$2 billion will drop debt load to long-term goal

Kinder Morgan Canada (ticker: KML) has successfully closed the sale of the Trans Mountain Pipeline and the Trans Mountain Expansion Project to the Canadian government, and today the company announced its plans on how it will use the proceeds.

KML will receive $3.5 billion in after-tax funds from the sale, which will be distributed to shareholders. The majority of the payout will go to KML’s parent, Kinder Morgan, Inc (ticker: KMI), which will receive $2 billion.

KMI plans to use these proceeds to pay down debt, reducing its debt-to-adjusted EBITDA ratio to about 4.6x. This represents a significant drop for KMI, and the company has lowered its target leverage to 4.6 times EBITDA.

KML also announced its intention to hold a reverse stock split on a one-for-three basis, which will occur after the proceeds from the Trans Mountain sale are distributed. KMI has announced its support for this proposal, which essentially guarantees sufficient approval.

KML may be spun off

KML is now left in a difficult situation, as Trans Mountain was the company’s primary goal and growth driver. It is not without assets, however, as KML holds several energy infrastructure properties in Western Canada including:

  • An integrated network of crude tank storage and rail terminals in Alberta that is one of the largest in the region;
  • The Vancouver Wharves Terminal, the largest mineral concentrate export/import facility on the west coast of North America; and,
  • The Cochin Pipeline system transporting light condensate from the United States to Fort Saskatchewan, Alberta.

These assets may have to stand alone, as the head of KMI recently discussed the possibility of a spin-off.

In today’s press release KMI Chairman and CEO Steve Kean commented “Our remaining portfolio of assets represents a strong platform as a stand-alone company with little to no leverage. That said, with respect to KML’s future we will be evaluating the full range of alternatives, and as always we will be focused on the path that provides the greatest value for shareholders.”

Kinder Morgan appears to have exited the Tran Mountain project at a good time as the problems that drove it to sell, concerted opposition from groups in British Columbia, have not abated. The project was dealt a major blow last week, when a Canadian court nullified approval of the project. While the Canadian government is considering appealing the ruling, it is a significant setback.

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