Pembina Pipeline Corp (PBA) 2009 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen and thank you for standing by. Welcome to the Pembina Pipeline Income Fund Q2 results conference call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questions. (Operator Instructions) I'd like to remind everyone that this conference call is being recorded on Wednesday, July 29, 2009 at 4:00 p.m. Eastern Time.

I will now turn the conference over to Peter Robertson, Vice President of Finance and Chief Financial Officer. Please go ahead, Mr. Robertson.

Thank you, Yvonne. And good afternoon and welcome to today's conference call and webcast. To review Pembina's second quarter and first half 2009 financial and operating results. I will be filling Bob Michaleski today. Joining me as always is Glenys Hermanutz, Pembina's Vice President of Corporate Affairs. We also have Mick Dilger, Pembina's Chief Operating Officer, and Stu Taylor, Vice President, Gas Services with us today.

During the call, we will review the information released this morning, provide our outlook for the second half of the year, and then open the line up for questions. Please note that Mick and Stu, our resident experts on our recently acquired gas gathering and processing facilities are here to help with inquiries related to those assets.

As always, I'd like to remind you that many of our comments today may be forward-looking in nature and are based on Pembina's current expectations, estimates, projections, and assumptions. Actual results could differ materially from those expressed or implied by those forward-looking statements and information. For more information about those risks, please refer to Pembina's annual and interim reports, which are available online both at Pembina's website and at the SEDAR website.

I'm going to assume that everyone on today's call has received and read our second quarter report. So, I'll just quickly provide an overview. I want to spend most of our conversation today providing you with an update on our operational priorities, progress we're making on our growth projects, and the integration of our recently acquired assets, the Cutbank Complex, gas gathering, and processing facilities.

Let's start with a quick look at our second quarter results. Net revenue generated by our operations during the second quarter were at CAD 121 million, met our expectations and represents an improvement over the second quarter of 2008 when net revenues totaled just over CAD 105 million.

Year-to-date net revenue of just over CAD 237 million is 12% higher than a comparable period in 2008. During the three- and six-month periods ending June 30, 2009, net operating income was up approximately 18% and 10% at CAD 85 million and CAD 157 million compared to CAD 72 million and CAD 143 million for the same period in 2008. The biggest contributor to this increase is with our oil sands and heavy oil infrastructure business, which saw revenues more than double over the same period in 2008. Primarily the result of contributions from our horizon pipeline that provides service to Canadian national resources oil sands operations.

Increased midstream activity at the Peace truck terminals and improved midstream results from the Drayton Valley and Swan Hill systems together with incremental revenue contributed by the Cutbank Complex of the growth improved financial performance.

Net earnings, which totaled approximately CAD 37 million during the second quarter of 2009 compared to CAD 42 million during the same period last year. Prior year results were impacted purposely by a CAD 15 million after tax gain on sale of linefill.

Cash flow from operations however was CAD 49 million during the second quarter, compared to CAD 68 million in 2008. There are a few contributing factors to this decline.

Our midstream and marketing business has been challenged and impacted by the year-over-year decline in both commodity prices and crude quality differentials. Increased activity in this business unit and revenues generated by the Cutbank Complex will assist in partially offsetting the impact of these variables.

Reduced production from our conventional oil customers as a result of weaker energy and credit market conditions has impacted throughputs on our conventional pipelines. Also, we've been seeing higher operating costs, which is primarily a reflection of expansion, upgrades, and increased maintenance activities.

Can't influence commodity prices or the production plans of our customers, however we can strengthen the value we generate for investors by focusing on what we can control. We're working to reduce operating expenses and labor at the downturn in the economy to take advantage of lower capital and labor costs. We'll continue to identify smaller scale pipeline projects that enable us to generate attractive returns with low capital investments.

We're constantly focused on operating in a safe, reliable, and efficient manner because it drives customer satisfaction and helps keep costs under control.

And last, but certainly not least, we're making significant progress on our major growth projects, and as I say in Mitsue pipelines, which are expected to boost earnings in cash flow and generate strong returns for investors for the long-term.

In March, our Board of Directors approved a proposal to expand the design capacity of the Nipisi pipeline by boosting capital to CAD 440 million from the original estimate of CAD 400 million. You can add 100,000 barrels per day more ultimate transportation capacity to the Nipisi pipeline to meet customers' demand as it materializes.

Project consultation and preliminary engineering work is well underway and we submitted regulatory applications in May of this year. Pending regulatory approvals, we're on schedule to have both pipelines in service by mid 2011.

During the quarter, we financed the CAD 75 million in maturing notes and accessed the debt and equity markets to finance the Cutbank acquisition. This demonstrates market confidence in Pembina and its business plan.

In mid July, we also filed a base shelf prospectus that will facilitate future equity issues and provide an additional source of debt financing in the public markets.

Continuing support of Pembina's unitholders, participating in the premium DRIP will help provide that equity financing required to fund the Nipisi and Mitsue pipelines.

Also of note during the quarter, Standard & Poor's and DBRS both confirmed Pembina's investment grade ratings following the Cutbank acquisition.

Now, let's turn to a recent acquisition of the Cutbank Complex gas gathering and processing facilities. We are very excited about this opportunity. The facilities integrate well with our existing operations and they're a nice fit with our strategic plan. Enhancing profitability through business flexibility and asset diversity. We're already seeing this value. In June, Cutbank added over CAD 2.8 million in net operating income.

Integration is going well. The gas services team is preparing for determination of the transition agreement with Talisman scheduled for August the 2nd. And is in a good position to safely and efficiently take over complete physical and commercial operations. Staffing to support the new business is nearing completion.

We're very happy to welcome Stu Taylor, a recently appointed Vice President, Gas Services, as well as 16 new employees to Pembina. We are excited about the opportunities that Stu and his team are pursuing to grow this new business.

Since 2000, the compound annual growth and throughput at Cutbank has been 21%, which demonstrates the success of the facilities in capturing new volumes and expanding to meet the needs of the producers in the area. Capacity exists in the complex as a result of recent expansions and the interconnectivity of the three process plants to accommodate production growth in the area. Bill and his team are already in discussions with a number of area producers to review their future drilling plans and locations and to assess the impact to the facility's capacity and timing of potential capacity additions.

That's a quick overview of operations. So, let's move, briefly, to an important piece of work being undertaken by my colleagues here in the Corporate Office. Converting from an income fund to a public traded-- publicly traded corporation. Although the date of conversion will be dependent on market conditions, it would likely occur during the latter half of 2010 and we're making good progress in ensuring the process will be a smooth one.

A key step to achieving that is to provide some level of certainty for investors. As mentioned previously, Pembina expects that if the current assumptions and projections are met, we plan to maintain our current level of cash distribution, CAD 1.56 per unit per year, to equity holders through 2013.

Solid sustainable results generated by Pembina's business, coupled with an anticipated increase in cash flow from capital projects currently under way, give us the confidence to provide this long-term forecast.

For more information, please review page 41 of Pembina's MD&A. Fine print makes for some good reading. Our balance sheet is strong, our operational and growth priorities are proceeding as planned, and we're making sustainable progress to grow our business and generate additional value for our investors.

With that, I'll turn it over to Yvonne the operator for questions.

Thank you. (OPERATOR INSTRUCTIONS.) The first question comes from Robert Catellier from Clarus Securities. Please go ahead.

Yes, thank you. I wonder if you could just quantify the increase in fees during the quarter to third party consultants and whether or not any of those relate to Cutbank?

Well, I can tell you that the only fees related to Cutbank would be legal fees relating to the transaction.

So, the --

And our total transaction costs on the Cutbank acquisition were -- I think they are disclosed in the notes of the financial statements. And I don't recall any specifically large payments relating to consultants in the second quarter.

Then with respect to Cutbank and the drilling outlook, on the one hand you have small capitalized drillers that are benefiting from some good hedge positions. On the other hand you have a full storage position with an uncertain outlook for the price of natural gas. I wonder what the major drillers in the area are telling you with respect to the upcoming drilling season. What activity level we might expect?

This is Stu Taylor. I'll take a shot a answering that. We held a number of meetings with our area shippers, not all of them to date. The price outlook they're forecasting is very positive. We talked to a number of them with an expectation that the price is going to increase as you move through.

They're beginning their operations, their drilling operations in the third quarter. We have some wells that have been drilled and are waiting to be tied in behind the complex, which we hope to have that accomplished in the fourth quarter. And then we'll begin through the winter drilling season to see activity increase. But they are all talking about positive price response at this point.

Okay. And just on the capital spending outlook, there's a pretty significant drop in the updated capital spending guidance, most of it related to Nipisi and Mitsue. And I wonder what you could tell us about your expectation for timing and if this is related to any process or regulatory delay for the project?

No change in plans there, just the refinement of the timing of our summer expenditures. Most of the capital will be incurred likely first quarter of 2010. For the balance of this year, we expect to be -- run just over the CAD 100 million mark in total for 2009. So, it's just a refinement on timing of the CapEx. No change in the project. No change in our expectations with respect to regulatory approval.

Okay. And your outlook for midstream in marketing, particularly the marketing. Do you believe will be any weakening -- further weakening in margins? Or do you expect any softness to be related to volumes and once we get capital spending back into the oil patch, do you expect those to stabilize?

I would expect the balance of the year to be somewhat similar to the first half. Yes, we recognize that yes, there is less money being spent in the basin and that obviously has an impact on our activities. And when the prices improve then our fortunes will follow suit.

Thank you.

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

Thank you. In respect of the conventional system you've suffered declines in throughput related, you suggest, to commodity prices. Is any of it at all attributable to attrition to other sources of transportation, such as trucking?

Well, we obviously rely on some-- the trucking industry to bring volumes to our system. It's a small portion of that. Some product has been cut elsewhere. There are clear volume declines certainly on our Drayton Valley system and the Mitsue production is lower. As I mentioned, there's less development and exploration drilling taking place in the province. And that is obviously impacting the decline rate has not been offset by new connections at this time. But we expect to see that recover perhaps as the pricing improves towards the end of the year then we believe producers will get back in track with their programs.

You've experienced and report quite a significant increase in your net operating margin per barrel on your conventional system due seemingly to reduce costs. How have these been achieved? And are they sustainable?

Some of that is sustainable. Some of it's more diligent and making sure that we really need to incur the costs. It's important that we operate the facilities efficiently and safely. And we were very cognizant of not compromising our integrity programs.

It's -- some of it is largely due to timing of expenditures as well. It's very difficult to forecast in a month-to-month basis when programs will actually be done. Priorities are always changing and some of the costs that we did expect to incur in the first half will be deterred to the second half and some into 2010.

Right. And just finally, a point of clarification in terms of a guidance of the sustainability of the distributions as a reference to the phraseology through 2013. And there's other reference to the phraseology of to 2013. So, is there any -- let that sort of (inaudible) --

There's no magic in the use of the words there. I mean we could be realistic. We can really only look forward say five years at a time. And we believe that the projects we have on file that we can maintain that CAD 1.56 over that period.

And just to be clear, the period then would be until 2014? Or to the end of 2012?

Well, I would say for the next five years.

All right, thank you very much.

Your next question comes from Matthew Akman of Macquarie. Please go ahead.

Thank you. Just first a question of clarification on the midstream and marketing business. Do the revenues and expenses in that business include or exclude the Cutbank Complex contribution?

It-- I guess it depends which numbers you're looking at. But we have included the revenues with the midstream function.

They are included.

Yes, so there's the CAD 4.4 million in revenue and net operating income about CAD 2.8 million related. But that only relates to one month.

Yes, I understand that.

(Inaudible)

Thanks, I understand that. And being with that business segment, when the expansion of the piece in Drayton Valley truck terminal facilities are in service, do you anticipate an increase in the operating income of this business?

It will slowly ramp up. We have to do some work in attracting volumes to those terminals. The facilities are now in place to a large extent, so we had to work hard at filling the capacity on those facilities. So, that will take some time.

Do you anticipate having to make significant other capital expenditures in this business to sustain the operating income of it?

Not for sustainment. We're continually looking at improvement projects to enhance the diversity of that business.

Okay, thanks very much. And my last question if I could, relates to the conventional pipeline business. The toll on the business overall has been rising with lower throughput. I'm just wondering what you think would happen if oil continues to rally and production increases and the throughput increases? Would you see a commensurate reduction back in the toll? Or do you think it would be sticky at this sort of CAD 1.60 level that it was sitting at in the second quarter?

It all depends where volume comes from. I mean we don't have a single toll over all of our systems. We have low-tier payers and high-tier payers, so a lot depends on the source of that volume and the cost structure in the facilities that that volume was connected to. So, it's a tough question to answer. And we would look at toll changes on a case-by-base basis, location-by-location.

I think in theory, though, if nothing else changed and volumes went up and costs were unchanged, as Peter indicated, they rarely stay unchanged and circumstances change, but if nothing else changed and volume went up, then there is the climate in which tolls could go down.

Okay, thanks very much for answering my questions.

You're welcome.

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

Thanks. Peter, in the press release is a reference to potential capital cost savings for Nipisi. And I'm just wondering if those cost savings could potentially affect the -- if they're down significantly they could affect that CAD 45 million of guidance that you provided in terms of return on invested capital. Or are the cost savings to your benefit?

The CAD 45 million is a fixed capital fee. So, any cost savings on the -- our investment in Nipisi is purely to Pembina's benefit.

Okay, great. And do you have an idea of how much potentially your capital cost savings that you could realize at this point?

That is difficult. We have not gone out to bid on the contractors for laying the pipe. To date we have ordered the pipe and we've ordered the pumps. And those costs have come in slightly better than expected.

The pipe laying contract is likely the -- one of the bigger components of the project, so it remains to be seen what benefits we'll achieve there. But we believe that the timing of ordering this contract is -- bodes well for cost reductions given the current environment. Of course that makes beginning to see a lot of appetite from contractors with interest in this project.

Great. Thank you.

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

Thanks. I noticed you have about CAD 571 million drawn on your credit facilities with still some room, but less than room than not. I'm wondering what your plans are for permanent financing? Would that be all debt termed out? And what do you think your debt interest rate would be if you were to term it out today?

Well, yes, we've got about CAD 129 million available in our facility today. We will likely term out some of our debt. 10-year money today we're getting quote about 300 to 325 basis point above the 10-year candidates. So, that puts it in a high 6%.

Okay, and would the plan be to use debt only to term that out? Or would I guess some of the DRIP or other sources of equity like asset divestitures or something also be considered?

Well, the DRIP is continuing. We're getting good participation in the DRIP. And that has always been part of our plan to raise equity for these types of projects like Nipisi using -- utilizing our DRIP program. It's unlikely that we'll do any equity other than our DRIP. So, any terming out of our bank facility will be in the debt markets.

Okay, thank you. In your discussions there's a mention of the oil sands and heavy oil infrastructure opportunities that you're still exploring. Can you provide some more color on the nature and timing of those opportunities that you're exploring?

We'd like to, but I think it'd be most appropriate if you looked at disclosures by CNRL or COSI in the case of same crude for that guidance. Those would be two natural growth areas for us in the future.

Okay, and anything else?

Not at this time, no.

Okay, thank you.

You're welcome.

(Operator instructions) Your next question comes from Bob Hastings of Canaccord Adams. Please go ahead.

Thank you. Most of my questions were answered, but just in terms of the CO2 projects that you've been looking at and you said you've had some discussions. Can you put any kind of sort of time frame or triggers that you see there that would get something moving for you?

It's next year. I think the place to look there is with the provincial funding for CO2 initiatives. I think when you see -- I think they're talking about CAD 3 billion or so released over a multi-year time period. When you see some of that money get earmarked and released, I think it'll provide a lot of guidance around what's going to happen when.

And what you're saying is that you'd be in that early threshold of receiving money and getting a project going? Or is it you've got --?

No, I'm not saying that. All's I'm saying is that all the identified major flood candidates sit on or around our existing pipeline system. So, at worst, we think we have a good opportunity to capture incremental oil volumes.

You're not specifically in a project now tied to one of the public entities out there?

We're working hard to be a front-runner in that business, but we have nothing specific to announce right now.

Okay, thank you very much.

Your next question comes from Bill [Sprouley], a private investor. Please go ahead.

Good afternoon, gentlemen. Thank you for taking my question. I'm reading -- considering that there's a lot of concern about the possibilities of a major long-term drought in the prairies. And I'm wondering how that might affect your operations and income.

Drought report (inaudible).

Drought, water. No rain.

Well, that -- if our -- some of our customers, our producers are using water for certain aspects of their operation, then at perhaps in the long-term it may affect our operations too. But we don't have any specific intelligence with respect to any impact on us or even our producers at this stage.

All right, thank you.

We have no further questions at this time. Please continue.

Thank you, Yvonne. And thank you all for participating in our second quarter call. And we look forward to further discussion at the end of October for our third quarter report. Thank you very much.

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