Pembina Pipeline Corporation has completed its previously announced acquisition of Kinder Morgan Canada Limited (KML) and the U.S. portion of the Cochin Pipeline system.
"We are pleased to have closed the highly strategic Kinder Morgan Transaction earlier than originally expected, which will allow us to realize a full year of contribution from these assets in 2020. The newly acquired assets provide enhanced integration within our existing franchise, entrance into exciting new businesses and clear visibility to creating long-term value for our shareholders," said Mick Dilger, Pembina's President and Chief Executive Officer. "Our teams will now focus on completing the integration activities and pursuing the $100 million of additional run-rate adjusted EBITDA we expect to realize over the coming years," added Dilger.
The Corporate Acquisition was completed pursuant to a plan of arrangement under Section 193 of the Business Corporations Act (Alberta) (the "Arrangement") pursuant to which KML acquired all of the issued and outstanding class B limited partnership units of Kinder Morgan Canada Limited Partnership ("Class B Units"), Pembina acquired all of the issued and outstanding special voting shares of KML ("KML Special Voting Shares") and PKM Canada Limited ("Pembina SubCo"), a wholly-owned subsidiary of Pembina, amalgamated with KML and continued under the name "PKM Canada Limited" ("Amalco"). Pursuant to such amalgamation, each restricted voting share of KML ("KML Restricted Voting Shares") was cancelled, each cumulative redeemable minimum rate reset preferred share, series 1 of KML ("KML Series 1 Shares") was cancelled, each cumulative redeemable minimum rate reset preferred share, series 3 of KML ("KML Series 3 Shares") was cancelled, each KML Special Voting Share was cancelled and each common share of Pembina SubCo was converted into one common share of Amalco. Pursuant to the Arrangement:
(a) holders of KML Restricted Voting Shares, for each KML Restricted Voting Share held, received 0.3068 of a common share of Pembina (a "Pembina Common Share");
(b) holders of KML Special Voting Shares, and associated Class B Units received: (i) for each KML Special Voting Share held, a cash payment of $0.000001; and (ii) for each associated Class B Unit held, 0.3068 of a Pembina Common Share;
(c) holders of KML Series 1 Shares, for each KML Series 1 Share held, received one cumulative redeemable rate reset class A preferred share, series 23 of Pembina (PPL.PF.C) ("PPL Series 23 Shares") with substantially the same terms and conditions as the KML Series 1 Shares; and
(d) holders of KML Series 3 Shares, for each KML Series 3 Share held, received one cumulative redeemable rate reset class A preferred share, series 25 of Pembina (PPL.PF.E) ("PPL Series 25 Shares") with substantially the same terms and conditions as the KML Series 3 Shares.
Following completion of the Arrangement, Pembina is the owner of all of the issued and outstanding securities of Amalco. The Arrangement was approved by the holders of KML Restricted Voting Shares and KML Special Voting Shares, voting together as a single class, and the holders of KML Series 1 Shares and KML Series 3 Shares, voting together as a single class, at special meetings held on December 10, 2019 and by the Court of Queen's Bench of Alberta on December 10, 2019. Immediately before the Arrangement, Pembina did not own or control any KML Restricted Voting Shares, KML Special Voting Shares, Class B Units, KML Series 1 Shares, KML Series 3 Shares or common shares of Amalco.
Dividends on the PPL Series 23 Shares and the PPL Series 25 Shares will continue to be paid on the 15th day of February, May, August and November in each year if, as and when declared by the board of directors of Pembina. Former holders of KML Series 1 Shares receiving PPL Series 23 Shares will receive a full quarterly dividend of $0.328125 on February 15, 2020, when declared, and former holders of KML Series 3 Shares receiving PPL Series 25 Shares will receive a full quarterly dividend of $0.3250 on February 15, 2020, when declared. The KML Restricted Voting Shares, the KML Series 1 Shares and the KML Series 3 Shares will be delisted from the TSX within a few trading days following closing of the Kinder Morgan Transaction.
Pembina assumed KML's $500 million existing revolving credit facility and converted it to a non-revolving term loan (the "Term Loan"). The Term Loan has an initial maturity date of August 31, 2022 and is pre-payable at the Company's option without penalty.
Concurrent with the completion of the Arrangement, the Cochin US Acquisition was completed by a wholly-owned subsidiary of Pembina for cash consideration of approximately $2.05 billion and was funded through Pembina's existing unsecured credit facility.
Common Share Dividend and Timing of Dividend Increase
Pembina pays cash dividends on its common shares on a monthly basis to holders of record on the 25th calendar day of each month (except for the December record date, which is December 31st), if, as and when determined by the board of directors of Pembina.
Former holders of KML Restricted Voting Shares and Class B Units receiving Pembina Common Shares that continue to be a shareholder of record on December 31, 2019 will be eligible to receive the previously declared dividend of $0.20 per Pembina Common Share, payable, subject to applicable law, on January 15, 2020.
As previously announced, Pembina's board of directors approved a $0.01 per common share increase to its monthly common share dividend rate, to $0.21 per common share, subject to closing of the Kinder Morgan Transaction. The first dividend under which the increase will take effect is expected to be declared in early January 2020, and payable on or about February 15, 2020.
Based on the Company's expectations and outlook for 2020, Pembina is anticipating annual adjusted EBITDA of $3.25 - $3.55 billion. 2020 guidance reflects the closing of the Kinder Morgan Transaction, the $440 million of new projects recently placed into service including Duvernay II, Wapiti Condensate Lateral, and NEBC Montney Infrastructure. In addition, Pembina expects to place into service an additional $1.1 billion of projects during 2020.
In 2020, the Pipelines Division will benefit from higher revenue volumes on the Peace Pipeline System from new projects, including Phase VI, NEBC Montney Infrastructure, the Wapiti Lateral, as well as increased volumes at existing locations. The Pipelines Division will also benefit in 2020 from the contribution of the Cochin Pipeline and Edmonton Terminals acquired as part of the Kinder Morgan Transaction.
The Facilities Division is expected to benefit from a full year of operations at Duvernay II and the Redwater Co-generation Facility, as well as the start-up of projects including Duvernay Sour Treatment Facilities, Prince Rupert Export Terminal and Empress Fractionation. 2020 guidance also reflects the contribution from the acquisition of Vancouver Wharves. These factors are expected to be partially offset by lower revenues at select dry gas facilities.
The outlook for the Marketing & New Ventures Division is based on an expectation of lower year-over-year crude oil marketing revenue, and narrower NGL frac spreads driven by lower NGL prices, partially offset by Pembina's hedging program. The Company has hedged approximately 50 percent of its 2020 frac spread exposure, excluding Aux Sable, with these hedges having been systematically entered into throughout 2019.
Pembina's Pipelines Division capital expenditures will be primarily focused on advancing the development of the Peace Pipeline System including the Phase VI, VII, VIII and IX expansions.
Investment in the Facilities Division will be focused on the Duvernay III, Prince Rupert Terminal, Prince Rupert Terminal Expansion, Empress Fractionation, and Empress Co-generation projects.
The Marketing and New Ventures Division spending will be focused on ongoing regulatory and permitting requirements related to Jordan Cove and advancing Pembina's remaining portfolio of unsecured development opportunities.
Contributions to Equity Accounted Investments & Advances to Related Parties relate to funding previously announced projects within our joint venture entities, the majority of which relate to the integrated propane dehydrogenation ("PDH") plant and polypropylene ("PP") upgrading facility ("PDH/PP Facility").
"One of our highest priorities is prudent and disciplined capital allocation. We invest in strong franchises, with significant contractual underpinning and good counterparties - all ingredients to delivering consistent, industry leading returns. Further, we continue to execute Pembina's strategy within our financial guardrails," stated Scott Burrows, Pembina's Senior Vice President and Chief Financial Officer. "It takes commitment and discipline, but Pembina and its stakeholders have been rewarded and we intend to maintain our approach moving forward," noted Mr. Burrows.
Pembina continues to be squarely focused on delivering transportation and midstream services that enable our customers to reach the best possible markets for their products at a competitive cost, thus enhancing their netbacks. Collectively, the following developments support the ongoing build-out of our integrated value chain and highlight Pembina's unique capability to quickly and cost-effectively add up to 300,000 barrels per day ("bpd") of incremental Peace Pipeline System capacity:
- Renewal of Peace Pipeline System Phase I & II contracts and additional firm service contracts;
- Peace Pipeline System expansions, optimization and capacity potential;
- Incremental fractionation facilities;
- Prince Rupert LPG Export Terminal expansion; and
- Ethane supply to support Alberta's Petrochemicals Diversification Program.
Pembina's liquids pipelines are now connected to all major export facilities and world-scale storage facilities in Alberta, including the 10 million barrels of storage acquired from Kinder Morgan. Further, through the acquisition of the Cochin Pipeline, Pembina has strengthened its capabilities and connectivity within its condensate business. In addition, Pembina's NGL pipeline systems are connected upstream to major Pembina and third-party gas processing facilities and downstream to all major NGL fractionation and storage facilities in the Fort Saskatchewan, Alberta area. This connectivity provides our customers with unparalleled flexibility in reaching their desired markets.
Renewal of Peace Pipeline System Phase I & II Contracts and Additional Firm Service Contracts
Pembina continues to progress the renewal of the legacy Peace Pipeline Phase I and II contracts, a portion of which were previously extended as part of the Phase III expansion. Pembina is engaged in ongoing discussions with customers and is highly confident that the majority of the remaining contracts nearing maturity will be renewed, or their firm capacity resold, given the tolls are substantially lower than current posted tolls. This will allow us to maintain Pembina's current earnings profile while providing exceptional value, flexibility and reliability for customers not available elsewhere.
Producer demand for Pembina's transportation services across the liquids-rich areas of the Western Canadian Sedimentary Basin ("WCSB") continues to grow. Since May 2019, Pembina has continued to secure firm service commitments on the Peace Pipeline System while extending many in the process. This continues Pembina's recent track record of systematically growing and extending the contracted revenue profile of these pipelines in response to customer demand and in lock step with our announced expansions. Firm volume commitments now will reach approximately 1.1 million bpd in 2022.
Peace Pipeline System Expansions, Optimization and Capacity Potential
Once the first stage of Phase IX is complete, Pembina will have 1.1 million bpd of market delivery capacity into Edmonton, Alberta across the Peace and Northern systems and will have completed its objective of achieving segregated liquids transportation service for ethane-plus, propane-plus, crude and condensate between Gordondale, Alberta and the Edmonton, Alberta area. Full product segregation is a significant accomplishment that will drive operational and capital efficiencies, strengthen Pembina's competitive advantage and ultimately benefit our customers. There are numerous advantages associated with product segregation including, most notably, the avoidance of product batching, which increases pipeline utilization, minimizes product interface and requires less operational storage. Finally, it also supports potential capacity increases through optimization and more efficient and ultimately cost-effective lateral connectivity to the pipeline, as well as optimal flexibility in future mainline expansions.
The elimination of batching and other hydraulic optimization initiatives, which Pembina refers to as Phase X, could create up to an incremental 100,000 bpd of capacity with minimal capital spending.
In addition, Pembina continues to have the ability, through a second stage of the Phase IX expansion, to add approximately 200,000 of capacity to its pipelines from Fox Creek, Alberta to Namao, Alberta through the addition of pump stations on these mainlines. Land for these additional pump stations has been acquired and all the upstream infrastructure required to access this capacity will be in place with the completion of the Peace Phase VI-IX expansions.
Incremental Fractionation Facilities
With the increasing amount of oil and condensate resource being developed along our pipeline systems and the anticipated startup of LNG Canada's Phase I liquified natural gas project on Canada's West Coast, Pembina continues to receive customer requests for incremental fractionation services for associated natural gas liquids.
Increasingly, we are observing customer demand for incremental natural gas liquid barrels, particularly from the Montney play, to move westward for export. Given this shift in WCSB product flows, Pembina is pursuing multiple developments in parallel, both within the existing Redwater fractionation complex as well as northeast British Columbia ("NEBC"), which will facilitate this movement and actively respond to producers' evolving needs.
Pembina currently has in excess of 1,500 acres at the Company's existing Redwater fractionation complex and has secured 540 acres in NEBC where Pembina is evaluating new fractionation facilities, based on the design of the RFS II and III facilities, and associated rail infrastructure. The Peace Pipeline provides location optionality to construct required NGL fractionation facilities in multiple locations to meet customer demand for services and provide maximum diversification to premium NGL markets, such as through Pembina's Prince Rupert Export Terminal and its expansion, or through value-added upgrading to polypropylene.
Prince Rupert LPG Export Terminal Expansion
Pembina continues to advance construction of its Prince Rupert LPG Export Terminal. The project is on track to provide customers with export service beginning in the second half of 2020.
The anticipated startup of this facility has generated significant interest from our customers and offtakers, and Pembina is pleased to announce an expansion of this terminal (the "Prince Rupert Terminal Expansion"), which will increase propane export capacity to approximately 40,000 bpd. The Prince Rupert Terminal Expansion is expected to cost approximately $175 million and has an anticipated in-service date in the first half of 2023, subject to regulatory and environmental approvals. The incremental capacity from the expansion will closely match the proposed NEBC fractionation facility's propane production and the in-service dates of the respective facilities would be closely aligned.
Ethane Supply to Support Alberta's Petrochemicals Diversification Program
Pembina's existing infrastructure ideally positions the Company to be a significant supplier of ethane to support the Government of Alberta's Petrochemicals Diversification Program. This program is designed to provide government support and incentives to build facilities that may include a world-scale ethane cracker in Alberta. Through the continued expansion and hydraulic optimization of the Peace Pipeline System, expansion and optimization efforts on the Alberta Ethane Gathering System, and the current capability of the Vantage, Northern and Brazeau systems, Pembina has concluded it can provide over 100,000 bpd of incremental, highly reliable, diversified, low-cost, ethane transportation to the Edmonton, Alberta area, much of which may be sourced from existing or future Pembina facilities. This opportunity aligns with our customers' needs and the Government of Alberta's goal to provide a made-in-Alberta petrochemical solution resulting in significant investment and long-term employment for thousands of Albertans.
Other important initiatives we are pursuing include:
- Alliance Pipeline expansion;
- PDH/PP Facility; and
- Jordan Cove LNG Project.
Alliance Pipeline Expansion
Alliance Pipeline ("Alliance") continues to pursue an expansion from the Bakken play in North Dakota to the Chicago area. Commercial discussions with customers are ongoing and Alliance believes there is an opportunity for a phased expansion of up to 400 million cubic feet per day with initial commercial support for an initial expansion of up to 100 million cubic feet per day. Due to current extensive flaring of natural gas in the Bakken, and increasingly stringent regulations in North Dakota restricting such flaring, Alliance believes it can provide a solution that will benefit customers and result in improved environmental performance.
Pembina continues to progress its PDH/PP Facility, which is under development through its joint venture entity, Canada Kuwait Petrochemical Corporation ("CKPC").
CKPC continues execution of the early works activities for the PDH/PP Facility in Alberta's Industrial Heartland, adjacent to Pembina's Redwater fractionation complex, located in Sturgeon County, Alberta. CKPC has obtained all environmental and regulatory approvals to construct and operate the PDH/PP Facility. All long-lead equipment to support mechanical completion has been ordered and we are progressing as expected with multiple parties to secure lump sum engineering and construction agreements with an objective of locking down two thirds of the project cost.
Jordan Cove LNG Project
On November 15, the Federal Energy Regulatory Commission ("FERC") released the Final Environmental Impact Statement ("FEIS") and recommended approval of the Jordan Cove LNG terminal and Pacific Gas Connector Pipeline. The FEIS is the result of FERC's comprehensive review process that began in September 2017 and includes complete and comprehensive environmental, safety and security reviews, developed with input from federal and state agencies, Tribes and many other stakeholders.
The FEIS issued by FERC represents the final step in the FERC environmental review process before an order is issued by the Commission, approving the project. Pembina looks forward to receiving our final certificate from FERC on February 13, 2020.
Engagement with the Oregon State regulatory authority continues. State permits remain a critical component of the regulatory process for Jordan Cove and are necessary to enable the commercial viability of the project and allow this investment to move forward.