Please ensure Javascript is enabled for purposes of website accessibility

Kinder Morgan, Inc.'s Most Brilliant Moves in 2017 So Far

By Matthew DiLallo - Jul 12, 2017 at 2:15PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The energy infrastructure giant creatively lined up the financing it needed to build its two largest growth projects.

One of Kinder Morgan's (KMI 0.98%) top priorities this year was to continue strengthening its balance sheet by funding its capital projects with internally generated cash flow until it lined up partners to help finance its largest growth project. The company accomplished that objective (and then some) via two brilliant moves. Because of that, the pipeline giant remains on track to provide investors with a meaningful dividend increase in 2018.

Partnering with private equity

At the end of February, Kinder Morgan announced that it sold a 49% interest in Elba Liquefaction Company (ELC) -- which is building the Elba LNG Liquefaction project in Savanah, Georgia -- to funds managed by EIG Global Energy Partners (EIG). Under the terms of the deal, EIG paid Kinder Morgan $385 million at closing, which included a $215 million reimbursement for EIG's share of capital spent on the project to that point and $170 million to compensate Kinder Morgan for the value it created by commercializing the project. Meanwhile, EIG pledged to fund 49% of the remaining capital expenses on the $1.3 billion project.

Kinder Morgan's Elba Island facility.

Image source: Kinder Morgan Inc.

That deal was brilliant for two reasons. First, Kinder Morgan offloaded about $650 million in capital requirements, which will free up its cash flow for other purposes. In addition, the company unlocked $170 million in value, which gave it money to pay down debt. One of the factors leading to that incremental payment is that Royal Dutch Shell (RDS.A) (RDS.B) signed a 20-year deal to take 100% of the gas produced from this facility. That agreement with Shell locked in a steady stream of future cash flow, which increased the value of ELC above its capital cost, enabling Kinder Morgan to capture that value uplift when it sold the stake in the project to EIG. 

Going public to finance Trans Mountain

Kinder Morgan was hoping to find a similar financing arrangement for its Trans Mountain Pipeline expansion project in Canada. In fact, its 2017 budget assumed the company would secure a partner to help fund a portion of the project's 7.4 billion Canadian dollars ($5.7 billion) construction cost. That said, to make sure it wasn't leaving any money on the table, its banks ran a "dual-track" process that included a formal process to attract joint venture partners while simultaneously exploring an IPO of its entire Canadian asset base. As a result of that process, the company settled on the IPO option, raising CA$1.75 billion ($1.36 billion) by selling nearly 103 million shares in Kinder Morgan Canada Limited (KML) in one of the largest IPOs in that country's history. 

Kinder Morgan chose this smart option because it will retain a greater portion of the project's future cash flow since it will hold a 70% stake in Kinder Morgan Canada Limited. Furthermore, the IPO provided the company with greater future financial flexibility because it can use Kinder Morgan Canada Limited's stock as currency to make acquisitions or finance growth projects.

Kinder Morgan plans to use the CA$1.75 billion cash infusion to pay down debt, which will push its debt-to-EBITDA ratio from 5.4 to 5.2. Meanwhile, it will finance the balance of the CA$6.2 billion ($4.8 billion) of remaining capital spend on TransMountain with a blend of cash flow and new debt. In fact, the company has already lined up CA$5.5 billion ($4.3 billion) of financing for the project from financial institutions. Barring any delays, the company expects to start construction on the project this fall, which should put it into service by the end of 2019.

Investor takeaway

By completing these two brilliant moves, Kinder Morgan now has all the financing it needs to complete its two largest growth projects. As a result, the company will free up a significant slice of the roughly $4.5 billion of distributable cash flow its stable, fee-based assets generate each year. While Kinder Morgan has several options for that money, its management team has said on more than one occasion that the company plans to return a substantial portion of its excess cash flow to investors via a higher dividend starting next year.

Matt DiLallo owns shares of Kinder Morgan and has the following options: short January 2018 $30 puts on Kinder Morgan, long January 2018 $30 calls on Kinder Morgan, and short December 2017 $19 puts on Kinder Morgan. The Motley Fool owns shares of and recommends Kinder Morgan. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Kinder Morgan, Inc. Stock Quote
Kinder Morgan, Inc.
KMI
$17.47 (0.98%) $0.17
Royal Dutch Shell plc Stock Quote
Royal Dutch Shell plc
RDS.A
Royal Dutch Shell plc Stock Quote
Royal Dutch Shell plc
RDS.B
Kinder Morgan Canada Limited Stock Quote
Kinder Morgan Canada Limited
KML

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
377%
 
S&P 500 Returns
123%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/07/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.