DBRS Comments on Inter Pipeline Ltd.’s Acquisition of Remaining Interest in Cold Lake Pipeline System and New Oil Sands Transportation Agreement

DBRS Limited (DBRS) today notes that Inter Pipeline Ltd. (IPL, Inter Pipeline or the Company; rated BBB (high) with Stable trends by DBRS) has announced that it has entered into an agreement to acquire Canadian Natural Resources Limited’s (CNRL; rated BBB (high) with Stable trends by DBRS) 15% interest in the Cold Lake pipeline system (Cold Lake) for $527.5 million. IPL plans to finance the acquisition through the issuance of $177.5 million of common shares and $350 million in term debt (the Transaction). The Transaction is expected to close before the end of the year and is subject to customary closing conditions and adjustments.

DBRS views the overall impact of this transaction on the Company’s credit rating as neutral. Apart from fully consolidating ownership of Cold Lake, the transaction is expected to generate approximately $40 million in incremental cash flow. Cold Lake earnings are largely supported by long-term cost-of-service transportation contracts with investment-grade counterparties. DBRS estimates that on a pro forma basis, although credit metrics will initially weaken slightly because of the acquisition debt, credit metrics on a 2017 full-year basis are expected to remain in line with the current rating range.

IPL has also announced that upon closing of the transaction, the Company will enter into a binding long-term take-or-pay agreement with CNRL to transport diluent and bitumen blend for the first phase of its Kirby North SAGD oil sands project. The contract also integrates existing long-term transportation arrangements for CNRL’s Kirby South development. The agreement will require IPL to construct a new $125 million pipeline connection to CNRL’s Kirby North production facility, with service targeted for Q1 2020. Furthermore, the new transportation agreement is expected to increase contracted capacity commitments by 30,000 b/d and 8,000 b/d on IPL’s Cold Lake and Polaris pipeline systems, respectively. DBRS expects IPL to fund the additional capital expenditures with a prudent mix of debt and equity in order to maintain its recourse debt-to-capital in the low 50% range.

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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