Pembina Pipeline Corp (PBA) 2011 Q1 法說會逐字稿

Good morning. My name is Simon and I will be your conference Operator today. At this time I would like to welcome everyone to the Pembina Pipeline Corporation 2011 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) Thank you. Mr. Michaleski, you may begin your conference.

Well, thank you, Simon and good morning, everyone, and welcome to Pembina's conference call and webcast to review our first quarter 2011 financial results. Joining me on the call today are Peter Robertson, Pembina's Vice President of Finance and Chief Administrative Officer, and Glenys Hermanutz, our Vice President of Corporate Affairs.

Our agenda today follows our standard process. I'll review the first quarter 2011 results we released yesterday, spend a few minutes providing an update on our growth projects, and then open up the line for questions. I'm going to assume everyone on the call has a copy of the first quarter reports so my synopsis will be fairly brief. Then we will have plenty of time to cover all of the questions I'm sure you'll have.

I'll start with a reminder, some of my comments 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 information I provide refers to non-GAAP measures. To learn more about these forward-looking statements and non-GAAP measures, please see Pembina's various financial reports at www.pembina.com and SEDAR. Actual results could differ materially from the forward-looking statements we may express or imply today.

Turning to the Q1 2011 review, our financial and operating performance during the quarter was very strong and I'm pleased with how our year actually has begun. This was also our first quarter reporting under International Financial Reporting Standards, so you'll note that some of the metrics we highlight have new names.

Quarter-over-quarter we're seeing strong gains, including a 36% increase in revenue and almost 9% jump in operating margin, and a 12% increase in cash flow from operating activities. These gains were driven by continued success in each of our business units, which are benefiting from the resurgence of industry activity and the application of new technology in the Western Canadian sedimentary basin.

Midstream and marketing had a particularly strong quarter generating a quarter-over-quarter increase of over CAD7 million in operating margin as a result of higher volumes and increased activity on the Peace Pipeline and Drayton Valley Pipeline Systems, new service offerings associated with the Edmonton Terminal, stronger commodity prices and wider margins.

Higher volumes on the Drayton Valley and the Peace Pipelines also helped our commensal pipeline business maintain the steady quarter-over-quarter and we saw higher volumes at our Cutbank Complex in our gas service business. Oil sands and heavy oil, again, produced consistent and stable results due to the contacted nature of this business.

General and administrative expenses of CAD14.6 million were incurred during the first quarter of 2011, compared to CAD8.9 million during the first quarter of 2010. Now, the primary driver of the increase was the timing of provisions made for incentives and an increase in the share price used to value those amounts. The increase also reflects higher salary and benefits expense due to an overall increase in the number of employees. We expect the G&A run rate to be about CAD13 million per quarter during 2011.

Now let's take a look at the progress we're making at Pembina to grow our business. With respect to Nipisi and Mitsue, I'm sure all of you are aware of the devastating fires that ravaged the Slave Lake area in the past few weeks. We're very saddened for the people of Slave Lake and the neighboring aboriginal communities and are working to provide assistance where we can. We have reached out to the Mayor of Slave Lake and have offered to provide necessary goods, such as blankets and food as well as employee volunteers, to help with their clean up efforts. Once they are out of immediate crisis, we will continue to work with them to determine how Pembina can best support the needs of the community. Over the past weekend, we were able to send a team out to view our construction sites from the air and have confirmed that our facilities were out of harms way and incurred no damage.

We have submitted a request at Alberta Sustainable Resource Development to get back to our construction site and we're awaiting their approval. We still expect to complete these projects on time and on budget. With the Mitsue Pipeline essentially complete, and Nipisi Pipeline about 90% complete, the majority of our costs are locked in. We are confident that we will be able to complete the projects within or under budget. Both pipelines are scheduled to be in service in mid-2011 and we're currently investigating expansion scenarios that would have the potential to 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 area of growth. Looking at gas services, in our first quarter report we also provided a more detailed look at the natural gas liquids extraction facility we are working on to complete at the Cutbank complex.

We are well into the construction of the new 205 million cubic feet a day of ethane extraction facility and the related 10-kilometer pipeline to deliver an ethane mix stream to Pembina's Peace Pipeline. The new plan is expected to cost CAD75 million and is on schedule for commissioning of start up in the third quarter of 2011.

The plant is being built on an existing Musreau gas plant site and the pipeline is using existing pipeline corridors and infrastructure where possible, which helps us to reduce the need to disturb additional land for the project. We have contracted approximately 80% of the plant capacity at the facility, and we expect to contract the facilities remaining capacity under terms designed to provide Pembina with cash flow certainty.

Once on stream, the ethane extraction facility expected to provide Pembina with approximately CAD12 million to CAD15 million of additional operating margin annually, as well as up to 14,000-barrels per day of liquids which Pembina will transport on its conventional pipelines and receive additional total revenue on. This is an exciting opportunity for Pembina and serves as another example of our ability to integrate our businesses. At present, we're on schedule to begin service in the third quarter and we are on budget.

We continue to investigate several other prospects for expanding our gas services business. Many of the exciting plays that are close 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 liquid 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 pipeline business, we're seeing increased volumes in some of our existing systems and we're exploring new and expanded service offerings as well. Since the latter part of 2010, we really began to see the impact of the development of the Cardium Formation. The 20,000 average barrel per day increase on the Drayton Valley Pipeline and Peace Pipeline systems we've quoted in our annual report has continued. And March 2011 exit volumes were up by roughly the same amount.

These are exciting results for us and have brought many expansion opportunities. We plan to invest approximately CAD40 million, a portion of which is subject to regulatory approval, on projects that will strengthen the transportation service options we provide cardium producers by mid-2012. To date this year, Pembina has spent approximately CAD15 million of the CAD40 million in preparation for this expansion to install 10-kilometers of 10-inch pipeline in the West Drayton Valley area to purchase and coat 42-kilometers for the Willesden Green Expansion Project, as well as pump station upgrades and producer facility connections.

Pembina also plans on spending about CAD7 million to construct the Baptiste Truck Terminal in the Willesden Green area and the Bonnie Glenn Truck Terminal east of Willesden Green by mid-2011. We expect the terminals will be capable of receiving a combined 3,000-barrels per day of clean, dry oil initially. By early 2012, Pembina expects volumes could ramp up to approximately 7,000 barrels per day, as the pipeline system connected to the terminals is de-bottlenecked. With further expansion capability and possibly of enhanced oil field services in the future.

Turning to midstream, all of the 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 terminals and storage facilities connected to major pipeline infrastructure and 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.

This acquisition forms part of a 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.

In terms of oil sands, with the rebound in the plant oil sands development, 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 our 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 projects come on stream as well as entering 2012.

Looking at financing activities, moving on I'd like to discuss them. On March 29, we closed the sale of CAD250 million of senior unsecured medium-term notes. The medium-term notes have the fixed interest rate of 4.89% per annum, paid semiannually, and will mature on March 29th of 2021. The net proceeds from the offering of the medium-term notes were used to repay a portion of Pembina's existing credit facility and to fund organic growth opportunities.

This successful financing demonstrates our continued confidence that should the need arise Pembina has good access to the capital markets on attractive terms in the form of public and private debt, or common equity, to ensure both objectives are met, while at the same time maintaining approved balance sheet. Based on the current 2011 capital program, Pembina has sufficient financial liquidity to fund and reapportion of the capital plan.

Our growth opportunities together with a strong financial results, continue to lend confidence in our ability to maintain our dividend at CAD1.56 per share per year through 2013. We'll continue to focus on the priorities that have brought us success in the past, and as always, we'll manage our operations with the need to maximizing shareholder value.

As you can see, there's a lot under way at Pembina and I expect the financial andoperational success we achieved in 2010 will serve us well in 2011 and beyond. With that we can start the Q&A, so Simon, please go ahead and open up the line for questions.

(Operator Instructions)Linda Ezergailis; TD Newcrest/Waterhouse Securities. Your line is open.

Thank you. I have a question about your Midstream and Marketing business. You seem to have benefited from a number of factors in the First Quarter, which is great. Can you maybe break down the increase in revenue between those factor volumes and activity on the Peace Pipeline and Drayton Valley Systems versus new service offerings with the Edmonton Terminal versus stronger commodity prices and lighter margins? And then comment on your views on how those trends might continue for the balance of the year?

You've asked a lot of questions, Linda. In terms of how we would break it all down, I think that what we've seen is that our volumes on Peace and Pembina are up about 20,000-barrels a day from where they were in the First Quarter of last year. So with that certainly is a significant contributor to the increase in the operating margin contribution from the Midstream business. I'd have to say roughly, and this is a rough guess, about half of the improvement in the Midstream contribution has come from volume increases. And so the other half is really related to other factors, including pricing and differentials. As well as, we did get some contribution from the storage facility that we acquired although it was pretty minor in the First Quarter. I think we're going to see more for the balance of the year.

In terms of guidance for the year, I'd say Midstream, excluding our ethylene storage, will continue somewhere around CAD80 million to CAD85 million this year, Linda. So it is up considerably over last year. I think, hopefully, that gives you enough to be able to base your projections on for the balance of this year. Obviously, the caveat of course is that we've had a lot of volatility in the first actually four months, almost five months of the year, now, so will that trend continue? I can't comment on it right now. But we're obviously off to a good start for the first four months. And the other factor, Linda, is that the Pembina Peace Pipeline System went single shipper on January 1 of this year and that also is a factor that will contribute to the increase in overall contribution from that business for the year. So I think the bottom line is we're seeing CAD80 million to CAD85 million ex-ethylene guidance that we're providing at this stage.

That's great, thank you. Maybe moving on to your financing plans for the year. Can you maybe comment on the relative attractiveness of your various options, both your short-term temporary financing options as well as some of the longer term ones?

I'll let Peter speak to that, Linda.

Linda, we have sufficient cash and undrawn credit facilities from a bank syndicate to finance the known projects that we have for the balance of 2011 and probably First Quarter of 2012. I don't see any need to go for traditional funds unless we have additional projects that come our way. It all depends on the size of those projects. Obviously the lower cost debt would be our preferred group, unless we have to shore up our balance sheet for a larger project.

Okay, so no plans for permanent financing this year then?

That's correct.

Okay, great, thank you.

You're welcome.

Juan Plessis; Canaccord Genuity. Your line is open.

Great, thank you very much. With respect to the enhanced NGL extraction facility, it looks like the in service date for this project has been pushed out a few months from July to October, but I see your CapEx expectations haven't changed. Just wondering if you can give us a bit of color as to what's going on there?

Yes. We actually were looking at an in service date at the beginning of July. Juan, but what we end up having, of course, we had a really cold winter for our Nipisi Mitsue construction. But the really cool winter didn't do much good at our Cutbank Complex because we had to deal with a lot of snow and really cold weather that has delayed us. We're pushing it out to October 1. We're not seeing a material change in our capital expense year estimates at this stage. I think probably, internally, we're saying that we had hoped for those costs to come in a little bit lower than what we're now projecting. But we are projecting Mitsue coming in about where we thought initially.

Okay, great. Now you contracted 80% of your expected capacity for that project. Can you give us some color on the nature of the contracts, in terms of length of contract, whether they're fee based, or if there's any potential profit-sharing mechanisms in there?

What I can say is there aren't any profit-sharing mechanisms. And the contracts are fee-for-service. I believe we're talking 10-year contracts here as well, Juan. So, in terms of the nature, I think the guidance we provided in our call would suggest that, that's what we're expecting on an annualized basis from the production from the facility itself. And then, in addition to that, we expect to have additional tariff revenue on our pipeline as well. So I think that combination of information should hopefully give you sufficient information to model the impact of that transaction.

Thanks. And then just a point of clarification. The guidance you gave was between CAD12 million and CAD15 million of operating income annually. Is that inclusive of any increased operating income from the toll revenue for the extra liquid?

No, that's exclusive of that, Juan. So I think at 14,000-barrels a day, I'm not sure what our posted toll is but at any rate, it's going to be, it will add another I'm going to say roughly CAD8 million to CAD10 million. This is top of my head so it is subject to check.

Okay, great. Thank you for that.

Let us just confirm that, that number is not unreasonable.

Okay, great. Thanks.

Robert Catellier; Clarus Securities. Your line is open.

Just like a little bit of an update on the impact you expect from the producer shut-ins and reduced activity as a result from the fires in the northern Alberta. Specifically, quite a bit of production shut-ins on the one hand, but Plains Pipeline being down presumably there's an offset and a benefit there. So in the Second Quarter how would you expect those two would weigh against each other?

Rob, I don't know that we're seeing a significant impact yet. I talked about our Nipisi Mitsue project. We're essentially on time and on budget for that. In terms of other producers. There are some producers that have been impacted. I think in the Swan Hills area. I understand that there's been a couple of batteries that have been impacted with power. But as you pointed out as well, Rob, we are getting trucks at all of our truck terminals to provide us oil that's generally not moving on the plains pipeline at this stage. Right now, I'd say that we are not expecting to see any significant impact negative or positive.

I am thinking that the truck volumes are going to offset some of the shut-in production. But I have to see Second Quarter, Rob, is going to look very much like the First Quarter. The exception being the Second Quarter typically we do have lesser volumes being tracked to our systems. But so far, for the month of April, its been pretty solid. Month of May, we had a bit of a blip for one week. But basically, we're moving about the same level of volume this time as we did during the month of March and April. So I think things look reasonably positive.

Okay. What can you tell us about your plans to develop those Gibson assets you acquired? Is there any more color you can provide in terms of how you might add additional services, interconnectivity without obviously giving too much competitive information away?

Rob, we reviewed this with our Board yesterday and I'd have to say that they're probably are several things that we can do here. I've talked about we bought 300,000-barrels of storage and there's a number of customers that we are talking to about how we can better use that storage in the near term, say over the next two to three years. But also, we're talking to customers as well about potentially expanding our storage capability at that facility. And I think that will develop over time. At this stage, all I can offer is that we are expecting to generate, say roughly, CAD9 million to CAD10 million a year from the existing facility with a plan to expand over the next several years to increase that contribution significantly. Because I think we've got the potential to go to close to 3 million-barrels of storage if we fully develop it. Glenys is looking at me kind-of funny so maybe that number is not right. I know we've looked at the potential projects that could be up to 3 million and what we may have to actually do is maybe acquire more land to achieve that.

Okay, thank you. Those were my questions.

You're welcome.

Tony Courtright; Scotia Capital. Your line is open.

Thanks very much. I think a lot have been answered, but a couple of housekeeping points. The equity account investment, can I confirm that, that is strictly the ethane storage, or does it represent anything else?

No, you're correct in that assumption, Tony.

And in terms of three of the five caverns being out of service, you've contracted to wash another cavern. How would you classify that expenditure or do you care any longer whether it's sustaining or growth?

That would be a capital expenditure from our point of view.

So growth expenditure?

Yes.

You can satisfy your requirements with the remaining two caverns at the moment?

Yes. Well our revenue stream is not impaired because of the caverns being out of ethylene service right now.

Right. Would adding the additional cavern create additional revenue and contribution?

No. The revenue stream would be maintained once the additional cavern's in service. So the revenue we're receiving today, or that we received in 2010, will continue through the term of the contract, out to 2023. But we have to build that additional cavern to satisfy that requirement.

Right, so maybe I miss heard, so you would consider that expenditure for the additional cavern to be sustaining or growth?

Well, we still see it as growth because it will be a new cavern and presumably it will have an extended life well beyond the contract term of 2023. And these Caverns could have a life of 20 to 30 years.

In terms of life of assets, I notice you changed your depreciation and it says certain pipeline systems or something. Could you specific about which particular pipeline?

The oil sands lines that historically we've been amortizing, those over the terms of the initial contracts which were 25 to 35 years. In reality, the reserves there are at least double that, maybe even triple that, so based on the reserves that these lines, oil sands lines, should be amortized more over a reserve base, as opposed to a contract term. So we've adjusted the useful life up to 75 years for those facilities.

So that would include Syncrude and Horizon, what about Cheecham Lateral?

All three.

Okay. And do you have any views about the Nipisi and Mitsue areas, in terms of reserve life, or is that premature?

It's a little bit early, Tony. We'll see once our lines are complete and the producers start ramping up their production. We'll have a better idea of what the reserve life might be on those facilities.

Yes. Tony, we think that the reserve life, these are oil sands type assets. So we think the reserve life is much longer than the contract life for sure. But at this stage, I think it would be too early. I think we want to see what sort of development does take place and we believe it could be significant but time will tell.

Great. And then I guess I'll stop there. Thanks very much.

You're welcome.

Matthew Akman; Macquarie Research Equities. Your line is open.

Thanks. Could you just expand on the investment you made in line fill in the quarter for the Marketing Business and the purpose of that?

Yes, the investment we made in line fill for the quarter was to acquire the line fill for the Peace Pipeline system, the residual line fill that we didn't already own. That then allows us to take the pipeline what we call single shipper and that is now consistent with what we have done with our Swan Hills system, our Drayton Valley system and now the Peace Pipeline system. They are now single shipper pipelines, which is pretty much common in the industry today.

And therefore you expect higher returns on those over the next little while?

Yes. The opportunity we expect, for example, with the Peace Pipeline system, we expect to generate say roughly, the number of off the top of my head might be CAD10 million from a single shipper.

Okay, thanks. On the maintenance on the conventional business, we've seen it move down and up. The level that was reported in the quarter, did that reflect some unusual maintenance activity, or is that a more sort of normal level of maintenance?

Well, it's going to vary, Matthew. Because part of what we are looking at strategically at this stage is that we are expecting to see increased liquids volumes coming our way over the next 12 to 24 months. So anticipation of that, we are spending more money on pipeline integrity because if we are operating at higher pressures, we want to make sure the pipelines are capable of operating at those higher pressures. So I think over the next 12 months, we might see our maintenance type expenditures higher than they actually have been in the past. And the simple reason for that is we want to insure that we're ahead of the game and preparing for volume increases on our systems.

Do you also anticipate any regulatory pressure, just given safety concerns on pipelines these days, and trying to get ahead of that?

I think it's certainly a valid consideration given some of the experiences. Some of the other pipeline operators have experienced. At this stage, we're staying the course. I'd have to think that we always have had a actually fairly very proactive integrity program in our pipelines. I think we maintain that at that level, or higher, in anticipation of increased volume. But certainly the regulators are going to be watching where they should and I think that's fine. We're prepared to respond to any type of regulatory changes that may come as a result of some of the incidents that have been experienced. But I still think that our pipelines are well maintained.

My last question is on balance sheet. You guys have taken leverage up a fair bit over the last couple years, which makes a lot of sense given the low level going into the change in tax treatment. I'm just wondering where that kind of ends for Pembina. Are you at a level of relative leverage that makes you comfortable now, or do you think you can go further on that front?

You know, I think well Peter, why don't you answer that question.

Yes. I think we're fairly comfortable with the assets we have today and the current leverage. A lot depends, going forward, on what type of expansion projects we have. If we have some major projects, let's say they were in the oil sands area that will be underpinned with long term contracts, variable risk then maybe in those contracts, we can afford to increase leverage a little. Whereas if the expansions are in our gas services or conventional systems, then the likelihood is that our leverage will be more in the 50/50 range as they have historically been. So long term, an average maybe slightly higher than the 50/50.

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

You're welcome.

Robert Kwan; RBC Capital Markets. Your line is open.

Great. Thank you. Just coming back to the Cutbank expansion and the operating income guidance. I'm just wondering what's driving the CAD12 million to CAD15 million range. Is it just the volumes under the 80% that's contracted or is that the potential to move it from 80 to 100 or is it something else?

I think it's closer to the range is probably saying going from 80 to 100. And that's sort of the basis for the guidance. And the basis for the terminations is generally driven by fees and calculation of fees that are common to the gas business.

Okay, so is it fair to say that at the 80% level you're going to be closer to the 12 million and if you can contract it up, you'll be moving that up towards 15?

Yes, I think that's fair to say, Robert.

And on the contracts that you have, I'm not sure if you disclosed it actually, are they all third party contracts or is any of it for your own book?

No, these are all third party contracts.

Okay. In terms of the IFRS conversion, we've seen some companies capitalize some of what was previously OpEx. Have you done any material amount of that switch for your business?

I'll let Peter answer that.

No. There's none of that going on, Robert. And I wasn't aware that other companies had certainly changed from expensing things to capitalizing things because of IFRS.

Okay, and just the last question I've got. Is there any new comments on the potential Nipisi and Mitsue expansions?

I think at this stage, that what we're likely going to see, Robert, I'd say based on the best information we have today, is that the Nipisi Mitsue expansion will be a phased expansion. That right now, we are saying 100,000-barrels a day of dilbit and 22,000-barrels a day of condensate. I think we can probably move some more condensate up there and we probably can move initially maybe a bit more dilbit out of the area based on the existing configuration. But I think what we're going to see is staged increases maybe moving to say potentially 150,000-barrels a day of dilbit and then ultimately at 205,000 barrels a day or roughly 200,000-barrels a day of dilbit over time. So I would say, the expansion is still actively being pursued. But we think the most logical way to do it, most cost effective way to do it, now, is through a staged expansion. Because that way, we can reconfigure existing systems in such a manner as to minimize the capital that we put into get the incremental volume.

Okay, so it sounds like the first set of expansions will just be horsepower before you get into anything that's a little more costly on 20?

Yes, pretty much, pretty much, Robert. We'll have more to say probably in the next six months on it. Because a lot of it is dependent on the natural gas liquids developments that might occur through our service area. Because to the extent that we get more liquids coming our way, again we have to rechange to reconfigure our pipelines to handle the increase. And that will then have it dictated as to how much capacity we have to handle more dilbit coming out of Nipisi.

Okay, that's great. Thank you very much.

Okay, Robert.

(Operator Instructions)Steven Paget; FirstEnergy Capital. Your line is open.

Good morning and thank you. You mentioned that you have a commitment to increase capacity on the Horizon Line, if the shipper wishes. Would you receive the same rate of return on the capital spend to increase the capacity, if that went ahead?

The contractual terms I think are very similar, Steven, with respect to potential expansion of the Horizon Pipeline, as to the existing arrangement that we have.

Thank you. Second question, in your Midstream and Marketing business, do you use a metric of percent of cash flow to hedge or otherwise control the value of risk in the business?

Well, you know, we really don't take on. We're subject to changes that exist in the marketplace, but typically, we don't take on a lot of risk. We might hedge, for example, a commodity for a period of time to insure that we meet our budget expectations. Typically, when we enter into an arrangement for example, where we're going to buy, store, and sell, we'll do that all at the same time to lock in the margin. So, I think it's really case specific and circumstance specific as well. Because a lot of it really is driven by what's happening in the marketplace and relationships between various crude prices. So I know it's kind of a convoluted answer but it's not a straightforward situation. I think there are probably so many different options to deal with here that what we're trying to do is actually increase the number of options that we can deal with, to sort of minimize the volatility that might exist in that business.

Maybe you could take us through how you make money on a typical barrel in the Midstream and Marketing system, the barrel enters the Peace system, you purchase it, etc?

Yes. So what I can do then is just talk about what we call, one thing that we call is equalization, Stephen. So what happens is we buy all of the barrels that come into our Peace Pipeline as an example. Those barrels have different densities. Some of those densities, when they're different densities, some receive a different price than others. So if you're outside of the scale you usually receive a penalty. And if you're within the band, you're not penalized. So what happens is when all those barrels come into our system, they get mixed. Generally speaking, the value of the product, at the end of the pipe when it comes out, is worth more than the value coming in. So that is an example of one way that we can make money in that business.

Another way we can make money in that business, is if for example, condensate was receiving higher price than light sweet. So we can blend light sweet crude with condensate and get condensate pricing to capture that differential. So that would be another example. We also can bring heavier products into our system that are generally discounted. And when you get the heavier product combined with the lighter products that we transport, you again can get higher pricing. But you only do that if you're sure that you're going to be able to make money on it, so that's what our guys do.

All right, thank you. Good explanation. I appreciate that.

There are no further questions at this time. Mr. Michaleski, I'll turn the call back over to you.

Well thanks, Simon. And thanks for all who participated in our call this morning. We're pretty excited about the start to this year. We have, obviously, significant growth potential this year. I think with the capital programs, we're seeing a lot of new activity in the areas that we provide service. I think Peter is pretty confident that we can finance the growth that we're seeing this year and next. So, off to a good start. We'll have more to say next quarter. For those of you who are in Calgary, our AGM is this afternoon, if you want to tromp your way through the rain to join us. If you do, we'll be happy to see you there and perhaps we can elaborate a bit more if we need to. So again, thanks for participating today.

Ladies and Gentlemen, this concludes today's Conference Call. You may now disconnect.