Pembina Pipeline Corp (PBA) 2006 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Pembina Pipeline Income Fund Second Quarter Results Conference Call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questions. [OPERATOR INSTRUCTIONS]. I would like to remind everyone that this conference call is being recorded on Thursday, July 27, 2006, at 11 a.m. Eastern time.

I will now turn the conference over to Mr. Bob Michaleski, President and Chief Executive Officer. Please go ahead, sir.

Thank you, and good morning everyone. I have Peter Robertson, Pembina's VP of Finance and CFO; and Glenys Hermanutz, our Manager of Corporate Development, with me here today and to discuss Pembina's second quarter 2006 operating and financial results.

Now let me start by telling how pleased we are to have made the distribution increase announcement yesterday. Effective August of 2006, we have raised our distribution rate for a second time this year up to $0.10 per unit per month from the $0.095 level implemented earlier this year. Together these rate adjustments reflect a 14% increase in the distribution rate to an annualized $1.20 per trust unit. This is up from the $1.05 per unit payment that we have maintained over the past 5 years. As we have projected, strong operating results across our three business segments and incremental cash flow, contributions from accretive growth initiatives have funded this sustainable increase in the distribution rate. I will speak more about our prospects for future growth following a brief review of the quarter.

Now, our lawyers have advised us that I'll have to read this, so I will. Note that many of my comments this morning may be considered forward-looking in nature. The actual results could differ materially from a conclusion, forecast or projection in the forward-looking information. Certain material factors or assumptions were applied in drawing a conclusion or making a forecast or projection as reflected in the forward-looking information. Additional information about the material factors that could cause actual results to differ materially from the conclusion, forecast or projections in our forward-looking information and the material factors or assumptions that were applied in drawing a conclusion or making a forecast or projection is reflected in the forward-looking information that's contained in our second quarter 2006 interim report to unitholders, which is available online both at Pembina's website located at www.pembina.com, and on the SEDAR website.

Detailed operating and financial results for the quarter are disclosed in the second quarter report. This morning, I'll provide a few brief highlights of the quarter prior to sharing Pembina's outlook and expectations for the balance of the year.

With respect to our conventional pipeline system, Pembina's conventional pipelines performed well during the quarter, transporting about 440,000 barrels per day, up 6% from the same quarter of 2005. New connections to the system contributed to the increase, most notably connection of the Calven pipeline system, which became fully operational during the quarter and the incremental production on the three Nisku zone production facilities connected over the previous [two quarters].

Revenue generated by the conventional pipelines during the second quarter of $55 million was 10% higher than the prior year and net operating income rose 8% to $32 million. Normal seasonal factors impacted second quarter operating results from these systems as did producer delays on several new connections.

Now for the balance of this year, we expect higher volumes and operating income contribution on several of our conventional systems as producers resolve operational issues, new connections come on stream and other business development initiatives including the Pembina system product segregating facilities become fully operational. Roughly $70 million of capital spending on the conventional systems is projected to the end of 2006 including $27 million spent to date.

With respect to oil sands, operating and finance results for this segment reflect returns on our Alberta oil sands pipeline. The AOSPL returns are fully contracted therefore independent of throughput. Actual throughput increased for both the second quarter and first half of 2006 compared to the year earlier period as Syncrude's expanded production capacity came on stream. Contracted capacity remained static to overall reported periods at 389,000 barrels per day. Revenue rose for the first 6 months of 2006 compared to the prior year largely as a result of higher flow-through operating expense incurred in the first half of this year. Higher costs relate partly to higher preventative maintenance spending, including an internal inspection utilizing the crack detection tool and to increased power costs.

Pembina expects a modest increase in operating income contribution over the balance of 2006 as a result of the second half rate-based additions on the [AOSPL] system and inclusions of the returns on the Cheecham Lateral pipeline, which are scheduled to commence later in the fourth quarter.

Year-to-date capital spending in this segment was much higher than 2005, reflecting our current oil sands pipeline expansion projects. Of the $43 million in oil sand spending to-date in 2006, $38 million was expended on the Cheecham Lateral, $4 million was spent on the Horizon Pipeline, and about $1 million on AOSPL.

The $42 million Cheecham Lateral is substantially complete and scheduled to be in place into service in November of this year. Construction of the Horizon Pipeline is scheduled to begin later this year, and we have planned to spend another roughly $30 million on this project by the end of the year. Pembina plans to spend an estimated $10 million in rate-based additions to the AOSPL system during the latter half of this year on pump and valve upgrades.

Now turning to midstream, the midstream unit performed better than anticipated by Pembina. This business segment contributed approximately $21 million in net operating income during the first 6 months of 2006, a 75% increase over the first half of 2005. Returns on our fully contracted 50% interest in the Fort Saskatchewan Ethylene Storage Facility were stable. Contributions from the now fully operational Swan Hills joint venture exceeded our initial expectations.

Pembina initially initiated midstream services on the Pembina system, which we commonly refer to as the Drayton System during the quarter, converting that pipeline to single shipper status on June 1st. We expect the timeline for the development of the services on this system and the associated projected returns will approximate our experience of the Swan Hills Midstream joint venture.

We are currently working on several other initiatives in this segment that may have a modest impact on results over the balance of this year. Capital spending in this business unit of $20 million is expected during 2006 including roughly $15 million in product purchases and another $5 million in business development expenditures.

General and administrative expenses increased through the first half of this year, up more than 50% from the first six months of 2005. Pembina continues to add employees to administer our growing business interests and will have increased our head office staff by an estimated 15 people by the end of the year.

Employee compensation both in the form of salaries and incentives rose in response to local employment market pressures. Pembina expects that G&A expenses will remain on an uptrend as the further planned expansion of our business unfolds, and we will continue to staff up in anticipation of the successfully capturing new business currently under development.

Interest expense was lower during the first half of 2006 as compared to the same period of 2005 as lower cost debt replaced maturing swap instruments.

Pembina's two debenture issues continued to convert at a relatively rapid pace with a total of just $96 million of principal amount remaining outstanding at June 30, 2006 compared to about $255 million at mid-2005.

Pembina's business operations and net interests generated a 3.1 million increase in the notional distribution reserve during the second quarter 2006 increasing the reserve balance to $20.3 million at June 30, 2006. 6 million of the reserve was drawn on June 30, in payment of the acquisition of shares of Pembina Management, Inc. related to the management internalization announced by Pembina on July 4, 2006. A copy of the share purchase agreement detailing this transaction is available for review at both Pembina's and SEDAR website.

Now, I will shift my focus to discuss the new developments underway at Pembina and provide a short and longer-term outlook. Pembina has experienced growth across its three business segments and is presently operating at capacity in terms of administrating that growth.

On the conventional pipelines, we continue to develop business opportunities in the form of new pipeline connections, product segregation facilities on the Drayton System and the associated development of our midstream service offering. New initiatives, both underway and under development have potential to materially impact results late in 2006 and into 2007. As we have previously disclosed, the product segregation initiative which is expected to become operational during the fourth quarter of this year has the potential to provide accretion in the 5% range -- in 5% of Pembina's 2005 distributable cash.

Further, the phased progression of midstream services on our Drayton System has the potential to be at least as accretive as the Swan Hills joint venture based on current market condition. Together, with increasing volumes from the ongoing industry, development of the Nisku zone and Drayton System service area and other connections currently underway across many of our pipeline systems. We see growing cash contribution from the conventional and midstream segments to the balance of 2006 and into 2007.

We continue to make good progress on our various oil sands related initiatives. As previously stated the Cheecham Lateral is scheduled to be placed into service and generating incremental cash flow by November of this year.

Horizon Pipeline project is proceeding on schedule. We continue to work with the customer, Canadian Natural Resources Limited, in finalizing the scope and capital cost for this new transportation service and expect to execute final project-related documents for CNRL in the third quarter. As stated in our quarterly disclosure, Pembina has binding agreements in place with CNRL and expects the Horizon Pipeline project to proceed on the timeline communicated earlier. These agreements provide Pembina, the exclusive right to transport volumes related to possible future expansions in CNRL's Horizon project -- product production capacity, which we understand could increase volume to the 500,000 barrels per day level.

Extensive planned and proposed industry development of the new oil sands in the coming years, may present the opportunity for further expansion of Pembina's presence in this region. We are presently in discussion with several producers with projects slated for the 2010 to 2012 timeframe. Should we successfully capture a piece of this new business, our already significant presence in the oil sands with transportation capacity of 640,000 barrels per day from the area by mid 2008 will be of further entrenched.

Industry continues to actively investigate the potential for CO2 flooding in Western Canada. Several of the producing fields identified by industry as being amenable to this technology and possible targets for implementation of this enhanced recovery approach are located in Pembina's traditional service areas. Upside arising from possible new developments here are two-fold. CO2 flooding has the potential to significantly increase recovery rates from matured fields and targets. Pembina has the capacity to transport increasing volumes from these areas with little incremental required capital. In addition to increasing pipeline receipts and total revenue, Pembina may have the opportunity to participate in the construction and operation of transportation facilities required to carry the CO2 from source to end-user.

Now finally, I will provide a brief update on the status of Pembina's proposed Condensate Pipeline. For those of you aren't familiar with our proposal, Pembina intends to build approximately 465 kilometers of pipeline from Kitimat, BC to hookup with our existing Western system near Summit Lake, BC. This new service will be capable of terminalling and transporting 100,000 barrels per day of imported condensate to Summit Lake where it would be then carried to market on Pembina's existing network of pipelines. We are devoting significant resources to the development and progression of this project and based on the current intelligence and expectation anticipate a further -- pardon me -- firm shipper commitments will be obtained by the end of 2006.

As previously disclosed, the development of this new transportation service is being financially backstopped by prospective shippers under terms of the Development Support Agreement. Preliminary activities under this agreement were launched in the second quarter and as stated, Pembina has committed significant amounts of staff and executive managed time and effort in progressing the project in all fronts.

Initial discussions with First Nations groups and governmental agencies were conducted during the quarter. Based on the feedback we acquired from these events, we are optimistic that together with these key stakeholders, we can work cooperatively through the existing challenges to achieve mutually beneficial goals and objectives.

Open house forums were conducted along the proposed pipeline right-of-way to gather community feedback to dial back into our planning process. Stakeholder consultation process is integral to this project and will be a prominent focus for Pembina throughout all phases of the project.

Pembina anticipates that following completion of this initial phase, we will have a much better understanding of the cost, as well as stakeholder, environmental, regulatory and other issues surrounding this project. We will continue to provide updates on our progress and firm up cost, scheduling and other previously disclosed information as it becomes available. Should this project proceed, it will be the single largest project ever, ever undertaken by Pembina, and we believe that we have the resources, talents and capacity to make this project the success that our projections indicate are possible. Stay tuned for further developments.

I will close in by reiterating. The distribution increase announced yesterday together with the previous increase implemented earlier this year, demonstrates once again Pembina's ability to deliver. Pembina has successfully executed its business plans, realized the accretion potential embedded in its various developments and expansion of the initiatives and deliver the stable and growing distributions to Unitholders, for which we are reputed.

As many of the projects currently underway at Pembina are completed to become operational in the coming quarters, we anticipate that further consideration of the distribution rate may be possible. In longer term, as we continue to pursue and successfully capture new business opportunities, we anticipate that this growth profile will be extended into the foreseeable future.

Thank you for your attention this morning. We will be happy to respond to any questions you may have. Operator, I will now turn it back to you.

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

Thanks; I was interested to see that your DRIP program has been increased again this year. Just wondering, what you notionally are financing? Is it kind of half of both your oil sands and conventional and midstream pipelines? Or are you using any sort of construction financing for your Horizon and Cheecham projects?

Actually Linda, I think that we don't -- whether as far as the DRIP program themselves is concerned, we are just using that program to fund any of the development capital that we see here in 2006; and we are going to continue that, that program in 2007, 2008 as these projects unfold. So, I think for planning purposes, I think you can assume that, we will be raising roughly $80 million a year over the next three years, probably four years to fund these expansion projects. But we don't -- we are not making a distinction as between conventional or oil sands, it's any development capital essentially that we have.

Okay. So, we can expect to see a little bit of a capital drag then given that you are not earning an AFUDC or anything on Horizon, are you?

No, we will not be earning anything on Horizon until that it comes on. And yes, there will be a dilutive effect of the program. But what we also have is, we've got additional cash flow coming from a number of initiatives that are contributing to overall cash flows for fund which will support the equity issues.

Okay. And then, maybe you can give us an update then on your views on ideal capital structure, I guess based on any sort of recent discussions about the debt-rating agencies, could we see your capital structure remaining stable over the longer term or?

I'll, let Peter answer that question.

Yeah, I think we are on the -- it depends how you calculate the metric, the way the rating agencies generally do it, they see as around 45 to 50% debt-to-book equity and we see that how we would finance those major capital expenditures at the end of the day.

All right.

Yeah, I think that's a fair comment. The nature of some of the projects we are working on Linda right now, they really lend themselves to a debt-to-equity ratio of roughly 50-50, and I think that's the way we will proceed on it going forward.

Okay. Moving on to your operations, your midstream business is performing better than your expectations, would it be fair to say I guess in the first quarter conference call you've indicated that the first quarter results were a reasonable run rate, should we be using Q2 '06 as a run rate for midstream?

Yes, I think Q2 '06 would probably a better -- would be a better indication of run rate for the midstream activity Linda, and again with respect to -- Pembina is coming on stream now and our expectation is that Pembina should be able to mirror what we are earning at Swan Hills, but it will take a little time for Pembina to get to that level because we don't - we've got -- the first phase of the merchant activity will occur likely in July, for July reported in August and then we've got some other arrangements with Keyera that will take place later on this year likely October, November.

So it, I think, if I were to look at it, I would say Q2 is good for what we can do with Swan Hills, but I would sort of phase in Q3, Q4 for Pembina, at probably half of where Swan Hills is at for the second quarter.

Okay. And then for the Pembina accretion that you mentioned of 5%, is that on a per unit basis or on the investment? And if it's on a per unit basis, are you assuming 50% equity financing on that?

No the Pembina initiative, you know, it's not a very -- $42 million is what we are expecting to spend there and we would not assume it’s financed 50-50, I think that's we're looking at that project to be financed with debt. As far as the accretion itself is concerned, we are either looking at it as being accretive to 2005 cash flow in total for the fund. So --

5% of distributed cash flow that was made in '05?

Yeah, 5% of distributed cash flow made in 2005. So, it's a good project for us and everything looks like it's going according to plan. The only exception I think right now we would look at putting in some additional storage facilities at our Buck Creek facility, which will start in the fourth quarter, but will not likely be in service till February of 2007, but we think we can manage the segregation with the existing tankage although it's not going to be as easy to do. So, returns are going to be as expected on that -- that expansion.

Great, thanks. I'll jump back in the queue.

Thank you.

Your next question comes from Karen Taylor from BMO Capital Markets. Please go ahead.

Thanks. I just have a quick question. I -- sorry, there was a lot of noise in the conference call. It sounds like someone is playing the bongo drums throughout it, so -

Probably, this -- Karen, we actually have them cleaning our windows here.

Okay. Well that might have been it, then. I wondered what all the banging was, so I apologize. Bob, can you just take me through how these future income tax reduction works? This is - you're the third guys now to report it and everybody is handling it different in terms of the effect. Can you just explain what this 11.3 million additional reduction was, how it shows up, because this does not appear to be going through the income statement even though you say it is an expense and we see the change in the future liability, but I'm not sure how that affected the reported results, if at all?

Okay. I'll let Peter take that question, Karen. We did have a fairly extensive review of our income tax liability feature, tax liability at the end of this quarter. And hopefully, Peter, can try to address it and give you some guidance as to what to expect for future quarters.

Karen, the big change is really the reduction in future income tax rates that quickened over various years, not necessarily all of it in the current period. So, we have to taper the total effect on the tax liability because of that deferred aspect of the rate change. So, yes, on our current balance the effect of the rate change was 11.3 million and that's included in the overall rate reduction for Q2. So, without that rate reduction in Q2 would have had an increase in the tax liability of $5 million for the quarter.

Now I'm sorry. It would have been instead of increasing earnings that would have actually reduced earnings in the quarter, is that right?

That's correct.

And for the tax liability instead of being a net credit or come back to you, it would have been notionally anyway a deduction or a payment. Is that correct?

Yes. It's not a payment, this is all notional.

Right, it's all future. So your future tax liability instead of being a clawback of 6.6 million, it would have been a positive liability of roughly 5 or 6.

Yeah without the --.

Okay.

Without the rate deduction. Going forward, we see the change being about 6 million a quarter of a fixed reduction.

I'm sorry, going forward you said what?

About 6 million a quarter, going forward as a future income tax reduction and that was an item that [would have been the] case for at least the next few years.

On an annual basis, what would be the future income tax reduction then?

It should be around 24 million, six times four.

Well. And so, that's it now a future liability that would reduce earnings?

No.

Increase earnings.

We are talking about reduction in future liabilities. So [we were -- that] would increase earnings.

Now, if the balance of that charge is in fact declining year-over-year, so can you talk to me about – if we’re looking for a reduction in the future income tax liability annualized at 24 million, how that's going to fall off over time?

It will be decrease; the 24 will gradually decrease. I am not sure at what extent it would decrease, maybe 2 or 3 million a year. At some point of time, it will level out. At what level we are not sure of that yet, but that's a number of years out.

Okay. I want to come back to the midstream group, and I want to understand about the increase in revenues for the group and the acquisition of [line tax]. So, my understanding of what's going on in the midstream group is that there is some high grading so you are buying bitumen at one end of the pipe, mixing it with a liquid and then selling it as a higher grade or lighter grade of crude to take advantage of that light/heavy differential. So, if you can maybe just talk to me about the delta in revenues, gross revenues that came from the midstream business forgetting the ethylene storage part of it. And then how much of that came from fractionation-related businesses as well as from high grading the bitumen in the pipeline and how does that relate to the expense of the [line tax]?

Well let's start with the linefill acquisition itself, first. When we go single shipper on the systems, we end up buying all of the linefill. And so that's -- we have done that both on the Swan Hill system and I guess Peter, we’re probably through now the first of the linefill on the Drayton Valley system?

At the end of July, we will have purchased all the linefill requirements.

Okay. So, we have got the linefill now that's all required. We will charge our customers a fee for the fact that we do own that linefill with a nominal fee. So, that's the first phase. Karen, with respect to your question as to the differentiation between revenue streams, I don't know that I've got the information; I will go roughly off the top of my head. One sec.

Okay.

I do have the information. So, as far as merchant-related activities on the year-to-date results for the Swan Hill system, just looking at the total we've got roughly $11 million of -- sorry, I will go back a bit here, storage is -- storage is 10 million. It looks like well it is above $9 million, little over 9 million, almost $10 million of revenue, and it split almost equally between what we call equalization and other merchant activities. So, I think that's -- that's probably the way to look at it Karen, without trying to get into the details. So, I say roughly 50% of that is as a result of equalization in merchant-related activities, and 50% will be roughly related to the mixing that you referred to earlier.

And when you talk about equalization what do you mean there?

Well what happens is when you go single-shipper you have got -- the product that you are transporting has different densities, and the heavier the product, there is a penalty associated with, the lighter, there is -- it's a preference. When you end up mixing the two in a pipeline to the extent when you mix then due to the sum of the parts the resulting product valuation is higher than the individual components coming in to the system and that's what we refer to as equalization.

Okay. So roughly half of those then are from the product mixing benefit at this point and that’s a light-heavy differential thing and then the other comes from other frac-based activities within the system?

That's right, and I think that's the way to look at it going forward, Karen. I think that's a reasonable representation so that arrangement in this commodity price environment has worked out better than we did -- we expected, and it looks like commodity prices are going to stay strong for the balance of the year. So I would think that we are going to continue to benefit from that as we go through the balance of the year and as we convert Pembina to the single shipper.

Okay. And just one last question and then I will turn it over to somebody else. I just want to make sure my accounting is straightened around. When you are capitalizing interest cost on Horizon and other development contracts to the extent that DRIP is not financing these, that is not coming out of the operating cash flow, it would be silent, and it would, I guess, result in an increase in the distributable cash flow available and then expressed on a per unit basis as well, and that would all be coming out of the financing section. Is that right?

Well, any interest relating to capital projects is capitalized. So that interest is capitalized. It's obviously not shown as a reduction in net income.

Right, but in terms of the funds flow, which would be relevant to the management buyout contract, because we are looking at everything above the capital line. So to the extent that we are capitalizing interest and it does not reduce income, of course, and it would occur below the operating cash flow line in the capital section of the fund flow. Is that right?

That's right. Yes, it's going to show up in your capital additions, Karen, as being interest not capitalized on capital, that's right.

Thanks. I just wanted to confirm that.

Okay, you are welcome.

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

Good morning. First I just wanted to touch on the updated capital spending program for 2006. Surprisingly, there is a modest, I guess, decrease in the forecast from 190 million or so to in or around 180. I am just wondering if some of that capital spend is being pushed down to 2007 or are you just seeing some modest reduction in terms of costing I guess for upgrading?

Alda, I can't think of anything specific with respect to those changes. The Cheecham Lateral or Horizon Pipeline, it could be that may be we are spending less money on Horizon than we anticipated but the change from 183 or 190 is not really all that significant at this stage.

And I guess, presumably so, the capital spending has been updated for the midstream business as of --

Yes, it's been updated. It's our best estimate today based on what we see we can do between now and the end of the year. So I think, it's -- we are -- there isn't anything significant that's changed in terms of our expectations at this stage, and I know we do have a number. There are some new connections that are expected to come on in the second half of this year, Alda, but they are generally pretty modest. When we look at new connections, they are probably about $1 million per facility, and so we have got, I think, five or six that we are working on right now, but again nothing major has changed between where we were last quarter and where we are this quarter.

Okay, great. And just moving on to your proposed condensate line, I guess you are more positive on its prospects in terms of finalizing firm shipper commitment. Has there been any change in terms of the shipper group given Enbridge’s recent announcement of a proposed diluent line from the Northeast in terms of the work -- using an existing line and --

No, there hasn't been any change in that group. In fact I think the group are expressing strong interest given right now that there are significant differentials between condensate pricing in Edmonton and what they could achieve through this project. And then so this project still has a lot of legs to it and we have done a lot more during the quarter as well, and I think Pembina's confidence has increased, given the work that's been done and it's been significant. So we are pretty optimistic that this project is real and that we are going to proceed with it.

Okay. Great. I guess you alluded to increased shipper interest given the differentials, is there a potential that it could be upsized in terms of the capacity?

Well at this stage I'd have to say the answer to that question is yes. It will be a little more challenging to upsize the pipeline because one of the elements that is a restricted element is that the reversal of the line north from Summit Lake to Taylor is a limiting factor and there would have to be some looping of that line if we're to expand it further. But certainly with the facilities we are putting in or plan to put in BC and in Alberta, they will be sufficiently sized to add more volumes to that initiative. So I guess there is a chance it could be upsized; again it will be based on the interests of our shipper group.

Okay. Great. I guess just lastly, expect once you have finalized the firm commitments and have undergone the detailed engineering, it provides better capital cost estimate, but would it be safe to say it's probably moved above $1 billion at this point?

You know --

-- expense.

Although we're only 2 weeks away from getting our capital cost estimates, as we've been finished with our Horizon initiatives, things do change and typically where the changes have come in are mostly scope changes, and right now I'll just say is that the best estimate we have today is still roughly $1 billion, so that's what I stick with, and I'd say we'll know more in a couple of weeks.

Okay. Thank you. Those are my questions.

Thank you.

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

Thanks. Bob, just want to clarify a couple of things. The first is with respect to the midstream business and the -- if commodity prices say, if crude oil prices drop but the light-heavy differential doesn't change, does that have an impact on the midstream business or not?

Good question. I think if the light-heavy differential doesn't change, I think it won't have much, not even impact on our midstream business.

So it's more the relative level of commodity prices rather than the absolute that has an impact?

Yeah.

Okay. And the second question I just want to clarify is you mentioned the potential exists for consideration of further distribution rate increase?

That's right.

If new business becomes operational. I just want to clarify what new business are we taking about, are we talking about Horizon or the Mid -- the Pembina extension into the Midstream business?

Well, there is actually a number of initiatives that we have underway currently and we will just go through them sequentially as they come across my mind. I mentioned in my -- in the quarterly comments, we talked about the Nisku play performing as expected. Right now it is not performing as expected. We have been in discussions with the various producers and their expectation is that they are going to achieve our budgeted volumes by the end of this year. So that's a plus. We've got the sour crude segregation initiative, which is expected to kick in again later this year, which will be a plus to cash flows. We have the Cheecham Lateral, which is expected to be in service November of this year, which again is a plus compared to our existing operations. We expect full merchant activities on the Drayton Valley system at the end of this year, which again is a plus to our existing cash flows. And so, if I look at where 2007 is, those items would be factored into our available cash flow for distribution before considering things like the Horizon expansion or the condensate initiative, which are expected to be 2008 or 2009 items.

So if I -- just what we're saying is that we have announced a distribution increase today, which we see as being sustainable. We have got additional cash flows coming into our systems later this year, which we feel will justify or give us the courage to look at further increases in distributions in 2007 and beyond.

Okay. I guess that's why I wanted to clarify that the distribution increase announced yesterday isn't taking in its account some of these -- I guess four or five things you mentioned for this year, like the Nisku play and Cheecham Lateral.

No. If we didn't -- in other words, a way to look at Fai, is if we didn't have those things coming on down the road, we still could sustain distributions at the level we are today.

Okay, alright. That's why I wanted to clarify. Thanks.

Okay.

Your next question comes from Claire Mitenko from National Bank Financial. Please go ahead.

Good morning. I'm not sure if you can talk about this yet, but what issues have come up so far in your public consultation process for the condensate pipeline?

Well, the issues are pretty -- I think we basically approach it to say that they are as expected. People, when we -- when we are looking at potentially spending a fair amount of money in British Columbia, the things that people are looking for are what will be permanent job opportunities, what are environmental impacts, what happens if you have a spill -- a condensate spill, what about marine traffic at Kitimat. Those are sort of the things the questions that were getting asked.

We are not seeing any regulatory issues. The government in British Columbia is quite open for business, so that's going well. I think personally our biggest challenge will be dealing with First Nations and getting them engaged in this project and endorsing it and I think that's pretty much sums up where we are on it. From our perspective, we are not concerned about, how we would finance this initiative. So, from a capacity perspective, we feel we have got capacity to do this initiative. We've got the team in place currently to advance the project and I think it will be fair to describe that things have gone better than expected.

Okay, great. Thank you on that. Just another question, you had talked to Karen about frac-based activities in the midstream business. Can you just be a little bit more specific on what those activities are? And are you taking on any commodity price risk?

I will just say that we are not taking any commodity price risk with respect to those arrangements, Claire.

Okay.

And I will leave it at that. I don't really want to get into the merchant activities, where we don't have positions like -- we have a joint venture with Keyera, who are involved in activities that we are not involved in and I'd rather not speak to those, because those are more confidential in nature.

Okay, great. Thank you, Bob. That's all of my questions.

Okay. You are welcome.

[OPERATOR INSTRUCTIONS]. Your next question comes from David Shymko from Macdonald, Shymko and Company. Please go ahead.

Ladies and gentlemen, can you give us a little bit of an insight into power availability and the power costs?

Yeah. I think we can. As far as power availability, we have not been impacted at all, David, with respect to our requirements. We have hedged our power costs at roughly $45 per megawatt hour through to 2010 and 2011. So, power is not an issue for -- say not an issue for our conventional systems because we've hedged it. We do not hedge power on the Alberta Oil Sands Pipeline, but power is a flow-through under that contract. So, again that's the choice of our customer there. They prefer not to be hedged and that's generally because they have variable power consumption, given that their production does vary fairly significantly depending on where they -- where they might be.

That's fine. Thanks.

You are welcome.

Your next question comes from Karen Taylor from BMO Capital Markets. Please go ahead.

Thanks. Bob, just a quick question on the capital, I think you had said earlier that you plan to continue the DRIP now for another three to four years and that would take us out probably to about 2009 then from 2006 if you go the full stretch. So, does that then preempt? And then we talked about before of an opportunistic issuance of equity to fund some of these initiatives in addition to the DRIP?

Well, Karen I don't think so. I think, again we've got [early innings] on our merchant activity, but I think our -- as we've indicated in our preliminary results our early results have been positive. And so I expect the things to get -- the conditions continue to persist, that we still could look at opportunistically using some of that cash flow to support, if you like a preemptive equity issue to, in advance of the completion or in service state of some of these projects.

Now, you went through a list of things that were not forecast in terms of the higher distribution you announced yesterday. Would those projects -- I guess, which projects then would you be explicitly financing with that preemptive equity issue?

Well actually, I don't even know -- we wouldn’t assign it to any of those specific projects, Karen because they are pretty insignificant. The big ones, of course, for us are Horizon, and if we just look at Horizon just a standalone if we are raising $8 million a year over the next -- including 2006.

You are right.

Net sales is $240 million, while the Horizon project is being probably just north of $300 million, so you have more than already financed the equity component of that project. So, we would already be pre-funding some of the equity required for the Condensate initiative. So, I say the opportunistic if you like equity issue, would apply to the financing that will be required for the Condensate initiative, which we expect that we will require somewhere around probably $400 million in total.

Of equity?

Yeah, in addition to our DRIP.

So, if you get contracts then, find -- I mean their condition was I suppose still at the end of the year?

Yep.

We could expect to see something in 2007?

That's a possibility. Yeah, it's a possibility.

Okay. Thank you.

You are welcome.

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

Thanks. I just wanted to make sure I am capturing this labor cost increase appropriately. When I look at your G&A, I guess, what percentage of that would be labor? You can get it to me in dollar amount, but I am just trying to get a sense.

Just one sec here. I think, we will see if we can find that information. It's somewhere for you, Linda. I am sort of guessing, I am going to say 60%, but --

Yeah, it's right here on $9 million for the previous salary data.

That's year-to-date, Peter, or a year-end forecast?

That's on an annual basis. So we are -- so year-to-date I believe it's going to be around 6 million mark, 5 to 6 million.

Okay. So the 9 million is 2005 number?

Yes, the salary component that is?

Yeah that's a salary component of 2005.

It is a similar percentage. It's going to be around the 60% mark.

6% of total G&A?

60%.

60%.

60 sorry.

Yeah.

Okay great thanks.

You are welcome.

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

Okay, well, thanks very much for participating on the call this morning. It has obviously been an interesting quarter for us here at Pembina. We have got a lot of initiatives underway, and we hope that we can speak to these initiatives as we move through the third and final quarters of this year, but we remain quite optimistic that these things are going to play out. I think the one observation so far is that we have been seeing these things are going to happen and typically it takes a little bit longer for them to come on but they are happening, and we're working hard on them and hopefully we will be able to continue to deliver on the promises we have made, and hopefully look for future increases in distributions for the Fund. So thanks for participating this morning. We will be happy to answer any questions that you have by contacting us directly if you choose to do so, thank you.

Ladies and gentlemen, this concludes the conference call for today. Thanks for participating; you may now disconnect your lines.