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Oct. 24, 2019, 6:04 a.m. EDT

10-Q: KINDER MORGAN CANADA LTD

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(EDGAR Online via COMTEX) -- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis should be read in conjunction with our accompanying interim consolidated financial statements and related notes included elsewhere in this report, and in conjunction with (i) our consolidated financial statements and related notes and (ii) our management's discussion and analysis of financial condition and results of operations included in our 2018 Form 10-K.

Recent Developments

Pending Sale to Pembina

On August 21, 2019, we announced that Pembina agreed to acquire all of our outstanding common equity, including the approximate 70% majority voting and economic interest held by Kinder Morgan. On closing, holders of Restricted Voting Shares will receive 0.3068 of a Pembina common share for each Restricted Voting Share and holders of Special Voting Shares will receive a cash payment of $0.000001 for each Special Voting Share and 0.3068 of a Pembina common share for each associated Class B Unit. In addition, Pembina has agreed to purchase the U.S. portion of the Cochin Pipeline from Kinder Morgan. The closing of the two transactions are cross-conditioned upon each other, and, in the case of Pembina's acquisition of KML, subject to our shareholder, Court of Queen's Bench of Alberta and regulatory approvals. Collectively, these transactions are referred herein as the "Pembina Transactions" and they are expected to close late in the fourth quarter of 2019 or in the first quarter of 2020.

On September 10, 2019, we announced that, as part of its acquisition of KML, Pembina agreed to exchange our outstanding Preferred Shares for Pembina preferred shares with the same commercial terms and conditions as our Preferred Shares. The exchange will be subject to the approval of our preferred shareholders and will close concurrently with the acquisition by Pembina of our common equity, although this approval is not a condition to closing of the Pembina Transactions described above.

2019 Outlook

Our 2019 budget contemplates declaring dividends of $0.65 (annualized) per Restricted Voting Share, generating Adjusted EBITDA of $213 million and generating DCF from continuing operations of approximately $109 million, representing DCF per Restricted Voting Share of $0.90. Our current expectation is that our results for the year will be consistent with our budget.

We do not provide forecasted income from continuing operations (the GAAP financial measure most directly comparable to the non-GAAP financial measures DCF from continuing operations and Adjusted EBITDA) due to the impracticality of quantifying certain amounts required by GAAP, such as realized and unrealized foreign currency gains and losses and potential changes in estimates for certain contingent liabilities. See "Results of Operations-Non-GAAP Financial Measures" for more information on DCF and Adjusted EBITDA.

Trans Mountain Transaction

On August 31, 2018, we closed on the sale of the Trans Mountain Asset Group, which was 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 billion net of a preliminary working capital adjustment (the "Trans Mountain Transaction"). Additionally, in February 2019, we paid the remaining $37.0 million of working capital adjustments that were accrued as of December 31, 2018. The underlying assets in the Trans Mountain Asset Group were primarily within our Pipelines business segment and the operating results for the Trans Mountain Asset Group are presented as "Income from Discontinued Operations, Net of Tax" in the accompanying consolidated statements of income and the following "-Results of Operations" for the 2018 periods.

2019 Return of Capital and Share Consolidation

Pursuant to our voting shareholders' approval on November 29, 2018, distributions of approximately $1.2 billion were made as a return of capital to holders of our Restricted Voting Shares ($11.40 per Restricted Voting Share) and approximately $2.8 billion to KMI as the indirect holder of our Special Voting Shares on January 3, 2019 (the "Return of Capital"). To facilitate the Return of Capital and provide flexibility for dividends going forward, our voting shareholders also approved (i) a reduction of the stated capital of our Restricted Voting Shares by $1.45 billion (the "Stated Capital Reduction") and

Terminals Matters

Material permits have been secured and construction activities continue on the distillate storage expansion project at our Vancouver Wharves terminal in North Vancouver, British Columbia. The approximately $50 million capital project, which calls for the construction of two new distillate tanks with combined storage capacity of 200,000 barrels and enhancements to the railcar unloading capabilities, is supported by a 20-year initial term, take-or-pay contract with an affiliate of a large, international integrated energy company. The project is expected to be placed in service in the first quarter of 2021.

As previously disclosed in our 2018 Form 10-K, a material contractual arrangement at the Edmonton Rail Terminal has an initial term expiring in April 2020 and includes a right of renewal on favorable terms for our customer related to rail terminal and associated pipeline connection service fees. As anticipated, the customer has exercised this right of renewal which is expected to result in lower revenues of approximately $43 million and $11 million on an annual basis for rail terminal fees and associated pipeline connection fees, respectively. We expect this revenue reduction will be partially offset by expansion projects as well as favorable renewal rates on expiring contracts at our other terminal facilities.

Results of Operations

Overview

As described in further detail below, our management evaluates our performance primarily using the GAAP financial measures of Segment EBDA, Net income and Net income available to Restricted Voting Shareholders, along with the non-GAAP financial measures of Adjusted Earnings and DCF, both in the aggregate and per share for each, and Adjusted Segment EBDA and Adjusted EBITDA.

GAAP Performance Measures

Non-GAAP Financial Measures

Certain Items

Certain Items, as adjustments used to calculate our non-GAAP measures, are items that are required by GAAP to be reflected in net income, but typically either

Adjusted Earnings

Adjusted Earnings is calculated by adjusting net income available to common stockholders for Certain Items. Adjusted Earnings is used by us and certain external users of our financial statements to assess the earnings of our business excluding Certain Items as another reflection of our ability to generate earnings. We believe the GAAP measure most directly comparable to Adjusted Earnings is net income available to common stockholders. Adjusted Earnings per share uses Adjusted Earnings and applies the same two-class method used in arriving at basic earnings per common share. (See "-Reconciliation of Income from Continuing Operations (GAAP) to Adjusted Earnings to DCF" below).

DCF

DCF is calculated by adjusting net income available to common stockholders for Certain Items (Adjusted Earnings) and further by D&A, income tax expense, cash taxes, sustaining capital expenditures and other items. DCF is an important

performance measure used by us and external users of our financial statements in evaluating our performance and in measuring and estimating our ability to generate cash earnings after servicing our debt and preferred stock dividends, paying cash taxes and expending sustaining capital, that could be used for discretionary purposes such as distributions or expansion capital expenditures. KML uses this performance measure and believes it provides users of its financial statements a useful performance measure reflective of our ability to generate cash earnings to supplement the comparable GAAP measure. DCF should not be used as an alternative to net cash provided by operating activities computed under GAAP. We believe the GAAP measure most directly comparable to DCF is net income. DCF per split-adjusted Restricted Voting Share is DCF divided by average outstanding split-adjusted Restricted Voting Shares, including stock awards that participate in dividends. (See "-Reconciliation of Income from Continuing Operations (GAAP) to Adjusted Earnings to DCF" below).

Adjusted Segment EBDA

Adjusted Segment EBDA is calculated by adjusting Segment EBDA for Certain Items attributable to the segment. Adjusted Segment EBDA is used by management in its analysis of segment performance and management of our business. We believe Adjusted Segment EBDA is a useful performance metric because it provides management and external users of our financial statements additional insight into the ability of our segments to generate segment cash earnings on an ongoing basis. We believe it is useful to investors because it is a measure that management uses to allocate resources to our segments and assess each segment's performance. We believe the GAAP measure most directly comparable to Adjusted Segment EBDA is Segment EBDA. See "-Certain Items Affecting Consolidated Earnings Results" below.

Adjusted EBITDA

Adjusted EBITDA is used by our management and external users of its financial statements as an additional performance measure. Adjusted EBITDA is EBITDA adjusted for Certain Items, as applicable. We believe the GAAP measure most directly comparable to Adjusted EBITDA is net income. We evaluate adjusted EBITDA in total and do not allocate Adjusted EBITDA amongst equity interest holders as it views Adjusted EBITDA as a measure against our overall leverage. See "-Reconciliation of Income from Continuing Operations (GAAP) to Adjusted EBITDA" below.

Discontinued Operations

DCF from discontinued operations and Adjusted EBITDA from discontinued operations, are reconciled to income from discontinued operations, the most directly comparable GAAP measure in footnote (c) to the above referenced GAAP to non-GAAP reconciliations.







        Consolidated Earnings Results (GAAP)
                                                                                                                        Earnings
        Three Months Ended September 30,                                2019                    2018              increase/(decrease)
        (In millions of Canadian dollars, except
        percentages)
        Segment EBDA(a)
        Terminals                                                    47.4                    44.6                        2.8                   6  %
        Pipelines                                                    12.2                     9.0                        3.2                  36  %
        Total Segment EBDA                                           59.6                    53.6                        6.0                  11  %
        D&A                                                         (22.1)                  (21.1)                      (1.0)                 (5) %
        General and administrative                                  (13.4)                   (7.1)                      (6.3)                (89) %
        Interest income, net                                          0.1                     6.1                       (6.0)                (98) %
        Income from continuing operations before
        income taxes                                                 24.2                    31.5                       (7.3)                (23) %
        Income tax expense                                           (7.6)                   (9.3)                       1.7                  18  %
        Income from continuing operations                            16.6                    22.2                       (5.6)                (25) %
        Income from discontinued operations, net of tax(b)              -                 1,327.2                   (1,327.2)               (100) %
        Net income                                                   16.6                 1,349.4                   (1,332.8)                (99) %
        Preferred Share dividends                                    (7.2)                   (7.2)                         -                   -  %
        Net income attributable to Kinder Morgan interest            (6.6)                 (940.7)                    (934.1)                (99) %
        Net income available to Restricted Voting
        Shareholders                                                  2.8                   401.5                     (398.7)                (99) %
                                                                                                                        Earnings
        Nine Months Ended September 30,                                 2019                    2018              increase/(decrease)
        (In millions of Canadian dollars, except
        percentages)
        Segment EBDA(a)
        Terminals                                                   150.1                   140.8                        9.3                   7  %
        Pipelines                                                    33.8                    25.5                        8.3                  33  %
        Total Segment EBDA                                          183.9                   166.3                       17.6                  11  %
        D&A                                                         (65.9)                  (61.1)                      (4.8)                 (8) %
        General and administrative                                  (33.8)                  (26.6)                      (7.2)                (27) %
        Interest income, net                                          0.7                     6.1                       (5.4)                (89) %
        Income from continuing operations before
        income taxes                                                 84.9                    84.7                        0.2                   -  %
        Income tax expense                                          (25.4)                  (25.0)                      (0.4)                 (2) %
        Income from continuing operations                            59.5                    59.7                       (0.2)                  -  %
        Income from discontinued operations, net of tax(b)              -                 1,347.8                   (1,347.8)               (100) %
        Net income                                                   59.5                 1,407.5                   (1,348.0)                (96) %
        Preferred Share dividends                                   (21.6)                  (21.6)                         -                   -  %
        Net income attributable to Kinder Morgan interest           (26.5)                 (971.8)                    (945.3)                (97) %
        Net income available to Restricted Voting
        Shareholders                                                 11.4                   414.1                     (402.7)                (97) %
        ________
        


Oct 24, 2019

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