Kinder Morgan Canada (TSX: KML) was set up to be the publicly traded entity for Canadian assets of Kinder Morgan (NYSE: KMI). KML is 70% owned by KMI. The 30% remaining trades on the TSX and they are functionally economic participation units (i.e. Kinder Morgan has complete control).
KML’s flagship asset was the Trans-Mountain Pipeline, which was sold to the Federal government in 2018. The bulk of the proceeds was distributed to KML shareholders. Everybody knows about this story and it has been dissected to death (including myself), so I will not give it further press here.
What was lesser known is that KML had other operating assets in Canada that generated quite a large amount of cash. The operation is quite easy to analyze (which sadly means that the market has mostly picked up on a proper valuation). In Edmonton, they have a rail terminal and storage tanks (which facilitates operations of oil-by-rail). They have a small condensate pipeline going to the US border from Alberta (creating an odd situation where KML owns the Canadian side, while KMI owns the US side of the pipeline). Finally, they have a mineral concentrate terminal in North Vancouver and are also building a fuel storage facility.
These assets in 2019 are anticipated by management to generate $213 million in “adjusted” EBITDA, and roughly $109 million in distributable cash flow.
This will go down due to an existing contract in Edmonton that is currently being priced on favourable terms to KML. Starting April 2020, this will decrease by approximately $50 million EBITDA. Management claims this will be somewhat offset by future pricing increases. A reasonable guess would be a $170 million EBITDA run-rate absent of the revenues expected from the diesel storage business.
Other than that, the assets are sound and are likely to be in use for the foreseeable future.
So it was logical after the Trans Mountain Pipeline sale that the company investigate options as it was fairly obvious to either sell everything, or merge back into the KMI entity again.
They concluded in May 2019 that they will remain a stand-alone entity. This took the stock down from roughly $15/share to $12/share where it trades presently. KML has 116.3 million shares outstanding, and this gives them a market valuation of CAD$1.4 billion or roughly 8x adjusted EBITDA.
The company has a tiny amount of bank debt (nearly offset by the amount of cash on hand), but they do have CAD$550 million in low-yield preferred shares outstanding (TSX: KML.PR.A and KML.PR.C). These preferred shares were issued in anticipation of the construction of the Trans-Mountain Pipeline!
It obvious from my standpoint that KMI would want to get rid of its Canadian operations entirely, but they are not in a rush to do so – probably waiting for the federal election to see if a more oil-favourable government comes into office. The question remains how much they can obtain for the assets in this more favourable environment. In the meantime, they continue to generate cash and distribute CAD$106 million/year to their shareholders (common and preferred) in dividends.
KML at this point would appear to be a relatively low risk, low return type investment.