While Kinder Morgan (NYSE:KMI) is one of the largest energy-infrastructure companies in North America, most of its assets are in the United States. However, an outsized portion of the company's near-term growth is in Canada due to one major project. Given the size of the project, the company is currently looking at a range of financing options, which could lead it to get creative with its Canadian business.
A closer look at Kinder Morgan in Canada
Kinder Morgan operates five business segments: natural-gas pipelines, product pipelines, terminals, carbon dioxide, and Kinder Morgan Canada. The Canadian segment is by far the smallest, supplying just 2% of its annual earnings. Those earnings come from the 300,000-barrel-per-day Trans Mountain oil pipeline, which is the only oil-sands pipeline to Canada's West Coast.
Kinder Morgan does operate several other assets in Canada that it houses in its other segments. For example, 11% of the liquids revenue in its terminals segment comes from its presence in Edmonton. The company owns several assets in that region, including two joint ventures with Keyera Corp. (TSX:KEY). One of those joint ventures, the Base Line Terminal, is in the process of building 12 storage tanks with 4.8 million barrels of capacity, which Keyera Corp. expects to enter service later this year. In addition, the company's product-pipelines segment operates the 1,900-mile Cochin Pipeline, which moves light condensate from the U.S. to Canada; oil sands producers use that to dilute bitumen so it can flow through pipelines. The company also operates the Trans Mountain Jet Fuel Pipeline, which moves oil from a Chevron (NYSE:CVX) refinery in Vancouver to the city's airport.
The future of Kinder Morgan in Canada
Even with those additional assets, Kinder Morgan's business in Canada still only generates a small portion of its revenue. However, the country is the company's biggest single growth driver, because Kinder Morgan is gearing up to expand Trans Mountain's capacity up to 890,000 barrels per day at a cost of more than $5.4 billion. That price tag is 45% of the company's current $12 billion growth-project backlog, which means the company has a lot riding on that one project.
Given Kinder Morgan's current financial constraints, this project is too big to handle all by itself, which is why the company is looking for partners to help finance it. Earlier this year the company launched a "dual-track" process to explore the sale of a 50% joint-venture interest in the expansion project, as well as an initial public offering of either the Trans Mountain Pipeline or a repackaging of its Canadian assets.
The first option is the most likely, given that the company set its 2017 budget on the assumption that a joint-venture partner would fund a share of that project's expansion capital this year. Furthermore, the company has already completed two similar joint-venture deals with its Utopia Pipeline Project and a portion of its Elba LNG export facility, providing it with a blueprint for a Trans Mountain partnership. What the company liked about those deals is that each partner not only agreed to finance the project's capital expenditures, but also paid Kinder Morgan a premium for the value it created by developing the project. It's a structure the company cast a wide net in hopes of replicating, by having discussions about joining the project with three of Canada's biggest pension funds, as well as private equity companies and Middle Eastern sovereign wealth funds.
That said, given the controversy surrounding the pipeline, as well as new oil pipelines in general, finding a joint-venture partner willing to pay a premium for the right to participate will be a tough sell. That's why the company is also working on an IPO. According to reports, if Kinder Morgan ended up taking that track, it would likely combine its other Canadian assets with Trans Mountain and then spin them off into a new entity. It would then launch an IPO seeking to raise 20% to 40% of Trans Mountain's targeted budget, or between 1.4 billion and 2.7 billion Canadian dollars, for one of the largest IPOs in Canada's history.
With construction on the project slated to start this September, Kinder Morgan needs to make a final decision on a financing option sooner rather than later. While the company didn't partner with Utopia or Elba until after construction began, it explicitly stated that the next step for Trans Mountain is finding acceptable financing. Ideally, that could come via a 50% joint venture with financial partners like private-equity or pension plans. However, if that option fails to drum up enough support, then the company will likely press on with an IPO of its entire Canadian business. While that wouldn't bring in the upfront capital it had hoped to raise, it would give the company more flexibility to grow in the future, by using the newly minted stock as currency so it can expand its presence in Canada.
Kinder Morgan Canada might be a small part of the company right now, but Kinder Morgan has big plans to grow the segment over the next few years. All it needs to do is settle on a financing path so it can start the expansion of its oil-sands pipeline. Given the size of the project and the assumptions of its 2017 budget, an announcement that the company has reached a decision on a funding plan is a significant catalyst that could boost the stock price later this year.