Kinder Morgan (KMI -0.32%) took another big step forward on its turnaround plan during the second quarter. Not only did it announce that it would sell its controversial Trans Mountain system in Canada, but it posted expectation-beating financial results and unveiled another new expansion project. Because of those factors, it continues to be optimistic about what lies ahead.
That growing confidence was evident by the comments of the company's management team on the accompanying conference call where they provided investors with a glimpse of some things going on behind the scenes that have them excited.
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We're not going to sit on our cash windfall
The announced sale of the Trans Mountain Pipeline and the associated expansion project is a significant move for Kinder Morgan. The company's publicly traded Canadian subsidiary, Kinder Morgan Canada Limited (KML), will receive 4.5 billion Canadian dollars ($3.4 billion) from the sale. That will amount to about CA$12 per share in cash after taxes, which is a significant portion of its market value since the stock currently trades at CA$16.25 per share even though it will retain a strong set of midstream assets in the country after the sale.
That begs the question of what the company will do with that money. On the call, Kinder Morgan's CEO Steve Kean stated that Kinder Morgan Canada's "board will be reviewing the use of proceeds alternatives, and we'll provide further guidance on that as we advance the transaction to close." However, he also noted that "while all options are on the table, we generally don't view it as attractive to KML shareholders for us to sit on a big pile of cash while management hunts around for a transaction to use it on." Because of that, "we're strongly indicating there, I think, that we're going to look for the best alternative for KML shareholders."
Among the options it's considering is a special dividend, stock buyback, or an outright sale of Kinder Morgan Canada and its remaining assets either to another company or Kinder Morgan in a take-private transaction. Any of these options will enable Kinder Morgan to gain access to its share of the cash proceeds from the Trans Mountain sale, which it estimates will be around $2 billion after taxes given its 70% stake in the company.
We see an upgrade in our future
Kinder Morgan's current view is that it will apply the proceeds received from Kinder Morgan Canada to reduce its debt. That would enable the company to get its leverage ratio well below its current target of 5.0 times debt to EBITDA. In fact, the company ended the quarter with a 4.9 times leverage ratio and expected to finish the year well below its 5.1 times forecast even before factoring in the anticipated proceeds from Kinder Morgan Canada.
One of the reasons the company wants to use that money to pay down debt is that it would give "us greater financial strength and flexibility" according to Kean. It also leads him to "believe it should also put us well on our way to upgrade land," meaning the company thinks it would be eligible for a credit rating upgrade. That would push the company a notch further into investment-grade territory, which should increase its access to capital and enable it to borrow money at a cheaper rate.
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While we might trim the edges, we don't need to make any more major changes
One of the analysts on the call asked if the company saw a benefit in cutting some areas of its portfolio where it didn't have a huge presence. Kean responded to this one by saying that the company is "generally, very happy with the portfolio that we have." However, he did note that the company has "pruned the assets" in its terminal business to focus on its largest hubs and has also done this in its natural gas pipeline business. The company could continue making similar small moves, with Kean noting that its Oklahoma gathering and processing business is one where it might consider a joint venture or some other alternative. However, investors shouldn't expect any more big asset sales such as unloading its carbon dioxide segment, which is one that some analysts believe it should sell.
Getting brighter with each passing day
Kinder Morgan's management team sees big things ahead for the company. The sale of the Trans Mountain pipeline will provide it with a sizable cash infusion that could be just the ticket it needs to win a credit rating upgrade. Because of that, the company doesn't foresee making any more major changes. Instead, it will be able to turn all its attention to creating shareholder value, which should help lift the stock out of its current doldrums.
