Pembina Pipeline Corporation
Q1 2014 Earnings Call Transcript

Published: 9 May 2014

[Operator:]

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

[Scott Burrows:]

Thank you, Steve. Good morning, everyone, and welcome to Pembina’s conference call and webcast to review our first quarter 2014 results. I’m Scott Burrows, Pembina’s Vice President of Capital Markets. This morning, Peter Robertson, Senior Vice President and Chief Financial Officer, will start the call by reviewing our first quarter results which we released yesterday after markets closed. Mr. Dilger, President and Chief Executive Officer, will then provide an update on Pembina’s growth project and strategy, including the dividend increase we announced yesterday. Following that, I will discuss our recent financings and financial positions, and then turn the call back to Mick once again for closing comments before finally opening up the line for questions. I’d like to remind you that some of the comments made today will 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 provided refers to non-GAAP and additional GAAP measures. To learn more about these forward-looking statements, non-GAAP and additional GAAP measures, please see Pembina’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 expressed or implied today. Please go ahead, Peter.

[Peter Robertson:]

Thank you, Scott, and good morning, everyone. Pembina’s financial and operating performance during the first quarter this year was very strong. In fact, we broke records for the majority of our key metrics which I’ll discuss momentarily. At a high level, our results were positively impacted by several factors. These included new assets and expansions being in service such as our Saturn I Facility which generated a full quarter results after being placed into service in October of last year, and our Phase I crude oil, condensate and NGL expansions on our conventional pipelines, which were placed into service in December 2013. In addition, growing customer activity in our operating areas, [indiscernible] results as did significantly higher propane prices from our Midstream business. Compared to the same period last year, we grew our EBITDA by almost 50%, from $211 million in the first three months of 2013 to $316 million this past quarter. This increase was largely due to improved results for the reasons previously mentioned. Adjusted cash flow from operating activities increased 31%, $264 million during the first quarter, from $202 million for the same period last year. On a per share basis, adjusted cash flow from operating activities grew over 22%. Each of our businesses generate excellent results for the first three months of the year. For our Conventional Pipeline business, average throughput increased by almost 12% to 553,000 barrels per day compared to the same period last year, with peak day volumes reaching over 587,000 barrels per day. Increased throughput was mainly a result of the Phase I Expansions being placed into service in December, as well as higher truck terminal volumes and new connections. Volumes from the Saturn I Facility also contributed to the increased throughput. Conventional Pipelines increased revenue by 22% to $117 million, up from $96 million in the same quarter last year. This revenue jump was due to increased volumes for the same reasons I previously mentioned along with higher tolls. Offsetting higher revenue in Conventional Pipelines were operating costs, which increased by 14% compared to the prior period. This was mainly because of higher labor and power costs related to volume growth and the Phase I Expansions, as well as seasonal winter-access pipeline work, and general repairs and maintenance. As a result, operating margin in Conventional Pipeline saw an increase of 26% during the first quarter compared to the same quarter last year. Our Oil Sands & Heavy Oil business generated improved results. This was largely due to higher volumes on the Nipisi Pipeline and flowed through operating expenses. Our operating margin increased by almost 10% for the first quarter compared to the same period last year. Gas Services increased average processing volumes by 77% to 528 million cubic feet per day compared to the first quarter of last year, with peak day volumes reaching 595 million cubic feet per day. This increase was largely a result of bringing our Saturn I Facility online in late October, and we’ve seen substantial increases as Saturn I has been put into service. And I’d also like to mention that average volumes increased by 44% over the fourth quarter of last year. Placing Saturn I facility into service and the associated new volumes, higher throughput volumes at the Cutbank Complex, an improved facility reliability which led to higher processing fees at the Musreau deep cut facility increased revenue by 50% during the first quarter compared to the same period last year. Offsetting this revenue increase were higher operating expenses which were largely a result of power, operating labor and maintenance costs associated with Saturn I being placed into service, as well as higher volumes and increased product [ph] cost at the expanded Cutbank Complex. Overall, operating margin in Gas Services increased by almost 53% for the first quarter compared to same quarter last year. Midstream also had another impressive quarter. Our Midstream business generated very strong results. Operating margin for the period increased over 63% compared to the same quarter last year, and NGL sales volumes increased by 8% to 133,000 barrels per day compared to the same period last year. This increase was driven by higher sales across all products. To put volumes into perspective, peak day production at the Redwater fractionator during the quarter was 77,000 barrels per day which exceeds its own capacity of 73,000 barrels per day, and was achieved on March 27. Further, our NGL related assets benefited from a significantly stronger year-over-year propane market, as well as increased fee-for-service related to storage caverns. Operating margin generated by our crude oil midstream activities grew over 21% due to higher volumes and wider margins. The expansion of currency related services increased storage opportunities, crude oil unit train loading and increased volumes at full-service truck terminals. The combined financial and operating results of all of our business resulted in a strong first quarter. I will now turn the call over to Mick Dilger, who will give an update on how we are progressing with our growth projects and plans.

[Michael Dilger:]

Good morning, everyone. Thanks for the overview of our strong first quarter results, Peter. Before I speak specifically about what lies ahead for Pembina and our growth projects, I want to first address the dividend increase that would approved at the board meeting yesterday. As we saw in our news release yesterday and our quarterly report, our solid business fundamentals, new assets and expansions being placed into service, attractive fleet of growth projects, and our growing and sustainable cash flows have driven the dividend increase of 3.6%. A new monthly dividend rate will be $0.145 per share or $1.74 annualized and will take effect as of May 25, record date. This increase demonstrates our ongoing commitment to enhancing sustainable shareholder returns. I believe that with the growth profile I’m about to discuss, we are well positioned to see increasing dividends over the long-term. Starting with our Gas Services business. Construction of the Resthaven, Musreau II, and Saturn II gas plants is progressing well. The Resthaven facility is tracking on-schedule for the third quarter of this year with over 70% of site construction completed to-date. The Musreau II and Saturn II facilities are also tracking on-schedule and are expected to be on-stream in the first quarter of 2015 and late 2015 respectively. With these three facilities and service by the end of 2015, we expect our net processing capacity to reach approximately 1.2 billion cubic feet per day, which is a long way from when this business started in 2009 with just over 300 million cubic feet per day. The roughly 55,000 barrels per day at NGL resulting from these projects will help support the expansions we’re undertaking and our conventional pipeline business, and feed the rest of our integrated value chain. Conventional; in our Conventional Pipelines business we are undertaking significant expansions without reiterating all of the details contained in our first quarter report, I’ll touch on a few highlights about the progress we’re making on these projects. We are progressing well on our Phase II Expansions which will see our crude oil and condensate capacity on our Peace Pipeline reach 250,000 barrels per day in late 2014, and our NGL capacity on our Peace Pipelines and Northern Pipelines reaching 220,000 barrels per day by mid-2015. Details of work for these projects is mainly related to pump stations, our regulatory approvals have been staggered. We have some of these approvals secured and are still working on others, but the projects are on-schedule to be in service as expected. Our project to expand capacity between Simonette and Fox Creek, Alberta is substantially complete. We’ll be conduction right-of-way clean-up activities and hydrostatic testing before placing a 60 kilometer line into service in the third quarter of this year. Based on our downstream capacity from Fox Creek into Edmonton, this expansion will initially bring in 40,000 barrels per day, but is built with a capacity of 150,000 barrels per day. On our Peace and Northern Pipeline Expansions are placed into service, the full capacity of the new pipeline will be available for use. Beyond these projects, we are diligently working on our Phase III Expansion. We are expecting to file regulatory applications for the project in the third quarter of this year which should allow us to stay on-schedule for late 2016, and mid-2017 and service date [ph]. In the next few months we will be making our final decision on pipeline size in order to secure long lead equipment orders. In Midstream we are pursuing a variety of crude oil, condensate and NGL related projects. The most substantial of these investments is RFS II, our new $415 million, 73,000 barrel a day fractionation facility at our Redwater site. We have done quite a bit of work and are tracking on-schedule to bring RFS II into service in late – in the fourth quarter of 2015. We have completed all of the Earthwork and our mechanical contractor is now on site. The pilling is currently about 30% complete, and foundations are expected to start next week. Equipment orders have been placed and equipment is showing up on site daily. The facility is also using modular fabrication to help reduce cost and schedule, and structural steel is currently being erected at the module yard. Storage cavern development also continues to be a major focus at our Redwater site in March. We signed another long-term fee-for-service agreement with a major petrochemical company for an underground storage cavern. We are also nearing completion of our full-service terminal at Cynthia, Alberta which will help bring additional volumes on to our systems. In Edmonton, we are progressing detailed engineering and have begun ordering long lead items with a view to bring an additional 540,000 barrels of above ground storage tanks into service by mid-2016. On the Oil Sands, we are also actively working on potential Cornerstone Pipeline project under an engineering support agreement with Star [ph]. We are awaiting their final investment decision on the upstream Oil Sands development which the pipeline would support. But regarding the work we are doing, we plan to file the regulatory application in the third quarter of this year, and are still on-schedule to be able to bring the pipeline in the service in the third quarter of 2017, subject to satisfactory commercial agreement and regulatory approvals. We also continue to work on a potential propane export terminal. This is proceeding slower than we originally expected. All in all, I’m very happy with how our growth projects are proceeding. We are keenly focused on the project execution at this stage, but still having our sight set on additional opportunities as they arrive. I’ll now pass the call back to Scott to give an update on our financing.

[Scott Burrows:]

Thanks, Mick. With the heavy capital spending profile we have in front of us, our focus is on maintaining the financial strength and flexibility to execute on our plans. We had two successful financing so far in 2014. On January 16, we closed our third preferred share offering for growth proceeds of $250 million, and in April, we issued $600 million in 30-year notes. As we stand today, we currently have $550 million of cash and a $1.5 billion credit facilities completely undrawn [ph]. Combined with strong participation in our drip program Pembina remains well positioned to continue to fund our growth initiatives moving forward.

[Michael Dilger:]

Thanks, Scott. So in closing, the first quarter of the year was very positive one for Pembina. And my first as the Company’s President and CEO, I’m very thankful to Bob Michaleski, Pembina’s previous CEO who retired in December of last year for the wonderful shape he left the company in. I’d also like to thank Lorne Gordon, who stepped down as Chairman of the Board in April for working so diligently to create such a strong foundation for the Company, and for those [ph] standing commitment to leadership since our inception as a public company. Our businesses continue to be operated safely and reliably, and in turn are producing solid cash flows and making our long-term growth profile more attractive than ever. The results we’ve produced thus far, 2014 demonstrates that we are on the right trajectory to generate attractive returns for Pembina and our shareholders in years to come. Before I open the lineup for questions, I wanted to remind everyone that Pembina’s Annual General Meeting is scheduled for this afternoon at 2 p.m. Calgary Time, 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 of how to access our webcast are on the website at www.pembina.com under Investor Centre. Operator, please, go ahead and open up the line for questions.

[Operator:]

(Operator Instructions) Our first question comes from David Noseworthy with CIBC. Your line is open.

[David Noseworthy:]

Good morning, and congratulations on a great quarter guys.

[Michael Dilger:]

Thanks, David.

[David Noseworthy:]

Firstly, to start off with your conventional system. Regardless the Phase III Expansion, what is happening in terms of producer commitments following the matured joint season?

[Michael Dilger:]

They are still assessing what they have and – so, no new news in terms of nominations or anything like that. We were seeing results in a Duvernay, I think [indiscernible] talks about some stuff, Trilogy talked about some stuff. So, it is starting to come out, and so we’ll just stay apprised of that and see if it results in any incremental nominations as those results kind of come out.

[David Noseworthy:]

Okay, thank you. And then, in terms of the Simonette and Fox Creek collateral, how should we think about the financial contribution from that lateral in Q3 and Q4 before the Phase II Expansion is complete?

[Michael Dilger:]

David I wouldn’t get too excited about if there will be some volumes that flow on that and access the Fox Creek into Edmonton. But more importantly, the real uptake will be once the Phase II Expansion comes on and we can access that 40,000 barrels a day of capacity.

[David Noseworthy:]

Thanks. And on the Gas Service side of the equation, it seems that the area around Saturn I is gas processing or it’s probably my interpretation by the rapid – I guess, ramp up of volumes that we saw there. Would you expect a similar ramp up for process volumes in your Resthaven, the Saturn II, Musreau II gas plants?

[Michael Dilger:]

You know, in the Saturn area, remember that’s a deep cut plant, there is a lot of shallow cut processing and so – it’s not like there is any superb drilling ramp up going there. I mean, it is an active area for sure but there are just a lot of shallow cut plants that previously existed and so, the drill there is just connecting two existing shallow cuts. So a lot of the production exists, it’s not new drilling.

[David Noseworthy:]

Okay.

[Michael Dilger:]

In terms of Resthaven, that’s a little bit more of a frontier area. We’ve got the good contracts there but that area will take a little while to develop to get up to nameplate if it’s probably not going to be one of those that turns on and we’re going to be bursting at the seams like we were with Saturn. It’s going to take a little longer to develop and recognizing it was more of a frontier area, it was the reason we got the high quality contracts there.

[David Noseworthy:]

Got it, okay, that’s helpful. And then, in terms of what you’re seeing right now – with Duvernay, and you talked a bit about this during your investor day, but can you just remind us kind of, from your perspective how much more gas processing infrastructure do you see is needed to accommodate the great volumes from these place?

[Michael Dilger:]

Well, in the Montney I think it’s pretty clear, it will be many Bcfs a day. I don’t know how many, is it going to two, four or six Bcf a day, it’s hard to say right now but it’s going to be pounded in the Bcf. In the Duvernay, because it’s much more of a liquid play, I wouldn’t even think about it in terms of million cubic feet a day, I’d think about it in barrels a day of liquids, condensate and – because that’s really the drill and the gas processing is kind of an ancillary activity to getting out the crude or condensate. I think that you could think about the potential of the Duvernay by looking at the Peace Phase III Expansion, that’s really – a good portion of that was built for Montney and Duvernay. If you’re asking me to guess on the Duvernay, it’s not going to be anywhere near in terms of the gas processing demand at the Montney. At least in the Fox Creek area, you know – in other – the Duvernay is still massive, down in the Drayton Valley area it will be probably be a little bit more gas focused, but again, it’s early days in the Duvernay.

[David Noseworthy:]

Okay, and maybe one last question, on the smaller part of your business, namely the full service terminals. Could you just provide us kind of what your strategy is for growing this business going forward?

[Michael Dilger:]

I would submit that we’re still – I mean, first we’ve piloted the business concept and we did some joint ventures as we typically do with new businesses, and Cynthia is our first constructed and wholly-owned terminal. And so the way I would think about that is, that’s our pilot on how to build and operate. And, so when we see the results of Cynthia, it’s go into operation, here I think I’m going to the ground breaking later this month. When we debug that and see how that’s all working, then we’ll make a decision on the speed at which we will grow that business but there is certainly lots of opportunity there and we remain committed to – if we’re making on that business, which I hope we will, and I think we will, we have – our mission really is to stick close to our existing dry terminals, that’s the synergy David that is taking our dry terminals and adding wet capability.

[David Noseworthy:]

So it sounds a lot like to bringing your correct debt services strategy to the full services?

[Michael Dilger:]

Yes, that’s a good way to think about it.

[David Noseworthy:]

Perfect. I will get back in the queue but thank you very much, those were my questions.

[Michael Dilger:]

Thanks, David.

[Operator:]

Our next question comes from Juan Plessis with Canaccord Genuity. Your line is open.

[Juan Plessis:]

Thanks very much, and congratulations on the strong quarter. You had a bit of CapEx spend on the potential project to connect the Nipisi Pipeline to the Trans Mountain pipeline. Can you talk a bit more about that potential project, and also maybe in terms of CapEx and timing of that potential?

[Michael Dilger:]

That wasn’t a large project but some of our customers wanted more than one outlet for their product and that wasn’t – that was a customer supported project, so we’re going to make some – a little bit of money on that, it’s not immaterial for sure but I think the takeaway there is, producers like options, and when you think about what we’re trying to do with our access terminal is being able to get any product from any pipeline to any pipeline is of great value because of differentials in quality and different markets that pay different values for different commodities, so that hub concept that we’re trying to develop is of great value to producers. And I think this is just more evidence of that.

[Juan Plessis:]

Okay, thanks for that. And you mentioned that you signed a long-term contract for underground storage in March, can you give us some more details on the scale and potential impact of that agreement?

[Michael Dilger:]

Yes, so that’s – it’s our typical deal if you look back on the last couple of press releases we’ve had on our underground storage caverns, very similar in terms of the terms and conditions. The one point I would point out is that, that will be in service in December of 2014, so we didn’t give the in-service date but that’s when it is, but in terms of the contractual obligations that you can look at the previous contracts. It was one of the caverns we were previously developing, remember we always have about three to five under development at any given time, so this was just one that was in development and close to being put into service which we were then able to sign a contract for. So it’s not like it’s a brand new one that we’re just starting to drill and watch today, it is pretty close to an in-service date.

[Juan Plessis:]

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

[Operator:]

Our next question comes from Carl Kirst with BMO Capital. Your line is open.

[Carl Kirst:]

Thanks. Good morning, everybody, congratulations as well, great quarter. Actually just to hit on the storage, but – can I ask, is there any granularity – anymore granularity we can get on the Midstream liquids margin with respect to perhaps split between Empress and Redwater? And from a volume standpoint, should we just assume that, that kind of Redwater ramp filled out the entire quarter given it was above nameplate for little bit there?

[Michael Dilger:]

Yes, I mean not a high level but the 8% be it volumes was pretty much equal on both, the east and the west, and I think that’s but all the additional information we’re about to prepare this year. So it’s not like the sales volumes be all came from one specific area, it was equal on both areas.

[Carl Kirst:]

And with respect to the significance of the margin ramp, could we then sort of extrapolate that to say that basically it was sort of an equal contribution, if you will, from both or did one perhaps just because of the way – obviously, propane was – maybe that produced some of the outside margin. We’re just trying to get a better sense of that.

[Michael Dilger:]

You just answered your own question Carl.

[Carl Kirst:]

Thank you.

[Michael Dilger:]

We can look at growth screens and see that obviously Sarnia pricing was extremely strong as was Edmonton but Sarnia was definitely was the stronger price this quarter.

[Carl Kirst:]

Fair enough. And then, last question if I could, and this is sort of more just – kind of a high level question given you all have so much going on, great to see all the project backlogs kind of continue on-time on budget. And I just wanted to touch base on cost pressures as far as what you’re seeing, have you seen any over the last three/four months, any further pressure that you were additionally seeing that you had come back or has the market conditions not materially changed one way or the other on cost pressures?

[Michael Dilger:]

I can say that everything we’re working on so far looks pretty good but I want to just caution you because the stages we’re at now for the most part rather than Resthaven is, we’re just starting construction so we’ve ordered long lead item and major equipment, and usually that comes in about as you expect and the risk is always in the construction. So notwithstanding, everything is going well so far, we’re not at the risky part of some of the larger projects other than as I said Resthaven where things are going according to the new plan. But one thing I will say is, it’s the same people building Saturn II that build Saturn I. And the people who build the Simonette pipeline, we’ve worked with in the past. We have the same engineering firm who did RFS I, doing RFS II, and we’re going to have the same people where we do RFS III, doing the same thing and so, it’s not quite what it would seem, maybe on the outside, we have a lot of familiarity with the people doing this work and so it would be a little bit surprising if – for example, we do Saturn I and it comes in on time and on budget, then we’ve have a complete run away on Saturn II, it would seem unlikely to us if that would occur.

[Carl Kirst:]

Excellent, I appreciate the color.

[Operator:]

Our next question comes from Robert Cuddlier [ph] with GMP Securities. Your line is open.

[Unidentified Analyst:]

Hi, good morning, and congratulations on the measured dividend increase, I’m sure it was tempting to do a little bit more. I just have a couple of business development questions, particularly on the LPG, you alluded to Mick that maybe it’s going little bit slower than expected there. Obviously, all the gas spot that Ferndale Terminal in Washington, and I’m wondering how that’s impacting the strategy, and obviously, the timeline has been impacted but is there anything that you can add there?

[Michael Dilger:]

We’re happy no matter who build export capacity, so we certainly wouldn’t have minded it if it was us making announcement about our new terminal but if people are clearing barrels, that’s a good thing. As we look forward, we’re ramping up for the RFS II startup with incremental rail export capacity, so we’ll be able to move our barrels out of there but the more markets we have, the better, no question about it. So whether it’s – we see barrels clearing in the Gulf Coast or hopefully on the West Coast with AltaGas project, we view that all as positive. But when we think about the Montney development, we just think there is going to be a lot of demand for more diverse market. So it’s – if not like the AltaGas announcement has changed our view of the amount of barrels that need to be cleared. I would submit that in due course, I don’t know how far to the future but they will likely need to be more barrels cleared than just that terminal.

[Unidentified Analyst:]

So to take that a little bit further then, would you consider shipping through that terminal and accessing international markets and maybe getting a lift in the propane margin?

[Michael Dilger:]

Well, two – two comments there. Number one, most of the barrels we clear are not proprietary, so they belong to our producers, and so we’d have to consult with them how to clear those barrels. But that would be an option, we would not dismiss that as an option but that does necessarily mean that we wouldn’t be continuing – and I didn’t say we are continuing to pursue a proprietary export option.

[Unidentified Analyst:]

I apologize, this one’s a bit of a stretch but – in the U.S. we’re seeing ramp up in business development and projects for ethane explore, particularly in the Gulf Coast. I’m wondering if the Sarnia in some of the company’s assets lend themselves to maybe participating in that ethane export, whether it’s shipping down or shipping anything down to the coast or some of the Northeast projects that have been established?

[Michael Dilger:]

You’re honestly telling me something I didn’t know, so I appreciate the knowledge. In terms of ethane, what we observe with ethane is that, in Alberta and in Sarnia, it doesn’t quite have the margins that propane has to be able to afford to build those kinds of things. So you’re – I’m going to speculate because like I say, I don’t know anything about it, but you’re probably talking about Gulf Coast activity where they are proximate to the water and they’ve got lot of the facilities in place whereas by and large we’re talking about Greenfield for propane and we just don’t have the margins currently on ethane. So – but as I said, I don’t really have much knowledge on that, so I apologize I can’t help more.

[Unidentified Analyst:]

That’s the answer I expected. Just on RFS III, similar to David’s question on getting additional nominations for the Phase III of the pipeline expansion, it sounds like its maybe a little bit early to talk about building on RFS III?

[Michael Dilger:]

You know we’re working hard on that, we do have customer interest but we – if we had critical math, we’d be announcing it, so we don’t yet have critical math on that project but it’s clearly within our sites in terms of something we want to get done.

[Unidentified Analyst:]

Okay. And then finally, company’s strategy on the gas processing plant, obviously it’s worked out well and the number of plants associated with your other assets but given the activity levels that you’ve alluded to in the Montney in particular, and some of your peers have said the same thing over this last year’s conference calls, obviously it’s a big opportunity there and I’m wondering about the company’s appetite to pursue maybe a large or larger or a standalone facility that didn’t necessary leverage your pipeline infrastructure.

[Michael Dilger:]

Probably not likely, we have enough that do leverage our infrastructure, and I’ve said a number of times, there are more opportunities than Pembina can do, we’re evidencing that now. I mean, we have some Enbridge plants, some Verizon [ph] plants, some Keyera plants on our system and, so – and we’ve got our hands on work, we’re building almost as fast as we can, I mean we have some capability that’s going to pop up after Saturn II and Resthaven are done. But we foresee having enough connected plants that we have the luxury and I meant we’re spoilt but we do have the luxury right now not needing to answer that question.

[Unidentified Analyst:]

Okay, thank you.

[Operator:]

Our next question comes from Matthew Akman with Scotiabank. Your line is open.

[Matthew Akman:]

Thank you very much. Good morning. Just to pursue the LPG export a little bit further. I’m wondering if you guys are thinking about it in terms of build versus buy economics, and obviously I’m not asking you to comment on the specific Ferndale transaction, but is that something you guys think about and just generically do you see the economics in the market is being better for you to build versus buy?

[Michael Dilger:]

Not necessarily in price build, the buy is nice because of speed. In terms of overall economics, the analysis we’ve done on a number of different options is, they are similar. When people are selling, they are pretty smart, they know what it will cost to buy or to build, so that’s kind of how they triangulate their values. But the good things about buying are speed and cost certainty but you do often pay a premium for that. So there is nothing completely obvious in terms of a clear win in terms of which way to go.

[Matthew Akman:]

Does it help to have more scale, and can you get that if you build versus buy?

[Michael Dilger:]

Scale is very, very important because it’s kind of governed by the size of the ships that come in – if you can only half fill a ship it’s never going to be economic. So you have to be able to fill a ship and that’s really what drives your scale and so, to Pembina that means probably no smaller than 30,000 barrels a day.

[Matthew Akman:]

Okay. Just one other separate question on financing that you guys had a very successful theory, your debt deal recently, and a lot of other companies are lending more towards sort of medium term notes. I’m just wondering given the success of that whether we’d see you guys lean more towards long-term debt financing or where you are in that balance of mix?

[Michael Dilger:]

Well, after we repay our note in June, the weighted average term of our debt will be 19 year. So we’re sitting pretty from a debt maturity, the way we structured it is we have a lot of flexibility right now. So there is lots of gap in terms of looking at a 7 year or 10 year or even going out to 30 year. So I don’t think we’ve made that decision yet, but likely the next note offering would be somewhere in the 10 year term.

[Matthew Akman:]

Okay. Thanks very much guys.

[Operator:]

Our next question comes from Robert Kwan with RBC Capital Markets. Your line is open.

[Robert Kwan:]

Good morning. Just quickly on the dividend, and I guess just timing policy, are you thinking about this being an annual review or just went into the decision of timing this quarter?

[Michael Dilger:]

Yes Robert, I think that we will likely lean more towards the first quarter. I mean, keep in mind, we assess every quarter with our board, the dividends and the dividend policy but I think on a go-forward basis, we’d likely look as Q1 as the timing for that dividend increase.

[Robert Kwan:]

Okay. I guess just turning to rail, any thoughts on some of the new regulations that have been put forward and as well, anything that you’re thinking about around track bottle mix, whether that’s congestion in the Edmonton area, and/or anything, any further thoughts on growing prior position?

[Michael Dilger:]

The only comment I’ll make there is, we don’t have any issues with the new regulations. We only have 58 of those department transportation on 11 cars and we have three years to deal with those. We’re probably going to accelerate that timeline quicker than the three years. So, we’ll move forward. In terms of the growing [ph] prioritization and the bottleneck comments there, we don’t see any issues there currently.

[Robert Kwan:]

Okay. And do you have concerns about – just with the growth and what you’re trying to do and – what others are trying to do, especially in and around Edmonton and then just Alberta, more generally getting out of problems?

[Michael Dilger:]

Yes, there is no question there is a lot of projects that look like they are coming on, so we’ll navigate our way through that. And I think our advantage is, we’re in business now and we’ve got the largest non-railroad owned yard in Western Canada, and we are shipping unit trains today. And so, as opposed to some of the new projects are – they’ve got to consider we’re already in the business. So – but in terms of adding additional capability we’re certainly aware that there is a lot of service coming on in the market or proposed to be coming on.

[Robert Kwan:]

And just the last question, following on what you’re doing with rail out of Redwater yet, you referenced earlier with RFS II you’re going to be some extra propane. So, in terms of increasing propane exports out of Redwater, is that an expansion of the existing racks or are you repurposing racks, such as some of the old stuff, and then how you’re balancing that between increased propane exports and then crude out of the terminal?

[Michael Dilger:]

We don’t need any incremental racks for the propane, there could be some repurposing. But longer term, we see Redwater as the NGL hub and Heartland as the crude hub. And so, there could be incremental development at Heartland, but we’ll have to wait and see. But in terms of moving our RFS II propane supply, we don’t need any new racks at Redwater, and we’ll have the cars in place.

[Robert Kwan:]

Okay. So long-term you’re thinking about repurposing the conduit racks [ph] to propane and then moving all the liquids over to Heartland, is that kind of the longer term plan?

[Michael Dilger:]

Yes, it is.

[Robert Kwan:]

Perfect. Thank you.

[Operator:]

Our next question comes from Steven Paget with FirstEnergy. Your line is open.

[Steven Paget:]

Good morning, and thank you. Regarding the profits in Midstream and marketing, do – what would you split them between fee-for-service and commodity base margins?

[Michael Dilger:]

Steven, I don’t think we’re prepared to share that at this stage.

[Steven Paget:]

Or how much of the margin is made by buying propane ahead of time and reselling?

[Michael Dilger:]

Those kinds of details we think are – could impact our competitiveness. So this is the reason we don’t disclose them.

[Steven Paget:]

Okay. With drop in Edmonton propane pricing versus other continental pricing, how would that affect Pembina in the second quarter?

[Michael Dilger:]

Well, clearly the second quarter prices will be lower than the first quarter, I mean the first quarter – even the fourth quarter were pretty outstanding. I think I saw the dashboard, prices are coming much closer in line with historical second quarter pricing. I think it’s still favorable but not multiples like we saw in the first quarter. Steven keep in mind with – given the cold weather, we were basically selling out of the backend of our frock [ph], so it’s not like we came out of winter with a huge amount of inventory and a high price similar to 2012, I mean we were basically – had no inventory, so it’s not like we’re carrying a huge dollar value there at a high price.

[Steven Paget:]

Okay, thanks guys. If we see condensate volumes from the Duvernay growing, could Western Canada condensate start squeezing out imported condensate and how is Pembina protected if that happens?

[Michael Dilger:]

Well, Pembina actually – I mean, obviously as Duvernay condensate we’re transporting it and it will most likely – in a scenario where there wasn’t enough sufficient demand for Duvernay condensate and imported condensate, the local condensate would probably have to discounted in price. We would not be impacted by that because we don’t have proprietary condensate barrels, but our view of the world is, when we have the large projects like curl [ph] that use 100,000 barrels a day for example, there is a long way to go before we’re long condensate, that could happen at one point, but it’s way is out there.

[Steven Paget:]

Okay, thanks. When I look at cash flows, the cash on hand debt and your committed projects of committed capital of $4.4 billion through 2017, it looks like you can get through with acquiring additional equity financing as – does this seem correct to you?

[Michael Dilger:]

Does that – sorry, does that assume your drip or no drip?

[Steven Paget:]

Well there is a drip in there.

[Michael Dilger:]

Yes, I mean, I think we can never say never but in this five minutes I can say that for the rest of the year in 2015 we’re not finding any equity financing but that could change with an acquisition, that could change with additional ramping up of the capital program, so obviously a lot can change but in this five minutes I think your assumption is correct.

[Steven Paget:]

Excellent, thank you, and those are my questions.

[Michael Dilger:]

Thanks, Steven.

[Operator:]

Our final question comes from David Noseworthy with CIBC. Your line is open.

[David Noseworthy:]

Hi guys, a couple of cleanups here. Just first, can you comment in terms of what you’re seeing in your Empress East for the rest of the year regarding some of the structural market changes that we’re seeing by the Koch universal Mirena West [ph] and truck mainline volumes?

[Michael Dilger:]

Yes, David, I mean I think we’ve been pretty stepback in terms of the Mirena West [ph] project saying that the ethane that’s going into that market is basically displacing the propane that was being brought by Koch and so, it’s a bit of a net-net neutral there. So where we stand today we don’t see that necessarily having a significant impact on the Sarnia prices. And in terms of mainline volumes, obviously, I mean you can pull up the border reports to see that volume going through the mainlines that we’re quite strong and obviously we benefited from some of that in Q1 of this year. Which then leaves you what’s the impact of Koch reversal, certainly not helpful but we know we can move our product. So I think that it – we do have to think about Gulf Coast exports and see what kind of impact on the market they had. It’s really hard to say when you look back at 2013, what was cold weather and what was the impact of exports. And I think anecdotally if – when [indiscernible] cancelled exports for a little while, they certainly thought exports was having an impact. So we just don’t know how all those things come together but as long as the price is high, somewhere we can get there.

[David Noseworthy:]

Alright, that’s fair. And then, this is tactical [ph], this is for Peter but just given your outside results in Q1, what do you expect your cash taxes to be for remainder of the year?

[Peter Robertson:]

I think our guidance that we gave last quarter is still valid, I think we suggested 15% to 20% of our cash flow number.

[David Noseworthy:]

But you didn’t burn through those shelters?

[Peter Robertson:]

But a lot depends David unlike capital way actually get through and how much of that actually translates into tools that we can utilize in 2014. So the best we can do is that rough guidance based on the cash flow number.

[David Noseworthy:]

Okay.

[Michael Dilger:]

And David, that was – that call was in late February, so we already had a good idea when Peter gave that guidance of what January and February we’re going to look like.

[David Noseworthy:]

Okay, that’s helpful. Okay, thank you. And lastly, on your emergency [ph] storage, is that going to be spec or contracted?

[Michael Dilger:]

The above ground?

[David Noseworthy:]

Yes.

[Michael Dilger:]

Right now it’s proprietary.

[David Noseworthy:]

Okay.

[Michael Dilger:]

Our model there is, we’re going to build proprietary and then what we found David was, when it came to above ground LBP storage was – when people needed it, they needed it, they didn’t have time for you to build it. And so we’ve developed a model where the amount we’re building is the amount we’re building is the amount we’re confident we can effectively use on a proprietary basis. And then, just like with the Redwater salt storage, we want to get into a program of building – constantly building, and then, as fee-for-service opportunities arise, which they will, just flip some of that into fee-for-service and then use the stuff we’re building next for proprietary.

[David Noseworthy:]

Okay, great, thank you. Those were my questions.

[Michael Dilger:]

Thanks, have a good day.

[David Noseworthy:]

You too.

[Operator:]

There are no further questions. I would now like to turn the call back over to Mr. Dilger.

[Michael Dilger:]

Well, thanks, everybody for attending this morning. Reminder, AGM is two ‘o’ clock today, Calgary Time. I’d like to thank all Pembina’s staff who are working so hard and making sure we had a safe and reliable quarter. And we look forward to seeing you at the AGM. Thank you.

[Operator:]

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