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Report on Business Inter Pipeline’s $3.5-billion Heartland project testing investors’ nerves as talk swirls of takeover interest

Inter Pipeline's Heartland petrochemical complex is shown under construction in Fort Saskatchewan, Alta., on Jan. 10, 2019.

JASON FRANSON

Calgary’s Inter Pipeline Ltd. is well into its biggest-ever construction project, a $3.5-billion petrochemical complex that has made some investors nervous.

It’s not the business plan for the Heartland propane-to-polypropylene venture that has put pressure on the shares. It’s the cost of funding it. Inter appears to want to see the project through on its own – even if that means spurning a takeover bid for the company.

Talk of such a bid has been circulating in financial circles, and when The Globe and Mail reported on Thursday morning that a suitor had come forward with a proposal for $30 a share, it lit a fire under the market. Inter Pipeline went up 8.7 per cent, closing at $23.64.

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Whether or not the proposal becomes a formal takeover bid is anyone’s guess. The sharp gain not only reflects some excitement over a potential $12.4-billion deal, it’s also an expression of relief that somebody else might take on the risk of building Heartland.

The development, in Strathcona County near Edmonton, has received $249-million in subsidies from both the Alberta and federal governments, and this year Inter issued $750-million of hybrid debt securities to help finance it. It is saving some cash through its dividend reinvestment plan, although that means it is increasing the share count.

Chief executive Christian Bayle has so far ruled out bringing in a partner for the project, which will produce 525,000 tonnes a year of polypropylene, used in finished plastic products. In second-quarter results released Thursday, the company reported it spent $287-million on Heartland in the period for a total outlay so far of $1.6-billion. Its funds from operations slipped 8 per cent from a year earlier to $240.2-million on lower pricing in the natural gas liquids processing business.

“We are very cognizant of the fact that the funding plan for this does bring some dilution to our shareholders as we execute. But we do take a long-term view of this project,” Mr. Bayle told analysts in May. He is scheduled to discuss the most recent results in a conference call on Friday.

Inter shares had traded at more than $27 before the company – which operates regional pipelines and gas-processing facilities in Canada as well as energy storage in Europe – gave Heartland the go-ahead in late December of 2017.

Raymond James analyst Chris Cox has zeroed in on the funding challenges, including dilution and elevated debt levels, and has rated Inter to “underperform.”

Now, there’s a question of whether Mr. Bayle and the board have decided to go it alone at all costs. The word in the financial community is that the company turned down the $30-a-share approach. If the offer was unconditional, it would represent a hefty premium – though it is clear that the board believes Inter’s own prospects look better after the project’s expected startup in late 2021. It has targeted $450-million to $500-million a year in earnings before interest, taxes, depreciation and amortization once in operation.

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To get there, Inter is now hoping to raise more than $1-billion by selling its European bulk fuel terminal business. The company said late Thursday it is exploring the sale of 23 terminals in Britain, Denmark, Germany, Sweden, the Netherlands and Ireland, with proceeds to go to debt reduction and capital spending, including on the Heartland project. It gave no timeline for a deal.

That represents an about face. Last fall, Inter bought seven European storage terminals from Texas-based NuStar Energy LP for $354-million.

Either a takeover or an asset sale would go a long way to easing investor worries about the Heartland project, though the former would remove them altogether. It’s unclear whether shareholders will get the opportunity to choose.

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