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Kinder Morgan assets help Pembina build base, weather market downturn, CEO says

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Kinder Morgan assets help Pembina build base, weather market downturn, CEO says

Pembina Pipeline Corp.'s leaders see limited opportunity for immediate, blockbuster profit growth in the company's planned C$4.35 billion acquisition of Kinder Morgan Canada Ltd. and the U.S. stretch of the Cochin pipeline system. However, they said the deal would add high-quality assets to Pembina's portfolio that would help the company thrive in the long term and continue shareholder payouts even through economic downturns.

The purchase would give Pembina full control of the Cochin condensate pipeline, which stretches about 2,900 kilometers, or about 1,800 miles, from Chicago to central Alberta, and it would increase the company's aboveground storage capacity tenfold through the acquisition of Kinder Morgan's 10 million-barrel crude storage and terminaling business centered in Edmonton, Alberta. Pembina will also take control of the Vancouver Wharves marine terminal based at the Port of Vancouver that handles more than 4 million tons of bulk cargo per year.

Pembina President and CEO Mick Dilger called the assets accretive from a "quality standpoint," suggesting they would set his company apart from peers. He made his observations during an Aug. 21 conference call following the deal's announcement.

"Pembina has always played the long game that way, and it shows, particularly in down markets — who's got quality and who doesn't," Dilger said. "This thing is going to be a rock through any market."

Stormy economy

The announcement came as growth has shown signs of stalling in key parts of the global economy, raising concerns about crude oil and fuel demand. Investors have fretted over the recent inversion of the yield curve in the bond market, which has historically heralded recessions.

"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," Dilger said. "So I love that about [the acquisition], and we would have done it just for that reason, even though sometimes in the short term, people don't pay you for quality."

Still, Pembina officials said the company should be able to generate $50 million in incremental run-rate adjusted EBITDA within five years of the acquisition, even with little capital investment in the assets. The company might be able to drum up an additional $50 million in EBITDA by expanding those assets.

The company should generate the first $50 million primarily through revenue synergies achieved by integrating the new assets with its core businesses of transporting, processing and marketing condensate, natural gas and natural gas liquids, executives said.

Solid base

With the Cochin aspect of the deal, Pembina would take control of a fully contracted pipeline that runs through the company's assets in the Bakken Shale formation and the areas around Edmonton and Channahon, Ill., and connects its existing markets. Pembina might extend the eastern leg of Cochin to its assets and markets in Sarnia, Ontario. That prospect is a big part of the company's "blue sky" scenario for the acquisition, Dilger said.

Dilger saw less blue-sky potential for the storage business but said it is a critical area for vertical integration that would not be possible without the deal. While Pembina's existing terminals are "good little" assets, Dilger called the Edmonton terminal "the main event."

"It's the delivery terminal we never had and that we could never catch up and build," Dilger said. "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."

Overall, the acquisition fits with Pembina's strategy over the past 10 years of purchasing assets that are good on their own, better following some capital investment, and great if the company can achieve ambitious expansion and integration plans, Dilger said.

"The opportunities are solid," Dilger said. "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."