Kinder Morgan (KMI 0.60%) has made it clear that it intends to leave no stone unturned as it seeks out alternative financing options for its Trans Mountain Pipeline expansion. The company hopes that by exploring its options, it can extract more value for the project. That's why the company continues to actively pursue an initial public offering (IPO) even though it used a joint venture agreement as a placeholder for its 2017 financial expectations. That pursuit led the company to file preliminary paperwork with Canadian regulators this week, positioning it to launch an IPO if it decides that's the best option.
Prepping for plan B
When Kinder Morgan hired Toronto-Dominion Bank (NYSE: TD) as an advisor to help it arrange the financing for Trans Mountain, the expectation was that the bank would run a "dual-track" process. That meant it would start a formal process to attract joint venture partners willing to take a 50% stake in the project while simultaneously exploring an IPO of either an interest in the pipeline or Kinder Morgan's entire Canadian asset portfolio. However, as its recent filing shows, the company has formally decided that it will package all its Canadian operations into a separate entity should it choose the IPO option.
According to the filing, Kinder Morgan would include not only its Kinder Morgan Canada segment, which comprises the Trans Mountain Pipeline and related terminals, but also its other assets in the country. These include several additional pipelines, such as the Puget Sound Pipeline, which ships oil from Trans Mountain to refineries in Washington state and the Jet Fuel pipeline system that transports jet fuel from a Chevron (NYSE: CVX) refinery in Vancouver to the city's airport. In addition, the company would include the Canadian portion of the Cochin pipeline system that moves 95,000 barrels of light condensate per day from the U.S. to oil producers in Canada. Furthermore, the company also plans to seed this entity with the Vancouver Wharves Terminal, which is a bulk terminal, and the North 40 Terminal that stores crude oil. Finally, Kinder Morgan would package three jointly controlled investments into this entity, including the Edmonton Rail Terminal that it co-owns with Imperial Oil (NYSEMKT: IMO) and the Alberta Crude Terminal and the Base Line Terminal, which are two separate joint ventures with Keyera Corp. (TSX: KEY).
By including those additional assets, which it will carve out of its products pipelines and terminals segments, Kinder Morgan will create a larger entity than its current Canada segment. That larger scale is necessary for two reasons. First, the combined business would have greater diversification, which reduces the risk of investors participating in the IPO. Furthermore, the larger size would make it easier for Kinder Morgan to raise the capital it needs because the combined entity would generate more cash flow to support such a massive construction project like the Trans Mountain Pipeline expansion.
What does this mean for the JV option?
Just because Kinder Morgan formally filed a preliminary prospectus for an IPO of its Canadian assets doesn't mean it has chosen that option. The company made it clear that it plans to fully negotiate with potential joint venture partners to see what kind of value it can earn above the project's construction costs. In one sense, by simultaneously moving forward with the IPO, Kinder Morgan has added a competitor to the JV option.
That said, the company also wants to make sure it has the chance to fully market an IPO to see what kind of value it can get from that option. If the company would receive more value back by going the IPO route, then it would make sense to go that direction.
Either way, the company fully expects that its dual-track process will produce favorable results. Furthermore, the company anticipates wrapping up this process during the second quarter. That will give the company's board time to make a final investment decision so that it can start construction this fall.
While Kinder Morgan built its 2017 budget around securing a joint venture to help finance its Trans Mountain Pipeline expansion, the company isn't ruling anything out just yet. That's why it's simultaneously exploring an IPO of its Canadian assets to gauge if it can capture more value by going that route. If nothing else, by continuing to move forward with the IPO, the company can put pressure on potential partners to pony up the premium payment it hopes to earn. That's the whole point here, because the more cash it can pull in with this transaction, the greater flexibility it will have in the future to allocate capital for other uses.