Toll-road builder and operator Transurban Group (ASX: TCL) has reached an agreement with the Victorian Government to contribute an extra $2.0 billion to complete the West Gate Tunnel project.
Tunnelling had been at a stand-still while Transurban, Victoria Government and contractors CPB John Holland Joint Venture debated over who should pay for the cost of contaminated soil found at the site in 2019.
The market has reacted subduedly to the deal, with the Transurban share price just 0.29% lower to $13.62.
“Interest of all parties”
The last update about the project was that all parties had entered remediation but negotiations remain challenging and may not result in a commercial agreement.
Fortunately, a resolution has been reached, meaning construction will restart in early 2022.
The project will cost an extra $3.4 billion, with Transurban and the Government contributing $1.7 billion each.
Transurban will also incur an extra $300 million as part of the company’s share of site activation, insurance and project costs.
The contractor has foregone additional constructions costs and revenue totalling $1.6 billion, impacting profits margins and overheads.
Positively, there has been no changes to concession rights or tolling arrangements. Transurban will charge once the project is completed.
Transurban will be able to operate the project with a 4.25% escalation regime until 2029 and then CPI price increases until 2045.
Transurban will fund the $2.0 billion in extra costs through its existing balance sheet capacity in addition to inflows from the sale of assets over the coming years.
Cost balloons above $10 billion
The West Gate Tunnel project was originally planned to be completed in 2022. But the completion date was pushed back to 2023 following the soil contamination issue.
Now the project is expected to be delivered by late 2025.
Furthermore, the total cost of the project has now blown out past $10 billion, noticeably above the $6.7 billion agreed back in 2017.
“Transurban acknowledges the situation has been disappointing for all stakeholders however we believe the agreement enables the most efficient and timely completion of the project, which Transurban believes is in the interest of all parties, Victorian road users and the broader community”
Traffic update
Transurban also released a traffic update. Sydney, where Transurban derived the lion’s share of its revenue, is now above back above pre-pandemic levels.
However, Brisbane, Melbourne and North America all remain at or below 2019 levels.
The business reiterated its first-half distribution of 15 cents per share and said its FY22 distribution will be in line with free cash excluding capital releases.
