Inter Pipeline Fund is a publicly traded limited partnership that runs pipelines and a European bulk storage unit.
Inter Pipeline Fund, a major transporter of Western Canadian oil, is looking to scrap rising management fees and attract a broader investor base with a $340-million conversion into a tried-and-true corporation that's reminiscent of many moves during and after the income trust era.
The company, a publicly traded limited partnership that runs pipelines and a European bulk storage unit, said it will buy out the general partner that operates its businesses for $170-million, and fork over the same amount again when a pair of big oil sands pipeline expansion projects come to fruition.
Under the arrangement, the management company's shareholders have agreed to be paid in preferred shares, which are likely to be exchanged for common once the conversion is completed.
The move to "internalize" how the business is managed will eliminate future management, acquisition, divestiture and incentive fees that currently get paid out to the general partner, according to Inter. Those payments are based on operating cash flow results and, with $2.7-billion worth of new projects in the hopper, they were set to leap, essentially making Inter a victim of its own success.
Fees totalled $18.4-million in 2012, and all signs pointed to a leap into the $50-million neighbourhood over the next five years, Inter said.
"And that was just getting started, so I think they wanted to make sure it never got to that," FirstEnergy Capital Corp. analyst Steven Paget said.
Investors were pleased, pushing Inter Pipeline units up 3.3 per cent to $23.75 on the Toronto Stock Exchange on Monday. Part of that likely had to do with an accompanying increase in Inter's cash distribution by 3 cents annually.
TD Securities advised the Inter board's special committee on the move, concluding that the price tag to buy out the general partner is fair. CIBC World Markets advised the partner.
Income trusts converted to traditional corporations after Ottawa eliminated their tax advantages in the early part of this decade. Limited partnerships were able to maintain their structure as there were no changes to their taxes, though some converted anyway.
Chief Executive David Fesyk said a big reason Inter held off was that the move would have triggered a re-pricing of $2.8-billion of debt that had carried attractive spreads, due to change-of-control provisions.
"So it wasn't in our interest to convert until the term of those debt facilities came up for maturity. There was a disincentive for us to convert … That issue is now behind us," Mr. Fesyk said.
Also, the general partner had not been willing to be bought out until recently, he said.
That second $170-million instalment will be payable once Inter starts generating revenue from the $2.35-billion expansions of the FCCL Foster Creek and Christina Lake pipelines in northern Alberta, now under construction. The pipelines move bitumen from the eponymous oil sands projects run by a joint venture of Cenovus Energy Inc. and ConocoPhillips.
Inter's management said another benefit of the move will be the ability to attract a wider pool for capital. Currently, all of its equity investors must be Canadian residents for income tax purposes.
Unit holders will vote on the conversion within four months.
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