Pembina Pipeline Corp (PBA) 2010 Q4 法說會逐字稿

Good afternoon, my name is Tracey, and I will be your conference operator today. At this time, I would like to welcome everyone to the Pembina Pipeline Corporation 2010 year end results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks there will be a question and answer session. (Operator Instructions)

Thank you and I'd now like to introduce and turn the call over to Mr. Peter Robertson, Chief Financial Officer. Please go ahead, sir.

Thank you, operator and good morning everyone, and welcome to Pembina conference call and webcast to review our 2010 financial results. I'm Peter Robertson, Pembina's Vice President of Finance and Chief Financial Officer. Joining me are Glenys Hermanutz, Vice President of Corporate Affairs, and Claudia Dorazio, our Controller. Our agenda today follows the standard process, reviewing the 2010 results we released yesterday and then open up the line for questions. Before we start the Q&A, I'll also spend a few minutes providing an update on our growth projects and the highlights of our conversion to International Financial Reporting Standards.

I'll start with a reminder that some the comments made today may be forward-looking, and are based on the Pembina's current expectations, estimates, projections, risks, and assumptions. I must also point out that some of the information I provide regards to non-GAAP measures. To learn more about these forward-looking statements and non-GAAP measures please see Pembina's various financial reports available at pembina.com and sedar.com.Actual results could differ materially from the forward-looking statements we may express or imply today.

Now on to the review of Pembina's 2010 results. We issued two news releases yesterday afternoon; one provides an overview of our 2010 results which were filed and posted to our website and SEDAR yesterday, and the other outlines are capital spending plans for 2011.

Our 2010 financial performance was very strong. In fact, I'm pleased to tell you we set new records for each of our key financial metrics. Revenue was nearly CAD520 million in 2010, up from CAD497 million in 2009. This increase of almost 5% was mostly a result of new revenue generated by the Cutbank natural gas gathering and processing complex and the strong showing from our Conventional Pipeline business. Both our Gas Services and Conventional Pipeline businesses benefited from a resurgence of industry activity and the continued application of new technology in the Western Canadian Sedimentary Basin which helped with volumes at Cutbank and are at Peace and Drayton Valley Pipeline Systems.

Our Oil Sands and Heavy Oil business stayed steady year over year as expected due to the contracted nature of this business. These positive results were offset by a decline in Midstream and Marketing revenue. Gas Services and Conventional Pipelines also had a positive impact on Pembina net operating which totaled about CAD360 million, an increase of over 6% from the year before. G&A was about CAD44 million in 2010, compared with CAD51.4 million in 2009. This decrease of almost 15% was largely due to a reduction in the use of third party consultants but was offset by one time legal and other costs primarily relating to corporate conversion and conversion to IFRS. We expect the G&A run rate for 2011 to be approximately CAD12 million per quarter as we step up to support our growth plans.

We also set a new record for cash flow from operating activities in 2010 with a year over year change of 14%, growing from about CAD225 million in 2009 to just over CAD255 million in 2010. Net earnings were CAD187 million in 2010, over 15% higher than our 2009 net earnings of just over CAD162 million.

Our fourth quarter results were also solid. Revenue net of product purchases was nearly CAD135 million, compared to just shy of CAD130 million the year before. Net operating income held fairly steady quarter over quarter at about CAD90 million, as the increase in revenue was offset by higher operating expenses which were just over CAD44 million during the fourth quarter of 2010, compared to almost CAD40 million in the fourth quarter of 2009. This slight increase in uptake was related to several integrity initiatives undertaken by the Conventional Pipeline business and increased expansions associated with handling new volumes in the Gas Services business.

On the operational front, throughputs in our Conventional Pipelines business were down about 5% year over year. We saw some weakness in volumes during the middle of the year, but throughput recovered in fourth quarter of 2010, down just 1% compared with fourth quarter of 2009. Of December 2010, exit volumes are much improved on some of our major systems which I'll discuss in further detail in a moment. Our Gas Services business handled more volumes in 2010 than 2009, a jump of almost 12% from just over 197 million cubic feet a day in 2009 to 220.5 million cubic feet a day in 2010. Quarter over quarter volumes were higher in 2010, nearly 228 million cubic feet a day in Q4 2010, compared to 206 million cubic feet a day in Q4 of 2009, an increase of about 11%. While these results were impressive, they were challenged by the lingering effects of the economic downturn, narrow commodity differentials, wet weather that impacted our customers' production on the sale certain of non-strategic assets.

Moving onto our growth projects, our operational and financial performance in 2010 provides a solid launching pad for Pembina's ambitious growth plans. On the projects front, we broke ground on our Nipisi and Mitsue Pipelines, expanded our Cutbank Complex gas gathering and processing facilities, and subsequent to year end acquired Midstream facilities near Edmonton. I will talk about each of these growth projects in a little more detail. Let's first take a look at the Nipisi and Mitsue Pipeline projects. In June, Pembina received approval from Alberta Energy Resources Conservation Board to construct and operate the Nipisi and Mitsue Pipelines. I am pleased to say that these approvals were granted without a public hearing since we were able to resolve all stakeholder objections through the consultation process, an outstanding example of Pembina's commitment to working with the stakeholders in an open, respectful, and transparent manner. As of the end of February, we have made significant progress on both pipeline and pump station construction.

We anticipate completing all pipeline construction by mid-April and construction of seven pump stations, two for the Mitsue Pipeline and five for Nipisi Pipeline by early May. Similar construction is complete for all pump station sites. Mechanical construction is about 80% complete and we recently started to [let] forward. We also estimate that we have about 90% of our cost locked in which lends confidence and our expectations that we will complete the project within our budget. Both pipelines are scheduled to be in service in mid-2011 and we are currently investigating expansion scenarios that will satisfy an expected increase in customer demand in the Seal and Pelican Lake region of Alberta.

Although the Nipisi and Mitsue Pipelines are currently our biggest projects, they certainly aren't our only growth opportunity. In November 2010, we began work to expand NGL extraction at our Cutbank Complex. Following regulatory approval, we began construction on a new 14,000 barrels per day extraction plant. To date, we have secured an anchor contract with the customer for a majority of the facility's planned capacity, and we expect the plants capacity to be fully contracted when it commences service in mid-2011. This is an exciting opportunity for Pembina and it provides another example of our ability to integrate our businesses. The NGL extracted from the plant will be transported in our Peace Pipeline. As of the end of February, we are rescheduled to begin service in July 2011 and we're on budget.

We're looking at several other prospects for expanding our Gas Service business. Many of the exciting plays that [prequels] to our existing infrastructure are gas oriented. And with new technologies and unfolding commodity prices, we expect to see increased gas handling requirements. These new gas volumes in combination with the liquids value embedded in the gas has created interest in new and upgraded gas plants with enhanced liquids extraction capacity and ethane plus transportation opportunities. In our Conventional Pipelines business, we are seeing increased volumes in some of our existing systems and were exploring new and expanding service offerings. Through latter part of 2010, we really began to see the impact of development in the Cardium formation. From December 2009 to December 2010 resurgence of industry activity in the Cardium formation has contributed to increased average daily throughput on each of the Drayton Valley Pipeline and Peace Pipeline by more than 20,000 barrels a day. These are exciting results for us and have brought many expansion opportunities.

Subject to regulatory approval, we plan to invest approximately CAD40 million of projects that will strengthen the transportation service options we provide Cardium producers. In 2010, we executed agreements with producers on our systems representing approximately 10,000 barrels a day of Cardium production and entered into construction support agreements with producers representing an additional 10,000 barrels a day of production. We also recently executed an agreement to extend Peace Pipeline system south into the greater Edson area by re-commissioning one of our previously deactivated pipelines, providing liquids transportation options to producers exploiting the Deep Basin Cretaceous formations which are predominantly gas plays, but the hydrocarbon liquids content is a significant driver for activity in this region.

All of this industry activity is also opening up many opportunities for our Midstream business. In January, we announced that we acquired midstream assets in the Edmonton, Alberta area consisting of pipeline connected terminalling and storage facilities capable of creating tailored products and services for customers. The acquisition also included over 300,000 barrels of existing storage and sufficient bare land to develop and significantly expand this capacity as customer demand grows. We plan to use the assets to receive, aggregate, and deliver product to and from our customers. The acquisition forms part of our larger vision. The assets will comprise an integral part of the Pembina Nexus Terminal otherwise known as PNT which will connect Company infrastructure in the Edmonton-Fort Saskatchewan-Namao area. We envision that PNT will be a key diluent distribution facility to serve the growing diluent demand by customers in the oil sands and heavy oil sector. We also expect PNT to form a receipt and delivery terminal for the potential expansion of Pembina's Mitsue Pipeline which will enable Pembina to expand diluent delivery to the Peace River heavy oil area.

We are developing plans to increase the interconnectivity of the terminal, aimed at providing value to both upstream and downstream customers. This is an important part of Pembina's growth strategy in the Midstream and Marketing business. And with the refined planned oil sands developments, we're also talking to various customers in the Fort McMurray area about future business opportunities. It is important to point out that the majority of capital expenditures will take place in the first half of the year and contribute to increasing our cash flow in the second half of the year as the projects come on stream.

Moving onto a discussion about our financing activities, in 2010 Pembina raised approximately CAD300 million in capital, and we have approximately CAD430 million of cash and unutilized credit facilities at December 31st. Our strong balance sheet gives us confidence that when the right investment opportunities arise, we'll be ready to capitalize on them. Should the need arise, Pembina is confident it can access the capital markets in the form of public and private debt or common equity to ensure our growth objectives are met, while at the same time obtaining a prudent balance sheet. Our growth opportunities together with our strong financial results continue to lend confidence in our ability to maintain our dividend at CAD1.56 per share through 2013. We'll continue to focus on the priorities that have brought success in the past, and as always we will manage our operations with a view to maximizing shareholder value. There is a lot underway at Pembina and expect the financial and operational success we achieved in 2010 will serve us well in 2011 and beyond.

I'll now provide a brief update on our progress towards adopting International Financial Reporting Standards otherwise known as IFRS. The fourth quarter marks significant progress in our transition to IFRS and our annual report released yesterday contains new qualitative and quantitative disclosures. As detailed in our MD&A, our opening balance sheet for January 1st, 2010 contains a number of transitional adjustments which in total would increase the deficit, after tax, by an estimated CAD120 million to CAD140 million. The most significant of the opening balance sheet adjustments is that before tax increased to the asset retirement obligation which accounts for an estimated CAD110 million to CAD125 million. Under IFRS, Pembina has estimated the net present value of its asset retirement obligation, based on total future liability adjusted for inflation and discounted using a risk free rate. Under current Canadian GAAP, the total future liability adjusted per inflation was discounted using a credit adjusted risk free rate.

There will be impacts on future earnings that will result from the accounting quality decisions made on IFRS adoption and will trend to a slightly more volatile bottom line. This is mainly a result of the application of fair value accounting or power hedges and interest rate hedges. It's important to note that the adoption of IFRS does not impact Pembina's underline economics, cash generation characteristics, or the Company's long-term potential. The adjustments made in restating the opening balance sheet come from the application of a new set of standards, are mechanical in nature, and will not impact future profitability and cash flows. We will continue to provide more details on the transition and the quarterly impact to earnings as we move forward with our transition. We've also created a new section on our website that is dedicated to IFRS. It currently contains a list of frequently asked questions which we will continue to update as we move ahead.

With that, we can start the Q&A. Operator, please go ahead and open the line for questions.

(Operator Instructions) Your first question comes from the line of Linda Ezergailis, TD Newcrest. Your line is open.

Great, thank you. Just some questions with respect to your capital budget for 2011. How much of that has been allocated to projects and is firm with board approvals and that kind of stuff versus still to be determined or firmed up?

Hi Linda, it's Glenys here. I would say that if you look at the nature of the spend certainly on the heavy oil and oil sands, all of that would be approved because the vast majority of it relates to the completion of the Nipisi and Mitsue Pipelines in respect of our Conventional Pipelines. Again, these are projects that are currently underway so pretty much -- there are some monies set aside in the Conventional budget as well for numerous new connection requests that we have received. And we will proceed with those as negotiations and agreements are reached with our customers for each of those facilities.

On the midstream side, again, a lot of that relates to us. I think we note in the text of the Press Release that it's related to the PNT terminal which again we have approval to proceed with and acquisition of line fill related to taking Peace single shipper at the beginning of this year. And then of course there's some corporate expenditures that are included in the budget which, again, are fairly certain at this point. I would suggest that the majority of the planned expenditures are approved and in fact many of those projects are already underway.

Or maybe the bulk would be approved you would say?

Yes.

And how much would you classify as maintenance capital in 2011? In your Conventional Pipelines paragraph you talk about some integrity spend, so I just wasn't clear on that.

You have particularly after the 2011 there was -- I would say there was very little related to maintenance. All of these are development projects and they will essentially all be earning revenue in the second half of 2011.

So your integrity spend for Conventional would be not material then?

Integrity spend is all expense.

It's operating expense, Linda.

It's an operating expense.

Okay, but it was discussed in the capital budget Press Release, so --

They would be, if we're integrity work when we're expanding service on a new line, expand increasing capacity on that line and if we -- to do that we may have to have to run some Integrity programs to do that. We view that as enhancing the capability of the system rather than just maintaining it. So that's why the comment would be under the capital section there.

Okay. And maybe you can just comment a little bit more on your financing plans for 2011 specifically. Have you considered turning up the drip and maybe you can comment on the relative attractiveness of issuing common equity, trimming out debt, or convertible debentures.

As you know, the drip was suspended in April of 2010. It still remains available to us and we'll always continue to look at that as an option in raising capital if we think we need to raise equity. We're always mindful of our Debt to Cap Ratios and debt to EBITDA covenants. And obviously the cheaper form of capital comes from the debt markets currently and that would be our first choice.

Okay. That's helpful. And just a final question on your marketing outlook for 2011. What are you seeing in terms of margins at this point? I know that 2010 ended up being a little bit lower in terms of EBITDA than we expected a year ago. Do you see those differentials in margins improving over the next little while? Have they improved the first couple of months or maybe you can just --

Today's a really interesting time with the way the markets are obviously very volatile just over the last month. And some of the markets are lighter, some are narrower, some areas there's more opportunities, some areas there's less opportunities. So it's a bit of a mix bag, Linda, as to -- we can't say just because we have oil over $100 that the margins are suddenly better than they were say at $80 a barrel. The volatility to market does present different opportunities for midstream folks. We will continue to watch the pricing impacts in the market over the various qualities of crude that we move.

Great. Thank you.

Your next question comes from the line of Juan Plessis, from Canaccord Genuity. Your line is open.

Thank you. With respect to the Fort Saskatchewan Ethylene Storage, three of the five caverns are out of service and not expected to return to service, yet you indicate that revenues are not materially impacted. Just maybe a bit of color on what's going on there and can two caverns accommodate your storage demand and what's the likelihood and timing around washing of an additional cavern?

We're working with our customers and partners as we speak with respect to washing a new cavern that will provide our customers with a storage capacity that they need. We already have arrangements in place that if we do that our revenue stream will be -- will not be impacted despite the lower capacity that we can provide with those caverns. So we don't see any change in our revenue for 2011 and beyond. We estimate it would take about 30 to 40 months to construct a new cavern, but the engineering is being done as we speak.

Okay, thank you for that. When you say no impact to revenue, I assume you're also talking about your no impact to cash flow earnings as well from that.

That's correct, yes. And although these caverns are out of Ethylene service, there are other potential uses for these assets as well, and our guys are investigating what the opportunities are available to us.

Okay, great. Thanks very much. And there was a reference in the Release about the Nipisi and Mitsue Pipelines are currently under budget. I'm just wondering if that would suggest that total CapEx could come in below the CAD440 million currently budgeted.

Until the project is completed, we are reluctant to change the number we published at CAD440 million. But I can say a lot of our costs are locked in. The project is going very well. But there's a few months of construction still to take place and we'll inform you the market at the time of in service what our final number is.

Okay. Thank you. And finally, just wondering if you can update us on the progress of contracting the remaining capacity at the Cutbank enhanced NGL facility.

Don't think we can comment much on that now, although the majority of it is contracted and the balance will be with a number of other players. But we're highly confident in the next three months -- three, four months that that'll be fully contracted.

Okay, thank you very much.

Your next question comes from the line of Tony Courtright, from Scotia Capital and Company.

Thanks very much. Peter, in terms of the Pembina Nexus Terminal, can you tell me in terms of all of these connections that you're referring to, will you be connecting yourself or will you have connections with Enbridge's Southern Lights Diluent in Portland?

Yes, we do have a connection there.

So that's proprietary connection that you guys have developed?

That's correct, yes.

And in terms of the Nipisi Mitsue, how the initial 122,000 barrels a day of combined capacity, how much of that is third party contracted versus how much are you retaining for your own account pending further producer interest?

I believe on the base project, Tony, it's Glenys here, that roughly 80% has been contracted to third parties on the Bitumen delivery system which would be Nipisi. A lower percentage of that would be contracted to those same customers on the Condensate delivery system.

And in terms of future prospects for expansion, can you outline where they have progressed here?

They are -- we're still in heavy discussions with primary customers there, Tony. But there is a great deal of interest from our customers and us expanding that system to meet their projected increased demand. So I would expect something to be included on that issue for I would say in the next six months.

And if something were concluded, would you think it would be pursued with alacrity so that it would come into cash flows late 2012?

That would be tough to do it before mid-2012 at this stage. We would need to start today. So I would say more like say Q1 2013.

I see. And then lastly in terms of the gas services CapEx, CAD75 million has been listed as the amount that's being dedicated and some of it to the Cutbank Complex, the enhanced recovery there. Can you give some color in terms of magnitude percentage of the CAD75 million that's for the deep cut enhancement versus other connections?

I would say -- that's 2011. We spent some money on the deep cut in 2010 as well. I would say close to 80% of that number released to the deep cut in 2011.

Right.

So the other -- the balance system -- smaller -- perhaps some booster stations here and there and the cushion as well.

Right, and perhaps I didn't look carefully enough, but could you outline what your tax pools are at year end 2010?

That should be online. I don't recall the numbers off hand.

It's posted on our website under tax information under the Investor Center.

But that won't be updated for December 31 numbers as yet.

Okay.

I think the last update would be September 2010.

So you would be using some of that shield in the first --

Yes, some of that. As we lost those, we gave up some of our interest shield in the last two months as some of the tax losses will have been utilized in the last part of the year.

But meanwhile you're adding to your capital base so your unclaimed capital cost --

Exactly.

Okay, those are my questions. Thank you.

Thanks, Tony.

Your next question comes from the line of Robert Catellier, from Clarus Securities. Your line is open.

I was wondering if you could comment on the Conventional business operations at the field level. Is the apportionment situation clearing up? And what have you noticed with respect to the bottlenecks that some the producers are complaining about on the service side, notably fracking and other drilling services? Has that had an impact on conventional business?

You know Tony, Enbridge keep -- and Trans Mountain keep announcing apportionments, but there are other things going on in the market with -- included in the horizon that seem to be freeing up enough space for products still to move. We currently don't have any restrictions on any of our lines and not even for the last month there may have been minor restrictions but we've always found ways to get our customers product to market. So the apportionment hasn't really affected us all that much. Remind me of the latter part of your question, Robert?

Related question. I'm wondering, we've read from time to time recently that the producers are complaining about the lack of available drilling services and wondering if that's had a noticeable impact on your operations on the Conventional business.

It certainly wouldn't impact our current volumes. It may slow down the addition of new volumes into our system. There's always a lag between drilling and tying in connections, so I'm not familiar with the issue but it's certainly not impacting our current operations.

Okay, thank you. Just with respect to your capital budget and your operations, you've added some storage capability. You're going single shipper on Peace and you're active in the Marketing business. I'm wondering your working capital requirements are going to increase, and if so whether that increase is already contemplated in your line fill element of the CapEx budget or can we see additional requirements related to working capital?

Yes, the line fill requirements are really -- that's part of our capital budget. That's included in the midstream or the capital, so we don't view that as working capital. That's an asset on our balance sheet. Our working capital requirements could change as well. Hopefully, they'll change as we get involved in more opportunities. If we do more storage transactions on our own account, then that'll be inventory we have on our balance sheet for resale. So that effectively increases our working capital requirements. But I wouldn't expect it to be significantly different as we grow our working capital requirements will grow with it. So I wouldn't expect any surprises.

And I guess a bit of a more delicate strategic question but I'll ask it anyway. Your Conventional operating results were strong year over year, yet you didn't raise tolls. And with the price of crude being significantly higher, I'm wondering if there's any opportunity or any strategy around toll area that you can share with us?

We are dealing with our customers every day and looking for new opportunities. They're bringing us additional volume particularly on Peace and Drayton Valley systems, and currently we don't need to see a need to increase our rate of return on those assets. We are seeking a reasonable rate of return overall forgetting that we don't feel we need to adjust tolls. Just because oil is at $100 today, it may not be that in two or three months, and then I wouldn't want to have to retract that toll increase. Producers don't like tolls going up and down either, so we would rather -- if we can maintain a reasonable rate of return on the conventional system then that will satisfy our needs.

Okay, thank you.

Your next question comes from the line of Robert Kwan, from RBC Capital Markets. Your line is open.

Thank you. Just on the Nipisi and Mitsue expansion that you're looking at, how much third party support would you need to proceed?

Probably at least 75%.

Okay. And on both lines or --?

Yes.

-- or just the Nipisi portion?

Makes sense to do them both.

Then just the other question I got. At the Investor Day you were hinting at, with all the growth that you've got, that potentially see some near-term growth in dividends and if not maybe something you'd examine further down the road. I'm just wondering why then you might be sticking with maintaining the language around keeping the dividend constant through 2013 rather than maybe just either just pushing the date out further or hinting at some potential growth?

2014 is still a few years away yet, and I'm not smart enough to tell you what's going to happen in 2014. We -- our board reviews our dividend policy and dividend rate every quarter, and we'll continue to do that. As we get closer to 2014, obviously we may have some clarity in the projects. We expect to be in service at that time and maybe something will happen at that time, but not until then.

So is it fair to say that absent of a significant change in the business, it really is just a passage of time issue rather than anything else?

That's correct, Robert, yes.

Great, thanks very much.

(Operator Instructions)Your next question comes from the line of Stephen Paget, from FirstEnergy. Your line is open.

Thank you. Just a question, your purchased and want to run a Diluents service terminal. Are we seeing synthetic crude take over as a dilute or condensate still being used?

Certainly both. Certainly some of the sink crude product is used as a dilute and we provide that service through our line. It's obviously going to come down to price at the end of the day, cheaper to use condensate or cheaper to use synthetic. And also -- so it's a price driven and it's source driven as well, where is the product, where does it need to be? So for now you'll plan to continue to see both, but predominantly it's condensate right now.

Okay, thank you. My second question, there are some companies building pipelines and tank farms, and they're not in the midstream business, they're upstream oil sands producers. Could there be acquisition opportunities there?

If you tell me who they are Steve, then that would be good. Then we can go have a look at them. There are always opportunities available that we keep an eye on.

Okay, great. Thank you.

At this time there are no further questions in the queue.

Thank you, operator, and thank you everyone for attending our year end call, and we look forward to informing you of progress over the next quarter at our first quarter call. Thank you very much.

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