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Williams Selling Canadian Business For US$1.03 Billion

Williams and Williams Partners said late Monday that they have agreed to sell the companies' Canadian businesses to Inter Pipeline Ltd. for combined cash proceeds of C$1.35 billion (about US$1.03 billion). Proceeds are to be used to reduce debt at the companies.

As part of the deal, Williams agreed to waive US$150 million of incentive distribution rights in the quarter following closing to facilitate the partnership's consent to the sale. After taking into account the waiver, Williams Partners will receive net consideration of about US$817 million and Williams will receive net consideration of about US$209 million.

Williams Canada pioneered the process of extracting NGL and olefins from offgas, a byproduct of bitumen upgrading operations. Williams Canada's assets include two liquids extraction plants located near Fort McMurray, AB, a fractionator near Redwater, AB, and a pipeline system that connects these facilities. The two extraction plants have the capacity to recover approximately 40,000 b/d of NGL and olefins from the upgrader offgas. The liquids mix is then separated into marketable products at the Redwater fractionator and sold across North America.

As a result of this acquisition, Inter Pipeline also assumes responsibility for the potential construction of a $1.85 billion propane dehydrogenation (PDH) facility located near the Redwater fractionator. This facility would convert low-cost, locally sourced propane into high value polymer grade propylene, an important petrochemical product largely used in plastics manufacturing.

"This accretive acquisition is a highly complementary addition to our existing NGL extraction business," said Inter Pipeline CEO Christian Bayle. "Consistent with our disciplined acquisition strategy, we are purchasing this unique and attractive business at a low period in the commodity cycle, and well below original cost. This positions Inter Pipeline to significantly benefit as energy prices strengthen."

The first extraction plant, which began operations in 2002, processes offgas from the Suncor Energy Inc. oilsands upgraders. The second extraction facility, completed in early 2016 (see Daily GPIMarch 28), is integrated with the Canadian Natural Resources Limited (CNRL) Horizon upgrader. Suncor and CNRL are contractually obligated to deliver offgas feedstock to the extraction plants under multi-decade supply arrangements. On a combined basis, these facilities are capable of extracting approximately 17,000 b/d of ethane-ethylene mix and 23,000 b/d of other NGL and olefinic liquids.

A 12-inch diameter, 261-mile pipeline, known as the Boreal pipeline, links the liquid extraction plants to the Redwater Olefinic Fractionator in central Alberta. The Boreal pipeline has a current throughput capacity of 43,000 b/d and can be expanded up to approximately 125,000 b/d with the addition of low-cost pumping stations, Inter Pipeline said.

The Redwater Olefinic Fractionator separates the NGL and olefin mixture into higher-value products, including propane, polymer grade propylene, normal butane, alky feed, olefinic condensate and an ethane-ethylene mixture. Caverns capable of storing over one million barrels of NGL support the fractionator operations.

The ethane-ethylene mix is sold to NOVA Chemicals Corp. under a long-term fee based contract which commenced in late 2013. The remaining NGL and olefinic products are distributed by third-party pipeline, truck and rail and sold to various North American counterparties.

Since 2013, Williams Canada has been developing an opportunity to construct Canada's first PDH facility. Using propane as its feedstock, this proposed $1.85 billion petrochemical facility is designed to produce polymer-grade propylene.

"Alberta is a particularly attractive location for a world-scale PDH facility given the ample supply of low-cost propane feedstock," Bayle said. "Construction of this PDH plant is an innovative way to provide an important new market for Alberta propane, help diversify our energy based economy, and deliver significant long term economic benefits to Inter Pipeline's shareholders and the province."

About $250 million has been invested to-date in the PDH facility by Williams Canada. Design work and equipment procurement has been initiated. Site preparation and early civil construction has also commenced on lands neighboring the Redwater Olefinic Fractionator. The PDH facility is intended to be integrated with the fractionator and use a combination of proprietary propane as well as other locally sourced product as its feedstock. In total, the PDH facility is designed to consume 22,000 b/d of propane and produce 525,000 tonnes per year of polymer grade propylene.

Inter Pipeline said it expects to make a final investment decision on the project by the end of 2016. Subject to full sanctioning, the project is expected to be operational in 2020.

Cash flow from the Williams Canada business is provided by a long-term fee based contract for ethane-ethylene sales to Nova, and shorter-term NGL and olefin product sales to a variety of counterparties. Inherently, cash flow from NGL and olefins sales varies with commodity cycles, whereas cash flow from ethane-ethylene sales is significantly more stable, Inter Pipeline said.

Inter Pipeline said funding for the acquisition will be provided by proceeds from the issuance of subscription receipts, new term debt expected to be issued prior to closing and available capacity on its committed revolving credit facility. Inter Pipeline anticipates increasing its $1.25 billion revolving facility to $1.5 billion in connection with the acquisition.

On their side of the deal, Williams and Williams Partners said that in compliance with tax rules, at closing 25% of the proceeds will be deposited with the Canadian Revenue Authority (CRA) or an escrow agent pending receipt of CRA tax clearance which is expected in late 2016 or early 2017. The companies do not expect a taxable gain in light of the "substantial" tax basis in the assets. The transactions are expected to close this year.

"This transaction represents significant progress on a major component of the 2016 capital and financing plan we announced in January," said Williams CEO Alan Armstrong.

Last month Williams cut its quarterly dividend to 20 cents from 64 cents and outlined plans to strengthen its balance sheet and credit profile as it builds out large-scale infrastructure to capitalize on growing demand for natural gas (see Daily GPIAug. 2).

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