Good afternoon. My name is Stephanie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Pembina Pipeline Corporation 2011 fourth quarter results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press star then the number one on your telephone keypad. If you'd like to withdraw your question, please press the pound key. Thank you. Mr. Bob Michaleski, President and CEO, you may begin your conference.
Thanks, Stephanie. Good afternoon, everyone, and welcome to Pembina's conference call and webcast to review our 2011 fourth quarter and annual results. Joining me today on the call are Peter Robertson, our Vice President of Finance and Chief Financial Officer, Glenda Serediak, our Vice President of Corporate Services, and Scott Burrows, our Manager of Corporate Development. This afternoon I'll review the financial and operating results we released earlier today and provide an overview of our recent developments, and then open up the line for questions. I'd like to remind you 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 today. Now onto a quick look at our Q4 and full year 2011 results. The fourth quarter of 2011 was another period of strong cash flow and operational performance across all of our business units. Quarter-over-quarter, we saw a 24% increase in revenue, a 22% jump in operating margin, and a 10% gain in EBITDA. Pembina's full-year 2011 results were impressive as well, with revenue, EBITDA, and adjusted cash flow from operating activities significantly higher than in 2010. One of the main drivers of these increases was our Midstream and Marketing business. During the fourth quarter, we saw a 91% increase in operating margin over the same quarter of last year from this business unit. For the full year, Midstream and Marketing's operating margin was CAD 93 million, up almost 84% from last year's operating margin of CAD 51 million.
The improved results from this business were largely due to higher volumes and increased activity at our Peace and Creighton Valley pipeline systems, stronger commodity prices, wider margins, and the addition of the Edmonton terminal. Our oil sands and heavy oil business also realized higher performance as a result of the contribution from our new Nipisi and Mitsue pipelines. During the fourth quarter, operating margin increased 37% compared to the fourth quarter of 2010, and year-over-year operating margin increased by just over 16% from CAD 78 million in 2010 to CAD 90 million in 2011. Gas services processed higher volumes at the Cutbank complex during 2011 and then generated CAD 13 million in operating margin during the fourth quarter, which represents an increase of 14% over the same period last year. For the full year, this business's operating margin was also higher by about 14% compared to 2010.
Throughput in our conventional pipelines business was nearly 13% higher during the fourth quarter of 2011 compared to the fourth quarter of 2010. To put things into perspective, the average barrels per day we shipped during the last week of December in 2010 was about 400,000 barrels per day. Contrast that with the volumes we shipped in the last week of December in 2011, which were approximately 450,000 barrels per day. For the month of January of 2012, we've seen throughput remain around 450,000 barrels per day, and we expect it to continue in this range going forward, not including additional volumes brought on as we complete our various expansion projects. Despite increased volumes, operating margin was down about 5% as a result of higher operating expenses during the quarter.
These expenses included extensive and proactive integrity work we conducted to ensure ongoing reliability to accommodate the continuing increase in volumes we're experiencing on our larger systems and to prepare for the expansions we have planned on our conventional systems. Our full-year results in this business unit were strong, with operating margin about 5% higher than in 2010 as a result of an 11% increase in average throughput year-over-year. The solid performance in 2011 across all of our businesses can be tied back to three key drivers, a thriving oil and gas liquids sector in Western Canada, the application by producers of new technology in the Western Canadian Sedimentary Basin, and the new services Pembina has developed and is now offering to our customers.
Pembina's assets are located in strategic areas of the basin and are already serving or can be tied in to some of the most exciting areas and plays, which include, but are not limited to, the Deep Basin, the Montney, the Cardium, Edson, Peace River, Pelican Lake, Swan Hills, the Athabasca Oil Sands, and the emerging Duvernay Shale. As you can see from our results, we're unlocking substantial and we believe sustainable value from our diverse portfolio of assets and our established integration strategy. Pembina's General and Administrative expenses were CAD 21 million during the fourth quarter of 2011 compared to CAD 11 million during the fourth quarter of 2010. Full year 2011 G&A totaled CAD 62 million, compared to CAD 49 million incurred during 2010.
The primary reason for the year-over-year and quarter-over-quarter increase in G&A was an increase in share-based incentives for existing and new employees carried at fair value, based on the increased share price, higher short-term incentives, and expanded office space. We expect to see these types of expenses continue as we expand our businesses and work to attract and retain the best possible employees to execute our expansion plans. Now that we've looked at our 2011 results, I'd like to provide an update on Pembina's proposed acquisition of Provident Energy Ltd. Since announcing the proposed acquisition in January, both Pembina and Provident have been working diligently on the transaction. In addition to working towards the necessary regulatory approvals, the special meetings required to obtain shareholder approval for both Pembina and Provident have been scheduled and will take place on March 27th of this year.
We plan to mail our joint information circular to our respective shareholders on February 24th. As a brief overview of the transaction, under the terms of the share arrangement, Provident shareholders will receive 0.425 of a Pembina share for each Provident share held. With this acquisition, Pembina will have an estimated market capitalization of CAD 7.9 billion and a total enterprise value of CAD 10 billion. This would make Pembina one of the largest publicly traded energy infrastructure companies in Canada, which could result in enhanced access to the capital necessary to pursue our planned capital spending projects, together with prospective large-scale complex growth projects. We believe that this provides significant upside potential for our shareholders.
Once the transaction is closed, we intend to increase our monthly dividend from CAD 0.13 per share per month, or CAD 1.56 annualized, to CAD 0.135 per share per month, or CAD 1.62 annualized, representing a 3.8% increase and reflecting management's confidence in the significant operational and financial strength of the combined entity going forward. In 2012, together, we will have an aggregate capital spending program of approximately CAD 700 million, a compelling growth platform for both Pembina and Provident shareholders. Our combined assets are strategically located in key producing areas, already mentioned, plus the Marcellus and Utica, which we expect to provide even more growth opportunities as we move forward. The combined unrisked identified capital potential over the next two years for both companies is in the neighborhood of CAD 4.5 billion. We believe this acquisition has the potential to enhance the likelihood of the combined entity realizing on those projects.
As part of our integration planning process, we have established an integration steering committee to oversee the work that will need to be done should the transaction be approved. While many of our employees are working on this file, it is still business as usual at Pembina, which means our business units are actively progressing their respective growth projects. Now, many of you have heard about Pembina's growth story and the projects we have on the books for 2012. I'll go over them briefly, and we can talk more about them during the Q&A if you have any specific questions. In gas services, currently, we're working on four projects within gas services. Two of these are expansions of our existing assets at our Musreau gas plant, which is one of the three plants that make up Pembina's Cutbank complex.
The other two projects, known as Resthaven and Saturn gas plants, will diversify our gas service operations and provide access into new regions that are seeing increases in development and gas processing requirements by producers. These four expansions are expected to bring Pembina's gas processing capacity to 890 million cubic feet a day net, including enhanced NGL extraction capacity of approximately 535 million cubic feet a day net, which would be processed largely on a contracted fee-for-service basis. In addition, this would result in approximately 45,000 barrels a day of incremental NGL being transported for additional toll revenue on Pembina's conventional pipelines by the end of 2013. Startup of the Musreau deep cut facility is behind its expected scheduled commissioning date of October of 2011, mainly due to constraints we experienced during construction related to the combined workspace at this facility.
However, we're very pleased to report that commissioning is near completion. We are aiming to have the facility actually in service today. Our team will be sending gas through the new facility for the first time today, which will result in enhanced NGL extraction. We'll be ramping up operation at the facility and moving the newly extracted NGL on our pipeline system. Also at the Cutbank complex, we're working to increase Musreau's shallow cut gas processing capability by 50 million cubic feet a day at an estimated cost of CAD 26 million. Subject to regulatory and environmental approval, we expect to have that expansion in service by the middle of this year. For the Resthaven and Saturn facilities, Pembina has ordered much of the long lead equipment for both projects and is currently in the consultation phase.
We're working with our stakeholders and regulatory bodies on environmental planning and route selection for the pipeline portion of the project and are also completing preliminary engineering work. Subject to regulatory and environmental approval, we expect to have both of these projects completed in the latter part of 2013. We continue to investigate several other opportunities to expand our gas service business. Many of the exciting new developments in this segment are close to our existing infrastructure. With new technologies and a supportive price environment for the NGL, we expect to see the need for increased gas handling requirements. These new gas volumes, in combination with the liquids value embedded in the gas, has created interest in new and updated gas plants with enhanced liquids extraction capacity and ethane plus transportation opportunities. Now turning to our conventional pipeline business.
I mentioned earlier that we're seeing increased volumes on our major systems. As a result, we're looking to expand our service offerings. Specifically, we're working to expand NGL capacity on the Peace and Northern pipeline systems by 55,000 barrels per day to accommodate increased customer demand resulting from strong drilling results and increased field liquids extraction by area producers. Subject to reaching acceptable agreements with our customers and obtaining the regulatory approvals, the NGL expansion will require Pembina to install five new pump stations and upgrade five existing pump stations, which we would expect to cost approximately CAD 100 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 is structured to accommodate the needs of our customers and producers in the area.
Once completed, the proposed NGL expansion is expected to increase the capacity of the Northern NGL system by 48% to 170,000 barrels per day. Now on the Drayton Valley system, Pembina expects to complete the refurbishment of our Calmar Booster Station, which will add an additional 50,000 barrels per day of capacity to the Drayton Valley mainline, bringing the total capacity of the system to 190,000 barrels per day by the second quarter of 2012. The Drayton Valley system is currently moving 125,000 barrels per day as of the beginning of February of 2012. Further expansion of Pembina's gathering and mainlines may be required. We're working with our customers to assess their needs over the next three to five years to ensure we have the capacity to accommodate their growing production.
In terms of midstream, as I'm sure you can appreciate, increased industry activity and throughput at our conventional pipelines is also opening up many opportunities for our midstream business. We continue to develop our Pembina Nexus Terminal, and we're working to expand our truck terminal network over the next year and a half. That brings me to oil sands and heavy oil. As you know, we completed construction of our Nipisi and Mitsue pipeline projects in the middle of 2011. Both pipelines are now in service and have begun contributing to our results in this business unit. With these pipelines now ramped up, we're working with customers in the area to pursue the many expansion and integration opportunities associated with this key infrastructure. Before I open it up to questions, I'd like to finish off with a brief overview of our financing activity in 2012.
Should the proposed acquisition with Provident proceed as planned, as I mentioned earlier, we're looking at increasing our dividend to CAD 1.62 per share per year. Pembina is currently in a position of strong liquidity with unutilized debt facilities at December 31st, 2011, in excess of CAD 300 million. We are also in the process of reviewing our syndicated bank facility prior to the closing of the proposed Provident acquisition to accommodate the increased requirements of a larger entity going forward. We believe that we will have access to the capital markets to fund our growth projects, and we have reinstated the drip to assist with our funding for 2012, 2013. With another great year behind us and kicking off 2012 with the proposed acquisition of Provident, times have never been so exciting for Pembina. We're looking forward to all the opportunities that lie ahead for us.
With that, we can start the Q&A, operator. Please go ahead and open up the line for questions.
Certainly. At this time, if you would like to ask a question, please press star then the number one on your telephone keypad. We will pause for just a moment to compile the Q&A roster. Your first question comes from the line of Juan Polisin with Canaccord Genuity. Your line is open.
Thanks very much. With regard to the conventional pipeline system, as you mentioned, you have some higher expenses due to labor cost escalations, power derivatives, and the integrity work. Just wondering if you can break out for us the increase between those three items and maybe what you expect to see on integrity costs going forward.
Yeah, Juan, I don't know that we've got a breakdown here. Maybe perhaps we have to get back to you on that question because actually, I just don't have it here in front of me. Going forward, we still do have a significant amount of integrity-related work that we need to fund. Will it be as much as we incurred in the fourth quarter? You know what, I don't think so, but we still have, I think, in our budget for 2012, I do believe we are forecasting something like roughly CAD 40 million in total for integrity-related work. Now, a lot of that would be regular, ongoing maintenance of our pipelines, but some of that will be related to the work we've got to do in advance of receipt of increasing volumes in our systems.
Okay. Thank you for that. You had mentioned some synergies with regard to the Provident transaction when you announced that transaction. You've had a bit more time since the announcement. Have you been able to place a target on what you think you can achieve with respect to cost savings?
Well, cost savings, we said were going to be modest, Juan. As far as where we think the majority of synergies from the transaction can come from would be the revenue side of the operations and really even things like cost associated with the expansion of the fractionator. We think we can do it much cheaper than we could do it on a standalone basis. Those are yet to be determined, Juan. I think we'll provide more guidance once we have the opportunity to assess the opportunities pro forma, the closing of the transaction.
Okay. Thanks very much, Bob.
You're welcome.
Your next question comes from the line of Robert Catellier with Macquarie. Your line is open.
I'll stick with the Provident team. Can you give us an update on the regulatory approvals with respect to the acquisition?
Yeah, Rob, I think we're making good progress with the Competition Bureau. All other approvals have been received. It's just the Competition Act that we have got to receive approval on. Sorry. Yeah. Excuse me, Rob. We're still back and forth with questions, but we expect to have the approval, I'd say within, I'm going to say. So I'll guess here. We expect it obviously prior to the meeting on the 27th of March, and hopefully, within a couple of weeks of that. Of course, Scott just reminded me that we will also need shareholder approval of that, and that'll follow from the meeting on the 27th.
Okay. I know it's a sensitive issue, but can you provide any updates on your retention strategy for some of the key Provident people, particularly those in the marketing unit?
Yeah, I think it's fair to say, Rob, we've been in conversation with the senior operations staff, the folks that you know over there, and I believe we're in a process that within a week or so, we will have conditional offers out to the folks. We are optimistic that we're going to get all or substantially all of the folks that we will need to continue to run the operations. I think the feedback that we have from the Provident and Pembina staff that are involved is everybody is very positive on the transaction, positive on the outcome, and they see the opportunities that may arise from the combined entity going forward. I think the interest is strong.
Yeah. That's good to hear. Moving on to the Musreau facility. Have you made any modifications to your engineering or your planning or even the costing, with respect to Resthaven and the Saturn facilities from what you might have learned, developing Musreau?
Well, I think there have been learnings there, Rob. The important distinction that we've made with respect to Musreau is that we had acquired a lot of the facilities from a plant that had been discontinued or was being abandoned. We were able to keep the costs down on it, but it meant that we did have to work in a very tight working space. That won't be the case at Resthaven nor at Saturn. Those facilities will all be brand-new facilities, Rob, so many that will be constructed off-site and delivered to the site. I would look at the Resthaven arrangement and Saturn as being very similar to each other. I think it's a bit of apples and oranges.
Our guys are pretty comfortable with respect to timing estimates for the completion of those two new plants by, I believe it's the end of 2013.
Okay. Given your description there, I'm a little surprised that it took, well, I guess 5 months more than you expected. Is that due to just increased labor? Just more time to actually assemble the plant?
Yeah. Well, what happened actually, Rob, someday we'll get to take you out to that facility and you can better appreciate this. I was out in September, and the working area itself is very small. Initially we had, I'm not sure how many different types of contractors, but probably three or four different types of contractors were in at the site at the same time, and they were tripping over themselves. They decided to scale it back so that they have had a more sequential approach to it. That way it added more time to the project for sure. Also we got hit with some very cold weather up there where we had to shut down operations for a period of time as well, because it was too cold for people to work, if you can believe it, in our winter.
I'd say it's a learning.
Okay.
For sure.
Just finally on the Midstream and Marketing, clearly the volumes on the conventional system are strong. It looks like the benchmark differentials anyway are widening. What's your short-term outlook for the Midstream and Marketing is really the question I'm getting at. Is it, as we're reading it, higher volumes, wider margins, so you should have a good run in the near term here on the Midstream and Marketing?
It's still early in the year, Rob, and we do see fluctuation in market conditions, and we've experienced that already this year, where March pricing for conventional crude dropped significantly compared to where it has been. Now that looks like that trend might be reversing, Rob. I'd say it's early innings yet. As far as 2012 is concerned, I think, we're looking at 2012 maybe being similar to 2011 at this stage in total. Like I said, it's early, and a lot of things can change on you out there.
Okay. Thank you.
Thank you, Rob.
Your next question comes from the line of Robert Kwan with RBC Capital Markets. Your line is open.
Thank you. Just with respect to what you're seeing in terms of new projects, you've been pretty successful with the gas producers for Resthaven and Saturn. With the decline in gas prices, have your BD guys noticed a bit of a shift in the psychology in the basin with respect to signing the types of contracts that you'd like, the long-term take-or-pays?
Well, I don't think we've seen any material change at this stage, Robert. I know our people are in the process of going out to contract on our conventional NGL systems, probably within the next couple of weeks. I think the response there is expected to still be strong. I think, if anything, the decline in the gas prices and the strong NGL prices, it's just continuing to reinforce the value of the natural gas liquids, and it's almost like the gas is a byproduct at this stage, Robert. But we're not seeing any real significant change at this stage.
Okay. Just to the Provident transaction and really the reaction from the rating agencies, I know it's not really a liquidity issue as you've outlined, but what are your thoughts there and some of that potential being highlighted for a two-notch downgrade? Can you just talk about where you would like to be? Would you be comfortable with a two-notch downgrade, or does that change your thoughts with respect to either frac spread exposure and/or funding for 2012?
There's a lot of questions there. Peter, do you want to take that?
Certainly, Rob. Yeah, we would not be happy with a two-notch downgrade, so we have obviously had some ongoing dialogue with the agencies, and we had face-to-face meetings with them last week, updating both them on our permanent activities and also the combined entity going forward. I would say the agencies have a little bit more work to do, but we're hopeful we'll get some positive responses. We will certainly continue to have dialogue with them between now and our shareholders meeting on March 27th.
Yeah. I guess if you get the impression that they are leaning towards a two-notch downgrade, would you accept it until you can prove up the risk profile on the cash flow, or would you take some steps to shore up the balance sheet and the cash flow ratios?
Well, Rob, I think you really have to talk to the agencies to get their view rather than our view at this stage in the process.
I guess, Peter, more so what I was just trying to figure out is, will you defend the minimum BBB flat rating?
Well, we like our high investment-grade rating, and we will have to see what we can do to maintain that rating going forward.
Okay. Just the last question I've got is on the strategy with Provident, especially around gas processing, and your strategy really has been to get those new plants where you can connect and get the NGLs onto the pipeline system, and not a lot of interest in gas processing where that wasn't going to be the case. Will that change now that you have Redwater, such that even if you can't get it on to, say, the P system, you'd be more than happy if those volumes find their way into Redwater?
You know what, I think our strategy will be consistent, Robert, with where we've been. Where Provident fits in, of course, is they've got the liquids gathering system that interconnects with us at Lagasse. They've got Taylor that we're transporting liquids from to the Redwater facility. We're doing the Musreau deep cut, the Resthaven, the Saturn, and the other opportunities we'll look at will be similar, where we have the opportunity to put in the deep cut facilities. Now the obvious advantage that we're going to have is if we can actually expand the fractionation capacity at Redwater, all these extra liquids that are coming our way will be able to fill that fractionator as well. What we have is a full-service offering for our customer, and that's entirely consistent with our strategy, and that's where Provident fit into that so well, Robert.
Obviously, having Empress East, we think there'll be some liquids-like opportunities there. Who knows, there could be certainly further fee-for-service storage, possibly further fractionation. I really see this as going to open up more opportunities for Pembina to be more customer-focused. We're not going to be looking at expanding into areas where the gas is lean or it's not associated with our infrastructure.
That's great. Okay. Thanks a lot, Bob. Thanks, Peter.
Thank you, Rob.
Again, if you would like to ask a question, please press star, then the number one on your telephone keypad. Your next question comes from the line of Steven Paget with FirstEnergy. Your line is open.
Thank you. Did I hear that you may have commented on new technologies in relation to liquids extraction? I seem to recall hearing something about this from a third party and wondering if you could add something to that.
Well, Steven, I don't think we've. If I've talked about it was probably a mistake because I'm probably the least informed to understand that part of the business. No, really, it's that the technology we're talking about is really related to the drilling and liquids-rich drilling and, I guess, liquids drilling in general right across our system.
Drilling and completion's not above ground technology?
Yes.
Second, thank you. Could you comment a little bit on the contracts for the NGL pipeline additions? Are those fully contracted, and what are the term of those contracts?
The terms vary. Are you talking about the new facilities?
You mentioned the additions you'd put in for CAD 100 million.
Oh, yes. No, those contracts are the ones I referred to earlier that we are working. We are actually planning to meet with the customers within the next week or 10 days, Steven, on those. Those contracts have not been executed other than the contracts associated with the facilities that we are now contracted for, which would include the Cutbank Complex, the Saturn, and Resthaven.
Okay.
Our plan is to get to about 75% of the capacity to get that tied up in a long-term contract.
Before going ahead?
Well, we're pretty confident we're going to get there.
Okay. You're already there for the first 20,000 barrels a day, because that's less than the Resthaven, Saturn volumes will be.
Yes.
Thank you. Those are my questions.
Okay, thanks, Steven. Are you there, Operator?
Yes, I am.
Okay.
There are no further questions. Sorry, there are no further questions at this time.
All right. Thanks for participating. I know that some of you may have further questions as you get into the financials, so don't hesitate to contact us, and we'll try to give you the breakdowns to assist you in doing your planning going forward. Thanks for participating in the call today, and we look forward to doing this again.
This concludes today's conference call. You may now disconnect.