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Kinder Morgan closing in on investment decision for Trans Mountain

Kinder Morgan Inc. appears set to create a joint venture for its Trans Mountain expansion project within the first half of 2017, with a final investment decision following soon after.

"[The FID date is] a little bit uncertain, but we're thinking end of Q1, no sooner than the end of Q1 probably or Q2," Steven Kean, president and CEO of Kinder Morgan, said in a Jan. 25 analyst day presentation. "So those are the next steps and [we] expect to start construction in September of this year and then complete construction in December of 2019."

Kinder Morgan is finalizing their cost estimates for the project with contractors, and Kean expected it to go over the C$6.8 billion price tag previously announced. Kean said costs would likely go up to "the low to mid-7s." With the increase, shippers will be given the chance to turn back their contracted capacity, for which Kinder Morgan is confident they can find new takers due to the level of demand.

"Now there are customers whose circumstances have changed, so we've been getting backup shippers lined up and the like," he said. "But this project is in demand. It's in demand by the marketplace. ... We've got to do our work with our shippers, and we've got a JV to do, a JV or an IPO. And so that's the main work that we have left to do here."

Kinder Morgan expects a growth CapEx of US$3.2 billion for 2017, to be funded using internally generated cash flow, according to CFO Kimberly Allen Dang. The budget assumes that Trans Mountain would be entered into a joint venture, with 50% capital contributions.

The company has received "a lot of interest" from potential joint venture partners, but said they would not be giving a marker for possible proceeds other than their share of capital contributions, such as a promote payment. Kinder Morgan is also looking at an option to launch an IPO of the project.

Barclays analysts noted that if the project's budget exceeds the C$6.8 billion threshold, the toll would increase by 7 cents. If Kinder Morgan manages to obtain a promote payment from a joint venture partner, up-front proceeds would be bigger than if the company chooses to launch an IPO, which would mean more deleveraging, the analysts said.

Analysts at Credit Suisse are watching for developments and could possibly raise Kinder Morgan's current Outperform rating if the company's plans are successful.

The Trans Mountain expansion is expected to boost the oil pipeline's capacity to 890,000 barrels per day, from 300,000 bbl/d. The system serves as a West Coast link for Western Canadian oil production.