Pembina Pipeline Corporation (PBA) Q2 2015 Earnings Report, Transcript and Summary

Good morning, my name is Kirk, and I will be your conference operator today. At this time I would like to welcome everyone to the Pembina Pipeline Corporation Second Quarter Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer session. [Operator Instructions]. Thank you. Mr. Scott Burrows, Vice President of Finance and Chief Financial Officer. You may begin your conference.

Thank you, Kirk. Good morning, everyone, and welcome to Pembina's conference call and webcast to review our second quarter 2015 results. I'm Scott Burrows, Pembina's Vice President, Finance and Chief Financial Officer. Joining me today is Mick Dilger, Pembina's President and Chief Executive Officer and Stuart Taylor, Senior Vice President of NGLs and natural gas facilities. For this morning's call, I'll start by providing a high-level review of our financial results, which we released yesterday after markets closed. Mick will then provide an update on Pembina's growth projects. Before closing remarks and Q&A, I will discuss our recent financings and financial position. I'd 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 and additional GAAP measures. To learn more about these forward-looking statements, non-GAAP and additional GAAP measures, please see the company's various financial reports, which are available at pembina.com and on both SEDAR and EDGAR. Actual results may differ materially from the forward-looking statements we may express or imply today. I would also encourage listeners to review the news release, MD&A and financials that we issued yesterday, which provide our full results for the second quarter ended June 30, 2015, as I won't go over each financial metric on today's call. Our diversified asset base and fee for service business model continue to demonstrate financial resilient in spite of a weaken commodity price environment three of our core businesses saw increased operating margin and revenue volumes compared to this time last year. Overall I’m pleased with the results given the macroeconomic environment. The relative strength of volumes across our business segments demonstrate the strength of the underlying resource supply in the western Canada sedimentary Basin, which our current and growing business services. During the quarter, we commissioned approximately 350 million of fee for service assets representing a modest portion of our over 6 billion secured growth portfolio. Year-to-date approximately 75% of Pembina’s operating margin came from fee for service revenue streams, the continued growth of our fee for service business was a main factors according that previously announced 5.2% increase to the dividend. Stronger performance in the conventional pipeline and gas services been this is as a result of our new fee for service assets based in service help to offset modest declines in our mid-stream business associated with lower commodity prices and higher general and administration expenses for the year-to-date results. In the quarter Pembina generate EBITDA of 226 million compared to 235 million in the second quarter of 2014. On a year-to-date basis, EBITDA totaled 466 million as company to 551 million in the same period of 2014. Adjusted cash flow from operating activity saw a small decrease to 176 million during the second quarter from a 191 million for the same quarter last year, for the first half of 2015 adjusted cash flow from operating activities was 389 million or $1.14 for common share compared to 455 or $1.42 for common share for the same time last year. The decrease in both the three and six months figures with due to a decline in operating results from the midstream business increased preferred share dividends and increased tax expense per share metrics were also impacted by an increased share count primarily as a result of dividend reinvestment and debenture conversions. The company's earnings decrease to 43 million or $0.09 per common share during the second quarter of 2015 compared to 77 million or $0.21 per common share during the second quarter of 2014. For the six months of the year earnings were 163 million or $0.41 per common share for 2015 as compared to 224 million or $0.65 per common share during the same period. In addition to the factors previously discussed an increase deferred tax expense as a result of Alberta's recent tax increase resulted in lower earnings per quarter and the year-to-date results by approximately 52 million. Without this change in tax rate our earnings for the quarter would have been 95 million or $0.28 per common share a 33% increase over our Q2 2014 numbers. Before moving on I would note that we’ve introduced the concept of revenue volumes in the quarter, revenue volumes in our conventional gas services businesses reflect contracted and interruptible volumes. And as a result may differ from our physical volumes. In conventional pipelines revenue volumes average 603,000 barrels per day which represents an approximately 5% increase during the second quarter, compared to the same quarter last year. Increased revenue volumes quarter-over-quarter was driven by our Phase I expansion placed into service in December of 2013 and our Phase II expansion placed into service in April. Additional new assets including advantage pipeline, storage facilities and new connections also help to increased system volumes. These factors contributed to an operating margin of 102 million in the second quarter, which is a 32% increased higher than the 77 million in the same period last year. On a year-to-date basis, operating margin was 200 million or 30% higher than the 154 million recorded in the first half of 2014. Although, our revenue volumes are up on our conventional business, second quarter revenue volumes were slightly effected by facility construction activities, unplanned third-party turnaround and downstream third-party facility outages. In aggregate, we announced secured 767,000 barrels per day of firm volumes under long-term contract, which included substantial, take a pay component. Included in that figure, our significant base system volumes that we’re converted from one year Evergreen contract to 10 year contracts is essential take a pay component. We look forward to seeing additional volumes from the NGL portion of our Phase II expansion project later this year. Mick will talk more about this project in our growth update. Our gas services business 24% increased in revenue volumes over the second quarter, compared to the same period last year. As a result of placing our Resthaven and Musreau II gas plant facilities into service late in 2014. The new assets placed into service led to a 35% increase in operating margin, which came in at 35 million for the quarter, compared to 26 for the same quarter last year. Additionally this new assets help increased operating margin for the first half to 72 million, which represented a 31% increased over the comparable period in 2014. August is also set to be a busy month with both are SEEP and Saturn II gas plant coming this service, which serve to support higher volumes to the remainder of the year. And our oil sands and heavy oil business we saw steady performance is expected with operating margin coming and slightly higher over the second quarter of 2014 at 35 million versus 33 million in 2014 due to higher interrupt the full volumes. In the midstream business, operating margin was 86 million during the second quarter of 2015, which was lower than the second quarter of 2014. On a year-to-date basis, operating margin was 199 million compared to 340 million in the first half of 2014. The decrease is largely due to the significant decline in propane prices or propane prices decrease nearly the 60% compared to the first half of 2014. Lower butane and condensate margins were also contributing factors to the decrease in this business. To a smaller extent, our crude oil Midstream business also contributed to the decrease in operating margin, which is mainly due to lower oil prices and narrow price differentials. Our Midstream results were somewhat offset by $4 million realized financial gain. In-spite of commodity headwinds we remain committed to execute on our over 6 billion in secured growth project, which are set to contribute 700 million to 1 billion of EBITDA depending on utilization rates by 2018. I will now pass the call over to Mick, who will give an update on how our growth projects are progressing.

Good morning, everyone. Before I discuss our growth projects, I want to recognize the continued commitment to safety that permanent staff, demonstrate every day. I’m very proud to say that Pembina is now up to six quarters consecutively without any employee lost time injuries. This is truly impressive as our employees continue to work more and more hours, in fact they work 20% more hours this quarter than in the second quarter of 2014 and 3.7 million hours in total since the beginning of 2014. I cannot comment our employees enough for their dedication to safety during this busy growth phase. It’s an exciting time with Pembina is within the next three weeks, we will be commissioning approximately $600 million of new assets and we are estimating a total for the year of approximately 1.1 billion. These assets will all provide a full year contribution in 2016. The projects put into service in 2015 represents approximately 18% of are over 6 billion in secured growth. In-spite of uncertainty in our sector and weakness in commodity pricing Pembina secured approximately 380 million of new projects comprised primarily of the 125 million for horizon pipeline, 180 million for Northwest red water partnership internally infrastructure and 55 million for the collateral to support producers in Northwest Alberta. Many additional business development opportunities across the value chain continue to circulate and we hope to be able to provide more detail before year-end. We are beginning to realize the benefits from our over $6 billion portfolio of secured growth projects as demonstrated by the solid operational and financial performance across many of our business. This trend is expected to continue over the next 2 years as we will be placing new assets into service almost every quarter ultimately translating it to additional fee for service cash flows. Starting first with our conventional pipeline business, we are committing significant capital to expand our mainline capacity through the Phase 2 and Phase 3 expansions and extending the reach of our gathering network through the construction of new pipeline laterals. Over the quarter, we made significant progress on our Phase 2 expansion project finishing the crude oil and condensate portion in April and advancing the engine oil to a portion where it will be placed into service by the end of the month and wrapping up to full operational capacity by the end of the fourth quarter. Also, during the quarter, as part of our Phase 3 expansion, we bought a CAD35 million, 35 kilometer 16 inch pipeline segment from Kakwa to Lator to service building on the 35 kilometer 16 inch pipeline segment from Lator to Simonette that was placed into service earlier this year. We have completed over 15% of the overall Phase 3 expansion program and are pleased with the results to date. Further to Phase 3, regarding our plans to construct 2 additional pipelines between Fox Creek and the Namao, Alberta, the Alberta Energy Regulator or AERs has postponed the previous hearing date related to these pipelines by three months. The hearing is now scheduled for October 2015. According to AER guidelines, we expect to receive a decision from the AER within 90 days after the hearing is concluded. Subject to regulatory and environmental approvals, our into service date remains in late 2016 to mid 2017 for these two pipelines. In addition to the secured Phase 3 expansion project, Pembina has an ability to increase the piece and Northern system capacity by approximately 60% to 680,000 wells per day by adding mid-point pump stations. These expansion volumes can be brought into service within 12 to 18 months for a very modest capital investment. As part of our lateral construction program, we are continuing to progress key lateral projects that will support our Phase 3 expansion. The car lateral will support growing Montney production and subject to regulatory and environmental approvals, we expect the project will be in service in early 2016. Additionally, during the quarter, we also completed a lateral and a Willesden Green region of Alberta. We also continue to advance our Northeast DC expansion, and expect it to be in service late 2017, subject to regulatory and environmental approvals. Progress on the vantage pipeline expansion that was announced earlier this year is ongoing. Long needed items have now been ordered and subject to regulatory and environmental approvals, we expect it to be in service in early 2016. In our oil sands and heavy oil business, we are pleased to announce the expansion of our horizon pipeline during the second quarter. Through the addition of mainline pump stations and other facility modifications, the capacity of the pipeline will be increased to its ultimate capacity of 250,000 barrels per day. The project has long been underpinned by long-term fixed return agreement by Canada's largest independent oil and gas producer. Subject to regulatory and environmental approvals, the horizon expansion is expected to be in service in mid-2016. Now, mon to gas services, where the focus is centered on execution of previously announced projects and commissioning activities. Our SLEEP facility is over 90% complete and is expected to be in service by the end of August 2015 and come in under budget. We are currently commissioning our Starter 2 facility which is 90% complete. I am very proud with what the team has done in Saturn by working safely and efficiently to execute the project ahead of schedule and under budget. This project is a concrete example of the value of leveraging a template design in project development. The rest of the expansion continues to progress well with all major items ordered and pump construction has now commenced. Construction of the associated gathering pipeline is also progressing at over 70% installed and all major river crossings completed. The pipeline will be placed into service in September and processing plant expansion will be placed into service mid-2016. Further leveraging the design template strategy is our muzzle 3 facility where all major equipment has been ordered and engineering is 75% complete. We expect to bring muzrel 3 online mid-2016. Once these facilities come on scene, our total gas processing capacity is expected to reach 1.5 billion cubic feet per day including deep cut capacity of 870 million cubic feet per day. Our mixing group has been busy executing previously announced projects as well as working on new and exciting growth. In May we announced that we will provide terminaling and fractionation service for the northwest Redwater partnership plan refinery for a total capital of $180 million which is underpinned by a 30 year fixed return agreement and 10 year NGL fractionation agreement. Subject to regulatory and environmental approvals the facilities are expected to be in service by mid-2017. We are proud to be part of such a large scale value add project that will be constructed in our province. All major equipment has been onsight for our RFS II module fabrication has finished and overall construction is currently 80% complete. We expect to bring RFS II onstream in the first quarter of 2016. We are also pleased to have now received regulatory approval for our third fractionators at Redwater. The project is progressing well with over 75% of long lead items ordered. We expect RFS III to be in service in the third quarter of 2017. Once complete our Redwater site will be the largest fractionation facility in Canada with a total of 210,000 barrels per day of capacity. At our Edmonton north terminal we continue to advance the construction of three above ground storage tanks with a total working capacity of 550,000 barrels per day. Hydra testing of the tanks is now complete and internal and external coating work has begun. The project is on schedule to be in service mid-2016. Site preparation and commercial discussion for our proposed Canadian building and hub are ongoing. Subject to further regulatory and environmental approvals Pembina anticipates phasing in additional connections to various condensate delivery systems with a view to achieving full connectivity and service offerings at CDH by mid-2017. At our storage and terminaling facilities in -- Ontario we are progressing a number of initiatives including the installation of a new brine pond, upgrade some of the the real rocks and construction of a new propane truck rack to meet increased demand for services. Detailed engineering and procurement of long lead items are almost complete and the ground work is now finished on brine pond. The overall project is expected to be completed in early 2016. Scott?

Thanks Mick. Pembina continue to have excellent access to the capital markets completing two financings during the quarter, preferred share offering for gross proceeds of $225 million and $600 million of medium term notes maturing in 2027 and 2043. As of August 7, 2015 our $2 billion of credit facility is completely undrawn and we have approximately $110 million of cash on hand. The combination of strong access to capital markets and an undrawn $2 billion credit facility creates a robust financial foundation to fund the remaining portion of our $1.9 billion capital planned for 2015 and positions us well to fund the remainder of our over $6 billion of secured growth projects through the end of 2017. Maintaining our investment grade credit rating and a strong balance sheet to ensure financial flexibility is paramount to Pembina. With that I will pass the call over to Mick to wrap things up before opening up the line for questions.

Thanks Scott. To conclude in spite of commodity price weakness we are keeping our sharp focus on doing the important things right which in my mind end around four key tenants: Firstly running our operations safely and reliably in support of all stakeholders. Second further progressing our $6 billion of secured growth projects will benefit our shareholders through meaningfully increased fee for service supported cash flows over the next two years. Third, continuing with our proven track record of solid project execution, building things on time on budget and most important safely. Finally continuing to drive down both operating capital cost the benefit of our shareholders. We are in the early innings of our transformational growth and we remain committed to our goal of adding $700 million to $1 billion of EBITDA through the development of our over $6 billion of secured projects. The increased cash flow stability associated with this growth will create a solid platform for accelerated dividend growth supported by fee for service cash flows With that I will wrap things up. Operator please go ahead and open the line for questions.

[Operator Instructions]. Your first question comes from the line of David Galison from Canaccord Genuity. Your line is open.

So Scott, the first question was, on the 75 million of fee-for-service, could you give some indication of how much of that has take-or-pay, or no volume risk component to it?

So David other 75% I’d say right now roughly half of that is take-or-pay. But we’ll be updating that I think in, as we towards 2016 and we have the Phase II NGL portion come in this service as well as RFS II that meaningfully going to increase that take-or-pay portion. So we will be providing guidance on that in the relatively near future.

And then I wanted to touch on the target for 5% reduction in the overall capital budget. Just wondering how things are progressing? And if the 5% is still a good number? Or maybe you’ve seen some other opportunities out there for reductions?

David we’re still targeting that the 5% of roughly 4.8 billion remaining that we have to spend. And so today we’ve had verified savings of approximately $60 million. So we are tracking as we expected to this year, expect to realize an increase on that 16 relatively short order here.

And your next question comes from the lines of David Noseworthy. Your line is open.

So just first question, on the conventional system, just noticing that quarter over quarter, you saw volumes fall there. Is that just spring break up? Or is there another driver, like commodity prices and propane rejection, at play here? And what should we expect to see in the following quarters?

David I think it’s a whole bunch of things, I mean some people are taking down their plants for turnarounds because of the low commodity price environment. Clearly, if propane being re-injected into the gas line that’s also a factor, break ups a factor. So it’s a whole bunch of different things. In terms of volumes as we go forward, my hypothesis is, we might see a little bit of weakness on the un-contracted systems, but I think that’ll be hopefully more than offset by bringing the HBP Phase II into service through the end of the year as it ramps up. So I think we’ll still see year-over-year increases for as we as we progress.

David just a little more precisely on the kind of third-party turnarounds and facility outages I mean remember we commissioned our fees to pipeline, which meant we had some wind down for a couple days there. So those all equated to roughly 10,000 to 12,000 barrels a day for the quarter.

Okay, and then this is a bit of a clarification question. But my understanding is that there’s a number of producers that are rejecting propane in the field right now. So I’m assuming that gets onto the NGTL system and ends up at the [indiscernible] plans. So do you, are you seeing higher volumes at Empress? Are you taking those out? And is this a net positive or net negative, given the pricing in Edmonton?

We are seeing in since Pembina owned Empress, because we’re seeing a highest barrels per million. Absolutely right because people are warming as it were warming up their plants to take out the least amount of propane they can and you’re right it does get down to Empress. But when in this pricing environment we’re not necessarily taking it out or take it out yet the ethane, butane, condi and then were often rejecting the propane ourselves.

Okay. So it does actually leave the market as gas, and so it’s not like a problem that’s persisting at Empress?

That’s correct. I mean pretty much anybody who cannot extract propane, it’s not extracting propane.

And then, can you just talk a bit about your strategy outside the Western Canadian sedimentary basin? And has the current commodity price environment had any impact on the speed at which you’re going to execute on that strategy? Are you getting more cautious, and therefore slowing it down? Or do you see more opportunities, and want to speed that up?

Right now our scenario is that we think we’re in a moderating commodity price environment, so moderating over five years with quite a bit of volatility. And of course outside the basin in the U.S. things just got 25% more expensive over the last three months. So that's certainly on our minds, mind you we also get paid in U.S. currency. If we step in say into the Bakken, so overall our strategy hasn't really changed. Our focus is on executing our growth keeping our plans on stream and seeing what opportunities are available given our strong balance sheet in a weaker market but no real shift in our mood or what we've been trying to do or what we've been saying over the last two or three years.

Your next question comes from the line of Robert Catellier from GMP Securities. Your line is open.

Yes. Could you just give a quick update on your strategy for the propane export terminal? Given the uncertainty with the Portland project, are you considering other alternatives, so that you don't fall too far behind here?

Robert, its Stuart Taylor answering here. Yes I mean the Portland terminal we continue to -- we develop with a cost estimate for our Portland terminal. We continue to work on what permits we can put forward work on those, and we are at this point still awaiting the city of Portland to bring us forward as far as a hearing date. Given that uncertainty though we have began looking at other sites both in the Pacific Northwest and in Canada as well. Those are still early days and but we have kicked off and got teams looking at various other facilities and opportunities for a terminal site.

Okay. And what do you see as the way forward? I know you don't have a definite date from the city council. But when you look at the range of outcomes, what do you really think is going to happen here? And if you can provide a little bit more color on the -- Portland specifically?

We're still awaiting what we hope is the citizens of Portland and the politicians of Portland to give us our fair share opportunity to be in front of them and have a decision on this terminal. It may take some time for that become to reality and we know that there's an election sometime in 2016 late in 2016 and that may be our first opportunity for something to go forward.

That's unfortunate. Last question, the -- I just want to hear you talk about your appetite to make a major acquisition, while they're undertaking this significant build-out, given the market environment. I guess the question was previously asked, in the ex-WCSB, but I wonder about that? And just the overall sense, and not limited to ex-Alberta?

We always look at everything is for sale, our first priority is connected infrastructure, because we tend to be able to add more value to it. We now consider the Bakken quasi-connected through Vantage, but not fully connected for sure. So when we're looking at all opportunities so far our observation as prices for acquired assets are not dropping yet, but I think as we kind of -- if commodity prices stay where they are then I think we're going to see greater opportunities as we head towards the third and fourth quarter.

Yes, price aside, though, could you answer the question from the perspective of Pembina's willingness to take on that risk? And while they're undergoing a major project build-out? And to a lesser degree, concerns about the commodity price environment? It doesn't feel like -- it's not like you're limited at all?

Yes, I think I mean it depends what you define as major acquisition but I think for us right now we still feel like in this environment we have the financial flexibility to fund the capital program as well as look at potential acquisition opportunities.

Okay. That's what I was looking for thanks.

Your next question comes from the line of Rob Hope from Macquarie. Your line is open.

Good morning everyone, most of my questions have been answered, so maybe I'll just move attention to the midstream business, specifically the midstream marketing margins. Just want to get a sense, with the step-down that we saw in Q2, as expected, with the propane prices. I want to know how you're looking at this business through the rest of the year and whether or not you're going to be able to really benefit from wide locational spreads as well as the low cost inventory in Western Canada.

Well I don't want to comment on spreads. It's not just predicting one thing it's predicting two. And so reluctant to do that, but you raise a good point I mean our inventory is very inexpensive at this time. And were we to get any kind of improvement, I think we have the potential for very positive growth in margins from the propane business, take it back to you know 2014 through 2013 we're buying inventory cheap and then we had some decent pricing and that's of course the perfect scenarios to be in and so I left all the colors make up their own mind that we are in the propane cycle. We think it's pretty low given prices are negative. So I think some might say that business is, maybe it's not bottomed out completely but it's near that point. And if we get any kind of improvement we should see kind of a double win because we bought the product and inventory so inexpensively and you get right rising prices when you sell it, of course that's going fund the propane business.

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

Thank you, good morning. Not to be patronizing about this, but it's pretty impressive in the commodity environment that we're in that you actually delivered margin expansion across most our businesses. So with that kind of backdrop I guess just two parts to question how should we think about some of your underlying businesses, is this a sign of just a fee for service nature of the business providing a floor for cash flows and then option value upside for the time we actually get into a better commodity market environment? And then the second part of it is thinking about just risk management practices with some of the producer customers you have because clearly they're not benefiting from the current environment at all.

Yes. So to two parts. I would agree with your the question or almost statement you made that really what's left in our EBITDA is our fee for service, not entirely but mostly. So yeah, what we're counting on for the balance of this year is fee for service with some option value. So I think that was well said. In terms of the -- I can't remember the second question correctly.

Just on the risk management, risk management around some of your producer customers.

Yes. I mean if you think about - we are the service provider for the basin. So it's just a vast number of producer and customers. You think about phase 3 of the stuff we're building, we have over 30 customer of all sizes. I think if I was going to leave you with one message is that you know by far most of our customers are investment grade and those are of course they are the largest customers that account for most of our revenue and volume. And so of course it's foreseeable that some people will have trouble over the next little while. But really when we look at opportunities, we look at the value of the geology. And that stands the test of time even if the company that owns the geology might have too much debt for example. If the geology is good and is positive cash flow then the volumes will flow regardless of stretch balance sheet and we do a lot of work in our investment criteria to make sure that we caught a good geology behind our assets.

Okay. That's helpful. And then one final question if I may, a lot of producers obviously have been citing the outage issues on [Nova] being problematic for some of their production. Let's just work with a hypothetical and say we didn't have any of those problems and I was completely unconstrained. How do you think that would've affected your financials?

Yes. I mean we've been -- we haven't had time to go through, it runs fast, but if you just go through a few of the sales notes for the last couple days with the commentary from various producers, I think I aggregated something like 15,000 barrels a day that are potentially behind pipe and stock due to TransCanada's outages.

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

If I can just go back to the statements you’re making, Mick, just around propane. And if it recovers, you’ve got torque to the upside. I guess I’m just wondering, with the quarter itself, propane was sliding through the quarter. So I’m just wondering, I’m assuming there would have been some margin compression, and even possibly some actual physical losses. And if that’s the case, is it fair that even if propane levels out, despite being at very low levels, that you should still be better off, going forward?

Yeah, Rob I think that is propane levels though we can probably make a small margin probably something even similar to what we made in Q2, but I wouldn’t expect any sort of large uptake if propane prices remain flat.

So you were getting off in propane really quickly in Q2, as the price was sliding?

We had sales as we expected, but we still had a lot of inventory to choose from. So despite lower prices throughout the quarter still take a while to turn down your average costs.

So I guess what I was thinking, in the second quarter, you would have bought high and sold low, for at least for some of that inventory?

Yeah I’m not, I don’t have those specific factors in front of me but certainly the margin we were able to achieve on the propane we were still cash flow positive on propane in the quarter.

Okay. Just moving to acquisitions, and just to follow on that theme, you talked, Mick, about maybe something potentially starting to open up in the third and fourth quarter. And I’m just wondering, as lower for longer thinking starts to set in, does that cause you, though, to be even more patient, with respect to hopefully getting better value? Or even assets that you think might not have shook loose, that might become available?

That's the multi-million dollar question, maybe the billion dollar question I don’t know. But how this earning you want to be, if you see something in strategy and maybe you still have to pay up for you led that opportunity go and wait for something better. And that’s a very difficult question to answer. Was actually the subject of our board meeting yesterday? But we just have to take on a case-by-case basis. If we still realize that there’s a finest assets and particularly the ones that are solidly and strategy for us we’re still going to have to pay significant price for.

And if I can ask one last question, a little granular on the conventional system. OpEx was down CAD6 million sequentially versus Q1. You’ve added a lot of pipe, even looking year over year, and the cost increase, year-over-year, hasn’t been that much. So just wondering if you can comment on OpEx during the quarter? And how you see that playing out for the remainder of the year? And even in 2016, as we think about run rates?

Maybe I’ll handle that question Scott, taking into the numbers here. But let me just make an overarching comment. The main things that cause variances in our OpEx our power and the timing of our integrity work. And so power significant but if you think about our integrity work over the coming years. We are going to peak out at $150 million this year may be slightly higher next year. And then we see a dropping significantly over the next two or three years subsequent to that. And the reason is we’ve had to do most of our work before we pressured up the pipes on the older systems and then as we bring in the new systems, our new main lines of course that asset, those assets are pristine. And so we see a pretty significant drop in integrity kind of host 2016, a steady drop over the years beyond that. Scott you want to add something for the microanalysis?

Yes Rob, I mean, I think, I would just add the color which I think we’ve talk about in the past which is on a kind of quarter-by-quarter basis it does round up due to the timing of the CapEx spend, what I can say is that based on our current estimates, what we've seen year-to-date is slightly below what we would expect for the rest of the year.

Okay. And actually, Mick, just in terms of that significant drop in OpEx on the integrity work, as you get past 2016. Is that included in that 700 million to 1 billion of incremental EBITDA or is that additive, given that's really been work that's on the existing system?

The 700 to a 1 billion is largely related to brand new assets, RFS II, RFS III, Phase III, the Saturn plants , Musreau so most of that with new assets, so most of the integrity savings were projecting is from work on existing assets.

So additive to that number?

Yes, so think about it anything we’re powering up by Phase II, Phase I piece anymore powering up, we needed to spend a lot of money integrity and once we’re through that, which we’re close to through that then the integrity on the existing asset base the integrity cost, we expect to drop I mean, you can never predict things like weather and so you could have some surprises on the way, but definitely trending down.

Your next question comes from the line of Matthew Akman from Deutsche Bank. Your line is open.

Thanks guys. Good morning on Phase III. The regulatory processes delayed I guess a couple few months, but it looks like there was no change to the in-service timing of the big pipes is that right?

Yes, that's right, Matthew. I think until we've gone through that hearing we won't be in a position to put a little bit more precision on to that answer this date.

Are there things though that your planners are doing to try and compress construction once you get the permits?

We always anticipated hearing Matt, so this is our expect case, we had the hearing earlier we might have been able to accelerate, so we’re just back in the expected case.

Okay. Good just wanted to confirm that. Question on financing Scott is, you guys had a lot of success in the quarter on financing and with debt and in a conservative manner was term debt as well on the other hand there's a big CapEx program and then you've said at some point, you'll need some money externally on the equity side and pref [ph] markets are really cooperating, how are you seeing I guess the timing of that obviously you'd rather wait until some of the new projects come online are the rating agencies cooperate up on that front?

Yes I mean we talk to them quarterly, we meet with them every six months and so they're well aware of the plans and the timing of the cash flow spend so from that perspective, yes they're aware in terms of our funding plan. Again we're saying consistent with what we said in the past which is yes, we might need some external funding, but based on the current velocity of the spend we don't we don't necessarily expect to need that until kind of Q4, if not Q1 2016.

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

Thank you. Just further to your capital allocation decisions. Can you give an update on how you're looking at the dividend in a potentially lower for longer scenario? Thank you. And do you still see 46% dividend growth might you choose to be more conservative in that in a lower for longer scenario or retain more cash flows for acquisitions et cetera?

Linda, we still look at growing the dividend in concert with growing our fee-for-service business. Our objective is to have our payout track our fee-for-service and most importantly our long term take or pay, fee-for-services is our guide and when you think about us you know adding seven hundred million to a billion dollars mainly fee for service I think the upward mobility of our dividend remains intact. You know and then, to the extent, we make more money on our commodity business but we kind of view that as you know a way to pay down debt or or applied elsewhere. So the answer to your question is is we don't see you know any reason to change our guidance of you know 4-6% dividend growth and 8-10% cashflow for share growth over the next number of years. We wouldn't significantly reduce the dividend to fund a possible acquisition. I think we would find our positions in a different way.

OK that's helpful. And can you just maybe broaden your. L.P.G. egress strategy beyond export lines too. Is there any other real offloading that you're looking at in North America et Cetera.

You know we we're growing our rail fleet quite significantly. We're looking at all the downstream markets or propane whether they're export terminals rail access or even petrochemical use by third parties. So we're looking at all options. We're pleased to see what's happening in the Gulf with their growth in exports. Some of our competitors have announced locations that that's good news. I mean we need to find a home for propane and so all those things help contribute.

Okay thank you and just as a follow up on the on the propane and then GL front. Given that you're seeing more propane reduction in Western Canada is that maybe delaying on top of weak moderate prices. Any sort of filling up of your Phase 3 systems for the remaining incremental amount that's not contracted currently.

Those are they're kind of two different concepts. The current rejection that's the current year or next year, you got to remember pastries kind of mid seventeen. So people aren't making those kind of rejection decisions now based on you know that there's a timing difference there in your question.

Yeah I realize there's a timing difference but to the extent that we're in a lower for longer scenario, do you think that you know if rejection continues and if we are in a lower for longer scenario are you thinking any differently about the rate at which you can fill up the incremental outstanding kind of spot capacity on your Phase 3.

The answer to that question is simply yet it's going to take longer to say, for example, see the phase 3 expansion that people are building the shallowest cut plant that they possibly can. R. and D. L. build will be slower but I think I want to back up that question by saying you know our four hundred twenty thousand barrel a day expansion is practically old now and that's all ten year take or pay agreement so what you're talking about now I want to put in the context that its the timing of the expansion beyond that comes to mind.

[Operator instructions] Your next question comes from the line of Steven Patrick from First Energy. Your line is open.

Well thank you and good morning. Could you please comment on the factors affecting the propane market for that you think will affect the propane market in the second half of '15. First is Western Canadian propane negative right now because there is a shipping bottleneck and if so when do you believe that gets resolved.

You know I think people are building export capacity as quickly as possible. So I mean that we don't know exactly how that's going to unfold even but you know the cure for a few cures for propane prices one is slightly higher oil prices because they're they have a strong correlation and some normal weather. If we had you know a normal winter then you know things would certainly improve.

And when you say export capacity you're thinking of capacity to move propane out of western Canada.

No I mean continentally

Right. So Fred thank you. So with the overseas market. be there to support all the expert terminals in say another 100,000-200,000 wells a day experts offshore from North America.

No, I guess if an exported product is priced right and right now, the ARB would say it can be priced appropriately for this place out of volume so I would say, in today's world, the answer to that would be yes.

Okay. And is the overseas propane market driving the Mont Belvieu price in your opinion.

Not yet. Not in my opinion. But, I'm not an expert, Steven. But I just don't think the, my understanding is a lot of the Belvieu volumes are going to South America. They are not necessarily going too Far East currently. And, so I don't think its really making any difference to those markets. Do you have a view on that? Yeah, I tend to agree.

So you're saying that big markets are yet to be tapped from North America.

Again, I'm not an expert but that would be my understanding.

Okay. So that would be, if that were to be the case, that would be positive with the Panama canal opening, if the Far East is not being tapped out of North America. There is a potential for a lot of growth.

Well, again I'm on a precipice. I'm not an expert, but it remains uncertain. We've been told its uncertain as to how much propane would get through the Panama Canal. Number 1, capacity thing, and number 2, not necessarily the highest value goods that could pass through the Canal. And, not a perishable goods and so, it’s a matter of who can pay the most to go through there and we're not sure that its propane but I wanted to say I'm not an expert. That's what we've heard. Or just because the Panama Canal is opening up, doesn't necessarily mean Gulf Coast propane rushes through the Panama might still have to go around the Horn so its a next retainer, 10 or 15 cents, 10 cents a gallon or something like that or. Another way to say that is West Coast experts should there's a good chance West Coast exports still retain the shipping advantage.

[Operator instructions] And, we have no questions in queue at this time. I will turn the call back over to the presenters.

Thanks everyone and again, thanks for your continued support and everyone have a safe weekend.