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Edited Transcript of PPL.TO earnings conference call or presentation 24-Feb-17 3:00pm GMT

Thomson Reuters StreetEvents

Q4 2016 Pembina Pipeline Corp Earnings Call

CALGARY Feb 24, 2017 (Thomson StreetEvents) -- Edited Transcript of Pembina Pipeline Corp earnings conference call or presentation Friday, February 24, 2017 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Scott Burrows

Pembina Pipeline Corp - VP, Finance & CFO

* Mick Dilger

Pembina Pipeline Corp - President and CEO

* Paul Murphy

Pembina Pipeline Corp - SVP, Pipeline & Crude Oil Facilities

* Stu Taylor

Pembina Pipeline Corp - SVP, NGL & Natural Gas Facilities

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Conference Call Participants

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* David Galison

Canaccord Genuity - Analyst

* Rob Hope

Scotiabank - Analyst

* David Noseworthy

Macquarie Research Equities - Analyst

* Jeremy Tonet

JPMorgan - Analyst

* Linda Ezergailis

TD Securities - Analyst

* Robert Catellier

CIBC World Markets - Analyst

* Ben Pham

BMO Capital Markets - Analyst

* Andrew Kuske

Credit Suisse - Analyst

* Robert Kwan

RBC Capital Markets - Analyst

* Patrick Kenny

National Bank Financial - Analyst

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Presentation

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Operator [1]

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Good morning, my name is Jodi and I'll be your conference operator. I'd like to welcome everyone to the Pembina Pipeline Corporation 2016 fourth-quarter result conference call.

(Operator Instructions)

Thank you, Scott Burrows VP of Finance and CFO you may begin your conference.

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Scott Burrows, Pembina Pipeline Corp - VP, Finance & CFO [2]

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Thank you, Jodi, good morning everyone, and welcome to Pembina's conference call and webcast to review highlights from the fourth-quarter and full-year 2016 results. I'm Scott Burrows Pembina's VP of Finance and Chief Financial Officer. On the call we me today are; Mick Dilger, Pembina's President and Chief Executive Officer; Stu Taylor, SVP NGL & Natural Gas Facilities; and Paul Murphy SVP Pipelines Crude Oil Facilities.

Before passing the call over to Mick for a review of quarterly and full year highlights, I would like to remind you that some of the comments made today may be forward looking in nature, and are based on Pembina's current expectations, estimates, judgments projections and risk. Further some of the information provided refers to non-GAAP measures. To learn more about these forward looking statements and non-GAAP measures please see the Company's various financial reports which are available at Pembina.com and both SEDAR and EDGAR. Actual results could differ materially from the forward-looking statements we may express or imply today.

Over to you, Mick.

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Mick Dilger, Pembina Pipeline Corp - President and CEO [3]

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Thanks, Scott. Good morning, everyone. Looking back we feel 2016 was a great year for Pembina. We had record financial and operating performance and maintained an exemplary safety record.

Our staff worked 2.9 million hours in 2016 without a single lost time incident. This is a third time, third year in a row we have had no lost time employee incidents.

We completed approximately CAD1.2 billion in major projects representing a meaningful portion of our secured growth projects including; our second Redwater Fractionator; expansion of two gas processing facilities totaling 200 million cubic feet per day; the expansion of the Horizon Pipeline System among other projects.

The remainder of our growth projects are also progressing well. Overall, Phase III is now 60% complete and we are actually commissioning the pump stations right now.

RFS III is expected to come in on schedule, actually ahead of schedule in July. Initial connectivity at our Dillion Hub in CDH is now operational. These projects alone total approximately CAD3 billion and are scheduled to be completed by the middle of this year.

In 2016, we secured over CAD750 million in new growth, which helped to augment our competitive positioning in two of the basins premier resource play, the Alberta Montney and the Duvernay. We have begun work on the next wave of growth opportunities.

We completed our feasibility study for our PDH EP project which Stu will discuss later on in the call. We purchased approximately 22 acres of highly strategic lands in the Alberta Industrial Heartland directly adjacent to our Redwater site. And we just announced an exciting opportunity with Chevron in the Duvernay which Stu will also discuss later on the call.

2017 is set to be a transformational year for Pembina as we complete approximately CAD4 billion in projects. Three-quarters of which will be completed by the middle of this year. The incremental fee for service cash flow from these projects will strengthen Pembina's financial foundation and ideally position us to pursue growth opportunities which will continue to drive shareholder value over the long-term.

I'm very proud of the year Pembina had and excited for what the future holds. I'd also like to thank our stake holders, customers, communities, investors and employees for their integral support during such an exciting time for Pembina.

Now Scott will provide a few financial highlights from our operational perspective.

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Scott Burrows, Pembina Pipeline Corp - VP, Finance & CFO [4]

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As Mick mentioned Pembina realized record operational and financial performance in 2016. Fourth quarter adjusted EBITDA was CAD342 million an all time quarterly high, and CAD1.189 billion for the year as a result of stronger performances across all businesses including new assets placed into service and the Kakwa River acquisition. Respectfully, adjusted EBITDA was 27% and 21% higher than the comparable periods last year.

The strong business performance partially offset by additional preferred share dividend resulted in adjusted cash flow of CAD292 million for the quarter and CAD986 million for the year. Per share metrics were largely in line with last year as a result of share issuances to partially fund our organic program part of which won't contribute to results until later this year and partially to fund the Kakwa River acquisition. Our GAAP services business process record 976 million cubic feet per day in the quarter and 836 million cubic feet per day for the year. Revenue volumes were 61% and 21% higher respectively and to comparable periods in 2015.

Increased revenue volumes from new assets in the Kakwa River acquisition translated to operating margin of CAD60 million for the fourth quarter, 82% higher than the comparable quarter last year. For the year gas services recorded operating margin of CAD195 million, a 35% jump from 2015. NGL sales volumes were also at a record level at 164,000-barrels per day for the fourth quarter and 143,000-barrels per day for the year.

A combination of increased NGL sales volume and higher commodity margin help support increased Operating margin in our Midstream business. Operating margins for NGL Midstream activities was 30% higher than for both the fourth quarter and full year of 2016 at CAD112 million and CAD334 million respectfully.

Operating margin for crude oil Midstream activities increased to CAD46 million compared to CAD37 million for the comparable quarter as a result of increased storage revenue. For the full year, Operating margin was 5% lower at CAD162 million as a result of lower commodity margins due to tighter differentials and the exit from the full service terminal business.

Conventional Pipeline volumes were 639,000-barrels per day for the fourth quarter and 650,000-barrels per day for 2016, increases of 3% and 6%. During the fourth quarter, routine maintenance on the Peace Pipeline moderately impacted revenue volumes due to turn around for our expansion coming online. Without this outage, revenue volumes for the fourth quarter would have been approximately 675,000-barrels per day or 6% higher than reported figures.

Operating margin in Conventional Pipelines increased by 8% to CAD118 million for the fourth quarter as a result of higher revenue somewhat offset by increased operating costs. For the year, Conventional Pipelines realized operating margin of CAD494 million, 23% higher than last year as a result of higher revenue and lower operating costs which were mainly due to ongoing refinement in our integrity management program. Our oil Sands business continued to perform in line with previous periods as expected.

Pembina continues to maintain one of the strongest balance sheets in our sector. Further supported by a very strong liquidity position. For the last 12 months Pembina's debt to EBITDA ratio was 3.5 times. After year end we completed a very successful CAD600 million medium term note offering and as of February 22nd our CAD2.5 billion credit facility was completely undrawn which allows Pembina to have ample liquidity to fund the remaining 2017 capital program.

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

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Paul Murphy, Pembina Pipeline Corp - SVP, Pipeline & Crude Oil Facilities [5]

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Thanks, Scott, good morning, everyone. As I mentioned on our last quarterly call we are now in full construction mode with over 3000 people if the field working on our various Phase III expansion projects, which is now 60% complete. Our teams are currently working on the largest section of the project between Fox Creek and Armada, Alberta.

In spite of very unseasonable weather last fall we feel confident about the project's scheduled completion by the middle of the year in its previously disclosed budget. I want to commend the great job our teams have done managing Pembina's largest greenfield project to date in spite of Mother Nature's challenges.

We also continue to advance our portfolio of lateral pipelines, these projects represent strategic opportunities to increase the reach of our main line system. After receiving approval from the British Columbia Oil and Gas Commission, we have begun construction activities where our northeast BC expansion. This CAD235 million project is underpinned by cost to service agreement and will provide strategic egress capacity for the liquids rich Montney production growth.

Development of the Ontario's lateral is also underway which will connect into the northeast BC expansion. Both of these projects are expected to be completed by the end of the year.

In 2016, we completed two projects within our oil sands and heavy oil business, the Horizon expansion was completed in July, which increased the system capacity to 250,000-barrels per day. Later in the year, a modest expansion of the Cheiftan lateral was also put into service.

Moving over to our crude oil business, midstream business, initially connectivity at the Canadian Diluent Hub is complete. This phase of development provides connectivity between Pembina's conventional pipeline infrastructure into the Diluent take away capacity at our Redwater sites.

We are currently flowing condensate volumes into Access, Cold Lake and Fort Saskatchewan Pipeline Systems and are pleased with the initial demand from customers as well as the operational performance of the facilities. Construction of the 500,000-barrels of storage at CDH is now 90% to 95% complete. We are expecting the overall CDH project to be finished by the middle of this year and it continues to trend under budget.

I will now pass the call to Stu to provide an update on gross projects within our NGL value change.

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Stu Taylor, Pembina Pipeline Corp - SVP, NGL & Natural Gas Facilities [6]

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Thanks, Paul, good morning, everyone. 2016 was a successful year for Pembina Gas Services Business, as we added approximately 450 million cubic feet per day gross of new processing capacity. Expansions were completed at both our Resthaven and Mezrow facilities earlier in the year and in April we closed the acquisition of the Kakwa river facility which represents Pembina's first sour gas processing facility.

Pembina continues to advance our infrastructure platform in the Duvernay. Engineering is 85% complete. All major equipment has been ordered and site grading and piling activities are now finished for our 100 million cubic feet per day Duvernay I facility.

At the field hub all required regulatory approvals have been received. Engineering is 55% complete. Initial civil work is done. Both projects are expected to be brought into service in the fourth quarter of 2017, and the expected total investment is approximately CAD240 million.

We are very pleased to have been selected by Chevron Canada Limited to be their Midstream service provider of choice, to support their Duvernay development. As we recently announced Pembina and Chevron have entered into a 20 year infrastructure development and service agreement. The agreement includes an area of dedication by Chevron in excess of 10 gross operated townships over 230,000 acres, concentrated in the prolific liquids rich Kaybob region of the Duvernay resource near Foxcreek.

Under the agreement and subject to Chevron sanctioning and regional development, Pembina will construct, own and operate gas gathering pipelines and processing facilities, liquid stabilization facilities and other supporting infrastructure. Additionally, Pembina will provide long-term service for Chevron pipelines and fractionation facilities.

In the aggregate and subject to internal Chevron and regulatory approvals, the infrastructure developed over the term of this agreement has the potential to represent multi billion dollar investment for Pembina. While this agreement and respective obligations are binding the infrastructure development remains contingent upon Chevron's sanctions as well as necessary environmental and regulatory approvals.

The development of our proposed PDH, and PP facility is well underway. We have completed our detailed feasibility study which yielded encouraging initial results.

We were also encouraged by the conditional award of CAD300 million, in royalty credit from the Albertas government Petro Chemical Diversification program late last year. We hope to make a decision about fees by the end of the first quarter of 2017.

Key deliverables of the FEED phase include Regulatory Applications, a Class III Cost Estimate, a Project Execution Plan among other items. We are aiming to make a final investment decision of this project by the second quarter of 2018. Subject to regulatory environmental and Pembina's board approval, the productive and service by 2021.

Overall construction of our Phase III is at 90% and the facility will be effectively complete by early in the second quarter of 2017, which will be followed by commissioning activities. We expect to be able to bring RFS III into service early in the third quarter 2017, ahead of our original expectations.

Pembina continues to progress in construction on infrastructure, in support of the northwest Redwater partnership plan refinery. Overall the project is now 70% complete, engineering a procurement activities are over 90% finished. Nearly all materials and equipment have arrived on site. Various phases of the project will be placed into service throughout 2017 and by year's end, the project will be complete.

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Scott Burrows, Pembina Pipeline Corp - VP, Finance & CFO [7]

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Thanks, Stu. Pembina made meaningful strides in 2016 towards achieving our goal of CAD600 million to CAD950 million of incremental EBITDA as compared to 2015. 2017 will be a very exciting year for Pembina as we will realize a full year benefit from the approximately CAD1.2 billion in major projects we completed in 2016.

Further with approximately CAD4 billion of projects to competed in 2017, the substantial fee for service cash flow is eminent. Our balance sheet remains among the least levered in our sector, and we continue to remain robust liquidity and are hard at work for our next wave of growth. This combination creates a unparallel foundation for Pembina to continue to drive long-term shareholder value.

As always, we will keep a sharp focus on operating and growing our business in safe reliable and cost effective manner. We look forward to speaking to you again in May in conjunction with our Q1 results.

With that we'll wrap things up and open the line for questions.

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Questions and Answers

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Operator [1]

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Thank you so much.

(Operator Instructions)

Our first question comes from David Galison with Canaccord Genuity, your line is open.

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David Galison, Canaccord Genuity - Analyst [2]

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Good morning, everyone. So my first question is, with all these assets coming online, including the Phase III in 2017, and with the cash flows you'll be generating, how should we think about the potential uses for those cash flows? Will they be focused on additional growth or will they be a focus on maybe a staged increase in the dividend or just your thoughts on how to use the cash?

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Mick Dilger, Pembina Pipeline Corp - President and CEO [3]

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I think the answer is yes. You know, we have been growing our dividends, you know, 4% to 6% for a long period of time. You know, we see room to be, you know, in the higher end of that. That will be up to the board in the next number of months to decide.

So yes, we're going to continue growing the dividend, and I think the, you know, we have been saying for some time, we have confidence in the basin, and continued opportunity in the basin and I think the Chevron transaction exemplifies that, and we expect to keep growing at, at least, you know, a billion dollars a year, that's what's in my objectives for the year, and in some years it's a lumpy business. Some years it might be three, and some years it might be one. We have been generating that kind of growth even through these last two kind of recessionary years, so we're pretty confident we can have a use of proceeds towards growing our asset base.

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David Galison, Canaccord Genuity - Analyst [4]

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And then just on the Chevron agreement, how do you envision the contracts, will they be fee for service or more of a cost of service take or pay type of contracting system?

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Stu Taylor, Pembina Pipeline Corp - SVP, NGL & Natural Gas Facilities [5]

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This is Stu, they are going to be a combination. Part of our agreements are cost of service for depending on the infrastructure, the remaining are fee for service type contracts with growing commitments as we continue to build and develop the infrastructure working with Chevron.

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David Galison, Canaccord Genuity - Analyst [6]

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Okay. And will those, will the assets all be dedicated to just servicing Chevron or will they be open to other volumes as well if it should warrant?

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Stu Taylor, Pembina Pipeline Corp - SVP, NGL & Natural Gas Facilities [7]

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One of the big important points for Pembina was to ensure that we have the ability to overbuild any infrastructure we saw in the area such that we could have third parties come through that infrastructure and utilize that. We have rights depending on the what the infrastructure is to bring third parties in, and that revenue will be attributed to Pembina' s account.

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David Galison, Canaccord Genuity - Analyst [8]

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Thank you very much.

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Operator [9]

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Your next question comes from the line of Rob Hope of Scotiabank.

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Rob Hope, Scotiabank - Analyst [10]

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Good morning, and congratulations on a good year.

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Stu Taylor, Pembina Pipeline Corp - SVP, NGL & Natural Gas Facilities [11]

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Thank you.

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Rob Hope, Scotiabank - Analyst [12]

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Just taking a look up into the Montney and the Duvernay, we're seeing a number of third party plans being sanctioned and seeing, you know, pretty good activity levels. Just want to get a sense on over the last three or six months if you have been able to continue to translate that activity level and to increase contracted volumes on your infrastructure being Phase IIIs?

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Paul Murphy, Pembina Pipeline Corp - SVP, Pipeline & Crude Oil Facilities [13]

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Yes, I mean, every time a new plant is built, it's Paul, at this point, they come to us for more service. So we're in the middle of looking at the feasibility of our phase IV, which we have talked about it before, some small pipeline segments and powering up the pipeline that we're building right now.

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Mick Dilger, Pembina Pipeline Corp - President and CEO [14]

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Yes, so we're doing the engineering and we're clearing land for phase IV right now, doesn't mean it's going to go ahead. We need a certain volume threshold, but it's certainly possible.

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Rob Hope, Scotiabank - Analyst [15]

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And can you share what kind of where you are on the volumes and where you need to be in the volumes for Phase IV? You know, if you're clearing land already, I would imagine you're getting closer?

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Mick Dilger, Pembina Pipeline Corp - President and CEO [16]

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You know how the producing community is. They're very cautious when they sign up, but once they sign up, they want the pipeline right away. And so, you know, we are on our account, we're spending a relatively modest amount of money, I think CAD20 million, to make the time between the date they sign and the on stream date a one-year period versus a multi-year period like we saw with -- you know, it's tough to get approvals overnight, and so we're preemptively seeking all the approvals and having the rights-of-way, and doing our consultation in anticipation that those volumes will be signed up. Because once they are signed up, our experience is that you just can't react quick enough.

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Rob Hope, Scotiabank - Analyst [17]

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Okay. And then one last question and I'll jump back in the queue. Looking at it another way, the CAD600 million to CAD950 million of EBITDA that you cite for your projects, I just want to get a sense of how quickly you're migrating from that CAD600 million north towards CAD700 million, CAD800 million.

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Mick Dilger, Pembina Pipeline Corp - President and CEO [18]

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If we just go through the math again, remember the CAD600 million is really the contractual threshold that assumes no volume. So the upside from CAD600 million to CAD900 million is a few things. It's volume through CDH which I think as we mentioned in this call, we're already starting to see volumes go through CDH. There's marketing revenue from both RFS 2, and RFS III. RFS II is fully running and we are marketing barrels off the back end that.

And higher utilization above our take or pay, which I think which we'll have a better view as we move throughout the year and get closer to the Phase III in service date but I think it's fair to say we will be above the bottom of the CAD600 million range. There's significant apportionment right now behind our systems, that's an indication that people are trying to do what they need to do to at least hit their take or pay threshold with physical volumes.

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Rob Hope, Scotiabank - Analyst [19]

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Excellent. Thank you.

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Operator [20]

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Your next question comes from the line of David Noseworthy of Macquarie.

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David Noseworthy, Macquarie Research Equities - Analyst [21]

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Congratulations on the great financial results and ongoing track record.

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Mick Dilger, Pembina Pipeline Corp - President and CEO [22]

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Thanks, David.

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David Noseworthy, Macquarie Research Equities - Analyst [23]

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So maybe you're starting off on Chevron, do you have an idea in terms of timing of when you might see the sanctioning of the first project?

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Stu Taylor, Pembina Pipeline Corp - SVP, NGL & Natural Gas Facilities [24]

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Yes, David, it's Stu again, just we're optimistic that, you know, Chevron is, we have been working with them, the D1 plant will process some of their existing wells have been drilled to date, as soon as that's in service, we expect, as they continue with their development that, you know, sometime in the next 12 to 18 months that the first service call will be coming in. But it is totally at Chevron's call, and subject to all their internal sanctioning, but we're excited about the Duvernay results. We're excited about the activity levels and we think we'll be busy here working fairly quickly.

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Mick Dilger, Pembina Pipeline Corp - President and CEO [25]

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I think we started some engineering on the infrastructure already.

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Stu Taylor, Pembina Pipeline Corp - SVP, NGL & Natural Gas Facilities [26]

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Yes, we have spent some money in advance recognizing, obviously our [D1] facility in the [NTS], the infrastructure we're building to date plus looking at some enhancements to that. We're spending limited engineering dollars, as mixed in on the pipeline so that we can move forward quickly with the designs. And shorten that in-service time.

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David Noseworthy, Macquarie Research Equities - Analyst [27]

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All right. And just so I'm clear, with respect to Chevron and their internal approval, to move forward is there something that they have to do above and beyond the required sanctioning in terms of approvals at this juncture or is it just at this point everything's been signed and it's just sanctioning the projects going forward?

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Stu Taylor, Pembina Pipeline Corp - SVP, NGL & Natural Gas Facilities [28]

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At this point the agreement that was covered included all of the infrastructure and the overriding structure of the arrangement, and upon their sanctioning, all the agreements are ready to be completed and they're in execution phase as they ask for that infrastructure.

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Mick Dilger, Pembina Pipeline Corp - President and CEO [29]

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David, the land's dedication is binding so if they are going to do anything, they have to do it with us. The timing of the different modules that they call for is still up to them. But the land dedication is the done deal.

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David Noseworthy, Macquarie Research Equities - Analyst [30]

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Okay. And then maybe just staying on the gas side of things, but just on another area. You're Kakwa plant acquisition came with a design for a 618 plant. Has there been any positive development on that front or has the change of ownership really cooled the opportunity of further growth there.

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Stu Taylor, Pembina Pipeline Corp - SVP, NGL & Natural Gas Facilities [31]

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Like most, we have continued to work with Seven Gen. I think like most things you have a new acquirer, it takes them a bit of time to sort out the acquisition moving forward. I'm happy to say that I think we're making progress and ramping up here quite rapidly with Seven Generation. We have been working with them on the expansion opportunities, looking at our existing infrastructure, how to utilize that as well. We're excited about moving forward with Seven Gen in a meaningful way here in the next few years.

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Mick Dilger, Pembina Pipeline Corp - President and CEO [32]

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That plant wasn't completely capable of being filled given its front end liquids capability, so we're spending significant money, I think CAD50 million to enhance the ability of that plant to take liquids, so that's well underway. And, you know, when we ran economics, we kind of thought of a 3-year build to build that plant and with the enhanced liquids front end, we think we can accelerate that and improve, you know, essentially the NPD, and IRR of that project.

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David Noseworthy, Macquarie Research Equities - Analyst [33]

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That's great to hear. You know, I'll get back into queue, but congratulations.

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Stu Taylor, Pembina Pipeline Corp - SVP, NGL & Natural Gas Facilities [34]

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Thanks.

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Operator [35]

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Your next question comes from the line of Jeremy Tonet of JP Morgan.

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Jeremy Tonet, JPMorgan - Analyst [36]

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I wanted to follow up on the Chevron opportunity. As far as the spending as you guys envisioned it, is it fair to think a couple years out it could start to tick up and kind of be a multi year window at that point or is it more ratable over a longer period of time, any color that you could provide there?

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Stu Taylor, Pembina Pipeline Corp - SVP, NGL & Natural Gas Facilities [37]

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Just to emphasize, it's totally at Chevron's request, you know, request as far as the timing. I do believe, you know, we're going to have a -- infrastructure gets added in lumps and I think as we go to do the first expansion, the processing will require some substantial stabilization in the field plus gas and liquid pipe lines to be built, so it will be, I think, a significant capital expenditure initially, and it will be lumpy as we move through.

We see continued development as Chevron ramps up. And, you know, delineates their Duvernay play on their liquid rich acreage, it's going to be lumps, it's going to be for a long period of time, and we'll be working with them, we do the work at their request, and they come back and we build the infrastructure as we go forward with them.

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Mick Dilger, Pembina Pipeline Corp - President and CEO [38]

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You know, with plays like this, you know, it's about repeatability, and taking costs out of the equation, and so that your question's obviously challenging because we don't know what commodity prices are going to do. If we could assume commodity prices would stay relatively stable, it would make sense to put rigs to work and keep them at work and use, you know, get that repeatability. And you know, if they're pursuing repeatability, then we get to pursue repeatability.

It's entirely conceivable that, you know, that Duvernay site has four or five, you know, D1 equivalents, NTSs, condensate facilities, stabilization, gathering, processing and then of course driving our phase IV expansion, and also filling our fractionators. That's our hope. I'm sure it's Chevron's hope, and commodity prices willing, we think this could be, you know, a really exciting decade long initiative.

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Jeremy Tonet, JPMorgan - Analyst [39]

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Great, thanks for that. And then just wanted to build off a couple comments you said before talking about apportionment behind your systems and [captioned] growth of 1 to 3 billion, how do you see kind of base and take away right now as far as constraints over all and how that trends and when that could lead to kind of more, you know, the next wave of discrete project announcements from you guys?

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Mick Dilger, Pembina Pipeline Corp - President and CEO [40]

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In terms of base and takeaway, there's a ton of natural gas takeaway, we are encouraged with the TransCanada open season to make our western Canadian gas more competitive. So that's indirectly a good thing for Pembina, very good for producers and also, I think, sensible thing for TransCanada to do. A lot of the product that's coming out of, you know, the Kakwa area or the Duvernay is condensate, so, you know, there's a lot of running room in terms of condensate demand right now, and of course we still have a couple hundred, maybe 250,000-barrels a day of condensate being imported.

So, you know, our view is that condensate's got a lot of running room and where the condensate demand builds in Alberta imports would be displaced first, so we don't really see a big constraint on supply in condensate into the basin. And then, you know, as we think about oil pipeline, you know, we're rooting for Kinder Morgan, Enbridge and TransCanada to get their projects done, and that hopefully will, between those three projects create egress for another couple of decades and then that will create the next platform for us to continue to grow.

So I guess in short, we don't have a lot of concern about egress right now. We were actually more worried about it some time ago, and on top of everything I just said there's also rail egress, you know, and it's not well utilized right now, but that is a safety belt as well. So, I think we've got a lot of license to keep doing what we have been doing for a long period of time.

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Jeremy Tonet, JPMorgan - Analyst [41]

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Got you, maybe just on a basin level, you know, as far as take away just outside of the basin from [Montney] to Edmonton as far as you know, what that could mean for opportunities for you guys in the next wave of discrete projects.

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Mick Dilger, Pembina Pipeline Corp - President and CEO [42]

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Well, I mean, as Paul said, in the not too distant future, we might need another pipeline between Kakwa area into Fox Creek, and then from Fox Creek in, we have the power up ability. We can add another 300,000-barrels a day or so, so, you know, that project is in our gun sight. We are not at the volume threshold we need to be yet. As Scott said earlier in the call, you know, how the supply demand of physical barrels, we know the contractual side, but the physical side will become more clear in the third quarter and, you know, that would be a sensible time for us to assess whether there's enough physical barrels to support an expansion.

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Jeremy Tonet, JPMorgan - Analyst [43]

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Great and one last one if I could. [NGL] midstream seemed quite strong in the quarter and I imagine there was some benefit from propane uplift. Just wondering if you see that kind of continuing into Q1 17, propane prices have given back a little here. Is 4Q16 a good run rate or should we expect a little bit of a down step in 1Q17?

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Mick Dilger, Pembina Pipeline Corp - President and CEO [44]

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Yes, I mean, as you know, Q4 and Q1 are always our strongest quarters, in that business unit just due to the winter heating season, so you know, you're putting me on the spot by trying to predict prices for another two months. I think it's generally, you know, in line with Q1 is looking generally in line with Q4 but that's going to be dependent on pricing for the remainder of the quarter. Also as you would have noticed in our results, we have layered on some incremental hedging and really that was to protect the cash flow and the margin as we kind of exited this heavy capital build, so to the extent there is upside some of that will be offset by hedging.

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Jeremy Tonet, JPMorgan - Analyst [45]

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That makes sense. That's it for me. Thank you.

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Operator [46]

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Your next question comes from the line of Linda Ezergailis of TD Securities, your line is open.

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Linda Ezergailis, TD Securities - Analyst [47]

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Thank you. Just have some more questions on the Chevron MOU. I can imagine a number of reasons why an entity like Chevron would want to partner with Pembina and one of them would also be to kind of minimize their costs, so can you comment on whether the scale of the opportunity for you and the certainty around the dedicated reserves or area allowed you to kind of accept a lower return or should we think of it more as kind of a full value chain pass actually translated into a typical or higher return than your smaller projects that you would do historically?

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Mick Dilger, Pembina Pipeline Corp - President and CEO [48]

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Well, I mean, you know, our view on the reason we got picked was that, you know, we have a great safety record or a liability is high, and, you know, it's no secret that the integrated value chain is a differentiating factor, having real assets, real fractionators, real pipelines to provide multi-product service is a differentiating factor. Our ability to construct on time, on budget, all those things, I think, played into it.

You know, we can't get too much into the deal. I think Stu has highlighted is some of it is cost of service. Some of it's fee for service. The commitments that they have ramp up with their call for facilities, but, you know, what I would say, Linda, it's a normal Pembina deal.

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Linda Ezergailis, TD Securities - Analyst [49]

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Okay. That's helpful. Maybe we can move onto something else then. In terms of your financing plans, you know, in terms of putting in permanent financing beyond the credit facility, how might we think of your current sense of the relative attractiveness of various options including [prefs] and how you think about kind of pre funding projects as they get built and derisking the financing plan versus avoiding dilution by putting in permanent financing as projects are already built?

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Mick Dilger, Pembina Pipeline Corp - President and CEO [50]

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Linda, you know, as we look forward to kind of from mid year on, you know, or maybe even from start of 2018, we expect to generate around CAD500 million of cash flow after dividends and if we just, you know, reinvest that and borrow against it, that's a billion of cash that we can deploy into projects. So, you know, at a billion a year of growth at least for the next few years, we really don't need to have the DRIP or do prefs or anything. It's just kind of like finishing our program this year. And then, you know, we have a great ability to just grow with internally generated cash flow, so that's our plan right now, but if, you know, something comes up and, you know, we make an acquisition or we start to grow above that billion a year, then, you know, we're going to finance things the way we always do with a combination of long-term debt, DRIP and prefs.

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Linda Ezergailis, TD Securities - Analyst [51]

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Okay. Thank you, and maybe just one final clean up question, as we look out over 2017, should we be mindful of any major facility maintenance or expansion outages and if so, kind of what quarter and what might the financial impact be?

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Mick Dilger, Pembina Pipeline Corp - President and CEO [52]

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Yes, you know, the hard stuff, once we get to the middle of the year, the hard stuff is, you know, knock on wood, behind us. I mean, we have done the integrity work. You know, we have been spending CAD150 million a year on pipeline integrity for a bunch of years, all in service being ready by the middle of this year, and we're going to put a whole bunch of brand new facilities into service. And yes, there will be some commissioning headaches the way there are, but, you know, everything we have done to get to, you know, the end of this year will put our facilities in as-new condition, and that's what's so exciting about it is our expenses, we expect our integrity burn and, you know, expenses to start to drop while our revenue is going up at the same time. And that's kind of what's exciting about 2018 for us.

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Linda Ezergailis, TD Securities - Analyst [53]

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Great. Thank you.

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Operator [54]

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Your next question comes from the line of Robert Catellier of CIBC World Markets, your line is open.

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Robert Catellier, CIBC World Markets - Analyst [55]

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Good morning. I have a question. I think you partially answered in responding to Linda, but I'm curious how the Duvernay agreement with Chevron, the impact how you look at dividend policy given that it is a binding agreement but you don't really have certainty in terms of the timing of the capital calls, so do you see need to maintain a lower payout ratio in order to be able to respond?

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Mick Dilger, Pembina Pipeline Corp - President and CEO [56]

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No, I mean, the Chevron deal is obviously a major deal, and you know, we have said pretty much as much as we can, but nevertheless, it's still a pretty small part of Pembina and it's not going to influence our dividend policy. You know, if we keep growing our dividends, you know, 6%-ish a year, you know, with our guardrail of 80% fee for service, and you know, we expect our payout ratio to keep dropping over the foreseeable future to the point where, you know, our dividend payments are entirely come out of fee for service, and the Chevron deal won't change that. It's well within the guardrails of staying on track.

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Robert Catellier, CIBC World Markets - Analyst [57]

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Okay. And then just with respect to the PDH FEED, I think the original plan was to go into a FEED by the end of the year, and, you know, I'm just curious why there was a little bit of a timing delay there?

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Stu Taylor, Pembina Pipeline Corp - SVP, NGL & Natural Gas Facilities [58]

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Rob, it's Stu, so we probably underestimated the amount of time, as you go from the feasibility study into the FEED work. The first bit of engineering that needs to be completed is with your technology providers. That is about a 4 to 6 month process of them working through their engineering and their work. And we probably underestimated initially that time frame, and so upon further work, we've added that, and now the time, you're right, initially we thought we would be going into the FEED, declaring our FID process before that. But we kind of built in that extra schedule.

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Mick Dilger, Pembina Pipeline Corp - President and CEO [59]

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The other this thing is, Rob, we elected along with our partner to get much more detail into the agreement, so, you know, at a time when we announced FEED, we have a lot of granularity on how the joint venture is going to work, whose jobs, you know, different aspects of it are. And so, you know, there's not going to be a mystery when we come out of FEED how things are going to work. And it's a pretty significant amount of money, you know, FEED could reach CAD100 million and so both sides agreed that we better know what the deal is before we spend that money. So it's been time well spent.

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Robert Catellier, CIBC World Markets - Analyst [60]

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Okay. That's helpful. And then my final question is on the impact of the line 2A outage, what impact do you think that will have on industry activity, specifically on Pembina?

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Paul Murphy, Pembina Pipeline Corp - SVP, Pipeline & Crude Oil Facilities [61]

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I can't comment on that. I don't know. Yes, we haven't felt anything yet upstream, so.

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Robert Catellier, CIBC World Markets - Analyst [62]

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Okay. Thank you.

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Operator [63]

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Your next question comes from the line of Ben Pham of BMO. Your line is open.

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Ben Pham, BMO Capital Markets - Analyst [64]

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Thank you. I wanted to follow up on your comments on what you characterize as a normal Pembina return because that's been changing a bit over the years. And with the Chevron agreement, you mentioned potential opportunities with cost of service on your pipelines and are you guys looking and just going back to Linda's initial question, are you looking at returns more from a integrated consolidated perspective now, maybe a little bit more than you have in the past when you're underwriting new projects?

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Mick Dilger, Pembina Pipeline Corp - President and CEO [65]

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You know, I think if you talked to us over the last three years, you know our deals are very integrated and where the profit lies within any business unit is almost a little arbitrary and, you know, we kind of do back three years, and we talked about our CAD6 billion growth profile and we said, you know, it would add [CAD600 million to CAD950 million] of EBITDA. There's your implied multiple of what a normal Pembina deal is. And you know, whether that profit ends up in the pipeline or the gas line or the frac facility or the marketing will be situation specific, but it's the reason we have integrated value chains because, you know, we can touch the molecules many times and hopefully make above average returns, but I think it's pretty well delineated what a normal Pembina deal is if you look back at the last CAD6 billion we spent.

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Ben Pham, BMO Capital Markets - Analyst [66]

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Okay. Thanks for that. And just thinking about, you know, with this new agreement, and FID on the PDH and 12, 18 months, it kind of squares up first module potentially, are you perhaps less enthusiastic about Petrochemical than maybe before because it is, you know, potentially a little more uncertainty on the returns in the construction?

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Mick Dilger, Pembina Pipeline Corp - President and CEO [67]

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No. Actually, the more we learn, the better we like it. It's kind of going the other way. You know, we're getting a lot of confidence from the engineering firms we're talking to about the turnkey, a good portion of this project we've got confidence that the market will be there, the North American market eventually, but the international market perhaps in the short-term, we're getting confidence with our partner and their capabilities. And you know, we're getting interest from the producing community to turn their propane into polypropylene on a fee basis.

So all those things combined, our return expectations really haven't changed over the last year, but I think what's making us feel better and better is we are perceiving that we can, you know, reduce the risk as, you know, as we contemplate these types of facilities. In fact, you know, if you kind of go back when Pembina entered the fractionation business, most of the agreements were frac spread business and now roll forward five years, and probably 70% going on 80% of our frac capacity is on a fee basis, so we do have a track record of changing the way businesses operate and we believe that to a point we can also do that in the Petrochemical business.

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Ben Pham, BMO Capital Markets - Analyst [68]

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Thanks and just a quick final question on the NGL Midstream margins, CAD112 million, if you compare that to Q3 and you look at just the change in frac spreads over that quarter, it seems to be a little bit inconsistent with some of the sensitivity analysis that you have put out there. Is that mostly the hedges that you highlighted earlier that's driving the downturn?

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Scott Burrows, Pembina Pipeline Corp - VP, Finance & CFO [69]

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Yes that's hedges, also remember that RFS II is not really a frac spread business. It's a fee-for-service business with some marketing revenue that is essentially more like commission versus a frac spread.

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Ben Pham, BMO Capital Markets - Analyst [70]

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Okay. All right. Okay. Thanks for taking my questions.

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Operator [71]

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Your next question comes from the line of Andrew Kuske Credit Suisse your line is open.

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Andrew Kuske, Credit Suisse - Analyst [72]

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Maybe following up on the operating margins in the Midstream business. So to the degree that you see this as being a structural expansion versus a cyclical one, is it fair to characterize that business is now more structurally strong from a margin standpoint quarter after quarter?

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Mick Dilger, Pembina Pipeline Corp - President and CEO [73]

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Are you referring, I mean, the business as a whole is becoming ever more fee for service oriented. Absolutely. The way we're running it now with some pretty significant hedging, I think that is taking volatility out of the business, but, you know, the original asset base we bought when we merged with Provident, that cash flow stream, the character really hasn't changed too much. What changed is everything else, you know, around that business is diluting that volatility in our overall cash flow stream.

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Scott Burrows, Pembina Pipeline Corp - VP, Finance & CFO [74]

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Andrew, if I just look at Q4 of 2016 versus Q4 of 2015, 50% of the difference on Redwater was really fee for service up tick from RFS II and a few incremental projects but of course the uplift in the east is strictly marketing because that's our [MPE] asset. Overall about 25 to 30% of the overall business, the increase was fee for service, the remainder was commodity exposed.

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Andrew Kuske, Credit Suisse - Analyst [75]

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Okay. That's very helpful.

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Scott Burrows, Pembina Pipeline Corp - VP, Finance & CFO [76]

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In terms of the difference.

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Andrew Kuske, Credit Suisse - Analyst [77]

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Okay. Great. And then maybe a broader question, and it speaks to just the resilience you're building up in the business in the fee for service model. Clearly you're positioning yourself for a lot of growth opportunities in the west whether it's the PDH, the PP, and with the activities you have going on with a number of producers and the land position you're building, how do you think about allocating capital in effectively your own backyard versus any opportunities you see just elsewhere, you know, in any basin in North America at this point in time? Do you have a temptation to look elsewhere and really build up another business or enhance what you've got elsewhere, say around [Sarnia], for example?

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Mick Dilger, Pembina Pipeline Corp - President and CEO [78]

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Well, we would like to be more diversified. Someday we hope to do that, but, you know, where we are now is, you know, brownfields are always the most accretive. Then greenfields, you know, then acquisitions and then usually what's least accretive because we don't have the integrated value chain to squeeze extra dollars is acquisition for greenfields in a different basin. So, you know, we tend to do the things in that order. But at some point, you know, we would like to be in more than one basin for sure, and we would actually like to have a different currency cash flow stream at some point as well. But, we look at everything. But just nothing so far, I mean, Vantage pipeline came up a few years so that met the criteria, but nothing right now is meeting our criteria.

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Andrew Kuske, Credit Suisse - Analyst [79]

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Okay. Great. Thank you.

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Operator [80]

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Your next question comes from the line of Robert Kwan of RBC Capital Markets, your line is open.

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Robert Kwan, RBC Capital Markets - Analyst [81]

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In terms of the Montney, previously you talked about producers come to you, some wanted more capacity, some wanted less and you were focusing mostly on trading amongst the customers. I'm just wondering, I guess with the 2017 capital budgets out and generally up in recent well results, are you seeing demand now really for just net increase and trying to eat away at the remaining capacity on the system?

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Paul Murphy, Pembina Pipeline Corp - SVP, Pipeline & Crude Oil Facilities [82]

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Yes, I think it's starting to, you know, I get the swap of capacities are starting to settle down. I'm not sure. It's probably in part that people could see it coming and what they needed so they have basically completed their business. But as we talked about earlier, we have had I'll say a material amount of interest on the capacity which is why we're getting close to I guess a decision on our phase IV, so it will be ever evolving, I think, for probably the next year as -- once the facilities come on and people see how much room there is. As Mick talked about earlier, we really want to see what the physical volumes are before we make any big moves.

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Robert Kwan, RBC Capital Markets - Analyst [83]

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I understand. Again?

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Paul Murphy, Pembina Pipeline Corp - SVP, Pipeline & Crude Oil Facilities [84]

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No, go ahead.

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Robert Kwan, RBC Capital Markets - Analyst [85]

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Oh, so just clear on phase IV, there were a few comments earlier, sounded like there was new build and powering up. Phase IV, are you looking at that as essentially the pump station expansion of Phase III or are we talking about substantially a new build of capacity?

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Mick Dilger, Pembina Pipeline Corp - President and CEO [86]

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You're bringing out a good point. We need to name things so that you guys can understand it. Phase IV used to be with just pumps, just powering up the pipe between Fox and Namao, and now we have a separate part of that project, which is essentially looping from Kakwa in, because that's where we're short at capacity. I don't know, we should maybe call that phase V which is a separate pipeline project, and both are under investigation right now, but you're absolutely right.

There's the power up, which was what we talked about being phase IV, and now there's also you're short of capacity from Kakwa in, because really the likes of Seven Gen are really, that whole Seven Gen phenomenon has happened since we announced Phase III and we built the pipes too small out there by a lot. So that's under investigation as well.

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Robert Kwan, RBC Capital Markets - Analyst [87]

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Okay. So when you're thinking about kind of this Phase V concept, is that really from your perspective more bottleneck driven and almost you need to do it or is it more of a strategic decision to kind of pre build parts of the system to continue to maintain that advantage you have over competitors of some of that spare capacity?

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Mick Dilger, Pembina Pipeline Corp - President and CEO [88]

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Just back to Phase III you might recall we built all those pipes upstream of Fox Creek, between Kakwa and Fox Creek a number of years ago. That part of Phase III has been in service for quite some time, and we do not have enough capacity there. Barrels are going around because they can't get onto those pipes so we're already short of capacity there, so our Phase III is done and it's not adequate.

So it's not strategic at all. It's just what's the critical mass to justify Phase V, you know, I mean, you can't build a brand new pipeline for 10,000-barrels a day. You need critical mass and we're not quite at the critical mass for what we have decided during this call to call Phase V.

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Robert Kwan, RBC Capital Markets - Analyst [89]

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Okay. Maybe I'll just finish with a question here on the PDH/PP project. I think historically you have talked about wanting to contract half of your half on a fee basis and being comfortable within the guardrails of having roughly the other half exposed. I guess as you think about what's developed in your business, you're thinking about things like Phase IV, and V, which I assume would be fee based and the Duvernay agreement here with Chevron, does that cause you to directionally be more comfortable being open, then, on that facility? Or coming back to maybe the capital allocation question, if you can get all the fee based stuff in the rest of your business you don't feel the need to take any material commodity exposure if you don't have to?

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Mick Dilger, Pembina Pipeline Corp - President and CEO [90]

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It's an interesting question. We could warehouse taking our half entirely as a commodity business if we wanted to. The guardrails would show we could do that. But, you know, using all of our, you know, 20% room for one project, it really does limit what we might be able to do next, right.

So we're still gunning for half of our half to be fee based because, you know, there might be other projects that we want to do, and take, you know, take a little bit of a position to get them built. So we've thought about it. We could do that. But we're still hoping to go half fee based, just to create a room for future initiatives.

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Robert Kwan, RBC Capital Markets - Analyst [91]

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Got it. Thank you very much.

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Operator [92]

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Your next question comes from the line of Patrick Kenny, National Bank Financial. Your line is open.

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Patrick Kenny, National Bank Financial - Analyst [93]

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Thank you, good morning guys, I think Duvernay has been well covered so I'll switch gears and I wanted to get your thoughts on the Pipestone region. Looks like that will be, you know, one of the hot pockets of the Montney going forward and obviously it will be quite competitive here. But just wanted to get a sense as to A, is that a play that you're going after aggressively, and B, what your main competitive advantages might be?

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Stu Taylor, Pembina Pipeline Corp - SVP, NGL & Natural Gas Facilities [94]

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You know, it's a play that is of significant interest to Pembina, obviously from, you know, speaking first on the pipe side, our Phase III expansion has a lot of the players are Phase III customers, already, we have been working with them for a number of years as they've grown in production as has matured from Alberta all the way through into northeast BC. Paul mentioned earlier our northeast BC expansion that's largely Montney focused and driven.

There's no question in my mind, the Montney is a world class play, there is going to be additional infrastructure requirements, we're excited about where we're sitting with our pipeline, with our gas processing expertise, with our value chain, we think we can work with the Montney producers both large and small getting them access to the infrastructure, getting that growth and the value chain that we can bring to the table.

So we're going to be aggressive, I think, looking at Montney opportunities. We love the resource itself. We love the liquid content in that gas and are excited about continuing to work with our existing customers and future customers.

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Patrick Kenny, National Bank Financial - Analyst [95]

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Thanks, Stu. And then this might be a bit of a tough question to quantify but I'll ask anyway. Any risk or material impact that you might see on your NGL marketing business from the border adjustment tax if it does get implemented.

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Mick Dilger, Pembina Pipeline Corp - President and CEO [96]

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Who knows. I think you're right. Very very hard to assess whether that would happen and in what form it would happen, and who would ultimately bear the cost for that is a second equally challenging question, whether it's Pembina or the customers or a combination, it really is difficult to answer. But I think the one thing we can say is it does support having alternative markets for Alberta hydrocarbons, it's just a classic example that our basin has all its eggs in one basket and we've got to change that.

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Patrick Kenny, National Bank Financial - Analyst [97]

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And not sure if you've ever provided this or not but just so we have a back pocket, what percentage of your NGL sales on a normalized basis might be in the US?

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Mick Dilger, Pembina Pipeline Corp - President and CEO [98]

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It's high. I mean, you look at Alberta on the whole, I think we have produced, what, 200,000-barrels a day, Stu, something like that.

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Stu Taylor, Pembina Pipeline Corp - SVP, NGL & Natural Gas Facilities [99]

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Probably on the high side there. 150,000 to 200,000.

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Mick Dilger, Pembina Pipeline Corp - President and CEO [100]

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By the time we have done all our expansions and we consume [30] locally, so there's your ratio per the basin, and, you know, we're the biggest player in that basin, so probably a decent guess on what we're doing. And again, you know, that's where the polypropylene plant makes a difference because [22] of that, of the new stuff could be used locally, and propane exports could, you know, reduce the US exports as well, so we're continuing to go work on both of those.

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Paul Murphy, Pembina Pipeline Corp - SVP, Pipeline & Crude Oil Facilities [101]

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I mean, we're not the only ones, I mean, obviously all of the frac operators are largely putting their barrels into rail cars at this point in time, and moving them to available markets. We do move into eastern Canada through our eastern assets, but we continue to load rail cars and access markets.

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Mick Dilger, Pembina Pipeline Corp - President and CEO [102]

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You know, Pembina thinks it has a leading role to play in balancing without a balance, you know, a basin that produces 7 times as much NGL as it consumes we want to play a leading role in trying to balance that market out.

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Patrick Kenny, National Bank Financial - Analyst [103]

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All right. That's great. Appreciate the color. That's all I had.

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Mick Dilger, Pembina Pipeline Corp - President and CEO [104]

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Well, I think we've got to wrap it up now, Hailey. Thanks everybody. We do very much appreciate and value your support. Thanks for being part of this journey. So far so good. Another bunch of months and we will have the wall of cash hopefully starting to come at us and it will be a lot of fun. Have a great weekend and thanks for your support.

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Operator [105]

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