Canada Growth Fund Inc. has entered into a strategic investment agreement with Entropy Inc., a Calgary-based developer of carbon capture and sequestration projects.
CGF has agreed to a CAD 200m investment in Entropy coupled with a fixed-price carbon credit purchase agreement of up to one million tonnes per annum, according to a news release.
Once fully drawn, the investment could result in CGF owning approximately 20% of Entropy. Brookfield will continue to invest the balance of its existing CAD 300m hybrid security into the business, by which point it would be the largest shareholder and control Entropy.
Osler, Hoskin & Harcourt LLP and BMO Capital Markets acted as advisors to Canada Growth Fund Inc.
Burnet, Duckworth & Palmer LLP and TD Securities Inc. acted as advisors to Entropy Inc.
According to the release, the strategic growth partnership represents an important new investment in Canadian carbon markets. The features of the CCO—notably its large scale and its long-term fixed-price—represent a global first in compliance markets. This financeable structure helps to de-risk and accelerate private CCS investment by establishing carbon price certainty for Canadian projects.
One pillar of CGF’s mandate is to invest in projects and technologies, including CCS, that hold significant potential to reduce emissions across the Canadian economy. A second pillar is to scale promising Canadian clean technology champions that can help create value for Canadians.
In March 2022, Entropy announced a strategic CAD 300 million investment agreement with Brookfield, via the Brookfield Global Transition Fund, to scale up the deployment of Entropy’s CCS technology globally. Today’s announcement builds on this strong foundation and provides greater revenue certainty to accelerate Entropy’s major investments in Canada.
Transaction Highlights
- Definitive agreements between Entropy and CGF to accelerate the decarbonization of hard-to-abate industries in Canada;
- CGF to invest CAD 200m in Entropy for the development of Canadian CCS projects and for corporate purposes which, once fully drawn, could result in CGF owning approximately 20% of Entropy;
- Brookfield will continue to invest the balance of its existing CAD 300 million hybrid security into the business, by which point it would be the largest shareholder and control Entropy;
- CGF to provide the first ever large-scale, long-term, fixed-price CCO in a compliance carbon market, committing to purchase up to one million tpa of carbon credits for 15 years;
- The initial allocation of CCO commitment will allow Entropy to proceed with its Glacier Phase 2 project, targeting the sale of up to 185,000 tpa of Alberta TIER carbon credits at an initial price of $86.50 per tonne for a term of 15 years;
- The balance of the remaining CCO will be available for Entropy to underwrite additional third-party projects on similar terms in Canada;
- Post-investment, Entropy will have approximately CAD 460 million of capital available which, together with investment tax credits, carbon capture incentives and project financing, establishes a path to execute over CAD 1 billion of CCS projects and abate more than 1 million metric tonnes per annum (“MMTPA”) of emissions, with a focus on the Canadian market.
Deal Structure Overview
CGF’s investment in Entropy is via a hybrid security similar to the prior investment from Brookfield (please see Entropy news release dated March 28, 2022), though at a valuation that reflects the numerous advancements of the business in the last two years. The flexible structure ensures access to capital for Entropy and retains flexible liquidity options for all major investors including Brookfield, CGF and Advantage (the Company’s controlling shareholder). Funding draws from Brookfield and CGF for Canadian projects and corporate purposes will proceed in tandem.
Coupled with the CGF investment, Entropy and CGF have entered into a CCO agreement whereby CGF has committed to purchase up to 9 million tonnes (up to 600,000 tpa over a 15-year term) of TIER or equivalent carbon credits from Entropy projects. The initial project to benefit from the CCO is intended to be Advantage Glacier Phase 2, drawing up to 185,000 tpa at an initial price of $86.50 per tonne, for a total of approximately 2.8 million tonnes over the 15-year term. With this CCO agreement in place, CGF has absorbed the carbon pricing risk for the project. Entropy is therefore pleased to announce provisional final investment decision of Glacier Phase 2.
Beyond Glacier Phase 2, CGF and Entropy intend to enter into separate CCO agreements for other Canadian projects, on terms that are expected to provide similar investment returns. Upon successful deployment of the initial 600,000 tpa of CCO, CGF may make available a further 400,000 tpa of CCOs for additional Entropy Canadian CCS projects.
CGF will nominate one member to the Entropy Board of Directors and is pleased to participate in the growth and evolution of this Canadian clean technology leader. Advantage and Brookfield will retain their existing Entropy board representation.
