DBRS Comments on Inter Pipeline Fund’s Project Announcement

DBRS notes that Inter Pipeline Fund (IPF) has today announced that it has entered into a binding Shipper Support Agreement to provide bitumen blend and diluent transportation services to three major oil sands projects owned by FCCL Partnership (FCCL), which is a joint venture of Cenovus Energy Inc. and ConocoPhillips (rated A (low) and “A,” respectively, by DBRS), through expansion of IPF’s Cold Lake and Polaris pipeline systems. These facilities will provide transportation service to existing FCCL projects at Foster Creek and Christina Lake, as well as the Narrows Lake project that is currently under development. IPF’s project announcement is consistent with DBRS’s expectations at the time of the latest IPF rating confirmation on June 26, 2012.

IPF expects the project to require total capex of approximately $2.1 billion, with a target completion date of mid-2014 for the Foster Creek and Christina Lake expansion projects and mid-2016 for the Narrows Lake project. IPF and FCCL expect to finalize a series of Transportation Service Agreements (TSAs) by the end of 2012, the key terms of which are expected to provide IPF with: (1) a long-term cost-of-service contract with full recovery of operating costs and (2) no exposure to cost overruns on the FCCL projects. The project is expected to generate significant annual EBITDA upon completion of pipeline construction.

IPF expects to finance the cost of the expansions through a combination of debt and equity financing sources.

On June 26, 2012, DBRS confirmed IPF’s Unsecured Medium Term Notes rating of BBB (high) with a Stable trend. At that time, DBRS noted the following:
-- IPF has identified up to $3 billion of potential development opportunities in the next three to five years.
-- To the extent that a significant proportion of these projects are developed, DBRS expects IPF to fund its growth capex with a prudent mix of debt and equity sources in order to maintain its credit metrics within the parameters of the current rating.
-- On a non-consolidated basis, DBRS expects a debt-to-capital ratio in the low-50% range and cash flow-to-debt in the mid-20% range over the medium term, which would be consistent with the rating based on the current business risk profile.
-- These projects are expected to increase the proportion of consolidated EBITDA from Oil Sands Transportation to about half of the total over the next few years (based on 2008 to 2010 average frac spreads) compared to 20% in 2010 and 35% in 2011, improving IPF’s overall business risk profile.

Consequently, the announcement of the FCCL project is consistent with DBRS’s expectations at the time of the above-noted rating confirmation.

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

The applicable methodology is Rating North American Pipeline and Diversified Energy Companies (May 2011), which can be found on our website under Methodologies.