Inter Pipeline Inks Transportation Agreement for Kearl Oil Sands Project

Kearl Oil Sands
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Inter Pipeline has signed a long term agreement with Imperial Oil Resources Ventures Limited ("Imperial") to provide diluent transportation service for Imperial's Kearl oil sands mining and extraction project ("the Kearl Project") located north east of Fort McMurray. Diluent will be transported on Inter Pipeline's 12-inch diameter pipeline that currently supplies diluent to the Athabasca Oil Sands Project owned by Shell Canada Limited, Chevron Canada and Marathon Oil Canada Corporation. This 12-inch pipeline will be idled from its existing operation in 2010 after a new 42-inch pipeline, currently under construction by Inter Pipeline, goes into service for the Athabasca Oil Sands Project.

Under a 25-year ship-or-pay transportation contract, Imperial has secured 60,000 barrels per day of committed capacity on the 12-inch pipeline beginning in late 2012, with an option to further increase its capacity commitment. Approximately $135 million will be invested by Inter Pipeline over the next 3 years to connect the existing pipeline to the Kearl Project at the north end of the pipeline and to diluent receipt points in the Edmonton area.

"This is an attractive long term deal for Inter Pipeline," stated David Fesyk, President and Chief Executive Officer of Inter Pipeline. "Providing diluent service to the Kearl project makes excellent use of existing pipeline infrastructure."

Mr. Fesyk further commented, "Imperial Oil is among Inter Pipeline's largest and highest quality customers, and this new agreement will only strengthen our long term relationship. We view Imperial's announcement to proceed with approximately $8 billion in funding for Kearl as strong evidence of their commitment to the project."

Project Description

The Kearl Project is a large scale oil sands mining and extraction project under development by Imperial. Imperial is jointly owned by Imperial Oil Limited and ExxonMobil Canada. Imperial has stated that full development is expected to occur in three phases with total production potential of over 300,000 barrels per day of bitumen. The first phase is expected to produce 110,000 barrels per day of bitumen and begin operations in late 2012.

Inter Pipeline will utilize its existing 12-inch diameter pipeline that runs 454 kilometres from the Edmonton area to the Fort McMurray region to supply diluent for the Kearl Project for use in blending with bitumen. This 12-inch pipeline currently forms part of Inter Pipeline's Corridor Oil Sands Pipeline System, providing diluent service to the Athabasca Oil Sands Project. Approximately 50 kilometres of new 12-inch diameter pipeline will be constructed to connect the existing pipeline to Imperial's mining and extraction facilities. Diluent receipt connections will also be added at the south end of the pipeline in the Edmonton area.

Upon completion, the pipeline will have the potential to transport approximately 120,000 barrels per day of diluent. Construction is expected to begin in mid 2010 and the pipeline is expected to be in-service late in 2012. Capital expenditures related to this project are projected to be approximately $5 million in 2009, with the remainder of the expenditures to be incurred between 2010 and 2012.

Key Commercial Terms

The ship-or-pay nature of this transportation agreement will generate very stable and predictable cash flows for Inter Pipeline. Under the terms of the contract, Imperial will make fixed annual transportation payments that will remain constant over the contract term. Inter Pipeline's cash flow from this investment is not impacted by commodity price or throughput volume. Furthermore, all operating and sustaining capital costs will flow through to Imperial. The initial term of the agreement is 25 years with an option to renew for up to an additional 25 years.

Beginning in late 2012, Imperial is expected to transport up to 60,000 barrels per day of diluent on the 12-inch pipeline to the Kearl Project. Subject to certain timing conditions, Imperial has an option to increase its capacity commitment to support the phased development of the Kearl Project.

Inter Pipeline currently operates the only diluent pipeline that can source product from the Edmonton area to supply the Fort McMurray region. Inter Pipeline retains the option to market any capacity that is not utilized by Imperial to third parties in the Athabasca oil sands area, once the line is removed from Athabasca Oil Sands Project service.

After the 12-inch pipeline is removed from current service, its capital base will be deducted from the Corridor rate base. This amount is expected to be approximately $125 million.

Attractive Investment Economics

Inter Pipeline expects to generate minimum annual EBITDA of $40 million beginning in late 2012, and will earn additional EBITDA in the event Imperial elects to increase its capacity commitment. Additional cash flow above the contract minimum may also be generated by marketing any unutilized capacity to third parties.

The project is expected to be highly accretive to Inter Pipeline's unitholders, providing approximately $0.05 to $0.10 per unit annually in additional cash available for distribution under conservative financing assumptions.

Financing for this project will come from Inter Pipeline's existing committed credit facility. As of March 31, 2009, this facility had $306 million of available credit capacity with a renewal term that extends through 2012.


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