Pembina Pipeline Corp (PBA) 2005 Q1 法說會逐字稿

Welcome to the Pembina Pipeline Income Fund first-quarter results conference call. At this time all participants are in a listen-only mode. Following the presentation we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questions. (Operator Instructions). I would like to remind everyone that this conference call is being recorded on Thursday, April 28, 2005 at 10 AM Eastern, and will now turn the conference over to Bob Michaleski. Please go ahead.

Thank you and good morning, everyone. Peter Robertson, Pembina's Vice President of Finance and CFO, and Glenys Hermanutz, our Manager of Corporate Development, are with me here today to discuss Pembina's first quarter 2005 operating and financial results. Following our review of the quarter I will provide a brief discussion of new developments at Pembina and provide our outlook for 2005. Once I have concluded my comments we will be happy to respond to any questions that you may have.

Pembina will conduct its eighth annual meeting of unitholders later this morning in Calgary. Pembina has roughly tripled in size since our IPO in late 1997, and today we have emerged as one of Canada's premier energy infrastructure income funds with an enterprise value that exceeds $2 billion.

Pembina began 2005 with consistent operating results and a solid financial condition. Distributed cash totaled 27.2 million during the quarter, a 4% increase over the same quarter of 2004. Monthly distributions of $0.0875 per unit, or $0.2625 for the quarter, were paid, consistent with the 2004 rate. At the end of the quarter the distribution reserve totaled 5.6 million, consistent with our expectations. Revenue of 69.1 million was generated during the first quarter, consistent with the prior year. Operating income for the quarter increased by 4% from the same quarter of the prior year to $44.1 million.

Pipeline throughput on the conventional pipelines of 445,700 barrels per day care during the first quarter of the year compared to 457,300 in the prior year. Pembina's AOSPL system transported 162,400 barrels per day compared to 258,800 barrels per day in the first quarter of 2004. Looking at the first quarter of the operating financial review as mentioned earlier, during the first quarter the Alberta system transported 423,000 barrels per day, relatively consistent with the same period of 2004. New connections completed in late 2004 attributed to be reduced aggregate decline rate year-over-year.

Receipts on the provincially regulated BC gathering systems averaged 34,300 barrels per day, off from the first quarter 2004 average of 36,800 barrels per day. The BC gathering pipelines operate under a cost of service methodology; therefore, results are not throughput-sensitive.

Western system volumes averaged 22,700 barrels per day, down from 28,200 a year earlier. The decrease was primarily due to a refinery turnaround early in the quarter that caused a reduction of deliveries into the Kamloops area.

Unscheduled plant maintenance at the Syncrude plant impacted volumes transported in the AOSPL system during the quarter. Receipts for AOSPL were 162,400 barrels per day compared to 258,800 a year earlier. Returns on this fully-contracted system are based on invested capital; therefore, not impacted by utilization rates.

As previously stated, aggregate revenue during the quarter totaled 69.1 million, relatively consistent with the first quarter of 2004. The average toll on the Alberta pipelines rose to $1.19 per barrel during the first quarter of 2005, up from $1.90 a year earlier.

Tolling (ph) adjustments undertaken earlier in 2004 offset the dual impact of higher overall operating costs and through input declines at some of the mature systems. Higher average annual totals (ph) of the AOSPL BC gathering systems reflect a higher cost of service associated with incremental investment in these assets.

Operating income for Pembina's pipelines and contracted assets rose to 44.1 million from 42.5 million in the prior year. This represents a 4% increase, primarily the result of improved operating margin contribution on the conventional pipeline. On a per barrel throughput basis, excluding both AOSPL and the ethylene storage facility, first-quarter operating expense rose to $0.48 per barrel from $0.43 per barrel in 2004.

Expanded pipeline integrity and preventative maintenance, along with increased regulatory and compliance requirements, resulted in increased costs of the conventional systems. Administrative expense rose in tandem with operating expense to 7.1 cents per barrel for the first quarter of 2005, up from 5.3 cents for the first quarter of 2004.

Development initiatives during the first quarter accounted for 7.7 million compared to 25.2 million year-over-year. Higher capital spending in 2004 is related to the AOSPL capacity expansion that was completed in mid 2004. New connections and upgradings on the Alberta systems totaled 6.5 million in the first quarter. Pembina expects development capital expenditures to approximate $50 million in 2005, somewhat lower than the 56.8 million expended for 2004.

Pembina raised $5 million under its premium DRIP plan during the first three months of 2005. The plan has consistently attracted strong unitholder interest and continues to exceed Pembina's target level. As previously communicated, Pembina has targeted planned proceeds at 15 million for 2005 to be directed to debt repayment and to fund Pembina's capital program. This target may be adjusted depending on additional projects currently under review.

During the first quarter, interest expense totaled 6.5 million compared to 5.4 million in the prior year. Pembina has minimized its exposure to potentially rising interest rates, fixing rates on approximately 85% of its long-term debt at approximately 6%. At the close of the first quarter, Pembina had a ratio of debt to total enterprise value of 34%, essentially unchanged from the end of 2004. This level of debt is well within Pembina's debt facility covenants and reflects our targeted capital structure. The high-quality, stable profile of our cash stream has been formally recognized by favorable credit agency ratings assigned by Standard & Poor's and DBRS.

Pembina continued to achieve its distribution objective through the first quarter, an increase in the distribution reserve of 0.4 million increased the balance on reserve to total 5.6 million at March 31, 2005. Based on the current outlook for the balance of the year, we anticipate that by the end of this year and barring any material unforeseen events, the distribution reserve will increase to a level at which reconsideration of the distribution rate will become appropriate.

Issued and outstanding trust units of the Fund reached 104.1 million at March 31, 2005 compared to 100 million at the end of the first quarter of the prior year. $257 million market value convertible debentures remained outstanding at March 31, 2005 compared to 270 million at the end of the first quarter of 2004.

Market value of Pembina's publicly traded securities rose to just over 1.6 billion and the total enterprise value of the Fund exceeded 2 billion at March 31. Market liquidity for the trust units remained consistent with daily trading volumes averaging about 100 million units during the beginning of 2005.

I will now turn to new developments and outlook. Pembina's unit trading price remained strong through the quarter supported by the solid fundamentals of our underlying business along with strong history and economic factors that appeal to the trust sector as a whole. These factors helped to push the unit trading price to a new 50-week high last month near the $15 mark. We are encouraged by the ongoing strength in the Western Canadian oil and gas industry. And based on the strong 2004 exit results which had carried over into the current year, we are optimistic for continuing opportunities for growth and further development in the coming quarters.

Specifically, the Nisku reef and the Pembina field that was first developed in the 1970s have attracted a lot of industry and media attention in recent months. With the development of 3-D seismic and secondary recovery methods, this area has become a hotbed of producer activity. Incremental production from this field and Pembina's direct service region has helped to boost receipts on the conventional pipelines. Currently there are three new connections in various stages of construction in the Pembina region. Should production from these facilities reach producer estimates in the coming year, incremental receipts could potentially ramp up by 35,000 barrels per day.

On Pembina's Peace system we have three new connections, a new natural gas liquids pipeline interconnection, and a truck unloading facility capacity expansion under construction. By moving 25,000 barrels per day of NGLs off the Peace system onto our Northern system, we will expand our capacity to attract incremental volumes onto the Peace system to respond to increasing demand for NGL transportation on the southern end of that system. Pembina anticipates further opportunities for throughput and revenue enhancement on the conventional systems as the year progresses.

Further expansion and other developments on our AOSPL system is a critical component of corporate strategy. In view of the Strong industry focus on the oil sands region and the significant amount of capital already committed to the development of this vast resource, Pembina believes there will be numerous opportunities in the near and longer-term for further investment in transportation infrastructure in this area. Pembina considers further investment in oil sands infrastructure as strategically important to the Fund. We are well positioned both geographically and competitively to meet transportation requirements of several announced oil sands projects.

The long-life asset base and stable fully-contracted returns that characterize such an investment make them an ideal fit for the Fund. Our extensive asset base creates economies of scale, allowing Pembina to competitively pursue new opportunities across business lines and to further diversify our revenue stream. We are firmly focused on continuing our solid track record of distributions and on the future sustainability of distributions at the Fund.

Let me close by saying that our existing assets are performing well and provide a very solid foundation for future stability in distributions of the Fund. And over the many years that I have been involved with Pembina, rarely have I seen such a wealth of potential opportunities for growth and development of our business. Thank you for listening in this morning. We will be happy to take any questions you may have. Operator, I'll turn it back to you.

(Operator Instructions). Linda Ezergailis, TD Newcrest.

A few questions. Can you remind me what your cash reserve levels were when you last raised distributions in the past?

Linda, just thinking back to that, we increased our distribution -- our distributions in I guess late 2000 following the Federated acquisition. And I think at the end -- what I can say is that at the end of 2001 after we had increased our distributions to $1.05 per unit, our reserve did build to about $10 million. I think what we are -- we're saying we're pretty comfortable with the reserve around $5 million, which is about the level we're at right now. Right now our projections are that reserve will build throughout the balance of the year, resulting in us being in a position to again reconsider distributions later this year, but probably not until, I would think, the third quarter.

Is that around when the income tax arbitration will be resolved at AOSPL?

That's right, Linda. That is sort kind of literally in the back of our minds here a bit. Right now our options are to -- we could pay down debt prior to -- prior to the receipt of that decision, but I think we are reasonably optimistic that we're going to receive that decision. I think it's scheduled now for -- our hearing in September, early September, I believe, of this year, Peter. And I would think the outcome of that will be fairly apparent some time, might be late third quarter, early fourth quarter.

And is the timing of any sort of discussions about expanding AOSPL in the next phase also being impacted by this arbitration? Can you give us an update on any discussions you might have had in terms of either timing or the nature of how you're positioned versus some of your competitors that are also looking to expand their local oil sands pipeline?

I sort of see this as being somewhat -- well, it is totally unrelated, Linda. Any future expansion of the AOSPL will be done on terms that are reflective of our current position with respect to our taxable status versus non-taxable status, so it won't be impacted in any way by the AOSPL contract. And that is really what is the matter discussion or debate currently. So in other words, if we're going to expand a pipeline for others, we will be doing it on terms different than the existing contract, so the tax issue will be (indiscernible).

You mentioned, though, if for others; but if it was for your current shipper, then that might --?

I guess that would be true. If we were expanding under existing contract, we would be perpetuating the same issue, that's for sure. I guess what I'm saying to you is that any future expansions right now currently that we're looking at would be expansion for others.

One last question. How much more profitable is it for you to ship natural gas liquids versus conventional oil? I'm just thinking about the additional 25,000 barrels per day.

It really depends on the location that we're going to be shipping from. We do not distinguish between the products in terms of tariffs, generally, Linda. So I would just say we don't have a tariff at Fox Creek, for example. For NGLs that might be lower than it would be at say up further in the deep basin, and that is largely a function of the distance the product has to travel. So again, it just depends on where it comes from. But I think it is fair to say that if we're freeing up capacity on a (indiscernible) and an (indiscernible), it would likely be at a slightly lower tariff than it would be if it came in from the (indiscernible) area. But again, there isn't any distinction as between NGLs and crude oil.

Karen Taylor, BMO Nesbitt Burns.

Bob, I just have a quick question. Going back in time as we look at the addition of assets and whether they are not -- they've actually resulted in increases in the distribution per unit. So, as you mentioned to Linda, yes, you did increase the distribution 2000 to 2001. And we've been sitting basically at $1.05 since then. Over that period we have invested a substantial amount of money in the AOSPL system without any net increase in the distributions per unit. So, when we talk about transportation for third parties potentially increasing AOSPL for further development at Syncrude, what about the unit distribution and how can we do that? What will be different about the prospective projects that potentially make it an accretive exercise rather than just simply staying at the slightly higher distribution level if that comes to pass at the end of '05?

Just going back a bit, Karen, the one thing that -- just looking at our operations since we have expanded, starting with the Federated transaction, we did have a build and a reserve as I mentioned. And then our conventional systems, they were declining. In other words, we were not being able to maintain or we did not maintain the operating income contribution from our conventional systems, so essentially the acquisitions that we've completed since 2000 and, I guess, 2001 essentially filled the hole that existed after 2002. The ethylene storage facility, again, (indiscernible). But these transactions were only modestly accretive -- but I think we talked about accretion in the 3 to 5% range at max from these initiatives. So what our strategy back in 2004 -- what we did is we took the position that we're going to restore the operating income contribution from the conventional systems to get it back to the levels that they were at in 2001, so that our core business could continue to pay the $1.05 and the accretion that existed from the acquisitions that we completed will start showing up in increased distributions. And that's exactly where we're at right now. We're looking at the operating income contribution from our conventional systems actually being -- this year being higher than our 2001 levels, which is restoring the distribution reserve and will give us more, I guess, optimism with respect to increasing distributions later this year. And our expectation is that we will achieve that 3 to 5% accretion that we anticipated. And looking at future expansion (multiple speakers)

In 2006.

We're looking at late 2005. Right now we see our reserve is at five; we can see we'll easily double that reserve by the end of this year. As Linda identified, we still have the AOSPL issue that we're working on. And if we get through that (indiscernible) that will give us the ability to continue to increase our distribution beyond (technical difficulty) possibly as early as late this year. We also asked about the expansion opportunities and accretion you might expect from them. Remember that if we're going to spend hundreds of millions of dollars here, we would expect those transactions to be more accretive than our AOSPL acquisition. That's all I can really say is that when we project going forward, we will contract for those expansions on terms that are different than our existing (indiscernible). And that should be more positive than what we are currently experiencing with the AOSPL acquisition. You have to remember too, the AOSPL acquisition was our first foray into the oil sands. And it was at an auction. So we -- I think we stepped up to the plate to get our foot in the door to be in a position to achieve further expansion opportunities, which I think is where we are today. And I think the benefit will come from the fact that we did -- we were successful on that transaction. It will give us opportunities for further business in that area.

Petro-Canada, the Makai (ph) river is down, I believe. And the status of that development, given net-backs and so on might not be where it was even two quarters ago. Can you just talk about perhaps the timing on perhaps the third-party opportunity for AOSPL, and then where Syncrude is generally on any further commitments for facilities?

Speaking to the last matter, Karen, with respect to where Syncrude is -- I have not talked to anybody at Syncrude lately. I did see that Canadian oil sands had their annual report, I believe, either earlier this week. And their CEO talked about potential future expansion of Syncrude post 2010. But, again, it was uncertain. They did not have any commitments at this stage with respect to that expansion. So, I don't see anything happening there before 2010. With respect to expansions for others, our own initiatives would suggest that there may be some that might come as early as 2006 and some that might be in the 2008 timeframe. So that is kind of the period that we're looking at. These expansions, Karen, typically with the contract go for I would say a minimum of 25 years.

Fai Lee, RBC Capital Markets.

Thank you. Bob, you mentioned that your CapEx budget for 2005 is $50 million. I'm just wondering if you have a rough breakout of where that capital is going to be spent.

Yes, actually. The majority of it is going to be spent on the Peace system on the debottlenecking of our NGL system. So (indiscernible) Fox Creek. That is roughly $18 million. We've got new connections in the Pembina and Swan Hills area of roughly 3 million each. We have got another minor -- the rest of the amounts are generally pretty minor, where we also are spending some money with the Western system. We have got just under $6 million contemplated for that system in 2005. The boundary (ph) lake BC light system is around $6 million, and we still have some money that we are spending on AOSPL -- about $7.5 million. I think those are the major numbers, so I think that is where we are today. We may have other -- there's other projects that are in the consideration stage right now which may add another potentially $15 million to our capital forecast for the year.

Turning to AOSPL, the disputed amount with the shippers looks like it has increased to $12 million compared to 10 million at the end of the year.

Right.

If I annualize the increase, does that imply that you're collecting about $8 million of taxes in your tolls, or is there some other amount in that $2 million?

I think if you're looking at -- that's accumulative numbers beginning of 2002. We're roughly collecting about $3 million a year in taxes related to AOSPL, so that is a cumulative effect of that. So I guess that is really the answer.

At the end of the year, Fai, we were at about 10.9 million. So, as Bob said, we're lagging monthly about -- around about $1 million a quarter.

You mentioned that you are reasonably optimistic about AOSPL receiving a positive decision from the arbitrator. And I guess I'm just maybe trying to interpret your wording here in terms of reasonably optimistic. How would you -- is there any -- it sounds to me that when you say you're reasonably optimistic, there may be some risk that you might not receive a positive decision. Am I misinterpreting your wording?

I think it is fair to say that when you go to arbitration, you can never tell. Our view on this matter is quite clear. It is not an issue with respect to our ability to collect taxes for the cost of service. The contract allows us to do that. And what is at issue here is that the participants are taking the view that, well, there is no taxes payable by the Fund, so therefore, they should not have to pay taxes to us. That is the issue that is at dispute. Our view is that that is an appropriate way to interpret it. Quite frankly, we're using shelter from assets that are non-AOSPL assets to shelter the income of that asset. And those are assets of Pembina, not of the Syncrude participants. So our position on that is very clear.

I think I understand your position. I'm just trying to figure out the risks here, how the arbitrator could come to a decision that is different from your position in terms of the rationale.

Everybody we have talked to does not see it any other way, but it's one of these things. You go to arbitration; that is how it has been resolved. And we're going to put our best case forward and we think we will be successful.

(Operator Instructions). Mr. Michaleski, there are no further questions at this time. Please continue.

Thanks for those who have listened into the conference call. If there are any further questions we are going to be around for a bit. We do have our (indiscernible) I think it starts 10:00 Calgary time. But, certainly we'll be happy to answer any other questions you might have or clarify the answers I've given you. Thanks for participating this morning.

Ladies and gentlemen, this concludes the conference call for today.