Canada pension funds may be long-term buyers of Kinder pipeline

TORONTO (Reuters) - Canada's biggest public pension funds could be long-term buyers of Kinder Morgan Canada Ltd's KML.TO Trans Mountain pipeline but are unlikely to invest until the C$7.4 billion ($5.7 billion) project has been built, several pension fund sources said on Tuesday.

The Canadian government said on Tuesday it will buy the Trans Mountain assets for C$4.5 billion, hoping to salvage a project that faces formidable political and environmental opposition. The pipeline is intended to move Canadian crude to ports in the Vancouver area for shipment to foreign markets.

Although the federal government has taken stakes in other struggling energy projects, Tuesday’s announcement marked the first time it is being an entire pipeline, and Ottawa said it does not want to hold the asset for the long term.

Frank McKenna, Toronto-Dominion Bank's TD.TO deputy chairman and a former New Brunswick premier, said he expected pension funds and private equity players to be interested in the asset as well as other pipeline or infrastructure players.

“I think there will be a lot of private sector interest in this project once the political risk is taken out of it. These are very desirable assets. They pay good economic rents and they’re long-life assets,” he said. TD is the biggest lender to the project.

The Canada Pension Plan Investment Board, Canada’s biggest public pension plan, said on Tuesday it was “not actively assessing an investment in the extension opportunity.”

The Canadian government could bring in partners to help finance the expansion, according to pension fund sources. However, it is unlikely to do so through its Infrastructure Bank, set up last year to facilitate public-private partnerships but not yet operational, they said.

Canadian pension funds have a long-held preference for buying assets that are already built rather than those with construction risks, and the reputational risk associated with the project could also be a turnoff.

With that in mind, pension fund sources said the federal government may have to hold the asset for a number of years to eventually attract the best price and give it the best chance to recover money for taxpayers, or even make a profit.

Caisse de depot et placement du Quebec [CDPDA.UL], Canada’s second biggest public pension and Kinder Morgan Canada’s biggest independent shareholder, has shown the most appetite for financing the construction of new infrastructure among Canada’s biggest pension plans. It declined to comment.

Ontario Teachers Pension Plan, Canada’s third biggest public pension fund, did not immediately comment.

($1 = 1.3022 Canadian dollars)

Reporting by Matt Scuffham; Editing by Jeffrey Benkoe