Pembina Pipeline Corp (PBA) 2017 Q1 法說會逐字稿

Good morning. My name is Chris, and I will be your conference operator today. At this time, I would like to welcome everyone to the Pembina Pipeline Corporation 2017 First Quarter Results Conference Call. (Operator Instructions) Mr. Scott Burrows, you may begin your conference.

Thank you, Chris. Good morning, everyone, and welcome to Pembina's conference call and webcast to review highlights from the first quarter of 2017.

I'm Scott Burrows, Pembina's Vice President of Finance and Chief Financial Officer. On the call with me today are Mick Dilger, Pembina's President and Chief Executive Officer; Stu Taylor, Senior Vice President, NGL and Natural Gas Facilities; and Paul Murphy, Senior Vice President, Pipelines and Crude Oil Facilities.

Before passing the call over to Mick, I'd 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, judgments, projections and risks. Further, some of the information provided refers to non-GAAP measures. To learn more about these forward-looking statements and non-GAAP measures, please see the company's various financial reports, which are available at pembina.com and on both SEDAR and EDGAR. Actual results could differ materially from the forward-looking statements we may express or imply today.

Over to you, Mick.

Thanks, Scott. Good morning, everyone. We're going to try to keep our prepared remarks quite short this morning to allow for questions on the quarter and time to discuss the transaction we announced on Monday for Pembina to combine with Veresen.

Before getting into our Q1 results, I wanted to again say how pleased we are with the Veresen announcement. This is truly a transformational event for the shareholders of both Pembina and Veresen as well as a positive development for our customers.

During our call on Monday, we discussed the many benefits of the transaction in great detail, so I'll keep comments brief today. For those looking for more information on the Veresen transaction, we have a webcast overview of the announcement on Pembina's website, or you can listen to our AGM presentation webcast this afternoon.

At a high level, the strategic transaction will create a larger, more diversified Canadian energy infrastructure company, supporting some of our -- North America's most prolific resource plays as well as a greater customer service offering. The combined company will have a large, integrated asset base supported by long-life, economic hydrocarbon reserves, a high proportion of fee-for-service cash flow and an impressive suite of both secured and unsecured growth opportunities.

Upon closing of the transaction, we will increase our monthly dividend by 5.9% or to $0.18 per common share.

Turning to the first quarter, we are happy with our performance across the board. We again achieved record financial and operating results, with record revenue and sales volumes of over 2 million barrels of oil equivalent per day. Also, our impressive safety record remains intact. Our employees worked over 755,000 hours in the first quarter of 2017 with no employee lost time injuries, while executing on a record quarterly capital expenditure of $709 million.

With our continued success and financial strength, we're also happy to have increased the dividend in April by 6.25%, marking our sixth consecutive annual increase.

We also saw a number of business units have success during this quarter. We have secured an exciting opportunity to grow our presence in the Duvernay through our previously announced infrastructure development and service agreement with Chevron. We announced our Phase IV and Phase V pipeline expansions, committing an additional $325 million of capital; and we identified a West Coast propane export terminal site capable of exporting 20,000 barrels per day of product with an associated capital cost of between $125 million and $175 million. Stu and Paul will discuss these announcements in more detail shortly.

I remain very positive about the year ahead. Our long-term strategy continues to unfold and deliver the promised results, while we work toward successfully closing the acquisition of Veresen.

I will now pass the call back over to Scott.

Thanks, Mick. As Mick mentioned, Pembina achieved operational and financial results and -- strong operational and financial results in the first quarter of 2017. All the details are in the reports; I'm only going to hit the highlights here.

Adjusted EBITDA was $363 million, an all-time quarterly high and an increase of 35% compared to the same quarter last year. The increase was a result of stronger performance across all businesses, including new assets placed into service and the Kakwa River acquisition. Our strong performance, combined with reduced current tax expense, resulted in adjusted cash flow of $308 million for the quarter, a 47% increase over the same period last year.

On a per-share basis, adjusted cash flow was $0.77, a 38% jump compared to Q1 of 2016. Our earnings came in at $215 million or $0.49 on a per-share basis, which are respective increases of 111% and 113% compared to the same quarter of 2016.

We achieved new quarterly records for revenue and sales volumes across all our businesses. Average revenue volumes on our conventional pipelines were a record 691,000 barrels per day, 3% higher than Q1 last year. Our Gas Services business processed just over 1 billion cubic feet per day in the first quarter of 2017, a 52% increase over the Q1 of last year. NGL sales volumes reached a record level of 173,000 barrels per day for the first quarter of the year. Higher volumes, along with improved operational performance and new assets in service within certain business units, resulted in strong operating margin in the first quarter compared to Q1 of last year.

Conventional Pipelines operating margin increased by 5% to $134 million, Gas Services operating margin increased by 89% to $70 million and Midstream's operating margin increased 45% to $165 million. This increase was also due to higher commodity margin and physical storage revenue, partially offset by a settlement timing difference on our storage-related financial instruments. Our Oil Sands business continued to perform in line with previous periods, as expected.

Turning to our financial position. Pembina maintains one of the strongest balance sheets amongst our peers and is further supported by ample liquidity and financing flexibility. As of March 31, 2017, Pembina's debt-to-trailing 12-month adjusted EBITDA ratio was 3.5x. We completed a very successful $600 million debt offering early in the quarter, and as of April 28, our $2.5 billion credit facility had approximately $200 million drawn, leaving substantial room for Pembina to fund its remaining 2017 capital program.

We also suspended our dividend reinvestment program, as we expect to fund our current equity needs through our internally generated cash flows from new assets being placed into service.

I will now pass the call over to Paul, who will provide an update on growth projects within our condensate and crude oil value chain.

Thanks, Scott. Good morning, everyone. We are excited to have announced in early April our Phase IV and V Peace Pipeline expansions for a total capital of approximately $325 million. As we alluded to in the last call, continued customer demand for transportation services is driving these incremental expansions.

We have regulatory and environmental approvals for Phase V, which is the 98-kilometer pipeline, and clearing of the way -- right of way for this line is 50% complete. Phase IV, which are 2 mainland pump stations, is still subject to regulatory and environmental approval. We expect to place both these projects into service in late 2018.

Moving to our Phase III Expansion, construction is essentially complete. All of the pump stations are built and all of the pipe is in the ground. Our teams are working on the remaining activities, including commissioning the pump stations and completing the last few pipe wells and final hydrostatic testing of the 2 pipelines in the Fox Creek-to-Namao, Alberta segment of the project. The overall project continues to track slightly under budget, and we expect to place it into service on July 1 this year, exactly 8 weeks from today.

For our Northeast B.C. Expansion, the main line is almost 50% complete; and the Altares Lateral, which will connect to the NEBC Expansion, is now -- is progressing now that we have environmental and regulatory approvals in hand. Both of these projects are expected to be completed in the fourth quarter of this year.

At our Canadian Diluent Hub, we've completed initial pipeline connectivity and are currently flowing Peace Pipeline condensate volumes directly into the Access, Cold Lake and Fort Saskatchewan diluent pipeline systems. We expect the overall project, which is trending under budget, to be in service July 1 to align with the Peace Phase III startup. Over to you, Stu.

Thanks, Paul, and good morning, everyone. Subsequent to the quarter end, we are pleased to have announced that we signed a nonbinding letter of intent with the city of Prince Rupert for us to assess developing a West Coast liquefied propane export terminal on the Watson Island -- in Watson Island, B.C.

Other than the letter of intent, we have begun the site assessment and engagement with key stakeholders, including aboriginal communities. The terminal is contingent on the completion of design and engineering requirements, entering into appropriate definitive agreements and receipt of necessary environmental and regulatory permits. This project, in conjunction with our proposed integrated propylene/polypropylene production facility, is evidence of our efforts to find new markets for Western Canadian hydrocarbons, which should benefit our producer-customers, local communities, partners and shareholders.

Development of our proposed PDH and PP facility is progressing, and we are finalizing our evaluations and approvals to move into the FEED phase. Key deliverables of the FEED phase include regulatory applications, a Class 2 cost estimate, a project execution plan, among other items.

On the heels of our Chevron announcement, our teams continue to progress work on several initiatives in the Duvernay area, with the goal of increasing our service offerings in response to customer demand. Engineering is 90% complete. All major equipment has been set on site, and the sales product pipelines have been installed for 100 million cubic feet per day Duvernay I facility. At the Field Hub, engineering is 80% complete, with all civil and piling work finished. Both projects are expected to be brought into service in the fourth quarter of 2017, and the expected total investment is approximately $240 million. We are also advancing preliminary engineering on a replica of our Duvernay plant, Duvernay II, as well as the development for substantial liquids handling and stabilization and connecting our facilities to the Alliance pipeline.

We have now completed construction of RFS III, and commissioning activities are underway to meet our July 2017 target and service date to align with our Phase III Expansion. Pembina continues to grow -- progress construction of infrastructure in support of the North West Redwater Partnership's refinery. Overall, the project is 80% complete and will be placed in service throughout this year.

Back to you, Scott.

Thanks, Stu. We are pleased with our strong financial and operational results so far this year and are especially pleased with our announcement to combine with Veresen. Our approximately $4 billion of large-scale growth projects slated to come into service in the next couple of months, combined with the associated incremental cash flows, we remain on track to deliver EBITDA between $1.8 billion and $1.9 billion in 2018 as a stand-alone company.

With the Veresen transaction, these numbers increase to $2.55 billion to $2.75 billion. With such clear visibility to near-term, high-quality cash flow growth and the potential close of the transaction, I look forward to the exciting milestones ahead for our company.

Thanks once again to our staff, customers and stakeholders who make all of this possible.

Before moving into the Q&A, I'd like to remind listeners that Pembina's Annual Meeting is scheduled for today at 2 p.m. at the Metropolitan Centre in Calgary.

We look forward to seeing those of you who are able to make it. For those of you unable to attend, we will be webcasting the presentation. The details on how to access the webcast are on our website at www.pembina.com under Investor Centre. I also wanted to remind listeners that Pembina is hosting its 2017 Investor Day on Tuesday, May 16, at One King West Hotel in Toronto.

With that, we'll wrap things up. Chris, please go ahead and open the line for questions.

(Operator Instructions) Your first question comes from the line of Jeremy Tonet of JPMorgan.

I just wanted to pick up on the last call with Veresen a bit, and I was wondering if you could talk a bit more about the opportunities that you guys see coming together that you wouldn't necessarily have been able to achieve as a stand-alone company. Just want to go back to that point, if you could help us.

Sure. We'll obviously be talking a lot about that this afternoon, but when we look forward, we had guidance from our board about diversification, first and foremost. Our company is really Peace Pipeline, what's upstream and connects to Peace Pipeline and what connects downstream of Peace Pipeline. Really, that's our core asset. And with this transaction, we have another core asset with Alliance Pipeline. And so we become a 2-asset company, which diversifies us to 3 basins, really, versus just 1. It's a currency diversification, a customer diversification and also a -- we're now not just a hydrocarbon liquids company but a gas company. So when we look at all those facets of the deal, we believe our risk is lower. And I think the extension of having lower risk is you have a higher-quality dividend. With a higher-quality dividend, it stands to reason your value should go up. So besides all the synergies we've touted and greater visibility to 8% to 10% cash flow per share growth over a longer period of time -- just to digress there for a minute, we saw the 8% to 10%, and we have for years, but we usually only see it 2 years or 3 years out. With this combo, we can see it beyond that 3-year period, that we have visibility to grow way further out. So all those things combined just make us -- it's really, the theme of the Investor Day is we finally have the missing puzzle pieces that we didn't have before. So we're absolutely excited about it.

That makes a lot of sense. Just turning to the operations for a minute here. I was just wondering if you could share with us what type of capacity utilization RFS II was at currently. Will RFS III be able to take volumes during the commissioning process that's underway? We're just trying to see, are you guys -- relative to MPC's, are you guys at those levels, or do you see upside there?

So we're sitting here today coming into commissioning of the RFS III. One of the beauties of our assets is the inter-connectivity of the 3 fractionators. And when we come into a commissioning phase, we're -- we will be able to move volumes and products across to ensure that we are commissioning effectively and safely. The beauty of our assets at this point, and what we have stressed in the past, was RFS II and RFS III are 100% take-or-pay contracts. From a utilization perspective, we're running at -- the utilization RFS I, we're building in RFS II as we expect. And then we've always expected, as the Phase III pipeline comes into service and those volumes begin to grow and ramp up on the pipeline, we'll have the same increase in utilization in RFS III as it comes into service as well.

Got you, great. And then the -- for the condensate hub that entered service, how -- what type of EBITDA contribution did you see for the quarter? Is that kind of achieving everything that you guys were looking to do with that project?

Yes, Jeremy, we're delivering barrels, but at this stage, I'd still consider it almost in a commissioning mode up until we get the full slate into service in July. So the EBITDA was definitely there in the first quarter, but it wasn't overly meaningful to the overall results. We'll start to see that pick up in Q3 of this year when that project fully goes into service.

Got you, great. And then I was just wondering, for the Veresen deal, was just wondering if there's an opportunity for PBA to play a part here? Or do you see other opportunities to kind of increase your PBA flow and kind of improve liquidity on that side?

Potentially, I think, Jeremy, we've spoken before about, is our New York listing meaningful? And we've got to confess, not yet, but with a greater U.S. footprint and the possibility of Jordan Cove and greater U.S. investment, because we finally have a low-risk but meaningful entry into the U.S. market, that starts to be something we're thinking about for sure.

Your next question comes from David Noseworthy from Macquarie.

Maybe I could just start off on the comments you made about the board guidance to diversify. I -- so in your opinion, has the diversification you achieved here sufficient? Or is there further objective to diversify into other North American basins?

You can never be too diversified. I mean, when you look -- we're going to be, David, 1/3, roughly, NGL; 1/3 gas; and 1/3 crude conde, so the product diversification is like perfect. The U.S. diversification, it's a good start. We've just seen, too many times, Canadian companies going into the U.S. or U.S. companies coming into Canada and making big mistakes. So when we looked at this, it's the same Canadian customers that we have now behind Alliance, and we're very comfortable with them. So it was a way for us to enter the U.S. in a more meaningful way, diversify into gas without taking -- jumping in with both feet. As I think Scott said, we're not just dipping our toe in the water, but we're dipping our whole foot in the water, but we're not -- I don't think we're opening ourselves up to making the kind of traditional mistakes that we've seen over those past couple of decades with people thinking business is easier across the border and learning that it isn't.

Right, okay. And then this question may be for Scott. Can you give us an update on your financing strategy, target credit rating, especially as we look post the Veresen transaction?

Sure, David. I think, post the Veresen transaction, our financing strategy doesn't change. We'll remain roughly 50-50 debt-equity at a high level. We're -- I mean, we're still -- as we've always said, we want to be strong BBB, and what that means is the high end of the metrics in the BBB range. But we're not chasing an upgrade nor are we kind of trying to skate the line from a downgrade. We like to be in that strong BBB. From an actual execution perspective, we signaled to the market, with the shutoff of the DRIP, that no more external equity is required. We think that we can fund the capital program with both the credit facility medium-term notes and internally generated cash flow. And when you actually look at pro forma Veresen, the slide that was in our webcast, and I believe is in our AGM today, it shows that in 2018, the free cash flow after dividends is sufficient to fund the capital program. Now that's not probably how we'd finance it, we'd put a little leverage on it, but I think it goes to show you the strength of the free cash flow profile once we close on Veresen.

Okay. And then just as we -- I mean, as we look forward with the NGL mix contracting, I was wondering if you could give us any color, both in terms of price and volumes, what you were able to secure for the upcoming season relative to last year.

Do you want to take that?

I don't have the numbers right here in front of me. We continue to -- obviously, the pricing has -- it has gone up substantially, so we're benefiting from the market uptick in the pricing. I don't have the exact numbers here in front of me, David, at this point.

Okay, so in terms of the...

We -- David, we've done quite a bit of hedging -- as our capital program isn't quite done, we came into the year and we sit quite highly hedged through the balance of the year.

And what's the plan for that going forward now? Is there still a need to hedge, given the combination? Or do you kind of go back to your original way of looking at it and say like, "Yes, we can let that float?"

Yes, the frac spread business with our crystal ball right now, we're only going to be 1% or 2% fracs in terms of EBITDA composition by 2018. It's only 1% or 2%. So there's really no reason to hedge, other than if the -- we're going to shift that from a kind of a corporate requirement to a business unit decision on whether they want to hedge. But we certainly don't need to hedge post combination.

Your next question is from Linda Ezergailis of TD Securities.

I wanted to maybe move from your NGLs to your crude oil Midstream business. We saw some declines year-over-year, and it looks like there's some kind of onetime-type items. But how might we think of a run rate going forward? Would this be somewhat indicative? Or might we start seeing more volatility? Or what are the other considerations in play?

Yes, Linda, I think you're always going to see a little volatility quarter-over-quarter, just depending on the timing of some of our settlements, especially as we've gotten more and more storage barrels into the system. But what I would suggest is, from a modeling perspective, look at 2017 to be very similar to the 2016 results. I think we showed in our Investor Day last year, it's not really dependent on oil price; it's kind of in that $160 million to $180 million range. We would expect that to increase in 2018 as we bring on the ENT and CDH facilities, but the underlying business is relatively consistent. So from a full year 2017, I'd look for it to be relatively consistent with 2016, and I wouldn't get overly concerned about quarterly results.

Okay. And just maybe moving on to your Prince Rupert LPG initiative. I know you're busy on a number of fronts, but I'm wondering if you've had any discussions with the NDP party about that project and your other presence in the province. And how might -- I guess I'm wondering how the election might affect that project in particular and your other assets and projects in B.C.

I'll start, Linda. So we've met, obviously, with the government of the day, was our conversation at this point. We've not reached out and met with the NDP party, particularly on this asset. That's something we're not speculating at this point as to who -- or the election results. We're -- we continue to be optimistic that the project is a -- it's a valuable project for the local communities; it's a valuable project from an investment perspective, from a tax perspective and from a job creation perspective. And we hope that will carry the day and that the people, the local communities are welcoming and we have support of the city of Prince Rupert to evaluate this opportunity and move forward with it. So we hope that carries the day with the -- whoever wins the election in the future.

And are you aware of any stakeholder groups that have opposed it in the media or anything? I haven't picked up anything substantive at this stage.

No, none at all.

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

I'm just wondering if -- are you able to or have you received and able to share any general customer feedback that you received so far on the Veresen combination?

Yes, Robert, it's Mick. I talked to all the CEOs of all of our major customers, and it's been very positive so far, with no concerns raised. We have outstanding customer relationships and they're positive.

Okay. Maybe just turning to the conventional pipe side and the Phase IV and Phase V announcements, in addition to just general commentary you've had with customers post that announcement and probably premature to think about even future expansions, but what's the general dialogue that's going right now, given the commodity environment but also with the TransCanada Mainline deal? Do you think that there's additional volume that's just waiting for greater clarity on both the Mainline deal to be approved and future expansion of NGTL upstream at James River?

I think that plays a big part -- sorry, it's Paul. I mean, there are a lot of factors that have been driving the producers and their activity. I mean, the -- obviously, the uptick over the last year in commodity price was a positive. Egress, of course, for the gas side was -- did put the brakes on it somewhat. But where we're at, we have a lot of capacity coming on. So we're not -- we're not the constraint. A lot of customers are still drilling to fill our capacity, but obviously, the more egress on the gas, the better. I think the first piece that needed to be solved was the actual -- the expansion of the TransCanada to the Montney area, and now Alliance has announced potential expansions. So I think everything points to, as long as commodity prices cooperate, to the same sort of trajectory on the growth. I think the gas pipes have to catch up with us, frankly, we've got enough capacity for the first -- for a couple of years here now.

Okay, that's great. And maybe if I can just finish with -- if I can turn to the PDH and PP projects and with the Veresen combination, you're going to increase your fee-based EBITDA. So I'm just wondering, does your approach on the project change, a, just overall; but b, in terms of contracting? Given that increased amount of fee-based EBITDA, does that alter how you think about your targeted contracting of half of your half, i.e., would you be willing just to go pretty much completely open at this point?

Robert, it's Stu. At this point, I'd say no. We're still very, I think, excited about the opportunity, and we like our strategy as its sits today with the 50% of the 50% mindset. We continue to have what I would describe as preliminary conversations with key NGL producers in the province who are looking for and are excited about opportunities to participate in that value-up with us. And so as we go forward, as things -- as it sits today, our plan is consistent and unchanged, and we're excited about working with our customers to provide market access for these constrained products.

Robert, what our customers like about the way we do this, if you think about the propane terminal where some of the volumes are ours, the PDH where we have shoulder-to-shoulder exposure, and even if you think about Jordan Cove moving forward, we could take a small amount of exposure there, too. And the customers, it really resonates with them that if it's working, we all make money together. And so even if we could toll the whole -- all those businesses, I think it takes away a little bit from the alignment, which is we all win and lose together, that -- I think that really resonates with our customers.

Your next question comes from David Noseworthy of Macquarie.

Just a quick question. You had -- you mentioned a couple of new projects or at least prospective projects in your MD&A this quarter, one just being the possibility of expanding Fox Creek to Namao up to 850. Paul, if I heard correctly, you kind of think you don't need much there for the next 2 years. Can you give us -- and then I guess the other one was increasing the deliverability both in and out of the Edmonton Nexus Terminal or North Terminal. Can you give us any idea of kind of EBITDA and CapEx that might be associated to this project?

David, in terms of the ENT, we announced that with our budget back in November. So we have the details on that project back in that press release. And then I think, as we talked about, the Phase IV and Phase V are the $325 million. We don't give guidance on individual projects. The ENT was always included in the initial $600 million to $950 million range, so it's embedded within that range. And then the Phase IV and Phase V would be on top of that, but we're not prepared to give individual product -- project guidance at this stage.

Okay. So that isn't incremental, that's all part of what you had talked about before on ENT?

So the ENT had been talked about before, but the Phase IV and Phase V is -- it wasn't new in the quarter. We press released it a couple of weeks ago, but it's that same kind of $325 million, $350 million of capital.

I think the main event there, David, that -- the nugget is we can go up to that kind of from 420 we've been talking about for a few years, up to 840 with just pumps. So we can be very responsive in the Fox Creek, Duvernay area to incremental volume. The regulatory approvals of expanding existing pump stations. We don't need pipe. We can do it very quickly, and we're obviously excited about the cost profile there, the regulatory profile and most importantly, the high level of service we can give Duvernay shippers.

That makes a lot of sense. And do you have a similar number for the length of pipe, the 20-inch up to lesser?

That was in the press release. It was 260,000 barrels we're going to -- incremental capacity.

Right. I meant, ultimate capacity.

I'd have to add them up, sorry.

But it's not powered. So there's still room on -- that's just the pipe, right? The same thing needs to be -- we tend to take some risk on oversizing the pipe because it's easier to put pumps in. So it would be no different there.

There are no further questions.

All right, everyone, thanks for sharing our excitement. I'm absolutely pumped to give this presentation this afternoon. I've been dreaming about it for about 60 days, so I hope you can join us on the call, and again, further -- what Scott said, thanks very much for the support over the last year, give us the confidence to do this exciting transformational transaction and we look forward to seeing you this afternoon.

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