Unsolicited takeover bid in Canada brings spotlight to a PDH/PP project

Inter Pipeline has moved along most of the way through construction of a propane dehydrogenator (PDH)/ and 550,000 tons per year of polypropylene(PP) capacity near Edmonton, Calgary for the past years but a “hostile” bid has put the spotlight on the project.

HPC site. Image courtesy of Inter Pipeline

“We continue to expect that our nearly completed Heartland Petrochemical Complex, the largest growth project in our history, will deliver a step change in cash flow starting next year,” said Margaret McKenzie, Chair of the Special Committee, on March 9 after the board determined a recently received bid was inadequate and adviced against selling any shares.

Brookfield Infrastructure Corporation announced on Feb. 22 its plans to make a formal offer to acquire all of the outstanding common shares of Inter Pipeline, a midstream Canadian company that is diversifying into petrochemical production by trying to add value to some of the propane it moves.

On March 9 the Board of Inter Pipeline determined the Hostile Bid inadequate and unanimously recommended shareholders to “reject the Hostile Bid.”

 “We have launched a comprehensive strategic review process focused on maximizing value for shareholders and we believe superior offers or other alternatives may emerge,” it said.

The new C$3.5-billion plastics plant will be an industry-leading petrochemical development for North America, with one of the lowest feedstock costs, according to Inter Pipeline.

“According to the offer, each IPL shareholder will have the ability to elect to receive, per IPL share, C$16.50 in cash or 0.206 of a Brookfield Infrastructure Corporation class A exchangeable share, ‘subject to pro-ration,’ ” it said. Brookfield has a presence in more than 30 countries.

Evaluating the offer

“Consistent with its fiduciary duties, the Board will evaluate a broad range of options, including exploring a possible corporate transaction, while continuing to seek a partner for a material interest in the Heartland Petrochemical Complex,” it said.

"Inter Pipeline is a high-quality energy infrastructure business with a diversified asset portfolio that generates long-term predictable cash flows, all of which understandably make it attractive," said Margaret McKenzie, Chair of the Special Committee.

The Board remains open to all opportunities that may create shareholder value. The Board continues to believe Inter Pipeline is well positioned to be an energy infrastructure leader in Western Canada and supports its action-based and focused business strategy.

The Offer is open for acceptance until June 7. Two-thirds of shareholders must accept.

PDH/PP plant’s value

“I think IPL is (was) attractive because up until the hostile offer investors brushed off the value that the PDH/PP plant would generate. Investors are quite myopic at times (particularly for non-tech industries). The issue is would the PDH/PP plant or a partial interest be attractive?” said by email analyst Elias Foscolos.

Another Canadian midstream company that was trailing InterPipeline with a similar PDH/PP project has since canceled those plans.

According to a report from Feb 26 by Pembina’s CEO Michael Dilger, the company decided it was time “to recognize an impairment in the value of certain assets, including our investment in Ruby Pipeline, Jordan Cove LNG and our CKPC petrochemical investment.”

The CKPC (Canada Kuwait Petrochemical Company) project had just seen the construction start early in 2020 when Covid-19 brought the companies to halt and reconsider the viability of the capital expenditure.

“We believe these opportunities remain in strategy, make economic sense if de-risked and are aligned with Pembina's ESG priorities.

But we believe the time for these projects may come since we can no longer predict with certainty when that time may be, we were compelled to reflect their impairments through a non-cash charge,” Dilger added.

According to Pembina’s CFO Scott Burrows, Pembina recorded a net earnings loss in the fourth quarter of C$1.2 billion due to non-cash after-tax impairment charges of C$1.6 billion on Pembina's investments in Ruby, Jordan Cove, as well as CKPC.

Excluding impairments and associated deferred tax recovery, earnings in the fourth quarter would have been C$338 million compared to C$365 million in the fourth quarter of 2019.

Canada’s Pembina share of the total cost of C$4.5 billion was C$2.7 billion.

A market analyst said that the value of a polypropylene plant at the current time will be influenced by alternative polypropylene production assets that could also be for sale at the same time. Braskem owns several polypropylene plants in North America and Brazil, Braskem’s owners Odebrecht and Petrobras have started actions to look for a buyer for up to all of Braskem.

By Renzo Pipoli