Pembina Pipeline Corp (PBA) 2006 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Pembina Pipeline Income Fund first quarter results conference call. [OPERATOR INSTRUCTIONS] I would like to remind everyone that this conference call is being recorded on Thursday, April 27, 2006, at 4 p.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 afternoon, 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 first quarter 2006 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 the remainder 2006. Once I've completed my comments, we'll be happy to respond to any questions you may have.

This morning Pembina held its ninth annual meeting of unitholders of Pembina Pipeline Income Fund. We are pleased to report strong operating and financial results for 2005.

It was a year of record achievement for Pembina, in which we successfully capitalized on the growth and development potential across a rolling base of energy infrastructure assets and set the stage for further development in 2006 and beyond.

Please note that certain of my comments this afternoon may be considered forward-looking in nature. We refer you to the forward-looking information and statements disclosure detailed in our first quarter 2006 interim report, which is available online, both at Pembina's website located at www.pembina.com, and on the SEDAR website.

I'll start with a few highlights for the first quarter. Pembina completed the first three months of 2006 with record operating and financial results. The fund distributed $0.095 per unit per month or $0.285 per unit during the quarter, a 9% increase over the 2005 rate. Cash distributions total $33.6 million during the quarter, a 23% increase over the same period of 2005.

Pembina has distributed a total of $722 million or $8.54 per unit since incipient as a publicly traded income fund over eight years ago. The notional distribution reserve stands at $17.3 million at the end of the first quarter, providing us with a high degree of confidence in attaining our 2006 distribution objective.

Record quarterly revenue of $81.5 million generated operating income of $51.9 million during the first quarter this year, a 16% improvement over the same period of the prior year.

Pembina transferred an average of 454,300 barrels per day with conventional systems during the first quarter of 2006, an increase over both the previous quarter and the first quarter of 2005. This is the first time in several years that we have seen a year-over-year increase in conventional throughputs during the first quarter.

The Alberta systems transported an average of 454,000 barrels per day during the first quarter, almost up 3% over the 441,200 during the previous quarter and 2% higher than the 445,700 barrels per day shipped during the first quarter of 2005. Incremental volumes from the newly connected Nisku production batteries on the Pembina system helped to more than offset the natural production decline from the Alberta systems during the quarter.

Throughputs of 26,000 barrels per day shipped on the BC systems during the first quarter of 2006 were also up compared to both the previous quarter and the first quarter of 2005.

As previously noted, total revenue of $81.5 million was reported for the quarter, a 17% increase over the first quarter of 2005. Conventional pipelines contributed $56.4 million in revenue, up 10% over the first quarter of 2005. Average revenue per barrel for the conventional systems of $1.28 for the quarter is $0.09 higher than the first quarter 2005 average of $1.19 per barrel. The higher average revenue is partially attributable to tariff increases implemented on some of the conventional systems late last year and in the first quarter of this year.

During the quarter, AOSPL generated revenue of $14.8 million on contracted capacity of 389,000 barrels per day, a 20% increase over the first quarter of 2005 revenue of $12.2 million. Flow-through of higher operating costs incurred during the quarter caused the increase in revenue. AOSPL contracted revenue includes full operating cost recovery and a rate of return on the capital invested to provide the contracted capacity. Returns, therefore, are not impacted by throughput levels. System receipts on the AOSPL averaged 209,500 barrels per day during the first quarter of 2006 compared to 162,400 barrels per day during the same period in 2005.

Midstream business operations contributed $10.3 million during the first quarter of 2006, up significantly over the $6.2 million generated during the same period of 2005. The increase in revenue was attributable to the ongoing development of Pembina's terminalling, storage and hub service operations.

Operating income, defined by Pembina as revenue less operating expense, rose almost 16% during the first quarter to $51.9 million from $44.9 million a year earlier. The year-over-year increase is mainly attributable to the positive impact of the expanded midstream operations. In addition, Pembina has been successful in both maintaining margins and attracting new volumes to our pipeline system.

Operating expenses on the conventional systems averaged $0.52 per barrel during the first quarter this year compared to $0.48 per barrel during the same period of 2005. Pembina continues to enhance and expand its comprehensive maintenance and pipeline integrity programs. These programs contributed to higher operating expenses during the quarter along with higher power consumption related to increasing throughput volumes.

General and administrative expenses during the first quarter of 2006 were $0.10 per barrel, up from $0.06 per barrel for the same period in the prior year. This significant increase is attributable to higher staffing level, market-based salary increases and a new increase in short-term-- in long-term incentives as Pembina responds to expanding business development opportunities and to the increasingly competitive regional employment market. Increasing regulatory and compliance requirements, both in our conventional and oil sands infrastructure business and the further development of the midstream business unit have necessitated the expansion of our head office resources.

During the first quarter of 2006 capital expenditures totaled $38.9 million compared to $8.1 million expended during the same period of 2005. The bulk of the year-over-year increase was related to the $24 million in capital spending on the construction of Cheecham Lateral pipeline. In addition, numerous new connections and upgrades on the conventional pipeline systems contributed to rising capital expenditures during the quarter.

Pembina's premium DRIP plan raised $13.3 million during the first quarter of 2006. The plan continues to attract significant unitholder interest and Pembina's target of plan proceeds for 2006 has been adjusted upward from $50 million to $75 million. The DRIP target is flexible and is generally tied to the magnitude of the projected capital requirements. Plan proceeds will continue to be directed to debt repayment and to fund the capital program.

Net debt financing cost of $5.8 million during the fourth quarter of-- sorry, first quarter of 2005-- 2006, sorry, was $0.7 million lower than for the same period of the prior year. Pembina's long-term debt at March 31st, was $489 million. Interest rates have been fixed on approximately 73% of our debt, minimizing our exposure to further increases in interest rates.

Subsequent to the end of the first quarter of 2006 Pembina announced that it had entered into a private debt placement for $200 million of senior unsecured notes. The notes will mature September 30th, 2021, and will have a fixed interest rate of 5.58%. Pembina expects this placement will close on September 30th, 2006, and the net proceeds will be used to repay existing bank debt and for general corporate purposes.

At the end of the first quarter, Pembina had a ratio of debt to total enterprise value of 23%, down from a ratio of 27% at the end of 2005. This metric improved due to the higher level of debenture conversions in the quarter and the maturity of the 8.25% debentures. The current level of debt is well within our bank facility covenants and provides sufficient capacity to continue to grow and further diversify the business.

Investment grade credit agency ratings assigned by Standard & Poor's and DBRS formally recognize 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 34th consecutive quarter and the $17.3 million notional balance on our distribution reserve at March 31st, 2006, provides confidence in our ongoing ability to meet our debt distribution objective.

At March 31st, 119.8 million trust units of the fund were issued and outstanding compared to 104.1 million at the end of the first quarter 2005. $106.9 million of principal amount of convertible debentures were outstanding at March 31st.

The market value of Pembina's publicly traded securities rose to roughly $2.3 billion. The total enterprise value of the fund totaled $2.8 billion at March 31, 2006.

Daily trading volume on the fund's trust units remained strong during the first three months of the year with the daily trading volume averaging 254,000 units for the quarter.

Now I'll turn to new developments and outlook. Oil and natural gas industry activity continues at record levels in Western Canada, benefiting Pembina's conventional pipelines and providing opportunities for the ongoing expansion and diversification of our business. New connections and facility upgrades generated incremental volumes that more than offset the natural production declines in some of our mature service regions.

Renewed industry development of the Nisku zone in south-central Alberta has resulted in a material increase in projected receipts on the Pembina system for 2006 and beyond. At the end of the first quarter, throughput volumes from this source were approximately 10,000 barrels per day. Based on producer estimates, Pembina expects these receipts to continue to rise over the remainder of 2006.

Pembina completed the new natural gas liquids pipeline interconnection between the Peace and Northern pipelines during the fourth quarter 2005 and the incremental 25,000 barrels per day of carrying capacity on the Peace system created by this undertaking is now available to attract incremental NGL production. Several additional projects are currently under development on the Peace system with the combined potential add increment to-- incremental throughput of about 5000 barrels per day by mid-2006.

In addition, the Calven Pipeline connection to the Peace system is now mechanically complete and has commenced operations. Pembina estimates that this connection will add an incremental 18,000 to 20,000 barrels per day with an addition 3500 barrels per day in the fourth quarter of 2006.

Turning to our oil sands interests, the two oil sands infrastructure-- infrastructure projects announced late last year continue to progress. Construction of the $42 million Cheecham Lateral is well underway, with the pipeline portion of the project complete and the construction of the pump stations and related facilities now occurring. The project is expected to be in service by the end of 2006 with the capacity to transport 136,000 barrels per day of synthetic crude oil from Pembina's existing AOSPL system to a new terminalling facility near Cheecham, Alberta.

The Horizon Pipeline is also proceeding as expected, with formal agreements nearing execution and construction expected to commence later this year with Canadian Natural Resources Limited approval. Pembina recently placed an order for approximately $50 million of pipe in anticipation of commencing construction on this project.

The 250,000 barrel per day Horizon Pipeline is scheduled for completion in mid-2008 and will provide exclusive transportation to Canadian Natural Resources Limited's Horizon oil sands project, located 70 kilometers north of Fort McMurray, Alberta.

Pembina continued to expand its midstream business operations during the first quarter of 2006 and is actively evaluating opportunities for further expansion of these services as resources and expertise are developed within Pembina. As this business is implemented across the conventional asset base, it is forecast by Pembina to become a significant revenue generator.

These operations, made possible by leveraging Pembina's existing infrastructure, assets and market position, diversify Pembina's business, provides a broader range of services to customers and extends the economic life of our conventional asset base.

In April Pembina announced that a development support agreement for our condensate project has been signed with a syndicate of shippers. This project involves the establishment of a main terminal in Kitimat, BC, and construction and operation of a proposed pipeline and related facilities capable of transporting a minimum of 100,000 barrels per day of imported condensate from Kitimat, BC, for delivery to Summit Lake, which is near Prince George, BC. From there, the condensate will be transported to the Edmonton market on Pembina's network of provincial and inter-provincial pipelines.

Pembina believes that this project could represent an attractive transportation solution for shippers and represents an exciting opportunity to materially expand both the scale of Pembina's operations and the returns for our unitholders.

Pembina's footprint in the rapidly growing oil sands region will be greatly expanded upon completion of the Cheecham Lateral and the Horizon Pipeline. The condensate project has the potential to further broaden that footprint. We believe that there are other opportunities in the near and longer term for further investment in infrastructure in this important area and we are well situated, both financial and operationally, to attract further business in the oil sands region.

Pembina has recently engaged in very preliminary discussions with producers to explore opportunities associated with miscible CO2 flooding in Alberta. This method of enhanced oil recovery may have the potential to significantly increase production in several mature oil-- oil-producing fields delivering into Pembina's Alberta conventional pipelines.

These fields, specifically the Swan Hill, Redwater and Pembina service areas, are projected by the oil industry to be potentially amenable to the application of this technology. Possible benefit to Pembina arising from the development of miscible CO2 flood projects is twofold.

Firstly, Pembina has the capacity to transport incremental production derived from the application of CO2 flood techniques at very little incremental cost. Secondly, there may be a real opportunity to participate in new CO2 pipelines, given our extensive network of pipeline rights of way. This represents longer-term potential for us and is highly speculative at present.

So to summarize, Pembina has established a solid reputation for stable operations, a solid track record for consistent and growing distribution to unitholders over the past eight years. Since our initial public offering in October of 1997, Pembina has distributed a total of $723 million or $8.54 per trust unit on a $10 per unit original issue price.

We have met our targets and objectives in each year of our public history. Ongoing growth in all three of our business units contributed to a 9% increase in our distribution rate effective January of 2006.

Finally, the breadth of tangible and prospective growth opportunities currently under development across all of our business segments lend confidence in our continuing ability to grow and prosper.

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

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

Thanks. Bob, I'm just wondering if you could paint a little bit more of a picture for us on your midstream business. Should we be viewing the first quarter EBITDA or EBIT as a good run rate going-- or a good baseline going forward, plus with some growth?

I think that's a good baseline going forward, Linda. We will be looking at potentially revving up some other activity later on in the year, but in terms of the impact it will have on the year, it'll be quite-- I think it would be minimal.

So I would use the first quarter and annualize that as a good baseline and as we progress through the second quarter, perhaps the third quarter, we'll get a better sense, Linda, but I think that's a good as it gets for now.

And then in terms of just some heuristics or an understanding of what drives this business, should we think that this business model might change if oil prices were to come down or if heavy/light differentials were to narrow or how should we be thinking about what's driving this growth in this business and why it wasn't there three years ago?

Well, I think as far as what's driving the business, certainly we had to make a bit of a transformation here and actually develop a concerted effort with respect to trying to take advantage of what we saw as a business opportunity up there, which is what we have done.

Getting back to your original question, right now I think certainly the differentials are working in our favor because of the higher oil prices, but we haven't developed an algorithm here that says if oil prices go to $40 or $50 or $60 what impact will that have on our merchant activities at this stage, Linda.

No, but I'm just wondering, directionally, if oil prices were to plunge or-- I mean, and if heavy/light differentials were to compress due to some exogenous factors, that might have some sort of an effect on your business and the converse would be true, as well, perhaps.

I don't think it's going to have a material impact at this stage, Linda, so we'll provide more guidance as we go and as we can.

Okay. And then so seasonality minimal?

Yes.

Okay. And then moving on to your capital program for 2006--

Yes?

--could we get an update on a breakdown of what sort of projects and what the-- of the total number?

I believe that's been posted on our-- on our website.

Take a look at capital expenditures, Linda, our website. It's under the investor relations financial reports section.

Okay. Was that posted just before the call?

No. It should have been posted yesterday.

Okay.

Yes, if you can't find it, Linda, just give us a call back and we'll get it for you.

All right. I'll jump back in the queue. Thank you.

All right. Thanks.

Your next question comes from Bob Hastings of Canaccord Adams. Please go ahead.

Hi, thank you. The-- going through the Spirit Pipeline, I like what you've done with the-- getting the development costs paid for by the producers until we get to a decision stage. Can you maybe go into a little bit more detail in terms of how and what's the timing of when you expect a decision and once that's decision made, if you go ahead, are those producers getting bought back out and it's going into the pipeline cost or are they taking a piece, equity interest, in the pipeline or how does that work?

Well, I guess in terms of time-- timeline that we're looking for in terms of getting their approval to proceed, I think it's going to be something that'll take us through the-- through the second quarter, probably into the third quarter of this year, Bob.

In terms of the go-forward position, it would be our intention to have-- at this stage, to have full responsibility for the costs associated with the construction of the pipeline, which means that we would enter into-- likely enter into contracts with the potential shippers for a long-term period where they, essentially, will be, then, providing us a guaranteed return on the capital that we invest in this project.

And the development costs they just swallow or do you buy them back out and would you entertain anybody taking an equity interest in the pipeline if it was desired?

It's something we could look at. As far as the costs are concerned, they-- they would absorb the cost. We have a retained interest in this, as well, Bob. We retained an exposure to a portion of the total cost. We see that really as being a development project which would-- would be for our account but if anybody came along to broaden the team, they would pick up those costs.

Well, but it would be normal for these more detailed engineering and environmental costs to be part of the capital project at the end of the day on which Pembina would earn a rate of return on once that project went into service.

Right. Yes. What is unusual is getting the producers to fund the development costs up front, so I wondered if there was any other tag-on arrangements that--

That just shows that they have a-- they have a vested interest in the project and there's a bit of a commitment on their part.

Right. Now the line itself will be sort of a bigger investment than you originally envisioned when you had a partner-- when Terasen was a partner. Do you see anybody else stepping into that role?

Not at this stage, Bob. We haven't-- we haven't pursued that arrangement. It is still pretty early-- early innings for us. We should be able to satisfy the potential customers here that we have sufficient credit facilities or could have sufficient credit facilities. Maybe, Peter, do you want to-- do you want to speak to that?

We had preliminary discussions with our bankers and with the balance sheet the way it is today, they believe that this project is quite financable by Pembina on its own. But that-- that doesn't shut the door for any potential equity partners in the future.

Yes. We kind of think that the arrangement itself, Bob, as it unfolds, if we're successful in moving forward, will be quite attractive to other-- to other players, but at this stage, as I say, I think it's a little bit early to go chasing-- chasing them down.

And I just heard from some other pipeline companies that they have people interested-- producers always interested in-- or some producers interested, so I wondered if you'd seen the same level. Anyway, thank you very much.

Okay, Bob.

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

Thank you. I just have a few technical questions. Just on the project costs themselves, Horizon looks like it's gone from $280 to $300 million and Cheecham's gone from $20-- sorry, $36 to $42. Is that right?

I'm sorry. I missed your first-- the first comparison on Horizon, Karen.

It was about $280 and now it's $300.

I think we always said $292 and we're just rounding it to $300 million now.

Okay. And Cheecham?

And Cheecham-- Cheecham I think you're right, Karen. It was initially around $36 and it's now $42 million.

Okay. The-- I'm sorry, go ahead.

That is really in respect-- in response to a scope change. I think we had to put-- put a little more pipe in than we had originally anticipated.

Okay. The-- in the document -- I don't know what page it's on -- you talk about a 90% payout ratio in 2006 and I just want to make sure I know what that is. You're paying out $0.095 now a month or about roughly $1.14. Does that imply, then, that available cash for the year is going to be something in the order of $1.26?

Yes. I think if that's the math, that is correct, Karen.

Okay. And it doesn't include any of the balances that are notionally set aside?

No, that would be-- that would be before the reserve.

Okay. And the DRIP of $75 million in '06, is that going to be a new run rate?

I think-- Peter, do you want to speak to that?

Yes, with-- we have good participation currently on our DRIP program and we leave it un-prorated today on an annualized we can raise $80 million. So for the balance of 2006 we estimate that to be-- that could be between $70 and $75 million for calendar 2006. 2008 if we continue to have--

Sorry, 2007?

'07 with the capital expenditure profile we have going forward, I would expect, given the current participation level, that we would raise $80 million in 2007.

$80 million in 2007.

Yes, I think you probably would project something in that same range going forward, Karen, because we've always stated that it is our intention to use equity to partially fund the expansions that we are completing and this is an opportunity to do that as we go as opposed to waiting 'til-- 'til we get there.

And while it is-- it maybe dilutive to a certain extent because it is-- the cost of equity is higher than the cost of debt, we do have-- we do have additional cash flows coming to us from our merchant activity which we can use to help service this additional equity that we're issuing.

Okay. Just very quickly, on the fixed proportion of your interest costs of 73% at March 31st, does that include the $85 million that's notionally hedged for just a little over a year and a half with the swap?

Yes, it is.

The average term to maturity of the fixed interest costs, exclusive of the swap, is how long?

It's going to be based on our Series A and B note issues. The A is-- the first series would be the-- we refer to it as the $100 million note issue and that is-- that is out to, I believe it's--

I can check that. It wouldn't have changed substantially.

It's in the annual-- annual report

And just very lastly on the Calven system, then I'll hop in the line. When you talk about 18,000 to 20,000 barrels a day, is that the run rate for the remainder of 2006 and would we look for anything further in 2007 incremental to that beyond the 3500 or is it-- that's the run rate and that's where it's going to sit and then you'll announce anything incremental to that as with the 3500?

Yes, I think that's a fair-- fair starting point, Karen. We don't have a good gauge yet as to what sort of decline we might expect on the Calven Pipeline. You might build a little bit of decline into it, but again the-- our customer there is out trying to secure additional volumes which would suggest that they're-- they're going to certainly try to maintain the volumes in the range. But I think for-- for your purposes I would use that 18 to 20 as being a good range with some coming-- additional coming in at the end of the year related to that $3500 of-- or 3500 barrels of sour.

Okay. I'll get in the queue. Thank you.

Okay. Thanks, Karen.

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

Yes, thanks. Bob, I just wonder if you can maybe elaborate on whether there's a potential for the condensate pipeline to expand, I guess, beyond 100,000 barrels per day, perhaps into the range that [Embry] just talked about, maybe 150,000?

I think all I can say is that with any conceptual pipeline it can be just about whatever you want to make it. Certainly we could easily expand this pipeline to 150,000 barrels per day, probably at a cost of less than-- I'm going to say it'd be a cost of less than $200 million. So it could be done.

And is there any-- are the shippers trying to drive any of this process in terms of indications to you that maybe they want more capacity than what you're-- you've originally contemplated on providing?

There's ongoing discussions, Fai, and I can't say much more beyond that at this stage. It'll be whatever it is and whatever they want to commit to at the end of the day, but I think they're-- It's like anything. They're going to want to explore as many options as they possibly can. If we can add more shippers to the group, then we increase the appetite for sizing of the pipeline, as well. So, again, that's going to unfold as we move forward in 2006.

All right, thanks. And the other question I had was on G&A expense. I guess there-- it looks like there were some incentive payments in the first quarter. I'm just wondering what sort of is a good run rate, I guess, going forward for G&A for the remainder of the year?

What I would do is-- Let's see, Peter, do you have a gauge on where we should be as far as providing guidance?

What I do, Fai, I would take the-- Oh, you wouldn't-- you don't have the information as far as the variance from our budget.

Yes, I would start with the variance from the first quarter 2005. I would take that variance and that will be your-- the projected variance towards-- for the end of the year.

Okay, sorry. I'm not quite following that. So take the difference between what it was in the first quarter of 2005?

Yes.

And apply that going forward?

Yes. Some portion of the variance isn't there, but you'll just have to take-- roughly annualize Q1 of '05 and then add the variance to Q5 for this-- to first quarter and then extrapolate that to the end of the year.

Okay. All right, thanks.

Thanks.

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

Good afternoon. My first question relates to the incremental capacity available on the Peace system from the NGL system with the Northern system. Can you just give a sense of-- of the volume pickup there that you're seeing on the system as a result of that interconnection?

Yes. Well, Alda, we haven't-- we have not seen any volume pickup as yet. We have been in discussions with, I'd say, probably three or four potential customers and they're-- they're sorting out their plans. Some have the opportunity to go further deep cut in their facilities and if they do, we have the opportunity, then, to move that. I can't give you any advice yet at this stage, Alda, as to when-- when that may happen. I suspect it's going to take most of the year for us to get some of that capacity utilized, so I think I'd just leave that as is for now.

So potentially it could be more 2007?

Yes, that's certainly-- that would be our hope, Alda, as we-- we talk to the various customers out in the field and certainly there's been a lot of discussion back and forth in this city about the demand for additional ethane in the petrochemical sector and we believe that there's additional ethane available throughout our service area. It may require some additional capital to extract that ethane and that's the type of business venture that we would like to pursue.

Okay, thank you. Just moving on to your capital spending program for 2004-- 2006, excuse me, and I-- I notice that there's been a slight increase in the midstream business as it relates to commercial development. Is that-- as it relates to an ongoing opportunity [inaudible] to expand the midstream services on your other systems or can you just explain what you're spending the $5 million on?

I'm sorry, Alda, I'm just going to have to try to follow that. So this is the midstream activity--

Yes. There's another line there, I guess, commercial development and there's an incremental $5 million which I don't believe was-- was disclosed last quarter. So I just want to get a sense as to is that just to expand your services across the--

Alda, that's really a placeholder for additional CapEx. We may need some additional metering or some other small line connections to do that potential additional business. We don't know quite what it is, as yet, but we're estimating it could be up to $5 million for those additional pieces of equipment.

Okay. Thank you. And your annual report alluded to, I guess, a further agreement with [inaudible] to expand services on the Pembina system. Can you just give us a sense of potential timeframe? You alluded to, I guess, later in the year, but can you give us any sense of an update there?

Yes. I don't think we can provide any sort of update at this stage, Alda. We're no further ahead than we were when we prepared the annual report. So I think this is something that will-- will progress through the second quarter and will be a part of our second quarter reporting in terms of providing additional guidance on any other activity related to that.

Okay, thank you. And my last question as it relates to, I guess, the diluent line. Can you just give a sense as to-- how the progress is with your discussion, initial discussions, with your-- the stakeholders, in particular, land rights along the new pipeline build?

Well, it's a good question, Alda, and it's one that-- that is very topical. We met with-- we had some external consultants here this week really to try to launch a communication program with respect to that. I expect it's going to take us, perhaps, a couple of weeks before we're out on the ground in terms of consulting with the various stakeholders and soliciting their input-- into this project.

So I expect that mid-May-ish we're going to be out and this will be a big part of-- trying to progress the project where we try to get all interested stakeholders in the queue and deal with their interests and concerns in this project.

Would you be willing to offer small equity stakes to key aboriginal groups that own the larger pieces of land along the new pipeline build?

If there is an opportunity for a win/win situation here, I think that's a rather creative solution to that particular issue and that's something that will be part of our considerations.

Okay, thank you.

Thanks, Alda.

Your next question is a followup question from Linda Ezergailis of TD Newcrest. Please go ahead.

Thanks. This is a followup question, I guess, to Fai's questions on G&A. I didn't quite understand the math. When I look at your G&A for the quarter, let's call it for your pipelines and-- your pipelines business, it's up a couple of million dollars year-over-year. How much of that was seasonal in nature related to incentives paid out in the first quarter? Or is that delta to be applied prospectively?

I think most of that would relate to those unusual items in the first quarter and that $2 million delta you will likely see still $2 million delta at the end of the year compared with the 2005 G&A.

So Q1 and-- Q1 only and then Q2, 3 and 4--

Will be that much lower.

Okay. That's it. Thanks.

Your next question is from Riz Suleiman of Credit Suisse. Please go ahead.

Hi, good afternoon. Thank you. I just had a quick question with respect to Horizon. I'm wondering if you have a sense from CNQ as to whether that project is online-- sorry, is on time and working within the budget? I think CNQ had mentioned that they were looking at the second half 2008 to have phase one up and ready.

Yes. I'm not-- I'm not familiar with where CNQ are in their public communication. I think what we're saying it's our plan to have the pipeline ready for service by late 2008.

Okay. And the commitment there's 110,000 barrels. Is that still accurate?

Well, they're speaking for the full capacity of the pipeline, which is 250,000 barrels per day. I appreciate that their initial production is scheduled to be something just over 100,000 barrels per day, but they're stepping up to the full capacity from the get-go.

I see. Okay. And just kind of a bigger question with respect to Spirit, though the producers are paying for the development cost at this stage, ultimately who is the owner of that pipeline at some point when we're all dead and buried and the pipeline's fully depreciated? Does that pipeline belong to Pembina still?

Yes. The pipeline will still belong to Pembina.

Okay. Okay. Great. Thank you very much.

You're welcome.

Next we have a followup question from Karen Taylor of BMO Nesbitt Burns. Please go ahead.

Now I'm going to ask you about your variance in operating costs. I get successively more confused the more we ask questions. So I just want to make sure. We've got a $2 million variance, roughly, Q1 '06 versus Q1 '05 and the way I understood you answered the last question now is that for the next three quarters we will be back to the Q5 run rate. Is that fair?

That's what we said for G&A. I think for Q1-- I don't know-- I don't think that's something we can do for our analysts. I don't know if in the model that you've got AOSPL segregated from the conventional pipelines as far as operating expenses are concerned.

Well, they're flow-through, so they should be margin neutral right?

Well, except that to the extent that they're over-- they're higher for the first quarter, they're likely to continue to be higher for the remainder of the year. We're expecting to see their volumes increase starting-- in fact, I think-- I believe it's starting today. And as a result of that, they're going to have much higher power costs on the AOSPL system. So the operating costs on the AOSPL will be higher in the second, third and fourth quarters than they will be for the first quarter.

And I think with conventional systems they probably were a little low for the quarter and will be higher for second and third quarter as we complete our one-time maintenance projects.

So it's not quite the same as our G&A, Karen. I think that we probably can give you some-- some better direction here to answer your question, but I think we have to address it in two components, one being AOSPL operating costs and one being our conventional system operating costs because they will-- they will react differently.

Okay. So just let me back up, then. So on the G&A the first quarter '06, which is a $2, roughly, million variance will be in Q1 '06 only with the run rate from Q2 to Q4 '05 being more appropriate. Yes or no?

I think that's right.

Okay and then on the operating cost side, we will have higher operating costs due to higher volumes on the AOSPL Q2, 3 and 4 versus a lower number in Q1 '06.

That's correct. Now the only other thing-- I can't-- I can't recall, Karen. I've just got to go back here. We ran a crack tool on the AOSPL system. I can't remember now if that was a late 2005 or early 2006 cost, so that may also have influenced our operating costs in the first-- the first quarter.

But let-- let us give you a followup response to give you better clarification on that, because I just don't have the information in front of me.

Okay. And before I ask my real question, I did look for the CapEx, but I can't find it on the website. What was the path, again, Glenys?

It's under the investor relations tab, financial reports. Then there should be a quarterly report and annual report tab segment. It'll be right at the bottom. So you'll see the interim report then there will be a segmented capital expenditure section and a segmented--

Oh, okay. I'm blind. Thank you. I found it.

And just lastly, on the condensate line, this bothers me not only with respect to Spirit or whatever you'd like to call this project now, but Enbridge, as well. There are liquids that could come in with gas from the north in, let's call Alaska 2014 to 2016 and then MacKenzie. How confident are you that if you spend $1 billion to bring in 100,000 barrels a day that at some point in time in the future that facility or that route, if you will, is going to fall by the wayside in terms of its usefulness.

Well, I think, Karen, it speaks to the commitments that we're hoping to see from the customers. They are-- once they are committed to this project, they are committed to paying for a tariff for 15 years. So presumably they're going to be very careful of ensuring that they have an adequate outlook for the condensate that's going to be coming into the system.

So I think they're looking at securing a condensate supply for their long-term needs and that really becomes their issue and ours, to a lesser extent, because, as I say, they're going to be committed to paying the rate of return for a 15-year period.

You don't expect, in any way, that they're really just pursuing options with you until the northern becomes, perhaps, more certain?

No, I don't think so, Karen, because in order to meet the timeline that they're looking for in terms of getting-- getting access to the condensate, they're going to have to make-- they're going to have to step up and make commitments before too long here in order to get the pipeline ready for service on a timeframe that they are looking for.

Okay, thanks very much.

You're welcome.

Next we have a followup question from Fai Lee of RBC Capital Markets. Please go ahead.

Thanks. Bob, I just want to follow up on your response to Karen's question. With respect to signing a 15-year contract, you'll probably-- I'm guessing that you're not going to be able to recover all your capital within that 15 years and that you'd probably have to hope for some sort of extension. Is that correct?

Yes, that probably would be correct.

And I guess, following up on Karen's question, beyond 15 years is there any concern -- I know you're protected for the-- you would be protected for the initial 15 years, but have you given any thought to the risk after the 15 years?

No, I think when we look at whatever we do, we would say-- we would be setting a minimum expectation of term and I'm suggesting 15. I mean, it could be longer, but we would-- like-- like we did with the AOSPL or CMRL Pipeline, we've-- that contract is an extendible contract. The Cheecham Lateral is an extendible contract. A lot of it will be driven by what economics make sense at the time.

I think we've got other-- other looks, as well, in the sense that throws another opportunity into the equation, but the way this line is being proposed is that it would be a dedicated line, which means that it's a line that could be reversed, if necessary. So there's options here and this is still early innings so I-- I'd say that the main event, from our perspective, is to try to get the commitments for the minimum term that we would look at. But certainly we'd see that condensate supply is going to be an issue for the oil sands for many, many years to come and we think that this is still going to be a very sizable, long-term investment for Pembina.

Okay, thank you.

You're welcome.

[OPERATOR INSTRUCTIONS] Mr. Michaleski, there are no further questions at this time. Please continue.

Well, thanks very much for participating in the call. I think we do have at least an undertaking to provide some additional information on operating costs, which we will and perhaps that's something we can post on our website as being a solution if we want to do that. Glenys, I don't know what you think as opposed to just responding to a single question?

Well, why don't we discuss it and then we can determine what the best approach will be.

Okay, fair enough and then we'll decide how to respond.

Yes.

So thank you, then, for participating this afternoon and I look forward to doing this again next quarter. 'Bye for now.

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