Enbridge sells Alliance Pipeline, Aux Sable to Pembina Pipeline

By Brian Zinchuk

CALGARY – In 1999-2000, the Alliance Pipeline was built from Fort St. John to the outskirts of Chicago, cutting right across Saskatchewan along the way. It was to be a game-changer for natural gas from northeast Alberta and northwest British Columbia, allowing otherwise largely stranded gas access to mid-continental markets and ultimately allowing for the more recent growth in the Montney gas play.

It was also arguably one of the last major pipelines built in Western Canada that did not result in major protests blocking its construction.

The name “Alliance” had a lot to do with the fact that it was initially an alliance of numerous energy companies working together to build it. But as the run-up to actual construction taking place, Enbridge bought out most of the junior partners to the point where it was half-owner of the company and project.

And on Dec. 13, after 23 years in operation, Enbridge sold its stake to the other owner – Pembina Pipeline, for $3.1 billion.

The two companies “entered into a definitive agreement to sell its 50.0 per cent interest in Alliance Pipeline and its 42.7 per cent interest in Aux Sable to Pembina Pipeline Corporation (PPL: TSX) (NYSE: PBA) for a purchase price of $3.1 billion, including non-recourse debt at Alliance of approximately $0.3 billion, and subject to customary closing adjustments,” according to Enbridge.

The sale price represents an attractive valuation of approximately 11 times projected 2024 EBITDA for Alliance and approximately 7 times for Aux Sable, which is in line with other commodity exposed businesses, Enbridge said.

“We are pleased to continue our strong track record of surfacing value for shareholders through an ongoing capital recycling program. With this divestiture, we will have raised ~$14 billion since 2018 at attractive valuations,” said Pat Murray, EVP and Chief Financial Officer. “Today’s transaction reinforces our disciplined approach to capital allocation. We remain committed to optimizing our portfolio, enhancing our industry leading cash flow profile by reducing commodity price exposure, bolstering our financial flexibility, and maintaining a strong balance sheet.”

As part of the transaction, Pembina, a long-standing partner on Alliance and the current operator of Aux Sable, will also assume operatorship of Alliance. Enbridge will work closely with Pembina to ensure a safe and orderly transition.

“The Alliance and Aux Sable system has been a reliable and profitable asset for Enbridge for many years. We would like to thank our high-quality team for their commitment to safety and reliability,” said Cynthia Hansen, EVP and President, Gas Transmission and Midstream.

The divestiture represents an important element of Enbridge’s financing plan, the company said. The sales proceeds will fund a portion of the strategic U.S. gas utilities acquisitions and be used for debt reduction. Any remaining acquisitions funding will be satisfied through utilizing any, or all, of the following financing programs available to Enbridge including its ongoing capital recycling program, issuance of further hybrid securities and bonds, reinstatement of its DRIP Program, or at-the-market equity issuances.

The effective date of the transaction is January 1, 2024, with closing expected to occur in the first half of 2024, subject to the receipt of regulatory approvals and customary closing conditions. Enbridge’s 2024 financial guidance and near-term growth outlook through 2025 remain unchanged as a result of this announcement.

Pembina said, “The cash portion of the acquisition will be funded through a combination of: (i) the net proceeds of a $1.1 billion bought deal offering of subscription receipts; and (ii) amounts drawn under Pembina’s existing credit facilities and cash on hand.” 

“Pembina’s business is built around integrated, difficult-to-replicate assets that provide an enduring competitive advantage and unequaled market access for customers. Alliance and Aux Sable are world-class energy infrastructure assets and increasing our ownership in them will further strengthen our growing franchise,” said Scott Burrows, Pembina’s president and chief executive officer. “This is a rare opportunity to consolidate interests in these assets at an attractive valuation multiple, with cash flow accretion and significant synergy potential. Aligning with Pembina’s strategy, the acquisition grows and strengthens our existing franchise and provides greater exposure to resilient end-use markets.

“Pembina is well positioned to benefit from growing volumes in the WCSB driven by near term catalysts, including new West Coast LNG export capacity, expanded crude oil export capacity, as well as developments in the Alberta petrochemical industry. The funding plan for the acquisition ensures Pembina’s continued financial flexibility and ability to fund future projects that respond to growing demand, while maintaining leverage within targeted ranges.”

“Pembina has enjoyed a strong relationship with Enbridge throughout our six years as partners in Alliance and Aux Sable,” said Jaret Sprott, Senior Vice President & Chief Operating Officer. “Enbridge is a world-class company, with similar values focused on safety, people, customers, and the communities in which we operate. With this acquisition, I look forward to welcoming Enbridge employees to Pembina, enhancing our relationship with Williams and strengthening our growing franchise and integrated service offering.”

Details on Alliance

Alliance’s webpage notes, “The Alliance Pipeline system consists of a 3,848-kilometre (2,391-mile) integrated Canadian and U.S. natural gas transmission pipeline system, delivering rich natural gas from the Western Canadian Sedimentary Basin and the Willis ton Basin to the Chicago market hub. The United States portion of the system consists of approximately 967 miles of infrastructure including the 80-mile Tioga Lateral in North Dakota. The system has been in commercial service since December 2000 and, through an innovative suite of customer-focused services, delivers an average of 1.6 billion standard cubic feet (or 45.3 million standard cubic metres) of natural gas per day.”

The project was different than most major gas pipelines, in that instead of shipping dry gas (methane), it shipped liquid-rich natural gas. Usually the liquids – ethane, butane, propane, etc., would be processed out of the gas stream before hitting the mainline. In Alliance’s case, those liquids are extracted at the far end of the pipeline, at a massive processing facility integral to the entire system known as Aux Sable. Located on the outskirts of Chicago, Aux Sable is also part of the deal.

The pipeline runs right past North Dakota’s Bakken oil region which produces so much surplus associated gas, the flaring is easily visible from space at night. Thus, in 2013, Alliance added a lateral to Tioga, North Dakota to take up some of that surplus gas.

According to archives from the Canadian Energy Regulator, the project was approved in 1998, and that approval noted that it was scheduled to be in service in the second half of 2000. In stark contrast to what has happened since in major mainline pipeline construction in this country, it was indeed complete and operating by December of 2000. In 1998, the project was expected to coast $3.7 billion Canadian, of which $2 billion would be on the Canadian portion.

There are seven mainline compressor stations in Canada, and another seven in the U.S. Four of those compressors are in Saskatchewan – at Kerrobert, Loreburn, Estlin (south of Regina) and Alameda – the last station before crossing the U.S. border south of Carnduff. Several years ago, Alliance affiliate NRGreen installed organic Rankine cycle power generation systems at its compressor stations, with each one producing a net 5 megawatts to the grid by recovering waste heat and turning it into electricity.

NRGreen is also part of the deal.