ALBERTA
Heartland Petrochemical Complex Update
HPC represents Inter Pipeline’s largest growth project and is expected to create a step change in cash flow generation once fully in-service. HPC, which is in the final stages of completion in Strathcona County, Alberta, will be an industry-leading petrochemical facility converting locally sourced, low-cost propane into high-value polypropylene. Polypropylene is an easily transported and fully recyclable plastic used in the manufacturing of an extensive range of essential finished products and consumer goods such as healthcare products, medical supplies, textiles and lightweight automotive components. Despite the prolonged impact of COVID-19, with Inter Pipeline’s strong adherence to rigorous health and safety procedures, HPC has exceeded a world-class 14 million work hours without a lost time incident on-site.
Since the April 22, 2021 HPC update, Inter Pipeline has successfully negotiated an eighth take-or-pay agreement for HPC’s production capacity. The new contract is with an investment grade, multinational integrated energy producer.
Inter Pipeline has now secured 68 percent of HPC’s production capacity under long-term take-or-pay agreements, which is very near our stated objective to contract a minimum 70 percent of capacity in advance of the facility becoming operational. Negotiations are continuing with several additional counterparties. These contracts are structured to include a stable return on capital payment to Inter Pipeline plus fixed and variable operating fees, with no exposure to commodity price fluctuations. The weighted average term of the executed contracts remains approximately nine years.
If no other contracts are secured, the remaining 32 percent of HPC production capacity would be tied to merchant sales of polypropylene production. Merchant sales are exposed to the spread between North American posted polypropylene and Edmonton propane prices. The current June 2021 spread is US$2,600 per tonne and is at a record high since the Cochin pipeline discontinued Alberta propane export service in 2014. The current spread is also approximately 80 percent higher than the average spread of US$1,450 per tonne over the same time period. The current strong pricing spread provides the opportunity for additional upside to Inter Pipeline should this pricing dynamic continue post HPC start-up and is indicative of the strong competitive positioning that HPC enjoys with its abundant, low-cost Canadian propane feedstock.
Inter Pipeline is planning a staggered start-up of HPC with the commencement of polypropylene facility operations expected early in the second quarter of 2022. The propane dehydrogenation facility (PDH), which is substantially mechanically complete, is expected to be operational several months later, with definitive timing subject to the completion of final commissioning plans later this year. The estimated cost of the complex is expected to be approximately $4.3 billion subject to any final cost adjustments related to the potential capitalization of certain additional PDH commissioning expenses and interest during construction for the commissioning period.
Due to the highly integrated nature of Inter Pipeline’s NGL operations, HPC can produce polypropylene before the start-up of the PDH plant utilizing polymer grade propylene (“PGP”) feedstock production from Inter Pipeline’s adjacent Redwater Olefinic Fractionator (“ROF”). A 600,000 barrel PGP storage cavern at ROF and pipeline connectivity between ROF and HPC provide the necessary infrastructure to support a stable supply of feedstock and operational flexibility.
Inter Pipeline continues to expect that 2023 will be the first full year of HPC’s polypropylene production and reconfirms its previous guidance of annual adjusted EBITDA between $400 to $450 million for that year. However, as the definitive timing for commissioning of the full complex has not yet been finalized, the Company considers it prudent to withdraw its 2022 financial guidance for HPC. The long-term average annual adjusted EBITDA for HPC remains approximately $450 million to $500 million, based on the seven-year historical average North American posted polypropylene to Edmonton propane price spread of approximately US$1,450 per tonne.
Advisors
Inter Pipeline has retained TD Securities Inc. and the Special Committee has retained J.P. Morgan Securities Canada Inc. as financial advisors. Burnet, Duckworth & Palmer LLP and Dentons Canada LLP are acting as legal advisors to Inter Pipeline and its Board of Directors. Kingsdale Advisors has been retained as Inter Pipeline’s strategic shareholder advisor.
About Inter Pipeline Ltd.
Inter Pipeline is a major petroleum transportation and natural gas liquids processing business based in Calgary, Alberta, Canada. Inter Pipeline owns and operates energy infrastructure assets in Western Canada and is building the Heartland Petrochemical Complex — North America’s first integrated propane dehydrogenation and polypropylene facility. Inter Pipeline is a member of the S&P/TSX 60 Index and its common shares trade on the Toronto Stock Exchange under the symbol IPL. www.interpipeline.com
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