint. The interview is about why.
