(Pembina Pipeline, 1.Mar.2022) — Pembina Pipeline Corporation (TSX: PPL) (NYSE: PBA) entered into definitive agreements with KKR to combine their respective western Canadian natural gas processing assets into a single, new joint venture entity (“Newco“), which will be owned 60 percent by Pembina and 40 percent by KKR’s global infrastructure funds. Pembina will serve as the operator and manager of Newco.
Included in the transaction are Pembina’s field-based natural gas processing assets, the Veresen Midstream business (currently owned 55 percent by funds managed by KKR and 45 percent by Pembina), and the business currently carried on by Energy Transfer Canada (“ETC”) (currently owned 49 percent by funds managed by KKR). Concurrently with closing of the joint venture transaction, Newco will also acquire Energy Transfer LP’s remaining 51 percent interest in ETC. Collectively, the ascribed value of these transactions totals $11.4bn, excluding the value of assets under construction.
Highlights
- Brings together three complementary platforms to create a premier, highly competitive western Canadian gas processing entity with the ability to serve customers throughout the Montney and Duvernay trends from north central Alberta to northeast British Columbia (“NEBC”).
- Approximately $700mn of cash proceeds to Pembina expected upon closing, with approximately $550mn expected to be deployed for debt repayment and approximately $150mn for additional common share repurchases.
- Efficiencies from the combination of three platforms, enabling cost reductions and an enhanced customer service offering.
- Increases Pembina’s ownership in Veresen Midstream and exposure to increasing LNG-driven volume growth in NEBC in a capital efficient manner.
- Mid to high single digit accretion to Pembina’s adjusted cash flow from operating activities per share1 over the next five years.
- Upon closing, Pembina intends to increase its common share dividend by $0.0075 per share per month, or 3.6 percent.
- Area of mutual interest for natural gas processing in western Canada provides strong structural alignment for joint venture partners.
- Well-capitalized entity able to pursue future opportunities in a capital efficient manner.
“Pembina has enjoyed a strong relationship with KKR as a partner in Veresen Midstream over the past four years,” said Scott Burrows, Pembina’s President and CEO. “We work well together and share a mutual desire to invest capital and generate attractive returns. The formation of this new joint venture is a natural extension of our relationship, unlocks value for Pembina and creates another growth platform. We are extremely pleased to be creating this exciting new company with KKR to drive real synergies and deliver a wider suite of commercial opportunities.”
“We have developed a great, trusted relationship with Scott, Jaret and the industry-leading team at Pembina and we are thrilled to be deepening that partnership with today’s strategic combination,” said Brandon Freiman, Partner and Head of North American Infrastructure at KKR. “Importantly, we share Pembina’s views on the positive and essential role that Canadian natural gas plays within the global energy transition and we are pleased to combine these assets to create a stronger platform to meet that opportunity.”
Paul Workman, Director at KKR, added, “The industrial logic of combining these three complementary businesses in a fully-aligned partnership is compelling. We believe that a well-capitalized, customer-oriented private partnership between KKR and one of Canada’s leading infrastructure companies is incredibly well-positioned to create value for our investors, customers and the communities in which we operate.”
Strategic Rationale
Pembina has owned and operated natural gas processing infrastructure in western Canada since 2009. These operations provide Pembina with a long-term, fee-based cash flow stream, while enhancing Pembina’s ability to serve its customer base by delivering natural gas liquids extraction capabilities and offering egress certainty, thereby providing additional value and a higher service offering for our customers. As the energy sector has evolved, the opportunities available from bespoke partnerships between public and private infrastructure owners have become more compelling, particularly in the natural gas processing business.
By partnering with KKR in Newco, Pembina intends to extend its strong operating foundation, focused on safety, reliability and operational excellence, to a larger asset base across western Canada. Pembina will realize greater exposure to growing NEBC natural gas volumes in a capital efficient manner through increased ownership in the Veresen Midstream assets. The transaction is structured to create strong alignment between Pembina and KKR, a leading global investment firm. The combination of three adjacently located, high-quality processing platforms will enable the joint venture to realize incremental efficiencies and economies of scale. Pembina will also receive strategic benefits through the diversification of its natural gas processing asset suite and customer base.
Newco Asset Profile
Pembina will contribute to Newco its field-based gas processing assets, which include the Cutbank Complex, the Saturn Complex, the Resthaven Facility, the Duvernay Complex and the Saskatchewan Ethane Extraction Plant, as well as its 45 percent interest in Veresen Midstream.
Pembina’s Empress, Younger and Burstall assets will be excluded from the transaction and Pembina will retain its current ownership position.
KKR will contribute the 55 percent interest in Veresen Midstream and the 49 percent interest in ETC owned by its funds to the joint venture. Newco has also agreed to acquire the remaining 51 percent interest in ETC from Energy Transfer LP, aligning ownership of those assets and driving additional efficiencies. The contribution of Pembina’s and KKR’s assets to Newco, and Newco’s acquisition of 51 percent of ETC from Energy Transfer LP, are cross-conditional upon each other and will occur concurrently. Upon closing, Pembina will own 60 percent of Newco and KKR will own 40 percent. Newco’s permanent name is expected to be announced prior to closing.
Collectively, the ascribed value of these transactions totals $11.4 billion, excluding the value of assets under construction related to Newco’s 50 percent, non-operated interest in the Key Access Pipeline System (“KAPS”) project. As part of the transactions, Pembina and KKR intend to dispose of Newco’s non-operated interest in KAPS following closing of the transaction, subject to receiving acceptable purchase terms through the sale process.
In addition, Newco’s business is expected to have the following characteristics:
- Physical capacity utilization of approximately 65 percent, offering a strong base cash flow stream and incremental low cost processing capacity to meet customers’ evolving needs.
- Contract tenures ranging from five to nearly 25 years, with an average of 14 years.
- Approximately 94 percent of the operating expenses across the asset portfolio are flow-through.
- Approximately 80 percent of counterparty credit exposure is with investment grade or secured entities.
- Tax pools of approximately $4.6 billion.
Newco Structure and Governance
Capital Structure
Newco is intended to have an investment grade capital structure, consistent with Pembina’s financial guardrails, with target leverage of 3.5 to 4.0 times debt-to-EBITDA. The entity will be independently funded and has obtained commitments for $4.75 billion of senior unsecured credit facilities. These commitments are comprised of a five-year, $3.9 billion drawn term loan facility, a three-year $250 mn undrawn revolving credit facility, a $50 mn operating facility, as well as a dedicated $550 mn revolving credit facility to support the construction of KAPS. No scheduled amortization payments are required on the facilities. Total drawn amounts under the facilities are expected to be approximately $4.3 billion upon closing.
Governance
Pembina will serve as the manager and operator of Newco, enabling the joint venture to benefit from Pembina’s operating capabilities, institutional knowledge, and management systems. Newco will be led by Chris Rousch, current President and CEO of Veresen Midstream. With alignment being a governing principle, the joint venture includes area of mutual interest (“AMI”) provisions whereby Pembina and KKR have agreed to pursue field-based natural gas gathering and processing assets in western Canada within Newco. The shareholder agreement includes certain governance and liquidity provisions, including right of first offer (“ROFO”), right of first refusal (“ROFR”), and tag-along provisions.
Environmental, Social and Governance
Newco will adhere to, and build on, Pembina’s and KKR’s strong program of continuously improving environmental, social and governance (“ESG”) performance. The partnership will integrate ESG considerations into its governance structure and long-term business strategy.
Newco assets will be included in Pembina’s target of taking concrete action to achieve a 30 percent reduction in greenhouse gas emissions intensity by 2030, against a 2019 baseline. Pembina’s policies and management systems related to health, safety, environment, cybersecurity, Indigenous and community relations, and other ESG matters will also be maintained at Newco. More information on these initiatives can be found on Pembina’s website at www.pembina.com/sustainability.
An ESG strategy for Newco will be established following the closing of the transactions. Initial priorities that Pembina and KKR have identified for Newco include:
- Building upon Pembina’s leading safety culture to continuously reduce process and occupational safety incidents, with the ultimate goal of zero incidents.
- Enhancing employee equity, diversity and inclusion across the Newco assets.
- Embracing Pembina’s commitment to meaningfully partnering and engaging with Indigenous communities, with an aim of continuously increasing the number of local Indigenous suppliers each year.
Financial Impact and Dividend Increase Following Closing
Pembina expects the creation of this joint venture to generate mid to high single digit accretion to adjusted cash flow per share over the next five years. This accretion is expected to be driven by a combination of the net impact of the purchase and sale components of the transaction, synergies associated with combining the operations of the three businesses, tax synergies, and the planned repurchase of Pembina’s common shares using cash proceeds obtained from the transaction.
With target leverage of 3.5 to 4.0 times debt-to-EBITDA, Newco’s capital structure will align squarely with Pembina’s financial guardrails. Newco will not be consolidated into Pembina’s financial statements and will instead be accounted for as an equity accounted investment.
Upon closing, Pembina expects to receive approximately $700mn in after-tax cash proceeds, subject to final closing adjustments, with $150mn expected to be devoted to additional share repurchases and the remaining $550mn expected to be used to repay debt. With the $150mn allocation to common share repurchases through this transaction, Pembina’s overall repurchase target in 2022 will increase from $200mn to $350mn. Following the planned sale of Newco’s non-operated interest in KAPS, the KAPS construction facility is expected to be repaid in full, and the remaining net proceeds will be distributed to Pembina and KKR according to their ownership interests.
In connection with the transaction, and subject to approval and declaration by its Board of Directors, Pembina also intends to increase its common share dividend upon closing by $0.0075 per share per month, or 3.6 percent. The increase reflects the immediate cash flow accretion from creation of the joint venture and recognizes Pembina’s long stranding track record of a sustainable, growing dividend.
Closing
Completion of the transactions is subject to approval under the Competition Act (Canada), concurrent closing of the acquisition of Energy Transfer LP’s 51 percent interest in ETC, and other customary closing conditions. Closing is expected to occur late in the second quarter or third quarter of 2022.
Conference Call & Webcast
Pembina will host a conference call and webcast to discuss the transaction on Tuesday, 1 March 2022, at 8:00 am MT (10:00 am ET). A presentation will be available prior to the conference call at http://www.pembina.com/investor-centre/presentations-and-events/.
The conference call dial-in numbers for Canada and the U.S. are 647-794-4605 or 1-888-204-4368. A recording of the conference call will be available for replay until 7 March 2022. To access the replay, please dial either 1-888-203-1112 or 647-436-0148 and enter the passcode 6314863.
A live webcast of the call can be accessed on Pembina’s website at www.pembina.com or by entering https://produceredition.webcasts.com/starthere.jsp?ei=1533498&tp_key=ef49bb49c4 in your web browser. Shortly after the call, an audio archive will be posted on www.pembina.com for 90 days.
Advisors
RBC Capital Markets is acting as financial advisor to Pembina and joint bookrunner with respect to the Newco credit facilities. Blake, Cassels & Graydon LLP is acting as legal advisor to Pembina. TD Securities is acting as financial advisor to KKR and joint bookrunner and administration agent with respect to the Newco credit facilities. Torys LLP is acting as legal advisor to KKR.
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