Pembina Announces $3.1bn Acquisition of Enbridge Interests

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(Pembina, 13.Dec.2023) — Pembina Pipeline Corporation (TSX: PPL; NYSE: PBA) has entered into an agreement with Enbridge Inc. to acquire all of Enbridge’s interests in the Alliance, Aux Sable and NRGreen joint ventures.

Highlights

  • Pembina has entered into an agreement to acquire Enbridge’s interests in Alliance, Aux Sable and NRGreen for an aggregate purchase price of approximately $3.1bn (subject to certain adjustments), including approximately $327mn of assumed debt, representing Enbridge’s proportionate share of the indebtedness of Alliance (the “Acquisition”).
  • The cash portion of the Acquisition will be funded through a combination of: (i) the net proceeds of a $1.1bn bought deal offering of subscription receipts; and (ii) amounts drawn under Pembina’s existing credit facilities and cash on hand.
  • Complements Pembina’s strategy of providing access for world-class, long-life resources from the Western Canadian Sedimentary Basin (“WCSB”) to premium end markets and increases exposure to lighter hydrocarbons, including natural gas and NGL.
  • Immediately accretive to adjusted cash flow per share, with mid-single digit accretion expected to be achieved in the first full year of ownership, inclusive of synergies. Additional long-term synergy opportunities have been identified that are expected to drive incremental accretion.
  • The Acquisition is expected to be leverage neutral, ensuring Pembina’s continued financial flexibility to fund future projects, and enhances its free cash flow position.
  • Aligned within Pembina’s financial guardrails, consistent with a strong BBB credit rating, and an unchanged business profile with 85% to 90% fee-based contribution to adjusted EBITDA with a high-degree of take-or-pay commitments. The Acquired Business (defined below) is estimated to be 80% to 90% fee-based.
  • Attractive acquisition multiple of approximately 9x 2023 and 2024 forecasted adjusted EBITDA, or approximately 8x 2023 and 2024 forecasted adjusted EBITDA, inclusive of $40mn to $65mn of annual synergies expected to be realized by 2025. Additional long-term synergy opportunities have been identified that would further reduce the transaction multiple.
  • The Acquisition is expected to close in the first half of 2024, subject to the satisfaction or waiver of customary closing conditions, including the receipt of required regulatory approvals.

“Pembina’s business is built around integrated, difficult-to-replicate assets that provide an enduring competitive advantage and unequaled market access for customers. Alliance and Aux Sable are world-class energy infrastructure assets and increasing our ownership in them will further strengthen our growing franchise,” said Scott Burrows, Pembina’s President and Chief Executive Officer.

“This is a rare opportunity to consolidate interests in these assets at an attractive valuation multiple, with cash flow accretion and significant synergy potential. Aligning with Pembina’s strategy, the Acquisition grows and strengthens our existing franchise and provides greater exposure to resilient end-use markets. Pembina is well positioned to benefit from growing volumes in the WCSB driven by near term catalysts, including new West Coast LNG export capacity, expanded crude oil export capacity, as well as developments in the Alberta petrochemical industry. The funding plan for the Acquisition ensures Pembina’s continued financial flexibility and ability to fund future projects that respond to growing demand, while maintaining leverage within targeted ranges,” Burrows said.

“Pembina has enjoyed a strong relationship with Enbridge throughout our six years as partners in Alliance and Aux Sable,” said Jaret Sprott, Senior Vice President & Chief Operating Officer. “Enbridge is a world-class company, with similar values focused on safety, people, customers, and the communities in which we operate. With this Acquisition, I look forward to welcoming Enbridge employees to Pembina, enhancing our relationship with Williams and strengthening our growing franchise and integrated service offering.”  

Strategic Rationale

  • Opportunistic Consolidation of Highly Strategic Infrastructure: The Acquisition is an opportunistic consolidation of critical and highly differentiated North American energy infrastructure. Further, it complements Pembina’s strategy of providing world-class, long-life resources in the WCSB access to premium end markets. Alliance has a strong track record of high reliability and high utilization and is unique within North America in its ability to transport liquids rich natural gas, while providing a cross-border conduit to high demand U.S. markets.

Given its existing ownership interests in the assets, current commercial management of Alliance and operatorship of Aux Sable, and established customer relationships, Pembina is uniquely positioned to execute this transaction with minimal integration risk. Given its deep knowledge of the assets being acquired, Pembina has identified both near-term and long-term synergies that it expects to unlock incremental value. Further, Alliance and Aux Sable are currently treated as equity accounted investees for accounting purposes and the Acquisition will allow Pembina to simplify its corporate reporting.

  • Backed by Strong Fundamentals: The North American natural gas industry is in a period of dynamic transition in which the supply and demand factors support a favourable outlook for both Alliance and Aux Sable. Growing WCSB natural gas production, most notably from the world-class Montney play, is expected to largely fill the approximately 2.8 bcf/d of new Canadian West Coast LNG export capacity expected to come on-line over the next 5 years, while existing production volume will continue to be drawn south to U.S. markets. Limited WCSB intra-basin demand growth, alongside growing production from the Bakken play in North Dakota, highlight the growing need for U.S. destined natural gas transportation. As well, the liquids-rich nature of Montney and Bakken natural gas aligns well with Alliance’s strategic value within the North American natural gas market and its unique ability to transport liquids rich natural gas at a premium to U.S. Midwest markets. Finally, a significant expansion of U.S. Gulf Coast LNG export capacity is expected over the next five years. Alliance acts as a valuable and cost-effective conduit for Canadian natural gas to access this growing export market.
  • Drives Resilient Growth: Consistent with Pembina’s well-established commitment to its financial guardrails, Alliance provides additional low risk, fee-based cash flows underpinned by long-term, predominantly take-or-pay contracts with high-quality counterparties. As the Acquired Business provides service for natural gas and NGL, the Acquisition is also expected to increase Pembina’s exposure to lighter hydrocarbons. Further, the Acquisition enhances Pembina’s service offering for existing customers, with whom Pembina has established strong relationships, and strengthens its competitive advantage.
  • Platform for the Future: Increasing its ownership interest in Alliance and Aux Sable will expand Pembina’s U.S. presence and is expected to provide opportunities to further establish the Company’s reputation and brand name in the robust U.S. NGL market. Post-2030, Pembina expects there will be an opportunity to grow its marketing portfolio by approximately 100,000 bpd and has identified incremental commercial integration opportunities, that could further bolster Pembina’s service offering. As well, the Acquisition is expected to deliver $225mn to $250mn of incremental low risk, predominantly fee-based cash flow from operating activities with modest sustaining capital, in support of continued strategic growth investments and maintaining Pembina’s strong financial position.

The Acquisition

Pembina has entered into a purchase and sale agreement (the “PSA”) with Enbridge to acquire all of Enbridge’s interests in the Alliance, Aux Sable and NRGreen joint ventures and in the related operatorship contracts (collectively, the “Acquired Business”) for an aggregate purchase price of approximately $3.1 billion (subject to certain adjustments), including approximately $327 million of assumed debt, representing Enbridge’s proportionate share of the indebtedness of Alliance.

Pembina currently owns 50% of the equity interests in Alliance, Aux Sable’s Canadian operations and NRGreen and approximately 42.7% of the equity interests in Aux Sable’s U.S. operations, and is the operator of certain assets of the Acquired Business pursuant to various operation services agreements (“COSAs”), with Enbridge being the operator of the remaining assets of the Acquired Business under other COSAs. Upon closing of the Acquisition, Pembina will hold 100% of the equity interests in Alliance, Aux Sable’s Canadian operations and NRGreen and approximately 85.4% of Aux Sable’s U.S. operations, and Pembina will become the operator of all of the Alliance, Aux Sable and NRGreen businesses. Pembina’s acquisition of Enbridge’s interests, including the additional interests in Aux Sable’s U.S. operations, is not subject to any rights of first refusal.

Closing of the Acquisition

Closing of the Acquisition is expected to occur in the first half of 2024 and is subject to the satisfaction or waiver of customary closing conditions, including all required approvals under the Competition Act (Canada), the Canada Transportation Act and the United States Hart-Scott-Rodino Antitrust Improvements Act of 1976 and approval from the United States Federal Communications Commission.

Pembina will provide updated 2024 guidance prior to closing of the Acquisition.

Aux Sable Commercial Update

In connection with the Acquisition, all claims between Aux Sable and a third party related to a natural gas liquids supply agreement have been settled and discontinued. In connection therewith, Pembina contributed approximately $145mn to Aux Sable, representing Pembina’s proportionate share of such claim, which is consistent with the provisions previously recognized and disclosed by Pembina. Additionally, a new third party marketing arrangement was executed and will take effect 1 Jan. 2024.

Funding of the Acquisition

The purchase price and the expenses related to the Acquisition will be funded through a combination of: (i) the net proceeds of a $1.1bn bought deal offering (the “Offering”) of subscription receipts (“Subscription Receipts”), and (ii) amounts drawn under Pembina’s existing credit facilities and cash on hand. In lieu of drawing on its existing credit facilities, in whole or in part, Pembina may issue debt securities prior to the closing of the Acquisition to fund a portion of the purchase price, as appropriate, to prudently manage its balance sheet. The Acquisition funding is consistent with Pembina’s existing capital structure and well within Pembina’s financial guardrails.

In connection with the Offering, Pembina has entered into an agreement with a syndicate of underwriters (the “Underwriters”) led by TD Securities Inc., RBC Capital Markets and Scotiabank (the “Lead Underwriters”) pursuant to which the Underwriters have agreed to purchase from Pembina and sell 26,000,000 Subscription Receipts at a price of $42.85 per Subscription Receipt for total gross proceeds of approximately $1.1bn. The Subscription Receipts will be offered to the public in Canada and the United States through the Underwriters or their affiliates.

Each Subscription Receipt will entitle the holder thereof to receive (i) automatically upon the closing of the Acquisition, without any further action on the part of the holder thereof and without payment of additional consideration, one (1) common share (“Common Share”) of Pembina, and (ii) Dividend Equivalent Payments (defined below) during the period from the closing date of the Offering to, but excluding, the closing date of the Acquisition or to, and including, the date of a Termination Event (defined below), as applicable.

The Offering is expected to close on or about 19 Dec. 2023. Pembina has also granted the Underwriters an over-allotment option (the “Over-Allotment Option”), exercisable, in whole or in part, at any time and from time to time until the earlier of: (i) 5:00 p.m. (Calgary time) on the day that is thirty (30) days following the closing date of the Offering; and (ii) the Termination Time (defined below), to purchase up to an additional 3,900,000 Subscription Receipts on the same terms and conditions as the Offering, to cover over-allotments, if any, and for market stabilization purposes.

Holders of Subscription Receipts (including Subscription Receipts that may be issued upon the exercise of the Over-Allotment Option) will be entitled to receive payments per Subscription Receipt equal to the cash dividends per Common Share, if any, paid or payable to holders of Common Shares in respect of all record dates for such dividends occurring from the closing date of the Offering to, but excluding, the closing date of the Acquisition or to, and including, the Termination Date (defined below), as applicable, to be paid to Subscription Receipt holders of record on the record date for the corresponding dividend on the Common Shares on the date on which such dividend is paid to holders of Common Shares (each, a “Dividend Equivalent Payment”). For greater certainty, the first Dividend Equivalent Payment that holders of Subscription Receipts are expected to be eligible to receive will be, if so declared by the Board of Directors of Pembina, in respect of the dividend payable to holders of Common Shares on or about March 29, 2024, to shareholders of record as of 15 Mar. 2024.

The gross proceeds from the sale of the Subscription Receipts, less 50% of the Underwriters’ fee (such amount, together with any interest and other income received or credited thereon, the “Escrowed Funds”) will be held in escrow by Computershare Trust Company of Canada, as subscription receipt agent (the “Subscription Receipt Agent”), and deposited or invested, as applicable, pursuant to the terms of a subscription receipt agreement to be entered into among Pembina, the Lead Underwriters and the Subscription Receipt Agent.

Provided that the requisite notice (the “Escrow Release Notice and Direction”) is delivered to the Subscription Receipt Agent on or prior to the Termination Time, the Escrowed Funds, less the remaining 50% of the Underwriters’ fee and any amounts required to satisfy any unpaid Dividend Equivalent Payments, will be released by the Subscription Receipt Agent to or as directed by Pembina and will be used to fund a portion of the purchase price for the Acquisition.

If (i) by 5:00 p.m. (Calgary time) on 1 Oct. 2024, (a) the Escrow Release Notice and Direction is not delivered to the Subscription Receipt Agent prior to such time, or (b) the Escrow Release Notice and Direction has been delivered to the Subscription Receipt Agent prior to such time, but the Escrowed Funds are subsequently returned to the Subscription Receipt Agent and notice is delivered to the Subscription Receipt Agent prior to such time; (ii) the PSA is terminated; (iii) Pembina gives notice to the Lead Underwriters, on behalf of the Underwriters, that it does not intend to proceed with the Acquisition; or (iv) Pembina announces to the public that it does not intend to proceed with the Acquisition (each, a “Termination Event” and the time of the earliest of such Termination Event to occur, the “Termination Time” and the date on which such Termination Time occurs, the “Termination Date”), the Subscription Receipt Agent will pay to each holder of Subscription Receipts, no earlier than the third business day following the Termination Date, an amount per Subscription Receipt (the “Termination Payment”) equal to the offering price in respect of such Subscription Receipt, plus (x) if a Dividend Equivalent Payment has been paid or is payable in respect of the Subscription Receipts at any time following the issuance of the Subscription Receipts, any unpaid Dividend Equivalent Payment owing to such holder, or (y) if no Dividend Equivalent Payment has been paid or is payable in respect of the Subscription Receipts at any time following the issuance of the Subscription Receipts, such holder’s proportionate share of any interest and other income received or credited on the investment of the Escrowed Funds between the closing of the Offering and the Termination Date. Any remaining Escrowed Funds after the payment of the Termination Payments shall be paid by the Subscription Receipt Agent to Pembina.

The company has applied to the Toronto Stock Exchange (the “TSX”) to list the Subscription Receipts and the Common Shares issuable pursuant to the terms of the Subscription Receipts (including the Subscription Receipts issuable pursuant to the Over-Allotment Option and the Common Shares issuable pursuant to the terms of such Subscription Receipts) on the TSX. In addition, the company has applied to the New York Stock Exchange (the “NYSE”) to list the Common Shares issuable pursuant to the terms of the Subscription Receipts (including the Common Shares issuable pursuant to the terms of the Subscription Receipts issuable pursuant to the Over-Allotment Option) on the NYSE. The Subscription Receipts will not be listed on the NYSE. There can be no assurance that the Subscription Receipts will be accepted for listing on the TSX or that the Common Shares issuable pursuant to the terms of the Subscription Receipts will be accepted for listing on the TSX or the NYSE.

Conference Call & Webcast

Pembina will host a conference call and webcast to discuss the Acquisition on 13 Dec. 2023 at 2:45 pm MT (4:45 pm ET). Content from the conference call and webcast is not incorporated by reference in this press release and should not be considered to be a part of this press release.

A presentation is available at http://www.pembina.com/investor-centre/presentations-and-events/.

The conference call dial-in numbers for Canada and the U.S. are 416-764-8624 or 1-888-259-6580. A recording of the conference call will be available for replay until 20 Dec. 2023. To access the replay, please dial either 416-764-8692 or 1-877-674-7070 and enter the passcode 794374 #.

A live webcast of the call can be accessed on Pembina’s website at www.pembina.com or by entering https://events.q4inc.com/attendee/365070539 in your web browser. Shortly after the call, an audio archive will be posted on www.pembina.com for 90 days. References to our website and other websites herein are inactive textual references only. Information contained on our website and other websites is not incorporated by reference in this press release and should not be considered to be a part of this press release.

Advisors

TD Securities Inc. is acting as exclusive financial advisor and Blake, Cassels & Graydon LLP is acting as legal counsel to Pembina with respect to the Acquisition. Blake, Cassels & Graydon LLP is acting as Canadian legal counsel and Paul, Weiss, Rifkind, Wharton & Garrison LLP is acting as US counsel to Pembina with respect to the Offering.

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