Pembina Pipeline Corp (PBA) 2007 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 26, 2007 at 4 PM Eastern time. I will now turn the conference over to Bob Michaleski, President and CEO. Please go ahead.

Good afternoon everyone. I've got Peter Robertson, Pembina's VP of Finance and CFO; and Glenys Hermanutz, the VP of Corporate Affairs, with me here today to discuss Pembina's first quarter 2007 financial and operating results.

Following our brief review of the quarter, I will provide a discussion of new developments at Pembina and provide our outlook for the balance of the year. After I have concluded my comments, Peter, Glenys and I will be happy to response to any questions that you may now.

Now many of my comments today will be forward-looking in nature, as such, Pembina's lawyers have asked me to advise you of the following. The actual results could differ materially from our conclusions, forecasts or projections in the forward-looking information. Certain material factors or assumptions were applied in driving a conclusion or making the forecast ore production, 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 projection in the forward-looking information, and material factors or assumptions that were applied in drawing a conclusion or making a forecast or projection as reflected in the forward-looking information as contained in our first quarterly report to unitholders, which is available online both at Pembina's website located at www@Pembina.com and in the Sedar website. Now I will turn from the legal (inaudible) into actually what transpired here for the quarter.

Pembina's 2006 was record results and began 2007 on the same note. During the quarter Pembina surpassed its previously established records on virtually all financial and operating metrics. The highlights of this quarter include aggregate net operating income for the first quarter of CAD65 million, representing a 26% increase year-over-year. Midstream operations posted a 93% increase over the first quarter of last year, generating CAD18 million in operating income during the quarter.

Net earnings of CAD29 million for the first quarter of 2007 were 46% and 102% higher than the same periods of 2006 and 2005, respectively. The Fund increased its monthly distribution rate to CAD0.11, effective January of 2007, following two increases to the rate in 2006.

Cash distributions to unitholders totaled CAD42 million, a 25% increase over the first quarter of 2006. At March 31, 2007 Pembina had distributed a cumulative total of CAD864 million, or CAD9.75 per unit on a CAD10 per unit trust original issue price almost ten years ago.

As we approach our tenth year anniversary as a publicly traded income fund in October of this year, we are pleased to report strong growth across all segments of our business. And our expectation, based upon knowledge available to us at this time, is that this trend should persist into the foreseeable future.

Turning to an operational and financial summary. Throughput on Pembina's Conventional Pipelines system continued on an upward trend during the quarter. New connections and other business initiatives on these systems have led to sustained increases in average throughput over the past three years, reversing a long-standing trend of modestly declining throughputs.

Conventional systems contributed CAD38 million in net operating income during the quarter, a 13% increase over the same quarter of the prior year. Net operating income contributed by the Oil Sands unit was up 5% year-over-year, to CAD10 million for the first three months of 2007, largely due to the inclusion of results for the Cheecham Lateral. Construction of this new service was completed at the beginning of the quarter, and the asset began to generate revenue on February 1, 2007.

Pembina's Midstream business segment continued to generate significant operating income during the first quarter. As previously stated, net operating income of CAD18 million was 93% higher than the comparable quarter of 2006. This increase was attributable to the continued addition of Midstream services, such as storage, terminalling and marketing to the Swan Hills, Pomona and Drayton Valley systems.

Capital expenditures rose significantly from the same period in 2006. The bulk of the year-over-year increase relates to the construction activities on the Horizon Pipeline. The first phase of construction on this pipeline is nearing completion with almost 100 kilometers of pipeline being installed this past winter. Preparations for the remaining two phases of construction for this pipeline are currently underway. We expect to meet the July 1, 2008 target date for completion of this new service.

Other major capital spending in the quarter included the CAD32 million of product synergies for facilities on the Drayton Valley Pipeline. These facilities are expected to be fully operational by midyear.

Pembina's DRIP plan raised CAD23 million during the quarter. And the target for the plan in 2007, based on current participation levels, is approximately CAD100 million. Pembina has the ability to alter this target should our funding requirements change during the year.

In the first quarter of 2007 Pembina met its distribution objective for the 38th consecutive quarter. Current Trust Unit distributions were 16% higher than the same quarter of 2006, reflecting distribution rate increases implemented in mid 2006 and in January of this year.

Pembina's business segments generated a CAD6 million increase in the notional distribution reserve during the first quarter, resulting in a notional balance on reserve of CAD27 million at March 31 of 2007. Should current operating measures, trends and financial performance continue as forecast, Pembina may determine that further positive reconsideration of a distribution rate is appropriate later this year.

Looking at new developments and the outlook, as previously stated work on Horizon Pipeline is proceeding on schedule. We continue to actively pursue opportunities to provide service to a number of planned and proposed large-scale oil sands and heavy oil developments. We are confident that our operating knowledge and presence in this area will allow us to successfully capture some of this new business.

The outlook for Pembina's Midstream business segment remains very positive for the balance of 2007. Over the past two years we have developed solid business expertise in the Midstream area that will enable us to continue to maximize the revenue generating potential of our extensive infrastructure.

Progress slowed on the development of our condensate project this quarter. Uncertainties relating to the demand and timing for diluent have delayed potential pipeline customers from entering into permanent agreement. In the meantime Pembina continues to advance the consultation process for this project. And we expect to incur costs of approximately CAD1 million related to this project over the balance of 2007.

In closing, I would like to reiterate that Pembina has delivered another quarter of record-breaking results. We have numerous growth initiatives underway. We continue to unlock the substantial potential related to our Midstream business. The growth trend we have established over the past several years is expected to continue into the foreseeable future. And we are on track to post yet another year of record-breaking results in this, our tenth year as a publicly traded income fund.

Thanks for participating in the call this afternoon. I will now turn the call back to Jared for questions.

(OPERATOR INSTRUCTIONS). Linda Ezergailis, TD Newcrest.

Your Conventional segment was quite strong this quarter. And revenues were up by my calculations CAD5.6 million, and expenses were up a more modest CAD3.9 million, where in fact depreciation was down CAD1.5 million. That is a CAD3 million expansion of margin. And yet the explanation given for the toll increase was that actual and expected expenses are expected to rise. Does that mean that we should expect to see expenses kicking in later in the year? Is this a timing element, or is there some sort of a sustainable run rate and margin expansion for the year?

I think the answer to your question is right that it is largely reflective of timing. I think probably a lot of the onetime projects were completed during the second and third quarters of the year, so we would expect our operating costs will increase during the second and third quarter of 2007. So I wouldn't use the first quarter as being representative of what they would look like for each quarter as we progress through the year.

But you are expecting to see some growth year-over-year?

Yes. Our budget was showing an increase as we had reflected a number of -- what we consider to be onetime expenditures. But we had onetime expenditures every year. It is just that there is a fairly significant maintenance program that is underway on the Peace Pipeline system too. But for the deep basin we started that program in the quarter, but there will be more to come in the second and third. So yes, expenses will rise during the balance of the year.

Moving on to your Midstream business, I believe on the last conference call you indicated you would give more guidance in terms of helping us have some visibility as to if there was any sort of commodity prices or anything we could look at. Can you give us anything to help us update our modeling, if only just bottom line guidance?

I think as far as bottom line guidance is concerned, I think if you look at our first quarter results and say, well, that looks reasonably representative for the balance of the year, I think I might look at that. That may be a little high. But I think it is a reasonable projection as to where we might be. Maybe perhaps we said by about CAD1 million, so I think for the first quarter we're about CAD17.5 million. So I may just reduce that by the CAD1 million.

And yes, we did undertake to provide some additional guidance for the various analysts that are following us. We have yet to get that information through from our Midstream area lender, so we are still working on that. And I hope that we will have that out before too long here to give you some indication as to the relationship with that cash flow to commodity prices.

But commodity prices have been strong through the first quarter. We would probably expect it to stay strong for part of the balance of the year. So that is why I am saying the contribution that we're getting in the first quarter probably is representative, as long as the commodity prices stay in the zone for the balance of the year.

When you say to reduce it maybe by CAD1 million, would that be for the quarter, for each quarter, or the balance of the year?

If you want to project it to the end of the year, take the first quarter and reduce it by about CAD1 million, and then project that number through to the end of the year.

Tony Courtright, Scotia Capital.

Just as to follow-up on the Midstream business, in your year-end results you had indicated that in 2006 you had garnered the benefits of a full year Midstream revenue on Swan Hills and Cremona. So are we to assume that the substantial improvement year-over-year is attributable largely to Drayton, or is it a commodity price driver here that is contributing to such significant year-over-year growth in Midstream (multiple speakers).

I would say the majority of the increase in the quarter would be attributable to Drayton Valley. The strength in commodity prices, I think really what we are seeing is the benefit we were getting last year from higher commodity prices is flowing through into the first quarter this year as well. So the short answer to your question is the majority of the benefit is coming from the Drayton Valley.

You hope to see even better contributions from that, is that because of higher volumes still yet to come on Drayton Valley?

There may be other things we can do there. It is early innings on that joint venture. What we're hoping to see actually is more volumes being produced out of the Drayton Valley Pipeline. We have seen an improvement in volumes, very modest, but I think a couple of the producers out in that area with those new connections are still having some difficulty. So if we see improvements in the volumes from the Drayton Valley operation, we should also see an improvement in the merchant contribution as well.

Karen Taylor, BMO Capital Markets.

I'm going to flog the dead horse one more time. If you just come back to the Midstream. And we had talked I think in late 2006 about a runrate of CAD60 million for the business, including Drayton Valley. So we're outperforming that on an annualized basis anywhere from CAD8 million to CAD11 million. Is that the commodity price?

I think there are other things we're looking at. I think if you looked at annualized Q1, we would probably be -- I'm saying probably -- mid 60s. So we are off the base from where we thought it would be last year.

Some of that is being driven, yes, by commodity prices. Because when we did our budget for 2007 we assumed, I think, a CAD50 WTI price. So with us averaging prices in excess of CAD60 WTI for the Q1, we're getting a positive push because of stronger commodity prices. So if that hold until the end of the year, yes, I think we will do better than what we had -- the guidance we had provided you late last year.

On the Alberta system, the increase in tolls, and I know that you touched in this with Linda's questions. So we are looking at a sustained increase to that CAD1.38 of revenue per barrel for the entire 2007. There's no -- you have obviously implemented it a little bit early for the quarter, but you're not thinking -- you're not going to take it down when this is over, are you?

No, the types -- the increases we implemented at the beginning -- they were implemented at the beginning of the year. And they were in respect of increasing tolls at our truck terminals, so that increase has taken place. We have also reflected the increase as a result of the sour crude segregation project on our Pembina Pipeline system. So we wouldn't expect there to be any further increases in tolls this year, barring any unusual set of circumstances. I think the increases that have been made, have been made, and so the average tolls should remain consistent until the end of the year.

Could you just briefly touch on -- I know you did very quickly in your remarks, and I'm sorry if I missed it in the press release -- just on the delays that you are experiencing on the condensate facility. I think you had notionally talked about an in-service date of 2010.

Yes.

If memory serves. So are we now looking at something beyond that?

I would think so. It seems that what the supers that we had been working with on, on that project, basically they said they need six to twelve months to further evaluate their diluent requirements. So it was difficult for them to make a commitment to keep the project going. I would think that, if anything, it is just going to delay the project for a year.

And we will know probably in -- I'm going to say probably in the third quarter of this year. We're going to have a better sense as to where that project will go. In the meantime, we're going to maintain some of the relationships that have been established with First Nations and others. So we have a communication program that is going out probably within the next week or so.

Just lastly, on the condensate project, all of monies have been expensed to date, is that correct?

That is correct.

And what was the expenditure for the project in the first quarter?

Our share of the expenditure for the quarter, we had a cumulative -- I guess the cumulative number was CAD1.6 million. Probably in the quarter it wouldn't have been very significant, so I think I would say a couple of hundred thousand dollars, our share.

Fai Lee, RBC Capital Markets.

I just wanted -- I am sorry, this Midstream runrate, if I could go back to that for one more second. In terms of the runrate as it stands, it is sort of in the mid CAD60 million range on an annualized, but you see additional upside at some point if you develop new services, is that correct?

That's right. But I don't think -- the upside, yes, we will probably start realizing on some of that later on this year. But it is not going to have a material impact on the runrate for this year. I think it will be a 2008 timeframe that we will be looking at a further increase in the Midstream contribution. Bob?

And I just had a couple of other questions. With respect to the pension contribution, I noticed that there wasn't employee future benefits contributions. There wasn't any this quarter. Is it a timing issue or has that stopped going forward?

It is a timing issue. We have got an actuarial valuations that we are completing. So we won't know what our funding obligation is in respect to the current year until after we complete that evaluation. But we would expect that our funding requirement will be in the range of CAD5 million for 2006 -- 2007, I'm sorry.

So that hasn't changed then, right?

No.

And Cheecham, I noticed that the contribution to me -- just based on the revenues, I don't think you provide the contribution -- seems fairly low. But I don't know if that is a runrate or a timing issue. Could you may be talk a little bit about that?

We said it was -- the revenue contribution commenced on February 1, so we have two months of revenue from Cheecham. I don't know if I had quantified that in any of the material. Glenys, can you recall whether we have or not?

No, the only real guidance that we have given on Cheecham, given that it is a contracted pipeline, we gave rough guidance when we first announced the project in terms of what the expected accretion would be.

I think if you did simple math, we have got CAD36.5 million in rate base, so using a number like CAD400,000 a month would be reasonable.

For revenue?

Yes.

All right.

That would be our cash flow return. The operating costs are flow through.

CAD400,000?

Yes.

Because isn't that -- I'm just looking since you started booking revenue -- yes, your revenues for the quarter is CAD800,000 -- or is that the contribution?

That would be the contribution for the quarter.

That is your contribution, the CAD0.8 million in the press release. Sorry, I thought that was revenue.

Roughly.

Maintenance, there wasn't any maintenance expenditure, capital expenditure this quarter. Is it just a timing issue again for that?

No, we decided not to show any maintenance capital as a deduction from [single] cash anymore. We're just going to -- just effectively treat it as an operating cost. And that is the best way to look at it.

So you're expensing that?

Yes.

Alda Pavao, CIBC World Markets.

Looking at the Midstream business a little bit differently, can you just update us as to potential further service options that you're looking to implement in that business to grow it?

Yes, one of the year's project that we're working on right now is an extension off of our Peace Pipeline system to an area called Worsley. So that would be a pipeline extension. So if we assume that we can get sufficient volumes to backstop that project, what we're thinking about doing is entering into a joint venture arrangement with another company, where we can provide what we call a full-service terminal for our customers. So that when they bring the product to the terminal there will be additional services that they will be able to achieve, other than just pipeline service. And that will generate some additional cash [roll] for us.

I would say we're probably at least a year off from having that connection in the ground and operating. But that is the type of thing that we will look at. There may be other similar arrangements that we can make. We probably have identified half a dozen or so of other areas that we can provide that level of service for our customer. Again, not significant in terms of capital, modest capital requirements, but again hopefully giving us an opportunity to find another way to leverage off our existing system to earn a little bit more money.

I believe I read -- I think in the AIS that you are also looking at water handling and disposal type services.

Yes, that is the full-service terminal -- our full-service terminal activities that we're considering.

But that sounds like it is more an '08 type initiative.

Yes. Yes, and we will be able to provide better guidance as we move through 2007, because we still -- we have the approval to proceed with the expansion, but again we need to ensure that we've got sufficient volumes to backstop that expansion.

So if they had approval to go ahead with the extension, would you be able to give us a range of capital expenditure on that system? (multiple speakers).

I don't know what we've got in our forecast. Peter, there's nothing in our forecast as yet? I think in total for what we mentioned the Board for was an additional CAD35 million. So that is order of magnitude.

Then just moving on. This will be to the Western system, and I believe that negotiations are underway with your shippers pertaining to the negotiation or the toll that is coming up for -- that is expiring in mid this year. Can you simply update us to how those negotiations are going? And are you looking to extend the current arrangements a couple of years, or revert to a different type of methodology?

No, what we have been down is we have all along the tracking and the methodology that the BC Utility Commission had provided us some years ago, that we found inadequate at a time because it really was working on a rate base that was close to 0. So in any event we had spent a lot of money, and we followed the BC methodology. We have been calculating tariffs on that methodology, and we have advised the shippers as to what the tariffs will be under that methodology. And we are indicating to them that it is our intention to adopt that methodology effective July 1 of this year.

So that will result in a fairly significant increase in tariffs on the Western system. And largely due to the fact that when BCU adopted the initial methodology it was based on a much higher level of volumes, which never did materialize. So as a result the volumes have been about 25% below where the BC Utility Commission pegged them for their rate determining purposes. So as a result of that we're going to get an increase in our tariffs.

And Peter, I don't know if we have got any particular guidance as to what sort of increase in tariffs on the Western system that we can provide? Right now it is 875 a [cube] going to Kamloops.

Yes, roughly that works.

It is roughly a doubling of tariffs on the Western system only.

This is require approval by the BCU, or this automatically reverts back?

What we have to do, we have to send the request for the tariff increase out to the shippers. If they object to it, then I guess we have to go back to the BC Utility Commission and see if they want to hear a complaint. I suspect what they are wanting to hear is that the shippers will agree to the tariff increase and move on. That is what we expect.

Tony Cartwright, Scotia Capital.

Could you give is any indication of what your remaining CapEx spend might be during the course of fiscal 2007?

We will have this posted on our website later today, I guess. But Peter, go ahead.

Q1 we are roughly just under CAD90 million. We expect the end of the year to be about CAD275 million. And most of that obviously being on the Horizon Pipeline.

With the combination of undrawn credit facilities and your DRIP you feel you are adequately covered in terms of funding?

Yes, that is correct.

Just a separate question. In terms of the guidance for the percentage treatment of distributions this year as between taxable and non-taxable, you have given an indication that probably 10% would be return of capital, if I'm not mistaken.

Yes, that's the guidance.

Is that in any way -- are you in any way husbanding any of your tax shields, or are you trying to maximize the benefit for the current investors to receive tax-deferred distributions?

No, not all. In fact, in that shelter -- really there is very little shelter available to us at the final level. It is minimum shelter there, and that is why there is a higher proportion of the distribution is in the taxable category.

Linda Ezergailis, TD Newcrest.

I'm looking at your cash flows from operations, and your change in non-cash working capital, and it has been trending significantly as a use of capital for the past year, with the latest source of capital being in Q1 '06. Is that a function of commodity prices rising or is it growing inventories, or how might we want to trend that going forward?

Peter, if you want to take that. I know there is a significant onetime event in the quarter being we've accrued for the recovery of the other parties' share of the condensate initiative. So I think we've got a receivable in the quarter of about CAD5.6 million roughly there would be unusual. So that is one element of it.

I think also because our revenues have been increasing, our accruals will also increase as our revenues increase. So I think that you have to -- in looking at the quarter you have to say at least -- or close to CAD6 million of that receivable is like a non-recurring item. Peter is there anything else?

No, I think that is the only unusual item in that number at the end of the quarter.

This is a cleanup item, I guess. In your Conventional Pipelines business you have a CAD1.6 million other expense. Is that your condensate line or something?

Yes, that is our share of the cost associated with the work that was done on the condensate initiative over the last roughly year or year and a quarter.

That was all expensed in the quarter?

Yes, we just felt that there wasn't enough certainty with respect to the project that would justify us continuing to capitalize those costs. We will revisit that when the time comes. But it will take us -- it might be the third quarter this year to determine what the ultimate outcome will be for that project.

I guess, my final cleanup item is, I'm having -- I'm quite challenged to reconcile Pembina's definition of distributable cash flow to your financial statements. Your annual report description of distributable cash flow is not very descriptive. And then there's this [slush] other line, which I realize isn't that big. But I am just wondering if I were to work from your financial statements, and maybe this is something we can take off-line, how do I get to your distributable cash disclosure in the quarter, or is it impossible?

I would suggest that --.

It depends what number you start with in the first place. But if you look on page 6 of our quarterly reports, you can see a reconciliation from our cash flow from operations for our statement of cash flows that will get you to our cash distributions to unitholders.

Yes, I appreciate that. But what is in the other line? And I know it is only CAD0.5 million. But I'm just -- in the future I'm just wondering -- I don't want to necessarily use a plug, so I'm just wondering what line items do you lump into other to get to just --.

That small a number, I don't recall specifically what it is. But if you really need to know, I'm sure we can get you an answer.

Yes. If we could take this off-line that would be appreciated.

We will have to get back to you. Given, as I think, probably is going to take our Controller to come up with that number.

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

I just had a question as it relates to product segregation facilities you're placing, or you have placed on the Peace System, I believe, for CAD25 odd million dollars or so. Can you give us an update as to timing of when that will be available in service, and timing of when you presumably put another incremental toll to recover that invested capital?

Peter, do you want to address that?

Most of that work involves additional tankage on our systems. And some of that tank work has been ordered already. So construction of that would take place between now and the balance of the year, which actually we are targeting, and service date of sometime in Q1 2008. And I imagine that tolling cost (inaudible) 2008.

Would you be able to give us a sense as to the return on invested capital of that project, or just a range of terms or accretion?

A lot of that is driven by the volumes that we get. And it will be dependent on the Worsley expansion as well. So it is a pretty hard question to answer. But I think if you're looking for general guidance for returns on projects that we look at, I will say that it will be above 10% and below 20%. That is -- I can give you a wide range and you can use your own judgment.

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

I don't have anything else to offer. We're coming off a very good quarter. We talked about a number of the projects that we have in front of us. There are other projects that we are working that are not sufficiently developed that we're pretty excited about too.

The news is good as far as Pembina's business is concerned. We remain concerned about where the government is going on this taxation issue. And we have been trying to stay fairly close to it as a member of an infrastructure group. So I don't know that we are going to make any headway there, but we're going to continue to try. It is unfortunate we have to deal with things like that when we've got so many other good things to work on.

So anyway, thanks for participating today. And I look forward to visiting with you again.

Ladies and gentlemen, this concludes the conference call for today. Thanks for participating. Please disconnect your line.