Kinder Morgan Canada (NASDAQOTH: KMLGF), which is controlled by U.S.-based Kinder Morgan (NYSE: KMI), had a very big year in 2018. Not much actually happened with its operating assets, per se, but it will be a very different company in 2019 than it was in 2018. Here's how the events of 2018 have changed the direction of Kinder Morgan Canada and, more importantly, what it will be working hard to achieve over the next year.
One big project
Kinder Morgan Canada was broken off from Kinder Morgan, which controls 70% of the voting rights in the Canadian company, in mid-2017 to own a small collection of midstream assets and one very large capital project. The Trans Mountain Pipeline project is a multibillion-dollar investment that would have taken years to complete and would have materially increased Kinder Morgan Canada's scale.
The only problem is that residents and local governments don't particularly want to see the Trans Mountain Pipeline project completed. The opposition was so bad that Kinder Morgan Canada eventually sold the project to the Canadian government for 4.5 billion Canadian dollars in cash. The good news is that Kinder Morgan Canada was able to get out from under a troubled project. The bad news is that Canadian midstream company's growth plans were basically thrown out the window.
And it was left with a boatload of cash with which it had to do "something." Some of the most obvious options were to find new investments, pay down debt, or pay a huge dividend. Since Kinder Morgan wanted to move as much of that cash as it could back onto its own books, the resolution was a rather large CA$11.40-per-share special dividend to be paid in early January 2019. The end result of this, however, will be that Kinder Morgan Canada has a lot less cash to support long-term growth.
The next year
At this point, Kinder Morgan Canada is made up of three assets, a network of crude storage and rail terminals in Edmonton, Alberta, the Vancouver Wharves terminal in British Columbia, and the Canadian portion of the Cochin pipeline system and the Jet Fuel pipeline system. These aren't bad assets to own. Kinder Morgan Canada expects them to produce CA$213 million of adjusted EBITDA in 2019, with distributable cash flow of CA$0.90 per share. That will easily support the planned dividend of CA$0.65 per share, leading to a robust distribution coverage ratio of nearly 1.4 times.
The Canadian company is expecting to invest around CA$32 million in expansion projects at these assets. And since it was able to use some of the cash from the Trans Mountain asset sale to reduce debt, it is projecting a net debt-to-adjusted EBITDA ratio of 1.3 times. That's very modest leverage for a midstream company. Right now, Kinder Morgan Canada is a relatively small, though financially strong midstream company with a solid trio of fee-generating assets. Growth, as the company stands today, is likely to be slow and steady over time.
But Kinder Morgan Canada has the financial strength to do a lot more. And that's the big question mark that investors will need to ponder over the next year. The company isn't likely to be content just running the pipelines and terminals it owns. That's especially true when you consider that constraints in the midstream space have forced oil from Western Canada to trade at a steep discount to Brent crude, a global oil benchmark. The issue has had a material impact on the industry. For example, Cenovus Energy announced in early 2018 that it was cutting back on production in the region. Essentially, the oil company wanted to leave more oil in the ground for when midstream constraints are resolved and Western Canada oil prices are higher.
What that means for Kinder Morgan Canada is that there are likely to be plenty of investment opportunities. It just has to identify them and then put the wheels in motion for bringing new projects to fruition. Since finding, getting approval for, and then building midstream projects is usually a long affair (think years, not months), don't expect Kinder Morgan Canada to move much earth over the next year.
However, investors should expect at least some update on the company's growth plan. The big question Kinder Morgan Canada needs to answer is: "How do we grow the business from here?" It will take some time, but over the next 12 months or so, investors should get, and have the right to expect, some inkling of an answer.
Not much now, but a whole lot later
So, over the next year, investors should expect the business to be stable and show a little growth based on expansion projects. However, the bigger expectation will relate to Kinder Morgan Canada's plans for the future, which revolve around investing in new assets (perhaps to include acquisitions) to help alleviate the massive demand for midstream infrastructure in Canada. That's the issue to which investors will want to pay the most attention.
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