Pembina Pipeline Corp (PBA) 2009 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Pembina Pipeline Income Fund third quarter results conference call. At this time, all participants are in a listen-only mode. (Operator Instructions) I'd like to remind everyone that this conference call is being recorded today Thursday, October 29, 2009 at 11:00 a.m. Eastern Time.

And I would now like to turn the conference over to Mr. Bob Michaleski, President and Chief Executive Officer. Please go ahead, sir.

Thank you, Operator. Good morning, and welcome to today's conference call and webcast to review Pembina's third quarter and year-to-date 2009 financial and operating results.

Joining me today are Peter Robertson, Pembina's Vice President of Finance and CFO and Glenys Hermanutz, Pembina's Vice President of Corporate Affairs.

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 these forward-looking statements and information. For more information about these risks, please refer to Pembina's annual and interim reports, which are available both online both at Pembina.com and SEDAR.com.

I'm going to assume that everyone on today's call has received and read our third quarter report. So I'll just quickly provide an overview and then we'll open up the line for questions.

Let's start with net earnings, which at first glance appear to be down when compared to the results generated in 2008. What I want to point out is that last year's net earnings benefitted from a bit of an anomaly. Line field sales that occurred as we prepped the Horizon pipeline for commissioning resulted in a one-time after-tax gain of CAD15 million during the third quarter of 2008 and CAD30 million during the first nine months of 2008. If you exclude the impact of this extraordinary circumstance net earnings increased nearly 36% during the third quarter as compared to the third quarter of 2008 while year-to-date earnings in 2009 would have been up nearly 18% compared to the year before.

Net operating income during the third quarter totaled approximately CAD92 million, up from the CAD77 million generated or earned during 2008. This increase primarily reflects strong returns generated by our oil sands and heavy oil business, which realized increases in both third quarter, and year-to-date, and operating income. Operating the Horizon Pipeline on behalf of our customer Canadian National Resources Limited has, as we promised investors, made a significant and positive impact for our financial results.

Although our oil sands pipelines were the big drivers through net operating income, we did see contributions from our other businesses. Steady, reliable operations in our conventional pipeline business helped reduce -- pardon me -- helped reduce operating expenses while the Cutbank complex gas gathering and processing facility acquired in June introduced a new source of revenue for our midstream and marketing business unit.

Combined, these positive factors helped offset the impact of lower pipeline throughputs on our conventional pipelines, which were down by approximately 10%. While the majority of Pembina's businesses have relatively low commodity price exposure, our conventional pipelines are sensitive to production declines. And as we all know, production levels have dropped over the past year as the energy sector responded to the challenges created by a new Alberta Royalty regime, softer commodity prices, and difficult access to credit.

While both the price of oil and gas appear to be on an upswing, I expect higher rates of production and in turn, more demand for Pembina's conventional pipeline services in the coming years. Now remember, oil production does not flow at the flick of a switch and upstream producers may still be cautious given all they have encountered over the past year.

That said I have a very optimistic view. Stronger commodity prices, combined with Pembina's work to reduce operating expenses should have a favorable impact on our financial performance over the long term.

And since we're assessing what the future may hold, let me briefly talk about our major growth projects, the Nipisi and Mitsue Pipelines, which are expected to be placed in service in mid-2011. Both projects are on budget and on schedule with detailed engineering nearing completion. Stakeholder and Aboriginal consultation is ongoing, and Pembina has submitted regulatory applications.

So far no major issues have come out in the regulatory review process. Pending successful completion of the review, we would expect approvals to proceed in the fourth quarter. Once placed into service, I expect these projects to boost earnings and net operating income for our investors for many years to come.

On Tuesday, we announced the private placement of CAD260 million in 10-year senior unsecured notes at a fixed interest rate of 5.91%. We expect to issue the notes on November 18th, and net proceeds of the offering will be used to repay existing bank debt and for general corporate purposes.

This is yet another example of Pembina's ability to access capital markets at attractive terms while also minimizing the risks associated with potential increases in interest rates. This financing, together with proceeds from our DRIP, which has a current participation of 102 million units, will ensure a financing for the Nipisi and Mitsue Pipeline projects.

We also marked another milestone on Tuesday when we successfully completed a maintenance shutdown at our Cutbank gas gathering and processing complex. We had originally expected to spend a total of 30 days completing repairs to the facility, but were able to complete the work ahead of schedule and below budget. We are expecting the bonds -- the (inaudible) at the Cutbank complex will only be down approximately 10% for October and that revenues will not be materially impacted.

That brings me to my bottom line, Pembina's ability to deliver growth projects that generate long-term investment value. Our successful track record of delivering safe, reliable operations that generate reliable rates of returns, and our ability to maintain a group balance sheet that broadens both Pembina's investment options and financial flexibility are key business strategies that provide a firm foundation for converting our fund into a corporate entity in 2010.

Most importantly, I expect these business strategies will enable Pembina to maintain our current level cash distributions of CAD1.56 per unit through 2013.

With that, I'll turn the line over to you or the operator for questions. Thank you.

Ladies and gentlemen, we will now conduct a question and answer session. (Operator instructions) Your first question comes from Tony Courtright at Scotia Capital. Please go ahead.

Thanks very much. Notwithstanding a noticeable reduction in the volume on the conventional pipeline system, you achieved a remarkable reduction in your operating costs. Can you elaborate on what were the factors that drove that?

Yes, Tony. The -- we've been watching our operating costs here during 2009. We do have a significant number of projects that are somewhat discretionary in nature. They typically are related to inspection and repairs in our pipelines. We've had to, in some cases this year, we've actually had to accelerate some of the programs, but we've been also able to defer some of the programs into 2010. So it's generally related to what we call one-time costs associated with pipeline integrity. I think we're satisfied that we're doing all that we really need to do as far as operating pipelines are concerned, so we're not concerned about a deferral of costs into 2010.

Was power a contributor to your savings? Or --?

Power is hedged on our conventional pipelines until 2010, Tony. So it doesn't have an impact on our conventional business. Where it can have an impact is in our oil sands business because we do not hedge our power costs and they become a flow-through to our customers on the oil sands activities. So that the Horizon Pipeline, the Syncrude Pipeline, and I guess to a smaller extent the Cheecham Pipeline. Peter, is there anywhere else that we --?

Yes, we're (inaudible) on our BC cover either because of the regulatory nature of the power supply in BC. But certainly most of our Alberta connection requirements are hedged as Bob said at about CAD46 to the end of 2010.

Yes, we'll be looking at putting a base -- further hedges on our conventional pipeline power. Right now it -- I don't know that we're -- we're in a situation we're just continuing to monitor at this stage only because the prices still seem to be a little high relative to where we think they might be going.

Right. In terms of midstream and marketing, Cutbank complex was a major contributor, but the underlying preexisting businesses, the net operating income declined. Is that -- you've previously indicated you have about three drivers, volume, absolute price, and product price differential. What were the major -- in your analysis, variance analysis -- driver for the decline in the net operating income?

I think each of the items that you referred to, Tony, were the contributing factor. Differentials that remain narrow, volumes have come off, and margins -- the margins continue to be tight.

So your expectation is you're optimistic that there'll be a recovery in conventional volumes on -- with higher hydrocarbon prices but produces may like the spot price?

Yes, I think so, Tony. We've seen -- even like natural gas liquids volumes have been off this year and I think that's, in some cases, is because some producers actually have shut in their natural gas production. So the liquids that are associated with that gas obviously are not being produced at this time.

Looks like liquids pricings -- liquid pricing is improving. We are still seeing some drilling activity in our mature fields, but again they will take time to come back. And we've seen a sharper decline in our, for example, the Drayton Valley system largely driven by reduced drilling activity for even at the Nisku field. We are encouraged that people are now starting to use a multi-zone fracing in the Cardium Reservoir and it seems to be having some success. So it'll take time for that to return, Tony, but we're optimistic that we will see a recovery.

And just one final question. Just a matter of housekeeping. The Nipisi/ Mitsue, is that -- will all of that be classified as oil sands and heavy oil? Or some of it will be classified as conventional?

We're calling it all heavy oil at this stage. The answer is there's a bit of blend there because we're going to have -- we'll eventually have condensate that's moving off of our system up to that development, which is more conventional activity. But it's going to commingled with the heavier product and become a (inaudible) or heavier oil product moving back into the Edmonton market. So I think it's better to call it all heavy oil, Tony.

Great, thank you very much.

You're welcome.

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

Thank you very much. My questions are around your midstream plans. And now that you've integrated Cutbank, I'm wondering what your outlook is for acquiring other field plants in Alberta? Is that part of your strategy? Would you take on some frac-spread exposure in those kinds of assets? How aggressively do you want to grow this business?

Well, what we are hearing is that a number of producers have publicly stated that they intend to review a lot of their holdings in the infrastructure and processing facilities. So clearly I think there is going to be a fair amount of product on the market in the years to come. So our intention would be to continue to look at expanding this part of our business and so we clearly would be interested in what might be developing.

We're not at this stage looking at exposing ourselves to any frac-spread risk though on any facilities that we would look at acquiring or expanding for that matter. What we would look more likely to do is to acquire a fee for service type assets. So our growth -- we will continue to look at growth opportunities in the midstream marketing prior to our gas (inaudible) part of our business. We'll look at even possibly expanding some of our existing assets consider -- or to consider things like a deep cut so we can get additional fee for services as well as additional volumes on our conventional pipelines as well.

Are you concerned about, or how do you I guess -- how do you see the outlook for productivity in the field plants though? And I mean given that volumes have been in fairly steady decline, how are you going to look at valuation on those? Or I guess what's the opportunity in terms of growth and actually picking up quality assets?

Well, I still think there's still good opportunity out there. Like using -- we'll use Cutbank as an example. I mean our customers are still pretty active there. There's new volumes that are continuing to come on. We do have take or pay arrangements in place for a large portion of the volumes for the Cutbank Musreau catwalk facilities. So that's the type of business that we'll be looking at in terms of growing.

We're probably not as interested in some of the more mature processing facilities. We would look at things that are generally associated with continued drilling, particularly in the areas for -- using Cutbank as an example. Areas around there where there seems to continue to be increased drilling and successful drilling by the producers. So that's the type of asset we'll continue to look at.

Would you look at potentially growing organically in Northeast BC, which is a more prolific growth area?

Well, I guess it's -- a lot of it depends on the opportunity. So I think that there continues to be a lot of drilling in that area and to the extent that we can participate in the infrastructure development in that area, we will certainly look in doing that.

Okay. And one last question on a slightly different topic. Have you guys had a chance to examine the potential implications for your gathering systems of Enbridge's Southern Lights Diluent Pipeline coming in to Alberta over the next couple of years?

Well, that's a project that we certainly are aware of and interested in. We are looking at providing the diluent supply for some of the heavy oil producers in the Nipisi region. And so that is an opportunity that we see in front of us and one that we would like to pursue further.

So you see it as an opportunity more than a threat to the volumes on your existing system?

Yes, that's exactly right because the condensate that we currently produce, particularly on the Peace Pipeline system, we'll be looking at moving up to Nipisi region. But we feel that there will be a greater demand for condensate than we can supply off of our conventional systems. So we'll look at other opportunities to get condensate up into that region. And that may involve a new -- construction of a new pipeline to provide condensate service to that area.

Okay, thank you very much. Those are my questions.

You're welcome.

Your next question comes from Robert Catellier of Clarus Securities. Please go ahead.

Yes, I wondered if you've given any thought to the dividend payment once you confirmed whether that would be a quarterly dividend or a monthly?

Bob, I think -- or Rob, I think that we probably have not addressed it specifically. I think the one thing that we probably would like to do is our shareholders and unit holders have become accustomed to a monthly distribution. I think a monthly dividend if that can be arranged would be something that would make sense.

Yes, I agree. I think that's definitely the market's preference, particularly since there'd be arguably no incremental cost in doing so. You're already paying monthly.

Right.

Furthermore, just with respect to the capital spending, the updated forecast. Obviously the numbers are down. You're expecting to spend less than 2009. And giving the fact that you've signed the shipping agreements on Nipisi/Mitsue in what I would call a strong market environment, the strong cost environment, and those two numbers are forecasted downward. I'm wondering if you have some permanent cost savings in the capital expenditures for those projects? Or if it's just a question of timing?

No, actually, Rob, we do see some permanent savings here at this stage. I think conservatively we probably see a savings of somewhere between I'm going to say about 5% to 8%, something like that would be -- that would be permanent in nature. We still do have -- we've got a contingency in our cost estimates at this stage. So what we may find it as time passes there may be more cost savings to be realized.

I think at this stage, I think that we had our meeting yesterday and about 60% of the costs associated within a project have now been fixed. But we still have some exposure to variable costs on that particular project, but it's getting smaller and smaller. And Rob, I think it's fair to say that our timing has worked out to our advantage here. Net costs have come in on both pipe cost of construction and on facilities as well. So everything's working in our favor.

Okay. And just following up on Matthew's questions on the gathering of processing. The current facility or complex that you operate is basically a sweet gas facility. I wondered if you have any thoughts as to whether or not you'd pursue sour gas facilities as well?

I think, Rob, if they had features that are similar in nature in terms of the way the fee per service might work, or the way the contracts might work, we would certainly look at that. We'll look at -- really we'll look at any expansion in the gas processing facilities that meets -- really meets our investment criteria. In other words, it'd be something very similar to what we've accomplished with the Cutbank arrangement, Rob.

Right. So you don't see the complexities that go along with sour gas processing as a deterrent to investment opportunities?

I don't see it. Typically if we looking at -- going to look at it, Rob, we're going to look at acquiring the facilities and applying the people that turn the work there. So to the extent that the operation may be more complex, presumably the people will already be quite familiar with the operation of the facilities. So we don't see that as being a deterrent for us at this stage.

Okay, thank you.

Thanks, Rob.

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

Yes, thank you. Just clarify a couple of things first of all if I could. When you mentioned that you -- the power costs you had hedged in at CAD36 was that until December of 2010?

Yes, that's correct, Bob. Yes.

Okay, you're looking to extend it. Okay, thanks. And the first issues you mentioned then, the Nipisi and Mitsue Pipelines, you were still working with the First Nations on I guess agreement. How far along in the process are you? Are we done or --?

We're darn close, Bob. We've got -- there's in total there's 16 First Nations groups that we're dealing with. We've got arrangements in place with 14 out of the 16 and we're currently working with the last two. And we expect to see a favorable resolution of that within a couple of weeks or so. We're darn close.

Okay, great. Thank you. Going over to the cost side, did you given higher guidance from 12.3 to 13.3 or whatever it was of operating income. So that's a bit of jump. Looks like it's CAD3.5 million to CAD4 million and I think all coming in in the second half. You talked about cost savings elsewhere. What -- can you give us some idea of why the increase in the G&A? I know there used to be cost pressures in Calgary, but it sounds like some of them are coming off. And is that a good number to use going forward forever? Or what's going on?

Well, I know that certainly the one thing we have been doing here, Bob, is we have been continuing to expand our staff as we expand our business and business model. So for the second and third quarter, we added -- certainly we added people to (inaudible) capital assessing. We've added people who are (inaudible) the marketing business as well as actually some of our accounting staff as we've gone through a major systems conversion here that was completed in the third quarter. So I think we're staffing up for the future.

I would think longer term, Peter, what kind of guidance can we provide with respect to G&A?

It should level off from here on in I would expect, Bob.

Okay. Now I just knew that we thought it would level off before and it's jumped as it proportions. I know the numbers go up as you grow, I understand that. And a lot of the staff goes into actual operating divisions so it wouldn't' be in the G&A. But I just didn't know if the -- why the proportion would be rising.

I think part of it was that our net operating income was lower than we expected. It has been lower than we expected. I think with our midstream marketing contribution being down, our conventional business has been kind of holding its own and oil sands doing what it has been doing.

But I think, Bob, it's fair to say that our growth does come in sort of lumps here too. And so we generally find that we've got a -- we do have to staff up for the growth that we expect. We're only showing you the projects that we have here that we're working on currently. There are other projects that we can't discuss with you that we're working on that we need to staff for as well. And that growth, as I say, it can come in lumps, it could come in 2010 or it won't be until 2011. So it's -- really it's kind of a view to the longer term.

Your comment with respect to things in Calgary. I think the -- what we've observed is that we've actually been able to hire some high quality staff in this down turned environment here, so an example might be in integrity. I hired a senior fellow that comes to us that we might have not -- otherwise not have been able to hire six or nine months ago. So I think the overall quality of people available to work in a growing company has improved considerably as well.

Okay, that was a very good answer. Thank you very much. And just again, on the cost side. When you talked about some of the maintenance that's been avoided, how do you avoid maintenance and then not sort of rear its head in 2010? Is it just because of cost savings?

It doesn't -- to a certain extent, it can be cost savings, but I think really it's a matter sometimes of looking at the project and say, well do we really need to do the project this year or can we simply defer it until next year? And typically, I mean we do that pretty much every year as we go through the projects and we re-evaluate whether the maintenance is required.

In some cases actually, Bob, what you do find when you run your tools through the lines you expect certain results. And in some cases the results are actually better than what you expected. So it means that you can -- do actually do less repair work on a particular initiative at that time. Or you can actually find that the interval that you have to go back to do more repair work might be extended, because again the quality of the pipe itself may be better than expected. So there's a number of factors that we have to consider.

Okay, good. So it's not just push back into next year or the year after. Okay, thank you. And then the last one on cost was depreciation. It was down a bit, yet you've added in some new assets. So that kind of surprised me.

Peter, do you want to answer?

Yes, Bob, we did a review. Every year we do a review of our assets. This year we did a more extensive review in preparation of our FRx and the implementation of a new financial system where we broke down our assets by a more detailed component level that resulted in a review of the assets at a more detailed level, assigning different lifes to those assets.

And bigger picture though, is some of our -- our big lines, our Peace line, for instance, it was getting down to a level of say 20 years life left based on our existing depreciation method. And we thought that was far too aggressive, but the real life we thought was beyond that 30 to 35 years. So we thought it prudent to amortize the remaining lifes of those assets. So we're over a more realistic time frame.

Okay, that's great. Thank you. And just one last question on the midstream business. Just -- you gave us some good color in what you're looking at, et cetera. I've seen a lot of dungeons in the gas business and the liquids business. And every time the producers look at maybe selling off assets. And it's always a little disappointing once they're actually put up. But how do you protect yourself from maybe structural changes in the industry given share gas, gas closer to market? And maybe producers are selling out at a time when they're afraid the risks are getting too great in terms of being able to keep production going.

Yes, we -- those are all really good points, Bob. And that's obviously a very important consideration when we look at anything that we're going to do. So yes, we're not looking at buying assets where the producers don't have the confidence in the production of those -- going through those facilities. So we're only going to look at things that meet a lot of the same criteria that we've identified with the Cutbank transaction. So we'll be very mindful of exactly what you're -- the concerns you expressed, Bob.

I thought you would be. I just didn't know if you'd be able to put it into contractual terms as (inaudible).

Yes, well we hope can. That's certainly the way we like to operate if we can.

Right. Thank you very much.

Okay, Bob.

Your next question comes from Robert Kwan of RBC Capital Markets. Please go ahead.

Bob, you mentioned early on about you expecting improving market fundamentals price. It sounds like price might be kind of the first move on our mind, followed by volume and that improving over the next 12 months. Is that a fair characterization in that?

Yes, I think that's a fair characterization.

And that really you probably aren't expecting to see the volume increase say until the back half of the next 12 months?

Yes, that's exactly right. I think that the volumes have been declining throughout the year. And this has actually been really quite unusual for us. In the past, when commodity prices declined, we really didn't see much of an impact on our volumes. But this year it's been more noticeable and I think it's largely driven by the uncertainty that exists primarily in the province of Alberta with respect to things like royalties and access to credit for a lot of the juniors have been an issue. And we're hoping that those things do -- the conditions associated with each of those also improve going forward.

But in the meantime, we do look at our operations and to the extent that we see declining margins, we do -- we're possible to look at our costs and as well as our totals to determine whether or not it'd be appropriate to make adjustments to maintain margins.

Okay. And I guess just on the midstream business, and you mentioned that you're looking to expand your contracted opportunities, spent a lot of time talking about the gas processing side. Are there any other kind of parts of that business that you see as good opportunities to expand the business in a meaningful way?

Well, I think the one thing that we are looking at, I think I did allude to the fact that we are considering going -- possibly putting in a deep cut facility at one of the gas plants. That's something that's on the -- I think it's on surface -- it's on the front burner now. But that would be an example of where you can get additional fee for services as well as additional tariff revenue on our conventional pipelines. So we'll continue to look at opportunities like that because it's a bit of a win-win. I think our customers get -- they get improved service or new service. And they get it at a decent cost.

So that's -- those are some -- that's the type thing that we'll look at. But as I mentioned earlier on, there has been a lot of discussion by a lot of producers about exiting the infrastructure business, so we see that as opportunities and there will be lots of competition as well, but again we'll be looking at those situations that make sense to us.

Okay. Just my last question here. In terms of the results in the midstream and marketing segments, you mentioned that there was -- the new truck terminals were contributing. Just wondering what you see -- what either you saw there and then what do you see kind of going forward in terms of the contribution upside as you continue to fill volumes through those terminals?

I think they -- the truck terminals are working pretty much as expected. The new facilities are working pretty much as expected. We do see some other odd type opportunities for us in and around the Edmonton area that will be for the future. Probably not seeing a lot of new activity in 2010 at this stage. But perhaps later in 2010, early in 2011 we will likely have facilities in place that will allow for an increase in contribution from the midstream part of our business.

So I think I'd say it's going to be steady as she goes for 2010 and look to an increase in 2011. And I'm not saying I can't really quantify what the increase might be at this stage, but we might use something like 5% to 10% increase in 2011.

Okay. And then -- and so just from the existing kind of facilities right now, very steady into 2010. We'll kind of look for more in '11.

Yes.

Okay. Thank you very much.

You're welcome.

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

Thank you. Actually just on the theme of looking over to 2011, I was just wondering if I could get your updated views as of whether or not the DRIP will still be in place? And I guess whether or not you see your capital structure changing as you move into a corporation.

Yes, I think right now out plan as we go through 2010 and we're financing the Nipisi expansion, that we would continue to maintain the drift in place of -- and probably in place until perhaps mid-2011 at this stage is what we're saying. As far as our capital structure is concerned, I think right now we're sort of 50/50 debt/equity. I think we could probably see our debt levels increase to perhaps 60% of the total capital structure post conversion to a corporation. So it's not a material change from where we are today, but it will likely change as we (inaudible) we'll take on a little bit more leverage in our structure post-conversion.

Okay, that's great. And just one follow-up question. Just a clarification on the depreciation during the quarter. I see that conventional had about CAD1 million and oil sands about CAD12.5 million. Are there one-time catch-ups in these numbers? Or are these I guess a run rate moving forward?

Peter, do you want to --?

Yes, Rob, we made some adjustments to the estimated lives of our major conventional systems. So that would have reduced our overall depreciation charge during the quarter. And that adjustment was for the whole, going back to January 2009. So what -- you would have seen a bigger impact in the quarter.

Just thinking out loud, Peter. We credited the rate base, the Syncrude rate base in the -- was that in the third quarter?

Yes, the Syncrude rate base would also mean credit for the proceeds of the line fill sale that occurred in 2008. We credited those proceeds. I think in -- it's either June or July, so the second or third quarter of 2009. So that would have an impact on ongoing depreciation of the Syncrude assets.

Right, and I think that the number we might have used was about a CAD55 million credit to the rate base.

Yes, that's right.

Okay.

Great, thank you.

You're welcome.

And your next question comes from Steven Paget of FirstEnergy Capital. Please go ahead.

Thank you and good morning. First question is on the production split on the -- or the shipment -- shipping split on the conventional system between the Alberta/BC system and the Western system if that's available?

Just one sec here, Steven. I think Glenys will provide that if we can find it. Just go ahead Glenys if you've got the information.

Okay, on the year-to-date -- and I'm just going to talk about the year-to-date because that's what I have. Of the total conventional -- of average of 397.9. About 20,000 of that would be British Columbia Western and 24 would be the gathering. So for reporting purposes, we always report just that element that is transported on the BC systems, which should be Western. 20,000.

So, 20,000 going down the Western system and then about 4,000 will go east to Edmonton. Yes.

And it will actually be Alberta.

So, Western it's 29,000.

No, Western would be 20,000. Two zero, Steven.

Two zero. Thank you. My second question, if I may, is just looking to get the amount of tax pools you expect to generate with construction of the Nipisi/Mitsue lines.

Maybe we'll have to do that off line, Steven, if you want a correct answer on this. Peter, you can take a shot at it?

Well, we were -- our current estimate is still CAD440 million of CapEx on Nipisi and Mitsue. Maybe a little bit less than that as we go through the project. So that'll all be -- that's all tax pools will be various CCA classes. A lot of it will be infrastructure, so it will be 20%, there'll be a (inaudible) this pipeline as well at 6%. As a guess, you could say 50/50 for pipeline and the other 50% to infrastructure.

Okay. Does that work for you, Steven?

Yes, thank you for that. On Nipisi/Mitsue, you're contracted for approximately 100,000 barrels a day through Canadian Natural and EnCana. Could you talk a little bit about the upside to your estimates if the full 200,000 barrels a day gets used?

Yes, I think quite simply, the easiest way to look at that is that we would get an equivalent about operating income contribution from the second 100,000 barrels per day as we would for the first 100,000. And I think the guidance that we have provided there was about CAD45 million per year and net operating income from the base case. So you could look at as much as doubling that if we filled up the whole line.

Yes, we would have to -- we would have to have some additional costs to do that. We will need some additional pump stations that would be required, but I think the cap is good and modest, so.

Okay, what are the indications that this might actually come to pass? Are you talking to producers on this?

Yes, we've been in constant dialog with the producers with respect to additional -- not only additional (inaudible) going to Edmonton, but also additional condensate supply to the region as well, Steven. So I think some of the customers, even existing customers are quite interested in that possibility as well. Just from the perspective that sourcing condensate out of Edmonton is actually probably a preferred source for condensate because of the nature of the condensate is higher quality. When you have to mix it with bitumen.

So there's two -- really there's two approaches we're taking. One is to find more customers to produce product out of the area, but also find customers that are interested in additional (inaudible) supply.

Okay. You discussed construction of a possible deep cut facility in the Cutbank region. Could you give a ballpark what sort of costs that might be? Would it be approximately CAD100 million?

That would be the number to use. I think that in combination with some additional facilities that we might require on the pipeline side of the business. A rough number, that'd be good.

Okay, excellent. All right. Those are my questions and thank you.

Thank you.

Your next question comes from Harry [Lebart] of Income Research Dossier. Please go ahead.

Thank you and good morning. I just have a couple of questions. The first one is on payout ratios and then reconciliation if you might, in a very general sense, to your 2011 guidance. They're running around 90% to 95% in payout ratios now excluding working capital needs. Which -- what needs to fall into place into 2011 in order to sustain the distribution -- i.e. will you rely more on CCA to shelter tax? The capital projects you expect will generate enough organic growth? Just kind of an overview I know.

Yes, I think for -- we have already provided guidance at our payout ratio for 2010 will be in that range of 95%, somewhat similar to what we've been looking at traditionally here. We will -- certainly we're looking at getting an increased contribution from our conventional business and some of that's conventional -- actually increased contribution for conventional oil sands and midstream and marketing. So we're expecting to see increases from each of those segments moving into 2010, which will allow us to maintain that payout ratio of about 95%.

Okay. And just a bit of a follow-up then on the conventional side. Are you seeing any indications -- I guess in the Western Canada and I guess specifically in your capture areas of increased activity there again? Some sense of recovery? Any comments on that?

Yes, I think we're starting to see it, albeit it's quite slow. And it's a bit anecdotal to a certain extent. It's what we read in the daily oil bills and then so on. And I know certainly our guys in the field are working more closely with the producers to see what their plans are.

I think I gave a couple of examples. Like for example, a Miscue play in the Pembina fields, drilling has been cut back following the introduction of the new royalty regime in Alberta because that deeper drilling for the type of oil that was being produced was negatively impacted. Now the government did introduce some incentives to allow people to improve their economics and to resume drilling. But it takes awhile before people actually get back to it.

And so I think there is -- continues to be wells licensed in the Drayton region. I talked a little bit about the multi-frac drilling that's taking place in the cardium. And they think that's a new -- use of new technology that is seemingly working there. So that's the type of evidence that we are seeing that there is some resumption of activity.

But having said that, people are still probably quite concerned about where gas prices might be going, for example. And so that might have a further impact on our liquids throughputs from the natural gas processing facilities that we service. But the news has generally been better. Gas prices are getting better and longer term they do look like they're recovering. But we're not going to see -- I don't think we're going to see CAD10 gas. I think we could get back to CAD6 or CAD7 in NCF, I think that would still be acceptable.

So I think it could be a slow recovery.

Yes, okay. Thanks very much. That's all the questions I have.

Thanks.

Ladies and gentlemen, if there are any additional questions at this time, please press the star followed by the one. And there are no further questions at this time. Please continue.

All right. Well, thanks very much for participating in the conference call this morning. I don't know, Glenys, I think as far as looking forward to the fourth quarter, we do not intend to have -- release the fourth quarter as -- okay, we will release our budgets. Okay.

So we will -- the next communication will be the budget, which we expect to have approved here in early December. So we will provide you an update on what we see happening for 2010. Thanks for participating this morning and look forward to chatting with you again.

Ladies and gentlemen, this concludes the conference call for today Thank you for your participation, and you may now disconnect your line.