Good morning. My name is Carol, and I will be your operator today. At this time, I would like to welcome everyone to the Pembina Pipeline Corporation investor and analyst call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, we will have a question and answer session. If you would like to ask a question at that time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, please press the pound key. At this time, I would like to turn the call over to Scott Burrows, Senior Vice President and Chief Financial Officer. Please go ahead, sir.
Thank you, Carol. Good morning, everyone. I'm Scott Burrows, Pembina's Vice President and Chief Financial Officer. This morning, Mick Dilger, Pembina's President and Chief Executive Officer, and I will walk through select slides from a presentation summarizing our announcement this morning on our offer to acquire Kinder Morgan Canada and the Cochin Pipeline. This presentation is being webcast, and the slides are available for download on our website. Before we start, I'd like to remind you that some of the comments made today may be forward-looking in nature and are based on Pembina's current expectations, estimates, judgments, projections, and risks. Further, some of the information provided refers to non-GAAP financial measures. To learn more about these forward-looking statements and non-GAAP measures, please see the presentation slides as well as Pembina's financial reports, which are available at www.pembina.com or on SEDAR.
Actual results could differ materially from the forward-looking statements we may express or imply today. We will begin with slide 3, which outlines some of the specifics related to the transaction. Without going through every point on this page, I want to draw your attention to a few key items. The overall transaction of CAD 4.35 billion is comprised of the offer to acquire all the outstanding shares of Kinder Morgan Canada in exchange for Pembina shares at an exchange ratio of 0.3068 Pembina shares for each common share of Kinder Morgan Canada. The assumption of CAD 550 million of Kinder Morgan Canada preferred shares and the acquisition of the U.S. portion of the Cochin Pipeline from Kinder Morgan, Inc. for approximately CAD 2.05 billion in cash. Funding of the transaction is roughly 48% equity, 52% debt, consistent with our long-term funding plan of 50% equity, 50% debt.
This offer represents a 32% premium given Pembina and Kinder Morgan Canada's 30-day volume-weighted average price, which we believe is very attractive to Kinder Morgan Canada shareholders. In addition to the compelling strategic drivers associated with this transaction, we will touch on momentarily, the financial outcomes are equally attractive. The transaction is immediately accretive to adjusted cash flow per share and increases the company's fee for service and take-or-pay component of adjusted EBITDA. The assets being acquired in the transaction are expected to generate adjusted EBITDA of approximately CAD 350 million in 2019. Through the integration of these assets with Pembina's existing business, we estimate that incremental run rate EBITDA of CAD 50 million can be realized within five years with nominal capital investment. In addition, we expect that the assets could generate an additional CAD 50 million of run rate adjusted EBITDA through expansion opportunities.
As we will discuss further, this transaction strengthens Pembina's financial guardrails and hence Pembina as a whole, and subject to successfully closing the transaction, Pembina will increase its monthly dividend by CAD 0.01 per share or approximately 5%. With that, I will turn things over to Mick to outline a number of the immediate benefits and future potential value creation associated with this transaction.
Thanks, Scott. Good morning, everyone, and thank you for joining us. First, I want to say how excited we are about this announcement. Pembina has a proven track record of using select M&A to supplement and enhance the organic growth within our businesses. This is yet another unique opportunity to create long-term shareholder value and enhance our customer service offering. I'd like to start with the strategic rationale for this transaction, a summary of which can be found on slide four. Through this acquisition, Pembina will acquire high-quality integrated assets, including the Cochin U.S. Pipeline system, the Edmonton storage and terminaling business, and the Vancouver Wharves. The Cochin mainline represents a fully contracted cross-border pipeline system that is highly strategic as it connects Pembina's Channahon, Falcon, and Edmonton area assets and is connected to markets in Mont Belvieu, Conway, and Edmonton.
The eastern leg of Cochin presents a future possibility to connect Pembina's assets and markets in Sarnia, Ontario. The transaction includes a significant crude oil and terminaling business in Western Canada's key energy complex, which connects Pembina's conventional and oil sands pipelines to all major export pipelines while providing increased flexibility and greater egress options to our customers. There's potential for further future integration of the Vancouver Wharves into Pembina's value chain. The acquired assets are predominantly supported by long-term fee-for-service, take-or-pay contracts, which are underpinned by investment-grade counterparties. The transaction enhances Pembina's basin, currency, and market diversification with approximately 50% of adjusted EBITDA being denominated in U.S. dollars and the Cochin Pipeline System's connections into the premium quality condensate market in the Chicago area. We see meaningful upside available from existing identified capital projects, as well as further integration with Pembina's other business.
As can be seen from the map on page five, this acquisition represents an excellent opportunity to continue to build out our low-risk, long-term, fee-for-service business while also extending our reach into the U.S. through highly desirable cross-border pipeline. Cochin is one of two cross-border condensate import pipelines spanning 2,900 km from Chicago, Illinois to Fort Saskatchewan, Alberta, and has a design capacity of up to 110,000 bpd. Cochin complements Pembina's existing condensate infrastructure in Western Canada and further extends the company's reach into the U.S., with the potential to provide Pembina and its customers improved market access and tremendous long-term optionality. The Edmonton terminals is a large crude oil storage and terminaling business in the core of Western Canada's crude oil complex and represents a tenfold increase in Pembina's above-ground storage capacity with excellent inbound and outbound connectivity.
The storage business also has strong strategic alignment with Pembina's existing conventional and oil sands pipelines and marketing businesses. The storage business also includes direct connectivity to several rail terminals, ownership, which is included in the transaction. Excuse me. Finally, the Vancouver Wharves is an important commodity export and import business in the Port of Vancouver, Canada's largest port. The Vancouver Wharves are a 125-acre bulk terminal facility which transfers over 4 million tons of cargo annually and is competitively positioned as the facility of choice for key agricultural, mining, and petroleum product customers. Pembina has identified a number of expansion possibilities at Vancouver Wharves, which would further integrate these assets into Pembina's value chain, help improve customer netbacks, and attract additional volumes to Pembina's existing asset base.
As can be seen on slide eight and nine pro forma, Pembina will own over 24 million barrels of net storage capacity and will have total hydrocarbon transportation capacity set to reach 3.2 million barrels of oil equivalent per day. Moving on to slide 10, this transaction continues to build out the Pembina store, adding key pieces of infrastructure to our integrated value chain. The Vancouver Wharves is another asset within our growing West Coast export business, and the Cochin Pipeline system and the Edmonton terminals add exciting new elements to our crude oil and condensate value chain. At our Investor Day, we discussed our focus as a company on getting better, not just bigger. Clearly, this transaction is aligned with that objective. I'll now turn things back to Scott to highlight how this transaction strengthens our financial guardrails.
Thanks, Mick. Turning your attention to slide 11, Pembina remains committed to building our business within our financial guardrails. This acquisition fits squarely within them. As can be seen from the slide, this transaction strengthens the quality of Pembina's earnings as it increases the company's fee-based component of adjusted EBITDA. Furthermore, the assets to be acquired are underpinned by strong investment-grade counterparties, ensuring our counterparty credit profile remains strong. Our payout ratio and BBB credit metrics remain within our targeted ranges. In summary, we see this transaction as an excellent opportunity to acquire strategically aligned assets that are low risk, high-quality extension of Pembina's value chain that will enhance our customer service offering. We have demonstrated a strong track record of successfully integrating acquisitions, and our plan in the coming five years is to add incremental EBITDA by having Kinder Morgan Canada, Cochin, and the Pembina assets work together.
Our long-term strategy remains unchanged. We continue to focus on reducing risk and creating shareholder value. We see this transaction providing both quality assets as well as meaningful accretion opportunities over the long term. As always, thank you to our stakeholders, our investors, customers, employees, and communities for their ongoing support. With that, we'll wrap things up. Carol, please go ahead and open the line up for questions.
Certainly. As a reminder, if you would like to ask a question, please press star followed by the number 1 on your telephone keypad. Our first question this morning comes from David Galison from Canaccord Genuity. Please go ahead.
Good morning, everyone. Just a quick question on the Cochin Pipeline. What are the length of contracts on that pipeline?
We'll classify them as long-term. We haven't disclosed that at this point.
Just wondering, longer-term for that pipeline, if we were to get into a situation where there's lower demand for condensate, have you thought about the potential for maybe reversing that pipeline and what might be involved from a permitting standpoint to export maybe crude oil or something?
By way of history, that used to be a propane export pipeline, and so it clearly has been flowing in the other direction, and that's part of the utility, the optionality around this asset. We think the base case, it continues in service. That'll depend on customers. If the customers want to keep exercising their desire to expand, then it'll stay as is. If the market sends a different signal to reverse, we can certainly consider that as well.
Okay. I was just wondering if you could talk a bit about or give a bit of color around the integration opportunities and what some of the opportunities there are there.
The opportunities, as mentioned on the call, it really is the vertical integration of tanks and Vancouver Wharves with our existing business. We touch the molecules more than once, we have the opportunity to make money more than once while also enhancing our customer service offering. It's really the same strategy. These assets are just two more key pieces. The tanks, for example, it's the delivery terminal we never had, and that we could never catch up and build. We never really had a delivery terminal for our crude oil pipelines. This gives us that. It gives us another source of diversification for condensate supply. It's just the integration, really.
Maybe just one point of color, David, is they're generally all revenue synergies. We're not baking in a significant amount of cost synergies, just to be clear.
Okay. Then just one quick question on the guardrails. Of the 87% fee base pro forma, can you talk about approximately how much of that is take or pay?
You mean on the specific acquisition? I think overall, on the base case, if you go to the breakdown of our EBITDA stream, roughly 60% to 65% is take or pay today. This would be slightly accretive to that number.
Okay. All right. Thank you very much.
Our next question comes from Robert Catellier from CIBC Capital Markets. Please go ahead.
Okay. Good morning. Congratulations on the transaction. I just wanted to start with a structuring question. Is there a lockup on the shares that Kinder Morgan's receiving?
Rob, that'll come out when the circular gets filed. I'm not at liberty to disclose that right now.
Okay. I'm just curious as to whether or not Keyera has a ROFR on the Base Line Terminal, and if in fact they do, what's the status of that? Have they waived it or is that still pending?
Yeah. I can confirm that there is a ROFR on one of these assets, but I'm not at liberty to discuss it. That's subject to confidentiality.
Okay, what is the base case, then, if the ROFR is exercised in terms of accretion and guardrails and really, quite frankly, the opportunity that comes with this?
We don't know that because we don't know what a ROFR price might be. We haven't plowed that field yet, Robert, so we won't be able to answer that question today.
Right. Your view, then, I suppose, along the way has to be you're willing to work with other industry participants and partner with them on co-ops where it makes sense?
Yeah. It always has been, for sure. We have, as you know, many joint ventures now, more than we ever envisioned.
Yeah.
We're actually getting pretty good at them.
Okay. You've indicated two streams of growth in terms of the upside, both CAD 50 million, one coming from CapEx investment, the other from low CapEx opportunities. That's the CAD 50 million over five years. Can you give us a little bit of color as to where that CAD 50 million comes from? Just on the face of it, I can see how there'd be some benefits for the crude oil marketing business, how would you characterize the upside from that CAD 50 million over five?
The revenue synergies, as I said, it involves the connectivity of our existing businesses with these businesses and then the merchant overlay that our marketing business has over our entire business. Consider now, we've got marketing all under one roof, whether crude oil or condensate or NGLs, and it reaches from the field. Once Rupert comes on stream or we take over Vancouver Wharves, it reaches from the field all the way to the Far East. There's quite a bit of opportunity there.
My last question will be, how do you see the fit of the assets that Kinder Morgan and Cochin can bring to the table, specifically with the assets you've acquired from Veresen?
These are LVP assets. Those were HVP assets. There's definitely some crossover. For example, our Northeast BC processing produces condensate, which flows down this value chain. There is crossover, but it's a little bit more peripheral because this was an LVP build-out, that was an HVP build-out. The connection points or the crossover points are, condensate comes out of Aux Sable, it flows up Cochin, so we have that synergy in that direction. Then some synergy in the other direction. The map, really. We got two pipes really in one ditch almost, Cochin and Alliance, and some ability to operate more efficiently had we not owned Alliance, but that's a little peripheral.
Right. It's not the driver, obviously. Okay.
Sorry, Robert. It's really having this existing LVP business with this LVP business more than any kind of an NGL or a gas value chain synergy.
Yeah. That's what I thought. I'll get back in the queue. Thanks.
Our next question comes from Andrew Kuske from Credit Suisse. Please go ahead.
Thank you. Good morning. I guess the question is for Mick. It's really how do you think about the KML Cochin deal relative to some of the other deals you've done in the past, whether it be Veresen, Provident, Advantage? How do you think about this from a positioning standpoint for you?
Similar. We continue to follow the pattern where when we buy something, it elevates the value of our existing assets. Thereby, it's connected. The way I think about this deal is similar to the other ones. It's just high-quality assets, and the people we hope to get through this are obviously high-quality people. High-quality people produce high-quality assets. We had to pay a handsome amount for all three of those transactions. Just looking back at Provident, we define Provident as a good acquisition. When we built RFS II, it became very good. When we built RFS III, it became great. Now that we're leveraging that supply to petrochemicals, it's maybe beyond great. Veresen was a good acquisition. If we can get the Aux Sable Alliance expansion done, then it becomes very good. If we get Jordan Cove done, it becomes great.
In parallel here, I think this is a good acquisition because it fits today without said synergies, said revenue synergies. It's about quality. It strengthens. It's modestly accretive, but it's about quality. Our fee-for-service component goes up, the counterparty credit goes up, our resilience goes up, and then as we're able to layer in those two buckets of synergies, if we get to 50 plus 50, that doesn't include all our blue sky ideas, which we always have. They're going to be hard. They're individually not probable. Collectively, there's a good probability around that. This has those same layers. It's good now. It could become very good within a few years. Some of our blue sky opportunities, for example, if we can connect Corunna and start feeding Corunna with either products out of Aux Sable, then that moves it into the great range.
That's very helpful color. Then maybe just on the storage business, because there's a step function change to your storage business with the KML deal. Do you see further growth opportunities there that aren't in your numbers at this stage?
The opportunities at storage are in the 50 plus 50. There's not a ton of blue sky. The blue sky is more around what might Worse become, what might the east leg of Cochin become. The stuff that Kinder had in the data room, we bought it. We believe it can happen, and it's a great footprint. It's something we could never replicate. We tried as hard as we could with our Edmonton terminal, but that's a good little asset. CDH is a good little asset. This is the main event. It's the storage facility in the heart of the Western Canadian business. Given the opportunity to grab that storage business we never had, it was pretty compelling.
Okay. I'll leave it at that then. Thank you.
Our next question comes from Robert Kwan from RBC Capital Markets. Please go ahead.
Good morning. Mick, you were talking a lot around the storage assets of the terminals. As well, Cochin, as you think about those two assets, and then you look at the revenue synergies in that first 50 million bucket and then layering on the expansion opportunities, which of those two was really the most attractive? Where are you getting the majority of the revenue synergies and the expansion opportunities?
Obviously, the first 50 is the most attractive because it's nominal capital, and it provides the real accretion that it doesn't come as of today. This thing's only modestly accretive today. It's quite accretive, in my opinion, from a quality standpoint. Pembina has always played the long game that way, and it shows, particularly in down markets, who's got quality and who doesn't. This thing's going to be a rock through any market. When you see yield curves invert and stuff like that, this is the kind of asset you want to have that can pay your dividend through any kind of cycle. I love that about it, and we would've done it just for that reason. Even though sometimes in the short term, people don't pay you for quality, they understand it better when things aren't going well and the modest accretion.
The ability for us to get that first 50, I think, through integration is the financially accretive reason. Then, the longer-term build-out is kind of like, the way to best characterize it's kind of a brownfield, greenfield build-out economics that you've seen from us for the last 10 years. We'll pick away at it, and the opportunities are solid. They're not massive, but there's just lots of little base hits in there that we think we have a good deal of control over executing.
Just within the revenue synergies, is that mostly integration of the terminals or is that mostly Cochin?
It's really overlaying our, what we call MBU over top of these assets. That's the first 50 and the next 50 is the build-out of these assets in the normal course. Then, as I said, that's how we talk base development. Then we've got a bunch of blue sky opportunities. I won't go into them all, but one is reactivating the east leg and connecting really the balance of our assets in a really interesting and exciting way. That's a possibility and you could throw up 100 obstacles of why that'll be hard, but, we'll pick away at it.
Got it. Just coming to the numbers here. Are you able to confirm what Kinder had floated in terms of the Edmonton rail step down being CAD 54 million coming into effect next year?
Yeah. Robert, I'm not going to confirm specific numbers, but I can confirm that we're aware obviously of the contractual profile of these assets. Part of the reason for the synergies that we've put out there is so that the market can understand that we expect the synergies to more than offset some of those declines.
Got it. Okay. If I can just finish, if I can come back to the ROFRs just to confirm. There's only one ROFR on the assets?
There's only one material one.
Okay. Since we don't know what it is, hopefully you can talk about it. Mick, you kind of said we don't know yet because we don't know the price. Is it fair to say that it's not a formulaic price in the ROFR?
We bought a company. We're still assessing how that value breaks out. Put it this way, if the ROFR were exercised, it's not devastating. It's not like we're going to go, "Oh man, I wish we didn't do this." It just shrinks the asset size a little bit. It's not something that's keeping us awake at night.
Okay. That's great. Thank you very much.
As a reminder, if you'd like to ask a question, please press star followed by the number one on your telephone keypad. Our next question comes from Patrick Kenny from National Bank Financial. Please go ahead.
Yeah. Good morning, guys. Just on the rail terminals here. I know historically, crude by rail has never really been core to the Pembina franchise. Does that now change with this transaction or did these assets just come along with the deal and we might be expecting you guys to potentially divest of your half ownership at some point after closing the deal?
It's a good question, and I think you nailed it. When we first looked at these assets, Cochin wasn't even for sale. It was kind of like, Vancouver Wharves, well, whatever, and we're not really into rail, so which parts of this would we like to own? Then we started to think more about everything that was in the basket. I think we're going to have a hard look at rail. We certainly didn't buy it for rail. We originally didn't really buy it for Wharves, to be honest. Now as we looked harder and we saw the opportunity and we all know, everybody on the call and here in the room knows that rail terminals or not rail, but export terminals are difficult to establish. We started to admire the entirety of the asset base and what Kinder had built.
We're going to have a hard look at everything in the basket. The rail terminals, things like that are nominal in value in the scheme of this CAD 4.3 billion. The rail terminal is extremely nominal in value. We'll have a hard look at it. We own a huge rail business now. We're very good at logistics. We'll see what can happen here and if either immediately or two years from now, that doesn't make sense for us, then we'll do the right thing, but we've got it now, so we're going to have a hard look at what all these pieces can do.
Okay. That's great color. Thanks, Mick. Got to ask, obviously with this asset base being adjacent to the Trans Mountain pipeline, would you ever now consider taking over TMX from the federal government? Obviously, if the price and construction risk profile was right, of course.
Yeah. TMX clearly, if you think about our 10-year plan and our strategy of getting Western Canada's hydrocarbons to the highest price markets on the globe, which you consider Prince Rupert, that's exactly what that is. Where's the best market in the world, and how do we get customers' products there? That's what we're trying to do here, along with strengthening our entire business. TMX would clearly fit into that mandate, we cannot take on the noise with something like that. In its current state, I could ask you if Pembina, rather than wanting to never be in the newspaper, if I said, "How would we best be in the newspaper every day?" You'd probably say, "Oh, if you'd go buy TMX right now." That's just not on for us. Could we successfully own and operate that asset?
I'd say we're uniquely qualified to do that. We've got a lot of other things that are going our way, and we don't want to submerge our entire management team or subject our entire organization and reputation to all the noise that entails. Strategically, for sure, it's in scope.
Got it. Last one from me here, maybe for Scott, just to come back to the guardrails on slide 10. Looks like the deal is modestly dilutive to the FFO to debt ratio. Just to confirm, no plans to issue common equity or reinstate the drip for the cash portion of U.S. Cochin and you're fine with the pro forma leverage ratios until, at least some of the synergies start to kick in?
Correct. Not associated with this transaction. We don't expect any additional equity. We've obviously socialized this transaction with the rating agencies and feel comfortable about their take on the transaction. If you think about all the things we've talked about today, it's accretive to all the kind of strategic rationale that the credit rating agencies look for long-term contracts, credit-worthy counterparties. From a business risk profile, this definitely improves Pembina's overall business risk. No, there's no plans to do common equity associated with this transaction. When you think about that FFO to debt, that's obviously our reconciliation of the S&P numbers. This transaction is a little unique in the terms of the number of operating leases that come along with it. That also impacts that, baked into that 18%. No, we feel comfortable with where we're at.
Okay. That's great. That's it for me, guys. Thanks.
Our next question comes from Elias Foscolos from Industrial Alliance. Please go ahead.
Good morning. Just a couple of questions. In terms of regulatory requirements for closing, and I'm going to focus on Competition Bureau, I would assume that this would be a pretty low risk. Would you agree with that assessment?
It's, Mick, I'm not anywhere near an expert in that. We think the Competition Bureau will probably have a look at this, in the ordinary course. We envision it following a similar process to Veresen. I don't want to hazard to guess on whether it's more or less risky. We feel those challenges are surmountable. We'll wait and see if they decide to have a look at it and how that goes.
Okay, thanks. I'm no expert on that either, but I thought I would ask. Following up on Pat's comment on slide 10, with the targeted payout ratio, so that's bullet two. On your illustrative 2019 pro forma, are you assuming an increase in the dividend or the 5% increase in the dividend in that pro forma? I haven't had time to go through the numbers yet.
No, we haven't, because that dividend really doesn't come into effect until closing, which as we stated is anticipated in the first half of 2020.
Great. That's it for me. Thank you very much.
I'll turn the call back for closing remarks.
Well, thanks everybody. Very excited about this opportunity. We think it really bolsters the quality of our asset base, the resilience, and gives us just a bunch more tools in the toolbox to keep growing and strengthening our value chain and, with good to very good, potentially upside exposure. Thanks for your continued support. Have a great day.
This concludes today's conference. You may now disconnect.