Pembina Pipeline Corp (PBA) 2011 Q3 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 third 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)

I will now turn the call over to Mr. Peter Robertson, Pembina's CFO.

Thank you, Simon, and good morning, everyone, and welcome to Pembina's conference call and webcast to review our third quarter 2011 results. As Simon indicated, I am Peter Robertson, Pembina's Vice President of Finance and Chief Financial Officer. And, joining me today on the call are Glenys Hermanutz, our Vice President of Corporate Affairs, and Scott Burrows, our Manager of Corporate Development. This morning I will review the quarterly results we released yesterday afternoon and provide an overview of our recent developments and then open up the line for questions. I'd also like to remind you that at the outset of the call that Pembina's offices will be moving to a new location starting at Noon Mountain Standard Time today.

Over the past few years, as your know, we have been growing our asset base and Pembina's market capitalization. At the same time, we've also been building out a strong team, both in terms of breadth and depth of experience. So far in 2011, we have hired about 50 new positions and with more (inaudible) projects, we need expansion space. Because of the move to our new space, which we expect to accommodate our needs for the next number of years, we will have Internet and access to voicemail, e-mail, and other systems until the morning of November 15. Should you, over the next few days, have any queries to which you require an urgent response, please contact Scott directly on his cell phone at 403- 771-1803 as it should remain unaffected by the potential outages.

I would like to remind you 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 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 available at pembina.com and sedar.com. Actual results could differ materially from the forward-looking statements we may express or imply today. Now, onto our Q3 review.

Third quarter of 2011 was another period of strong cash flow generation and operational performance across all our business units. As you can see from our results, we are unlocking substantial and we believe sustainable value from our diverse portfolio of assets and our established integration strategy. Quarter-over-quarter we saw 32% increase in revenue and almost 28% gain in EBITDA and a 57% jump in adjusted cash flow from operating activities. Year-to-date the results are also impressive with revenue, EBITDA, and adjusted cash flow from operating activities significantly higher than during the first nine months of 2010. This strong performance was driven by a thriving oil and gas liquid sector in Western Canada. Increased industry activity, as well as from application by producers of new technology in the Western Canadian Sedimentary Basin, and by the new services Pembina's developing and offering to our customers.

Pembina's assets are located in strategic areas of the basin and are already serving or can be tried into some of the most exciting areas and plays, including but not limited to the Deep Basin, the Montney, the Cardium, Edson, Peace River, Pelican Lake, Swan Hills, and the Athabasca oil sands, and the emerging Duvernay Shale. Midstream and marketing had another strong quarter generating an increase of CAD11.4 million in operating margin over the same quarter of last year, an increase of almost 145%. This was a result of sustained higher volumes and increased activity on our Peace and Drayton Valley Pipeline Systems, strong commodity prices, and differentials. Higher volumes in our Drayton Valley and Peace Pipelines also bested the results of our conventional pipelines business. There we saw average daily throughput around 430,000 barrels per day during the third quarter.

While revenue was up over 20%, operating margin came in at CAD43.8 million, which amounts to about a 9% increase compared to the third quarter of 2010. In this business unit, we incurred CAD3 million in one-time, non-recurring operating expenses relating to the Swan Hill spill and cost associated with the Western system's shut down. We have experienced higher power and labor costs associated with moving more product on our pipelines. Our gas services business processed higher goings at our Cutbank complex and generated CAD12.4 million in operating margin, an increase of 22% over the third quarter of 2010. This business unit had an extremely productive quarter, which I will discuss in greater detail shortly.

Finally, our oil sands and the heavy oil business delivered consistent and stable results, as expected, due to the contracted nature of this business. We expect the contribution from this business to grow as the Nipisi and Mitsue pipelines were ramping up in the third quarter and are now fully commissioned and will generate additional revenue in the fourth quarter. Pembina's general and administrative expenses were CAD13.8 million during the third quarter compared to CAD15.2 million during the third quarter of 2010. This decrease was due to higher legal and other expenses in 2010 related to Pembina's conversion for corporation and a transition to IFRS. We expect a G&A run rate of about CAD14 million per quarter in 2011. However, this many vary with our stock price performance, as the value of our employee incentive programs are driven by this metric.

I will now provide a snapshot of what is an extremely busy and exciting time at Pembina. So far, 2011 has been a very successful year. We are making significant progress in executing our growth strategy, and the longer-term picture is looking very promising. As I mentioned earlier in the call, we are moving to a larger office space to accommodate our growing Company. Throughout the organization we are working to deliver on approximately CAD600 million of new projects, which have recently been publicly announced. We expect most of the projects we have announced over the past nine months to be in service prior to the end of 2013. Beyond that timeframe we have more attractive opportunities under development than ever before in the history of our Company.

Each of our four business units has identified several promising areas that we intend to focus on and I'll touch on each of these, starting with gas services. Pembina continues to see significant growth opportunities resulting from the trend towards liquids-rich gas targeting and drilling and the extraction of natural gas liquids from gas. Our gas services team is focused on expanding this line of our Business, capitalizing on its experience and expertise, and building out its capacity to gather and process, extract the liquids, and transport them to market using Pembina's existing conventional pipeline network. Four recently announced gas services expansion projects evidence the strength of the Company's integrated approach. Two of these projects are expansions of Pembina's existing assets at its Musreau gas plant, one of the three plants that make up the Company's Cutbank complex. The other two projects will help Pembina to diversify Pembina's gas services operations and provide access into new regions that are seeing similar increases in development and gas processing requirements by producers.

These expansions are expected to bring Pembina's net enhanced NGL extracting capacity to approximately 600 million cubic feet per day, which would be processed in our largely contracted fee-for-service basis and result in approximately 40,000 barrels per day of incremental NGL to be transported for additional total revenue on Pembina's conventional pipelines by the end of 2013. Pembina expects these expansions to contribute between CAD75 million to CAD90 million in EBITDA annually. These projects, when combined with Pembina's existing and expanded shale cuts, will allow Pembina to process almost 1 billion cubic feet of gas per day. Pembina's CAD75 million Musreau Deep Cut Facility and new 205 million cubic feet per day ethane extract facility and related pipeline is in the commissioning phase, and we expect start-up to take place in December. Once on stream and at full capacity, we expect this deep cut to provide Pembina with around CAD12 million to CAD15 million of additional EBITDA annually, as well as up to 13,000 barrels per day of liquids for transportation. Pembina has contracted approximately 80% of the plant capacity and expects to contract the remaining capacity under terms designed to provide Pembina with cash flow certainty.

Pembina is also working to expand Musreau's shallow cut gas processing capacity by 50 million cubic feet per day. When the expansion is finished, the Cutbank Complex will have gross raw gas processing capacity of 410 million cubic feet per day and that's 355 million a day in net to Pembina, an increase to Pembina of 16%. We expect the project to cost approximately CAD26 million, and subject to regulatory and environmental approval, we expect to have expansion in service by mid-2012. For this expansion, Pembina has entered into fee-for-service contracts with a minimum term of five years with area producers for the entire capacity of the expansion.

We also announced two new gas services projects subsequent to the end of the third quarter, the Resthaven Facility and Saturn Facility. For the Resthaven Facility, Pembina has entered into agreements to develop a combined shallow cut and deep cut NGL extraction facility by modifying and expanding an existing gas plant in west central Alberta. Once operational, the initial phase of the Resthaven Facility will have gross capacity of 200 million cubic feet a day and 13,000 barrels per day of liquids extraction capability. Pembina estimates that the Resthaven Facility, associated NGL pipeline, and storage facilities will cost approximately CAD213 million net to Pembina. Subject to regulatory approval, Pembina expects these new facilities to be in service in late 2013.

Turning now to the Saturn Facility. Pembina plans to construct, own, and operate a 200 million cubic feet per day enhanced NGL extraction facility and associated NGL and gas gathering pipelines in the Berland area of west central Alberta. The Saturn Facility will be connected to Talisman Energy's Wild River and Bigstone gas plants through existing and newly constructed gas gathering lines. Once operational, Pembina expects the Saturn Facility will have the capacity to extract up to 13,500 barrels per day of NGL. Pembina expects the Saturn Facility, associated NGL and gas gathering pipelines, and related storage to cost approximately CAD200 million. Subject to regulatory and environmental approval, Pembina expects the Saturn Facility and associated pipelines to be in service in the fourth quarter of 2013.

We continue to investigate several other prospects for expanding our gas service business. Many of the exciting new developments in this segment are close to our existing infrastructure and liquid rich gas plays. And, with new technologies, we expect to see the need for increased gas handling (inaudible). 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 liquid extraction capacity and ethane plus transportation opportunities.

Moving on to our conventional pipeline business, we are seeing increased volumes on some of our existing systems and we are exploring new and expanding service offerings. This is evidenced by our news release, which crossed the wire yesterday, about expanding our NGL capacity on the Peace and Northern pipeline systems by up to 55,000 barrels per day to accommodate increased customer demand, resulting from strong [drilling] results and increased fuel liquids extraction by area producers. Subject to reaching acceptable agreements with our customers and obtaining any necessary regulatory approvals, the NGL expansion will require Pembina to install 5 pump stations and upgrade 5 existing pump stations, which we expect to cost approximately CAD100 million. Pembina expects that 20,000 barrels per day of the NGL expansion can be brought into service by the end of 2012 and the remaining 35,000 barrels per day by the end of 2013. This staged approach will be timed to accommodate the needs of our customers and producers in the area. Once completed, the proposed NGL expansion is expected to increase the capacity on the Northern NGL system by 48% to 170,000 barrels per day. Further expansion of Pembina's gathering and mainlines may be required.

We are working with the customers to assess their needs over the next three to five years to ensure we have the capacity to accommodate their growing production. We are also continuing our plans 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. We are nearing completion of our CAD23 million Willesden Green expansion, and we would expect it to be in service before the end of the year. This expansion will see that particular 42 kilometer segment of pipe reach capacity of 37,000 barrels per day, up from 12,000 barrels per day to serve a transportation-constrained area in the south of the Cardium formation. As well, Pembina expects to spend about CAD6 million to construct the Baptiste Truck Terminal in the Willesden Green area and the Bonnie Glen Truck Terminal east of Willesden Green by year-end.

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 connection to the terminals is de-bottlenecked with further expansion capability and the possibility of enhanced oil field services in the future. All of this industry activity is also opening up many opportunities for our midstream business. We continue to develop plans for our Pembina Nexus Terminal, otherwise known as PNT, which connects our infrastructure in the Edmonton- Fort Saskatchewan- Namao area, and will be available as a diluent distribution facility to serve the growing demand by customers in the oil sands and heavy oil sector. During the third quarter, we also announced our plans to invest approximately CAD50 million over the next 18 to 24 months to expand our truck terminal network at key locations throughout western Alberta and British Columbia.

Pembina plans to expand its services at a number of existing truck terminals and also to construct new full-service terminals that focus on emulsion treating, which is separating oil from impurities to meet shipping quality requirements, produced water handling, and water disposal. In addition to earning fees for these services, the Company's truck terminals will ensure volumes -- secure volumes for our pipeline systems and will generate additional pipeline total revenue. Pembina has numerous opportunities across our pipeline systems to service constrained in developing areas. The locations we have selected will enable us to provide the services our customers need in close proximity to their operations. At the same time, we are adding long life, integrated assets to our midstream portfolio on helping secure volumes for conventional pipelines.

That brings me to oil sands and heavy oil. As you know, we have completed construction of our Nipisi and Mitsue projects in the middle of this year. Both pipelines are now in service and have begun contributing to results in this business unit. As these pipelines are ramped up to full initial capacity, we are now excited to pursue the many expansion and integration opportunities associated with this key infrastructure. Our growth opportunities, together with the strong financial results, continue to lend confidence in our ability to maintain our dividend CAD1.56 per share per year through 2013.

Pembina is currently in the position of strong liquidity with unutilized debt facilities in excess of CAD300 million. We continue to believe that we will have access to capital markets to fund our growth projects, and we can also reinstate the DRIP, which we have successfully used in prior years. With another great quarter behind us and a record first nine months of the year, we're looking forward to finishing 2011 on a high note. We will have a conference call on December 1 to discuss our capital budget for 2012. With that, we can start the Q&A. Simon, please go ahead and open up the line for questions.

(Operator Instructions)

Juan Plessis, Canaccord Genuity.

Congratulations on a strong quarter. The first question is just a housekeeping question. In your conventional pipeline system, you incurred a CAD2.5 million expense associated with the pipeline spill near Swan Hills, just wondering if there is any more cost to be recognized in the fourth quarter?

That CAD2.5 million represents our insurance deductible and about CAD0.5 million of extra costs that we may or may not recover from that incident. So, we don't anticipate any further expense to hit our income statement.

Okay, thanks for that. I know in the past you've indicated that you had about CAD1.75 billion of potential growth opportunities that you're pursuing. I know you've talked today about a number of projects, about CAD600 million, that you have recently announced. Just wondering if you can us give an update on the amount of potential growth projects you now see in front of you, excluding the already announced projects?

It's probably in that CAD1.75 billion, to say, potentially, CAD2.5 billion, CAD 2.75 billion. We are getting calls on a weekly basis with potential new opportunities for, in fact, all of our business units. So, that is a large number, but with the activity by the EP producers, our opportunities seem to continue to grow.

Okay. Thank you very much.

Linda Ezergailis, TD Securities.

Thank you. I'm wondering, with respect to your potential expansion of the Peace and Northern pipelines, how much more contracting you expect to require to proceed with the expansion? And, what might be the timing of firming that up?

Well, we are currently working with, we are [certainly] in discussion with a lot of our particular NGL customers. We are looking at, before we build that expansion, we are looking at signing up under some term agreements. We expect to firm up between 70% and 80% of that incremental capacity under term arrangements with our producing customers.

And, when would you expect to have firmed those up by?

Certainly the next three to four months.

Okay, and what would be the incremental EBITDA and/or returns that you expect from that?

We are still in negotiations with our customers on those items. I shouldn't comment on that.

Okay. Just as a more detailed question. In your cash flows from operations, it looks that you've made some increased provisions. I think it is related to Nipisi, Mitsue. Can you just describe what the CAD9.6 million of additional obligations are and confirm that, that is what is showing up on your cash flows from operations?

Yes, the cash flow from operations statement these days is, I admit, it's a little bit more complicated to understand. Most of the provision number of that CAD11 million that is quoted there relates to the Swan Hills spill. Total costs are roughly about CAD11 million to CAD12 million; we expensed CAD2.5 million of that. But, that increasing provision number is also included in the CAD9.5 -- the same amount is included in the changes in non-cash working capital. Under IFRS, we are not allowed to net these numbers.

We've actually spent about CAD3 million. Not all of the bills have been -- most of the bills have not been received from that incident. They are shown as a liability or a provision, and it's also shown as a receivable from our insurance coverage. On the cash flow statements, it does not impact the cash flow from operating activities. It's included in the provision, and it's also a negative number in the non-cash working capital.

Okay. And then, the Nipisi and Mitsue shows up the CAD9.6 million, I guess that's year-to-date, and that's showing up in a different line item then?

I'm not clear what you mean by the Nipisi provision.

In your notes, in terms of provisions, you've estimated an increase of CAD9.6 million.

That relates to our asset retirement obligation. That is a balance sheet item.

Oh, that is a balance sheet. Okay, thank you.

Steven Paget, FirstEnergy.

Thank you, and good morning. First question, are the Resthaven, Saturn Facility tolls based on capital employed? In other words, do the tolls come down over time as the plants depreciate?

No. They don't. They don't decrease as the -- during the term of that project.

Okay, thank you. Second, does Pembina have access to land where it might build salt cavern storage facilities other than the Fort Saskatchewan ethylene?

Do we have access?

Yes.

Yes, we do.

Are you planning on building anything like this?

If our customers -- if there is a demand there, then we will, as part of our business model, we'll certainly do that.

Third question, could you comment on the impact of the partnership tax issue?

That legislation is not enacted yet. We're still looking at our models to see how that impacts us. And, if it is enacted, the likely [vent] is that it brings forward our cash tax horizon by about one year, as we have to reduce our deferral by about 20% a year over the next four years. We also have a number of, our gas plant projects in particular, have high capital cost write-offs, so the net effect of the partnership issue and the incremental capital projects should still keep us non-cash taxable until the end of 2014, '15.

Thank you. Okay, just a quick question, finally. You are moving into oil treatment so producers can just -- they can basically just drill and produce the emulsion. So, isn't there really one piece standing between Pembina and the producer and that is trucking?

Yes, it's still about 15% of our conventional volume comes to us by truck. So, although we are not involved in the trucking business there is certainly an important part of the infrastructure that ensures that the volume does come to our pipelines. Our midstream folks have commenced actually buying product from the producer at the well head. That ensures that, that volume comes to our systems.

Okay, and the trucks, basically their job is to deliver it. Thank you.

Matthew Akman, Scotia Capital.

Hey, guys. I just wanted to better understand the economic model for revenue on the NGL pipeline expansion. You provided some EBITDA guidance for some of the liquids extraction facilities that you are constructing. When you did that, you mentioned that those liquids would flow onto Pembina's P system largely. And so, I guess I am wondering whether those EBITDA estimates were inclusive of EBITDA from this pipeline expansion, or whether there could be incremental EBITDA over and above what you have talked about from the extraction facilities?

No. The existing EBITDA numbers that were quoted in our gas services initiatives exclude any incremental revenues. As I mentioned earlier, we have not contracted out that incremental expansion capacity as yet. So, most of that incremental business will provide additional EBITDA.

Presumably, those could be from some of the same customers that are providing gas for the extraction facilities, correct?

Could be same customers, but different areas.

Okay, so this is actually -- this is clearly completely over and above the contribution from the extraction facilities?

Yes it is.

Okay, great. Thanks. That's all I had.

Robert Kwan, RBC Capital Markets.

Good morning. First question around getting some granularity on how you are thinking about the financing plan. You certainly don't need the money now, but there's a lot of capital that you've committed as you get in towards the back end of next year. So, just wondering what your thoughts are right now, and how you are planning on addressing that?

Well as you know, Robert, we have -- we believe we have good access to both the debt and equity markets. And, as indicated, we also have our DRIP program that we could ramp up. That had the capability of raising to up CAD150 million a year when we last had it in service. Generally, we will we be -- we'll still raise debt and equity to capitalize projects, generally on a 50/50 basis. So, as you indicated, we won't need most of that money until the latter part of 2012. We certainly have sufficient credit facilities available to us in the short-term for our short-term projects and the initial capital on these gas service projects.

Okay. So, I guess the key take away that you are planning right now both on what you've committed to, and then, it seems like there's a lot that you are pursuing right now. You'd still much rather like to match the timing of the external financing with when the capital is going to start going out the door?

That makes sense. We can -- certainly, the markets are open today. We could raise funds today, but these funds would be sitting on our balance sheet earning little value for us.

Okay. And then, sorry, go ahead?

It doesn't make sense for us to [pre-fund] to a large degree.

Okay. The last question I've got is somewhat related. As the capital plan starts to ramp up, and therefore, some of the financing needs and the risk around what levels you are going to be financing at if you are looking a little further out. Do you start to adjust the hurdle rate, or maybe put differently, do have a bit less of a willingness to factor in the upside from the pipeline tolls for volumes that you would otherwise receive, especially when you are chasing some of these gas plan opportunities?

Yes, I think, Robert, as our CapEx budget grows and the opportunities increase, I do think it affords us a little bit more of an opportunity to look at higher return projects.

Okay, and you'd be fine losing a few gas plants, if that is what it is, because you are going to get the pipeline tolls regardless?

That's correct.

Okay, that's great. Thank you.

(Operator Instructions)

Robert Catellier, Macquarie.

Thank you. Most of my questions have been answered. But, on the proposed expansion on the NGL pipeline, I'm curious, given that there is going to be a relatively high contracted amount there how we should look at the risk transfers. Assuming that you have less risk at the end of your negotiation, how much would we be looking at the returns? I know they are not fully negotiated, but is this type of project going to get your traditional returns with lower risk, or is there some trade-off with perhaps lower return because you are getting contracted volumes?

Hey Rob, it's Scott here. I think, obviously, we are still in negotiations so we can't say everything. But, I think we've tried to indicate in our press release that we are looking to get term here, so we are looking to get less risk by [terming] up those contracts for long-term contracts And generally, associated with long-term contracts are slightly lower return. We are looking to give something back to our producers here.

Thank you.

And, I am showing there are no further questions at this time. Mr. Robertson, I turn the call back over to you.

Thank you, Simon. And, thank you, everyone for listening in on our call today. We look forward to completing our year-end and discussing our fourth quarter and annual results in mid- February of 2012. Thank you very much.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.