Hostile takeover target Inter Pipeline reports 60% of Heartland plant is contracted
CALGARY — Inter Pipeline Ltd. says it has signed take-or-pay contracts covering about 60 per cent of production from the Heartland Petrochemical Complex it's building northeast of Edmonton as it continues to fight off a hostile takeover bid by Brookfield Infrastructure Partners LP
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The Calgary-based company said Thursday the deals with a total of seven parties have an average duration of nine years and it is confident it will achieve its goal of 70 per cent contracted production before the plant, designed to convert propane into polypropylene plastic pellets, starts up in early 2022.
“Our announcement today is very positive for shareholders. It provides clarity around the success we've had in creating what we call more like an infrastructure-based contracting model for the plant,” Inter CEO Christian Bayle said in an interview.
The contracts are with a mixture of North American polypropylene consumers as well as Canadian and multinational producers who will pay to have their propane transformed into polypropylene at the plant and then share in the profit when that product goes to market, he said.
When Brookfield made its takeover offer in February of $16.50 per share in cash or 0.206 of a Brookfield Infrastructure Corp. class-A exchangeable share (a deal that values Inter at $7.1 billion), it said it would consider increasing the bid if Inter can "substantiate'' growth and commercialization plans for the $4-billion Heartland project.
Inter said Thursday it expects Heartland to generate annual adjusted earnings before interest, taxes, depreciation and amortization of between $400 million and $450 million in its first full year of operation, based on 70 per cent stable contracted sales and 30 per cent merchant sales.
In estimating the merchant sales, Inter said it is assuming a US$1,200 per tonne difference between North American posted polypropylene and Edmonton propane prices, a "conservative" assumption based on the current spread of US$2,300 per tonne and the seven-year average of US$1,400 per tonne.
Brookfield did not immediately respond to a request for comment on Thursday.
Bayle laughed when asked if Brookfield had called him after the announcement, then declined to answer due to confidentiality rules associated with the strategic alternatives review launched by the Inter board after the Brookfield bid.
"How that translates into a reaction from Brookfield, that's really a question for them," he said.
"When it comes to our strategic review process, clearly it has to be a net positive."
He said the company's long search for a Heartland partner and the review are expected to "all funnel together" before the hostile bid expires on June 7.
Heartland was given a financial boost two weeks ago when the United Conservative Party government in Alberta committed $408 million in cash grants over three years once the complex is operational to replace $200 million in royalty credits granted by the previous NDP government.
In a report, analysts with Stifel FirstEnergy said achieving 60 per cent contracted sales is below target but "is likely above market expectations." It added Inter's adjusted EBITDA forecast is less than expected given the Alberta cash injection announcement.
"While we view the update as positive given the previous uncertainty around the project, we expect the name will continue to trade on news related to the hostile takeover from Brookfield," said ATB Capital Markets in a report.
It added that it expects the contract news could generate more announcements in relation to Inter's review and partner search.
This report by The Canadian Press was first published April 22, 2021.
Companies in this story: (TSX:IPL, TSX:BIP. UN, TSX:BIPC)
Dan Healing, The Canadian Press
The Calgary-based company said Thursday the deals with a total of seven parties have an average duration of nine years and it is confident it will achieve its goal of 70 per cent contracted production before the plant, designed to convert propane into polypropylene plastic pellets, starts up in early 2022.
“Our announcement today is very positive for shareholders. It provides clarity around the success we've had in creating what we call more like an infrastructure-based contracting model for the plant,” Inter CEO Christian Bayle said in an interview.
The contracts are with a mixture of North American polypropylene consumers as well as Canadian and multinational producers who will pay to have their propane transformed into polypropylene at the plant and then share in the profit when that product goes to market, he said.
When Brookfield made its takeover offer in February of $16.50 per share in cash or 0.206 of a Brookfield Infrastructure Corp. class-A exchangeable share (a deal that values Inter at $7.1 billion), it said it would consider increasing the bid if Inter can "substantiate'' growth and commercialization plans for the $4-billion Heartland project.
Inter said Thursday it expects Heartland to generate annual adjusted earnings before interest, taxes, depreciation and amortization of between $400 million and $450 million in its first full year of operation, based on 70 per cent stable contracted sales and 30 per cent merchant sales.
In estimating the merchant sales, Inter said it is assuming a US$1,200 per tonne difference between North American posted polypropylene and Edmonton propane prices, a "conservative" assumption based on the current spread of US$2,300 per tonne and the seven-year average of US$1,400 per tonne.
Brookfield did not immediately respond to a request for comment on Thursday.
Bayle laughed when asked if Brookfield had called him after the announcement, then declined to answer due to confidentiality rules associated with the strategic alternatives review launched by the Inter board after the Brookfield bid.
"How that translates into a reaction from Brookfield, that's really a question for them," he said.
"When it comes to our strategic review process, clearly it has to be a net positive."
He said the company's long search for a Heartland partner and the review are expected to "all funnel together" before the hostile bid expires on June 7.
Heartland was given a financial boost two weeks ago when the United Conservative Party government in Alberta committed $408 million in cash grants over three years once the complex is operational to replace $200 million in royalty credits granted by the previous NDP government.
In a report, analysts with Stifel FirstEnergy said achieving 60 per cent contracted sales is below target but "is likely above market expectations." It added Inter's adjusted EBITDA forecast is less than expected given the Alberta cash injection announcement.
"While we view the update as positive given the previous uncertainty around the project, we expect the name will continue to trade on news related to the hostile takeover from Brookfield," said ATB Capital Markets in a report.
It added that it expects the contract news could generate more announcements in relation to Inter's review and partner search.
This report by The Canadian Press was first published April 22, 2021.
Companies in this story: (TSX:IPL, TSX:BIP. UN, TSX:BIPC)
Dan Healing, The Canadian Press
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