Inter Pipeline earns $127.8-million in Q1 Inter Pipeline earns $127.8-million in Q1
INTER PIPELINE REPORTS STRONG FIRST QUARTER 2021 FINANCIAL AND OPERATING RESULTS
Inter Pipeline Ltd. has released its financial and operating results for the three-month period ended March 31, 2021.
"Inter Pipeline continues to successfully execute its business plan as evidenced by our solid quarterly results and the considerable progress made on contracting and completion of the Heartland Petrochemical Complex," said Christian Bayle, Inter Pipeline's President and Chief Executive Officer. "The ongoing construction work at HPC is progressing well, and we remain on track to begin generating significant additional cashflow for shareholders in early 2022."
First Quarter Highlights
Reorganized business segments and financial reporting structure effective January 1, 2021
Adjusted EBITDA* of $278 million, a five percent increase over the same period in 2020
Marketing business generated adjusted EBITDA* of $74 million due to stable volume and improved commodity price environment
Funds from operations (FFO) totalled $239 million, a 15 percent increase over the same period a year ago
Net income for the quarter was $128 million, a 43 percent increase over the first quarter of 2020
Declared cash dividends of $52 million or $0.12 per share
Quarterly payout ratio* of 22 percent
Initiated comprehensive strategic review process to maximize shareholder value
Margaret McKenzie succeeded Richard Shaw as Chair of the Board of Directors
The Heartland Petrochemical Complex (HPC) began the transition from construction to a world-scale operating facility, with commissioning and start-up activities underway
Subsequent to the Quarter
HPC was awarded a $408 million cash grant under the Alberta Petrochemicals Incentive Program
Announced approximately 60 percent of HPC's production capacity is held under high-quality, long-term take-or-pay contracts with arm's length third parties
Entered a new agreement with NOVA Chemicals (NOVA) for the sale of ethane produced from the Cochrane extraction plant
Standard & Poor's (S&P) upgraded Inter Pipeline's outlook to stable and affirmed its BBB- credit rating
* Please refer to the "Non-GAAP Financial Measures" section of this news release and the MD&A.
Strategic Review Process
Following the announcement of an unsolicited hostile offer for the Company in February 2021, the Board of Directors of Inter Pipeline initiated a comprehensive review of strategic alternatives to maximize shareholder value. A special committee, chaired by Margaret McKenzie and comprised of independent directors, has been formed to oversee the process.
Consistent with its fiduciary duties, acting in the best interest of the Company and its shareholders, the special committee is evaluating a broad range of options that includes exploring a possible corporate transaction and continuing to seek a partner for a material interest in HPC.
Inter Pipeline anticipates providing an update on the strategic review in advance of the hostile bid expiry on June 7, 2021. There can be no assurance that this process will result in any transaction or, if a transaction is undertaken, as to the terms or timing of such a transaction.
As stated in the Directors' Circular dated March 8, 2021, the Board unanimously determined that the hostile offer is not in the best interests of the Company or its shareholders and unanimously recommended that shareholders do not tender their common shares.
New Business Segments
Effective January 1, 2021, Inter Pipeline began reporting its operating and financial results under a new structure that more effectively aligns with how it manages, budgets and commercially operates the business. Four new segments have been created: Transportation, Facilities Infrastructure, Marketing and New Ventures. This revised structure replaces the previous business segments: Oil Sands Transportation, Conventional Oil Pipelines, NGL Processing and Bulk Liquid Storage.
Financial Performance
During the first quarter of 2021, Inter Pipeline generated adjusted EBITDA* of $277.5 million, a five percent increase from the $263.9 million in the same quarter of 2020. FFO also trended higher during the period, increasing 15 percent to $239.3 million compared to $207.5 million during the same period in 2020. Financial results were positively impacted by strong operational performance and a higher commodity price environment, partially offset by the bulk liquid storage asset sale late last year.
First quarter 2021 corporate costs increased to $30.9 million primarily due to higher long-term incentive plan expenses, driven by a higher share price in the current quarter.
* Please refer to the "Non-GAAP Financial Measures" section of this news release and the MD&A.
Cash Dividends
In the first quarter of 2021, dividend payments to shareholders were $51.5 million or $0.12 per share, resulting in a conservative quarterly payout ratio of 21.5 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 segment generates adjusted EBITDA* that is underpinned by stable cost-of-service and fee-based contracts. During the first quarter 2021, adjusted EBITDA* was $211.0 million, representing a nine percent decrease from $232.5 million for the same quarter of 2020, largely as a result of the sale of the majority of the European bulk liquid storage assets in November 2020.
Transportation volume was 2,197,500 b/d during the quarter compared to 2,232,600 b/d in the first quarter of 2020. The decrease was due to a 11,000 b/d reduction of oil sands volume in excess of take-or-pay commitments, as well as a 24,100 b/d decrease on conventional oil pipeline volume largely due to lower producer activity compared to pre-pandemic levels. Bulk liquid storage had a first quarter utilization rate of 94 percent, relatively unchanged from 95 percent in the same quarter of 2020.
Inter Pipeline remains in the process of closing the Milk River asset swap with Plains Midstream Canada ULC, in exchange for the 100 percent ownership interest in the Empress II and 50 percent ownership interest in the Empress V straddle plants. Inter Pipeline will also receive $35 million as part of this transaction that is expected to conclude in the first half of 2021, following completion of customary closing conditions and regulatory approvals.
Facilities Infrastructure
The Facilities Infrastructure segment generates adjusted EBITDA* from cost-of-service and fee-based arrangements, with commodity-based products sold to the marketing segment for fixed service fees. For the first quarter 2021, the adjusted EBITDA* for the facilities infrastructure segment was $33.1 million, a decline of 24 percent compared to $43.8 million reported in the same quarter of last year. The decrease is primarily due to lower straddle plant volume, as well as higher AECO natural gas and power prices.
Total first quarter 2021 volume was 141,800 b/d versus 154,400 b/d during the comparable quarter in 2020. Straddle plant volume of 101,400 b/d was 15,200 b/d lower primarily due to lower ethane sales volume from the Empress complex, while Cochrane volumes were flat. In contrast, Redwater Olefinic Fractionator (ROF) volume of 40,400 b/d was 2,600 b/d higher than the comparable period. The increase resulted from strong operational performance and higher propane-plus volume from the sale of propane cavern inventory.
Subsequent to the quarter, Inter Pipeline entered into a new fee-based agreement with NOVA for ethane sales at the Cochrane extraction plant. Effective January 1, 2025, NOVA will purchase the majority of Cochrane's annual ethane production under this agreement. * 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 engaging in facility and pipeline optimization opportunities. The marketing segment's first quarter 2021 adjusted EBITDA* was $74.3 million compared to $2.9 million in the same quarter of 2020. The significant increase relates to higher realized pricing, particularly for polymer grade propylene (PGP), propane, propane-plus and crude oil. Results were offset by higher shrinkage and butane costs, as well as a $16.5 million realized loss on risk management activities primarily related to PGP and propane sales at ROF and propane-plus products at Cochrane.
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 second quarter of 2021, Inter Pipeline currently has hedged approximately 30 percent of its crude oil, NGL and natural gas volume exposure and 25 percent for the balance of the year.
New Ventures
Inter Pipeline's new ventures business includes HPC, a world-scale integrated polypropylene facility which is in the latter stages of construction in Strathcona County, Alberta. During the quarter, the rail yard was turned over to operations. Currently, overall site construction, including the propane dehydrogenation facility (PDH), polypropylene facility (PP) and central utility block is approximately 90 percent complete. Inter Pipeline continues to expect the PDH plant to be substantially mechanically complete in May and the PP plant by the end of the year. Polypropylene production is expected to commence in early 2022, supported by strong business and operations readiness programs.
Significant progress has been made towards reaching Inter Pipeline's stated objective of securing at least 70 percent of HPC's production capacity under long-term, take-or-pay agreements. Currently, the project is underpinned by executed take-or-pay contracts with seven third parties representing 60 percent of production capacity, and advanced negotiations are proceeding with a number of additional counterparties. These agreements 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 contract term of these agreements is approximately nine years. Furthermore, Inter Pipeline confirms that conditions associated with the one agreement referred to in the April 22, 2021 news release have been satisfied.
Inter Pipeline recently completed a detailed review of its total capital costs for HPC as the propane dehydrogenation facility approaches mechanical completion. The estimated final cost of the complex is approximately $4.2 billion, which is a slight increase over our previous estimate as it includes additional expenses associated with keeping our workers safe through the COVID-19 pandemic. Inter Pipeline spent approximately $225 million on HPC during the first quarter, bringing the total capital investment since inception to approximately $3.4 billion.
Financing Activity
Maintaining financial flexibility and liquidity to fund the Company's ongoing business remains a key objective. During the quarter, Inter Pipeline repaid $325 million of medium-term notes that matured in February and reduced the pricing margin on $1.5 billion of credit capacity. Inter Pipeline has no remaining debt maturities during 2021 and remains well positioned to fund its capital program including HPC.
As of March 31, 2021, Inter Pipeline had approximately $2.0 billion of available capacity on its revolving credit facilities and a consolidated net debt to total capitalization ratio of 42.6 percent, significantly below the maximum covenant level of 65 percent.
* Please refer to the "Non-GAAP Financial Measures" section of this news release and the MD&A.
Inter Pipeline maintains investment grade credit ratings. DBRS Limited (DBRS) has assigned Inter Pipeline a credit rating of BBB (stable trend). Subsequent to the quarter, S&P upgraded Inter Pipeline's outlook to stable and affirmed its credit rating at BBB-. Inter Pipeline (Corridor) Inc. has investment grade credit ratings of A (low) (stable trend) from DBRS and BBB- (stable outlook) from S&P.
Response to COVID-19
Beginning in March of 2020, Inter Pipeline implemented a series of health and safety protocols at all company worksites to align with protective measures recommended by both government and public health agencies. Our operations have been identified as an essential service, with many of our employees continuing to work at our various asset locations and major project sites, including HPC. When conditions permit, we intend to relaunch our phased plan to safely return our office-based employees back to Inter Pipeline workplaces.
Conference Call and Webcast and Annual General Meeting
A conference call and webcast has been scheduled for May 7, 2021 at 11:00 a.m. MT (1:00 p.m. ET) for interested shareholders, analysts and media representatives. To participate in the conference call, please dial 1 (888) 231-8191. A replay of the conference call will be available until May 14, 2021 by calling 1 (855) 859-2056. The conference ID and code for the replay is 9870355. A link to the webcast and updated investor relations presentation are available on Inter Pipeline's website: www.interpipeline.com
In light of the ongoing strategic review process, Inter Pipeline will hold its virtual-only 2021 Annual General Meeting of Shareholders in early August 2021. Additional details will be provided once a date has been determined.
Join Us: Virtual Tour of HPC
On May 12, 2021, Inter Pipeline will host a virtual tour to highlight current construction and operational readiness at the Heartland Petrochemical Complex. Presenters for this virtual event will include: Senior Vice President of Petrochemical Development, David Chappell, and Project Director, Neil Montgomery. The virtual tour will be followed by a question period.
Date: May 12, 2021
Time: 2:00 p.m. MT (4:00 p.m. ET)
Registration: To register in advance for this virtual update event, please click HERE or visit www.interpipeline.com.
Select Financial & Operating Highlights
(millions, except volume, per share and % amounts)
Three Months Ended March 31
Operating Results 2021 2020
Transportation volume (000s b/d)
Oil sands pipelines 2,038.1 2,049.1
Conventional oil pipelines 159.4 183.5
Total transportation volume 2,197.5 2,232.6
Facilities infrastructure volume (000s b/d)
Straddle plant volume(1) 101.4 116.6
Redwater fractionation volume 40.4 37.8
Total facilities infrastructure volume 141.8 154.4
Marketing volume (000s b/d) 58.4 56.4
Bulk liquid storage capacity utilization 94% 95%
Financial Results
Revenue $ 697.2 $ 603.8
Gross profit $ 326.1 $ 287.6
Adjusted EBITDA(2)
Transportation $ 211.0 $ 232.5
Facilities infrastructure $ 33.1 $ 43.8
Marketing $ 74.3 $ 2.9
New ventures $ (10.0) $ (7.7)
Corporate(2) $ (30.9) $ (7.6)
Total adjusted EBITDA(3) $ 277.5 $ 263.9
Funds from operations $ 239.3 $ 207.5
Per share(3) $ 0.56 $ 0.49
Net income $ 127.8 $ 89.1
Per share - basic and diluted $ 0.30 $ 0.21
Supplemental Financial Information
Cash dividends declared $ 51.5 $ 181.1
Per share(4) $ 0.120 $ 0.428
Payout ratio(3) 21.5% 87.3%
Capital expenditures
Growth(3) $ 282.7 $ 311.6
Sustaining(3) $ 9.9 $ 4.9
Total capital expenditures $ 292.6 $ 316.5