DBRS Comments on Inter Pipeline Fund’s Proposed Corporate Conversion

DBRS notes that Inter Pipeline Fund (Inter Pipeline, rated BBB (high)) announced today that it has completed several internal transactions (the Internalization Transactions) related to the restructuring of its current limited partnership structure to position the business for a planned conversion to a corporation within the next four months. In addition to unitholder approval, the conversion will be subject to receipt of all required regulatory, stock exchange and Court of Queen’s Bench of Alberta approvals.

DBRS notes that the Internalization Transaction agreements have been designed to eliminate all future management, acquisition, divestiture and incentive fees payable to an external manager ($18.4 million in 2012 and expected to exceed $50 million annually within the next five years). Inter Pipeline has indirectly purchased all outstanding shares of Pipeline Assets Corp. (PAC), the owner of Inter Pipeline’s General Partner, Pipeline Management Inc. (PMI). The initial consideration is valued at $170 million, plus adjustments of approximately $8.6 million to reflect the market value of the Class B limited partnership units held by the General Partner, fees earned by PMI prior to closing and working capital adjustments. A second installment valued at $170 million will be made once Inter Pipeline becomes entitled to receive revenue from both the FCCL Foster Creek and FCCL Christina Lake expansion projects, which are currently under construction.

In the event that the Foster Creek and Christina Lake projects are not both generating revenue by January 1, 2017, the value of the second installment will be reduced to $70 million. PAC’s shareholders have agreed to accept all consideration in the form of preferred shares rather than cash. Furthermore, PAC shareholders are prevented from selling any of their equity holdings related to the initial payment within six months of exchange into common shares of Inter Pipeline’s corporate successor. It is anticipated that the preferred shares issued under the Internalization Transactions will be exchanged for common shares of Inter Pipeline’s successor, on a one-to-one basis; the initial installment upon conversion to a corporation, and the second installment upon the earlier of revenue commencement from the two identified oil sands expansion projects or January 1, 2017.

Currently, DBRS’s Issuer Rating for Inter Pipeline and its rating on the outstanding Unsecured Medium Term Notes (MTNs) are both BBB (high), with Stable trends. DBRS does not expect the Internalization Transactions and the corporate conversion plans to have any material impact on Inter Pipeline’s underlying business risk and financial profile, and its credit metrics continue to support the current ratings. DBRS expects that, following the conversion to a corporation, Inter Pipeline’s assets and liabilities, including outstanding MTNs and credit facilities, will be assumed by the successor corporation. Consequently, at that time, DBRS expects to assign BBB (high), with a Stable trend, to both the Issuer Rating and the rating on the MTNs of the new corporation, and discontinue the ratings for Inter Pipeline. This rating action would be based on DBRS’s conclusion that there are no material changes to any of the terms of the corporate conversion relative to the current proposal.

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.