Almost 14 years after Rich Kinder made his first big buy in Canada, the Texas midstream magnate is ready to close the book on a profitable foray into the north.
With a C$4.35 billion sale of Kinder Morgan Inc.'s Canadian subsidiary and a U.S. pipeline pending, the co-founder and executive chairman of Kinder Morgan has reaped a generous profit on a US$5.6 billion purchase of Terasen Inc. in 2005. Over the years, Kinder Morgan wound down Terasen assets with the C$4.5 billion sale of the Trans Mountain pipeline to the Canadian government in 2018, the C$3.7 billion sale of Terasen's natural gas utility in 2007 and the disposal of a smattering of other assets.
Compared to the Trans Mountain sale and gas utility exit, however, the Kinder Morgan Canada Ltd. deal caught some off guard. Earlier this year a Kinder Morgan Canada divestment appeared to fail. Only a late reexamination of the assets led Pembina Pipeline Corp. to the deal, Pembina CEO Mick Dilger said.
The attraction of the assets was their quality — a fully contracted pipeline that carries needed condensate to the oil sands region from the U.S. and the opportunity for a 10-fold increase in its oil storage operations near Edmonton, Alberta, where a pipeline capacity crunch has led to chronic shortages of inventory space. Dilger, who oversaw the C$8.85 billion takeover of Canadian midstream operator Versen Inc. in 2017, has a reputation for squeezing value out of acquisitions.

Oil storage gains
The deal has some kinks to be worked out. Kinder Morgan will not make a clean exit from Canada as it traded a roughly 5% stake in Pembina shares for its 70% stake in Kinder Morgan Canada. And Kinder Morgan's stake in a joint-venture oil storage facility in the Edmonton area, home to refineries and pipeline connections to western Canada and the U.S., is encumbered by a right-of-first-refusal held by rival Keyera Corp. that must be resolved before that part of the deal can close. Still, Dilger was enthusiastic about the prospects for increasing his company's oil-storage footprint.
"We tried as hard as we could with Edmonton — our Edmonton Terminal," Dilger said on an Aug. 21 conference call. "That's a good little asset but this thing, this is the main event. It's the storage facility in the heart of the western Canadian business. And so given the opportunity to grab that storage business we never had, it was pretty compelling."
Pembina and Keyera, whose offices are just blocks apart in downtown Calgary, are also neighbors in the pipeline rights of way that snake through the Baseline Road region, where both have pipelines that connect the oil sands region to the hub. While acknowledging the existence of Keyera's first call on Kinder Morgan's share of the 4.8 million-barrel Base Line Terminal operation, Dilger did not offer investors any insight into how the situation might unfold.
"We don't know what the [right of first refusal] price might be," he said. "We haven't plowed that field yet ... so we won't be able to answer that question today."
Keyera is in a good position to buy the rest of the Base Line Terminal operation, which is adjacent to its fuel additives processing plant, after raising C$600 million in a hybrid offering recently, analysts at Tudor Pickering Holt & Co. said in an Aug. 22 note. The offering helps give Keyera the capacity to potentially fund the purchase of the remaining 50% interest in the Base Line Terminal and possibly further expand the facility and could help Pembina fund the separate, but related, purchase of the Kinder Morgan's Cochin NGL pipeline in the U.S.
"The [right of first refusal] risk was known throughout the process and Keyera is expected to be served the notice including value of the offer and required response deadline," the analysts said in the note. "If exercised, the proceeds would be used to fund a portion of the C$2.1 billion of cash consideration paid for the U.S. portion of Cochin."
Cochin
Cochin is a key asset in Pembina's takeover deal. The 12-inch-diameter pipeline winds across 1,810 miles and six U.S. states to connect Fort Saskatchewan, Alberta, and Windsor, Ontario. Originally built to supply propane produced in Alberta to the U.S. Midwest, the 95,000 bbl/d line was reversed by Kinder Morgan in 2014 to carry condensate from a hub in Kankakee, Ill., back to Canada for use in oil sands operations. Condensate is ultra-light oil that is used to thin oil sands bitumen for shipment by pipeline. Kinder Morgan combined the Utopia Pipeline, an NGL line connecting with Cochin and Windsor, in the deal.
Cochin also closely tracks the route of Pembina's Alliance Pipeline, a venture it owns with Enbridge Inc. that carries gas from Canada to the Midwest. The Aux Sable NGL plant in Illinois, which is partly owned by Pembina, ships condensate on Cochin, which Dilger identified as a "crossover point." The Canadian portion of Cochin is part of the Kinder Morgan Canada purchase.
Condensate is highly valued in the oil sands region, which sent just over 3 million bbl/d of heavy crude to the U.S. in 2018. One third of each barrel of blended bitumen can be made up of condensate, depending on factors like temperature and quality of the tar-like crude being shipped. While Canada has recently seen condensate production increase from the shale gas fields that straddle the Alberta-British Columbia border, pipelines like Cochin and rail shipments are vital to supplies.
"The crossover points are condensate comes out of Aux Sable, it flows up Cochin, so we have that synergy in that direction and then some synergy in the other direction," Dilger said. "We've got two pipes really in one ditch, almost, — Cochin and Alliance — and some ability to operate more efficiently had we not owned Alliance."
Dilger also hinted that the eastern portion of the Cochin system could be built out to increase its access to the NGL processing center of Sarnia, Ontario, about 100 miles north of Windsor.
A last component of the acquisition is the Vancouver Wharves bulk commodities terminal. Located in the shadow of Vancouver, British Columbia's iconic Lions Gate, the facility handles mostly bulk shipments of sulfur, mineral concentrates and some agricultural products. While the handling of bulk commodities has been a mainstay of Kinder Morgan's business, it is not directly related to Pembina's operations. However, the Tudor Pickering Holt analysts noted that the facility could provide a future benefit for Pembina's under-construction propane dehydrogenation plant. That facility, which would have the capacity to produce 550,000 tonnes of components used in making plastics annually, is expected to be in service by mid-2023.
The company could make "use of Vancouver Wharves to move polypropylene overseas after [the processing plant's] build-out," the analysts noted.
