Taxpayers Could Bear the Losses in Trans Mountain Pipeline Sale

Canada’s acquisition and expansion of the Trans Mountain Pipeline (TMC) in 2018 has long sparked controversy over its financial feasibility. With the expansion officially operational as of May 1, 2024, new analysis from the Parliamentary Budget Office suggests that the project’s sale may lead to considerable taxpayer losses.

Despite significant federal investment and the project’s completion, the profitability of divesting the pipeline hinges on multiple unpredictable factors, including contract renewals, toll models, fluctuating oil demands, and Canada’s changing climate policies.

The PBO initially evaluated the Trans Mountain project in a 2022 report, based on cost projections from the pipeline’s incomplete expansion, estimating expenses at $21.4 billion. By May 2024, the Trans Mountain Expansion Project concluded, with total costs coming in significantly higher at $34.2 billion.

The pipeline has now entered its initial 20-year phase of contracted operations, but the increase in project costs raises questions about long-term profitability. The PBO’s updated 2024 report, excluding prior sunk costs, offers a revised financial analysis, focusing on the project’s current prospects as Canada contemplates a future sale.

To determine the present-day value of the Trans Mountain Pipeline, the PBO employed a discounted cash flow model that evaluates expected future cash flows while adjusting for potential risks linked to contract renewals, toll structures, and market volatility. This analysis centers on two primary scenarios.

In the first scenario, TMC renews its initial contracts after 20 years, which would yield a valuation of $33.4 billion. Alternatively, a reversion to a cost-of-service tolling model — a setup where tolls would only cover TMC’s operational costs — reduces TMC’s value to $29.6 billion.

A significant uncertainty is whether TMC will succeed in renewing its 20-year contracts, which currently secure the pipeline’s operational capacity. By the early 2040s, these agreements will expire, and contract renewals may prove challenging as Canada accelerates its transition toward renewable energy. A decrease in oil demand could lead to excess pipeline capacity, making cost-of-service tolling preferable for shippers but significantly reducing TMC’s revenue potential.

In a cost-of-service framework, the tolls would only cover TMC’s operating expenses, with limited profit margins. The PBO noted in its report, “A cost-of-service tolling framework would be far less lucrative and would lower the present value accordingly.” The PBO included these alternative scenarios to showcase how the uncertainty around tolling frameworks could dramatically impact Trans Mountain’s financial viability.

The PBO’s analysis highlights how minor changes in underlying assumptions can significantly impact TMC’s valuation. For instance, adjustments to pipeline utilization rates, toll levels, or the discount rate applied to cash flows can alter the valuation by billions of dollars. Lower-than-expected utilization rates or tolls could reduce TMC’s value, while a decrease in the discount rate, which measures financial risk, could boost it substantially.

According to TMC’s 2023 balance sheet, the corporation holds $35.2 billion in assets against liabilities of $26.9 billion, resulting in $8.3 billion in shareholder equity. Given these figures, even under favorable conditions, TMC’s estimated sale price would not cover the full asset value. Selling TMC near its estimated value in 2024 would likely necessitate recording a loss for the Canada Development Investment Corporation.

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