Pembina Pipeline Corp (PBA) 2010 Q1 法說會逐字稿

Good afternoon. My name is Sara, and I will be the conference operator today. At this time, I would like to welcome everyone to the Pembina Pipeline Income Fund first-quarter results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions).

Mr. Michaleski, you may begin your conference.

Thank you, and good afternoon, everyone, and welcome to today's call. My agenda will follow our standard process. I will start by providing an overview of the first-quarter financial results that were released earlier today. I'm going to assume everyone on the call has a copy of the first-quarter report, so my synopsis will be fairly brief. Then we will have plenty of time to cover all the questions I'm sure you will have.

Here with me today in the Calgary office are Glenys Hermanutz, our Vice President of Corporate Affairs, and Peter Robertson, our Chief Financial Officer.

As always, I must start with a brief reminder that some of the comments made today may be forward-looking in nature and are based on Pembina's current expectations, estimates, projections, risks and assumptions. I must also point out that some of the financial information I will refer to are non-GAAP measures. To learn more about both forward-looking statements and non-GAAP measures, please see Pembina's annual report and the first-quarter report available at Pembina.com and SEDAR.com.

Now on to our first-quarter results. Overall, I am pleased with how our year has begun. Quarter-over-quarter we are seeing some strong gains, including a 13% increase in revenue, a 30% jump in net operating income, an 80% increase in net earnings and a 63% gain in cash flow.

Although some of the gains reflect a stronger economy and rising commodity prices compared to Q1 2009, the primary reasons for the improvement in the first quarter were growth in operational excellence, action Pembina took to generate investor value.

We saw continued success in each of our businesses, but the biggest driver of growth during the quarter was Gas Services, which added more than CAD14 million to revenue and CAD10 million to net operating income. As you know, we acquired our Gas Services assets in July of 2009, so comparison to the first quarter of 2009 aren't possible. That said, Gas Services had made gains in the short time since we acquired it. Throughput revenue and net operating income are up over the fourth quarter of 2009.

Another driver for financial improvement was Midstream and Marketing, where we saw quarter-over-quarter increases in revenue and net operating income. The expansions we completed in 2009 that broadened the service we offer producers at our Alberta-based terminals and hubs is timely, given increased crude oil and liquids prices.

On the operational front, our Conventional Pipelines business reduced operating expenses by approximately CAD10 million, which in turn helped to boost net operating income, despite quarter-over-quarter declines in throughput.

There are two items worth noting here. Although Conventional Pipelines will continue to reduce expenses while also maintaining operational integrity, I don't expect we will maintain this level of cost reduction into the coming quarters. Some of the reduced expenses we experienced during the first quarter reflect the timing of integrity projects, which I expect will still take place in 2010.

Also, we are starting to see signs that pipeline throughput may be strengthening. If you compare our Q1 2010 throughputs to the fourth quarter of 2009, you will see they were up 389,300 barrels per day in Q1 versus 379,400 in Q4 2009. This improvement in throughput is occurring despite our sale of the Cremona Pipeline System, which reduced throughputs by about 10,000 barrels per day.

The operating results generated by all of our businesses helped move our payout ratio into the right direction. At the end of the first quarter, our payout ratio was just over 92%. As we head into summer and project spending increases, this ratio may increase. In March, I said we were looking towards a payout ratio of about 95% for the year, and so far we are on track to deliver.

I will provide an update on our Nipisi project. Of course, boosting revenue will have the biggest impact on cash flows, and we're making good progress on the Nipisi and Mitsue Pipeline projects, which are on track to be placed into service in a little over one year from now. We are heading into the final planning phase, engineering on both pipelines and the supporting infrastructure, including pump stations, is substantially complete. And we are pretty much set to begin construction this fall.

On July 6, the ERCB has scheduled a public hearing to examine concerns from two stakeholders relating to the projects. We continue to consult with these stakeholders with the hope that we can resolve their concerns and avert the need for a hearing.

I am very proud of the community consultation that has occurred over the last two years. I expect these pipelines will generate value for our customers and our investors, and I'm also confident our project planning will meet the expectations of our local communities as well.

A final decision by the ERCB is expected to be made by early October or sooner, if we can satisfy the interests of the affected parties before the hearing (inaudible).

Other growth opportunities we are examining include a fee-for-service expansion at our Cutbank complex that could see the extraction of approximately 10,000 barrels per day of ethane from the natural gas process at the complex, as well as a pipeline connection to transport the additional volumes through our Peace Pipeline. And of course, we are working with producers in the Drayton Valley area to assess their needs and ensure we are prepared to transport the new volumes we hope we will be generating from the Cardium development.

It will likely take some time for production to ramp up, but by readying ourselves now, we hope to maximize the opportunity that Cardium presents. These initiatives are consistent with our strategy of adding new projects and businesses that enhance the value of our existing assets.

Turning to financing, we expect to utilize our cash and undrawn credit facilities to finance our growth initiatives. As you all are likely aware, we suspended our DRIP effective April 25, so there is always the possibility of reinstating the plan should we need to fund new projects in the future.

That concludes my summary of the quarter. However, I do want to also mention that our Annual General and Special meeting is being held tomorrow afternoon. For those on today's call that are Calgary-based, I hope I will see you there.

It will be an important meeting, as unitholders will vote on our corporate conversion plans. Subject to receiving all the necessary approvals, we expect the conversion could become effective as early as July 1. However, our Board has the discretion to complete the conversion when it best serves the interest of our investors, as long as it's prior to December 31. We will confirm that date with you as well as any additional information about our new TSX listing.

And operator, with that, I will ask you to open the lines to questions.

(Operator Instructions) Robert Catellier.

I wondered if you could walk us through your plan for risk mitigation on the extraction project. And I say that because these projects typically involve quite a bit of capital, and you are talking about fee-for-service structure. Would there be any volume commitments there or take-or-pay commitments?

Rob, what we are looking for with respect to that particular initiative is a multiyear contract. Right now, it could be anywhere in that probably -- we will say somewhere in the three-year range initially, fee-for-service, flow through of operating costs.

We have not -- we are not really in a position we can release the information with respect to fee estimated capital on it. But certainly, we will not have any exposure to commodities or anything of that nature with respect to that investment.

And of course, on the pipeline side, we will just continue to earn transportation revenue or tariff revenue on the incremental investment we make, as well as transport the volumes on our Peace Pipeline System. So I would characterize it as a very low risk project.

Right, but even with a take-or-pay contract and recovery of operating costs, three years seems like it is a short -- relatively short period of time. Maybe the contract ends up being longer. But if it were only three years, it suggests that some of the investment is being made on spec.

I don't think we would be looking at some of the investment made on spec here, Rob. We are looking to fully commit our customers to full capacity requirements for the expansion that we are looking at.

So I think part of it, too, Rob, this is relatively new business for us. So when we are looking at a shorter term than we might otherwise look, I think we also would look at the opportunities that provides us. So that, again, we are not taking on much in the way of risk with this initiative, so shorter-term, we'll get comfortable with it and take a look and see what happens after that time frame.

Right, okay. And what feedback are you getting from the producers with respect to the change in the royalty regime in Alberta? And if you could distinguish between oil producers versus gas.

You know, it's interesting, Rob. I guess -- remind me -- maybe, Glenys, remind me whether the Alberta government has come out with any -- remember with the (inaudible) some further clarification for the rules with respect to the royalties. I just have not followed it.

I'm not sure with respect to the royalty payment; they're certainly looking at the regulatory framework.

Okay. So Rob, I guess we are not giving a very good answer. I think one thing we are seeing -- and I'll deal with both oil and gas -- is that with respect to gas, the Cutbank complex, we are actually seeing stronger volumes than what we had anticipated this year, which we take as a good sign. So people are still out there drilling, and we are seeing the volume show up at the gas plant. So I think in select areas of the province, people still can make money.

I think our customers are attracted to the possibility of getting an opportunity to extract liquids at the field, because it is -- obviously liquids pricing is very attractive to them today, and there is a high demand for ethane in particular in the Edmondson market. So I think that's a good sign.

With respect to oil possibilities, with the Cardium developments, it is not just limited or restricted to the Pembina Drayton Valley field itself. We are seeing Cardium developments outside of the Pembina field. I believe we've got a number -- I'd say more than a half dozen of new connectional requests on the Drayton system. And there is a number of possibilities, not only just for the crude recovery production, but also natural gas liquids production.

So I think the indicators, based on our discussions with customers, is that there are considerable drilling plans contemplated now. And I think that is not saying anything that isn't in the public domain, because I think the public domain would suggest that there a number of prospects.

So I'd say while I can't tie it specifically to the royalties and royalty regime, Rob, what I can say is that I think with these commodity prices where they are, particularly for oil and natural gas liquids, they are strong, they are attractive, and people are busy trying to find more production, more volumes, and we are working hard on trying to attract those volumes through our systems.

Okay, thank you.

Bob Hastings.

Thank you. First, let me congratulate you on your excellent stock performance about an hour and a half ago relative to the rest of the market.

I've sort of missed that. Probably been in meetings pretty much all morning, so I'll follow up on that after our call.

Yes, it was very interesting. You will enjoy that. So anyway, so the ops for the Cheecham, just a minor thing. But noticed that their net operating income was down a bit and wondered if there was an explanation for that.

I think -- Bob, it's Peter -- that [it doesn't] really relate to the first quarter of 2009, where we flowed through some extra costs that we incurred late 2008 relating to right-of-way work that we flowed through to the shippers in Q1. So revenue is higher than it normally would be in Q1 2009. So 2010 revenue is more of the correct run rate.

Okay. And when we look at the OpEx, as Bob was referring to, for the Conventional Pipeline, and we noticed it was a little light in this quarter. Does that just sort of balance off for the rest of the year, and we are sort of back to a regular annualized number? Or is that going to be just a little bit light overall for the year?

It may well be a bit of both. Generally, our high maintenance and integrity work is really in the second and third quarters. First quarter is, depending on the weather, etc., there is not a lot of maintenance-type work done in Q1 this year; last year there was. Last year, we got a lot of big work, integrity work on our Peace System -- CAD5 million in extra costs in Q1 2009 versus this quarter.

So I guess really to answer your questions, Bob, I think that the first quarter was lower than what we expect to average for the balance of the year, but we kind of expect the year to be normal.

I think the one thing that we are planning, though, that some of the integrity work that we are doing, that the costs of running tools and so on have come down for us, which is a nice thing to experience, as we look at introducing new vendors and getting -- hopefully, getting more competition for the work that we can provide for people in that business.

Okay, thank you. And one last one is on the midstream and your -- and I'm not talking about Cutbank or your extraction business, but your marketing business -- what do you see as an outlook there? Is the market starting to change with oil coming down here, or how do you see this year shaping up?

That's a tough question to answer really right now, Bob, because, yes, we've experienced some really interesting changes in commodity prices during the first quarter. And you wonder will that continue into the second, third and final quarter for the year.

Oil prices have moved [off] fairly significantly here recently. We've seen a strong demand for -- our condensate pricing has been much higher than what we expected. So at this stage, Bob, we don't know if those trends that we experienced in the first quarter will continue through.

But right now, I think if you look at sort of annualizing the first quarter, I think there's going to be pluses and minuses. And I think right now, it is pretty hard for us to give you any particular guidance.

Peter, any thoughts about where we might be?

I better not add anything more to your comments there, Bob.

As I say, it is pretty hard to predict. We are hoping that we will be in a position to maybe -- if we have decent results, we should be able to hopefully match where we were at last year. But there will be more to come as we progress through the second and obviously third quarters of the year.

All right. Okay. I was sort of thinking of your comments after the fourth quarter, that always hard to say, but you couldn't imagine it would be down more than CAD5 million for the year.

Yes. And I guess the thing is I would still think that, Bob. But as I said, I do think, given that we've just got quite a bit of things going on out there right now which are really quite unusual, things like the Keystone pipelines being filled, so as a result, there is an increased demand for heavier oils and differentials have narrowed. And is that going to continue after the line is filled? So there's a number of variables. But I still think that probably is still a fair comment that I made after the fourth quarter.

And to be clear, that is just the marketing business as opposed to the midstream, which would include the Cutbank and extraction businesses?

That is exactly right, Bob.

Thank you very much.

Tony Courtright.

Bob, could you give me some indication as to what factors might influence a decision to convert earlier than later?

Yes, the main factor there, Tony, is really related to the tax shelter -- well, there's two things, and they kind of offset each other to a certain extent.

One is an early conversion will result in us unwinding the existing internal structure that we have with respect to the Fund and the Corporation, which is currently generating tax losses that, of course, have value to us as we go and convert to a corporation. So on the one hand, the sooner we convert, that will result in a reduction of the tax losses that we could preserve if we convert later in the year.

On the other hand, converting to a dividend paying corporation, if you are held in a taxable account, it is going to have a tax advantage to our shareholders. So we are trying to find the right balance here, Tony.

Right now, maybe July 1 -- I think it is going to be sooner -- would be earlier than we would likely convert, and more likely, maybe at the end of the third quarter of this year. But certainly before the end of the year.

Right. What feedback have you received so far in terms of shareholder preference?

Not -- Glenys, you can speak to that. I know I certainly haven't heard a lot on my travels. I spent quite a bit of time in the first quarter out on the road. Glenys.

I haven't either. I think a lot of our peers who are going to convert are contemplating converting in the latter part of the year. So in terms of any pressure to achieve that tax advantage earlier rather than later, we haven't really heard a lot from our owners.

I think, Tony, it is good to retain some flexibility as long as we can, just in case we -- we wouldn't want to be doing a financing in the middle of a conversion.

Understand.

So that has some consideration, too.

Right. Turning to the Cutbank ethane extraction project, what are the next steps? When will you commit to this, and how soon?

What I can tell you is the Board has given us approval to proceed, and there is a couple subject-to's. And the subject-to would be -- the main subject-to is entering into contracts for the utilization of the facility. And we are well along there, Tony, and I would hope that we have something more to say maybe within -- who knows -- within a week or 10 days.

So we've advanced the project to the point where we have sought and received Board approval. And we do have other approvals that are necessary, and at this stage, we are not aware of any fundamental problem there. We have obviously more detailed engineering to do, and so that work will have to continue on. We are largely through the major hurdles that we have to face with respect to this initiative.

Last question relates to the volumes. You have indicated broadened customer services that you have implemented. And relative to one of your other peers that also reported much greater reductions in conventional throughput, can you give some color as to whether you have achieved a competitive advantage?

Well, you know, I think the real key for us is that in most of our pipelines today -- not all -- we do have capacity to move new production. I think we have been very proactive in trying to attract the new customers or existing customers, to the extent they have incremental production, to attract and get them to commit those projects to our systems.

So you know, I can't comment on our competition or our competitor as to what they are experiencing, but I think certainly generally, the geology in the areas that we offer service are still very attractive, even in a lower commodity price environment. So to the extent that customers are going to continue to drill, we are pretty optimistic that we are going to continue to see a stabilization and possibly an increase in volumes that will come to us over the next several years.

I mean, we are quite encouraged by conversations we have with our customers as to what their drilling plans are, and we are certainly looking at finding ways to ensure we've got the capacity, where we have some constraints or bottlenecks, to be able to respond to that.

So I think we are just generally encouraged that we've come through a bottom and a difficult time, and I think we are going to see some positive developments in the months and years ahead.

And this benefits both your volumes in terms of conventional as well as your Midstream Marketing?

That is correct, Tony. It is absolutely right. It is a double-edged sword. When our volumes were declining, we got hurt in our Midstream and Marketing area, as well. But volumes look like they've stabilized and actually are increasing, and that should be a win for the Midstream and Marketing part of our business as well.

Let's hope they continue. Thanks very much.

Robert Kwan.

Just coming back to the operating costs in the Conventional system -- I think previously you made a couple of comments, one, that there were some deferred costs from 2009 that may show up in 2010. And then also for 2010, that costs might look similar on an overall annual basis as 2009. Is there any update to kind of those two statements?

I will turn that part over to Peter. Peter's got more detailed information in front of him than I do, Robert, so I'll defer to Peter (multiple speakers).

Yes, it all depends on -- our larger operating costs, most of those are fixed, like power, labor, etc. The ones that vary more are the integrity costs, the actual running of the tools, when those are done, and if there are digs required after that, when we actually get to do those digs. So some of the work we will be doing this summer may relate to two runs that we conducted at the end of last year. And we will be undertaking other tool runs this year and the digs will be done next year.

So it is very difficult to say precisely when we are going to incur those costs, but I think it is safe to say that year-over-year, it is going to be pretty much the same.

Okay. Just in terms of another line item, G&A costs, obviously Q4 was a big number. Bob, you had mentioned that CAD11 million a quarter as a run rate for 2010 wasn't bad. Is that still kind of a decent number that you would be looking at?

Yes, I think so, Robert. The first quarter was -- I'm not sure where we --

CAD11 million.

CAD11 million. So I think that is a reasonable run rate for 2010.

Okay. And just a last question. You turned off the premium DRIP. And just wondering when you made that decision, if you are this far down the road on Cutbank presumably, that decision was made in light of Cutbank likely moving ahead. So is it fair to say that based on where you think the cost should be that you don't see the need to raise any equity?

I think that is fair to say. We believe we have sufficient cash in hand and undrawn bank lines sufficient to do the projects that we're currently aware of, and that would include the deep cut at Cutbank.

Great. Thanks very much.

Linda Ezergailis.

Thank you. Some of my questions have already been answered, but I guess maybe we can step back and look at the big picture, and you have some very good organic opportunities within the Company. But I'm wondering if you still are seeing any potential acquisition opportunities and what might they look like in terms of pricing volumes of deal flow and types of assets.

Well, it is a good question. That is always a possibility for us. What I can tell you is we, just this morning, reviewed with our Board a number of our growth projects or prospects. And I can say that in each of our business units, we continue to have growth prospects and projects that individually may be in -- who knows -- maybe CAD50 million to CAD 100 million, to as large as in excess of CAD1 billion.

So if I had to add them all up, you would get a number that is somewhere between -- who knows-- it would be a big number, well into the billions of dollars. Will we do them all? No.

At the same time, we continue to look at other opportunities, if there is opportunity that through a combination we could achieve some synergies and it would be tied to our expansion of our existing framework, those are something that are still always possible, Linda. And those are (inaudible) something that we keep in front of us all the time. So that is no different.

If you're asking me do we have something in mind right now, I would have to answer you that honestly and say no. But, as I said, also when you have all these other organic prospects that generally speaking are highly accretive, we have a tendency to focus on those initiatives rather than look at growth -- lumpy growth through an acquisition. So I think we've got enough to keep us busy for quite some time, Linda, without having to look for anything else.

Okay. Thank you.

Steven Paget.

Questions on the ethane extraction process. The next application season for the Government of Alberta's incremental ethane extraction program ends June 15. Is your go-ahead decision partially dependent on approvals from the Alberta Government?

And second, where would this fit with the N-E-X-T, or NEXT, process that is currently going through regulations as well?

Good questions, actually. I'm not aware, as far as the Cutbank transaction is concerned, that we are looking for anything specific.

I do understand that, as you suggested, [it's going to appear] that there may be from a provincially-run program some incentives available that certainly we would pursue. And I don't think that would drive our timeline though.

So in terms of NEXT, I think that the jury is still out in terms of what the ultimate impact. I think from what I am hearing from our own internal experts is that the NEXT may drive extraction either way, further into the field or to the border. I don't think that is -- and I don't know what the time frame for implementation is on that. You could probably elucidate on that better than I could.

Okay, thank you.

(Operator Instructions) Matthew Akman.

Thank you very much. A couple of questions on the Conventional Pipeline business. First, I'm just wondering if the mix of NGLs and light oil have changed on that system over the last couple of years.

That, I don't have it at my fingertips, Matthew. I don't know that we've actually got the historical information.

Matt, if you want, you can follow up [explanatory] with me after. But certainly the splits on our -- I believe the crude and liquid splits historically are included in our supplemental information in the annual report.

Yes. I'm just wondering directionally if maybe the NGL mix has been falling, because obviously there's some [interesting] on conventional oil coming out, but gas production is still falling. And given you had quarter-over-quarter increase in volumes, I'm just wondering if that is because of the mix change.

I think we would have to look at that to properly answer the question, Matthew. So perhaps can we get back to you --?

Sure.

-- following this call?

Okay. My second question is I think you talked about spending about CAD48 million in growth CapEx in Conventional this year. Is that still the budget? There wasn't a lot spent in the first quarter.

Glenys or Peter, do either of you have that information?

We are a little lighter than the first quarter, but that is -- that was expected. We may -- some of these CAD48 million, some of the projects may be done, some may not be done. We've got a few other things in mind that we may well do sometime during the year. So I would say it was going to be between CAD48 million and, say, CAD55 million for Conventional.

Yes, I think that is a fair guesstimate to date.

Okay. So -- and in the last couple years, the Company has spent, I guess, CAD75 million or CAD80 million on CapEx in that business. So I'm just wondering whether we should be modeling, in your expectation, revenues in that segment starting to rise year-over-year this year or next year or when will that growth show up?

You know what I think I would do if I were in your position there, Matthew? What I would do is I would assume you are going to start to see some incremental throughput coming to late 2010, early 2011.

And -- but I think you pretty much have to -- you're going to have to watch the quarterly growth throughout the year to get a sense as to what that might be. Because it is difficult for us -- when we were reviewing our material at the Board today, we put in some incremental capital for some facilities that we have to put in the field in (inaudible). At this stage, we can't accurately forecast what the incremental volume will be at this stage.

So I think it is going to come, but it is going to take a while to show up. So I would be looking at 2011 and beyond, really, if I were trying to forecast any kind of logical relationship between the capital we spent and increased volumes.

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

There are no further questions at this time. I turn the call back over to you.

All right. Well, for those who participated in the call today, thanks very much for participating. Again, for those of you in Calgary that will be around for our AGM tomorrow, we invite you to attend and look forward to seeing you there. For those that can't, we'll look forward to talking to you again at the end of next quarter. Thanks very much.

This concludes today's conference call. You may now disconnect.