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Pembina Pipeline Corp. is buying Kinder Morgan Canada Ltd. and the U.S. portion of a key condensate pipeline for $4.35-billion, a deal that will bolster its position in the high-demand oil storage and transport business.

For Houston-based Kinder Morgan Inc., the sale marks its exit from Canada after it sold its largest asset – the Trans Mountain oil pipeline – to Ottawa last year for $4.4-billion. It follows a formal process to seek buyers for the majority-owned Canadian operation that ended in the spring after failing to attract acceptable proposals.

Pembina, based in Calgary, is acquiring transport and storage operations, largely backed by long-term contracts that shield it from the vagaries of commodity-price swings. The midstream business has been a bright spot in an energy industry that has been under severe pressure because of tight capacity to move oil and gas to markets outside Canada.

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Its stock is up 20 per cent this year against a backdrop of sharp declines throughout most of the producing sector. Pembina shares dipped 18 cents to $49.09 on the Toronto Stock Exchange on Wednesday. Kinder Morgan Canada surged 32 per cent to $14.45.

“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,” Mick Dilger, Pembina’s chief executive officer, told analysts.

The acquisition will immediately boost cash flow, allowing Pembina to increase its dividend, the company said.

The deal includes the Edmonton terminals operation, which consists of pipeline and rail terminals around the Alberta capital; the Cochin Pipeline, a major import line for condensate; and the Vancouver Wharves, a bulk commodity import and export operation that Pembina says could eventually be integrated into its energy system.

Pembina bulks up

on pipelines, terminals

Pembina is buying Kinder Morgan Canada for

$2.3-billion and the Cochin Pipeline for

$2.05-billion. The 2,900 kilometre-long pipe-

line is a key import artery for the condensate

used to blend with bitumen from the oil sands

so it can be transported to market.

Key assets

CANADA

Edmonton

Terminals

Cochin Pipeline

Vancouver

Wharves

Cochin

Max Bass

Terminal

Riga

Windsor

Cochin

Kankakee

Terminal

UNITED STATES

JOHN SOPINSKI/THE GLOBE AND MAIL

SOURCE: pembina pipeline corp.

Pembina bulks up on pipelines, terminals

Pembina is buying Kinder Morgan Canada for $2.3-billion

and the Cochin Pipeline for $2.05-billion. The 2,900

kilometre-long pipeline is a key import artery for the

condensate used to blend with bitumen from the oil

sands so it can be transported to market.

Key assets

CANADA

Edmonton

Terminals

Cochin Pipeline

Vancouver Wharves

Cochin

Max Bass

Terminal

Riga

Windsor

Cochin

Kankakee

Terminal

UNITED STATES

JOHN SOPINSKI/THE GLOBE AND MAIL

SOURCE: pembina pipeline corp.

Pembina bulks up on pipelines, terminals

Pembina is buying Kinder Morgan Canada for $2.3-billion and the Cochin Pipeline for

$2.05-billion. The 2,900 kilometre-long pipeline is a key import artery for the condensate

used to blend with bitumen from the oil sands so it can be transported to market.

Key assets

CANADA

Edmonton

Terminals

Cochin Pipeline

Vancouver Wharves

Cochin

Max Bass

Terminal

Windsor

Riga

Cochin

Kankakee

Terminal

UNITED STATES

JOHN SOPINSKI/THE GLOBE AND MAIL, SOURCE: pembina pipeline corp.

Under the deal, Pembina will offer 0.3068 of one of its shares for each Kinder Morgan Canada Ltd. (KML) share, which translates into a value of $15.02 per KML share, or $2.3-billion in total, it said. That is a 38-per-cent premium over Tuesday’s close. It will also assume $550-million of KML preferred shares.

Pembina will acquire the 2,900-kilometre Cochin pipeline for $2.05-billion. The line carries condensate to Fort Saskatchewan, Alta., from Riga, Mich., for blending with bitumen from the oil sands so it can flow in pipelines.

What likely clinched the deal after the unsuccessful formal sale effort was the inclusion of the U.S. portion of the Cochin pipeline, said Chris Cox, analyst with Raymond James.

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“I suspect Pembina was pretty adamant that they do include that and eventually there was enough pressure in the process,” Mr. Cox said. “The valuation seems fair; they are definitely good assets.”

A potential snag for Pembina involves one of the oil terminals, known as Base Line, which is jointly owned by Keyera Corp. Keyera could exercise a right of first refusal on the terminal, one of five that are part of the package. Officials with that company did not respond to a request to comment.

As 70-per-cent owner of KML, Kinder Morgan Inc. will get a stake in Pembina currently worth about $1.2-billion. Details of any agreement governing how long the U.S. company must hang onto the stock were not immediately known, but Kinder Morgan said it planned to eventually sell them in an “opportunistic and nondisruptive manner.”

The company intends to use proceeds from the deal to reduce its debt, giving it flexibility to buy back stock and invest in new projects, Kinder Morgan CEO Steve Kean said.

The deal is the second instance in a week that shows heightened interest in Canadian energy infrastructure as the industry struggles to move supplies to the United States and other markets because of delays to major pipeline proposals. Inter Pipeline Ltd., a rival of Pembina’s that operates a network of regional pipelines, said last week that it had been approached by an unnamed suitor, although it was not in talks to sell the company. It made the announcement after The Globe reported the approach, valued at around $12.4-billion.

The contentious expansion of Trans Mountain between Alberta and the B.C. coast – which Ottawa announced on Wednesday is resuming despite opposition from some West Coast Indigenous communities and environmental groups – is one of a few much-delayed projects aimed at allowing new access to markets. Kinder Morgan sold it to the federal government after years of legal and regulatory challenges to the expansion project.

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Mr. Dilger did not rule out an eventual bid for the operation, saying it would fit well with its strategy of getting its customers’ products to end-markets. However, he stressed that Pembina is wary of the likely controversy that the $7.4-billion expansion would bring almost daily.

“Could we successfully own and operate that asset? I’d say we’re uniquely qualified to do that, but 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 that entails. But strategically, for sure, it’s in scope,” he said.

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