Ottawa in $4.5 billion deal to buy Kinder Morgan pipeline

Kinder Morgan Canada [KML-TSX] said Tuesday May 29 the Government of Canada has agreed to purchase its Trans Mountain Pipeline expansion project (TMEP) for $4.5 billion and “to work with the board” to seek a third party buyer for the project.

As part of the agreement, Ottawa will fund the resumption of the pipeline planning and construction work by guaranteeing the project’s expenses under a separate Federal Government recourse credit facility until the transaction closes.

News of the agreement comes just days before a May 31, 2018, deadline set by Kinder Morgan which had suspended non-essential spending due to opposition from the British Columbia government and a previous lack of clarity regarding the way forward for the project.

“We are pleased to reach agreement on a transaction that benefits the people of Canada, TMEP shippers and KML shareholders,” said KML Chairman and CEO Steve Kean.  “The outcome we have reached represents the best opportunity to complete TMEP and thereby realize the great national economic benefits promised by that project.”

The original Trans Mountain Pipeline was built in 1953 and continues to operate today with no ocean petroleum spills. The proposed expansion is essentially a twinning of the existing 1,150-km pipeline between Edmonton, Alberta and Burnaby, British Columbia.

Expected to cost approximately $7.4 billion, it will create a pipeline system with a nominal capacity rising from 300,000 barrels per day to 890,000 barrels per day.

Once the sale is complete, Ottawa will continue the construction on its own, with a view to selling the entire project at a future date when market conditions are right, said Canadian Finance Minister Bill Morneau during a press conference to announce details of the agreement.

Export Development Canada will finance the purchase, which includes the pipeline, pumping stations and rights of way along the route between Edmonton and Vancouver, as well as the marine terminal in Burnaby, B.C., where oil is loaded onto tankers for export.

Morneau said Ottawa does not plan to be a long-term owner and is in negotiations with interested investors, including Indigenous communities, pension funds and the Alberta government.

On Tuesday, Alberta Premier Rachel Notley called the agreement “a major step forward for all Canadians. The project has more certainty than ever before.”

Kinder Morgan Canada shares rallied on the news, rising 0.54% or $0.09 to $16.68 on Tuesday.

British Columbia has filed a reference case with the province’s top court to determine if it has jurisdiction to limit expanded shipments of heavy oil through the province.

British Columbia Premier John Horgan has said clarity is needed to ensure the B.C. government protects its coastline. Critics have argued that the move is a tactic to delay or block the project by creating uncertainty.

Canadian Senator Doug Black recently underlined his view of the importance of Trans Mountain and pipelines in general to the Canadian economy, noting that:

• Pipeline operations added $11.5 billion to Canada’s gross domestic product in 2015, sustaining 34,000 full-time jobs.
• Twinning the Trans Mountain Pipeline will inject $7.4 billion into Canada’s economy through project spending and help our country export these resources by moving oil to the West Coast for marine transport to markets around the world.
• Combined government revenue impact for construction and the first 20 years of expanded operations is $46.7 billion.

Kinder Morgan said the parties expect to close the transaction late in the third quarter or early in the fourth quarter of 2018.