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UPDATE 3-Inter Pipeline to buy Corridor for C$760 mln

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CALGARY, Alberta, March 5 (Reuters) - Inter Pipeline Fund IPL_u.TO is buying an Alberta pipeline from Kinder Morgan Inc. KMI.N in a C$760-million ($644 million) deal that will result in the fund shipping about half of Canada's oil sands output, Inter said on Monday.

Inter, operator of several oil pipelines, plans to buy the Corridor line, which moves bitumen production from Shell Canada Ltd.'s SHC.TO Muskeg River oil sands mine north of Fort McMurray, Alberta, to the Scotford upgrader near Edmonton.

Under the deal, which includes assumption of C$485 million of debt, Inter would take over responsibility for a C$1.8-billion expansion, in conjunction with an expansion of the overall oil sands project now under way.

That project will boost capacity of the pipeline to 465,000 barrels a day by 2010 from the current 280,000.

Inter also has an 85-percent stake in the 330,000 barrel a day Cold Lake oil sands pipeline system in eastern Alberta.

By adding Corridor, the fund will move 50 percent of Canada’s oil sands output amid an investment boom in the industry that will triple production over the next decade.

UBS Securities Canada Inc. analyst Andrew Kuske said in a research note the oil sands rush provides big opportunities for pipeline firms as developers seek a doubling of transport capacity by 2020.

For Kinder Morgan, the sale is its second big divestment of Canadian assets in the past week as it works to cut debt. On Feb. 26, the Houston-based company said it would sell its British Columbia natural gas distribution business to Fortis Inc. FTS.TO for C$1.4 billion.

The company, which acquired the Canadian assets in 2005 when it bought Terasen Inc., is itself the target of a $15-billion buyout led by Chairman Richard Kinder.

The latest sale does not include the Alberta-to-Vancouver Trans Mountain pipeline system or Express/Platte system to the U.S. Midwest from Alberta. Kinder Morgan is sketching out expansions for both.

“And we will continue to pursue additional pipeline and terminal projects,” Kinder Morgan Canada President Ian Anderson said in a statement.

The transaction is subject to waivers of rights of first refusal held by Shell Canada and its Athabasca Oil Sands Project partners, Chevron Corp. CVX.N and Western Oil Sands Inc. WTO.TO, Inter said.

The fund said the deal will boost its cash available for distributions. Once the Corridor expansion is completed, most if its operating earnings will be generated by oil sands transport contracts.

In addition, the new assets will help cushion the blow of Ottawa’s decision in October to start taxing the cash distributions of income trusts, Inter said.

It plans to finance the transaction using bank lines. Upon closing, it will also take on C$300 million of additional debt associated with the Corridor expansion.

Inter’s trust units fell 5 Canadian cents to C$9 on the Toronto Stock Exchange on Monday. In New York, Kinder Morgan shares were unchanged at $105.70.

$1=$1.18 Canadian