Kinder Morgan (KMI) announced today that it has entered into an agreement with Pembina Pipeline (PBA) to sell the US portion of its Cochin Pipeline. It also announced a plan to sell its 70% stake in Kinder Morgan Canada Limited (KML.TO) to Pembina.

These transactions are valued at approximately $2.5 billion. This total includes approximately $1.5 billion in cash and about 25 million shares in Pembina. The company noted that the closing of the two transactions is “cross-conditioned upon each other.” The company expects the transactions to close in Q4 2019 or Q1 2020.

Rationale

Kinder Morgan was evaluating suitable options for its stake in KML since the company sold its top asset, Trans Mountain Pipeline, to the government of Canada last year. The company used the proceeds of that transaction to reduce its debt.

Similarly, Kinder Morgan plans to use the proceeds from its latest asset sale to reduce its debt. The company targets to maintain a net-debt-to-adjusted-EBITDA ratio of approximately 4.5x. Additionally, it plans to use the remaining proceeds in growth projects or share repurchases.

According to the company, the $1.5 billion in cash proceeds from the sale of Cochin Pipeline would improve its debt-to-EBITDA ratio to 4.4x. The company earlier projected a ratio of 4.6x at the end of 2019. Kinder Morgan has been working to reduce its leverage for some time.

Discussing the benefits of these transactions, Kinder Morgan CEO Steve Kean noted, “It enables KMI to reduce leverage and gives us the flexibility to create additional value for shareholders through share buybacks, project investments, or both.”

Kinder Morgan’s KML transaction

For the stake sale in KML, Kinder Morgan would receive 0.3068 shares of Pembina for each of its shares in KML. In total, Kinder Morgan would hold slightly less than 5% of Pembina’s common equity after the transaction. Eventually, the company plans to convert these shares into cash. However, it plans to do this opportunistically while not disrupting Pembina’s stock price.

KMI stock reacted positively to the news and was up 1.2% in early morning trading today. The stock has risen around 32% in 2019, outperforming the broader markets.

For the latest coverage on energy stocks, please check out Market Realist’s Energy and Utilities page.

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