Pembina Pipeline Corp (PBA) 2006 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Pembina Pipeline Income Fund Q4 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 for 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 Wednesday, February 7 at 4:00 PM Eastern standard time. I will now turn the conference over to Bob Michaleski, President and CEO. Please go ahead.

Thank you look and good afternoon everyone. Peter Robertson, Pembina's Vice President of Finance and CFO; and Glenys Hermanutz, Pembina's Vice President Corporate Affairs, are with me here today to discuss Pembina's fourth-quarter 2006 operating results.

This quarter, we did not issue a full fourth quarter report upon the advice of our auditors and legal counsel. Instead, we issued a press release with our preliminary unaudited operating results. We do, however, expect to issue our annual 2006 audited results, including our fourth-quarter results in mid-March.

Today, I will provide a brief review of our unaudited operating results for the quarter and an update on Pembina's new developments and our outlook for 2007. Once I have concluded my comments, I will be happy to respond to any questions that you may have.

Pembina completed 2006 with record operating results. On its Conventional Pipeline systems, Pembina transported an average of 457,800 barrels per day during the quarter, a 4% increase over the same period in 2005. This year is the second consecutive year that volumes on Pembina's Conventional systems increased.

Pembina's Alberta systems transported an average of 434,200 barrels per day during the fourth quarter compared with 417,100 barrels per day during the same quarter of 2005. Throughputs of the DC gathering systems averaged 31,400 for the barrels per day for the fourth quarter, a slight increase over the same quarter in 2005. On the Western System, operational issues with a third-party operated delivery point resulted in a slight decrease in throughputs. Throughputs on this system were 23,600 barrels per day compared to 24,100 barrels per day in the same quarter last year. Revenue generated by the Conventional systems during the quarter totaled $57.9 million, a 9% increase over the fourth quarter of 2005. Average revenue per barrel on the Alberta systems during the quarter was $1.26 per barrel, up $0.06 per barrel, compared with the fourth quarter of 2005. This increase was partially attributable to total adjustments implemented on a number of systems during the year.

Pembina's AOSPL system continued to experience record levels of throughput from the Syncrude facility as a result of increased production from their newest expansion. AOSPL generated revenue of $17.6 million during the fourth quarter of 2006, a 15% increase over the $15.3 million generated in the same period of 2005 due to a higher flowthrough of operating expenses. AOSPL revenue is based on the contract's capacity of 389,000 barrels per day and is not impacted by variability in actual pipeline throughputs. During the fourth quarter of 2006, system receipts increased to 308,000 barrels per day, which represents a 34% increase year-over-year.

Pembina ethylene storage facility continued its stable operations while an increase in Pembina's [terminaling] storage and hub services led to an increase in both revenue and net operating income quarter-over-quarter. The Midstream business unit generated revenue of $12.5 million during the quarter compared to $10.5 million for the same quarter in 2005. Net operating income for the quarter rose 25% from $9.1 million in 2005 to $11.4 million in 2006. These increases are due to higher than expected returns on the Swan Hills joint venture and the start-up of Midstream services on the Drayton Valley system. Operating expenses during the fourth quarter increased to $32.5 million from $28.5 million for the same period in 2005. This increase is due to increased maintenance spending and the unhedged AOSPL power requirements.

Pembina's premium DRIP plan raised $21.5 million during the fourth quarter of 2006. The plan continues to attract significant unitholder interest and Pembina's targeted plan proceeds for 2007 of $100 million are in line with Pembina's expanded capital expenditures. Plan proceeds will continue to be directed to debt repayment and to fund our capital program.

I now turn to new developments and outlook. The highlight of this quarter was the announcement of yet another increase in the Fund's distributions, the third increase made in the last 12-month period. Unitholders of record on January 31 of 2007 will receive a 10% increase in their distributions to $0.11 per Trust Unit, or $1.32 cents per Trust Unit on an annual basis. The Fund has increased its distribution rate by a cumulative 26% since the beginning of 2006, from the $1.05 per unit paid annually during the previous five years. These increases in distributions demonstrate management's confidence in the quality of Pembina's assets and in the strength of our growth profile.

Pembina's Conventional Pipelines benefited from high levels of oil and natural gas industry activity this year and Pembina expects this trend to continue. [Industry] production in Drayton Valley is projected to increase as operational issues continue to be resolved. Two new connections on the P system are also expected to come onstream in 2007. Pembina continues to work with customers to attract new NGL volumes to be transferred in the southern leg of the P system.

Turning to our Oil Sands interest, construction of the 42 million Cheecham Lateral Pipeline was completed during the fourth quarter and began earning revenue February 1. The Horizon Pipeline project is also proceeding as planned and is on schedule to be available for service July 1, 2008. Definitive agreements with Canadian National Resources Ltd. have been executed and clearing, grading and access activities for the pipeline have commenced. In 2006, Pembina spent $50 million on the Horizon Pipeline project and we expect to spend approximately $160 million more in 2007. Both the Cheecham Lateral and the Horizon Pipeline project offer consistent fully [protracted] returns for extendable 25-year terms.

Pembina has also commenced preliminary discussions with several other producers in the Oil Sands area for pipeline projects with startup dates in the 2010 to 2012 time frame. Pembina also continues to grow and develop its Midstream business with services now available in the Swan Hills, Cremona and Drayton Valley systems. Pembina plans to expand its Midstream services and expects increasing returns from this unit in 2007.

The proposed condensate project continues to progress. During this quarter, representatives from Pembina traveled throughout Alberta and northeastern B.C. to conduct open houses with local residents. Advancements were made in our discussions with a number of First Nations groups and in our review of the project with government and regulatory agencies. And updated project and cost estimate report was delivered to prospective shippers during this quarter and further project development funding has been requested.

Long-term prospects that Pembina has in its sites include potential admissible carbon dioxide flooding in several of the mature fields Pembina services. A producer-sponsored pilot project is currently underway in the Drayton Valley service area. Should this pilot project proceed to commercial operation, Pembina is well positioned to provide transportation services. Pembina may also play a role in the delivery of carbon dioxide flood projects by virtue of its extensive network of rights of way and potential construction synergy, along with other projects. Pembina's Swan Hills, Redwater and Drayton Valley fields have been identified as potentially amenable to this type of [enhanced lower] recovery.

The numerous project on the horizon for Pembina and the record operating results experienced this year bode well for our future. Although the recent federal tax pronouncement on future potential taxation of income trusts is unfavorable to Pembina unitholders, it will not changed our core business strategy. Our ability to vertically integrate our service offerings and capitalize on synergies within our business units remain unchanged.

Since our initial public offering nine years ago, Pembina has met its targets and objectives every year, demonstrating its ability to execute its business strategy. The three increases in distributions announced this past year is testament to this effect. Since Pembina's inception in 1997, we have distributed a total of $830 million, or $9.42 per Trust Unit on a $10 per unit original issue price. In 2007, Pembina plans to continue actively pursuing new opportunities and maximizing the value embedded within our existing asset base.

Thank you all for your attention this afternoon. Operator, I will now turn the call back to you for questions.

(OPERATOR INSTRUCTIONS). Linda Ezergailis, TD Newcrest.

Thank you. Can you give us a sense of what your Midstream operating income was from Drayton, Cremona and Swan Hills, and what you expect in 2007?

I don't have that information here in front of me right now, Linda. Glenys, do you have anything that has the details, or Peter? Maybe, Peter, if you can provide that breakdown between the ethylene storage facility and Midstream for 2006?

The pumping income for the storage facility was about $18 million.

It was $18 million. And in Q3 '06, your expectation was that it would be $24 million. Can you explain what the delta is?

I would not think that that would be correct, Linda.

I think what Peter was saying, Linda, was that the operating income from the storage, just the ethylene storage facility, was $18 million for the year, and the Midstream -- (MULTIPLE SPEAKERS).

And our overall Midstream was $46 million.

46 minus 18, okay. So it exceeded your expectations?

(MULTIPLE SPEAKERS) I can't recall what the expectation was, Linda, but I think the Midstream contribution this year did exceed our expectations.

And next year, what are your expectations?

I don't think we've given any guidance at this stage, Linda.

I guess I must have misunderstood, because in Q3, my understanding was that there was an expectation of growth of about $12 million.

In total for 2007?

Yes, over 2006.

I think that's probably a reasonable number.

Okay, thank you. So going forward in terms of quarterly disclosure, is this going to be a systemic change in terms of not getting unaudited financial statements with the quarterly release, or is this a onetime --?

Generally, quarterly financial statements are only reviewed by our auditors, which is the case for quarters one through three. There's no requirement to issue a fourth quarter report.

Okay, so next year in the Q4, you might not provide -- you might provide the same amount of disclosure as this time?

Yes, I think that's a fair comment at this stage, Linda, unless things change here with respect to any concern about a difference in unaudited results versus audited results at the end of the year. But certainly, we're going to continue on with the quarterly reporting as we have quarters one through three in 2007.

Okay. Can you give us an update on your capital spend program for 2007, and are you posting your 2006 actuals on your web site? We have not seen them.

It's already posted, Linda, it should be available on our web site now.

So maybe you can just tell us what the bottom-line number was for 2006, and what your expectations are for next year?

Bottom-line for 2006 looks like a total of $169 million. And 2007, our budget for 2007, we're currently showing $227 million.

Okay. I guess I can follow up if I have any further questions. I will jump back into the queue.

Bob Hastings, Canaccord Adams.

Looking out -- or looking at your reported results, and I realize we're missing some information, we'll get that in a month, can you give us any sort of -- you get net operating -- or operating income, which is defined as pre-financing, G&A, [admins], taxes I guess and depreciation, is there any way to sort of get a number on sort of what a net cash number was generated in the quarter for the year?

Net cash generated in the quarter for the year -- I don't know that we have anything out in the public domain Bob (indiscernible) to provide that. I don't know (indiscernible) providing any sort of guidance here. If we went back to our third quarter to say, could we have a reasonable expectation that we would be generating the same amount of cash in the fourth quarter as the third period -- Peter, can you?

Luckily, we gave you what our expectations might have been here back in September, then that would be a reasonable number to base your estimates on.

So I think from a cash perspective, Bob, I don't think we're seeing any -- there isn't anything material that has gone on the quarter, positive or negative, that would have a significant change in our projections from the third quarter. So results were pretty much in line with expectations, with exception, I think our Midstream operations came in a little better-than-expected. I'm not sure if that's any help yet or not, Bob.

It's kind of awkward (indiscernible) because you talk a lot about the operations, but we don't actually have any numbers. It might be better to wait until we had the numbers. I know a lot of other companies maybe hold back on the notes, but some give you the financial statements that are subject to audit.

You will have those be mid-March.

Maybe I can go in another direction then and ask, in terms of looking ahead at some of the projects that you have, we have seen a little bit of I guess cost pressures with inflation. Are you still seeing a lot more? It seems that the condensate pipeline is up about 20% in cost from the last estimate. Is that something we're going to see through everything?

I think it's fair to say, Bob, when we first worked on these projects, they're at preliminary stages in terms of doing cost estimating. And you're right, the more detail you get into, it's quite likely that the costs are going to come in higher than what you originally expected. That's certainly what we are finding. In the case of the condensate initiative, the scope of that project has changed somewhat in that what we're looking at doing now, Bob, is actually looping the line from Taylor to Judy Creek. So that involves about -- I'm guessing now in terms of distance -- I'm thinking it's about an additional 60 kilometers of pipe more than what we had anticipated, because we were looking at utilizing our existing northern system for a portion of the way. But what we're looking at now is looking at a batched line from Taylor to Judy Creek, and we would batch crude oil with the condensate coming through that line. So it is a scope change that has resulted in increases in our costs.

In looking at other projects, like Horizon, I think our cost estimates initially were around 338. They're probably coming in a little bit higher now. Again, some that is due to scope changes, Bob, but we're getting a lot closer with Horizon because they have already pre-ordered the pipe, the construction has already started. All I can say about it, though, is we don't have a fixed-price contract with a contractor on that particular initiative; we have a target price. And so to the extent that there is a savings compared to the target price, I think we share that 50-50, and our target, of it succeeded as it's the cost of the contractor there, so we're trying where we can to minimize cost overruns. But certainly, the trend has been on the up as far as costs are concerned. I still think if (technical difficulty) 10% or 15%, we're not seeing that as being a material difference. And in the case of the Horizon project, we worked very closely with [St. Hurell] all the way along on getting their approval for any of the increase in cost that we might experience.

So any increase so far in Horizon is not going to be a problem for you?

No, it won't, Bob.

Okay. And then, can you give us a cost of Cheecham? What was the final cost on that?

I think we're still saying $42 million, Bob, of which our rate base amount will actually be $36 million. So we will be reimbursed a $6 million overrun on that project. That will be paid by the shippers on the line. But for purposes of modeling that arrangement, you should use $36 million.

Great. And the projects you have -- well, actually, I'll let somebody else on the line. I'll come back if nobody else asks the question. Thanks.

Karen Taylor, BMO Capital Markets.

Can you just tell me what the chief legal concern was that prevents you from putting out unaudited statements with this earnings release?

Well, the consensus, at least amongst our legal guys, is that very few of our peers were releasing fourth quarter reports this year, just because of the added stringency and onerous requirements of the market compliance these days. (MULTIPLE SPEAKERS) issued before they're audited, there may be changes between each of those numbers. And in fact, there is no requirement for us to -- (MULTIPLE SPEAKERS).

Peter, I realize that, but quite frankly, to read this press release without even an earnings per unit number is quite frankly inadequate. So why was this call not scheduled for mid-March when your financial statements were available?

Will likely do another conference call in mid-March.

That would be typical.

That would be what?

That would be typical for us if we've actually released this information, then we have to speak to the -- we haven't spoken to the final numbers yet, Karen, so we will in the middle of March.

So why has this press release been issued?

Well, we thought we'd just give you some information. So if we don't -- you know, we could back up on this --.

Because there's not one GAAP number here that is standard, like operating earnings before expenses, and so on -- this is not helpful. So to me if you have -- I don't understand why we're having this call today when there's nothing in here that will actually affect it and allow us to close the books on 2006.

This press release is not intended to close the books on 2006. We have not closed the books on 2006 yet and our auditors have not been in their offices yet. That process will conclude by mid-March.

So make a suggestion too that we don't do this again next year, that we are waiting until they end of March.

We will likely continue to do it. If you don't want to use the information, Karen, that is fine.

Well, it's just not helpful at all. So, what was the unaudited earnings per unit number for the quarter and for the year?

That's not available at this time.

What was operating cash flow for the Company on an unaudited basis for the -- (MULTIPLE SPEAKERS)?

The information is available is the information that we have disclosed in the press release, Karen.

What was the primary cost increase, then, on the Spirit pipeline? How much was that cost increase? I didn't recall seeing that.

I think what we've publicly stated before, Karen, was that the cost estimates were about $1 billion previously, and now they're $1.2 billion. And I was explaining to Bob Hastings in his question, Karen, that we have -- we're now looking at looping the pipeline --.

I understand that, yes.

So that's the prime cost increase on that pipeline since we last talked about it.

And how much would that increase the cost?

My guess at this stage, Karen, was somewhere in the range of $100 million.

And how much further project development financing are you requiring, and how much have you spent to date?

What have we spent -- what have we spent, Peter?

$7 million, Karen.

I beg your pardon?

We've spent $7 million to date.

And we're looking for a number, just around that number, Karen, going forward. That should take us into about October of this year And, most of that funding is intended to deal with regulatory and First Nations approvals that we required. So we're pushing off some of engineering for the pipeline on -- pending the receipt of those approvals.

And pushing off the engineering -- does that fundamentally change the in-service date profile of this pipeline?

I think it's going to delay it probably; it could be delayed six to 12 months.

And so the new proposed in-service date -- I'm sorry, I missed that -- was?

Probably -- I think we said before, beginning of 2010, so probably now, we would be looking at closer to the end of 2010, Karen.

Thank you very much.

Fai Lee, RBC Capital Markets.

Bob, I'm just wondering in terms of this cost increase for the condensate project, is there -- I know it's not up 20%, but is there sort of some level where it goes above where it's not economic? Have you had any discussion with that on the shippers about that?

Yes, we presented the most recent cost estimate to the shippers, and this has not the resulted in a material change in the proposed [flow] under that arrangement, Fai. So they are aware of it, and they know where the costs are and what the totals would be under the circumstance, and they are still in support of the project.

So they're comfortable with the increase in the total implied by the higher CapEx then?

Yes, they are.

And I guess you're going to spend another $7 million -- is that what you were saying -- in 2007 on business development for the project?

Well, I said you could use $7 million as a base for the number. I said it will be approximately $7 million (MULTIPLE SPEAKERS).

Okay, so about $7 million to $10 million. Okay. Could you remind me if that's being expensed or capitalized at this point?

At this point, it's being capitalized. We have responsibility for 20% of the project, so we will capitalize it until we determine whether or not the shippers do not want to proceed, at which time we would expense our portion of it and they would be responsible for reimbursing us for their share.

Okay. And this $7 million to $10 million -- just to clarify that -- is that your portion of the 20%, or is that --?

No, that's 100%.

Okay. And if the project falls apart, then you'll -- or, you decide not to proceed, then you will re-expense it I guess at that point?

Yes, we will expense 20% of the -- whatever amount has been capitalized in respect to the project itself.

(indiscernible) 20% of 14 to 20 (MULTIPLE SPEAKERS) $17 million, okay.

And just turning to the Midstream business, I noticed that the revenues and the operating income were down from the third quarter about $2.8 million, both on a revenue and an operating income basis, and I'm just wondering what's causing the variation.

Peter, can you think of anything offhand? I cannot recall offhand, but I will just turn it over to Peter; he can compare the financials that we have here in front of us.

It seems rather significant from like third to fourth quarter.

What are the numbers you have for the third and fourth quarters, Fai?

I have the third quarter -- I think you guys reported $14.2 million in operating income. In this quarter, it's $11.4 million

I know that there were some adjustments between the third and fourth quarter, Peter, with respect to Midstream operations on the Swan Hills joint venture, and we had only started -- well, we started the equalization benefit on Pembina in June or July. We would have to look into it, obviously, where the [little] change occurred.

Well I guess the question is -- relating to is, which number do you think is more representative going forward -- the fourth-quarter number or the higher number in the third quarter?

You know what I would do? I would probably take an average of the whole year, and say that would be more representative. But, the only thing I might add though is that we've started our joint venture operations with [Kiera] on the Drayton Valley system in January of this year, so there should be an increase. And I would say an increase in the range of -- let's say $0.5 million a month in, 2007 compared to an average of 2006.

Okay, thanks.

Alda Pavao, CIBC World Markets.

Just focusing on the Midstream business for a minute here, and particularly as you commented on expanding services. Can you just talk about -- you did allude to additional services on the Drayton Valley. Is there any others on other plans you plan to roll out in 2007?

Right now, as far the plan is concerned, we're looking at a full run rate on Cremona, Swan Hills and Pembina in 2007. And the other opportunities that we might look at and we are looking at currently might involve the Peace Pipeline System, some single shipper truck terminals, those sorts of things. But we're still at early stages in 2007. Also, I don't expect that we're going to have any kind of meaningful impact from any other activities in the Midstream area in 2007, other than what happened perhaps in the third or fourth quarter of the year, which again, won't have a material impact on the year itself. So as we go through 2007, we will certainly communicate any other initiatives that we have underway in our Midstream business unit. But I think it's fair to say that the contributions from any other activity that we do will be positive.

Okay. Is there any significant seasonality that we should note to the extent that we saw a drop in Q4 for relative to the run rate in Q2 and Q3 contribution, or is it somewhat representative maybe of the commodity price environment to the extent you saw frac spreads narrow as well as light/heavy differentials?

The equalization scales, they do change, depending on where crude prices are, and I think we have positive -- we did have contributions during 2006 because of the strong commodity prices. For 2007, we had assumed for budgeting purposes that crude oil would return to about $50 per barrel, so we budgeted for a reduction in our equalization revenue from our Midstream business for 2007. So the expectation would be that 2007 would likely have been lower than 2006. I think, Peter, the equalization scale has just been published, and it will be lower than 2006, but not as low as what we had budgeted for, so it's somewhere in between. And I don't think I should give you any real guidance on that at this stage. But I would have to say, probably the more conservative approach to take would be to assume that whatever we earned in 2006, that we would be able to match that in 2007, and then get a positive contribution because of the Drayton Valley merchant operation running at full run rate. So to be conservative, I think you use 2006 as the best projection for 2007, and we will provide better guidance one's we are into the first quarter of 2007.

Okay, thank you. That's much appreciated in terms of the context with the guidance. Just moving on, particularly to the Western system, and I believe that the fixed toll on that system is up for renewal or expiring in mid-2007. Can you give us context of the view there? And I believe it's somewhat related to the condensate pipeline, so to the extent that you can give us an update as to timing on realizing [interim] shipper projects that that's related, that would be helpful.

It's a bit of a complicated situation, because right now, you're right, the contracted or the settlement is up in the middle of 2007. If we were to -- and we have -- I think we budgeted that we would revert to the BCUC tolling methodology mid-year. That is the way that we budgeted, so in trying to put that in context, it's probably a couple of million dollar increase in revenue if we adopt the BCUC methodology. So if nothing else changes here and the condensate pipeline does not go ahead, then that's what we would be looking to seek from our customers going forward. However, if the condensate pipeline does go ahead, I think we'll have to look at revisiting that whole issue to determine whether or not just maintaining the existing negotiated settlement for the next couple of years might make sense for a customer. So I think it's, maybe the short answer here, it will be subject to further negotiation.

Can you give us a sense of when you anticipate a resolution of this situation I guess dependent on progression on firming up shipper commitments on the condensate line?

That's exactly right, Alda. I think to be conservative, I would assume that, again, that 2007 was going to look like 2006. And as far as timing is concerned, we hope that by the time we get say to October of this year, that we will have moved far enough along with respect to First Nations and other approvals here to be able to advance the project and get full shipper commitments for the project. But, it's likely to be later on this year, and our current target would be sort of October-ish.

Okay. Thank you. Those are my questions.

Rizwan Suleiman, Credit Suisse.

I just had a quick question with respect to whether or not you have contemplated converting Pembina back into -- or into a corp, as opposed to a trust, and whether you've engaged financial advisers do that end?

The answer to the question is, we've considered a number of alternatives and we have engaged financial advisers with respect to that issue at this time, and nor do I expect that we would ever engage financial advisers with respect to that subject. Yes, we have looked at long at what Pembina would look like in corporate form, and I think anybody that was a trust, [it wouldn't] be a prudent thing to do. So that has not been looked at and we have not crossed the bridge yet as to whether or not that's what we're going to do. I think one thing I can say is that, it's highly unlikely that Pembina would exist as a trust beyond 2010.

Can I ask whether or not your Q4 or your full-year annual results will contain information on-- detailed information on tax loss carryforwards, and your unused capital cost allowance -- unused CCA balances?

I think what we've posted right now is the balances at the end of -- or beginning of 2006. Probably what we will be doing here is, we will be going through and preparing our tax returns in the first and second quarter of 2007, and that information should be available -- will be available -- likely towards the latter part of the second quarter, after the returns have been filed.

Thank you very much, those are all my questions.

Lamont Richardson, PEG Capital Management.

I have three questions, unrelated. Number one -- have you gentlemen done any analyses to come to a judgment as to whether the throughput of liquids obtained from the oil sands will be a greater corrosive risk problems than the conventional hydrocarbon throughputs?

Is that your question? We have not done an analysis of that.

Well, isn't that going to be very important as these oil sands get ready to be moved by pipeline?

Well, certainly. As far as any of the detailed engineering that we do for any of these projects would factor in, whatever quality of oil that was going to be transported in the pipelines would be equipped to handle whatever type of product was going to be produced. So I say -- we have not done the analysis. We certainly have done the analysis for the Horizon Pipeline, because that pipeline -- the pipe has already been ordered and it's being laid right now. Any other project would involve the same sort of assessment of product quality before we would look at putting the pipe in the ground.

So you do some work on that problem, or issue?

Yes. Certainly, sir, I thought your question was more general. But specifically, we're talking about the Cheecham Lateral or the Horizon Pipeline, all of that work has been done.

Number two -- what price for crude oil is the so-called cutoff point for the throughput of oil obtained from tar sands up there? It's it $50 U.S., or what is the thinking up there?

I'm not certain. I don't know if I can give you the right answer here. What I have heard is $45 to $50 U.S., is required to make those projects economic.

That's it, so it's a little below $50 U.S.?

That's what I understand, but that's that for new developments, yes.

Okay. Number three -- what would be involved for a party that wanted to become a competitor pipeline with Pembina, in terms of assemblage of the right of way, etc.?

With respect to our existing conventional operations, it would likely be very difficult for somebody to compete head-to-head with Pembina, because we typically are dealing with high barriers to enter in those particular operations, recognizing that we have been in some cases in business for 50 years. So it would be very difficult for somebody to come in, particularly when we have capacity, to move more product than we currently move. That would be very difficult. If you're looking at just competing over oil sands involvement, I think at the end of the day, Pembina would -- or if somebody were to compete for Pembina, it would come down to really what was their cost of capital relative to our cost of capital; what type of experience would they have had in terms of building oil sands-related pipeline, what is their track record; and I guess, three, what is their ability to finance some of those opportunities. So I think it's fair to say that those would sort of be the important factors to be considered in terms of an oil sands expansion.

What about getting the right of way, the basic right of way? Wouldn't that be a time-consuming process for a competitor?

It can be, but it really, in our case, we have existing rights of way, but we do have supply for new rights of way from any of these expansions that we have to go through. So while it's an advantage to us where we have existing rights of way, but to the extent that we're expanding, we have new routes, we have to acquire those new rights of way as well. So it would be no different for a competitor as it would be for Pembina in those circumstances. Some of the rights of way that we have currently will be full with some of the expansion we have now, so we'll need new rights of way.

Okay, thank you.

Linda Ezergailis, TD Newcrest.

Your DRIP program has increased to $100 million from an expectation of $80 million stated in Q3, for 2007. Now, looking forward to 2008, should we maybe expect $100 million DRIP as well?

I think that's fair, Linda, based on our projected capital program. There will be continuing need for new equity to finance those projects, so $100 million for '07 and '08 is a reasonable assumption.

Okay. So maybe, I know I will be getting this in mid-March, but maybe you can help me with some rudimentary per-unit operating income analysis, I guess. Can you give me your average number of units outstanding for Q4 '06 and 2006 on a basic and diluted basis?

We likely have that available, Linda, but not in front of us at this point in time.

Yes, Linda, if you wouldn't mind, could you call Glenys, and she can provide that information? And if anybody else is interested in that information, I guess we'll provide that to you all.

Probably won't be able to get diluted, but basic, certainly.

So basic information is available, apparently. Will do that, Linda.

Thank you. In terms of your maintenance capital expenses, it's not a GAAP number, so I'm hoping that perhaps I can get that from you today. I don't know if the actual is on the website, but the Q3 '06 estimate for 2007, the budget did not have any maintenance capital, so can you give me an outlook for 2007?

We're not segregating what might have been maintenance cap in 2007. These projects will be classified as our other operating expenses, or capital, depending on nature of the cost itself.

So, Linda, just for clarity then, in looking at modeling for 2007 and beyond, your best off to assume there will no longer be a category called maintenance capital that's expensed and is the actual distributable cash. It will be either -- and for the most part, I think we've just decided we'd classify it as operating costs, and so that we treat it as operating expense going forward.

So you're going to be expensing, effective January 1, '07, so assuming that my Q3 '06 estimate of maintenance capital of $3.8 million -- and correct me if that number changed after year end. So should I increase my operating expenses for Pembina by $3.8 million when I delete the maintenance capital number?

I think that would be a fair approximation. I would use something like a number like $3 million a year.

$3 million a year increase, okay. Let me just see what else I can ask that's non-GAAP -- I guess that's all I have to work with. Thank you.

Karen Taylor, BMO Capital Markets.

Thanks. Just maybe on the DRIP, because we seem to be able to increase the amount that's effectively issued at will. What's the actual participation rate that you're limiting? So in the past, we were 70s and 80, and now 100 -- what is the actual demand for the program?

Currently, we're not prorating the participation levels in the DRIP program.

So the 100 million is 100% of all desired levels?

Yes, and I think the participation ratio is about 55% roughly.

And no prorating?

No.

Can you just -- and I don't know if this comes back to stuff you're going to make available in the future regarding the taxation pools, but you said that very quite definitively, that converting for the notion of taxability will be unfavorable to Pembina, which implies of course that you have done some math. So can you perhaps indicate to us as others have what percentage of the earnings number would in fact be taxable?

I'm trying to think of how we can equate this where it would make sense for you, Karen. I think what we did, we looked at modeling the effect of the 31% tax on distributions, and then we looked at the effect of --.

Sorry -- it's not tax on distributions, it's tax on income.

Yes, I know. What I'm trying to do is come to a number to give you some help in terms of trying to get to a rate, because I'm not sure that we have that rate. My sense is that, if we looked at modeling tax on our distributions, we'll pick a number and I'll say that it was $50 million, that if we looked at it being in corporate form, our corporate tax would be, say, $40 million, or $35 million -- that was sort of the delta -- so that we are better off in corporate form by about $15 million per year, roughly. So I think effective rate of tax, if we assume that the corporate tax -- well, you almost could do that. You could say, that would be about effective rate of 20% versus 31%.

So having said that, since we can't talk about any numbers on this call, we'll talk about blue sky things like CO2 and other things. It's widely expected that Terasen Gas is going to pop out at the some point in 2007. Is that an offset that Pembina would take a look at in order to increase its footprint to a related business, and expand its scale and scope, and at the same time, effect some type of corporate conversion, basically enabling you to stay outstanding as a publicly-traded entity and potentially being absorbed by private equity?

Karen, we have not considered that possibility as this stage. It's not to say we wouldn't consider it, but we certainly haven't to date, because part of it, when I said I think earlier in my comments, I said that we're sort of maintaining the status quo with the existing business processes. That's not to say we're going to put our blinders on to any other possibility. But, the reality is, we do have a number of still very good projects for us to work on, and that's where our focus will be. And it's also not going to say that we're not going to look at what we should look like in 2011, because I think it's prudent for us to continue to do that. But we're doing that with respect to the opportunities we have in front of us today. We have not seriously considered any other opportunity with Terasen Gas or any other corporate entity outside of our existing projects that we have talked about to date.

Lastly before we leave other pipeline opportunities, a quarter of pipeline and the planned expansion of it has stalled. I am presuming that the need for the pipeline facility still exists. Is there a way to wrap that into the Horizon AOSPL system and introduce yet that third mine, if you will, into the mix?

Well, it would be interesting if we could do that, Karen. I can't really comment on what's going on with respect to the Corridor pipeline. My knowledge is consistent with yours, that there's an expansion underway, that the process has probably been slowed down here, and it may very well be that maybe Kinder is looking to monetize the existing assets and perhaps have somebody else assume responsibility for the expansion. And whether there's any synergy there or not, that's always a possibility, but it's not something that we are currently looking at.

And, given that he was planning to sell 85% of Corridor into a trust, or at least that's what his business plan, among other things, showed last year, and you're not looking at that opportunity?

I think, what's fair to say, Karen, we would look at it if it made sense to us. Right now, the projects that we're working on make a lot more sense to us than that project, not that I understand what the economics are, but all I'm saying that if you're looking at a typical regulated type rate of return arrangement, I think the project economics are not going to be as attractive as some of the other things that we're working on today. So all I'm saying is, it could go into the jar of the things we'd look at, but if we have to then assess all of our financing requirements and projects, I don't think it would be the number one priority for us. I think we have other projects that make more sense.

Lastly on the Midstream business, there has been softness in commodity prices. Can you just talk about, there is I think a little bit of the confusion about what this is going to do and how it generates earnings. So can you talk to us a little bit about how that business, other than the direct price of oil that you talked about earlier, is affected by commodity prices?

Yes. I think the price of oil certainly does -- we believe it has a direct effect on the equalization benefit. But, I think as far as the other operations within our Midstream business unit, Karen, we have not seen a correlation of commodity price changes to significant adjustments in our operating income that we're generating from, if other than through the equalization benefit, which again, as we budgeted for a decrease in 2007, and we actually may do a little bit better than we budgeted because of the change has not been as significant. So I think, probably if I was going to land on any correlation, I would focus on the oil prices. And I wish I could give you the direct link as to what that relationship should be. That's something I don't have in front of me today. Perhaps, what we could do is look at providing some general guidance on what we expect it to earn in 2006, what we expect to earn in 2007, as a result of a lower estimate of commodity prices, of oil prices in particular. And maybe that's some guidance we could provide to you directly.

Before I wrap up my last question I guess, so then can we look forward to I guess another conference call with this sort of guidance in it at some point in March when the financials are available (MULTIPLE SPEAKERS) given everything that we have seen today with financials that we obviously need?

Yes. Well I think certainly, if that's an outstanding issue, I think we can address that through a conference call and provide some guidance at that time, Karen. Perhaps that's something we can even post on our web site once we get closer to having the audited results here for the end of this year, if that is at all helpful in terms of assisting in the modeling of the contribution from the Midstream area.

Okay, thank you.

Fai Lee, RBC Capital Markets.

Bob, I just want to make sure I have this correct. Did you say that, under corporate, when you did your modeling for a corporate tax model, the effective tax rate would be 20%, is that right?

I was trying to give you an order of magnitude because I don't have the numbers in front of me. What I do know is that, going forward, if we were to stay in trust form, our taxes compared to a corporation would be about $15 million higher as a trust as compared to a corporation. So you'd almost have to do the math, but you know that as the distribution tax is (indiscernible) 31%, I just said that the guidance we've given you is that our corporate tax would be about 20%, and that's really because of the fact we do have CCA and other deductions that can shelter some of our income from corporate income tax.

Right, and I'm just trying understand this $15 million differential. Is that just in 2011, or is that something that will carry past 2007?

I think probably for modeling purposes, it would probably be lower than that in 2011, and it would grow over time. So I think that really, sort of more of the sustained number based on what we know today, and that's assuming they don't do anything else between now and 2011, that you're looking at about a $15 million differential.

On average over --?

On average, yes.

-- over a sustained period of time?

Yes, so that would ramp up over time, so it may take a few years before you get there.

Okay, thank you.

(OPERATOR INSTRUCTIONS). Alda Pavao, CIBC World Markets.

I just wanted to clarify I guess your thoughts, when you look at driving your potential tax impact as a corporation versus a trust, do you include in terms of your future growth prospects in that analysis as it relates to incremental UCC pools, etc., from a project like the condensate line?

That would be based on what we would call our base model, (MULTIPLE SPEAKERS) so we would have the Horizon Pipeline in there, and no other projects, unless we know there are commitments there.

So the condensate line then would not be presumed to be included in the base case?

That's correct.

Really, it won't be until such a time as really we get (indiscernible) commitments for that pipeline, so I think that's a prudent way to look at it today. Certainly, the profile would change dramatically of we were to incur a $1 million expenditure on our pipeline. But again, that is something that we would look at once we get through probably the third quarter of this year.

Okay, thank you for that.

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

For those who did participate in this lack of information conference call, I guess if you want to call it that, we thank you for your patience. We will provide you with the required audited results as soon as they are available, which we expect to be mid-March, and appreciate that you could do much in your models with the information we've given, but we thought what we would try to do is just try to stay abreast of all the more recent developments and share those with you. We look forward to following up with some of the requests that were made and looking forward to talking to you again soon. Thank you.

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