Inside Kinder Morgan: KM Canada

Based on combined enterprise value, Kinder Morgan (NYSE: KMI  ) is the third-largest energy company in North America. We tend to associate the giant with its 75,000 miles of pipelines, but in reality its operations are incredibly diverse. Over the next few days, I'll take a closer look at each of the midstream company's five distinct business units. I've already tackled terminalsnatural gas pipelines, and products pipelines, so today we'll break down the partnership's Canada segment.

Background on the assets
Kinder Morgan Canada consists of five pipeline systems and two terminals. The capacity of the pipeline systems are broken out below:

  • Trans Mountain (crude oil, refined products): 300,000 bpd 
  • Trans Mountain Jet Fuel (jet fuel): 45,000 bpd 
  • Puget Sound (crude oil, refined products): 180,000 bpd
  • Express & Platte (crude oil): Express, 280,000 bpd; Platte, ~150,000 bpd
  • Cochin (propane): 70,000 bpd

There are five terminals that are technically part of the Trans Mountain pipeline system. The biggest one is the Edmonton terminal, which features 19 storage tanks and a current capacity of 2.5 million barrels.

The two main terminals are operated by a Kinder Morgan Energy Partners (NYSE: KMP  ) subsidiary, cleverly titled Kinder Morgan Canada Terminals. Its North Forty terminal is located east of Edmonton. It provides storage and blending services for crude oil and petroleum products and has a capacity of 2.2 million barrels. Its Vancouver Wharves terminal sits in Port Metro, British Columbia, and handles over 3 million tons of bulk cargo every year.

From a fiscal standpoint, Kinder Morgan Canada makes the smallest contribution to the bottom line out of all of the partnership's business segments. It earned $71 million in the fourth quarter of last year, which was a 38% increase over 2011. At the end of 2012, Kinder Morgan sold its ownership interest in the Express-Platte pipeline system to Spectra Energy, which will affect earnings in the short term. That being said, this segment is going to be a powerhouse in five years, based largely on some expansion work.

A look ahead
The biggest news for the segment is the potential growth of the Trans Mountain line, which we'll get to in a minute. First, let's cover the expansion of the Edmonton terminal, which sits on the Trans Mountain line.

In January, Kinder Morgan announced that it had secured contracts that would support the additional expansion of the facility. This would be phase two of the build out (phase one is already under way), and it will add 1.2 million barrels of additional storage capacity to the site. The partnership expects to spend $112 million to bring the new capacity online by the end of 2014. Once completed, the Edmonton terminal will have a total capacity of 9.4 million barrels.

And now on to the Trans Mountain expansion. As stated above, the current capacity is 300,000 barrels per day. Management was originally looking to increase that number to 750,000 bpd, but received so much interest during its open season, that the target is now an incredible 890,000 bpd. The new long-term customer commitments are signed by a veritable who's who of oil sands producers. Kinder Morgan has submitted approval for its toll methodology to Canada's National Energy Board and is expecting a decision by June.

Paperwork dominates the timeline for the project from now until the end of 2015, when all necessary regulatory approvals are expected. Construction should commence in 2016 and finish by the end of 2017.

This pipeline project is controversial only in that all oil sands pipeline projects seem controversial right now. However, there are a few advantages that Kinder Morgan has with the Trans Mountain that may allow the project to actually be completed by its 2017 target date. Unlike Enbridge's (NYSE: ENB  ) Northern Gateway project, which is completely new construction, the Trans Mountain line already exists. With the exception of one section of the line around Hinton, Alberta, that will divert from the original pipe, this is basically a very large twinning project. In fact, the Trans Mountain has already been expanded once, back in 2008. By and large, this project is familiar territory for Kinder Morgan.

The second advantage, given the political climate for pipeline projects, is that not very many people know about it, especially when compared to the Northern Gateway, which is known and reviled by seemingly everyone in British Columbia. A strong track record and a low profile should go a long way for this expansion.

Foolish takeaway
Though it makes the smallest contribution to the balance sheet of all the Kinder Morgan segments, KM Canada is incredibly important to the partnership. There is tremendous opportunity here for future growth, particularly with crude oil pipelines, and any growth in this segment will continue to diversify Kinder Morgan's revenue, which is exactly what we want to continue to see.

It's easy to forget the necessity of midstream operators that seamlessly transport oil and gas throughout the United States. Kinder Morgan is one of these operators, and one that investors should commit to memory due to its sheer size – it's the third-largest energy company in the U.S. – not to mention its enormous potential for profits. In The Motley Fool's new premium research report on Kinder Morgan, our top energy analyst breaks down the company's growing opportunity, as well as the risks to watch out for, in order to uncover whether it's a buy or a sell. To determine whether this dividend giant is right for your portfolio, simply click here now to claim your copy of this invaluable investor's resource.


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