Q4 2020 Inter Pipeline Ltd Earnings Call
<unk> fourth quarter and year end, 'twenty 'twenty conference call and webcast.
I would now like to turn the meeting over to Mr. Jeremy Real Bearish, Vice President Finance and Investor Relations of pipe Inter pipeline. Please go ahead Mr. Barish.
Thank you Mary Emma and good morning, everyone.
On the call with me.
Me today are Chris Bayle, Inter pipeline's, President and Chief Executive Officer.
Brent Hagy, Chief Financial Officer, Jeff Marchant, Senior Vice President Transportation and Cory Neufeld.
Vice President NGL, what today's call, Chris will discuss recent developments, including our recently announced strategic review process and business outlook.
Brent will remark on our financial performance and capital priorities and I will conclude with a discussion on our recent financing and hedging activity as well as our corporate ESG initiatives.
I would like to remind you that certain information on this conference call may contain forward looking information that involves risks uncertainties and assumptions.
Such information.
Considered reasonable by inter pipeline at this time may later prove incorrect and actual results may differ materially from those stated or implied by our comments today.
Undue reliance should not be placed on such information.
A discussion of the related risk factors uncertainties and assumptions is available in our MD&A, which you can find on our web.
Although we're at SEDAR Dot com. Please.
Please go ahead Chris.
Thanks, Jeremy and good morning, everybody.
As we reflect on 2020, we're proud of inter pipeline resiliency on accomplishments during this difficult period protracted economic weakness.
Compounded by the ongoing Covid.
Website pandemic.
We sincerely wish to thank all inter pipeline workers and their families as well as our customers suppliers communities and investors for helping us successfully navigate what are the most challenging years in our company's history.
Jeremy and I will first direct our marks to the performance of the remarks to the performance of the business in 2020.
19, I will address the strategic review at the end and then take questions.
Beginning with oil Sands transportation.
Pleased to report record funds from operations of $616 million during 2020.
This business segment continues to be a foundation of our organization.
Biding stable cash.
Those supported by long term contracts with strong investment grade Counterparties.
Although the near term growth outlook remains challenged by the current environment, we continue to be optimistic about the future recent.
Recent producer consolidation has improved the strength of our customer base.
And demonstrates the adapting this of our.
Industry.
Additional pipeline egress out of Alberta through projects, such as the Enbridge line three replacement and the Trans Mountain expansion are supportive of oil sands development, and we remain well positioned to provide existing or prospective customers enhanced transportation services with approximately $2 3 million barrels per day of available capacity.
Keeping with the transportation team our conventional business fundamentals continued to improve as volumes return into our pipeline systems.
Fourth quarter volumes of approximately 165000 barrels per day or over 25000 barrels per day higher than the trough in the second quarter of 2020.
As we progress.
2021, we expect volumes will continue to trend upwards towards pre pandemic levels supported by the recent strength in oil price the completion of the central Alberta pipeline system expansions and the previously announced asset swaps on the order.
Pipeline system.
We continue to advance through the regulatory.
Approval process and have updated our timing for the close of this transaction.
For the first half of 2021.
Once completed we expect to generate approximately $25 million of annual EBITDA, including both tolling arrangements and midstream marketing activities.
Moving to European bulk liquid storage.
In November we successfully closed the sale of 18 million barrels of storage capacity across 15 storage terminals to the CRH group the.
The transaction was valued at $727 million before closing adjustments with proceeds used to strengthen our balance sheet by reducing debt and assist with internally financing our capital expenditure program.
Strategically this divestiture refocus our efforts on developing our higher growth Canadian businesses.
In the near term the business outlook for our remaining storage assets in Sweden, and Denmark is strong as we expect heightened utilization rates as a result of increased demand for storage.
Our last segment.
NGL processing had a challenging 2020 with significant price volatility.
Strong operating performance was led by record sales volumes at Red water and higher liquids extraction at our Cochrane facility. Despite two months of partial outage during October and November.
Looking forward on.
Happy to report.
Short that we started the year with materially higher realized commodity pricing and we're constructive in our forward view on segment performance.
To provide stability, while capitalizing on the current pricing dynamics inter pipeline has executed several material hedges subsequent to the quarter, which Jeremy will discuss shortly.
Yes.
Next I would be remiss, if I didn't comment on the remarkable work completed on the Heartland petrochemical complex to advance the project despite the global pandemic with.
With strong compliance to rigorous health and safety protocols, we have been able to keep our workforce safe and successfully limit the impact of COVID-19.
I'm proud to announce that we recently achieved over $10 million.
Hours without a lost time incident on site.
With project completion in sight, we continued to transition our efforts from heavy construction to operational and business readiness.
Meeker milestones during 2021 will be the substantial mechanical completion of the PVH facility expected in May and then we will be in a position to ramp down.
On its construction workforce and move into commissioning.
The polypropylene facility will be mechanically complete late this year and commissioned in early 2022.
We remain engaged in a process to secure a partner for a material interest in that project, which is expected to conclude on the first half of 2020.
One.
So as we have stated in the past we remain fully prepared to execute HBC on a standalone basis.
Commodity pricing tailwind mentioned in support of our NGL processing business have also positively impacted the forecast economics underpinning underpinning <unk> investment.
Specifically the spread between propane and polypropylene has widened to approximately $800 per ton in January roughly 35% higher than the five year historical average.
This strengthening in price materially improves the indicative economics for current and prospective propane in polypropylene.
Clean customers.
Yes.
In conclusion, the board has determined that the company will in the near term provide a fulsome commercial update on the status of contracting for the Heartland complex.
At that time, we will also provide additional EBITDA guidance specific to the early years of the project.
As such we will be issuing a news release on these <unk>.
Matters in due course.
Now I'd like to turn things over to Brent to discuss our financial performance and capital allocation priorities. Please go ahead.
Thank you, Chris and good morning, everyone.
Beginning with consolidated funds from operations inter pipeline generated $204 million or <unk> 48 per share during the fourth quarter.
<unk> 2020 compared to $217 million.
<unk> per share during the same period in 2019.
A decrease was largely attributable to conventional results, which were impacted by lower volumes and reduced midstream marketing activity.
In addition, bulk liquid storage <unk> decreased as a result of the sale of a majority of the.
The European storage business that was completed in November.
Partially offsetting the decrease was strong oil sands transportation results as well as a relative improvement and paraffinic and propane plus frac spread pricing within the NGL processing business.
For full year 2020, <unk> was 792 million.
Compared to 2019 <unk> of $873 million.
Record 2020, <unk> was generated by the oil sands transportation and bulk liquid storage businesses of $616 million on a $129 million respectively.
Annual <unk> was impacted by conventional results as previously indicated.
As well as lower NGL pricing, particularly in the second and third quarters of 2020.
Moving on to adjusted EBITDA enter pipeline issued full year 2020 guidance in March of $780 to $810 million from cost of service and fee based sources within the oil sands conventional and.
On bulk liquid storage segments I'm happy to report that we demonstrated in our financial resiliency and generated $797 million on adjusted EBITDA approaching the higher end of the guidance range for the quarter and full year 2020, total adjusted EBITDA was 23 $232 million and $962 million perspective.
Respectively.
Both <unk> and adjusted EBITDA were negatively impacted by one time expenses relating to the European storage sale that needed to be accounted for it to normalize our results specifically <unk> was impacted by transaction fees of $2 8 million for the quarter and $14 1 million for the full year EBITDA.
EBITDA was also impacted by the transaction fees as well as a realized loss on our foreign exchange financial instrument, which combined totaled $17 1 million and $28 4 million for the quarter and year end respectively.
Now turning to capital allocation inter pipeline remains committed to maintaining financial flexibility.
<unk> and is well positioned to self fund our capex.
<unk> per program, including HBC.
With the three year anniversary of project construction.
Achieved in November we have clear visibility to project completion, and incremental cash flow, which will be directed towards accomplishing our capital.
<unk> allocation priorities, our primary objective is to reduce debt on.
By a prudent dividend increases as business conditions permit.
Regarding inter pipeline's dividend are made by our board of directors and will we be weighed against organic growth opportunities and share buybacks now I'd like to turn things over to Jeremy So please.
Jeremy.
Sure.
Great. Thank you Brian.
2020 was an active year for financing activity to enhance our liquidity position and refinance near term debt obligations in April we closed a $1 billion unsecured revolving credit facility that matures in August 2021, and extended debt maturity.
On our $500 million term loan facility to August 2022.
In June we issued $700 million of senior unsecured medium term notes in the Canadian public debt markets book.
Seeds were primarily used to repay $500 million of notes that matured in July.
In November we completed the partial sale.
Sales of inter terminals and use the proceeds to reduce indebtedness under inter pipeline is one 5 billion syndicated credit facility.
Overall these financing initiatives resulted in almost $2 $5 billion of available cash.
Limited capacity available at year end.
Subsequent to December 31, we actually.
We repaid $325 million of medium term notes that matured in February with funds available on our revolving credit facility.
In addition, we reduced the pricing margin and extended the maturity on our $1 billion unsecured revolving credit facility to December 2022.
Concurrently inter pipeline also reduced borrowing costs associated.
With its $500 million term loan facility.
Inter pipeline has no remaining debt maturities in 2021.
With our primary $1 5 billion facility maturing in December 2024.
Moving to risk management inter pipeline has been actively increasingly focused on optimizing and reducing risk.
To commodity based cash flow.
A strengthening commodity prices in December inter pipeline began to enter into a number of commodity swaps that have terms between 1% and 12 months.
For the first quarter of 2021 inter pipeline has hedged approximately 40%.
Of its propane polymer grade propylene butane.
Butane and condensate volume exposure.
For the remainder of the year inter pipeline has additionally, hedged approximately 35% of its polymer grade propylene volume exposure.
These commodity hedges luck and strong pricing on our part of our strategy to actively manage commodity exposure and stabilize funds from.
Operations.
Lastly from a mark on corporate ESG initiatives, we began reporting on our sustainability efforts in 2016 and issued our inaugural sustainability report in 2017.
Since then there has been accelerated focus to develop and enhance our corporate ESG platform.
Our third sustainability report will be issued in the <unk>.
Fall of 'twenty 'twenty, one and we continue to actively work on the creation and implementation of formal ESG targets.
Although it is premature to discuss what specific ESG targets, we are intend to set.
The commitments that we intend to build on including examples such as the black North CEO pledge.
Three year partnership with.
Women building futures and a 10 year $10 million partnership with Northern Alberta Institute of technology, known as plastics research and action to research plastic recycling and waste reduction.
Now I'd like to turn things back over to Chris for some final remarks.
Thanks, Jeremy.
We also announced yesterday that following the recently announced unsolicited expression of interest for the company and we will be conducting a comprehensive review of strategic alternatives to maximize shareholder value.
Process will be overseen by a special committee made up of our independent directors.
Our board consistent.
Consistent with its fiduciary duties will evaluate a broad range of options, including exploring a possible corporate transaction and continuing to seek a partner on material interest in HBC.
The company has not set a timetable for the conclusion of this review.
In the interim we remain focused on executing our strategy to maximize.
Shareholder value for all of inter pipeline shareholders.
This concludes the formal portion of the conference call and I'd now like to turn the meeting back to Mary Alma to open the floor for questions.
<unk>.
Thank you.
Minder to ask a question you will need to press star one on your telephone.
It's John.
All your question press, the pound or hash key please standby, while we compile the Q&A roster.
Your first question comes from <unk> Satish with Wells Fargo. Please go ahead.
Thanks. Good afternoon, I was just just to start off on the on the Brookfield proposal.
Youre planning to release more information on HBC contracting and update EBITDA forecast you said didn't do process. Just wondering if you could provide any more clarity on when that would be do you plan to provide something before your next earnings call.
Or will it be when you when the search for a partner concludes.
Well as we mentioned many times we've been in.
Regular contact with the board on determining the appropriate timing for releasing more detailed information on contracting and the board clearly feels the time is.
Right.
Currently the timing is right now given the business dynamics going on.
I'm highly confident that we'll be in a position to release more information well in advance of.
The Q1 results.
Okay great.
And then just in terms of Europe.
Your interactions with Brookfield have you spoken to them since their bid was proposed.
Have you engaged with them at all on have you provide anymore.
Information on HBC contracting to them.
Well I don't think it would be appropriate for me to comment on confidence.
<unk> discussions that the board may have had with Brookfield.
I think.
The most material thing to point you to is the strategic review that was announced yesterday.
The board.
We came to the correct decision that running a disciplined comprehensive process is the best way to maximize shareholder value.
And just a few comments on the process.
A lot of this I went through in my prepared remarks, but our special committee has been established.
The independent directors to review this process and manage the process, we have retained TD securities and and JP Morgan to assist with advice to the.
A special committee.
And really the intention is to evaluate a broad range of corporate.
<unk>, one of which obviously is as a possible corporate transaction.
And I think it's fair to say that the board certainly wouldn't preclude including Brookfield into that process, if they wish to participate.
However, no timetable.
Bill has been set and certainly no decisions have been made regarding strategic alternatives and the board is fully prepared to keep the shareholder base well informed on the process as appropriate.
Thank you.
Your next question comes from Robert Cadillac, <unk> with CIBC capital markets.
Markets. Please go ahead.
Just first on the hedging are you prepared to disclose the hedge prices for <unk>.
Particularly for the Frac spread.
Or are you still actively.
Engaging and reducing risk and therefore, not willing to make those disclosures.
Yes.
Hi, Robert this is Jeremy.
We will be disclosing those on our Q1 results were still in the middle of looking and reviewing our and executing our hedging strategies rather than commenting on the specific volumes that I mentioned in my prepared remarks, we're not going to get into various pricing for the various commodities that we have hedged we.
We do have a very comprehensive risk management policy that we did put in place and that policy allows us to hedge up to 80% of our exposure from.
An 18 month period, so I think it's prices it looks like they've been quite strong.
And we've been able to lock in a few of the hedges, but we're not going to get into the into the details of those until we're required to.
You report those in our public flow passion.
No that makes sense and just going through the hub.
The Brookfield proposal.
Correct me, if I'm wrong, but in 2019 IPL acknowledged the existence of a conditional bid for the company, but did not disclose the AR.
They're going to bid range to give a number.
Number of subjectivity to some conditions.
Is that correct and are you willing to disclose on a price now.
No I think we are public remarks regarding the conditional indicative proposal 2019 standard on the road I think.
The forward is clearly focused.
On the future.
As established as I just mentioned the strategic review process.
To reach the appropriate.
Crystallized.
Maximum shareholder value for for our Investor base in due course.
Okay and then.
Yes.
So what do you think you need to see from our partner <unk>.
<unk>.
Yes.
On to not take the company to a fully marketed auction process. So under what circumstances kind of English on the partnering to generate more value per shareholders.
So I think that's for a company and I was hoping that you could address both value which is August and then.
More importantly.
<unk> their partnership on attributes do you think would add value to our shareholders.
Well I think I think I need to be very careful not to speculate on hypothetical scenarios here I just want to be very clear that the board is fully engaged and theyre going to consider.
Our broad range of options that they believe will maximize shareholder value that and again that could include a corporate debt transaction. It could include a material sale of the Heartland project.
But I don't want to get ahead on the board on on that topic.
Okay and exit standard finally, my comment would be I think the.
The information you intend to put out on that.
Particularly with respect to contracting is.
A very important because as you know the market pays more for certainty.
And I think.
No on the contract level at HBC is an important factor on that so I'll just leave it there and get back in the queue. Thank you.
Your next question comes from Robert Kwan with RBC capital markets. Please go ahead.
Hey, good morning.
Just kind of coming back from the review here.
First just on timing.
Do you anticipate that the special committee, though.
Have the full evaluation.
In times of about 105 day.
From it it did periods and then just as it relates to evaluating all potential alternatives.
Do you see that as being independent from the partnership discussions or do you see that partnership would be held out pending.
The board's evaluation of all the different options and then selecting them on to go west.
Well on your first question I think the board fully understands the Timeframes involved.
If brookfield makes a formal offer to shareholders four for IPL.
And I think the board.
Those prepared to conduct itself accordingly in that regard.
Then coming back to the partnering process I think the board is looking at this holistically the.
The most important thing is to consider all options to maximize shareholder value.
Preclude any one option over another at this point.
So put differently, yes, you and again I don't know if you want answers. This is hypothetical but if you were in the final discussions here on partnering you had a deal that came together in the next week.
It sounds like from your original answer to that given that looking at it holistically that that would be held out pending.
The full review to make sure that you are maximizing.
Italian does that share.
Yes, Robert I think it's very important for me to stay away from hypotheticals like that so I'm not prepared to comment.
Understood maybe last on the review.
You talked about a wide range of alternatives I guess theres a couple of things that were put forward.
On.
Can you talk about maybe some of the other things that might be on the table whether that.
Now larger sales of existing assets or even partial interests of.
Of large materials.
Segments are those types of things that will be looked at or.
Or is it really mostly confined.
Fine to aspects of the two things that you've laid out.
Well Robert I'd point, you to the words that were chosen for the news release that the board is looking at a broad range of options and I don't want to speculate on what those options may or may not be again once again get ahead of the board with their deliberations in this regard.
If I could just pointed out and clean up one question here on the oil Sands segment. There was some reference to remediation costs in the quarter I'm, just wondering where those recovered.
In revenues this quarter or is it future quarters or they just noticed just on recoverable.
Hey, Robyn it's Jeff here.
Those are recoverable and being being recovered under the terms of the contract.
And so where they recovered in the fourth quarter revenues or whereas it looked like fourth quarter margin was a little bit lower than previous quarter. So is that just timing at all.
Up in 'twenty one.
Yeah, well you know theres a lot of pieces in there there but essentially.
We are recovering cost in revenue as part of our capital fees on our operating fee recovery under those contracts. So the answer is yes, we're getting them there is a bit of a timing difference, but it's fairly immaterial.
So it came out of Q4, it will come back in 'twenty one.
Yes.
Perfect. Thank you.
Your next question comes from Patrick Kenny with National Bank. Please go ahead.
Hey, good morning, guys just on the dividend here on.
I guess in light of the commercial disclosure for Heartland on its way.
Curious, how youre thinking about the <unk>.
Timing for resetting the dividend back to more of a I'll call it normal.
Normalized payout ratio.
Yeah.
Obviously, you have to execute the project first on time on budget, but you know.
With this disclosure if there is visibility towards sustainable long term contracted EBITDA from Heartland.
Does this give you an opportunity to to them at that point give shareholders.
Any comfort around.
Back to a more normalized dividend level of course again conditional on no further cost overruns on no impairment to the base business.
Yeah, I'll take that question Pat it's Chris.
Obviously this is a pivotal.
Old here for the company.
We're three months away from substantial mechanical completion for the PTH plant, which is the larger and more complicated of the two facilities and the polypropylene facility will follow there. Shortly thereafter at the end of the year.
And.
Our commissioning date remains intact of.
Early 2022, and so at that point.
Once we've commercialized the facility there will be substantial EBITDA incremental EBITDA coming into the organization, which.
Which we'll disclose as I mentioned.
In the near term here.
And that ended up itself will drive our payout ratio to be.
Really quite low so I think at that point the board will have.
Lots of Optionality, depending on the current business environment to consider dividend increases as well as management of the balance sheet.
Okay got it.
And then I guess my.
Other question is just.
You know it looks like one of the ways to crystallize value here for shareholders is improving.
Improving the ESG narrative around the story.
Either in the hands of a new owner or you know as a going concern so.
But just thinking outside of just aligning disclosure and emission targets and whatnot.
What other strategic moves from a business mix perspective could you think I'm, making here, albeit on.
On a bit of a crunch time frame, but.
Any other asset.
Portfolio optimization opportunities here in the next few months that you could be thinking about from a from an executive level perspective.
Well two things that come to mind immediately R. R. As.
As HBC and our off gas processing business.
Those platforms have the great ESG story.
Depending on them.
Gas processing business by virtue of stripping out these high value liquids out of the.
Our gas stream at the horizon and Suncor upgrader substantially.
Substantially reduces the GH <unk> footprint those operations on.
Secondly, as we mentioned many times in the past HPT itself.
With the technology choices that we've made and the substantial investments into.
Generate.
Adding our on site power as well as consuming our on site produce hydrogen as a fuel source means that our polypropylene, we will have a 65% lower GHT footprint than comparable projects around the world.
In this environment, particularly where plastics are are both very necessary.
Necessary in high demand I think really is a great story for inter pipeline on ESG basis.
Okay. Thanks for that Chris I'll leave it there.
Yeah.
Your next question comes from Jeremy Tonet with J P. Morgan. Please go ahead.
Hi, good morning.
Alright.
Just wanted to come back to HPT, if I could to the extent you're able to discuss it.
If I think about from the construction process as a whole what are the largest hospital swap book.
<unk>.
How do you think about it.
The risk for additional cost overruns delays at this point have you guys.
Kind of gotten everything and a good working process with Covid just wanted to get an update on your thought.
Thoughts on those topics.
Well I think given.
Given the how far advanced we are with the PVH facility, we're quite confident.
View on bringing that to mechanical completion here.
In the next several months.
I think.
One macro issue on the project is.
We are still managing through Covid.
Very pleased with how the team has been able to progress this project through through the pandemic.
And but that still remains a risk that we have to manage overnight out of the woods yet.
Around the corner, but the rollout will take time and we have on site over 3500 people.
As we speak so that requires just constant attention and that's I would say one of the areas that we remain very diligent on in terms of executing this project.
Okay.
Got it that's helpful. Thanks, and then.
Just wondering for the project overall could you generate much EBITDA from the facility before it.
Service in early 2022, just wanted to think about what what could be possible there.
I think in the EBITDA, we might generate a revenue more importantly, I guess.
It could be a better way to characterize it.
Would be quite a material Jeremy.
As we commission the PTH facility in the back half of the year.
<unk> has the potential to generate some polymer grade propylene, but we think the amounts will be relatively small from a sales perspective, especially considering you need to build.
Build up a pretty substantial amount of PGP inventory before you started off the polypropylene plant.
Got it that's helpful. I'll stop there. Thank you.
Yeah.
Your next question comes from Andrew <unk> with Credit Suisse. Please go ahead.
Thanks, Good morning.
I guess as we think about the bridging exercise between now and the completion of H P. C.
Could you provide any color on just maybe how the dialogue is changed in relation to either the contracting process on it you can see are really seeking a partner just given what's happened in commodity markets overall.
And in particular on polypropylene prices.
Oh, that's a great. That's a great question and we tried to make that point in my prepared remarks that the margins are certainly the highest I've ever seen in terms of the analysis that we've done.
So I think obviously that's an.
An important tailwind if there.
All association's progressed with perspective, both partners and customers.
Today.
Which obviously the plant is not running but if it was running today.
The rough math on the uplift, Alberta propane producer with crystallized.
Through our facility.
Is about triple the underlying value of propane, which not only is it a powerful diversification.
Story for producer, it's also economically quite lucrative.
Okay. That's book.
That's helpful and then.
Maybe related to.
<unk> the processes you have in place with HBC, and you think about value maximizing across the whole enterprise.
Whats the balancing act of bringing in potentially private capital on having partial interests in certain assets. How do you think about just that balancing act of.
Crystallizing value now.
Versus.
Maybe complexity.
Well.
Obviously, a consideration as we move through the partnering process.
We are looking at the long term, we're not just trying to.
Consider the impacts to the business over the next six to 12 months do we have the right partnership.
Partnering relationship for decades, so that's a very important consideration that we've got a balance.
Thank you.
Your next question comes from Rob Hope with Scotiabank. Please go ahead.
Hello, everyone.
A follow up question on the the partnering process for H B C. Given the Brookfield bed have you re engaged with all the parties involved and have there been any changes just based off of.
The events that have been have since transpired.
All I can comment on Rob in that regard is that the process remains active and ongoing with parties involved.
Okay. Thanks for that and then just in terms of the new hedging policy and the risk mitigation policy.
Does this include HBC in the future and have you potentially.
<unk> thought about adding some hedges just based on where some of these commodities are trading on right now.
Okay.
Robert I'll take that on lender object.
Go ahead, Brent sorry.
Yeah, No you make a good point you know it's it's.
It's a little bit early.
Right now.
Rob to be considering putting on hedges and yes, albeit you know prices.
Prices are really really good right now, but you got to look basically well how much further could you had Joe.
But I think that that would be more of a decision that will be made as we get closer.
Closer to ramping up the facility and certainly that's something that we would consider for our commodity exposed portion.
H P C.
Alright, thank you.
Okay.
There are no further questions.
At this time I will now turn the call back to Mr. A bearish for closing remarks.
Great. Thank you for participating on our conference call today, and we look forward to discussing our first quarter 2021 results with you on May the seventh.
Goodbye.
Ladies and gentlemen, this concludes today's conference call.
Thank you for participating you may now disconnect.
[music].
Okay.
Yeah.
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