DBRS Comments on Inter Pipeline Ltd.’s acquisition of William’s Canadian Midstream Business

DBRS Limited (DBRS) today notes that Inter Pipeline Ltd. (IPL, Inter Pipeline or the Company; rated BBB (high) with Stable trends) has announced that it has entered into an agreement to acquire the shares of The Williams Companies Inc.’s and the Williams Partners L.P.’s Canadian natural gas liquids (NGL) midstream businesses (Williams Canada) for cash consideration of $1.35 billion, subject to closing adjustments (the Acquisition). The Acquisition is expected to close in Q3 2016 and is subject to approval under the Competition Act and other customary closing conditions. DBRS views the Acquisition as somewhat dilutive, as it exposes the Company to incremental commodity exposure, but manageable in the context of IPL’s overall business mix. However, the potential construction of the $1.85 billion propane dehydrogenation facility raises some concerns, as it entails execution risk and, depending on the contractual arrangements, could potentially add volume and commodity risks that could adversely affect the rating.

THE ASSETS
Williams Canada’s assets include two liquids extraction plants located near Fort McMurray, Alberta, a fractionator near Redwater, Alberta, and a pipeline system (Boreal pipeline) that connects these facilities. The two extraction plants have the capacity to recover approximately 40,000 barrels per day (b/d) of NGL and olefins from the upgrader offgas -- a byproduct of oil sands bitumen upgrading operations. The first extraction plant processes offgas from the Suncor Energy Inc.’s (Suncor; rated A (low), Negative trend by DBRS) oil sands upgraders. The second extraction facility is integrated with the Canadian Natural Resources Limited’s (CNRL; rated BBB (high), Negative trend) Horizon upgrader. Suncor and CNRL are contractually obligated to deliver offgas feedstock to the extraction plants under multi-decade supply arrangements. On a combined basis, these facilities are capable of extracting up to 17,000 b/d of ethane-ethylene mix and 23,000 b/d of other NGL and olefinic liquids. The liquids are transported to the Redwater fractionator via the Boreal pipeline and separated into olefins and NGL products. The ethane-ethylene mix is sold to NOVA Chemicals Corporation (Nova; rated BBB (low), Stable trend) under a long-term, fee-based contract, and the remaining NGL and olefinic products are sold under short-term contracts to various customers across North America.

ACQUSITION FUNDING
IPL plans to fund the acquisition with proceeds from the issuance of subscription receipts for total gross proceeds of $600 million (the Offering), new term debt expected to be issued prior to closing and available capacity on its committed revolving credit facility for a total of approximately $750 million in new debt. Inter Pipeline plans to increase its $1,250 million revolving credit facility to $1,500 million by using the $250 million accordion feature. Inter Pipeline also plans to reinstate the premium dividend component of its Premium Dividend™ and Dividend Reinvestment Plan (DRIP) upon the close of the Acquisition. IPL expects the DRIP to raise approximately $25 million in additional equity capital per month.

IMPACT OF THE ACQUISITION ON IPL’S CREDIT RATING
DBRS has assessed the impact of the acquisition on the Company’s Business Risk Profile as moderately negative, with a neutral impact on the Financial Risk Profile, but has concluded that the overall impact on the Company’s credit ratings is neutral.

BUSINESS RISK ASSESSMENT – Moderately Negative
DBRS views the acquisition as moderately negative for the Company’s business risk profile, as it exposes the Company to incremental commodity exposure. However, DBRS expects the commodity exposure to be manageable in the context of IPL’s overall business mix. IPL’s ratings reflect the Company’s earnings from a diversified portfolio of liquids pipelines, bulk liquids storage and NGL extraction businesses supported by medium- to long-term cost-of-service (COS) and fee-based contracts. For the six months ended June 30, 2016, 61% of IPL’s EBITDA was underpinned by COS contracts, primarily in the oil sands transportation business, with no volume and commodity risk; 30% was fee-based exposed to volume risk; and 9% was exposed to commodity price risk. DBRS notes that EBITDA from the Acquisition is provided by a long-term, fee-based contract for ethane-ethylene sales to Nova, which is relatively stable, and shorter-term NGL and olefin product sales to a variety of counterparties with exposure to commodity risk.

FINANCIAL RISK ASSESSMENT - Neutral
IPL’s financial profile is supported by a contracted stream of cash flow generated from its portfolio of diversified energy infrastructure assets. DBRS views the impact of the acquisition on the Company’s financial profile to be neutral, as the Acquisition is accretive to cash flow, and IPL is funding the acquisition with a meaningful issuance of equity. Furthermore, IPL expects to reduce its annual cash taxes by approximately $70 million in 2017 through 2019 through the realization of tax synergies between Inter Pipeline's and Williams Canada's businesses. The Company’s ongoing capital expenditure (capex) requirements are significantly lower, with the completion of major oil sands projects, following the heavy capex cycle from late 2013 to 2015. Overall, DBRS expects the Company’s non-consolidated credit metrics to improve slightly from current levels from the full-year impact of the Acquisition.

DBRS notes that as a result of the Acquisition, Inter Pipeline also assumes responsibility for the potential construction of a $1.85 billion propane dehydrogenation facility (the Project) located near the Redwater fractionator in Alberta. This Project would convert low-cost, locally sourced propane into high-value, polymer-grade propylene, an important petrochemical product largely used in plastics manufacturing. Inter Pipeline expects to make a final investment decision on the Project by the end of 2016. Subject to full sanctioning, the Project is expected to be operational in 2020. DBRS recognizes that the commissioning of the Project entails execution risk and, depending on the contractual arrangements, could potentially add both volume and commodity risk exposure, which could have a negative impact on the ratings. DBRS will review the contractual and financial details relating to the Project as more information becomes available.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodology is Rating Companies in the Pipeline and Diversified Energy Industry (December 2015), which can be found on our website under Methodologies.

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