Canada to buy Kinder Morgan’s Trans Mountain Expansion Project

Kinder Morgan Canada Ltd. has reached an agreement with the Canadian government to sell the Trans Mountain Expansion Project (TMEP). Canada will purchase the crude transportation project and the pipeline and terminal assets constituting the existing Trans Mountain pipeline for $4.5 billion in a transaction expected to close in August and intended to ensure TMEP’s timely completion.

The agreement will guarantee resumption of work for the summer construction season. Federal loan guarantees will ensure that construction continues through the 2018 season.

TMEP involves building 1,150 km of 36-in. OD pipeline, generally paralleling the route of the existing system. The expansion will carry 590,000 b/d of crude from Alberta to coastal British Columbia for export, bringing total capacity to 890,000 b/d. Beginning construction this year should allow the expanded system to enter service in 2020.

The Canadian government noted that the core assets required to build TMEP “have significant commercial value, and this transaction represents a sound investment opportunity.” The government does not, however, intend to own TMEP long term. “At the appropriate time, Canada will work with investors to transfer the project and related assets to a new owner or owners, in a way that ensures the project’s construction and operation will proceed in a manner that protects the public interest,” the government said in a press release.

Kinder Morgan will work with the government to find a third-party buyer for both the existing Trans Mountain pipeline and TMEP.

The government will extend federal indemnity to protect any prospective new owner from costs associated with “politically motivated delays.” The province of Alberta will also contribute to get the project built. Alberta’s contribution would act as an emergency fund and would only come into play if required due to unforeseen circumstances. In return, Alberta will receive value commensurate to their contribution, through equity or profit-sharing.

Canada’s Minister of Finance Bill Morneau noted the deepening conflict between Alberta and British Columbia regarding TMEP in announcing the acquisition: “Division among provinces—such as the dispute that has arisen between Alberta and BC—cannot be allowed to fester. Especially not when the resulting impasse threatens both the livelihood of thousands of workers and Canada’s solid reputation as a good place to invest. And so, for the last few weeks I have been in intense negotiations with Kinder Morgan, Trans Mountain’s owner. Discussions became necessary when the political uncertainty in British Columbia made it difficult for the company to proceed with construction.”

BC Premier John Horgan, governing in coalition with the Green Party, had pledged to block the pipeline despite federal approval granted in December 2016. Alberta subsequently moved to limit energy shipments to British Columbia (OGJ Online, Apr. 23, 2018).

Ratings agencies also cited the interprovincial dispute in their initial statements. “The announced sale by Kinder Morgan Canada of its Trans Mountain Pipeline system and TMEP is credit positive for Kinder Morgan Inc.,” said Terry Marshall, a Moody’s senior vice-president. “The sale removes the significant risk attached to the TMEP expansion, eliminating at least $6.4 billion (Can.)—before potential cost overruns—of additional capital to complete the project and the uncertainty of construction scheduling and completion, given the opposition to the project from various stakeholders.”

Contact Christopher E. Smith at chriss@ogjonline.com.