“Inter Pipeline delivered another quarter of strong, stable results, with our core businesses performing very well,” stated Christian Bayle, President and CEO. “I wish to take this opportunity to sincerely thank the Inter Pipeline team for their unwavering focus on advancing our business priorities despite the disruption and uncertainty of an extended corporate strategic review and likely sale of the company.
“I am very proud of the professionalism and resilience demonstrated by the entire team and their dedication to managing our diverse business, safely and reliably.”
Second Quarter Highlights
- Adjusted EBITDA* of $235 million, up from $230 million in the same period of 2020
- Marketing business generated adjusted EBITDA* of $59 million benefitting from economic recovery and favourable commodity pricing
- Funds from operations (FFO) totalled $206 million, a 12 percent increase from $184 million in the second quarter of 2020
- Net income was $146 million, approximately 130 percent higher than the $63 million generated in the second quarter of 2020
- Declared cash dividends of $52 million or $0.12 per share
- Quarterly payout ratio* of 25 percent
- The Heartland Petrochemical Complex (HPC) propane dehydrogenation facility (PDH) was substantially mechanically completed; commissioning and start-up activities continue to advance
- Closed acquisition of Milk River pipeline system in exchange for Empress II and V straddle plants
- HPC was awarded a $408 million cash grant under the Alberta Petrochemicals Incentive Program
*Please refer to the “Non-GAAP Financial Measures” section of this news release and the MD&A. |
Subsequent to the Quarter
- The Arrangement Agreement with Pembina Pipeline Corporation (“Pembina”) was terminated and Inter Pipeline paid a termination fee of $350 million
- Inter Pipeline’s Board of Directors recommended acceptance of the July 19, 2021 takeover offer (the “Revised Brookfield Offer”) from an affiliate of Brookfield Infrastructure Partners L.P. (“Brookfield”)
- Successfully negotiated an eighth take-or-pay agreement for HPC’s production capacity with an investment grade, multinational energy producer thereby bringing the aggregate capacity secured under such long-term agreements to 68 percent
Strategic Review Process
On May 31, 2021, Inter Pipeline entered into an agreement (the “Pembina Arrangement”) for a business combination with Pembina, whereby Pembina agreed to exchange 0.5 of a Pembina common share for each issued and outstanding Inter Pipeline share. Subsequent to the filing of the Revised Brookfield Offer, and after careful consideration, Inter Pipeline advised Pembina that the Board would not be reconfirming its recommendation of the Pembina Arrangement. Pembina terminated the Pembina Arrangement effective July 25, 2021 and was paid a termination fee of $350 million.
On July 27, 2021, Inter Pipeline’s Board of Directors recommended acceptance of the Brookfield revised takeover offer that was filed on July 19, 2021. Under the Revised Brookfield Offer, Inter Pipeline shareholders can receive for each Inter Pipeline share, at their election, either (i) $20.00 in cash (ii) 0.25 of a Brookfield Infrastructure Corporation class A exchangeable subordinate voting share or (iii) for eligible electing shareholders, 0.25 of a Brookfield Infrastructure Corporation Exchange Limited Partnership class B exchangeable limited partnership unit, subject to proration.
Financial Performance
In the second quarter of 2021, Inter Pipeline generated adjusted EBITDA* of $235.2 million, a two percent increase from $230.3 million in the same quarter of 2020. FFO was also higher at $206.3 million, a 12 percent increase from $184.4 million in the second quarter of 2020. Financial results were higher due to strong operational performance within our transportation business, adjusted for the sale of the majority of the European bulk liquid storage business which closed in November 2020. In addition, our Marketing business realized significantly improved results as a result of increased commodity pricing during the quarter. Facilities infrastructure adjusted EBITDA* was impacted by scheduled plant maintenance activities and higher natural gas and power costs.
As of June 30, 2021, Inter Pipeline’s four business segments generated adjusted EBITDA* as follows:
Adjusted EBITDA* (millions) |
Three Months Ended June 30, 2021 |
Transportation |
$210.1 |
Facilities Infrastructure |
$25.3 |
Marketing |
$59.1 |
New Ventures |
($12.8) |
*Please refer to the “Non-GAAP Financial Measures” section of this news release and the MD&A. |
Second quarter 2021 corporate costs increased to $46.5 million, primarily due to higher fees related to the strategic review process and increased long-term incentive plan expenses resulting from a higher share price in the quarter.
Cash Dividends
In the second quarter of 2021, dividend payments to shareholders were $51.5 million or $0.12 per share, resulting in a conservative quarterly payout ratio of 25 percent. Inter Pipeline’s current monthly dividend rate is $0.04 per share or $0.48 per share on an annualized basis.
Transportation
Inter Pipeline’s Transportation business generates adjusted EBITDA* that is supported by stable cost-of-service and fee-based contracts. During the second quarter, adjusted EBITDA* was $210.1 million, a four percent decrease from $218.7 million for the same period in 2020. This negative variance resulted from the divestiture of 15 European bulk liquid storage terminals during the fourth quarter of 2020.
The conventional oil pipeline systems generated adjusted EBITDA* of $36.6 million during the second quarter of 2021, a 44 percent increase over the second quarter of 2020. Results were favourably impacted due to higher conventional volume resulting from an improved energy industry environment, as well as the June 1, 2021 close of the Milk River pipeline acquisition. Second quarter 2021 volume increased 11 percent to 164,900 b/d compared to the same quarter last year. Bulk liquid storage had a second quarter 2021 utilization rate of 92 percent.
Adjusted EBITDA* (millions) |
Three Months Ended June 30, 2021 |
Oil sands pipelines |
$158.5 |
Conventional oil pipelines |
$36.6 |
Bulk liquid storage |
$15.0 |
Facilities Infrastructure
Inter Pipeline’s Facilities Infrastructure business generates adjusted EBITDA* from stable cost-of-service and fee-based arrangements, with commodity-based NGL products sold to the Marketing business for fixed service fees. For the second quarter of 2021, adjusted EBITDA* was $25.3 million, compared to $46.2 million in the second quarter of 2020. Results were primarily impacted by scheduled plant maintenance at the Redwater Olefinic Fractionator (ROF) and Pioneer II facilities during the quarter, as well as higher AECO natural gas and power costs.
For the second quarter 2021, total volume was 131,800 b/d versus 157,700 b/d during the comparable quarter in 2020. Straddle plant volume of 102,100 b/d was lower than 120,200 b/d in the second quarter of 2020 primarily due to lower ethane sales from the Empress V straddle plant. Redwater Olefinic Fractionator volume of 29,700 b/d decreased 7,800 b/d compared to the second quarter of 2020 due to scheduled plant maintenance as described above.
*Please refer to the “Non-GAAP Financial Measures” section of this news release and the MD&A. |
Marketing
Inter Pipeline’s Marketing segment manages the logistics and sale of products not produced under fee-based or cost-of-service agreements, as well as engages in facility and pipeline optimization opportunities. Adjusted EBITDA* for the second quarter was $59.1 million, a significant increase from the $7.3 million loss reported in the same period of 2020. The ongoing favourable pricing environment for propane, polymer grade propylene (PGP) and other produced NGL led to these results, despite slightly lower volume due to the scheduled turnaround period at ROF.
Inter Pipeline utilizes derivative financial instruments as part of its active hedging program to manage commodity risk exposure, reduce volatility and stabilize adjusted EBITDA*. For the third quarter of 2021, Inter Pipeline has hedged approximately 45 percent of its crude oil, NGL and natural gas volume exposure and approximately 50 percent for the fourth quarter.
New Ventures
In the second quarter, Inter Pipeline invested $301.7 million in HPC, bringing the total capital investment since inception to approximately $3.7 billion. The adjusted EBITDA* loss for this segment was $12.8 million, against the $4.5 million in the comparable quarter of 2020. The higher expenses are attributable to an increase in operational readiness and commissioning costs, as well as an increase in general and administrative expense.
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 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.
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 PDH facility, 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 facility utilizing PGP feedstock production from Inter Pipeline’s adjacent 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.
*Please refer to the “Non-GAAP Financial Measures” section of this news release and the MD&A. |
Financing Activity
Inter Pipeline continues to prioritize financial flexibility and liquidity, while continuing to fund its ongoing business. As at June 30, 2021, Inter Pipeline had approximately $2 billion of available capacity on its revolving credit facilities and a consolidated net debt to total capitalization ratio of 42.7 percent, significantly below the maximum covenant level of 65 percent.
Inter Pipeline maintains investment grade credit ratings. DBRS Limited (DBRS) and Standard & Poor’s (S&P) have assigned Inter Pipeline credit ratings of BBB (under review with developing implications) and BBB- (stable outlook), respectively. Inter Pipeline (Corridor) Inc. has investment grade credit ratings of A (low) (stable trend) from DBRS and BBB- (stable outlook) from S&P. Inter Pipeline’s diversified asset portfolio is expected to produce long-term and predictable cash flows from predominantly high-quality customers, and the company believes it remains well-positioned to generate positive returns for investors over the long term.
COVID-19 Update
In keeping with recommendations from provincial and federal health agencies, Inter Pipeline is planning a phased return for all office-based staff in the third quarter of this year. Health and safety protocols will continue to be reviewed in order to ensure a safe and welcoming office environment for all employees.
Select Financial and Operating Highlights
(millions, except volume, per share and % amounts) |
|||||||||
Three Months Ended June 30 |
Six Months Ended June 30 |
||||||||
Operating Results |
2021 |
2020 |
2021 |
2020 |
|||||
Transportation volume (000s b/d) |
|||||||||
Oil sands pipelines |
2,041.9 |
1,987.6 |
2,040.0 |
2,018.4 |
|||||
Conventional oil pipelines(1) |
164.9 |
148.0 |
162.2 |
165.8 |
|||||
Total transportation volume |
2,206.8 |
2,135.6 |
2,202.2 |
2,184.2 |
|||||
Facilities infrastructure volume (000s b/d) |
|||||||||
Straddle plant volume(2) |
102.1 |
120.2 |
101.5 |
118.4 |
|||||
Redwater fractionation volume |
29.7 |
37.5 |
35.0 |
37.7 |
|||||
Total facilities infrastructure volume |
131.8 |
157.7 |
136.5 |
156.1 |
|||||
Marketing volume (000’s b/d) |
50.2 |
53.7 |
54.3 |
55.1 |
|||||
Bulk liquid storage capacity utilization |
92% |
98% |
93% |
97% |
|||||
Financial Results |
|||||||||
Revenue |
$ |
702.9 |
$ |
539.5 |
$ |
1,400.1 |
$ |
1,143.3 |
|
Gross profit |
$ |
280.2 |
$ |
276.6 |
$ |
606.3 |
$ |
564.2 |
|
Adjusted EBITDA(3) |
|||||||||
Transportation(1) |
$ |
210.1 |
$ |
218.7 |
$ |
421.1 |
$ |
451.2 |
|
Facilities infrastructure(2) |
$ |
25.3 |
$ |
46.2 |
$ |
58.4 |
$ |
90.0 |
|
Marketing |
$ |
59.1 |
$ |
(7.3) |
$ |
133.4 |
$ |
(4.4) |
|
New ventures |
$ |
(12.8) |
$ |
(4.5) |
$ |
(22.8) |
$ |
(12.2) |
|
Corporate(4) |
$ |
(46.5) |
$ |
(22.8) |
$ |
(77.4) |
$ |
(30.4) |
|
Total adjusted EBITDA(3) |
$ |
235.2 |
$ |
230.3 |
$ |
512.7 |
$ |
494.2 |
|
Funds from operations |
$ |
206.3 |
$ |
184.4 |
$ |
445.6 |
$ |
391.9 |
|
Per share(3) |
$ |
0.48 |
$ |
0.43 |
$ |
1.04 |
$ |
0.92 |
|
Net income |
$ |
145.5 |
$ |
62.5 |
$ |
273.3 |
$ |
151.6 |
|
Per share – basic and diluted |
$ |
0.34 |
$ |
0.15 |
$ |
0.64 |
$ |
0.36 |
|
Supplemental Financial Information |
|||||||||
Cash dividends declared |
$ |
51.5 |
$ |
51.5 |
$ |
103.0 |
$ |
232.6 |
|
Per share(5) |
$ |
0.120 |
$ |
0.120 |
$ |
0.240 |
$ |
0.548 |
|
Payout ratio(3) |
25.0% |
27.9% |
23.1% |
59.4% |
|||||
Capital expenditures |
|||||||||
Growth(3) |
$ |
333.4 |
$ |
275.7 |
$ |
616.1 |
$ |
587.3 |
|
Sustaining(3) |
$ |
15.4 |
$ |
7.6 |
$ |
25.3 |
$ |
12.5 |
|
Total capital expenditures |
$ |
348.8 |
$ |
283.3 |
$ |
641.4 |
$ |
599.8 |
(1) |
Milk River pipeline results have been included from June 1, 2021. |
(2) |
Volume for the Empress divestiture group is included for periods up to May 31, 2021. Empress V NGL volume reported on a 100% basis for the ownership period. |
(3) |
Please refer to the NON-GAAP FINANCIAL MEASURES section. |
(4) |
Includes intersegment eliminations. |
(5) |
Dividends to shareholders per share are calculated based on the number of common shares outstanding at each record date. |
MD&A, Financial Statements & Notes
The Management’s Discussion and Analysis (“MD&A”) and consolidated financial statements provide a detailed explanation of Inter Pipeline’s financial and operating results for the three and six months ended June 30, 2021 as compared to the three and six months ended June 30, 2020. These documents are available at www.interpipeline.com and at www.sedar.com.
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