Last month, Kinder Morgan (NYSE:KMI) agreed to hand over its Trans Mountain Pipeline and the associated expansion project to the Government of Canada in a 4.5 billion Canadian dollar ($3.5 billion) deal. That sale came after years of negotiation and legal battles to expand the controversial pipeline, which left Kinder Morgan unable to justify further investment given the risk that it might never finish the project due to intense public opposition.

However, with the Government of Canada taking over the project to ensure its completion, the risk to the next buyer won't be as high. Because of that, it has piqued the interest of a range of potential acquirers, including Brookfield Asset Management (NYSE:BAM). If Brookfield buys the pipeline, it could be a needle mover for the company's high-yielding infrastructure arm, Brookfield Infrastructure Partners (NYSE:BIP).

A stack of pipelines with a blue sky in the background.

Image source: Getty Images.

"We'll consider it"

During an interview at Brookfield's recent annual meeting, the topic of the Trans Mountain Pipeline came up, leading to the question of whether the company had any interest in the controversial project. CEO Bruce Flatt responded that the company "look[s] at all infrastructure," and that "if there's something that makes sense for us, given everything that has gone on, we'll consider it." For that to happen, the company would need to earn an attractive return, especially in light of the risk involved.

From a purely financial standpoint, that's certainly feasible. The existing Trans Mountain Pipeline has routinely generated steady income for Kinder Morgan, producing an average of more than $180 million in earnings in each of the past two years. Meanwhile, according to Kinder Morgan's estimates, the CA$7.4 billion ($5.6 billion) expansion project has the potential to generate about CA$1.1 billion ($830 million) of annual earnings before interest, taxes, depreciation, and amortization (EBITDA), which implies an EBITDA multiple of 6.7. That's a strong return for such a large infrastructure project, especially considering that Kinder Morgan's target for new investments is seven times EBITDA.

It's also important to consider the risk that the project faces additional delays, which would delay the start of return generation. While that risk was too great for Kinder Morgan, it might not be as big an obstacle for Brookfield given its unique ability to handle complex situations.

A pipeline with mountains in the background.

Image source: Getty Images.

Reallocating the risk

Pipeline companies like Kinder Morgan tend to be fairly risk-averse because they cater to income-seeking investors. That's why they secure long-term contracts before breaking ground on new projects and don't invest capital unless there's a high probability of success. Given the increased possibility of additional delays, the company opted to walk away from this project so that it could pursue less risky expansions.

Brookfield, on the other hand, prefers to invest in sectors or geographies that others deem too risky because those tend to generate better returns over the long term. One area where it has noticed a shift in investor sentiment is North American energy infrastructure. Because of that, the company has been presented "with a greater set of acquisition and partnership opportunities," according to Sam Pollock, the CEO of Brookfield Infrastructure Partners. That leads him to believe the company is "well-positioned ... to act as a single counterparty for large transactions," which could include asset carve-outs, take-privates, and partnership arrangements.

One possibility: Brookfield Asset Management could use its enhanced ability to handle risk to its advantage by better matching the risk profile of Trans Mountain with the appropriate investor. Brookfield could, for example, lead a consortium of investors to buy the pipeline and associated expansion project from Canada. It could use Brookfield Infrastructure Partners to acquire a stake in the existing Trans Mountain Pipeline along with other investors such as pension funds. Because the pipeline generates steady cash flow from long-term contracts, it would be a good fit for investors seeking income. It would make an ideal acquisition for Brookfield Infrastructure since it would enable the company to put its large cash war chest to work on a needle-moving investment, potentially positioning it to deliver high-end distribution growth in the coming year.

Meanwhile, Brookfield Asset Management could use its private-equity arm Brookfield Business Partners (NYSE:BBU) to take the lead on the expansion project. The company could form a consortium with other private-equity funds to acquire the pipeline and finance the construction of the expansion. That structure would better match the project's increased risk profile with investors who have a greater appetite for risk. Brookfield Infrastructure could also join this partnership as a minority investor, which would enable it to earn higher returns on an investment in the expansion, but with less risk than if it took the lead on the project.

A unique opportunity to watch

Brookfield Asset Management has shown a willingness to take on riskier investments in exchange for the potential to earn higher returns. That makes it ideally suited as a possible investor in Trans Mountain. Now that Kinder Morgan has given up on the opportunity, it has opened the door for Brookfield Infrastructure Partners to potentially join its parent on a transaction that could move the needle in the near term, as well as in the years to come.

Matthew DiLallo owns shares of Brookfield Asset Management, Brookfield Business Partners L.P. Limited Partnership Units, Brookfield Infrastructure Partners, and Kinder Morgan. The Motley Fool owns shares of and recommends Kinder Morgan. The Motley Fool has a disclosure policy.