EBITDA is commonly used by Management, investors and creditors in the calculation of ratios for assessing leverage and financial performance and is calculated as results from operating activities plus share of profit from equity accounted investees (before tax) plus depreciation and amortization (included in operations and general and administrative expense) and unrealized gains or losses on commodity-related derivative financial instruments.
Adjusted EBITDA is EBITDA excluding acquisition-related expenses in connection with the Acquisition.
| 3 Months Ended September 30 |
9 Months Ended September 30 |
||||||||||
| ($ millions, except per share amounts) | 2013 | 2012 | 2013 | 2012 | |||||||
| Results from operating activities | 147.4 | 74.5 | 469.2 | 272.2 | |||||||
| Share of profit from equity accounted investees (before tax, depreciation and amortization) |
2.7 | 1.4 | 6.1 | 4.2 | |||||||
| Depreciation and amortization | 48.6 | 53.2 | 126.5 | 129.9 | |||||||
| Unrealized loss (gain) on commodity-related derivative financial instruments |
2.1 | 23.0 | (5.1) | (38.3) | |||||||
| EBITDA | 200.8 | 152.1 | 596.7 | 368.0 | |||||||
| Add: | |||||||||||
| Acquisition-related expenses (recovery) | 1.7 | (0.6) | 23.1 | ||||||||
| Adjusted EBITDA | 200.8 | 153.8 | 596.1 | 391.1 | |||||||
| EBITDA per common share – basic (dollars) | 0.65 | 0.53 | 1.96 | 1.49 | |||||||
| Adjusted EBITDA per common share – basic (dollars) | 0.65 | 0.53 | 1.95 | 1.58 | |||||||
Adjusted cash flow from operating activities
Adjusted cash flow from operating activities is commonly used by Management for assessing financial performance each reporting period and is calculated as cash flow from operating activities plus the change in non-cash working capital and excluding acquisition-related expenses.
| 3 Months Ended September 30 |
9 Months Ended September 30 |
|||||||||
| ($ millions, except per share amounts) | 2013 | 2012 | 2013 | 2012 | ||||||
| Cash flow from operating activities | 87.3 | 130.9 | 456.5 | 220.3 | ||||||
| Add (deduct): | ||||||||||
| Change in non-cash operating working capital | 101.4 | 0.6 | 84.2 | 78.1 | ||||||
| Acquisition-related expenses (recovery) | 1.7 | (0.6) | 23.1 | |||||||
| Adjusted cash flow from operating activities | 188.7 | 133.2 | 540.1 | 321.5 | ||||||
| Cash flow from operating activities per common share – basic (dollars) | 0.28 | 0.45 | 1.50 | 0.89 | ||||||
| Adjusted cash flow from operating activities per common share – basic (dollars) | 0.61 | 0.46 | 1.77 | 1.30 | ||||||
Operating margin
Operating margin is commonly used by Management for assessing financial performance and is calculated as gross profit before depreciation and amortization included in operations and unrealized gain/loss on commodity-related derivative financial instruments.
Reconciliation of operating margin to gross profit:
| 3 Months Ended September 30 |
9 Months Ended September 30 |
||||||||||
| ($ millions) | 2013 | 2012 | 2013 | 2012 | |||||||
| Revenue | 1,300.2 | 815.4 | 3,723.7 | 2,161.8 | |||||||
| Cost of sales: | |||||||||||
| Operations | 86.6 | 69.6 | 254.9 | 185.7 | |||||||
| Cost of goods sold, including product purchases | 983.3 | 565.4 | 2,797.1 | 1,506.4 | |||||||
| Realized (loss) gain on commodity-related derivative financial instruments | (4.5) | (2.9) | 1.7 | (15.6) | |||||||
| Operating margin | 225.8 | 177.5 | 673.4 | 454.1 | |||||||
| Depreciation and amortization included in operations | 46.5 | 51.6 | 120.7 | 125.8 | |||||||
| Unrealized (loss) gain on commodity-related derivative financial instruments | (2.1) | (23.0) | 5.1 | 38.3 | |||||||
| Gross profit | 177.2 | 102.9 | 557.8 | 366.6 | |||||||
Total enterprise value
Total enterprise value, in combination with other measures, is used by Management and the investment community to assess the overall market value of the business. Total enterprise value is calculated based on the market value of common shares, preferred shares and convertible debentures at a specific date plus senior debt.
Management believes these supplemental Non-GAAP measures facilitate the understanding of Pembina’s results from operations, leverage, liquidity and financial positions. Investors should be cautioned that net revenue, EBITDA, adjusted EBITDA, adjusted cash flow from operating activities, operating margin and total enterprise value should not be construed as alternatives to net earnings, cash flow from operating activities or other measures of financial results determined in accordance with GAAP as an indicator of Pembina’s performance. Furthermore, these Non-GAAP measures may not be comparable to similar measures presented by other issuers.
Forward-Looking Statements & Information
In the interest of providing our securityholders and potential investors with information regarding Pembina, including Management’s assessment of our future plans and operations, certain statements contained in this MD&A constitute forward-looking statements or information (collectively, “forward-looking statements”) within the meaning of the “safe harbour” provisions of applicable securities legislation. Forward-looking statements are typically identified by words such as “anticipate”, “continue”, “estimate”, “expect”, “may”, “will”, “project”, “should”, “could”, “believe”, “plan”, “intend”, “design”, “target”, “undertake”, “view”, “indicate”, “maintain”, “explore”, “entail”, “schedule”, “objective”, “strategy”, “likely”, “potential”, “envision”, “aim”, “outlook”, “propose”, “goal”, “would”, and similar expressions suggesting future events or future performance.
By their nature, such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated in such forward-looking statements. Pembina believes the expectations reflected in those forward-looking statements are reasonable but no assurance can be given that these expectations will prove to be correct and such forward-looking statements included in this MD&A should not be unduly relied upon. These statements speak only as of the date of the MD&A.
In particular, this MD&A contains forward-looking statements, including certain financial outlook, pertaining to the following:
- the future levels of cash dividends that Pembina intends to pay to its shareholders and the tax treatment thereof;
- planning, construction, capital expenditure estimates, schedules, expected capacity, incremental volumes, in-service dates, rights, activities and operations with respect to new construction of, or expansions on existing, pipelines, gas services facilities, terminalling, storage and hub facilities and other facilities or energy infrastructure;
- pipeline, processing and storage facility and system operations and throughput levels;
- Pembina’s strategy and the development and expected timing of new business initiatives, growth opportunities, and management succession planning;
- increased throughput potential due to increased oil and gas industry activity and new connections and other initiatives on Pembina’s pipelines;
- expected future cash flows and future financing options;
- tolls and tariffs and transportation, storage and services commitments and contracts;
- operating risks (including the amount of future liabilities related to pipeline spills and other environmental incidents) and related insurance coverage and inspection and integrity programs;
- the possibility of offshore export opportunities for propane; and
- the expected impact of changes in share price on annual share-based incentive expense.
Various factors or assumptions are typically applied by Pembina in drawing conclusions or making the forecasts, projections, predictions or estimations set out in forward-looking statements based on information currently available to Pembina. These factors and assumptions include, but are not limited to:
- oil and gas industry exploration and development activity levels;
- the success of Pembina’s operations;
- prevailing commodity prices and exchange rates and the ability of Pembina to maintain current credit ratings;
- the availability of capital to fund future capital requirements relating to existing assets and projects;
- expectations regarding participation in Pembina’s DRIP;
- future operating costs;
- geotechnical and integrity costs;
- in respect of current developments, expansions, planned capital expenditures, completion dates and capacity expectations: that third parties will provide any necessary support; that any third party projects relating to Pembina’s growth projects will be sanctioned and completed as expected; that any required commercial agreements can be reached; that all required regulatory and environmental approvals can be obtained on the necessary terms in a timely manner; that counterparties will comply with contracts in a timely manner; that there are no unforeseen events preventing the performance of contracts or the completion of the relevant facilities; and that there are no unforeseen material costs relating to the facilities which are not recoverable from customers;
- in respect of the stability of Pembina’s dividends: prevailing commodity prices, margins and exchange rates; that Pembina’s future results of operations will be consistent with past performance and management expectations in relation thereto; the continued availability of capital at attractive prices to fund future capital requirements relating to existing assets and projects, including but not limited to future capital expenditures relating to expansion, upgrades and maintenance shutdowns; the success of growth projects; future operating costs; that counterparties to material agreements will continue to perform in a timely manner; that there are no unforeseen events preventing the performance of contracts; and that there are no unforeseen material construction or other costs related to current growth projects or current operations;
- interest and tax rates; and
- prevailing regulatory, tax and environmental laws and regulations.
The actual results of Pembina could differ materially from those anticipated in these forward-looking statements as a result of the material risk factors set forth below:
- the regulatory environment and decisions;
- the impact of competitive entities and pricing;
- labour and material shortages;
- reliance on key relationships and agreements;
- the strength and operations of the oil and natural gas production industry and related commodity prices;
- non-performance or default by counterparties to agreements which Pembina or one or more of its affiliates has entered into in respect of its business;
- actions by governmental or regulatory authorities including changes in tax laws and treatment, changes in royalty rates or increased environmental regulation;
- fluctuations in operating results;
- adverse general economic and market conditions in Canada, North America and elsewhere, including changes in interest rates, foreign currency exchange rates and commodity prices;
- the failure to complete remaining integration of the businesses of Pembina and Provident; and
- the other factors discussed under “Risk Factors” in Pembina’s AIF for the year ended December 31, 2012. Pembina’s MD&A and AIF are available at www.pembina.com and in Canada under Pembina’s company profile on www.sedar.com and in the U.S. on the Company’s profile at www.sec.gov.
These factors should not be construed as exhaustive. Unless required by law, Pembina does not undertake any obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Any forward-looking statements contained herein are expressly qualified by this cautionary statement.
| CONDENSED CONSOLIDATED INTERIM STATEMENT OF FINANCIAL POSITION (unaudited) |
|||||||||||||||
| ($ millions) | Note | September 30 2013 |
December 31 2012 |
||||||||||||
| Assets | |||||||||||||||
| Current assets | |||||||||||||||
| Cash and cash equivalents | 15.5 | 27.3 | |||||||||||||
| Trade receivables and other | 395.5 | 331.7 | |||||||||||||
| Derivative financial instruments | 11 | 5.2 | 7.6 | ||||||||||||
| Inventory | 143.9 | 108.1 | |||||||||||||
| 560.1 | 474.7 | ||||||||||||||
| Non-current assets | |||||||||||||||
| Property, plant and equipment | 4 | 5,482.8 | 5,014.5 | ||||||||||||
| Intangible assets and goodwill | 2,577.0 | 2,622.7 | |||||||||||||
| Investments in equity accounted investees | 164.9 | 161.2 | |||||||||||||
| Derivative financial instruments | 11 | 0.7 | 0.3 | ||||||||||||
| Other receivables | 3.1 | ||||||||||||||
| Deferred tax assets | 17.0 | 7.7 | |||||||||||||
| 8,242.4 | 7,809.5 | ||||||||||||||
| Total Assets | 8,802.5 | 8,284.2 | |||||||||||||
| Liabilities and Shareholders’ Equity | |||||||||||||||
| Current liabilities | |||||||||||||||
| Trade payables and accrued liabilities | 433.6 | 344.7 | |||||||||||||
| Dividends payable | 43.7 | 39.6 | |||||||||||||
| Loans and borrowings | 5 | 261.8 | 11.7 | ||||||||||||
| Derivative financial instruments | 11 | 11.9 | 15.9 | ||||||||||||
| 751.0 | 411.9 | ||||||||||||||
| Non-current liabilities | |||||||||||||||
| Loans and borrowings | 5 | 1,388.0 | 1,932.8 | ||||||||||||
| Convertible debentures | 612.1 | 610.0 | |||||||||||||
| Derivative financial instruments | 11 | 83.2 | 51.8 | ||||||||||||
| Employee benefits | 28.0 | 28.6 | |||||||||||||
| Share-based payments | 13.0 | 17.2 | |||||||||||||
| Deferred revenue | 4.4 | 3.1 | |||||||||||||
| Provisions | 6 | 293.3 | 361.2 | ||||||||||||
| Deferred tax liabilities | 675.2 | 592.2 | |||||||||||||
| 3,097.2 | 3,596.9 | ||||||||||||||
| Total Liabilities | 3,848.2 | 4,008.8 | |||||||||||||
| Shareholders’ Equity | |||||||||||||||
| Equity attributable to shareholders of the Company: | |||||||||||||||
| Common share capital | 7 | 5,877.5 | 5,324.0 | ||||||||||||
| Preferred share capital | 8 | 244.4 | |||||||||||||
| Deficit | (1,146.7) | (1,027.7) | |||||||||||||
| Accumulated other comprehensive income | (26.1) | (26.1) | |||||||||||||
| 4,949.1 | 4,270.2 | ||||||||||||||
| Non-controlling interest | 5.2 | 5.2 | |||||||||||||
| Total Equity | 4,954.3 | 4,275.4 | |||||||||||||
| Total Liabilities and Shareholders’ Equity | 8,802.5 | 8,284.2 | |||||||||||||
| See accompanying notes to the condensed consolidated interim financial statements | |||||||||||||||
| CONDENSED CONSOLIDATED INTERIM STATEMENT OF COMPREHENSIVE INCOME (unaudited) |
|||||||||||||||||||
| 3 Months Ended September 30 |
9 Months Ended September 30 |
||||||||||||||||||
| ($ millions, except per share amounts) | Note | 2013 | 2012 | 2013 | 2012 | ||||||||||||||
| Revenue | 1,300.2 | 815.4 | 3,723.7 | 2,161.8 | |||||||||||||||
| Cost of sales | 1,116.4 | 686.6 | 3,172.7 | 1,817.9 | |||||||||||||||
| (Loss) gain on commodity-related derivative financial instruments | 11 | (6.6) | (25.9) | 6.8 | 22.7 | ||||||||||||||
| Gross profit | 177.2 | 102.9 | 557.8 | 366.6 | |||||||||||||||
| General and administrative | 29.8 | 26.9 | 88.6 | 70.2 | |||||||||||||||
| Acquisition-related and other expenses | 1.5 | 24.2 | |||||||||||||||||
| 29.8 | 28.4 | 88.6 | 94.4 | ||||||||||||||||
| Results from operating activities | 147.4 | 74.5 | 469.2 | 272.2 | |||||||||||||||
| Finance income | (3.5) | (6.9) | (12.2) | (9.2) | |||||||||||||||
| Finance costs | 39.5 | 40.0 | 123.4 | 88.6 | |||||||||||||||
| Net finance costs | 9 | 36.0 | 33.1 | 111.2 | 79.4 | ||||||||||||||
| Earnings before income tax and equity accounted investees | 111.4 | 41.4 | 358.0 | 192.8 | |||||||||||||||
| Share of (profit) loss of investments in equity accounted investees, net of tax | (0.4) | 0.5 | 0.3 | 0.9 | |||||||||||||||
| Current tax expense | 6.2 | 0.9 | 18.7 | 0.3 | |||||||||||||||
| Deferred tax expense | 33.8 | 9.3 | 82.9 | 47.9 | |||||||||||||||
| Income tax expense | 40.0 | 10.2 | 101.6 | 48.2 | |||||||||||||||
| Earnings and total comprehensive income for the period | 71.8 | 30.7 | 256.1 | 143.7 | |||||||||||||||
| Earnings and total comprehensive income (loss) attributable to: | |||||||||||||||||||
| Shareholders of the Company | 71.9 | 30.6 | 256.1 | 143.5 | |||||||||||||||
| Non-controlling interest | (0.1) | 0.1 | 0.2 | ||||||||||||||||
| 71.8 | 30.7 | 256.1 | 143.7 | ||||||||||||||||
| Basic and diluted earnings per share attributable to shareholders of the Company (dollars) |
0.22 | 0.11 | 0.83 | 0.58 | |||||||||||||||
| See accompanying notes to the condensed consolidated interim financial statements | |||||||||||||||||||
| CONDENSED CONSOLIDATED INTERIM STATEMENT OF CHANGES IN EQUITY (unaudited) |
|||||||||||||||||||||||
| Attributable to Shareholders of the Company | |||||||||||||||||||||||
| ($ millions) | Note | Common Shares |
Preferred Shares |
Deficit | Accumulated Other Comprehensive Income |
Total | Non-controlling Interest |
Total Equity |
|||||||||||||||
| December 31, 2012 | 5,324.0 | (1,027.7) | (26.1) | 4,270.2 | 5.2 | 4,275.4 | |||||||||||||||||
| Earnings and total comprehensive income for the period |
256.1 | 256.1 | 256.1 | ||||||||||||||||||||
| Transactions with shareholders of the Company |
|||||||||||||||||||||||
| Common shares issued, net of issue costs | 7 | 334.6 | 334.6 | 334.6 | |||||||||||||||||||
| Share-based payment transactions | 7 | 12.1 | 12.1 | 12.1 | |||||||||||||||||||
| Dividends declared | 7 | (375.1) | (375.1) | (375.1) | |||||||||||||||||||
| Preferred shares issued, net of issue costs | 8 | 244.4 | 244.4 | 244.4 | |||||||||||||||||||
| Dividend reinvestment plan | 7 | 210.8 | 210.8 | 210.8 | |||||||||||||||||||
| Debenture conversions and other | 7 | (4.0) | (4.0) | (4.0) | |||||||||||||||||||
| Total transactions with shareholders of the Company |
553.5 | 244.4 | (375.1) | 422.8 | 422.8 | ||||||||||||||||||
| September 30, 2013 | 5,877.5 | 244.4 | (1,146.7) | (26.1) | 4,949.1 | 5.2 | 4,954.3 | ||||||||||||||||
| December 31, 2011 | 1,811.7 | (834.9) | (15.2) | 961.6 | 961.6 | ||||||||||||||||||
| Earnings and total comprehensive income for the period |
143.4 | 143.4 | 0.3 | 143.7 | |||||||||||||||||||
| Transactions with shareholders of the Company |
|||||||||||||||||||||||
| Share-based payment transactions | 5.9 | 5.9 | 5.9 | ||||||||||||||||||||
| Debenture conversions and other | 0.4 | 0.4 | 0.4 | ||||||||||||||||||||
| Dividends declared | (299.2) | (299.2) | (299.2) | ||||||||||||||||||||
| Common shares issued on acquisition | 3,284.0 | 3,284.0 | 3,284.0 | ||||||||||||||||||||
| Dividend reinvestment plan | 151.1 | 151.1 | 151.1 | ||||||||||||||||||||
| Total transactions with shareholders of the Company |
3,441.4 | (299.2) | 3,142.2 | 3,142.2 | |||||||||||||||||||
| Non-controlling interest assumed on acquisition |
5.0 | 5.0 | |||||||||||||||||||||
| September 30, 2012 | 5,253.1 | (990.7) | (15.2) | 4,247.2 | 5.3 | 4,252.5 | |||||||||||||||||
| See accompanying notes to the condensed consolidated interim financial statements | |||||||||||||||||||||||
| CONDENSED CONSOLIDATED INTERIM STATEMENT OF CASH FLOWS (unaudited) |
||||||||||||||||||
| 3 Months Ended September 30 |
9 Months Ended September 30 |
|||||||||||||||||
| ($ millions) | Note | 2013 | 2012 | 2013 | 2012 | |||||||||||||
| Cash provided by (used in): | ||||||||||||||||||
| Operating activities: | ||||||||||||||||||
| Earnings for the period | 71.8 | 30.7 | 256.1 | 143.7 | ||||||||||||||
| Adjustments for: | ||||||||||||||||||
| Depreciation and amortization | 48.6 | 53.2 | 126.5 | 129.9 | ||||||||||||||
| Unrealized loss (gain) on commodity-related derivative financial instruments | 11 | 2.1 | 23.0 | (5.1) | (38.3) | |||||||||||||
| Net finance costs | 9 | 36.0 | 33.1 | 111.2 | 79.4 | |||||||||||||
| Share of (profit) loss of investments in equity accounted investees, net of tax | (0.4) | 0.5 | 0.3 | 0.9 | ||||||||||||||
| Deferred income tax expense | 33.8 | 9.3 | 82.9 | 47.9 | ||||||||||||||
| Share-based payments expense | 8.2 | 5.3 | 23.0 | 11.6 | ||||||||||||||
| Employee future benefits expense | 2.9 | 1.9 | 8.2 | 5.2 | ||||||||||||||
| Other | 0.1 | (0.4) | 0.7 | 0.1 | ||||||||||||||
| Changes in non-cash working capital | (101.4) | (0.6) | (84.2) | (78.1) | ||||||||||||||
| Payments from equity accounted investees | 5.4 | 1.5 | 14.6 | 9.2 | ||||||||||||||
| Decommissioning liability expenditures | (0.3) | (0.5) | (0.6) | (2.9) | ||||||||||||||
| Employer future benefit contributions | (3.1) | (2.5) | (9.4) | (7.5) | ||||||||||||||
| Net interest paid | (16.4) | (23.6) | (67.7) | (80.8) | ||||||||||||||
| Cash flow from operating activities | 87.3 | 130.9 | 456.5 | 220.3 | ||||||||||||||
| Financing activities: | ||||||||||||||||||
| Bank borrowings | 40.0 | 80.0 | 120.0 | 346.9 | ||||||||||||||
| Repayment of loans and borrowings | (115.9) | (0.8) | (617.8) | (60.8) | ||||||||||||||
| Issuance of debt | 200.0 | |||||||||||||||||
| Issuance of common shares | 345.2 | |||||||||||||||||
| Common share issue costs | (14.1) | |||||||||||||||||
| Issuance of preferred shares | 8 | 250.0 | 250.0 | |||||||||||||||
| Preferred share issue costs | (7.5) | (7.5) | ||||||||||||||||
| Financing fees | (0.1) | (3.0) | (5.1) | |||||||||||||||
| Exercise of stock options | 5.1 | 1.8 | 10.2 | 4.4 | ||||||||||||||
| Dividends paid (net of shares issued under the dividend reinvestment plan) | (53.8) | (50.8) | (160.1) | (130.7) | ||||||||||||||
| Cash flow from financing activities | 117.8 | 30.2 | 122.9 | 154.7 | ||||||||||||||
| Investing activities: | ||||||||||||||||||
| Capital expenditures | (244.8) | (143.3) | (604.6) | (329.6) | ||||||||||||||
| Changes in non-cash investing working capital and other | 47.8 | 4.6 | 23.9 | (28.2) | ||||||||||||||
| Contributions to equity accounted investees | (2.4) | (10.5) | ||||||||||||||||
| Cash acquired on acquisition | 8.9 | |||||||||||||||||
| Cash flow used in investing activities | (199.4) | (138.7) | (591.2) | (348.9) | ||||||||||||||
| Change in cash | 5.7 | 22.4 | (11.8) | 26.1 | ||||||||||||||
| Cash (bank indebtedness), beginning of period | 9.8 | 3.0 | 27.3 | (0.7) | ||||||||||||||
| Cash and cash equivalents, end of period | 15.5 | 25.4 | 15.5 | 25.4 | ||||||||||||||
| See accompanying notes to the condensed consolidated interim financial statements | ||||||||||||||||||
NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
1. REPORTING ENTITY
Pembina Pipeline Corporation (“Pembina” or the “Company”) is an energy transportation and service provider domiciled in Canada. The condensed consolidated unaudited interim financial statements (“Interim Financial Statements”) include the accounts of the Company, its subsidiary companies, partnerships and any interests in associates and jointly controlled entities as at and for the nine months ended September 30, 2013. These Interim Financial Statements and the notes thereto have been prepared in accordance with IAS 34 – Interim Financial Reporting. They do not include all of the information required for full annual financial statements and should be read in conjunction with the consolidated financial statements of the Company as at and for the year ended December 31, 2012. The interim financial statements were authorized for issue by the Board of Directors on November 1, 2013.
Pembina owns or has interests in pipelines that transport conventional crude oil, condensate and natural gas liquids (“NGL”), oil sands and heavy oil pipelines, gas gathering and processing facilities, and an NGL infrastructure and logistics business. Facilities are located in Canada and in the U.S. Pembina also offers midstream services that span across its operations.
The comparative statement of financial position as at December 31, 2012 was reclassified to present deferred tax assets of $7.7 million from one tax jurisdiction separate from deferred tax liabilities of another tax jurisdiction.
2. SIGNIFICANT ACCOUNTING POLICIES
The accounting policies are set out in the December 31, 2012 financial statements. Those policies have been applied consistently to all periods presented in these Interim Financial Statements.
New standards
The following new standards, interpretations, amendments and improvements to existing standards issued by the International Accounting Standard Board or International Financial Reporting Interpretations Committee were adopted as of January 1, 2013 without any material impact to Pembina’s Financial Statements: IFRS 7 Financial Instruments: Disclosures, IFRS 10 Consolidated Financial Statements, IFRS 11 Joint Arrangements, IFRS 12 Disclosure of interests in Other Entities, IFRS 13 Fair Value Measurement, and IAS 19 Employee Future Benefits.
3. DETERMINATION OF FAIR VALUES
A number of the Company’s accounting policies and disclosures require the determination of fair value, for both financial and non-financial assets and liabilities. Fair values have been determined for measurement and/or disclosure purposes based on the following methods. When applicable, further information about the assumptions made in determining fair values is disclosed in the notes specific to that asset or liability.
i) Property, plant and equipment
The fair value of property, plant and equipment recognized as a result of a business combination is based on market values when available and depreciated replacement cost when appropriate. Depreciated replacement cost reflects adjustments for physical deterioration as well as functional and economic obsolescence.
ii) Intangible assets
The fair value of intangible assets acquired in a business combination is determined using the multi-period excess earnings method, whereby the subject asset is valued after deducting a fair return on all other assets that are part of creating the related cash flows.
The fair value of other intangible assets is based on the discounted cash flows expected to be derived from the use and eventual sale of the assets.
iii) Derivatives
Fair value of derivatives, with the exception of a put option, are estimated by reference to independent monthly forward settlement prices, interest rate yield curves, currency rates, quoted market prices per share and volatility rates at the period ends.
The fair value of the put option is based on a contracted calculation of a multiple of earnings, adjusted for associated capital expenditures and debt based on management estimates (see Note 11 “Financial Instruments and Financial Risk Management”).
Fair values reflect the credit risk of the instrument and include adjustments to take account of the credit risk of the Company entity and counterparty when appropriate.
iv) Non-derivative financial assets and liabilities
Fair value, which is determined for disclosure purposes, is calculated based on the present value of future principal and interest cash flows, discounted at the market rate of interest at the reporting date. In respect of the convertible debentures, the fair value is determined by the market price of the convertible debenture on the reporting date. For finance leases the market rate of interest is determined by reference to similar lease agreements. For disclosure purposes, carrying value is a reasonable approximation for fair value for cash and cash equivalents, trade receivables and other, trade payables and accrued liabilities, finance lease liabilities and dividends payable.
v) Share-based payment transactions
The fair value of the employee share options is measured using the Black-Scholes formula. Measurement inputs include share price on measurement date, exercise price of the instrument, expected volatility (based on weighted average historic volatility adjusted for changes expected due to publicly available information), weighted average expected life of the instruments (based on historical experience and general option holder behaviour), expected dividends, expected forfeitures and the risk-free interest rate (based on government bonds). Service and non-market performance conditions attached to the transactions are not taken into account in determining fair value.
The fair value of the long-term share unit award incentive plan and associated distribution units are measured based on the reporting date market price of the Company’s shares. Expected dividends are not taken into account in determining fair value as they are issued as additional distribution share units.
4. PROPERTY, PLANT AND EQUIPMENT
| ($ millions) | Land and Land Rights |
Pipelines | Facilities and Equipment |
Linefill and Other |
Assets Under Construction |
Total | |||||||||||||||
| Cost | |||||||||||||||||||||
| Balance at December 31, 2012 | 88.0 | 2,593.7 | 2,072.2 | 506.6 | 751.8 | 6,012.3 | |||||||||||||||
| Additions | 0.2 | 87.3 | 71.3 | 9.3 | 433.5 | 601.6 | |||||||||||||||
| Change in decommissioning provision | (23.4) | (22.8) | (46.2) | ||||||||||||||||||
| Capitalized interest | 5.4 | 3.1 | 17.1 | 25.6 | |||||||||||||||||
| Transfers | 9.6 | 64.3 | 277.9 | 40.8 | (392.6) | ||||||||||||||||
| Disposals and other | (0.1) | (0.6) | 3.1 | 2.4 | |||||||||||||||||
| Balance at September 30, 2013 | 97.8 | 2,727.2 | 2,401.1 | 559.8 | 809.8 | 6,595.7 | |||||||||||||||
| Accumulated Depreciation | |||||||||||||||||||||
| Balance at December 31, 2012 | 4.4 | 776.7 | 171.9 | 44.8 | 997.8 | ||||||||||||||||
| Depreciation | 0.2 | 43.8 | 53.3 | 18.3 | 115.6 | ||||||||||||||||
| Disposals and other | (0.1) | (0.6) | 0.2 | (0.5) | |||||||||||||||||
| Balance at September 30, 2013 | 4.6 | 820.4 | 224.6 | 63.3 | 1,112.9 | ||||||||||||||||
| Carrying amounts | |||||||||||||||||||||
| December 31, 2012 | 83.6 | 1,817.0 | 1,900.3 | 461.8 | 751.8 | 5,014.5 | |||||||||||||||
| September 30, 2013 | 93.2 | 1,906.8 | 2,176.5 | 496.5 | 809.8 | 5,482.8 |
Commitments
At September 30, 2013, the Company had contractual commitments for the acquisition and or construction of property, plant and equipment of $1,187.4 million (December 31, 2012: $362.8 million).
5. LOANS AND BORROWINGS
This note provides information about the contractual terms of the Company’s interest-bearing loans and borrowings, which are measured at amortized cost.
Carrying value terms and debt repayment schedule
Terms and conditions of outstanding loans were as follows:
| ($ millions) | Carrying amount | ||||||||||||||||
| Available facilities at September 30, 2013 |
Nominal interest rate |
Year of maturity |
September 30, 2013 |
December 31, 2012 |
|||||||||||||
| Operating facility(1) | 30.0 | prime + 0.45 or BA(2) + 1.45 |
2014 | ||||||||||||||
| Revolving unsecured credit facility | 1,500.0 | prime + 0.45 or BA(2) + 1.45 |
2018 | 25.6 | 520.7 | ||||||||||||
| Senior unsecured notes – Series A | 175.0 | 5.99 | 2014 | 174.8 | 174.7 | ||||||||||||
| Senior unsecured notes – Series C | 200.0 | 5.58 | 2021 | 197.2 | 197.0 | ||||||||||||
| Senior unsecured notes – Series D | 267.0 | 5.91 | 2019 | 265.8 | 265.6 | ||||||||||||
| Senior unsecured term facility | 75.0 | 6.16 | 2014 | 74.9 | 74.8 | ||||||||||||
| Senior unsecured medium-term notes 1 | 250.0 | 4.89 | 2021 | 248.8 | 248.7 | ||||||||||||
| Senior unsecured medium-term notes 2 | 450.0 | 3.77 | 2022 | 447.9 | 447.9 | ||||||||||||
| Senior unsecured medium-term notes 3 | 200.0 | 4.75 | 2043 | 198.0 | |||||||||||||
| Subsidiary debt | 8.9 | 4.92 | 2014 | 8.9 | 9.3 | ||||||||||||
| Finance lease liabilities | 7.9 | 5.8 | |||||||||||||||
| Total interest bearing liabilities | 3,155.9 | 1,649.8 | 1,944.5 | ||||||||||||||
| Less current portion | (261.8) | (11.7) | |||||||||||||||
| Total non-current | 1,388.0 | 1,932.8 | |||||||||||||||
| (1) Operating facility expected to be renewed on an annual basis. |
| (2) Bankers’ Acceptance. |
Pembina’s $1.5 billion revolving unsecured credit facility was extended by one year from March 2017 to March 2018 and the $30 million operating facility was also extended by one year from July 2013 to July 2014.
6. PROVISIONS
| ($ millions) | Total | |
| Balance at December 31, 2012(1) | 361.7 | |
| Unwinding of discount rate | 6.5 | |
| Decommissioning liabilities settled during the period | (0.6) | |
| Change in rates | (74.1) | |
| Change in estimates and other | (0.1) | |
| Total | 293.4 | |
| Less current portion (included in accrued liabilities) | (0.1) | |
| Balance at September 30, 2013 | 293.3 | |
| (1) Includes current portion of $0.5 million (included in accrued liabilities). |
The Company applied a 2 percent inflation rate per annum (December 31, 2012: 2 percent) and a risk-free rate of 3.07 percent (December 31, 2012: 2.36 percent) to calculate the present value of the decommissioning provision. The remeasured decommissioning provision decreased property, plant and equipment and decommissioning provision liability. Of the re-measurement reduction of the decommissioning provision, $28 million was in excess of the carrying amount of the related asset and is recognized as a credit to depreciation expense.
7. COMMON SHARES
| ($ millions, except share amounts) | Number of Common Shares |
Common Share Capital |
|||||||||||||
| Balance December 31, 2012 | 293,226,473 | 5,324.0 | |||||||||||||
| Common shares issued, net of issue costs | 11,206,750 | 334.6 | |||||||||||||
| Share-based payment transactions | 522,119 | 12.1 | |||||||||||||
| Dividend reinvestment plan | 7,057,256 | 210.8 | |||||||||||||
| Debenture conversions and other | 71,037 | (4.0) | |||||||||||||
| Balance September 30, 2013 | 312,083,635(1) | 5,877.5 |
| (1) | Weighted average number of common shares outstanding for the three months ended September 30, 2013 is 310.8 million (September 30, 2012: 289.2 million). On a fully diluted basis, the weighted average number of common shares outstanding for the three months ended September 30, 2013 is 311.7 million (September 30, 2012: 289.7 million). Weighted average number of common shares outstanding for the nine months ended September 30, 2013 is 305.0 million (September 30, 2012: 247.8 million). On a fully diluted basis, the weighted average number of common shares outstanding for the nine months ended September 30, 2013 is 305.9 million (September 30, 2012: 248.4 million). |
On March 21, 2013, Pembina closed a bought deal offering of 11,206,750 shares at a price of $30.80 per share for aggregate gross proceeds of $345.2 million ($334.6 million, net of issue costs).
Dividends
The following dividends were declared by the Company:
| 9 Months Ended September 30 ($ millions, except per share amounts) | 2013 | 2012 | ||||||||||
| $1.23 per qualifying common share (2012: $1.20) | 375.1 | 299.2 |
On October 9, 2013, Pembina announced that the Board of Directors declared a dividend for October of $0.14 per qualifying common share ($1.68 annualized) in the total amount of $43.8 million.
8. PREFERRED SHARES
| ($ millions, except share amounts) | Number of Preferred Shares |
Preferred Share Capital |
||||||||||
| Preferred shares issued, net of issue costs | 10,000,000 | 244.4 | ||||||||||
| Balance September 30, 2013 | 10,000,000 | 244.4 |
On July 26, 2013, Pembina issued 10,000,000 cumulative redeemable 5-year rate reset Class A Preferred shares, Series 1 (“Series 1 Preferred Shares”) at a price of $25.00 per Series 1 Preferred Share for aggregate proceeds of $250 million. The holders of Series 1 Preferred Shares are entitled to receive fixed cumulative dividends at an annual rate of $1.0625 per share when declared by the Board of Directors. The dividend rate will reset on December 1, 2018 and every five years thereafter at a rate equal to the sum of the then five-year Government of Canada bond yield plus 2.47 percent. The Series 1 Preferred Shares are redeemable by the Company at the Company’s option on December 1, 2018 and on December 1 of every fifth year thereafter.
Holders of the Series 1 Preferred Shares have the right to convert all or any part of their shares into cumulative redeemable floating rate Class A Preferred shares, Series 2 (“Series 2 Preferred Shares”), subject to certain conditions, on December 1, 2018 and on December 1 of every fifth year thereafter. Holders of Series 2 Preferred Shares will be entitled to receive cumulative quarterly floating dividends at a rate equal to the sum of the then 90-day Government of Canada Treasury Bill yield plus 2.47 percent, if, as and when declared by the Board of Directors of Pembina.
Dividends
On October 9, 2013, Pembina announced that the Board of Directors declared a dividend of $0.3726 per share for the period commencing July 26, 2013 to November 30, 2013, on the Series 1 Preferred Shares and a dividend of $0.1932 per share for the period commencing October 2, 2013 to November 30, 2013, on Pembina’s cumulative redeemable rate reset class A Preferred Shares, Series 3 (the “Series 3 Preferred Shares”) which were issued on October 2, 2013 (see Note 12). These initial dividends are payable on December 1, 2013 to shareholders of record at the close of business on November 1, 2013.
9. NET FINANCE COSTS
| 3 Months Ended September 30 |
9 Months Ended September 30 |
|||||||||||||||||
| ($ millions) | 2013 | 2012 | 2013 | 2012 | ||||||||||||||
| Interest income from: | ||||||||||||||||||
| Related parties | (0.2) | |||||||||||||||||
| Bank deposits and other | (0.5) | (0.4) | (5.1) | (0.7) | ||||||||||||||
| Interest expense on financial liabilities measured at amortized cost: | ||||||||||||||||||
| Loans and borrowings | 11.6 | 19.1 | 41.5 | 52.9 | ||||||||||||||
| Convertible debentures | 10.6 | 10.6 | 31.8 | 25.8 | ||||||||||||||
| Finance leases | 0.4 | 0.1 | 1.1 | 0.3 | ||||||||||||||
| Unwinding of discount | 2.3 | 3.3 | 6.5 | 9.1 | ||||||||||||||
| Gain in fair value of non-commodity-related derivative financial instruments | (3.0) | (6.5) | (7.1) | (4.1) | ||||||||||||||
| Loss (gain) revaluation of conversion feature of convertible debentures | 13.6 | 6.7 | 41.7 | (4.2) | ||||||||||||||
| Foreign exchange losses | 1.0 | 0.2 | 0.8 | 0.5 | ||||||||||||||
| Net finance costs | 36.0 | 33.1 | 111.2 | 79.4 | ||||||||||||||
10. OPERATING SEGMENTS
| 3 Months Ended September 30, 2013 ($ millions) | Conventional Pipelines(1) |
Oil Sands & Heavy Oil |
Gas Services |
Midstream(2) | Corporate & Intersegment Eliminations |
Total | ||||||||||||
| Revenue: | ||||||||||||||||||
| Pipeline transportation | 103.1 | 48.2 | (12.1) | 139.2 | ||||||||||||||
| Midstream services | 1,129.6 | (0.1) | 1,129.5 | |||||||||||||||
| Gas Services | 31.5 | 31.5 | ||||||||||||||||
| Total revenue | 103.1 | 48.2 | 31.5 | 1,129.6 | (12.2) | 1,300.2 | ||||||||||||
| Operations | 37.2 | 15.2 | 10.7 | 25.1 | (1.6) | 86.6 | ||||||||||||
| Cost of goods sold(3) | 994.8 | (11.5) | 983.3 | |||||||||||||||
| Realized gain (loss) on commodity-related derivative financial instruments | 0.4 | (4.9) | (4.5) | |||||||||||||||
| Operating margin | 66.3 | 33.0 | 20.8 | 104.8 | 0.9 | 225.8 | ||||||||||||
| Depreciation and amortization (operational) | 6.4 | 5.0 | 5.4 | 29.7 | 46.5 | |||||||||||||
| Unrealized gain (loss) on commodity-related derivative financial instruments | 0.1 | (2.2) | (2.1) | |||||||||||||||
| Gross profit | 60.0 | 28.0 | 15.4 | 72.9 | 0.9 | 177.2 | ||||||||||||
| Depreciation included in general and administrative | 2.1 | 2.1 | ||||||||||||||||
| Other general and administrative | 1.2 | 0.8 | 0.5 | 5.5 | 19.7 | 27.7 | ||||||||||||
| Acquisition-related and other expenses (income) | 0.2 | (0.2) | ||||||||||||||||
| Results from operating activities | 58.6 | 27.4 | 14.9 | 67.4 | (20.9) | 147.4 | ||||||||||||
| Net finance costs | 1.0 | 0.3 | 0.2 | (0.8) | 35.3 | 36.0 | ||||||||||||
| Earnings (loss) before tax and equity accounted investees | 57.6 | 27.1 | 14.7 | 68.2 | (56.2) | 111.4 | ||||||||||||
| Share of profit of investments in equity accounted investees, net of tax | 0.4 | 0.4 | ||||||||||||||||
| Capital expenditures | 78.6 | 8.4 | 80.2 | 76.7 | 0.9 | 244.8 | ||||||||||||
| 3 Months Ended September 30, 2012 ($ millions) | ||||||||||||||||||
| Revenue: | ||||||||||||||||||
| Pipeline transportation | 79.0 | 44.1 | (6.2) | 116.9 | ||||||||||||||
| Midstream services | 674.8 | 674.8 | ||||||||||||||||
| Gas Services | 23.7 | 23.7 | ||||||||||||||||
| Total revenue | 79.0 | 44.1 | 23.7 | 674.8 | (6.2) | 815.4 | ||||||||||||
| Operations | 30.1 | 14.8 | 7.1 | 18.2 | (0.6) | 69.6 | ||||||||||||
| Cost of goods sold(3) | 571.6 | (6.2) | 565.4 | |||||||||||||||
| Realized gain (loss) on commodity-related derivative financial instruments | 0.5 | (3.4) | (2.9) | |||||||||||||||
| Operating margin | 49.4 | 29.3 | 16.6 | 81.6 | 0.6 | 177.5 | ||||||||||||
| Depreciation and amortization (operational) | 12.0 | 5.0 | 3.4 | 31.2 | 51.6 | |||||||||||||
| Unrealized gain (loss) on commodity-related derivative financial instruments | (7.1) | (15.9) | (23.0) | |||||||||||||||
| Gross profit | 30.3 | 24.3 | 13.2 | 34.5 | 0.6 | 102.9 | ||||||||||||
| Depreciation included in general and administrative | 1.6 | 1.6 | ||||||||||||||||
| Other general and administrative | 1.9 | 0.5 | 1.0 | 4.4 | 17.5 | 25.3 | ||||||||||||
| Acquisition-related and other expenses (income) | 0.1 | 1.4 | 1.5 | |||||||||||||||
| Results from operating activities | 28.4 | 23.8 | 12.2 | 30.0 | (19.9) | 74.5 | ||||||||||||
| Net finance costs | 1.4 | 0.5 | (1.3) | (2.6) | 35.1 | 33.1 | ||||||||||||
| Earnings (loss) before tax and equity accounted investees | 27.0 | 23.3 | 13.5 | 32.6 | (55.0) | 41.4 | ||||||||||||
| Share of loss of investments in equity accounted investees, net of tax | 0.5 | 0.5 | ||||||||||||||||
| Capital expenditures | 34.7 | 6.1 | 29.8 | 70.7 | 2.0 | 143.3 | ||||||||||||
| (1) | 5.2 percent of Conventional Pipelines revenue is under regulated tolling arrangements (6.1 percent for quarter ending September 30, 2012). | |
| (2) | Midstream services revenue includes $24.9 million associated with U.S. midstream sales ($21.8 million for quarter ending September 30, 2012). | |
| (3) | Including product purchases. |
| 9 Months Ended September 30, 2013 ($ millions) | Conventional Pipelines(1) |
Oil Sands & Heavy Oil |
Gas Services |
Midstream(2) | Corporate & Intersegment Eliminations |
Total | ||||||||||||
| Revenue: | ||||||||||||||||||
| Pipeline transportation | 300.4 | 142.5 | (37.2) | 405.7 | ||||||||||||||
| Midstream services | 3,230.5 | (0.1) | 3,230.4 | |||||||||||||||
| Gas Services | 87.6 | 87.6 | ||||||||||||||||
| Total revenue | 300.4 | 142.5 | 87.6 | 3,230.5 | (37.3) | 3,723.7 | ||||||||||||
| Operations | 110.2 | 45.4 | 30.7 | 71.6 | (3.0) | 254.9 | ||||||||||||
| Cost of goods sold(3) | 2,833.7 | (36.6) | 2,797.1 | |||||||||||||||
| Realized gain (loss) on commodity-related derivative financial instruments | 2.2 | (0.5) | 1.7 | |||||||||||||||
| Operating margin | 192.4 | 97.1 | 56.9 | 324.7 | 2.3 | 673.4 | ||||||||||||
| Depreciation and amortization (operational) | 5.9 | 14.8 | 12.6 | 87.4 | 120.7 | |||||||||||||
| Unrealized gain (loss) on commodity-related derivative financial instruments | 2.4 | 2.7 | 5.1 | |||||||||||||||
| Gross profit | 188.9 | 82.3 | 44.3 | 240.0 | 2.3 | 557.8 | ||||||||||||
| Depreciation included in general and administrative | 5.8 | 5.8 | ||||||||||||||||
| Other general and administrative | 5.4 | 2.0 | 3.2 | 17.2 | 55.0 | 82.8 | ||||||||||||
| Acquisition-related and other expenses (income) | 0.8 | (0.3) | 0.1 | (0.6) | ||||||||||||||
| Results from operating activities | 182.7 | 80.6 | 41.1 | 222.7 | (57.9) | 469.2 | ||||||||||||
| Net finance costs | 3.0 | 0.9 | 0.5 | (2.7) | 109.5 | 111.2 | ||||||||||||
| Earnings (loss) before tax and equity accounted investees | 179.7 | 79.7 | 40.6 | 225.4 | (167.4) | 358.0 | ||||||||||||
| Share of loss of investments in equity accounted investees, net of tax | 0.3 | 0.3 | ||||||||||||||||
| Capital expenditures | 198.9 | 33.0 | 202.5 | 166.5 | 3.7 | 604.6 | ||||||||||||
| 9 Months Ended September 30, 2012 ($ millions) | ||||||||||||||||||
| Revenue: | ||||||||||||||||||
| Pipeline transportation | 239.6 | 126.6 | (13.1) | 353.1 | ||||||||||||||
| Midstream services | 1,743.7 | 1,743.7 | ||||||||||||||||
| Gas Services | 65.0 | 65.0 | ||||||||||||||||
| Total revenue | 239.6 | 126.6 | 65.0 | 1,743.7 | (13.1) | 2,161.8 | ||||||||||||
| Operations | 87.6 | 39.4 | 20.3 | 40.3 | (1.9) | 185.7 | ||||||||||||
| Cost of goods sold(3) | 1,519.5 | (13.1) | 1,506.4 | |||||||||||||||
| Realized gain (loss) on commodity-related derivative financial instruments | (0.7) | (14.9) | (15.6) | |||||||||||||||
| Operating margin | 151.3 | 87.2 | 44.7 | 169.0 | 1.9 | 454.1 | ||||||||||||
| Depreciation and amortization (operational) | 36.1 | 14.8 | 10.9 | 64.0 | 125.8 | |||||||||||||
| Unrealized gain (loss) on commodity-related derivative financial instruments | (9.8) | 48.1 | 38.3 | |||||||||||||||
| Gross profit | 105.4 | 72.4 | 33.8 | 153.1 | 1.9 | 366.6 | ||||||||||||
| Depreciation included in general and administrative | 4.1 | 4.1 | ||||||||||||||||
| Other general and administrative | 5.0 | 1.3 | 3.0 | 11.2 | 45.6 | 66.1 | ||||||||||||
| Acquisition-related and other expenses (income) | 0.9 | 0.4 | 0.2 | 22.7 | 24.2 | |||||||||||||
| Results from operating activities | 99.5 | 70.7 | 30.8 | 141.7 | (70.5) | 272.2 | ||||||||||||
| Net finance costs | 4.8 | 1.5 | 0.8 | 1.6 | 70.7 | 79.4 | ||||||||||||
| Earnings (loss) before tax and equity accounted investees | 94.7 | 69.2 | 30.0 | 140.1 | (141.2) | 192.8 | ||||||||||||
| Share of loss of investments in equity accounted investees, net of tax | 0.9 | 0.9 | ||||||||||||||||
| Capital expenditures | 99.2 | 12.1 | 85.6 | 126.6 | 6.1 | 329.6 | ||||||||||||
| (1) | 4.8 percent of Conventional Pipelines revenue is under regulated tolling arrangements (5.1 percent for quarter ending September 30, 2012). | ||
| (2) | Midstream services revenue includes $93.1 million associated with U.S. midstream sales ($50.5 million for nine months ending September 30, 2012). | ||
| (3) | Including product purchases. |
Certain comparative general and administrative expenses have been restated to be consistent with the current allocations applied.
11. FINANCIAL INSTRUMENTS AND FINANCIAL RISK MANAGEMENT
Fair values
The fair values of financial assets and liabilities, together with the carrying amounts shown in the statement of financial position, are as follows:
| September 30, 2013 | December 31, 2012 | |||||
| ($ millions) | Carrying Amount |
Fair Value |
Carrying Amount |
Fair Value |
||
| Financial assets carried at fair value | ||||||
| Derivative financial instruments | 5.9 | 5.9 | 7.9 | 7.9 | ||
| Financial liabilities carried at fair value | ||||||
| Derivative financial instruments | 95.1 | 95.1 | 67.7 | 67.7 | ||
| Financial liabilities carried at amortized cost | ||||||
| Loans and borrowings | 1,649.8 | 1,740.7 | 1,944.5 | 2,089.7 | ||
| Convertible debentures | 612.1(1) | 809.1 | 610.0(1) | 725.0 | ||
| 2,261.9 | 2,549.8 | 2,554.5 | 2,814.7 | |||
| (1) | Carrying amount excludes conversion feature of convertible debentures. |
The basis for determining fair values is disclosed in Note 3.
Fair value hierarchy
The fair value of financial instruments carried at fair value is classified according to the following hierarchy based on the amount of observable inputs used to value the instruments.
Level 1: Unadjusted quoted prices are available in active markets for identical assets or liabilities as the reporting date. Pembina uses Level 1 inputs for the disclosed fair value measurements of the convertible debentures.
Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices). Level 2 valuations are based on inputs, including quoted forward prices for commodities, time value and volatility factors, which can be substantially observed or corroborated in the marketplace. Instruments in this category include non-exchange traded derivatives such as over-the-counter physical forwards and options, including those that have prices similar to quoted market prices. Pembina obtains quoted market prices for commodities, future power contracts, interest rates and foreign exchange rates from information sources including banks, Bloomberg Terminals and Natural Gas Exchange (NGX). With the exception of items described in Level 1 and 3, all of Pembina’s financial instruments carried at fair value are valued using Level 2 inputs.
Level 3: Valuations in this level require the most significant judgments and consist primarily of unobservable or non-market based inputs. Level 3 inputs include longer-term transactions, transactions in less active markets or transactions at locations for which pricing information is not available. In these instances, internally developed methodologies are used to determine fair value. The redemption liability related to acquisition of subsidiary is classified as a Level 3 instrument, as the fair value is determined by using inputs that are not based on observable market data. The liability represents a put option, held by the non-controlling interest of Three Star Trucking Ltd. (“Three Star”), to sell the remaining one-third of the business to Pembina after the third anniversary of the original acquisition date (October 3, 2014). The put price to be paid by the Company for the residual interest upon exercise is based on a multiple of Three Star’s earnings during the three year period prior to exercise, adjusted for associated capital expenditures and debt based on management estimates. These estimates are subject to measurement uncertainty and the effect on the financial statements of future periods could be material.
Financial instruments classified as Level 3
| ($ millions) | 2013 | ||||||
| Redemption liability, January 1, 2013 | 5.3 | ||||||
| Gain on revaluation | (1.9) | ||||||
| Redemption liability, September 30, 2013 | 3.4 | ||||||
The following table is a summary of the net derivative financial instrument liability:
| ($ millions) | September 30 2013 |
December 31 2012 |
|||||
| Frac spread related | (2.0) | (3.1) | |||||
| Product margin | (1.3) | (1.1) | |||||
| Corporate | |||||||
| Power | (2.9) | (7.1) | |||||
| Interest rate | (8.1) | (14.3) | |||||
| Foreign exchange | (0.4) | 0.7 | |||||
| Other derivative financial instruments | |||||||
| Conversion feature of convertible debentures | (71.1) | (29.6) | |||||
| Redemption liability related to acquisition of subsidiary | (3.4) | (5.3) | |||||
| Net derivative financial instruments liability | (89.2) | (59.8) | |||||
| Commodity-Related Derivative Financial Instruments | 3 Months Ended September 30 |
9 Months Ended September 30 |
||||
| ($ millions) | 2013 | 2012 | 2013 | 2012 | ||
| Realized (loss) gain on commodity-related derivative financial instruments | ||||||
| Frac spread related | (2.0) | (3.2) | (1.0) | (10.2) | ||
| Product margin | (3.3) | (0.4) | (1.2) | (4.4) | ||
| Power | 0.8 | 0.7 | 3.9 | (1.0) | ||
| Realized (loss) gain on commodity-related derivative financial instruments | (4.5) | (2.9) | 1.7 | (15.6) | ||
| Unrealized (loss) gain on commodity-related derivative financial instruments | (2.1) | (23.0) | 5.1 | 38.3 | ||
| (Loss) gain on commodity-related derivative financial instruments | (6.6) | (25.9) | 6.8 | 22.7 | ||
For non-commodity-related derivative financial instruments see Note 9, Net Finance Costs.
Sensitivity analysis
The following table shows the impact on earnings if the underlying risk variables of the derivative financial instruments changed by a specified amount, with other variables held constant.
| As at September 30, 2013 ($ millions) | + Change | – Change | |||||||||
| Frac spread related | |||||||||||
| Natural gas | (AECO +/- $1.00 per GJ) | 7.5 | (7.5) | ||||||||
| NGL (includes propane, butane, condensate) | (Belvieu +/- U.S. $0.10 per gal) | (5.7) | 5.7 | ||||||||
| Foreign exchange (U.S.$ vs. Cdn$) | (FX rate +/- $0.05) | (3.5) | 3.5 | ||||||||
| Product margin | |||||||||||
| Crude oil | (WTI +/- $5.00 per bbl) | (6.6) | 6.6 | ||||||||
| NGL (includes condensate) | (Belvieu +/- U.S. $0.10 per gal) | 4.8 | (4.8) | ||||||||
| Corporate | |||||||||||
| Interest rate | (Rate +/- 50 basis points) | 2.6 | (2.6) | ||||||||
| Power | (AESO +/- $5.00 per MW/h) | 4.3 | (4.3) | ||||||||
| Conversion feature of convertible debentures | (Pembina share price +/- $0.50 per share) | (3.5) | 3.4 | ||||||||
12. SUBSEQUENT EVENTS
On October 2, 2013, Pembina closed its offering of 6,000,000 cumulative redeemable rate reset Class A Preferred shares, Series 3 (the “Series 3 Preferred Shares”) at a price of $25.00 per share for aggregate proceeds of $150 million. The holders of Series 3 Preferred Shares are entitled to receive fixed cumulative dividends at an annual rate of $1.1750 per share, if, as and when declared by the Board of Directors. The dividend rate will reset on March 1, 2019 and every five years thereafter at a rate equal to the sum of the then five-year Government of Canada bond yield plus 2.60 percent. The Series 3 Preferred Shares are redeemable by the Company at its option on March 1, 2019 and on March 1 of every fifth year thereafter.
Holders of the Series 3 Preferred Shares have the right to convert their shares into cumulative redeemable floating rate Class A Preferred shares, Series 4 (“Series 4 Preferred Shares”), subject to certain conditions, on March 1, 2019 and on March 1 of every fifth year thereafter. Holders of Series 4 Preferred Shares will be entitled to receive a cumulative quarterly floating dividend at a rate equal to the sum of the then 90-day Government of Canada Treasury Bill yield plus 2.60 percent, if, as and when declared by the Board of Directors of Pembina.
Proceeds from the offering were used to partially fund capital projects and for other general corporate purposes of the Company. The Series 3 Preferred Shares began trading on the Toronto Stock Exchange on October 2, 2013 under the symbol PPL.PR.C.
CORPORATE INFORMATION
HEAD OFFICE
Pembina Pipeline Corporation
Suite 3800, 525 – 8th Avenue S.W.
Calgary, Alberta T2P 1G1
AUDITORS
KPMG LLP
Chartered Accountants
Calgary, Alberta
TRUSTEE, REGISTRAR & TRANSFER AGENT
Computershare Trust Company of Canada
Suite 600, 530 – 8th Avenue SW
Calgary, Alberta T2P 3S8
1-800-564-6253
STOCK EXCHANGE
Pembina Pipeline Corporation
TSX listing symbols for:
Common shares: PPL
Preferred shares: PPL.PR.A, PPL.PR.C
Convertible debentures: PPL.DB.C, PPL.DB.E, PPL.DB.F
NYSE listing symbol for:
Common shares: PBA
SOURCE Pembina Pipeline Corporation
For further information:
INVESTOR INQUIRIES
Phone: (403) 231-3156
Fax: (403) 237-0254
Toll Free: 1-855-880-7404
Email: investor-relations@pembina.com
Website: www.pembina.com