Pembina Pipeline Corp (PBA) 2008 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Pembina Pipeline Income Fund Second Quarter 2008 Results Conference Call. (OPERATOR INSTRUCTIONS.)

I would like to remind everyone that this conference call is being recorded on Wednesday, July 30th, 2008 at 2:00 PM Mountain Time.

I will now turn the conference over to Bob Michaleski, President and CEO. Please go ahead.

Thank you, Natasha, and good afternoon, everyone. Joining me today to discuss Pembina's second quarter 2008 operating and financial results are Peter Robertson, Pembina's Vice President of Finance and CFO, and Glenys Hermanutz, Pembina's VP of Corporate Affairs.

Following my review of the quarter, I will provide an update on our outlook for the second half of 2008 and new developments underway at Pembina. After I have concluded my comments, I will open up things for questions.

Now, as many of my comments today will be forward-looking in nature, Pembina's counsel has asked me to advise you that the actual results could differ and could differ materially from the forecasted results. I'd just ask you to refer to reports to unitholders with respect to the forward-looking information and the related disclaimer.

Now, Pembina's proud to announce an 8.2% increase to the distribution rate was approved today by Pembina's Board of Directors. As you will recall, Pembina increased its distribution rate in January of last year, and again in August. This latest increase in the monthly distribution rate to CAD $0.13 per trust unit, or CAD $1.56 per trust unit on an annual basis, will become effective with the August 2008 distribution.

While net operating results produced by Pembina's Conventional assets, along with growth in our Oil Sands & Heavy Oil Infrastructure and Midstream & Marketing business, have generated what Pembina believes to be a significant and sustainable increase in cash flow. This increase in cash flow is expected to support the higher distribution rate on a go-forward basis.

Now, from inception in late 1997 to the end of the second quarter 2008, Pembina has distributed a cumulative total of CAD $1.1 billion, or CAD $11.51 per trust unit on a CAD $10 per unit original issue price back in 1997. The quality of our existing portfolio of assets, together with the range of tangible and perspective opportunities presently under development across our business, lends confidence in our continuing ability to meet our business objectives and to deliver on a commitment to unitholders.

Other highlights of the quarter include net earnings for the quarter of CAD $42.1 million and CAD $74.7 million year-to-date, represent substantial increases of 18.6% and 7.6% over the comparable periods of 2007.

Cash distributions for the quarter of CAD $48 million, compared to CAD $43 million in Q2 2007. On a per-unit basis, this represents close to a 10% increase over 2007.

The CAD $400 million Horizon Pipeline was completed on July 1st, 2008 on schedule.

Now, turning to second quarter operating and financial highlights. As previously seen, the ongoing expansion and development of each of our business segments generated strong results during the second quarter of the year.

Conventional receipts on the Peace, Drayton Valley and Swan Hills systems continued to exceed expectations as a result of increased receipts from new connections and higher condensate throughputs. The Northern system volumes were up also, due in large part to increased natural gas liquids receipts. These volumes helped to offset volume reductions due to seasonal turnarounds and (inaudible).

Net operating income contribution from the Conventional pipelines for the second quarter totaled CAD $37.7 million. Second quarter results on the Conventional pipelines were impacted by roughly CAD $2.5 million in unexpected expense, largely related to the Cremona Pipeline incident, which I'll provide an update on later in this discussion. As a result, net operating income contributed by the Conventional pipelines is only marginally higher than the comparable period of 2007.

The Oil Sands business segment contributed CAD $8.9 million and CAD $18.5 million in net operating income during the second quarter and first half 2008.

During the quarter, as mentioned, Pembina completed the CAD $400 Horizon Pipeline on schedule on July 1st. Once Horizon comes on-stream, we expect a significant increase in contribution from this segment in terms of operating cash flow. We are currently forecasting that Horizon will generate roughly -- or generate CAD $45 million in net operating income on an annual basis, or roughly CAD $11 million per quarter, commencing on the in-service date.

The completion of this project further solidifies Pembina's presence as a major infrastructure player in Alberta's growing oil sands industry. Pembina now has 775,000 barrels per day of fully-contracted synthetic crude oil transportation capacity in three distinct pipelines serving key oil sands producers in Alberta.

Pembina's Midstream & Marketing business contributed CAD $25.4 million in net operating income during the second quarter, a 65% increase over the same quarter of 2007. Year-to-date operating income of CAD $47.1 million is up 41% from the first six months of 2007. The majority of the increase can be attributed to the ongoing development of services offered on the Swan Hills, Cremona, Drayton Valley and Peace pipeline systems.

Turning to our development capital program, capital expenditures during the second quarter of CAD $88.1 million were up from the CAD $63.7 million expended during the second quarter of 2007. CAD $62.2 million was related to the construction of the Horizon Pipeline, while about CAD $3.1 million pertains to engagement facilities on the Peace system. CAD $4.1 million was spent on new connections and upgrades, and CAD $15.9 million was related to operations and equipment in the Midstream business segment.

Pembina's payout ratio for the six months ended June 30th, 2008, was 98%, approximately 6.5% higher year-over-year. The full-year payout ratio for 2008 is estimated to be 90%, compared to the full-year payout ratio of 95% in 2007.

Pembina continues to maintain a strong balance sheet, with a total aggregate debt-to-enterprise value of 29% at the end of June 2008. As such, we are confident that our financial capacity is sufficient to fund the pursuit of new developments and expansions as they arise.

Now, turning to new developments. Provide an update on new developments underway at Pembina. Specific to our Oil Sands & Heavy Oil Infrastructure segment, I've already mentioned the completion of the Horizon Pipeline.

The development of the Oil Sands resource in Western Canada continues to be a focus of industry. This activity presents a suite of growth and expansion opportunities that we continue to pursue vigorously. Pembina expects to compete for new business in this segment and expects to win a proportionate share of this business going forward.

Pembina has progressed discussions with customers in the Nipisi and Peace River areas regarding the future development of the proposed Mitsue and Nipisi pipelines. This estimated CAD $400 million project represents another excellent development opportunity for Pembina, and we expect to finalize contracts and arrangements with the [founding] customers for this new service during the third quarter.

Moving on to our Conventional Pipeline segments, we continue to pursue opportunities and efficiencies that serve to add value to stakeholders through the upgrading of facilities, the construction of new connections to existing facilities, and the construction of new infrastructure.

We intend to continue to expand the scope and range of new services offered by our Midstream segment. Beginning July 1st of 2008, Pembina expects to generate additional net operating income of approximately CAD $1 million per month from the addition of new merchant truck terminal services on the Peace system.

This business represents the fastest growing segment of Pembina's operations. And we believe that Pembina, with its existing asset base, along with plans that I've outlined for growth in both the Oil Sands and Conventional segments, is uniquely positioned to capture additional midstream opportunities as we move forward in 2008 and beyond.

Of note, Standard & Poor recently upgraded Pembina Pipeline Corporation's long-term corporate credit to BBB+ from BBB. As S&P indicates, the upgrade reflects a stronger and more diversified business risk profile due to the enhanced capability in oil sands transportation and the Horizon Pipeline capital projects timely execution.

I'd also like to take a moment to provide an update on the pipeline release that was experienced during the quarter. On June 15th, Pembina experienced a small pipeline release of light sweet crude on Pembina's Cremona system. The line was quickly shut down and Pembina, in cooperation with the various regulatory authorities, continued and cleaned up the spill.

The line has now been successfully purged and Pembina has commenced remedial activities. These activities will include removing approximately 700 meters of pipe, replacing and reburying the pipe and restoring the right-of-way. Pembina expects that this remedial action will occur during the month of August 2008, with the pipeline being placed back into service early September of 2008.

This incident is not expected to have a material impact on Pembina's financial results; however, it did impact the operating results in our Conventional pipelines during the second quarter when the bulk of the expense associated with this incident was occurred.

Before turning it back to Natasha, I would like once again to make mention of how pleased I am to be announcing an increase in our distribution rate. This increase attests to our confidence in our ability to successfully execute on our business plan across all of our business segments, and to continue to honor our commitment to Pembina's unitholders.

I would also like to thank and congratulate the team at Pembina, and all others, who made the completion of the Horizon project on schedule possible. The completion of Horizon serves as an example of our ability to deliver on our plans and to grow our business.

Thanks again for participating in the call today. And now, I'd like to open it up for any questions that you might have.

Thank you. (OPERATOR INSTRUCTIONS.) Your first question comes from Bob Hastings from Canaccord.

Hi. Thank you--.

--Please go ahead.

Hi. Thanks. And great results. Good to see the distribution going up. The question I have is on -- with regards to the purging -- or sorry, the sale of the oil and the gain and how it's credited again back against your Horizon rate base. I'm kind of wondering, like, whose oil was it? And is this really a cash item for you if it's really reducing the rate base for the benefit of the oil company?

Yes. The oil was in the Syncrude Pipeline so it was part of the Syncrude Pipeline rate base. And so, part of our agreement with Syncrude, that we reduce the Syncrude rate base by the proceeds of the sale of that line. So--.

--So not the gain, but the proceeds?

Yes. Yes, that's correct. We reduce the rate base by the proceeds and Pembina gets to keep the cash, which we will use to offset against our bank debt.

So, to me that looks like almost a sale of an asset where you got the cash and using -- you have the cash to use against something else. But the reduced rate base is a benefit for the oil company, Syncrude in this case. And I'm just wondering how you're able to book that as a cash flow or an income gain.

Well, the gain -- under GAAP, the gain is recorded in the income statement. The gain is obviously a difference between proceeds and the original cost.

Yes. I guess I'm just having trouble with the accounting scheme. I'm not questioning whether it's legitimate or not, so let me be clear on that. But it just seems to me that it was Syncrude's assets. They're selling it, or you sold it for them, and they're getting the benefits for a lower rate base.

No, we own the line fill in the Syncrude Pipeline so it's our asset. And we have been earning a rate of return on that asset.

Okay. But if the rate base declines, does that reduce your (inaudible) on the asset?

Yes.

Yes, it will. Yes, it will on a go-forward basis.

Okay. Okay. Thank you.

You're welcome.

Okay, Bob.

Your next question comes from Tony Courtright from Scotia Capital. Please go ahead.

Just want to discuss your capital position. You've got about CAD $125 million of headroom under your borrowing facilities, if I've read your statement correctly. And you're contemplating a Nipisi-Mitsue project that might cost CAD $400 million in aggregate. What are your plans for funding? Would you reinitiate DRIP? What can you share with us?

Well, Tony, there are lots of options available to us. We can increase our existing bank lines to accommodate additional CapEx. We could do additional private placements or we could go to the equity markets or we could increase our DRIP program, or reinstate our DRIP program.

Yes. I think it's fair to say our preference likely will be to increase our credit facilities in the near term to accommodate the CapEx required with respect to Nipisi, recognizing, too, that the majority of the capital requirements for Nipisi wouldn't come into play until late 2009 and 2010. So, we're a ways off. So, we've got quite a bit of flexibility there.

And the rating agencies were well aware of these considerations when they recently upgraded you?

Oh, yes. Indeed they were.

Okay. You indicate that your preference using bank lines, even for the existing Horizon expansion, is I guess just the cost of capital is so much cheaper than other forms. What is a long-term desirable -- do you have guidelines in terms of how you operating in terms of your capital structure, though, and where you may not get over-weighted in one bucket versus another?

Well, we do. No, we don't have specific guidelines, sorry, but we are mindful of the fact that as we approach the end of 2010, and if you're starting to look more like a corporation you probably would be taking on a larger debt component of your capital structure.

What would be used, probably a target would be somewhere around 60% I would think would be a target ultimately. We don't like -- we wouldn't like to exceed it, so that would be -- if I were to give you a guideline, I guess that would be a guideline roughly, Tony.

And 60%, the metrics you're using here are 60% of debt to capitalization GAAP measure?

Yes, the book equity.

Yes. Book equity. And in terms of just looking at 2010, there are some new rules, guidelines out, preliminary. How has your thinking advanced in terms of what you might be doing and when you might be doing it?

Well, I don't know we've really necessarily advanced it. We'll have to see that (inaudible) clarification of the rules with respect to what might happen. So, Tony, I think that that is one of the options, certainly, is more available now, the fact that we've got (inaudible) rules at this stage. And so, that gives us that option. There are other options. Certainly, there could be other considerations. But I'd say that's the one that we're most focused on at this time.

Alright. Those were my questions. Thank you.

Thanks, Tony.

Your next question comes from Rob Hope from TD Newcrest. Please go ahead.

Hi. Thank you. Just back on Horizon for a second. Can you remind us when the in-service date is and if you'll be recouping interest costs in the interim?

Well, with respect to -- the original in-service date was scheduled to be, I think, July 1st. But that was always subject to a delay notice from CNRL. So, I believe CNRL had stated, or their position's going to be stated publicly here early in August, I believe, as to what their intention are. In the meantime, we will continue to recover our carrying costs associated with our investment in that project.

And will that be added toward the rate base?

The IDC is -- it's treated as revenue.

Okay. Great. Thank you. And if we look at your power hedge contracts, could you remind us when and at what price those were entered into and when in 2010 they expire?

I know they--.

--They expire at the end of December 2010. And the average price, I believe, was CAD $46.50 for the cost of the current (inaudible). That excludes any distribution fees.

Okay, great. I'll jump back in the queue. Thank you.

Okay, Rob.

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

Thanks. Just had a couple questions, one on the Nipisi pipeline and the agreement that you hope to reach in Q3. What kind of structure are you looking at? Remind us if -- or can you comment on that?

I'm sorry. I don't understand what your question is with respect to structure?

Are we looking at some sort of similar agreement like what you reached with respect to Horizon, where you have level life cash flows over the time period, or if it going to be a cost of service or is it going to be a fee for service type of contract?

We are looking at a fixed return on investment over the term of the contract. So, it would be similar to what we have with Horizon, plus a flow through of costs.

Okay. And the capital cost -- I'm sorry, I'm not sure if -- is it still CAD $360 million or is it -- has it increased?

No, we actually increased -- I think in my comments I indicated that those costs that we now estimate to be closer to CAD $400 million for that project. And that's reflective of the increases that we're seeing in steel prices today, plus the essential delay of in-service on that pipeline until mid-2011.

I think we were looking at sort of fourth quarter of 2010, but that construction schedule has had to be delayed because, obviously, we don't want to -- or we can't do a lot of the work we want to do until we get executed contracts from our -- some of the customers.

Okay. And has that -- okay. I guess you're still negotiating, so we don't really know if that's changed your return expectations on the project.

Right. I think that's a fair comment to make.

Okay. And just on the internalization as a management expense. Does that reflect -- you booked an expense this quarter. Does that reflect the increase that you just announced today on the distribution?

Well, besides the -- the increase is tied to distributable cash, not distributed cash.

Okay.

So, it's -- that's the basis for the determination of the increase. And Peter, correct me if I'm wrong, but the forecast -- or the adjustment that was made in this quarter or -- yes, in this quarter was reflective of the fact that we're using the six month period of 2008 to say that -- let's duplicate that. And if we duplicate that, that would be the result that we get under the internalization contract.

Yes, I confirm that.

Okay. And how much is the deferred -- the estimated deferred payment? It's going to be paid out at the end of this year, is that correct?

Likely, early 2009.

Yes. I think probably after the audit is completed in 2009.

And do you have an estimate of what the total payment will be?

I don't know that we actually have that. I think that what we did say in the announcement to the -- and the report, I believe, we did provide a number.

In a note to the financials.

And which note is that, Glenys?

I think it's note two.

Note two? I think you can get it in note two.

Okay. Thank you.

You're welcome.

(OPERATOR INSTRUCTIONS.) The next question comes from Bob Hastings from Canaccord. Please go ahead.

Okay. Thank you. Just back on Nipisi, just to sort of understand all the remaining sort of hurdles and timeline. It looks like you're getting closer to it, but what exactly is left to be done, assuming you sign contracts with producers in the third quarter?

Well, I think it's just the finalization of the agreements, Bob. We've exchanged agreements with the founding customers. We just received some final, what I would consider to be minor comments back that we have to have legal counsel turn around and get back to our prospective customers.

And it's my understanding that we don't have any commercial issues outstanding here, Bob, that these are primarily minor legal matters that need to be remedied. And so, that's going to take a little bit of time here yet.

And I think it's just what we're dealing with, of course, as you all know, is we're in sort of a holiday season here. It's sometimes difficult to get everybody in the room at the same time. But these changes I would consider to be minor and will be resolved here very shortly.

Are there any regulatory or landowner issues?

Not at this stage, Bob. But we can -- what we'll be doing is conducting our typical landowner environmental sort of work here starting in the summer.

And so, we have done some preliminary work, but there aren't any issues that have been raised as yet on this initiative. We'll face all of the same sort of issues that you face on any pipeline expansion when you've got to deal with landowners and very, very interested parties. But we don't expect to have any major obstacles here, Bob.

It's not a power transmission line, thank goodness. Okay, one last question is in the Cremona event with the spill, you alluded to that there was a CAD $2.5 million charge for that and certain other non-recurring items or events. And I wasn't sure if the others were material or how many. Can you elaborate on that?

Yes. Bob, I'd say I would put it in the category of sort of CAD $1 million to CAD $2 million, in that range that we had -- we've got our vehicles underway at one of our pipelines and it's costing us more than what we had expected. And that's just largely due -- you go into a program and you don't necessarily know what to expect.

In this case, what the results of the repair work that we were doing turned out to cost us a lot more to repair. But we think we've addressed the higher cost parts of that program sooner than later. So, as a result, that did impact the results in the quarter. But we expect those costs to level off over the balance of the year.

Okay. And do you get -- once they're in, do you get a return on that cost base?

When we set our tolls, Bob, we generally base it on what we expect our costs to be. So, when we set the toll increase for Peace Pipeline, for example, in 2008 it would have been based on the anticipated costs that we expected to incur on the repair program. Costs have come in higher than expected, so we'll have to review that issue when we look at addressing tolls for 2009 and beyond.

Right. So, it's not a continuing problem, it's just sort of the one-off impact for this year.

That's right.

Hopefully.

Yes.

Okay. Thank you very much.

Okay, Bob.

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

Just a follow-up question on the gain on the sale of the oil inventory. Did that have an impact on the future income tax expense at all?

Yes, it would have, Fai. But don't ask me the amount.

I was just going to ask you--.

--It's a fairly detailed calculation. But it would have. Anything on our income statement obviously impacts the FIT number.

Okay. Thanks.

Your next question comes from Tony Courtright from Scotia Capital. Please go ahead.

Thank you. A follow-up. On the mixed term in the marketing, your net operating income came in generally in line with your previous guidance for -- quarterized for the full year. Could you tell me whether the recent correction in the price of crude oil and natural gas is likely to change your outlook in terms of your full-year guidance for this segment?

I don't -- at this stage we don't see any significant impact, Tony. And I think we would stay the course on the previous guidance that we have provided at this time.

We do have -- as I mentioned in my comments, we do have other initiatives that we are -- that are being undertaken. And I've alluded to the truck terminals on the Peace Pipeline system, which we expect to generate about CAD $1 million a month, more than what we had earned in the first half of the year. So, that's positive.

So, I think, like in anything, you have some fluctuations in that business, but we don't see any material fluctuations between now and the end of the year.

So, it's more in relation to the differentials rather than the absolute levels, although the absolute levels might have some bearing in terms of contribution, but not overall for the segment.

That's absolutely right.

Alright. Thank you.

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

Hi. Good afternoon. Just looking at your updated segment (inaudible) capital expenditure guidance that's posted on your website--.

--Yes.

The Midstream & Marketing business CapEx has moved up margins. Is there additional activity you can speak to related to that?

I'm going to get Peter to speak to that.

We have some additional length to what you see of potential purchases in there for the increase in [Valley] system. So, a CAD $12 million estimate in there but we're not sure what that's going to cost us right now. And so, that's really the bulk of the increase.

Okay. Thank you for that. As well, you spoke about prospective opportunities across all your business segments and were close to expanding the Oil Sands & Heavy Oil Infrastructure division. But I was wondering if you could speak about opportunities you're seeing in the Conventional pipeline operations, if there's any significance there, maybe expansions.

Yes. I can't speak specifically to them. I know we're in discussions with a potential partner that may -- where maybe to look at consolidating some of our operations in areas we provide service. And that, combined with modifications that they can make, will enhance the productive capability -- the production potentially that may come out of that service area.

It's going to take a number of months to develop. So, I've got to say, at this stage that would be something that we might look at as seeing an impact mostly in 2009 versus 2008. So, it isn't imminent, but it is something that we're working on.

And of course, we are still seeing impact that comes from new connection requests. We're putting in new pumping facilities at one of our locations, or a couple of our locations, to deal with increased volumes coming our way.

So, it's those sorts of developments that are going to take place. There aren't any homeruns here, though. These are modest ones, 2,000 barrels a day sort of events. Maybe as much as 8,000 to 10,000 barrels a day if you're looking out to 2009. But generally speaking, it's positive.

Okay. Thank you for those comments.

You're welcome.

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

Okay. Well, thanks for participating. If you do have any follow-up questions, we are available to take them. Thank you for participating in the call. We look forward to talking to you again at the end of the third quarter.

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