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Pembina to Acquire Kinder Morgan Canada in Multi-Billion Dollar Deal

Pembina Pipeline Corporation, August 22, 2019

Pembina Pipeline Corporation ("Pembina" or the "Company") has entered into agreements pursuant to which it will acquire Kinder Morgan Canada Limited ("Kinder Morgan Canada" or "KML") (the "Corporate Acquisition") and the U.S. portion of the Cochin Pipeline system ("Cochin US") from Kinder Morgan, Inc. ("KMI") (the "Cochin US Acquisition") for a total purchase price of approximately $4.35 billion (the "Transaction").  The Transaction values Kinder Morgan Canada at approximately $2.3 billion, or $15.02 per share, based on an all-share exchange ratio of 0.3068 of a common share of Pembina per KML security and Pembina's 30-day volume weighted average price on the date hereof; and Cochin US at approximately $2.05 billion for cash consideration.

Subject to closing of the Transaction, Pembina's board of directors has also approved a $0.01 per common share, or approximately five percent, increase to its monthly common share dividend rate.

Through the Transaction, Pembina will acquire strategically located assets including the Cochin Pipeline System, the Edmonton storage and terminal business and Vancouver Wharves, a bulk storage and export/import business. Upon closing, the Transaction immediately provides Pembina with well-established business platforms and substantial opportunities for growth.

High Quality, Integrated Assets

The Cochin mainline system ("Cochin") represents a fully contracted cross-border pipeline system that is highly strategic as it connects Pembina's Channahon, Bakken and Edmonton area assets and is connected to markets in Mont Belvieu, Conway and Edmonton. Further, there is future potential to connect the eastern leg of the Cochin Pipeline System to Pembina's assets and markets in Sarnia, Ontario.

As well, the Corporate Acquisition includes a significant crude oil storage and terminalling business in Western Canada's key energy complex, which connects Pembina's conventional and oilsands pipelines to all major export pipelines, providing increased flexibility and greater egress options to customers.

Finally, there is potential for further integration of Vancouver Wharves assets into the Pembina value chain.

Strong Commercial Platform

The assets to be acquired under the Transaction are predominantly supported by long-term, fee-for-service, take-or-pay contracts, which are underpinned by investment grade counterparties.  The Transaction strengthens Pembina's financial guardrails and hence Pembina as a whole.

Enhanced Diversification and Future Growth

The Transaction enhances Pembina's basin, currency and market diversification with approximately 50 percent of acquired adjusted EBITDA being denominated in U.S. dollars and the Cochin Pipeline System's connections into premium quality condensate supply in the Chicago area. Further, Pembina believes there is meaningful upside available from currently identified capital projects, as well as further integration with Pembina's existing businesses.

Positive Financial Impact

The Transaction will be 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 $350 million in 2019. Through the integration of these assets with the Company's existing businesses, Pembina estimates that incremental run-rate adjusted EBITDA of $50 million can be realized within five years with nominal capital investment.  In addition, Pembina expects the assets could generate an additional $50 million of run-rate adjusted EBITDA through expansion opportunities.

"This acquisition is highly strategic for Pembina, providing enhanced integration with 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. "It represents an ideal opportunity to continue building on our low-risk, long-term, fee-for-service business model while extending our reach into the U.S. through a highly desirable cross-border pipeline.  Further, it will enhance our diversification as well as Pembina's customer service offering as a leading provider of integrated services to hydrocarbon producers in Western Canada," added Mr. Dilger.

"This transaction strengthens the quality of Pembina's adjusted EBITDA, is accretive to adjusted cash flow per share and fits squarely within Pembina's financial guardrails.  Combined, these factors give us confidence to increase our dividend by approximately five percent upon close of the Transaction," stated Scott Burrows, Pembina's Senior Vice President and Chief Financial Officer.

Overview of Acquired Assets

The Transaction represents a unique opportunity for Pembina to acquire 100 percent of Cochin, which is one of two significant cross-border condensate import pipelines.  Cochin, which spans 2,900 km from Chicago, Illinois to Fort Saskatchewan, Alberta, has a design capacity of up to 110,000 barrels per day and is primarily underpinned by long term, take-or-pay commitments with investment grade counterparties.  Cochin complements Pembina's existing condensate infrastructure in Western Canadaand 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. Cochin has operated both as a condensate import system, and previous thereto, as a propane export system.

The Transaction also provides Pembina enhanced diversification and an entrance into a new franchise opportunity through a significant crude oil storage terminalling business (the "Storage Business") strategically located in the core of the Edmonton area crude oil complex and underpinned by long-term, fee-based contracts with investment grade counterparties.  With 10 million barrels (net) of storage capacity, excellent inbound and outbound connectivity and strong industry fundamentals associated with crude oil storage, Pembina views these assets as highly attractive in the current environment.  The Storage Business also has a strong strategic alignment with Pembina's existing conventional and oil sands pipelines and marketing businesses. The Storage Business also includes direct connectivity to two rail terminals, ownership in which is included in the Transaction.

The Transaction also includes Vancouver Wharves, a critically important commodity export and import business in the Port of Vancouver, Canada's largest port. Vancouver Wharves is a 125 acre bulk marine terminal facility, which transfers over four million tonnes of bulk cargo annually and is supported by fee-based contracts with creditworthy counterparties 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.

Summary of Corporate Acquisition Terms

Under the terms of the arrangement agreement governing the Corporate Acquisition, Pembina will acquire all of the issued and outstanding restricted voting shares (the "Restricted Voting Shares") and special voting shares (the "Special Voting Shares") of Kinder Morgan Canada and all of the class B units (the "Class B Units") of Kinder Morgan Canada Limited Partnership by way of a plan of arrangement under the Business Corporations Act (Alberta). Pembina is offering to acquire each of the outstanding Restricted Voting Shares and each Class B Unit in exchange for 0.3068 of a common share of Pembina, which represents a 32 percent premium, based on Pembina and Kinder Morgan Canada's 30-day volume weighted average prices of $48.96 and $11.37, respectively, on the date hereof.  The Corporate Acquisition is valued at approximately $2.3 billion including the assumption of Kinder Morgan Canada's preferred shares and outstanding net debt.

The Corporate Acquisition is subject to approval of: (a) at least 66 2/3 percent of holders of Restricted Voting Shares and Special Voting Shares, voting together as a single class; and (b) a majority of holders of Restricted Voting Shares, in each case present in person or by proxy at a special meeting of the holders of Restricted Voting Shares and Special Voting Shares to be called to consider the Corporate Acquisition, approval of the Court of Queen's Bench of Alberta, certain regulatory approvals in Canada, and other customary conditions.

KMI, who holds all of the Special Voting Shares (an approximate 70 percent of the voting rights of KML) and a corresponding 70 percent economic interest in Kinder Morgan Canada's business and assets (by way of its ownership of all the Class B Units), has entered into a support agreement pursuant to which it has agreed to vote its Special Voting Shares in favor of the Corporate Acquisition. The Corporate Acquisition is also subject to clearance under the Competition Act (Canada) and the Canada Transportation Act.

Summary of Cochin US Acquisition Terms

Under the terms of the purchase and sale agreement, Pembina, through its wholly-owned subsidiary Pembina U.S. Corporation, will acquire all of the outstanding membership interests in Kinder Morgan Cochin LLC, the entity holding Cochin US, for US$1.546 billion in cash, representing approximately $2.05 billion at the prevailing foreign exchange rate. The Cochin US Acquisition is subject to clearance under the HSR Act of 1976.

Additional Transaction Details

The Transaction is cross-conditional on the closing of both the Corporate Acquisition and the Cochin US Acquisition. It has been unanimously approved by the board of directors of the Company and is expected to close in the first half of 2020.

The arrangement agreement in respect of the Corporate Acquisition includes customary provisions relating to non-solicitation, fiduciary outs for Kinder Morgan Canada with respect to financially superior alternate proposals and Pembina's right to match such proposals until the date of the Kinder Morgan Canada shareholders' approval of the Transaction. 

The cash consideration associated with the Cochin US Acquisition will be initially funded through the Company's $2.5 billionunsecured credit facility and a new $1 billion committed term facility. Subsequently, Pembina expects to refinance this with the issuance of Medium-Term Notes.

A copy of the arrangement agreement and the purchase and sale agreement with respect to the Transaction will be filed on Pembina's SEDAR profile and will be available for viewing at www.sedar.com.

 

Advisors

TD Securities Inc. is acting as exclusive financial advisor to Pembina with respect to the Transaction. TD Securities Inc. has provided a verbal opinion to the Pembina Board of Directors stating that, as of the date thereof and subject to the assumptions, limitations and qualifications contained therein, the consideration payable pursuant to the Transaction is fair, from a financial point of view, to Pembina. Stikeman Elliott LLP is acting as Canadian legal advisor to Pembina and Latham & Watkins LLP is acting as United States legal advisor to Pembina.

About Pembina

Calgary-based Pembina Pipeline Corporation is a leading transportation and midstream service provider that has been serving North America's energy industry for 65 years. Pembina owns an integrated system of pipelines that transport various hydrocarbon liquids and natural gas products produced primarily in western Canada. The Company also owns gas gathering and processing facilities; an oil and natural gas liquids infrastructure and logistics business; is growing an export terminals business; and is currently constructing a petrochemical facility to convert propane into polypropylene. For more information, visit www.pembina.com.


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