Canada Buys Kinder Morgan’s Trans Mountain Pipeline System

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One day before Kinder Morgan Inc. (NYSE: KMI) was very likely to shut down its project to expand the Trans Mountain pipeline system, the government of Canada agreed to purchase the existing pipeline system and the expansion project for C$4.5 billion (about US$3.46 billion).

The Canadian government, however, has no intention of owing the pipeline system for the long term. According to Tuesday’s announcement, Canada has agreed to fund the resumption of planning and construction work on the expansion project under a separate federal government recourse credit facility until the transaction with Kinder Morgan Canada, Kinder Morgan’s Toronto-traded subsidiary, closes in the second half of this year. Kinder Morgan Canada has agreed to work with the Canadian government through July 22 to seek another buyer for the system.

Kinder Morgan acquired the Trans Mountain system in 2005 when it acquired Canadian pipeline company Terasen for $5.6 billion. In addition to the 710-mile Trans Mountain system that then had a capacity of 225,000 barrels a day of crude oil transportation from Alberta to the coast of British Columbia, Kinder Morgan acquired more than 2,200 miles of Terasen pipelines, along with 27,000 miles of natural gas distribution lines and 1.1 million natural gas customers.

In 2007, Kinder Morgan expanded the Trans Mountain’s capacity to 300,000 barrels a day and announced the expansion to 890,000 barrels a day at the same time. The company set the cost of the expansion at $7.4 billion. Resistance from Canada’s First Nations and the province of British Columbia have stalled the pipeline, and Kinder Morgan said last month that it would make a decision by May 30 on whether to proceed with the project.

Canada’s federal government and Prime Minister Justin Trudeau are strong backers of the expansion, viewing it as a more direct route for the country’s oil sands production to buyers in Asia. Opponents see the expansion as an influx of new tankers with an increased potential for a spill in the waters around Vancouver.

Kinder Morgan assured shareholders that the company plans to meet its forecast for distributable cash flow in 2018 and that approximately $2 billion of the sale price would hit the parent company’s balance sheet.

Kinder Morgan shares traded up about 2.4% early Tuesday, at $16.27 in a 52-week range of $14.69 to $21.25. The consensus 12-month price target is $20.65.