Pembina Pipeline Corp (PBA) 2008 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Pembina Pipeline Income Fund Third Quarter 2008 Results Conference Call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct our question-and-answer session. Instructions will be provided at that time for you to queue up for questions. (OPERATOR INSTRUCTIONS.) I would like to remind everyone that this conference call is being recorded on Thursday, October 30, 2008 at 11 AM Mountain Time.

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

Thank you, and I guess, good morning for those who are in western Canada and good afternoon for those who are in eastern Canada. Joining me today to discuss Pembina's third quarter 2008 operating and financial results are Peter Robertson, Pembina's Vice President of Finance and CFO, and Glenys Hermanutz, Pembina's Vice President of Corporate Affairs.

Following my review of the quarter, I will provide an update on our outlook for the remainder of 2008 and new developments underway at Pembina which will lead us into 2009. After I have concluded my comments, I will open things up for questions.

Now, as many of my comments today will be forward-looking in nature, Pembina's legal counsel has asked me to advise you of the following. The actual results could differ materially from our conclusion, forecast, or projection in the forward-looking information. Certain material factors or assumptions were applied in drawing a conclusion or making the forecast or projection as reflected in the forward-looking information. Additional information about material factors that could cause actual results to differ materially from the conclusion, the forecast, or projection in the forward-looking information and the material factors and assumptions that were applied in drawing the conclusion or making a forecast as reflected in the forward-looking information is contained in the third quarter interim reports to unit holders, which is available both at the Pembina website and at SEDAR.

Now, turning to the third quarter operating and financial results, but before I delve into the operating and financial results for the business, I wanted to basically discuss what I see as the significant accomplishments during the quarter.

First, Pembina increased its monthly distribution rate in August to CAD0.13 per trust unit, or CAD1.56 per trust unit on an annualized basis. I see this as evidence of Pembina's continuing ability to meet its commitment to provide steady and sustainable growth to unit holders. From inception in late 1997 to the end of the third quarter of 2008, Pembina has distributed a cumulative total of CAD1.16 billion, or CAD11.88 per trust unit, on a CAD10.00-per-unit original issue price. The quality of our existing portfolio of assets, together with our inventory of growth opportunities presently under development, supports this recent increase.

A part of my discussion today will focus on the future sustainability of Pembina's distribution on a go-forward basis. Further, on expansion opportunities, the fund announced on August the 12th that its wholly-owned subsidiary, Pembina Pipeline Corporation, is proceeding with the construction of two pipeline systems, the Nipisi and the Mitsue pipelines, at an estimated capital cost of CAD400 million. I will provide further details on the status and development of this project a bit later in the call.

Now with the financial operating performance for the quarter. All three of Pembina's business segments contributed to solid financial and operating results. Cash distributions for the quarter of CAD50.7 million represents a 10% increase compared to CAD46.2 million in Q3 2007. Net earnings of CAD48.1 million for the quarter and CAD122.8 million year to date represent substantial increases of 27% and 14% over the comparable periods of 2007, driven largely by one-time events.

Crude throughputs on our conventional systems averaged 430,441 barrels per day during the quarter, marginally lower than results posted for the comparable period in 2007, and due in large measure to a service outage on the Cremona system over much of the quarter.

Net operating income, in contrast to the CAD115.5 million year to date, was slightly higher year over year. The increase is primarily due to total adjustments negotiated and implemented in some of our conventional systems earlier in 2008.

Beginning July the 1st, 2008, the Horizon Pipeline began earning revenue under the Transportation Service Agreement with CNRL. Net operating income generated under the interim tolling arrangement was CAD3.2 million during the quarter.

Before we turn, our rate base will commence under the contract on November 1 of 2008. As a result of the contribution of the Horizon Pipeline, net operating income generated by the oil sands and heavy oil infrastructure segment increased by 31%, from CAD9.8 million during the third quarter of 2007 to CAD12.9 million in the same period of 2008.

And the midstream and marketing business had an excellent quarter, contributing CAD26.1 million in net operating income during the third quarter, a 40% increase over the same period of 2007. Year-to-date operating income of CAD73.2 million is up 41% from the first nine months of 2007. The majority of the increase can be attributed to the ongoing development of services offered in the Swan Hills, Cremona, Drayton Valley, and Peace Pipeline systems.

Turning to our development capital program, capital expenditures during the third quarter of CAD14.6 million were significantly less than the CAD62.4 million expended during the third quarter of 2007. This variance is primarily due to the completion of the Horizon Pipeline.

Pembina's payout ratio for the nine months ended September 30, 2008, was 97%, approximately 5% higher year over year. Full year payout ratio for 2008 is estimated at 90% compared 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 30.2% at the end of September of 2008. As such, we are confident that our financial capacity is sufficient to fund the pursuit of new developments and expansions as they arise.

While recent upsets in the credit and equity markets have been challenging, Pembina believes it is well positioned, both financially and strategically, to execute its business plan. We presently have CAD140 million in undrawn facilities under a CAD500 million credit facility. In our interim report to unit holders, Pembina signaled its intention to reinstate our DRIP program effective with the October 2008 distribution. We believe that our existing credit facilities, together with the expected DRIP proceeds, will fund our immediate requirements and that additional credit will be available to Pembina to fund its ongoing capital program.

I'll now provide an update on new developments underway at Pembina. As I've already mentioned, Pembina is proceeding with the construction of two pipeline systems, the Nipisi and the Mitsue pipelines, at an estimated capital cost of CAD400 million. Both of these pipelines are contracted under long-term agreements. As of mid-September, Pembina launched a public consultation process, conducting open houses along the proposed pipeline route, and initiated discussions with First Nations, governmental agencies, and other key project stakeholders. Feedback relating to the proposed pipeline regarding traditional land use, environmental impacts, and other aspects of the project that are gathered through the consultation process will be incorporated into project planning.

Pembina continues to assess shipper demand to determine the feasibility of expanding the planned capacity of these systems to better serve customers in the Nipisi Lake and Seal area.

Another key development during the quarter relates to Pembina's estimation of the sustainability of its distribution and consideration of the impending taxation of SIFT entities commencing in 2011. Pembina has completed a detailed review to determine the best path forward for the fund and its stakeholders. And at present, Pembina expects that the conversion to corporate form during the latter half of 2010 is the most probable outcome. Based on current conditions and Pembina's internal review, we believe Pembina is in a position to maintain its current per-unit level of cash distributions to unit holders post corporate conversion in the form of a dividend and into the foreseeable future, including the period in which Pembina will begin to pay cash taxes, currently estimated to be in 2013.

So for clarity, we are saying we are able to at least maintain distributions of CAD1.56 per unit after we become taxable in 2013. (Inaudible) its sustainable results generated by all three of Pembina's business units, coupled with an anticipated increase in cash flow from capital projects currently underway, lends confidence in Pembina's ability to maintain the distribution rate through corporate conversion and the onset of taxable status.

I would like again to direct participants' attention to the forward-looking statements and information contained on page 12 of Pembina's Third Quarter Interim Report for discussion of the assumptions and risks associated with the plans I've outlined.

I would like to conclude my comments with a brief discussion of Pembina's business and operations outlook. The production potential of the oil sands remains a focus of industry and an area that presents attractive growth and expansion opportunities for Pembina. Although current conditions may push certain producers' planned oil sands development into the future, Pembina is well positioned to capture opportunities in this area as they arise. Our uniquely positioned infrastructure and operating experience in this region supports the further expansion of Pembina's business interest in this area. We look forward to the commencement of operations on the Horizon Pipelines, and we will maintain our focus on development opportunities related to our oil sands and heavy oil infrastructure segment throughout the remainder of 2008 and into 2009.

The scale of our conventional pipeline operations provides Pembina with a substantial inventory of internal growth opportunities. This segment generates long-term, stable cash flows, and Pembina will continue to pursue opportunities and efficiencies that serve to add value to stakeholders and unit holders. We plan to further expand the scope and range of service, or the new services offered by the midstream segment, which represents the fastest-growing segment of Pembina's operations. We believe that Pembina, with its existing asset base, along with the plans I've outlined for growth in both oil sands and heavy oil infrastructure and the conventional segments, is uniquely positioned to capture additional midstream opportunities as we move towards 2009 and beyond.

An example of initiatives currently underway in this unit includes hub development, terminaling facilities, and other ranges of services.

In closing, Pembina will continue to build on its good strategy. We will continue to identify and examine new ways to diversify our business, generate cash flow from existing assets, and increase our opportunities to service the developing oil sands and heavy oil sector. We would like to thank you again for participating in the call, and I will now turn the call back over to the operator so we can open it up for questions.

Thank you. (OPERATOR INSTRUCTIONS.) The first question comes from Linda Ezergailis from TD Newcrest. Please go ahead.

Thank you. I appreciate the updated views on 2011. But just to clarify, have you put any thought to what an appropriate capital structure might be as a corporation in terms of amount of leverage that might be appropriate?

Peter will answer that question, Linda.

We think under a corporate structure that additional leverage could well be appropriate, maybe up to the 60% range compared with where we are today.

Okay. And then maybe I could follow up afterwards with Glenys, but based on my understanding of the drawdowns in the various UCC classes you have for your tax pools, I show you paying cash taxes before 2013. So maybe we can have a discussion, Glenys, offline on that? Or I don't know if you want to talk a little bit about your assumptions related to cash taxes on the call.

I'd be happy to discuss that with you later.

Okay. And just another kind of clarification question. My understanding, based on, I guess, your press release in August related to Nipisi and Mitsue, was that CNRL and EnCana had contracted 80% and 50%, respectively, on that, as well as Pembina Marketing Unit. Has there been any additional contracting on that? Your release today talks about those being contracted with just CNRL and EnCana, and you're kind of silent on the Pembina Marketing.

Yes, I think, Linda, it's fair to say that we continue to have discussions with other producers in the area. And in fact, those discussions are quite encouraging. And when I say encouraging, what we are looking at doing potentially here is actually having an expansion of the base program. So those discussions will continue, and we're quite optimistic that not only will we have Pembina Marketing capacity taken up, but we'll have sufficient capacity to justify us building a slightly larger pipeline.

Okay, but there's been no additional contracting on the existing planned Phase One of Mitsue and Nipisi since August?

That is correct.

Okay. Thank you.

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

Sure. Just as much as you've given guidance, I just want to make sure my understanding is correct. You've indicated the terms of distribution that you believe you have the capacity to continue to distribute CAD1.56 as dividends through 2013 and even beyond, once you become taxable?

That's based on our forecast today. That's right, Tony. But you've got to remember, too, and that's a pretty bold statement, but I'm saying that's an estimate that we've got here for at least five years beyond 2008. And we have not factored in any other development initiatives other than the Nipisi Pipeline and the end service of the Horizon Pipeline. So that's assuming we don't do anything other than those projects. That's what we're saying.

Right. And would that be pretty much at the rim of your penny in terms of distributing all of your cash flow at that juncture once you become taxable? Or particularly, once you become taxable, is there envisaged to be a reduction in the distribution?

The answer to that is no.

Okay.

We're not, even at that stage, we don't estimate that we're distributing 100% of our after-tax cash flow at that stage.

All right. In terms of your midstream and marketing segment, net operating income guidance previously given, has that likely changed at all, given developments in the oil prices?

I'd say the--no, it hasn't, Tony. We've had probably a bit of a delay on the start-up of some midstream activities on our Peace Pipeline system, so we will be slightly below our budget, but it's not off the previous guidance.

So the drivers here, you've indicated are volume, absolute price levels, and differential price levels?

That's right.

And so the absolute price levels haven't had such an impact to delay or to materially alter your previous guidance?

No.

Finally, Nipisi-Mitsue, you've indicated that they are subject to certain conditions. No sense of the two major anchor shippers deferring any of their wish to see this coming online by mid-2011?

No. In fact, they probably would like to see us complete that pipeline sooner, if we could.

Right. Okay. Thank you.

You're welcome.

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

Hi. Good results, but sorry to stay on the same focus as some of the other analysts, but just to be clear on it. The Mitsue and Nipisi lines, if there was any problems in accessing capital in the financial market, do you have the flexibility to delay the start?

We have a requirement to start with a certain length of time following regulatory approval, Bob. It is not our expectation to me that we're going to have any issues with respect to raising capital for the finances and industry project.

No, and it wouldn't be my expectation, either. I just wanted to ensure that, if required, you'd have some flexibility without having to pay a substantial penalty of some sort.

We're well underway now, Bob. I think that, as we mentioned on the conference call, that we started on the public consultation work. We expect to have our regulatory application filed in February and have regulatory approval-—sorry, February 2009, and have regulatory approval by the end of 2009.

We will be ordering all of the long-lead items early in 2009 with expected delivery later in 2009 to allow for two winters of construction. So the project is geared up to go, and we're pretty enthused about the project, because we think its base project is excellent, Bob, and I still think that there's a good probability that we'll be able to actually upsize the project and generate even better returns than what we projected in the public with respect to the base project.

Right. Now, we're also hearing and seeing that some costs of the projects are declining in terms of input costs, labor--maybe even labor--but right now, certainly in the materials side. Are you seeing anything, and if that is the case, does that improve your economics, or does that go through to the shippers?

You know, Bob, I think it's too early stages there. We're looking at what it might cost us for steel, as an example. And we're not seeing a significant variance from what we anticipated even three or four months ago. But everything is changing so quickly here as well. So if anything, if costs do come down, clearly that improves the economics of the project.

And to your benefit?

Yes.

Oh, okay. Going back to the SIFT tax and the conversion, talking about the tax, what could change your date of taxation? New projects, an upsized project here, or what are the other metrics that you see impacting this?

Well, I guess it's just we do anything other than what we've got planned, and we are generating internal tax losses at this stage, Bob, with our existing structure, and I don't believe that we'll have a chance to materially change that. So yes, if we do other projects that we're not aware of today. That may have an impact. But I don't expect it's going to be a material impact, Bob, because we are highly, we do become highly taxable. We generate a lot of cash flow, and so we'll utilize the tax losses that we're generating plus our UCC pools fairly quickly. But we still think we're going to have at least two years of tax-free status as a dividend-paying corporation.

Does that imply conversion, then, in 2013?

No, we'd be converting before the end of 2010.

Okay.

And the reason for that, Bob, and if we stay as a trust and pay the distribution tax, it's going to be much higher. Well, we'd have to pay it, where we don't have to pay corporation tax.

Right. Okay. And are there any changes in terms of your midstream business? You're still pursuing things and looking at opportunities. Are you seeing any changes in the marketplace yet in terms of the number of opportunities or the risk level of opportunities?

You know, Bob, I think we're getting close to reaching maturity in that business with the existing operations. We do have a number of initiatives we still have underway in 2009, that some of them may not be completed until late 2009, so we should be able to generate some additional cash flow from that business over and above our 2008 numbers in 2009. But beyond 2009, I think we're in a position that we've got a fairly mature midstream business, and we'll be looking at other opportunities to find ways to make more money in that business.

When you say look for other opportunities, do you mean outside of the liquid side?

Yes, it could be that we still could look at other vertical integration strategies that may be available to us. So again, those will be on the horizon, Bob, but certainly, I wouldn't be forecasting any new developments at this stage. We'll provide guidance as we move through 2009.

Okay. Thank you very much.

Thank you, Bob.

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

Thanks. My understanding is even though crude oil prices have come down, the differential between the different crude types has not changed significantly. Is that your expectation going forward, just given what you've seen so far in the crude oil environment?

Yes. You know, I think that probably would be our best estimate today, but so we're still looking at pretty solid midstream operations through the balance of this year and into 2009, notwithstanding the fact that commodity prices seem to be moving on us. But it has become relative pricing, and so no, I think that we've got pretty solid results for this year, and our expectations for next year will be just as solid, if not better.

Okay. And I might have missed this, but do you have a target for your DRIP program?

When we had, our DRIP program was running--let's say, I'm not sure how long ago. We curtailed it. But we're on track to raise up to CAD100 million per year under that program. I think right now our internal forecast, which suggests that we look at raising CAD50 million a year under that program, just because we don't know what's happened to our unit holder base. So it may take us a couple of months--two to three months--before that gets sorted out. But I think if you're looking at a run rate, CAD50 million per year would be a good number to use.

And how long do you expect to have the program in place for?

Our internal estimates at this stage would suggest maybe three years, Fai.

Three years? Okay, thank you.

(OPERATOR INSTRUCTIONS.) Your next question comes from Tony Courtright from Scotia Capital. Please go ahead.

I just want to come back to this guidance issue one more time. You've indicated you have the ability. Do you think it's likely that you would maintain a distribution? I mean, "able" is different than wanting or choosing to maintain a distribution at comparable levels.

Let me see how I can make that clear. We're saying we're going to maintain our distributions at CAD1.56--at least CAD1.56 per unit per year until 2013, when we become taxable. And I'm saying that we can maintain that level of distribution even beyond 2013 when we are taxable.

All right. Thank you.

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

All right. Well, I'm hoping that the guidance has helped the interested parties here understand what Pembina's position is with respect to our go-forward position. I think clearly we're saying that it's highly likely that we'll convert to a corporation, and that will be by the end of 2010, that we are in a position to be able to maintain our distributions beyond that at the current levels and maintain our dividends beyond that at current levels, even after we've become taxable. So that's the position that we're leaving with you.

I think it's also fair to say that that's based on our best estimates today, and Pembina management will continue to find ways to add value for our unit holders, and if we continue to do that, there is an opportunity that we may be able to see improvement in that position. But at least we're giving you substantial guidance with respect to where we're going.

So if you do have any other questions, by all means give us a call, and we'll chat with you then. Bye now.

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