Closes on Trans Mountain Sale and Proposes Distribution of Proceeds as a Return of Capital
CALGARY, Oct. 17, 2018 – The Kinder Morgan Canada Limited (TSX: KML) board of directors has declared a dividend for the third quarter of 2018 of $0.1625 per restricted voting share ($0.65 annualized), payable on November 15, 2018, to restricted voting shareholders of record as of October 31, 2018. KML’s restricted voting share dividends are eligible dividends for Canadian income tax purposes.
“KML’s strategic infrastructure operations across western Canada had a strong third quarter, underpinned by multi-year take-or-pay contracts with high quality customers and stable cash flows,” said KML Board Chairman and CEO Steve Kean. KML reported third quarter net income (from continuing and discontinued operations) of $1,349.4 million, up from $42.4 million in the third quarter of 2017, primarily due to the $1,308.0 million gain, net of tax, on the sale of the Trans Mountain pipeline system. Distributable cash flow (DCF) was $80.6 million, up by 4 percent compared to the comparable prior year period. DCF for the quarter benefited from greater contributions from both the Pipelines and Terminals segments for the two months before the sale of Trans Mountain versus the same period in 2017, as well as interest income on the deposited proceeds from the sale of Trans Mountain, partially offset by the payment of preferred share dividends and the loss of September 2018 earnings from Trans Mountain.
In the third quarter, KML generated earnings per restricted voting share from continuing and discontinued operations, including gain on the sale of Trans Mountain, of $0.05 and $3.78, respectively. KML produced DCF of $0.230 per restricted voting share relative to our declared $0.1625 per restricted voting share dividend, resulting in $7.1 million of excess DCF coverage above the company’s dividend.
Overview of Business Segments
“Earnings in our Terminals segment were roughly flat compared to the third quarter of 2017, while Pipeline segment earnings were down as a result of the Trans Mountain sale. Contributions from our Edmonton-area terminals were slightly higher than the third quarter of 2017, driven by our new Base Line Terminal joint venture, where all tanks are now in service, as well as higher rates on re-contracted tank leases at our North 40 and Edmonton South terminals,” noted John Schlosser, KML President. “These increased contributions were partially offset by tank lease costs at our Edmonton South Terminal following the sale of Trans Mountain and the expiration of a third party rail terminaling contract at our Edmonton Rail Terminal joint venture. Contributions from our Vancouver Wharves facility were lower compared to the third quarter of 2017 with earnings negatively impacted by lower fertilizer and agricultural product volumes as well as higher labor costs.”
Sale of Trans Mountain and Proposed Return of Capital
On August 31, 2018, the Trans Mountain pipeline system and expansion project were indirectly acquired by the Government of Canada through Trans Mountain Corporation (a subsidiary of the Canada Development Investment Corporation) for cash consideration of approximately $4.43 billion, which is the contractual purchase price of $4.5 billionnet of a preliminary working capital adjustment. The sale price is subject to a customary final true up of the estimated working capital calculation as provided in the purchase agreement.
Shortly after closing and as previously announced, the KML board unanimously voted to distribute the net proceeds from the sale, after capital gains taxes, customary purchase price adjustments and repayment of KML debt, as a return of capital to shareholders. The return of capital to holders of KML’s restricted voting shares is expected to be approximately $1.2 billion or approximately $11.40 per restricted voting share. To facilitate the return of capital and provide flexibility for dividends going forward, KML will seek voting shareholder approval to reduce the stated capital of KML’s restricted voting shares by $1.45 billion. The KML board also approved a proposal to effect a consolidation or “reverse stock split” of our Restricted Voting Shares and Special Voting Shares on a one-for-three basis (three shares consolidating to one share).
The proposals will be voted on at a special meeting of KML shareholders currently scheduled to be held on November 29, 2018. Subject to the shareholders’ approval of these proposals and the KML board’s subsequent confirmation of the return of capital, the anticipated payment date for the proposed return of capital is expected to be January 3, 2019, with the reverse stock split to occur a few days thereafter. KML will issue a press release confirming the amount of the return of capital and the associated record and payment dates shortly after the shareholders meeting.
For the fourth quarter, representing the first full quarter without Trans Mountain earnings but with nearly a full quarter of Base Line Terminal earnings, KML anticipates that the remaining assets in the Pipelines and Terminals segments will generate Adjusted EBITDA of $50 million to $55 million. KML expects the one-for-three stock split to be effective prior to the declaration of the dividend for the fourth quarter of 2018 and expects to pay a dividend of $0.1625 per split-adjusted restricted voting share. KML does not anticipate the proposed return of capital or reverse split to have any impact on the outstanding preferred shares of KML or dividends payable thereon.
KML’s board of directors declared a dividend of $0.328125 per Series 1 Preferred Share ($1.3125 annualized) and $0.3250 per Series 3 Preferred Share ($1.30 annualized), each payable on November 15, 2018 to Series 1 and Series 3 preferred shareholders of record as of the close of business on October 31, 2018. KML’s preferred share dividends are eligible dividends for Canadian income tax purposes.
Upon the closing of the Trans Mountain transaction, KML’s temporary credit facilities were terminated and replaced with a 4-year $500 million unsecured credit facility to be used for working capital purposes.
Construction of all major facilities at the Base Line Terminal in Edmonton, Alberta, Canada, is materially complete, with the final tanks placed in service in the third and early fourth quarters of this year, slightly ahead of schedule. The 12-tank, 4.8 million barrel facility is fully contracted with long-term, firm take-or-pay agreements with creditworthy customers. The 50-50 joint venture crude oil merchant storage terminal developed by KML and Keyera Corp. is expected to be completed under budget, with Kinder Morgan investing approximately $373 million.
Permitting efforts continue on the distillate storage expansion project at KML’s Vancouver Wharves terminal in North Vancouver, British Columbia. The $43 million capital project includes the construction of two new distillate tanks with combined storage capacity of 200,000 barrels and enhancements to the railcar unloading capabilities. The project is supported by a 20-year initial term, take-or-pay contract with an affiliate of a large, international integrated energy company and is expected to be placed in service in the first quarter of 2021.
About Kinder Morgan Canada Limited (TSX: KML). KML manages and is the holder of an approximately 30 percent minority interest in a portfolio of strategic energy infrastructure assets across Western Canada. Kinder Morgan, Inc. (NYSE: KMI) holds an approximately 70 percent majority voting interest in KML and a corresponding 70 percent economic interest in KML’s business and assets. KML focuses on stable, fee-based energy transportation and storage assets that are central to the energy infrastructure of Western Canada. We strive to promote shareholder value by increasing utilization of our existing assets while controlling costs and operating in a safe and environmentally responsible way. For more information visit kindermorgancanadalimited.com.
Please join KMI and KML at 4:30 p.m Eastern Time on Wednesday, October 17, 2018, at www.kindermorgan.comfor a LIVE webcast conference call that will include a discussion of KML’s third quarter earnings.
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