Houston-based Kinder Morgan Inc. is cashing in its Canadian affiliate plus ownership in the Cochin pipeline through asset sales worth roughly $2.5 billion.

Calgary, Alberta-based Pembina Pipeline Corp. agreed on Aug. 21 to acquire Kinder Morgan’s assets in two transactions, closing of which are cross-conditioned upon each other.

The combined value of the divestitures comes in just $150 million below estimates made in September 2018 by analysts with Tudor, Pickering, Holt & Co. (TPH) despite a significantly different market outlook, “resulting in a notable positive vs. more recent expectations.”

“Given continued deleveraging push across both [Canada] and the U.S., we suspect [Kinder Morgan’s long-term] target will migrate lower with execution on increased buybacks weighted to [free cash flow] generation 2020+,” TPH analysts wrote in an Aug. 21 research note.

Per the sale agreement, Kinder Morgan’s 70% interest in Kinder Morgan Canada Ltd. will be swapped into roughly 25 million Pembina shares, worth about $935 million in pre-tax proceeds.

Pembina is acquiring the Kinder Morgan Canada stock for an exchange ratio of 0.3068 shares. TPH analysts noted that this translates to a 38% premium to Kinder Morgan Canada’s closing stock price on Aug. 20.

As for Kinder Morgan, the agreement represents the acquisition of just under 5% of Pembina’s pro forma share count, which the company said it expects to exit over time.

In conjunction, Kinder Morgan is also selling its ownership of the U.S. portion of the Cochin Pipeline to Pembina for about $1.5 billion. According to Kinder Morgan, proceeds from the Cochin sale is roughly 13 times 2019 expected EBITDA.

Kinder Morgan Cochin Pipeline Asset Map (Source: Kinder Morgan Inc.)
Kinder Morgan Cochin Pipeline Asset Map (Source: Kinder Morgan Inc.)

Kinder Morgan’s Cochin pipeline system consists of a 1,810-mile, 12-inch diameter multi-product pipeline. The U.S. portion of the Cochin pipeline is regulated by the Federal Energy Regulatory Commission and extends from the Kinder Morgan station near Riga, Mich., to the International Boundary near Maxbass, North Dakota.

The pipeline is currently moving light condensate westbound from the new Kinder Morgan Cochin terminal in Kankakee County, Ill., to Fort Saskatchewan, Alberta, with an estimated system capacity of about 95,000 barrels per day, according to the Kinder Morgan website.

The companies are expecting to close both transactions late in fourth-quarter 2019 but said closing could also occur in first-quarter 2020, subject to customary closing conditions, including Kinder Morgan Canada shareholder and applicable regulatory approvals. 

Kinder Morgan said proceeds from the two divestitures will initially be used to reduce net debt. Assuming a fourth-quarter close, this would reduce year-end 2019 debt/EBITDA to about 4.4 times from previously guided 4.6 times, the company added.

In an Aug. 21 statement, Kinder Morgan CEO Steve Kean said: “This is an attractive transaction for [Kinder Morgan] and [Kinder Morgan Canada] stockholders. It enables [Kinder Morgan] to reduce leverage and gives us the flexibility to create additional value for shareholders through share buybacks, project investments, or both.”

Bracewell LLP is Kinder Morgan’s legal adviser for the transactions.