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Kinder Morgan has 'pivotal' quarter as it puts Trans Mountain woes behind it

Kinder Morgan Inc. had a pivotal quarter as the midstream giant put questions about the Trans Mountain pipeline expansion behind it and saw natural gas volumes pick up as power generation demand surged.

The Houston-headquartered company's sale of Trans Mountain to the Canadian government helped it reduce its net debt to 4.6x EBITDA, lower than Kinder Morgan's target of 5.0x EBITDA. The approximately $2 billion the company will receive from the Trans Mountain sale coincides with the end of regulatory headaches and uncertainty the company faced in Canada. Kinder Morgan Inc. expects to see its share of the sale proceeds in January 2019. The reduction in debt and closing of the Trans Mountain transaction made the third quarter "pivotal" for the company, co-founder and Executive Chairman Rich Kinder said on a conference call.

"Beyond good operational and financial performance, we have substantially improved our balance sheet, extricated ourselves on favorable financial terms from the Trans Mountain expansion that was problematic in view of unrelenting opposition from the government of British Columbia," Kinder said on the Oct. 17 call. "We have developed additional significant expansion projects which should allow us to continue to grow our cash flow in the future."

CEO Steve Kean declined to discuss the future of Kinder Morgan Canada Ltd., the Kinder Morgan-controlled entity that held its interest in Trans Mountain. The company will consider options for its publicly traded Canadian unit which could result in Kinder Morgan Canada, or KML's, sale or the consolidation of the business into Kinder Morgan Inc. The company has reportedly engaged TD Securities to advise it on a course of action. KML shareholders will meet in Calgary on Nov. 29 to vote on the final distribution of the proceeds from the sale and other issues.

"KML is evaluating all options to maximize value to its shareholders," Kean said. "The original purpose of KML was to hold a strong set of midstream assets and to use the cash flows from those assets and the balance sheet to provide a self-funding mechanism for the Trans Mountain expansion. Clearly, that purpose no longer exists."

Bringing debt to below 5.0x EBITDA is a key credit metric for Kinder Morgan, which cut dividends and borrowing for projects when its credit ratings were threatened. Even though the $2 billion from the Trans Mountain sale has not been distributed, the money is being held by KML and the debt reduction is a reflection of the parent company's holding in the subsidiary. Kean said the company would work on turning positive indications with the three major credit ratings agencies "into positive ratings actions" in light of the debt reduction.

Power generation and exports to Mexico boosted Kinder Morgan's natural gas transportation volumes. Gas delivered to power generators was up 1 Bcf/d, or 16% in the third quarter, company President Kimberly Dang said on the call. Exports to Mexico jumped 375 MMcf/d compared with the third quarter of 2017, she said. Total exports to Mexico averaged just under 3.3 Bcf/d in the quarter.

Kinder Morgan and partner Royal Dutch Shell PLC pushed back the anticipated start-up date of their Elba Island LNG facility in Georgia from the fourth quarter of 2018 to the first quarter of 2019. The first of 10 units will come online during the first quarter while the remaining nine units will start throughout 2019, the company said in its earnings release.

Separately on Oct. 17, Kinder Morgan reported third-quarter adjusted EBITDA of $1.86 billion, an increase from $1.75 billion in the prior-year period. The S&P Global Market Intelligence consensus estimate of adjusted EBITDA was $1.86 billion. The company's distributable cash flow in the quarter was $1.09 billion, up from $1.05 billion a year earlier. Kinder Morgan reported net income of $1.01 billion, an increase from $387 million a year earlier.