Pembina Pipeline Corp (PBA) 2005 Q3 法說會逐字稿

Welcome to the Pembina Pipeline Income Fund Fourth Quarter Results Conference Call. [OPERATOR INSTRUCTIONS] I would like to remind everyone that this conference call is being recorded on February 2, 2006, at 11:00 a.m. Eastern time. I will now turn the conference over to Bob Michaleski, President and CEO. Mr. Michaleski, please go ahead.

Thank you, John, and good morning everyone. Peter Robertson, Pembina’s Vice President of Finance and CFO and Glenys Hermanutz our Manager of Corporate Development are here with me today to discuss Pembina’s fourth 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 2006. Once I have concluded my comments, we will be happy to respond to any questions you may have.

I’ll start with a few highlights from the fourth quarter. Pembina completed the last three months of 2005 with record operating and financial results. The fund distributed $0.0875 for unit per month or $0.2625 per unit during the quarter consistent with the 2004 rate.

Cash distributions totaled $29.7 million during the quarter, a 10% increase over the same quarter of 2004. Pembina marked its eighth year as a publicly traded income fund with distribution since inception totaling $688 million or $8.25 per unit.

The notional distribution reserve grew to $15.1 million by end of the quarter enabling Pembina to announce a 9% increase in its distribution rate, effective January 2006.

Revenue of $77.2 million generated operating income of $48.7 million during the quarter this year, a 5% improvement over same period of the prior year.

Pembina transported an average of 441,200 barrels per day (bpd) on conventional systems during the fourth quarter of 2005, an increase over both the previous quarter and the fourth quarter of 2004; the first time in several years that volumes have not shown a decline. Volumes of the conventional system were higher; the seasonal factors that lingered into the start of the third quarter were alleviated and incremental volumes from two new connections in several facility upgrades came off stream.

The Alberta systems transported an average of 417,100 bpd during the fourth quarter of 2005 compared with 409,799 bpd during the previous quarter and 415,500 bpd during the fourth quarter of 2004. Incremental volumes in the new Nisku production helped to offset the natural production declines on the Alberta systems.

Throughput from the BC gathering systems averaged 30,300 bpd during the fourth quarter, down 3% from the previous quarter and 8% from the fourth quarter of 2004.

On the Western system throughputs during the fourth quarter of 224,100 bpd were consistent with the 24,200 bpd shipped during the same period of 2004; however, lower than the 25,500 bpd shipped during the third quarter of 2005. Fourth quarter volumes from the Western systems were hampered by a 10-day planned maintenance outage during which time Pembina completed the internal inspection on the northern half of the line as well as the completion of upgrade work at the Taylor Terminal.

Alberta Pipeline generated revenue of $15.3 million during the quarter of 2005 – sorry, fourth quarter, compared to $15 million in the fourth quarter of 2004. The optimal revenue is based on the contract capacity of 389,000 bpd and is not impacted by the variability of pipeline receipts.

During the fourth quarter of 2005, system receipts averaged 230,700 bpd compared to 232,400 bpd during the same period in 2004.

The ethylene storage facility continued its stable operations generating $5.5 million in revenue during the fourth quarter of 2005. This compares to $5.1 million during the fourth quarter of 2004.

Pembina commenced terminating storage and hub service under its new midstream business unit late in the third quarter of 2005 and continued to expand these operations here in the fourth quarter. The midstream activities contributed $3.8 million net operating income during 2005.

As previously noted, aggregate revenue of $77.2 million was reported for the quarter, a 7½% improvement over the fourth quarter of 2004. Average revenue per barrel for the Alberta systems of 121 for the quarter is consistent with both first nine months of 2005 and the fourth quarter of 2004. Lower average revenue per barrel on a provincially regulated BC gathering systems reflects lower operating and capital cost requirements on the systems.

Now operating income – defined as revenue less operating expense rose during the fourth quarter to $48.7 million from $46.6 million a year earlier; 4½% year-over-year increase results from continued improvement and operating margins of conventional systems combined with a positive impact of the new midstream business.

Pembina has over the past several quarters taken measures to restore margins on the conventional pipelines and the improved results reflect a success in achieving that objective.

Operating expenses on the conventional systems average $0.50 per barrel during the fourth quarter of this year compared to $0.48 per barrel during the same period of 2004. For the full year of 2005, however, operating expenses on the conventional systems average $0.47 per barrel, $0.02 lower than the $0.49 per barrel last year.

Pembina continues to enhance its already extensive program of regularly scheduled maintenance and pipeline integrity. Higher operating expenses in the fourth quarter were mainly due to the completion of another internal inspection program.

General and administrative expenses during the fourth quarter of 2005 were $0.06 per barrel, up from $0.05 per barrel for the same period of the prior year. The increase is attributable to higher staffing levels and market-based salary increases.

Increasing regulatory and compliance requirements both in our conventional and oil sands infra-structure business and develop a midstream business unit have necessitated the expansion of our head office resources.

Total capital expenditures during the fourth quarter of 2005 were $27 million compared to $15.2 million expenditure in the same period of 2004; for the year-ended December 31, 2005, total capital expenditures of $79.5 million or $21.5 million higher than 2004. The bulk of the year-over-year increase was $15.5 million in development capital required for line fill and facility modifications required for the new midstream operations. In addition, numerous new connections and upgrades on the conventional pipeline systems represented a large portion of the capital expenditures during the year.

Pembina’s Premium Drip Plan raised $9.4 million during the fourth quarter of 2005 and $31.3 million during the year, exceeding Pembina’s target of $30 million. The plan continues to attract significant unit holder interest and Pembina’s targeted plan proceeds for 2006 have been adjusted to $47 million.

The drip target is flexible and is generally tied to the magnitude of our projected capital perks. Plan proceeds will continue to be directed to debt repayment and to fund our capital program.

Net debt financing costs of $5.2 million during the fourth quarter of 2005 were $1.3 million lower than the same period of the prior year. Pembina’s long-term debt on December 31, 2005, is $463 million which approximately 80% has fixed interest rates in order to minimize our exposure to the potential rise in interest rates.

Net [inaudible] for the fourth quarter, Pembina had a ratio of debt to total enterprise value of 27%, down from the ratio of 28% at the end of the third quarter of 2005 and 34% at the end of 2004. This metric improved following the late July 2005 conversion of $52 million fiscal amount of 7.35% convertible debentures that resulted in the issuance of 4.2 million trust units.

This level of debt is well within our bank facility covenants and provides sufficient capacity to continue to grow and further diversify our business. Favorable credit rating, agency ratings assigned by Standard & Poor’s and DBRS formally recognized the high quality, stable profile of our cash flow stream and enhance our ongoing access to capital on favorable terms.

Pembina met its distribution objective for the 33rd consecutive quarter. Our solid business operation produced an increase in distribution reserve of $5.7 million during the fourth quarter of 2005 resulting in a notional balance on reserve of $15.1 million at year-end.

113.9 million trust units of the fund were issued and outstanding at December 31, 2005, compared to 102.9 million at the end of 2004. As previously mentioned, 4.2 million units were issued subsequent to the end of the second quarter of 2005 in relation to the $52 million debenture conversion.

164.8 million principal amounts of convertible debentures were outstanding at December 31, 2005. The market value of Pembina’s publicly traded securities rose roughly to 2.1 billion and the total enterprise value of the fund totaled 2.5 billion at December 31, 2005. Any trading volume of the fund’s trust units remain robust during the last few months of the year with daily trading volume averaging 257,000 units for the quarter and 274,000 units per day in December trading.

Now looking to new developments and outlook – Pembina achieved record operating and financial results in 2005. These results produced a 9.9 million increase in the distribution of reserve this year enabling Pembina to announce a 9% increase in unit over distribution effective January 2006. Our continued focus on our organic growth opportunities and the diversification of our business in 2005 resulted in record breaking levels of development activity on our conventional pipeline systems as well as significant growth in our oil sands region infrastructure and the launching of the new midstream business unit. Together these developments have generated a significant and sustainable increase in cash flow that will support the new level of distribution.

The oil and natural gas industry continued at a rapid pace of exploration and development during 2005; and Pembina’s conventional pipelines, again, benefited from this level of activity. Pembina completed five new pipeline connections and upgrades during 2005 as well as the construction of a new natural gas liquid pipeline interconnection between the Peace and the Northern systems which was put into operation during the fourth quarter that will free up additional capacity of the Peace system of 25,000 bpd.

Several additional projects are currently under development on the Peace system. A five-year fixed total agreement with Plains will see an incremental 18 to 20,000 bpd of incremental crude oil delivered from the Plains Calven system into our Peace system commencing early this year. A thorough 3,500 bpd of committed throughput is expected under this agreement by mid-2006. Two additional upgrade projects are well under way on the Peace system with combined potential to add 5,000 bpd by mid-year.

On the Pembina system, the three new connections in the Nisku area of the south central Alberta where mechanics and complete by year-end and one was on a stream. Volumes from the remaining two connections are expected to come up stream during the first few months of 2006 and will continue ramp up throughout the year.

In addition, the product segregation facility currently under development on the Pembina system are expected to the operational by the end of 2006. The new facilities which are expected to cost up to $31 million to construct are designed to segregate high sulfur content and light sweet crude oils preserving the value of the product for our pipeline customers.

The development of terminalling, storage and hub services with the new midstream business unit continued during the fourth quarter. The facility modifications required for the joint venture with Keyera Energy are complete and activities are expected to become fully operational during the first quarter of 2006.

In addition, Pembina has initiated similar services on another of the conventional systems during the fourth quarter of 2005. As the business is rolled out over our conventional asset base, the units forecast become a significant source of new revenue.

Now turning to our oil sands interest - Pembina has in the past several months announced two new investments in the oil sands related infrastructure. During the third quarter of 2005 Pembina announced agreements with Canadian Natural Resources, Ltd. to provide dedicated pipeline transportation service to Canadian Natural for all your oil sands projects.

Pembina actually used for this pipeline have commenced and construction is scheduled to occur over 2000 and 2008-- 2007 and 2008 with a projected in-service date of July 1, 2008. Pembina estimates the total cost of this project at roughly $300 million and will provide 250,000 bpd of dedicated capacity to the rising project.

Pembina announced the second oil sands related project during the third quarter of 2005 for the construction of the Cheecham Lateral pipeline. Tentative agreements for construction of this pipeline are in place and construction is now under way with an expected in-service date of November 2006.

The 56400 pipeline is designed to transport synthetic crude oil from newly constructed outlet point on Pembina’s AOSPL system. [Inaudible] you a new terminalling facility located near Cheecham, Alberta.

With these two projects, Pembina has successfully captured opportunities to expand and diversify our presence in this important area. The financial impact of these two projects is expected to be considerable and Pembina believes these projects will have the potential to deliver 12% accretion to the 2005 level of distributed cash.

During fourth quarter of 2005 Pembina announced a project to oversee the potential development and construction of the proposed Spirit Pipeline. This new pipeline will entail both new construction and would make extensive use of existing infrastructure to facilitate the transportation of 100,000 bpd of condensate from the west coast at Kitimat, BC to Edmonton, Alberta. Preliminary engineering and design of the pipeline is now complete and we are in discussion with a limited group of potential Spirit Pipeline shippers.

Pembina expects to determine firm, fast commitments by the end of the first quarter or early in the second quarter of this year. With the preliminary estimated cost of $1 billion and an expected in service date of as early as December 2008, the Spirit Pipeline represents an attractive transportation solution for heavy oil and [inaudible] producers to receive condensate to be used as [inaudible] to facilitate the pipeline transportation of their production.

Pembina’s footprint in the rapidly growing oil sands region will be greatly expanded upon completion of the Cheechan Lateral and Horizon Pipeline. The Spirit Pipeline has the potential to further broaden that foot print. We believe there will be other opportunities in the near and longer term for future investment infrastructure in this important area. We believe that we are well situated financially and operationally to attract further business in the oil sands region.

We are pleased with the announcement by the government of Canada in late November that a reduction of income taxes on dividends will be put into place and tended to level the playing field between corporation and income trusts and other flow-through entities. Pembina was among the 72 trusts added to the S&P index at a 50% weighting in mid-December and that includes a full weighting is scheduled to occur in March of this year.

On a final note, Pembina announced the favorable evolution of the tax-related toll in dispute with the AOSPL shippers during the fourth quarter and more importantly the 9% increase in our distribution rate effective January 2006.

The strong operating results we are seeing from our conventional pipelines combined with the growth in our oil sands related infrastructure and new midstream operations has generated a significant and sustainable increase in cash flow that will support the new level of the cash distribution.

Since our public offering in October of 1997, Pembina has met its targets and objectives each year and has established an enviable reputation for stable operations, prudent management, sound corporate governance and a solid track record of consistent and growing distributions to unit holders.

During 2005, Pembina generated a total return for investors of 25%, the highest amongst our peer group in a pipeline trust sector. With the breadth of tangible and perspective growth opportunities currently under development across all of our business segments, we have confidence in our ability to continue to provide leadership and superior performance.

Operator, I will turn this call back to you for questions.

Thank you. [OPERATOR INSTRUCTIONS] The first question comes from Linda Ezergailis of TD Newcrest. Please go ahead.

Thank you. Just some clarification on your CapEx for 2005. It was almost $10 million higher than I was expecting. What was driving the increase? Was it cross overruns in some of your programs or did you take on more initiatives than you thought earlier in the year? What was going on there?

All I can think-- with some cost pressures on our oil. A number of the projects we are working on. I think that probably the main branch might have come from the midstream business where we were acquiring line fill which was about, I believe Peter, is above $15 million for the year. So that might have given the estimation for the variance, Linda.

So there was no new initiatives, really?

No. We did complete the new connections for the Nisku area on the Pembina system. We did complete the last of the Judy Creek upgrade or expansion; but other than that there really wasn’t anything in particular that stands out.

So are you earning a return on your line-fill or is that just--?

Yes. We do earn a return on line-fill.

And I just have a question with respect to the funding status of your Employee Future Benefits. I was a little bit surprised to see the infusion in the fourth quarter. Can you talk a little bit more about if we can expect more of that in 2006?

Actually, I think probably we’re getting back to what we consider more of a normal contribution to our pension fund which would be, Peter, probably in the range of $4 million per year?

Yes. Guidance may be at $45 million range. It all depends on what happens to the long-term bond rates; that is the primary driving factor on the liability side of our benefit plans.

Yes. We actually made a voluntary contribution to our plan this year and the objective there was there was a requirement that if you have-- there’s a solvency test where you have to have-- you like to have at least the value of your pension plan bigger than 85% of the liability and we were teetering with that and we decided just to make a voluntary contribution to the plan for this year and that resulted in, I guess, really a $9 million contribution over and above what we would have normally made; and that was the process of some of the poor performance that we’ve had in the fund over the last couple of years.

I guess you don’t have a lot of Pembina units in there.

Yes. We’re trying to convince our pension manager that he should be investing in Pembina.

Yes. This is a very different company, but Enron had too much of their own stock in their pension fund, unfortunately. Your CapEx program for 2006, how much growth, how much maintenance?

I don’t know if we have that information.

It’s not available on line. Actually, the spreadsheets under the quarterly results right at the bottom of the page on the left side.

Yes. I’ll just give you the totals. We’re looking at developed capital for 2006 of $166 million and maintenance CapEx of roughly $3 million in that.

Okay. And then the development capital largely funded from some sort of bridge financing or--?

Yes. We’re going to use our credit facility for that as well as we’re increasing our-- we were current on our drip program last year. We opened that up this year just because we thought we do have a need for additional development capital. We’ve got a number of projects that we’re working on so I think I had mentioned that we’re targeting for 47. It will be roughly $50 million of drip and then also we’ll just be using existing credit facilities.

Okay. Shifting more to the 10,000 foot level, CO2 pipelines-- interested that you are interested. Would you be partnering with anyone on that? I guess, namely Kinder Morgan versus going it alone and what sort of advantages do you bring to the table in terms of getting the mandate to potentially build those?

I think it early innings with respect to the construction of the new facilities, Linda. We’re what-- where we stand to benefit obviously from the near term is that both Pembina the fields which is under pilot currently and the Swan Hills field are considered to be ideal candidates for CO2 flooding so we should see the incremental throughput coming our way without us having to spend much in the way of money.

As far as partnering with anybody at this stage, Linda, that’s still is early innings. We haven’t really had any meaningful discussions with anybody at this stage. There have been parties that are expressing interest in it. [Ark] has mentioned it. [Penn West] is involved. I believe [Debit] is involved and there are a number of parties that are interested in securing that supply. But it would be way too early to talk about partnering with anybody at this stage in terms of providing the pipeline for the CO2.

I’m not a CO2 expert and I know there’s a lot of uncertainties with exactly how this technology will translate into Pembina and Swan Hills, but can you give me some ballpark estimates as to what sort of level of incremental throughput would we see? Would it be just mitigating natural declines or would there be a discreet bump up in the year that it was implemented and what’s the timing, I guess.

Good question. I’m not an expert in CO2 either and I really don’t have a good answer for you. I would expect that probably the best that would happen is you might be able to mitigate your normal declines; but, again, that is really a guess at this stage. They are talking about potentially increasing recovery rates by 3 to 5% which doesn’t sound like a lot on a percentage basis but the original recovery rates for Pembina field, for example, are around 20% of original oil in place. So 3 to 5% improvement in that recovery factor is huge.

Sorry. What was the original Pembina recovery rates?

I think it’s around 20% of the original oil. Yes.

So that’s 3 to 5 percentage points? Or 3 to 5%?

That is really not an informed answer.

All right. I’m making this too much of a science, I realize.

Are--?

Sorry?

We’ll have to get that information. We’ll try to provide it. Right now it’s just too early to tell.

Okay.

And I really think it’s probably going to be three to four years off as well so it’s a ways out there.

Okay. Thank you.

You’re welcome.

Your next question comes from Dominique Barker of Credit Suisse First Boston. Please go ahead.

Hi. Given all your growth opportunities, have you ever considered - this is a strange question – have you ever considered moving back to a corporate structure given the leveling of the playing field in Canada between trusts and corporations?

Well, it’s not a silly question. I think it’s a good question. I think right now the structure that we do have does lend itself quite well to an income trust with our internal debt and so we are able to off-set the tax status and, quite frankly, in the pipeline business having the CapEx and the growth that we do have it still doesn’t attract very high depreciation rates or CCA rates for tax purposes. So I think our structure still makes a lot of sense and we will continue to maintain the structure going forward.

And to what level would you increase the drip? You talked about it increasing this coming year.

Well, we’re targeting for around, Peter, do you know? $50 million?

Yes. With no provision with the current participation rates we are at about $50 million a year right now.

Sorry. What percent is that overall?

It will all depend on the, well you know our distribution-- what we’re planning to make expected distributions for 2006. So $50 million is the percentage of that. It will depend on the participation rates of the individual investors.

Do we have anything that-- did we find a participation percentage for the month of January?

Yes. I don’t recall the actual percentage but $50 million on 113 or so million, 40% participation rate?

Yes. Probably 40 or 50%.

Okay. And I just wanted to clarify because at Kinder Morgan’s investor day last week they talked about Kinder Morgan energy partners rather than Kinder Morgan energy partnering on the Spirit Pipeline. Is that correct? Or is that your understanding?

No. Right now we are proceeding with the Spirit Pipeline. We are proceeding on our own at this stage.

Okay. Was it not originally with Kinder Morgan?

Yes. It was originally started with Terrace and, of course, Kinder Morgan took over. And then we were working with Kinder Morgan on the project but it turns out the economics weren’t as attractive to them as it was to us because we were utilizing our existing infrastructure. So as a result we decided to proceed on our own on that initiative.

I see. Okay. Thank you very much.

You’re welcome.

Next question comes from Karen Taylor of BMO Nesbitt Burns. Please go ahead.

Thanks. So can I just follow-up the last question here with the Kinder Morgan? So was this something that happened from last week until today?

That’s correct, Karen.

Okay.

We’ve been working on trying-- we believe we had an understanding with Kinder that turns out they didn’t feel it was as strong as we did; so we just decided that this project makes a lot of sense for us and that we’re going to carry on.

Okay. Interesting. So now previously, although it was I think even 50/50 – correct me if I am wrong – you were bearing less of that capital cost; so given that the capital cost if anything is going to increase with the cost of pipes and other constraints, do you feel that $1 billion plus is still something that you can still bite off and chew?

Yes. Actually, we estimate currently the cash cost of this project to be roughly-- it’s just under $900 million, Karen. So we’re going to consider options. Right now we have applied to lenders with respect to our ability to finance it and I think we’ve got some comfort there. We may also find that it may make sense to bring in a financial partner here; but those are options that we’re going to consider as we move forward with this initiative.

Our main event right now really is trying to get shippers committed to this initiative and that’s what we’re focusing our attention on right now.

And can I-- you know this is my favorite question – because you are now taking the proration off the drip and increasing the plan by quite a sizeable amount - and I assume that because you are doing that for ’06 that you’re also going to do it for ’07 - so I printed off the capital budget for ’06 yesterday to take a look at the $166 million and how that breaks down between the different systems; and you know I’ve been concerned with the use off issuing new capital to maintain the current cash flow. So could you please go through particularly as it would relate to the Albert and the BC systems, how much of that expenditure is required to maintain the existing cash flows on the existing businesses; because that is analogous to sustaining CapEx and argue it should be deducted or at least not funded from incremental capital.

You know, Karen, for the most part – just looking at the listing of the information that’s on here – for new connections and upgrades we’ve got about $25 million so that would all support itself. The main value product segregation is about $34 million and, again, that’s going to support itself.

In what time frame? So if you didn’t actually make these investments would the throughput on these lines be flat or decline?

I think typically you’re going to look – depends on the system – but most systems we’re looking at say 3 to 5% decline. That’s what you would normally expect.

Yes.

This year we’re actually budgeting for an increase by almost 8 or 9% for the pensional system so a number of the initiatives, the things that we’ve spent in 2005, are contributing to an increase in volumes in 2006; and these new expenditures that we’re contemplating for 2006 will also add new volumes to the system which should – it’s hard to say – are they off-setting decline? Yes, they are. But I think what we’re expecting is that we’re actually going to see an increase as I mentioned in 2006.

So when I look at the level of capital, there’s only a minor amount of capital events related to things like – you’ve got instrumentation and [inaudible] upgrades for example, that is something that we need to continue to do with our systems as our systems mature. Systems are going to change.

The expenditures we have in British Columbia is about $13 million contemplated. A lot of that, really, is going to support the ongoing production from British Columbia as well as potentially the Spirit Pipeline once it’s in service. And then we’ve got a bunch of capital that’s dedicated to oil sands, about $72 million and, again, that’s going to be related to future perspective cash flows.

Right. So I’m not as concerned with the oil sands, but you’ve got total maintenance CapEx which would be deducted from available cash of $2.9 million in 2006; but yet you’ve got instrumentation and [inaudible] of 4; you’ve got a variety of different things in the BC system, the pipeline inspection costs-- are those going to be expensed or capitalized?

Those are capitalized and they are capitalized because they are under the BCUC regulated pipeline so those go to capital and those expenditures will be recovered over the future.

And then the valve and tank projects and the new connection and upgrade. So I guess we’re concerned with the dilution coming off of an expenditure program when we’re not fully discounting or deducting from cash what is the real maintenance to sustaining CapEx. And could I also just come back to the line pack issue? You had $17 million budgeted in 2005 for the line still on the midstream business. Are you telling me that the total cost for the line fill was $27 million?

$15.5 is the total, Karen.

So coming--

I’m sorry. I didn’t hear you.

I’m sorry I’m trying to listen to Glenys but she’s coming in and out.

Okay. Sorry. Glenys --?

I believe the total was $15.5 but that does include some facility costs, Peter, so what would be the line cost – 15?

I’d go with a rough 15, Karen.

So what then is the variance? You said to Linda it was line-packed but line-pack was lower.

Yes. What’s available what she was comparing to Karen?

The total capital numbers for the year were $79 million and the total development CapEx that’s on your sheet here is $63.8; so where’s the variance?

All right. We’ve got $75.5-- this is actually, Karen, this is going to be updated this morning so you can get the break down. I really can’t speak to the variance I’m just trying to look at where the differences have come in. Oil sands looks like it’s higher; midstream is a little bit higher; so it’s really across the board. But I think what we’ll do, Karen, is you’ll see that on our website here later this morning and if you have any other questions about it we’ll be happy to answer it. I couldn’t tell what the old number we have here for development capital is 62.8 so the variances will show up on a number of lines on the capital.

But getting back to your point on the drip, Karen, I don’t know whether I necessarily agree with your concern because the reality is we’ve got other things that are contributing to cash flow here for us and we’ve taken a fairly conservative approach to it so far. The midstream business is new business, we said it’s going to be about 10% for the – Keyera’s pension is an example, we said 10% accretive to capital for 2006. So if it comes in at 10%, maybe comes in at 12%, we don’t know; but that cash flow will be available to service the new units that are being issued. We’ve got a number of other initiatives that are underway that will also be available; so I’m less concerned, perhaps, than you are. And, I guess, that’s just being consistent where we stand on this; but I see the drip program as being a very efficient way of raising equity in today’s market; particularly in [inaudible] today.

And just lastly given that we do have a very large funding requirement for the combined oil sands project over beyond 2006, what is your threshold or capacity for issuing convertible debentures because they are being converted now at fairly diluted rates if you will. So can you just explain to me whether you are going to use convertible debs in the future and what’s part of the financing plan?

Yes. Our plan, Karen, going forward is that we’re going to look at using debt to finance these expansions. We’re currently looking at a couple of options with respect to that; so we use credit particularly given our cost of financing today is low. We will then look at coming to the equity markets to maintain our typical capital structure at roughly 50/50 - sometime, generally following obviously the in-service date of these new initiatives. However, if some of these other opportunities and new business developments we’re working on – if they work out reasonably well, we could opportunistically look at coming to the equity markets before completion.

I’m sorry. What did he say?

I think what you look for long-term for modeling is that we’re going 50/50 but we’ll be using debt in the near term.

I’m sorry. When you talk about the accretion to 2005 cash flow, for instance, on the midstream initiative?

Yes.

You are assuming an aggregate number not on a per unit basis. Is that right?

That’s right.

So if we have a capital program of $166 million in ’06 and we’ve got roughly $50 million of that coming from the drip and notionally you want to finance that $156 50/50?

Yes.

It means that we’re looking for another roughly $35 million in equity in ’06 and if you don’t do it in ’06 then you would add it to whatever you acquire in ’07?

Yes. I think that’s fair. But we’ve got sufficient capacity to go beyond 50/50 for now, Karen. Our debt to EBITDA is, Peter?

27.

2.7 times. You’ve got plenty of capacity in our existing credit facilities so we can be selective as to when we go.

But the intention would be to finance the capital program as it unfolds over the next cumulative period of time 50/50?

I think that’s a good way to model it, Karen.

And the last question – sorry – somebody else! The budget for 2007, you have to have a preliminary CapEx budget. I know it’s early ’06 but we’re talking about an integrated multi-year program. What’s the current budget for ’07 exclusive of Spirit?

I don’t have that information on me, Karen.

Yes. ’07 the bulk of that, Karen, is going to be for the Horizon Pipeline.

Do you have a sense as to what you were looking at in ’07? I know that we did talk to our Board about it yesterday.

I would say it’s going to be at least $200 million for 2007 at Horizon. We’re expecting that to be in service mid-2008 with little CapEx, maybe $20 million, $25 million CapEx in ’08. There’s going to be some CapEx in 2006 so I would say at $200 to $225 would be in the-- unless it’s slightly higher in 2007.

Sure. Thank you very much.

Your next question comes from Brian Purdy of FirstEnergy Capital. Please go ahead.

Hi guys. I just wanted to ask about Spirit. I haven’t seen too much or maybe I’ve missed it here on your CapEx budget; but are you planning to capitalize any of these costs that you’ve expended to date or are they being expensed?

We are pretty [inaudible] to date. I’d say probably certainly less than $1 million. We’re looking at just the engineering – the pre-engineering for this – we’re looking for support from our customers for expenditures of around $4 million so it’s still pretty early in the game with respect to the Spirit Pipeline.

Okay. Great. And changing gears I want to ask about the midstream business. Obviously you guys saw pretty good growth over the third quarter as the business ramps up and it sounds like you’ve started providing the same sources for the Cremona system. Can you give us an idea of maybe what you expect from the Cremona system and the new initiatives there and where do you see these services rolling out in the future? Can you put these on some of your larger systems like the Peace [inaudible]?

Yes, Brian. I think that is part of the plan, here. It’s going to take us some time to do that; so we’ve got the joint venture with Keyera on the Swan Hills system. It’s playing out pretty much as expected,

Cremona, we’re in early innings still on Cremona. We’ve got the facilities in place, expect that maybe we’re going to get somewhere between $1 and $2 million on the Cremona system. Keyera joint venture on Swan hills we estimate about $10 million. We’re hoping to do the same on the Pembina system, looking at a potential joint venture on the Pembina system; which, again, will not be fully in place until probably the third quarter of this year and we might expect the benefits from the Pembina system to be similar to the Swan Hill system on an annualized basis.

We are also looking at merchant activities on the Peace system. But, again, that would be late 2006, Brian; so we’re really not going to see the full-year effect of these new developments, new opportunities until 2007. But we will see an improvement throughout 2006 with respect to the initiatives that have been started or are in process.

Just in terms of these initiatives that you haven’t started yet but I guess you’re looking at, obviously, or you’re having some joint venture conversations-- how confident are you that these are going to go forward and should we be looking for this cash flow at least in ’07?

I would say that we’re fairly confident, Brian, and in our own mind this is what we’ve conveyed to the market in the past is that because this is so new business for us we’ve said – look, it’s new so what we need to do is apply half the cash from this new business to our debt repayment and half we’ll have available for distributions to our owners; so I that’s still the mental model we’re working with.

As far as the total contribution rank yet, we’ll give better guidance as we get through the year and implement these arrangements. I’m pretty confident that we’re going to be doing something with Pembina like single shipper status by mid-year and merchant activities probably third quarter; but, again, Brian, I think it’s a matter of saying – for now we’re going to do it and we will provide better guidance as we implement these arrangements.

Well, at least the initial activities on Swan Hill seem quite accretive so I’m just wondering how stable are the margins from this business and can you give some more details in terms of what the risks are and how that cash flow might move around from quarter-to-quarter or should it be fairly steady?

I think we have base lines-- looks like it’s going to be pretty much as predicted; so I think it’s going to be pretty reliable. It can vary month-to-month but we haven’t seen a huge variability so far; and so, again, as we go through each quarter I think we’re just going to have more confidence with respect to the sustainability of those cash flows and, again, provide better direction to that sort of market with respect to what to expect.

And you are right. They are quite accretive because really the investment we’re making for the most part is in line fill which we are earning a rate of return on. The facilities modifications and so on that we have to do are quite modest. The biggest deal and it’s really not necessarily directly related to it but the product segregation initiative that we have on the Pembina system is going to cost us around $34 million this year; but again, that’s something that we’ll recover through tolls because we’re providing improved service for our customers.

So there are a number of things that we’re working on and as I say we’ll continue to provide updates as we proceed through the quarters.

Okay. I’m just wondering if I could have some more questions about this business because it seems like you haven’t talked too much about the details but the cash flow is so significant and I’m just wondering-- were there other companies providing these services around your pipelines previously and are you expecting some sort of competitive response there and when I look at these, just even look at the Pembina and Peace systems that you could add on – sounds like if you’re saying you get another $20 million a year cash flow eventually, is there any danger of competitive response here or do you have some advantage just because you own the systems already?

Well, I think that your last conclusion or comment, Brian, is right. We have an advantage because we own the systems already. There are people that are involved in all kinds of merchant activities all around us but they can’t do it to the same scale as we can because of the pure size of the systems that we have; so I don’t see that there is going to be a competitive response to this. I think the market will continue to do what they can; but given that we have significant investment and infrastructure we can take advantage of our investment to maximize our revenue earning opportunity.

Okay. Great. Thanks very much.

Thanks, Brian.

Your next question comes from Fai Lee of RBC Capital Markets. Please go ahead.

I was just wondering if you have a forecast for the average toll expense-- for average revenue per barrel for 2006 on the Alberta system or the Alberta Pipeline? Sorry.

For Alberta? Gwyneth, I think she is telling me it’s going to be $1.25 roughly per barrel.

$1.25 average for 2006?

Yes.

Okay. And in respect to the Cheecham Lateral and the Horizon Pipeline, I know that the costs have kind of creeped up a bit since you had originally announced the projects and could you just remind me if your return that you earn on these projects is impacted by higher capital costs; like does it get adjusted or do you simply earn a fixed return on the initial capital regardless of how much it’s gone up?

Yes. Peter, maybe you want to answer that question?

Yes. On the Cheecham, we’ve agreed that we’ll-- there will be a cap on the rate base that we come out on. But if the CapEx is actually more than that cap then Pembina will recover that on a cash basis. Horizon is going to be what it is and we’ll be working closely with CNR to minimize any over-runs we can.

Okay. Just to be clear-- so for the Cheecham Lateral if the capital costs exceed the cap then you get to recover that amount?

Yes. That is correct.

Okay. Thank you.

You’re welcome.

Next question comes from Alda Pavao of CIBC World Markets. Please go ahead.

Thank you. I’m just want to turn to the Spirit Pipeline proposal now that it appears that you guys are going on your own on that. I want to clarify the potential cash outlay that you would have to put forth in order to build the pipeline from Kitimat to Prince George as well as expand your current system into Edmonton. Could you just elaborate as to the potential cash outlay versus the capital cost?

Sure. Right now our best guess is about $875 million and that would involve the change, the acquisition of terminalling facilities of Kitimat. It would involve the construction of new pipe from Kitimat to Prince George. It would involve the construction of new pipe from Taylor into Box Creek and the necessary modifications that would be required on our western system as well as to reverse the flow of product from [inaudible] to Prince George to service the refinery. So that’s sort of the break out as far as we see it today.

Thank you. And just further along, I understand you are obviously still in discussions with potential shippers as well as Husky as it relates to the refinery product that would feed into the Prince George Refinery. I understood the advantage that Kinder Morgan also brought was that they proposed to bring product on the Trans Mountain System through the Western system into Prince George. Is that still going to be the case – that still what you’re proposing with Husky?

Yes. [Inaudible] would be necessary because we’ll still be part of the product and the best way to get it would be off the Trans Mountain System [Inaudible] and then delivered north into Prince George.

And then shifting gears, just want to get an understanding as well-- you have a heavy schedule in terms of organic development projects which is very good for your growth outlook. Are you still pursuing further oil sands pipeline within Alberta on a stand-alone basis?

Well, it’s something that we’re going to continue to look at. You are absolutely right in that we do have a lot of initiatives here in front of us in the next two to three years; but we’re still going to be involved. People are going to request proposals for pipeline transportation. That’s the business that we are in; so we will be involved in those. But I think we can also be quite selective here too. I think it’s also fair to say that we’re doing the expansion for C&RL for their -- sorry, the project for C&RL for the Horizon project but they’re also talking about a further expansion for that project which we have an exclusive right to provide that initial capacity. So that would likely involve new pipe or could involve some looping of the pipe; but if it’s new pipe that’s another large project to meet their capacity requirements.

If [Inaudible] for example, requires a further expansion, again, we have the opportunity to provide that expansion for them and there are others that are looking at providing established new projects up in the oil sands that we would be looking for transportation services. So I think, really, from a strategy perspective, our focus is on doing what we have in front of us for now and we will respond to other opportunities but I think we’ve got enough to keep us busy for some time.

Thank you very much.

Next question comes from Juan Plessis of Canaccord Adams. Please go ahead.

Hi. It’s Juan Plessis, actually; but getting back to the Spirit pipeline, given there’s been a significant change in sort of the ownership potential here, do you see that you are taking on a greater risk in the competitive pipeline situation than you normally would take on and if so would that require a higher return down the road and what would you be willing to – and how much are you willing to – invest in the near term to try and develop your project?

That’s a good question and I think the economics from our perspective are quite attractive based on what we’re seeing today. Taking on more of this project I don’t see that it necessarily significantly raises our risk profile. We’re not going to move on this initiative until we get shippers to commit to a long term contract and once we have those commitments then we’ll proceed with it much like we’ve done with the C&RL Horizon project or the Cheecham Lateral. So that’s the business model that we’re working under and we don’t see that it’s necessary to change the economics because we see the risks as being not much different than they were a week ago.

Well if Kinder has dropped out and maybe they’re funding more of the pipeline stuff, it would seem to me that if you’re going to attract other potential partners you could have done that with Kinder in terms of maybe enjoining the two portions and getting a good return and the Kinder cost to capital is obviously quite low so I’m just kind of wondering what the whole rational of them dropping out might have been?

I think part of it, Bob, is that we have an understanding as to what the economics of what the project were and I think it’s fair to say that there may be different expectations for different partners as will always be the case. They’ve got a different corporate structure than we do and we were in a position and we have the advantage of utilizing existing infrastructure. So it could be that our economics were better than theirs and that likely is the reason as to why they may not have proceeded.

Similarly, some of the others may not-- well, I cannot speak for others because there isn’t anybody else out there right now that we’re talking to about partnering on this initiative; but the reality is that this is the business that we’re in and we can do this on our own.

Okay. And I have sort of followed the pipeline industry for 30 years and I’ve never seen so much different pipeline competition in so many different fronts at once. It’s kind of interesting; but let me ask this final question. Embridge on their call this morning said that they thought they had good producer support and would be filing their application in the second quarter. How do you respond to that?

Well, I don’t know much about Embridge’s business, Bob. I think they are prudent; they’ve been in business a long time and they’re not going to put pipe in the ground without having shippers to commit to it. So I would expect that they’ve got a number of shippers that are expressing interest for service. It could be that that service is going to be required later than what we will be able to provide and so we’re working with the people that we believe want the service sooner than some of the others.

So that’s where you’re getting your support. Then you do see a sufficient support at this point?

Yes. We do.

Thank you very much.

The next question comes from Linda Ezergailis of TD Newcrest. Please go ahead.

Thanks. This is, I guess, a follow-up question from Bob’s. Would it make sense to combine Embridge’s condensate import project and yours and would that perhaps enhance returns for both parties so that it makes sense for Embridge to participate versus Kinder Morgan?

I don’t know the answer to that, Linda. I think that maybe once you get one pipeline in, you get an opportunity as we are all experienced now to expand a pipeline at a fairly low cost to provide incremental capacity. It could very well be that there is demand for 250 to 300,000 barrels a day in condensate long-term and into the Edmonton area. And that both projects should go.

To combine them, I don’t know that it necessarily makes a lot of advantage. But particularly under these circumstances because we are really looking at using our existing infrastructure and that’s something that is unique to Pembina so we can offer a lower cost transportation alternative to our customers and also have it in service sooner than our competitors might be able to. So that’s really what makes sense for this project.

So if we assume that both projects go forward, then can you help me understand how much volume risk you’d be willing to take on and how the returns might change on the project over time?

We’re not going to take any volume risk on this initiative. We will sign up shippers for the capacity that we are looking to provide and as I mention we will provide that under long-term contract. So it will be something-- it won’t be processed long-term as the oil sands initiatives but still it will be a long-term contract, greater than 10 years.

Okay. So the profile of your returns would not change over the duration of the contract?

No.

Okay. Thank you.

Our next question comes from Fai Lee of RBC Capital Markets. Please go ahead.

Just a clarification, Bob. Do you get any sense that the shippers that you are negotiating with are the same shippers that Embridge might be looking at?

I can’t comment on that. There’s lots of people that are looking for condensate and we believe we are talking to people who have a real need for condensate and if they are talking to Embridge we don’t know that but we think that we’ve brought up a good project and we’re going to proceed with their continuing negotiations to achieve the objective we want to achieve.

And just a clarification on the pension. From an actuarial standpoint at this time with the top up in the fourth quarter, is the pension plan now considered fully funded or is it still under-funded?

No. I would still think it is under-funded, Fai. It should be above the 85. We think it’s somewhere between 85 to 90% funded. But a lot of that will depend as Peter mentioned earlier, we’ve got to look at what the rates the actuaries will be using this year. I think we are going to get another actuary report this year. So we’ll have a better sense probably in a couple of months as to where we stand. But our objective is to try to get the fund back to being fully funded.

Okay. Thank you.

Your next question comes from Dominique Barker of Credit Suisse First Boston. Please go ahead.

Hi. I just have a question on midstream business. How satisfied have you been with that business and would you consider bulking up that business by either – I know there’s a lot of producers that are selling midstream assets or perhaps even making a corporate acquisition?

I’d say we’re satisfied with the business and we’ve only just begun with respect to that business; so I think it’s early innings. As far as expanding our operations into midstream area, that’s something we would certainly consider if it makes-- if there’s some synergy or something that does make sense. But right now, we’ve decided to proceed primarily by a joint venture where we don’t have the expertise and that’s why we’ve entered into this joint venture with Keyera.

So, again, that’s down the road, I believe.

And would you-- there’s a lot of assets for sale but then there’s potentially some corporate acquisitions that could be made as well. Would you consider both?

Yes. We would consider both; but I still think those are going to be off in the future just because with the initiatives we have currently in front of us it’s enough to keep us busy and these projects that we have are much more accretive than a corporate acquisition. I can tell you that.

Thank you very much.

You’re welcome.

Your next question comes from Karen Taylor of BMO Nesbitt Burns. Please go ahead.

Thanks. I just have a couple of really quick follow-up questions. Peter, can you just elaborate on the Horizon Pipeline? If you have cost over-runs, can you explain to me what you mean by, “It will be what it is.” Does that mean you have cost [pasture] or not?

We will have a return on the investment capital.

So irregardless of where the cost goes the arrangement--

That’s right. We will be working with the NR to the process to try and land the East Coast as we go along.

But it is a full pasture. Is that right?

That’s correct.

So on the Cheecham, then, just to come back – if you go over the cap on the construction costs, you recover?

They pay us cash for that over-run.

I beg your pardon?

They pay cash for the over-run on the CapEx for the return on the capital. So we get a return off the capital but enough return on the capital.

So no return on capital?

Yes. That’s a far smaller project, Karen. We’re looking in the low $40 million range.

I just want to make sure I understand what you meant because it wasn’t clear. So no return on capital but return of capital?

That’s correct.

On Cheecham and then on Horizon it’s a complete pasture but for the purposes of that contract there’s a bit different treatment on invested capital. Is that right?

That’s correct.

Can you talk about-- and then just a clarification for the earlier question on the pension, how much do you anticipate funding on a cash basis run-rate for 2006?

I would say $5 million.

And just lastly on the midstream, when I think of the midstream business here you’re not owning at this point anyway, any – what I’ll call – midstream and field natural gas processing facilities? It’s more of the pipeline infrastructure facility, storage and terminal. Is that fair?

That’s fair, Karen.

You would tend to buy any gas gathering or processing assets then in conjunction with taking an active commodity price exposure.

No.

And do you have any commodity price exposure now?

No.

Thank you.

Mr. Michaleski, there are no further questions at this time. Please continue.

Well, thanks very much. This has been one of the longest conference calls that we’ve had. But we’ve had a lot to talk about. So thanks for participating and if you have any other questions we’ll be happy to respond to them as we can. Thanks very much.

Ladies and gentlemen, this concludes the conference call for today. Thank you for participating, please disconnect your lines.