Inter Pipeline Ltd. has provided an update on production capacity contracting, adjusted EBITDA guidance, environmental advantages and other matters relating to its Heartland Petrochemical Complex.
HPC, which is in the final stages of completion in Strathcona County, Alberta, will be an industry-leading petrochemical facility converting locally sourced, low-cost propane, into high-value polypropylene. Polypropylene is an easily transported and fully recyclable plastic used in the manufacturing of an extensive range of essential finished products and consumer goods such as healthcare products, medical supplies, textiles and lightweight automotive components.
The construction of HPC continues to advance, with the propane dehydrogenation plant expected to be substantially mechanically complete in May 2021and the polypropylene facility by the end of the year. Polypropylene production is expected to commence in early 2022.
HPC Capacity Contracting
As previously disclosed, Inter Pipeline's objective is to secure a minimum of 70 percent of HPC's polypropylene production capacity under long-term, take-or-pay agreements; a commercial framework that will make HPC unique in the world for an integrated polypropylene facility. These agreements are structured to include a stable return on capital payment to Inter Pipeline plus fixed and variable operating fees, with no exposure to commodity price fluctuations.
Inter Pipeline's contracting efforts to date have yielded significant results. Currently, approximately 60 percent of HPC's production capacity is held under executed take-or-pay agreements with seven counterparties, including Canadian and multinational energy producers and North American polypropylene consumers. One of the executed agreements is subject to conditions expected to be satisfied this quarter. The weighted-average contract term of the seven agreements is approximately nine years.
"Our commercial teams have made great progress in securing high-quality, long-term contracts for HPC's production capacity," stated Christian Bayle, Inter Pipeline's President and Chief Executive Officer. "Our systematic approach to contracting this unique facility over the past several years has been key to creating a diverse customer base and has resulted in a stable cash flow profile consistent with our energy infrastructure business model.
"We are over 85 percent of the way to our minimum contracting objective and advanced negotiations are proceeding with a number of additional counterparties. Should these negotiations be successfully concluded as anticipated, Inter Pipeline will be in a position to exceed its 70 percent minimum target for production capacity under long-term contracts, in advance of the facility becoming operational in early 2022."
HPC EBITDA Guidance
In 2023, the first full year of operations, Inter Pipeline expects HPC to generate annual adjusted EBITDA in the range of $400 to $450 million. Approximately 70 percent of this adjusted EBITDA range is expected to be generated by a combination of stable take-or-pay cash flow from existing capacity contracts with the seven counterparties as outlined above, and fixed cash grant received through the Alberta Petrochemical Incentive Program* ("APIP"). Furthermore, approximately 85 percent of this take-or-pay cash flow and APIP grant will be from investment grade counterparties or private firms with investment grade owners.
The remaining 30 percent of forecast 2023 annual adjusted EBITDA is anticipated to be generated through merchant sales of polypropylene production currently not under take-or-pay contracts. In estimating the merchant sales, Inter Pipeline assumes, among other things, a US$1,200 per tonne spread between North American posted polypropylene and Edmonton propane prices. This is a conservative assumption when compared to the current spread of US$2,300per tonne and the seven-year historical average of US$1,400 per tonne. As additional take-or-pay capacity contracts are executed, stable adjusted EBITDA from those agreements will grow, and merchant product sales will decline.
In 2022, HPC adjusted EBITDA is expected to be approximately two thirds of the 2023 guidance range, as the facility's production begins partway through 2022 and capacity ramps up over the course of this two-year period. Long term, Inter Pipeline continues to expect HPC to generate approximately $450 to $500 million of average annual adjusted EBITDA. This represents a strong return on invested capital and is a substantial increase when compared to Inter Pipeline's consolidated 2020 adjusted EBITDA of $969 million.
An Environmental Leader
Inter Pipeline is committed to building a sustainable future through its business practices and HPC has been designed to deliver to shareholders the benefit of sustainability as a commercial opportunity. Through the use of advanced technology and on-site hydrogen-augmented power and utilities generation, the polypropylene produced at HPC is anticipated to have a greenhouse gas ("GHG") emissions footprint 65 percent lower than the global average.
In fact, HPC is expected to have among the lowest GHG emissions profiles of any comparable integrated facility in the world, making its production desirable by sustainability-minded global polypropylene consumers.