DBRS Comments on Inter Pipeline Fund’s Petroleum Storage Acquisition

DBRS notes that Inter Pipeline Fund (IPF) has today announced an agreement to acquire DONG Energy Oil Terminals (DEOT), which owns four petroleum storage terminals in Denmark, from a subsidiary of DONG Energy A/S, one of the largest energy groups in northern Europe, for EUR 354 million, or approximately $500 million. The transaction is expected to be immediately accretive to cash flow, with cash available for distribution forecast to increase by approximately $0.10 per unit annually, supported by fully contracted tank capacity. DBRS believes that IPF’s financial and business risk profiles will remain within the parameters of its BBB (high) credit rating, although significant credit metric flexibility will be used up at the current rating as the transaction will initially be debt financed, as detailed below. The acquisition is expected to close in October 2011 and is subject to certain closing conditions and customary purchase price adjustments.

IPF will initially fund the transaction purchase price, which equates to approximately 9.3 times IPF’s forecast of 2011 EBITDA, with available sources of credit, including its $750 million unsecured revolving credit facility ($265.8 million outstanding at March 31, 2011). IPF expects to potentially term out a portion of the outstanding amounts under its credit facility in order to restore its liquidity position. In addition, IPF expects to re-introduce its Premium Dividend Reinvestment Plan (DRIP) in July 2011 (which raised $10 million to $12 million per month).

DBRS estimates that, on a pro forma basis, the DEOT transaction would initially (excluding the impact of the Premium DRIP re-introduction) increase IPF’s non-consolidated debt-to-capital and debt-to-EBITDA ratios to 52% and 3.7 times from 42% and 2.8 times, respectively, as at March 31, 2011. However, the transaction is consistent with DBRS’s expectation at the time of its July 20, 2010, upgrade of IPF’s rating to BBB (high) from BBB given DEOT’s largely fixed revenue stream through three-year to five-year contracts with integrated oil companies and major petroleum traders.

DBRS views the business risk profile of the DEOT acquisition as modest given the high historical utilization rates, with existing tank capacity fully contracted. Approximately 90% of revenue is fixed under term storage contracts with a well-diversified customer base. The remaining 10% of revenue comes from throughput fees, blending activities and harbour fees. There is no direct exposure to commodity price volatility.

The acquisition doubles the size of IPF’s fee-based European Bulk Liquids Storage segment EBITDA from 8% to 16% on a pro forma basis in Q1 2011. IPF continues to generate the majority of its EBITDA from its Conventional Oil Pipelines and Oil Sands Transportation segments (a combined 57% and 52% prior to and pro forma the transaction, respectively), while the NGL Extraction segment drops marginally from 35% to 32% of EBITDA (including commodity-based EBITDA from 25% to 23%).

Notes:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodology is Rating North American Pipeline and Diversified Energy Companies, which can be found on the DBRS website under Methodologies.