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Executives

Bob Michaleski - President and CEO

Peter Robertson - VP of Finance, CFO

Glenys Hermanutz - VP of Corporate Affairs

Analysts

Robert Catellier - Clarus Securities Inc.

Bob Hastings - Canaccord Adams

Tony Courtright - Scotia Capital

Robert Kwan - RBC Capital Markets

Linda Ezergailis - TD Newcrest

Stephen Paget - First Energy

Matthew Akman - Macquarie Capital Markets

Pembina Pipeline Income Fund (OTC:PMBIF) Q1 2010 Earnings Call May 6, 2010 4:00 PM ET

Operator

Welcome to the Pembina Pipeline Income Fund first quarter results conference call. All lines are place 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.

Bob Michaleski

Thank you, and good afternoon, everyone. Welcome to today's call. My agenda, we will follow our standard process. I will start by providing an overview of the first quarter financial results that we released earlier today. We have sent everyone on the call a copy of the first quarter reports, so my synopsis will be fairly brief. That will leave us plenty of time to cover all the questions I am sure you will have.

Here with me today in the gallery are Glenys Hermanutz, Pembina's Vice President of Corporate Affairs and Peter Robertson, our Chief Financial Officer.

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

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

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

We saw continue success in each of our businesses, but the biggest driver of growth during the quarter were s gas services, which added more than C$14 to revenue and C$10 million to net operating income.

As you know, we acquired our gas services in July of 2009. So comparison to the first quarter of 2009 are possible. That said, gas services have maintained in a short time since we acquired it. Throughput revenue and net operating income are up over the fourth quarter of 2009.

Another driver for financial improvement was midstream in marketing, where we saw quarter-over-over increases in revenue and net operating income. The expansions we completed in 2009 that broadened the service we offer producers at our Alberta based terminals this time they gave an increased crude oil and liquids prices.

On the operational front, our conventional pipeline's business reduced operating expenses by approximately C$10 million, which in turn helped to boost net operating income despite quarter-over-quarter declines in throughput.

There are two items worth noting here. Although our conventional pipelines will continue to reduce expenses while also maintaining operational integrity. I don't expect we will maintain this level of cost reduction into the coming quarters.

Some of the reduced expenses we experienced during the first quarter reflect the timing of integrity projects, which I expect will still take place in 2010. Also, we are starting to see signs of pipeline throughput maybe strengthening.

If you compare our Q1 2010 throughputs to the fourth quarter of 2009, you will see that we are up probably 389,300 barrels per day in Q1 versus 379,400 in Q4 2009. This improvement in throughput is occurring despite our sale to come out the pipeline system, which reduced throughputs by about 10,000 barrels per day.

The operating results generated by all of our businesses help move our payout ratio into the right direction. At the end of the first quarter, our payout ratio was just over 92%.

As we head into summer and project spending increases this ratio may increase. In March I said we are looking towards the payout ratio of about 95% for the year, and so far we are on track to deliver.

I'll provide an update on our Nipisi project, of course boosting revenue will have the impact on cash flow. We're making good progress in Nipisi and Mitsue pipeline projects, which are on track to be placed into service in a little over one year from now.

We're heading into the final planning phase, engineering on both pipelines and the supporting infrastructure, including pump stations is substantially complete and we are pretty much set to begin construction this fall.

On July 6, the ERCB has scheduled a public hearing to examine concerns from two stakeholders relating to the project. We continue to consult with these stakeholders with the hope that we can resolve their concerns and avert the need for a hearing. I am very proud that consultation that has occurred over the last few years, I expect these pipelines will generate value for our customers and our investors and I am also confident our project planning will meet the expectation of our local communities as well. A final decision by the ERCB is expected to be made by early October or sooner if we can satisfy the interest of the effective parties before the hearing.

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

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

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

That concludes my summary of the quarter. However, I do want to also mention that our Annual General and Special Meeting is being held tomorrow afternoon. For those who are on today’s call that are Calgary based, I hope I'll see you there. It will be an important meeting as unitholders will report on our corporate conversion plans. Subject to receiving all the necessary approvals, we expect the conversion could be come effective as early as July 1st. However, [Alberta] has the discretion to complete the conversion when it best serves the interest of our investors, just so it's done and prior to December 31st. We will confirm that date with you as well as additional information about our new TSX listing.

Operator with that, I will ask you open the line for questions.

Question-and-Answer Session

Operator

(Operations instructions) Your first question comes from Robert Catellier.

Robert Catellier - Clarus Securities Inc.

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

Bob Michaleski

Rob we are looking for with respect to that [extraction] is a multiyear contract, but now it could be anywhere in that probably in the three year range and initially fee for service will include operating costs, we're not really in position we can release the information with respect to the estimated capital on it, but certainly we will have any exposure to commodities or anything of that nature with respect to that investment and of course on the pipeline side we will just continue to earn transportation revenue or tariff revenue on the incremental investment we make as well as transport volumes on Peace Pipeline system. So, I'd characterize it as a very low risk project drop.

Robert Catellier - Clarus Securities Inc.

Even with take-or-pay contract and recovery of operating cost, three years seems like it's a relatively short period of time and maybe the contract ends up being longer, but if there were only three years it suggest that some of the investment is being made on [stock].

Bob Michaleski

I don't think we will be looking at some of the investment made on stock. We're looking to fully commit our customers to full capacity requirements for the expansion that we are looking at, so I think part of that too, Rob, this is relatively new business for us, so we are looking at shorter term than we might otherwise look. I think we also would look at the opportunities that provide us. Again, we're not taking on much risk with this initiative, so shorter term we get comfortable with it and take a look at and see what happens after that timeframe.

Robert Catellier - Clarus Securities Inc.

What feedback are you getting from the producers with respect to the change in the royalty regime in Alberta, and if you could distinguish between oil producers versus gas?

Bob Michaleski

It's interesting. Maybe because that remind me whether the Alberta government has come out with any, and remember we'll be called them for some further clarification, the rules, with respect to the royalties, I just have not followed it.

Glenys Hermanutz

I'm not sure about that sector Bob, we're certainly looking at the regulatory frameworks.

Bob Michaleski

Rob, I guess, we're not giving very good answer. One thing we are seeing and now deal with the both oil and gas is that with respect to gas the Cutbank Complex, we're actually seeing stronger volumes than what we had anticipated this year, which we take as a good sign, so people are still out there drilling and we're seeing the volume drop at the gas plant.,

So I think in select areas of the province, people still can make money. I think their customers are attracted to the possibility of getting an opportunity to extract liquids at the field because it's obviously liquid pricing and it is very attractive to them. So there is a high demand for ethane in particular into the [Alberta] market. So I think that’s a good sign. With respect to oil, possibilities, the Cardium development is not just limited or restricted to the Pembina creating value field.

In south, we are seeing Cardium developments outside of the Pembina field. I believe we have got a number, and I say more than a half dozen of new connection requests on drilling system and there is number of possibilities not only just for the crude production but also natural gas liquids production. So I think the indicators based on our discussions with customers is that there are considerable drilling plants contemplating that.

Although I think that’s not seeing anything that isn’t in the public domain because I think the public domain which suggest the required number of prospects.. So I would say, well, I can't tie it specifically to the royalties in what you're seeing, all I can say is that I think with these commodity prices where they are, particularly for oil and natural gas liquids, they are strong, they are attractive, and people are busy trying to find more production, more volumes and we are working hard in trying to attract those volumes to our systems.

Operator

Your next question comes from Bob Hastings.

Bob Hastings - Canaccord Adams

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

Robert Michaleski

I missed that. I was probably in the meetings pretty much all morning. I will follow-up on that after our call.

Bob Hastings - Canaccord Adams

It’s very interesting. You will enjoy that. For the Cheecham just as minor thing, but notice that their operating income was down a bit, I wondered if there was an explanation for that.

Peter Robertson

Bob, this is Peter. With respect to the release to the first quarter of 2009, where we flow through some extra cost that we incurred late 2008 and relating to right of way work that we flow through the shippers in Q1. So, revenue is higher and normally would be in Q1 2009. So 2010 revenues more of the correct run rate.

Bob Hastings - Canaccord Adams

Okay. When we look at the OpEx as Bob referring to for the conventional pipeline and we know that was a little light in this quarter. Is that just sort bounce off for the rest of the year and we are back to the regular annualized number or is that going to be just a little bit light overall for the year?

Bob Michaleski

That are both, generally our maintenance and integrity work is really in the second or third quarters. First quarter is depending on the weather etcetera. Now a lot of maintenance pipe work is done in Q1.

Bob Hastings - Canaccord Adams

This year or last year that was?

Bob Michaleski

Yes, last year we got a lot of big work, integrity work on our [P] system, that was the C$5 million and etcetera cost in Q1 2009 the rest is this quarter.

So, I guess, to answer your question, Bob, I think that the first quarter was lower than what we expect to average for the balance of the year, but we kind of expect the year to be normal. I think one thing that we are finding though that some of the integrity work that we are doing, that the costs of running tools and so on have come down for us, which is a nice thing to experience. As we look at introducing new vendors and getting hopefully getting more competition for the work that we can provide for people in that business.

Bob Hastings - Canaccord Adams

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

Bob Michaleski

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

You know our oil prices have moved up pretty significantly here recently. We've seen a strong demand for [Can-USA] pricing has been much higher than what we expected, so what, at this stage while we don't know this little trends that we experienced in the first quarter will continue through, but right now I think if you look at annualizing the first quarter. I think there's going to be pluses and minuses and I think you already know it's pretty worthless to give any particular guidance. Peter, any thoughts about where we might be?

Peter Robertson

I don’t want to add anything more to your comments there BOB.

Bob Michaleski

Yeah, I would say it's pretty hard to predict. We're hoping that that we'll be in a position to maybe if we have decent results, we should be able to hopefully match where we were at last year., but there'll be more to come as we progress through the second and obviously third quarters of the year.

Bob Hastings - Canaccord Adams

All right. Now thinking of your comments after the fourth quarter that it's always hard to say but you could imagine that it would be down more than $5 million for the year.

Bob Michaleski

Yes, and I guess the thing is I will still think that Bob. We just got quite a bit of things going on over there right now so its really quite unusual things like Keystone Pipeline is being filled so as a result of that increased demand for heavier oil and there are some differentials that have narrowed and that is going to continue after the line is filled, so there is a number of variables but I just think that probably is still fair comment after the fourth quarter.

Bob Hastings - Canaccord Adams

Did they clear that just a marketing business as opposed to the midstream which would include the Cutbank and the extraction businesses.

Bob Michaleski

That is exactly right Bob.

Operator

Your next question comes from Tony Courtright.

Tony Courtright - Scotia Capital

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

Bob Michaleski

The main fact there Tony is really related to the tax. There were two things and they are kind of offset each other to certain extent. One is an early conversion will result in unwinding the existing internal structure that we have with respect to the Fund and the corporation which is currently generating a tax loss that of course have value to us as we go and convert to a corporation. So, on the one hand the sooner we convert, that will result in a reduction of the tax losses that we could preserve if we confront later in the year. On the other hand converting to a different bank corporation if you held the taxable account, it's got after tax advantage for the shareholder. So, we are trying to find the right balance here Tony. July 1st I think it’s going to be sooner, it would be earlier than we would like to convert and more likely maybe at the end of the third quarter of this year, certainly before the end of the year.

Tony Courtright - Scotia Capital

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

Bob Michaleski

I know I certainly haven’t heard a lot, Tony on (0.32:13) and quite a good time this quarter.

Glenys Hermanutz

I have an order. I think a lot of our peers, who are going to convert their [company] converting in the latter part of the year, so in terms of any pressure to achieve that advantage earlier rather than later, we haven’t early heard a lot from our owners.

Peter Robertson

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

Tony Courtright - Scotia Capital

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

Bob Michaleski

Well, what I can tell you is the Board has gave us approval to proceed and its subject too and the main subject too is entering in to contracts for the utilization of the facility and we are well along there Tony and we hope that we have something more to say maybe within a week or 10 days. So, we advanced the project at the point where we start and receive more approval and we do have other approvals that are necessary and at this stage we are not aware of any fundamental problem there. We have obviously more detailed engineering to do and so that work we'll have to continue on, obviously through the major hurdles that we have faced with respect to this initiative.

Tony Courtright - Scotia Capital

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

Bob Michaleski

The real key for us is that in most of our pipelines today, not all, we do have capacity to move new production. I think we've been very proactive in trying to attract the new customers or existing customers to the extent they have incremental production to attract and get them to commit to those projects to our systems, so I can't comment on competition or competitor as to what they are experiencing, but I think certainly generally the geology in the areas that we offer service are still very attractive even in a lower commodity price environment, so to the extent that our customers are going to continue to drill, we're pretty optimistic that we're going to continue to see a stabilization and possible increase in volumes. They will come to us over next several years.

I mean we're quite encouraged by conversations that we have with our customers as to what their drilling plans are and we are certainly looking at finding ways to make sure we got the capacity where we have some constraints or bottlenecks to be able to respond to that. I think we're just generally encouraged that we've come to a bottom in the difficult and I think we are going to see some positive elements in the months and years ahead.

Tony Courtright - Scotia Capital

This benefits both your volumes in terms conventional as well as your midstream marketing?

Bob Michaleski

That is correct Tony. It's absolutely right. It sound like stabilized in sort, our volumes are declining, we got hurt in the midstream and marketing areas while the volumes look like they have stabilized and actually are increasing and that should for the way for Midstream and Marketing part of our businesses as well.

Operator

Your next question comes from Robert Kwan.

Robert Kwan - RBC Capital Markets

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

Bob Michaleski

I will turn that part over to Peter, he has got more detailed information in front of him than I do Robert. So I will turn it to Peter.

Peter Robertson

It all depends on our larger operating cost, most of those are fixed like power, labor etcetera. The one that’s vary more are the integrity cost, the actual running of the tools, when those are done and sort of dig require after that when we actually get to do those digs. So, some of the work we will be doing this summer and may relate to two runs that we conducted there last year and we will be undertaking other tool runs this year and the digs will be done next year. So, we won' be able to say precisely when we are going to incur those cost but I think it's safe to say that year-over-year it's going to be pretty much the same.

Robert Kwan - RBC Capital Markets

Okay and just in terms of another line item G&A cost, obviously Q4 is a big number Bob you had mentioned that C$11 million a quarter is a run rate for 2010 wasn’t bad. Is that still kind of a decent number that you’d be looking at?

Bob Michaleski

I think so, Robert, I mean the first quarter was I’m not sure, 11 million. So I think that’s a reasonable run rate for 2010.

Robert Kwan - RBC Capital Markets

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

Bob Michaleski

I think that it's fair to say, yeah, we believe we have efficient cash in hand and un-drawn bank lendings sufficient to do the projects that we are aware off and that would include the deep cut at Cutbank.

Operator

Your next question comes from Linda Ezergailis. You line is now open.

Linda Ezergailis - TD Newcrest

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

Bob Michaleski

Well, its good question Linda. I mean that is always a possibility for us, but what I can tell you is that we just, this morning reviewed with our board a number of our growth projects or prospects and I can say that in each of our business unit we continue to have growth prospects and projects that individually maybe in who knows maybe $50 million to $100 million to as large as in excess of $1 billion, so if I had to add them all up, you get a number about somewhere between, who knows it may be a number well into to the billions of dollars. Will we do them all? No.

At the same time, we continue to look at other opportunities if there is opportunity that through a combination we could achieve some synergies and would be tied to an expansion of our existing framework, those are some thing that are still always possible Linda and those are some things that we keep in front of us all the time, so that's no different.

If you had asked me to have something in mind right now, I definitely have to answer honestly and say no. So as I said, also we have all these other organic prospects that generally speaking are highly accretive. We generally focus on those initiatives rather than look at growth, lumpy growth through an acquisition. So I think we've got enough to keep us busy for quite sometime without having to look for anything else.

Operator

Your next question comes from Stephen Paget.

Stephen Paget - First Energy

Questions on extraction process. The next application season for the government of Alberta's incremental extraction program ends June 15th. Is your go ahead decision partially dependent on approvals from the Alberta government and second where would they stand with any or next process that's currently going through regulations as well?

Bob Michaleski

That's good question actually. I'm not aware as far as the Cutbank transaction is considered that we are looking for anything specific.

Glenys Hermanutz

I do understand as you suggested us that there maybe from a perpetually run program some incentives available that certainly we would pursue and I don’t think that would drive our timeline. In terms of next I think that the [journey] is still on in terms of what the ultimate impact, I think somewhat I am hearing from our internal experts is that the next may drive by extraction either way to the field or to the board. I don’t think that that has known and you know what the timeframe for implementation is on that, you used to bid on that better than I could.

Operator

(Operator Instructions) Your next question comes from the line of Matthew Akman.

Matthew Akman - Macquarie Capital Markets

Couple of questions on the Conventional Pipelines business, first, I am just wondering if mix of NGLs and light oil changed on that system over the last couple of years.

Bob Michaleski

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

Glenys Hermanutz

Matt, if you want me to follow up with clients served with me afterwards, certainly this splits on our crude and liquid splits historically are included in our supplemental information in the annual reports.

Matthew Akman – Macquerie

Yeah I am just wondering directionally maybe the NGL mix has been following because obviously there is some interesting and conventional oil coming out, but gas production is still following and given the quarter-over-quarter increase in volumes and just wondering if that’s because of the mixed change.

Bob Michaleski

I think we will have to have look at that properly before answer the question, so perhaps can we get back to you?

Matthew Akman – Macquerie

Sure.

Bob Michaleski

Following this call?.

Matthew Akman – Macquerie

My second question is I think you talked about spending about C$48 million in growth CapEx unconventional this year, is that still the budget? There wasn’t a lot spend in the first quarter.

Bob Michaleski

Peter, I think you have that information.

Peter Robertson

Yeah, we were a little later than in the first quarter, but that was expected. Some of this C$48 million, some projects may be done, some may not be done. We’ve got a few other things in mind that we will do sometime during the year. I would say it's going to be between C$48 and say C$55 million for conventional.

Bob Michaleski

Yeah, I think that's a fair guess today.

Matthew Akman – Macquerie

Okay. So and in the couple of years the company has spent I guess 75 or 80 on CapEx in that business. So I’m just wondering whether we should be modeling in your expectation revenues in that segment starting to rise year-over-year this year or next year or when will that growth show up?

Bob Michaleski

Mathew If I was in your position there, what I would do is I'd assume that you’re going to start to see some incremental throughput coming to late 2010 and early 2011 but you’ve to watch the quarterly growth throughout the year to get a senses to what that might be and because its difficult for us reviewing our material with the board today, we put in some incremental capital from some facilities that we have to put in the field and at this stage we can't accurately forecast what the incremental volume is. So, I think its going to come, it just going to take a [long] to show up, so I'll be looking at 2011 and beyond really if I were try to forecast any kind of large relationship and the capital we spend and increased volumes.

Operator

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

Bob Michaleski

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

Operator

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

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Source: Pembina Pipeline Income Fund Q1 2010 Earnings Call Transcript
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