Pembina Pipeline Corporation (PBA) Q3 2016 Earnings Report, Transcript and Summary

Good morning. My name is Sharon and I will be your conference operator today. At this time, I would like to welcome everyone to the Pembina Pipeline Corporation’s 2016 Third 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, Sharon. Good morning everyone and welcome to Pembina’s conference call and webcast to review our third quarter 2016 results. I’m Scott Burrows, Pembina’s Vice President, Finance and Chief Financial Officer. On the call with me today are Mick Dilger, Pembina’s President and Chief Executive Officer; Stu Taylor, Pembina's Senior Vice President NGL and Natural Gas Facilites and Paul Murphy, Pembina’s Senior Vice President and Pipelines and Crude Oil Facilities. Before passing the call over to Mick for a review of quarterly highlights, I’ll remind that some of the comments made today maybe forward-looking in nature and are based on Pembina’s current expectations, estimates, projections, risks and assumptions. Further, some of the information provided refers to non-GAAP measures. To learn more about these forward-looking statements, and non-GAAP measures, please see the company’s various financial reports, which are available at pembina.com and on both SEDAR and EDGAR. Actual results could differ materially from the forward-looking statements we may express or imply today. Over to you Mick.

Thanks Scott, good morning everyone. I wanted to quickly note a few of the successes, the third quarter brought for Pembina. Overall the real highlight for me is the great progress our constructions teams are making on growth projects, essentially all of which are trending on time and on budget or even better. In 2016, we expect to bring approximately $1.2 billion of projects into service. This leaves us with around $4 billion of projects to remaining to be brought into service in 2017. The vast majority will be completed around the middle of the year. Pembina’s largest Greenfield project to-date the $2.4 billion Phase III expansion is over 50% complete. The mechanical construction of our third fractionator at Redwater is 75% complete. Construction on a variety of terminalling and storage infrastructure in support of the North West Redwater’s plant refinery is 50% complete. Civil work associated with the Canadian Diluent Hub is 70% complete. Looking at our operations; our gas plant set a new revenue volume record of 894 million cubic feet per day, including physical volumes at the Musreau deep cut. Volumes reached over 1 billion cubic feet per day in gas services. But there a record level of construction activity underway, Pembina’s focus remains on executing safely and delivering the remainder of our secured growth projects on time and on budget. Nearly all of these projects are underpinned by long-term fee for service contracts and as such, we have a visibilities significant high quality cash flow growth. Coupled with the strong balance sheet and continued access to capital, Pembina is well positioned to continue driving long-term shareholder value. Scott back to you for our financial results.

Thanks Mick. Pembina continues to deliver improved financial and operational performance, nearly all business segments realizing higher revenue volumes in operating margins. Pembina generated adjusted EBITDA of $287 million in the third quarter, a 17% increase compared to $245 million in the same period last year. So far in 2016, Pembina generated adjusted EBITDA of $847 million a 19% increase over the $714 million in the first nine months of 2015. Increased quarterly and year-to-date results were driven by increased volume on Pembina’s conventional pipeline system, higher throughput within our gas services segment as well as the greater contribution from our NGL midstream business. Higher gross profits were partially offset by higher taxes, net finance cost and general and administration expenses, resulting in earnings of a $120 million or $0.25 per share in the third quarter of 2016. This compares to a $113 million or $0.29 per share for the same period last year. Earnings for the first nine months of 2016 were $335 million compared to $276 million or 21% higher than in comparable period in 2015. This increase was as a result of higher gross profits and lower taxes which was somewhat offset by higher net finance cost and general and administrative costs. Comparable periods in 2015 benefited from a gain on revaluation associated with Pembina’s convertible debentures of $30 million and $40 million respectively, were as the 2016 periods, we recognized a loss of $3 million and $32 million. Cash flow from operating activities increased to $247 million in the third quarter of 2016 compared to a $187 million in the same period last year. This was largely driven by increased operating margin and lower cash taxes paid. Year-to-date cash flow from operations increased to $791 million compared to $516 million in the same period of 2015. As a result of increased operating margin and lower cash taxes paid, as well as the reduction in non-cash versus capital. Adjusted cash flow from operating activities increased year-over-year mainly as a result of increased cash flow from operating activities, net of changes in non-cash working capital and reduced taxes paid. This increase was partially offset by additional preferred share dividends. In the third quarter, Pembina generated adjusted cash flow from operating activities of $250 million or $0.64 per share, this compares to $209 million or $0.60 per share in the same period last year. Pembina generated adjusted cash flow from operating activities of $694 million or a $1.80 per share for the first three quarters of 2016, compared to $598 million or $1.75 per share in the first nine months of 2015. Increased cash flow from operations and net of change in non-cash working capital, decreased tax expense and share based payments were offset by higher preferred share dividend. I’ll now review our business unit performance. In the third quarter, conventional pipelines saw a slight increase in quarterly revenue volumes of 643,000 barrels per day, a 7% increase compared to 600,000 barrels per day in the third quarter of 2015. Year-to-date revenue volumes were 654,000 barrels per day compared to 612,000 barrels per day, during the first nine months of last year. Revenue volumes grew as a result of the Phase II expansions completed in April and September of 2015, new connections that were placed into service an increased volumes on Vantage pipeline. Volumes trended slightly lower than prior quarters, as a result of our facility outages on both, the Pembina pipeline as well as third-party facilities and flooding in British Columbia. Operating margin within the conventional pipeline was a $121 million for the third quarter representing a 32% increase over the same period last. So far in 2016, operating margin within this business was $376 million compared to $292 million recorded for the comparable period in 2015. In gas services, revenue volumes for the third quarter were a record 894 million cubic feet per day compared to 690 million cubic feet per day in Q3 2015. Revenue volumes increased as a result of the acquisition of the Kakwa River facility as well as Saturn II and SEEP coming into service in August 2015. Operationally there were few challenges within this business including both scheduled and unscheduled outages at Resthaven and a fire incident at Saturn II which somewhat offset increased volumes for new assets. Resthaven was restarted July 24 and Saturn II on August 8. Since returning to service, both facilities have been operating very well. Operating margin within gas services increased by 33% to $52 million for the third quarter compared to $39 million in the third quarter of last year. On a year-to-date basis, operating margin increased 22% to $135 million compared to $111 million during the nine months ended September 30, 2015. So far in 2016, the estimated impact of the Resthaven and Saturn II outages is nearly $18 million. An insurance claim for the insurable portion of the Saturn outage is pending and is expected to cover $6 million of lost revenue across Pembina’s operations. In our oil sands and heavy oil business, we saw a modest increase in operating margin, as a result of the Horizon expansion which was partially offset by lower interruptible volumes on NEBC [ph] system. Operating margin for the third quarter was $36 million compared to $33 million in the third quarter of last year. For the first nine months of the year operating margin was comparable to the $103 million earned in the same period last year. In our midstream business operating margin for the third quarter of 2016 was $106 million compared to a $105 in the third quarter of 2015. Improvements in NGL midstream results were driven by the in service of RFS II and a more favorable NGL sales environment. On a quarterly basis, volumes increased by 25% while on a year-to-date basis they were up 19% compared to prior periods. These factors resulted in an operating margin of $77 million or 24% higher than a third quarter of 2016. For the first nine months of 2016, operating margin was $222 million compared to $171 million in the comparable period of 2015. Operating margin in crude oil midstream was lower as a result of the more challenging price environment, timing of storage revenue and tighter commodity margins. Third quarter operating margin was $29 million compared to $43 million for the third quarter of last year. For the first nine months of 2016 operating margin decreased to $116 million from a $133 million for the comparable period. Year-to-date results were impacted by the same factors as Q3. We continue to ensure our balance sheet remains strong during the period of elevated capital spending and are encouraged with our continued access to capital at attractive terms. In August, Pembina completed a $500 million tenure medium term note issuance with a coupon of 3.71% and as of November 3, our $2.5 billion credit facility was approximately $165 million drawn. Additionally as of September 30, our debt to trailing 12 month adjusted EBITDA was 3.4 times, making for one of the most conservative balance sheets in our peer group. Overall I'm pleased with the results Pembina has been able to generate while executing such a large scale capital program. All this hard work is setting up for an exciting 2017 as we commission numerous large scale growth projects and begin to realize the incremental cash flows. I will now pass the call over to Paul who will provide an update on growth projects within our condensate and crude oil value chain.

Thanks Scott. Starting off with our phase III expansion. Construction teams were hard at work on the number of key sections of the project. During the third quarter the pipeline between Montney and Kakwa was completed and we began construction on the Fox Creek to Namao portion. Working on this section is the largest portion on the Phase III expansion and will continue into 2017. We have successfully completed a numerous challenging river crossings including Peace, North Saskatchewan, Athabasca and Kiskatinaw rivers. The combined Phase III expansion project is over 50% complete and continues to trend on schedule and under budget for mid-2017 in service date. We are waiting final regulatory approval for our major Northeast British Columbia expansion. Once received, we expect construction will begin in the fourth quarter of this year. The project remains on track for late 2017 in service subject to receiving required regulatory approvals by year end. The Vantage Pipeline expansion was placed into service late in the quarter and we are pleased that was completed under budget. The projected added 80 kilometer lateral, the new connectivity and increased the system capacity to 68,000 barrels per day from the initial 40,000 barrels per day. At our Canadian Diluent Hub and Fort Saskatchewan, engineering and procurement are over 80% complete and civil work is 70% complete. Construction of the two 250,000 barrel tanks is about one-third complete. The project is targeted in service date of mid-2017 to align with the in-service date of the Phase III expansion and its trending under budget. I’ll now pass the call to Stuart to provide an update on the growth projects in our NGL value chain.

Thanks Paul and good morning everyone. Pembina’s $270 million Duvernay development program is advancing well. The Duvernay one have received all required regulatory approval. Site curating is complete, plumbing will be done by the end of the year and the produce is on track to be in service by the fourth quarter of 2017. Development in the Field Hub which was announced earlier this year is also progressing. Engineering at 35% complete and most of the major equipment has been ordered. Key regulatory applications have been submitted and subject to the receipt the Field Hub is expenses to be in service by the fourth quarter of 2017 as well. Redwater, all detailed engineering associated with our Phase III is complete and major equipment has arrived on site, overall mechanical construction is 75% complete and electrical construction is 25% complete. The project continues to trend on time and on budget for our Q3, 2017 startup. Construction is underway and support the terminalling infrastructure associated with the plant Northwest Redwater Sturgeon Refinery, with detailed engineering and procurement 85% complete. The project is tracking on-time and on budget and we expect to place the assets into service throughout 2017 beginning early in the year. Further through the detailed feasibility study associated with the Pembina’s proposed PDH PP facility is complete, with all key deliverables received. Pembina now partner Kuwait’s PIC are viewing the study findings and our expected to make a decision on proceeding to FID by the end of year. At which time we will provide an update to all stakeholders. Scott, back to you.

Thanks, Stu. We are very pleased with the financial results and volumes in our businesses and our outlook for the reminder of the year is positive. Furthermore 2017 is setting up to be an exciting year as we will enjoy a full year contribution from large scale assets such as RFS II, Kakwa River, Musreau III, horizon expansion amongst others. We are enthusiastic about the growth we will be bringing on stream over the next twelve months. Includes some of the projects put into service this year, we have clear line of site to adding $600 million to $950 million of EBITDA by 2018 providing visibility to near-term dividend and cash flow per share growth. As always we will continue to focus on our operating, growing our business in a safe reliable and cost effective manner. With that I’ll wrap things up. Sharon please go ahead and open the line for questions.

[Operator Instructions] Your first question comes from David Noseworthy from Macquarie. Your line is open.

Thank you very much and congratulation on the good quarter. Just starting with the recently completed PDH and PP facility study, are you still anticipating a capital cost of kind of 1.5 billion to 2.5 billion net to Pembina?

That is within our expected range, nothing has changed through that feasibility assessment.

Perfect. And then in terms of commercial contract actually take up a fee for service, what stage in this process do you think you will set that for the project or perhaps definitely how much do you anticipate spending before understanding whether or not this is a project you can invest in?

We continue to look at that and we’ve had a preliminary conversations with the variety of companies and individuals, it’s difficult to say how far we ramp that up until we proceed further along with the feeds assessment given review of our feasibility study. We’ve got some capital to spend to progress something but at the same time where we have been in conversations, it’s harder to predict how much money we’ll spend until we complete some of those conversations.

I think the reason we put out these the guard rails and our investment criteria, is getting a comfort, you know we’re going to stay within the guard rails on this back then and we’ll take up as much fee for service customer base as we need to stay comfortably within the guard rails.

Okay. Thanks for that color. Maybe just one last question on timing. Understanding with the FID decision is by year-end do you have any -- what’s your expectation to see things move along as expected for an FID decision?

We now the targeted FID is looking to be early 2018.

Okay. And maybe just one last question for Scott, just now seeing the tax refund that you received in the quarter, can you speak briefly about what your available CCA pools are and your expectation regarding cash taxes going forward?

Sure similar to our Q3 of last year and Q4 of last year where we filed our true ups after completing our year-end tax returns. We did have a current tax, so just to be clear that’s the current tax recovery not a cash tax recovery. But from that end, maybe what I’ll guide you towards is the fact that we expect to have a current tax expense somewhere in the neighborhood of $60 million to $65 million for this year and we would expect next year to be consistent with that just given the large scale capital projects that we’re bringing on as well as the CCA pool that are associated with them. But David I don’t have the number in front of me, but we have somewhere in the neighborhood of about a $0.5 billion in tax pools.

Perfect. Thank you very much. Appreciate the color and I’ll get back in the queue.

Thanks David.

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

Just further to some of your big capital allocation decisions that you’re going to be making over the next couple of years. How does your dividend policy and thoughts on that fit into that retaining capital maybe to finance some of these pending potential projects like the PDH or moving your payout ratio maybe as you complete some of your big projects next year or should we look to the historical trend of dividend growth to look forward?

So when it comes to the dividend, I mean I think the first principle it goes back again to a mix set of both the guard rails as we’d like to get that dividend to be below a 100% of our fee for service business. More comfortably in a kind of 90% to 100% of fee for service and then we’ll let the little commodity exposure that we have float in and it will be what it will be. In terms of in relation to the capital, remember most of this capital is all completed by the middle of next year. There is some obviously that goes through the end of next year but the vast majority of it is through the first half of next year and then the capital spending on some of the large scale facilities like the PDH, as Stu said an FID decisions early ’18 we won’t be spending heavy capital until 2019-20 if we decide to go ahead. So in his five minutes it’s not really a driving factor. So I think it goes back to the fee for service business, our starting point is likely the historical rate and then we’ll assess that in terms of any new projects we win or the current environment this time.

If everything unfolds we’ve guided we should be 90% of 80% after these projects come into service and it’s that would assume historic dividend increase, so that puts us kind of into early ’18 when we may or may not change the historic dividend growth rate depending on how many capital projects we have at that point but we’re kind of focused on get that’s the one guard rail that we’re not within just yet, but as Scott said with roughly $5 billion we bring in over the next year or so we intend to get that guard rail on side and then we’ll reassess the dividend growth rate after that period of time.

Thank you and just further to the front end loaded timing of your CapEx spend next year. Can you talk about the relative attractiveness of various financing options including how much kind of short term lending you might do to finance that CapEx versus kind of prefunding some of that through longer term capital?

Yeah right now, I said as of November 3 we only have a 130 or something drawn on our credit facility. If you watched our historical pattern we tended to carry no more than roughly a billion on that facility to leave flexibility. So we do have the capacity that go up to $2.5 billion, we would never do that Linda. We’re probably targeting somewhere in the neighborhood of a $500 million bond deal next year, which we talked a lot about. And the key point on the capital program is we will carry probably a little more on the credit facility than we have in the past as we go through the financing programs, only because then it provides us flexibility because as we move to the back end of ’17 and into ’18 any new projects will be generating significant free cash flow and then we’ll have auctions and one of the auctions will obviously be due to repay debt and we have a lot more flexibility for carrying it on our credit facility then redeeming on for notes.

That’s helpful thank you.

But I’d say some from our perspective other than our share price all other options of financing are attractive. We’ve seen preferred share rates come down, bond rates are attractive. So both of those are very attractive in the current market.

Great thank you.

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

Just going back to the petrochemical proposal. I’m just wondering on the feasibility study that you've done. I wondered if there is any other incremental surprises or maybe come out of it more optimistic on when you think about perhaps looking at the pricing for curve and not competitors not just within North America but also globally. Was there anything else incremental coming out of the that?

Nothing. This is Stuart, Ben. Nothing tremendously surprising obviously some fine tuning some details, recognizing its a dynamic market we're projecting long ways into the future at this point in time. The rule is changing, but I would say that we're fairly pleased and confirmed many of our initial expectations through the feasibility study.

I just add to that. The one thing that looks possible that we haven't seen in Alberta for a long time is, there is a possibility we can lump sum turnkey the project. And that something we haven't seen in major facilities before. I'm going to characterize as it's possible at this point and that something that wasn't apparent as a possibility to it when we started this thing out. So as we look at the way we can mitigate commodity exposure the way we can mitigate capital exposure and just the overall feasibility, what we’ve seen so far looks positive.

So when we say lump, is that more mandatory cost?

Yeah what that means is someone will construct that facility for us at a pretty agree to price. So we don’t -- if that were to come to pass I'm not saying it is but it would mean that someone would build that at a pre-agreed cost and hence forth ourselves and PIC would no longer take the capital cost stress.

Okay. And have you thought any change in sizing and partners?

We continue to evaluate and we have not considered any other partners at this point in time. And as part of the feasibility study we did evaluate two sizes and those are still our decisions to be finalized.

Okay. And just one quick clarification. The Phase III the portion that became in Q3, are you going to book fees on that or is that more of mid ‘17 with the some of your portion to?

That it will come into service on in mid-'17 because right now our pipelines that pipeline is full. So there is really can't put a whole lot more volume on there. So it's really just the pre-build, so it will be mid-2017.

Okay great. Thanks for taking my questions.

Thank you.

Next question comes from Jeremy Tonet from JP Morgan. Your line is open.

Good morning.

Good morning.

Just want to touch on crude oil operating margin in the midstream segment there. As you notice, stepped down a little bit quarter-over-quarter and year-over-year. And just curious as we look into 4Q here if you see that bouncing back towards where it was or is it kind of more of a run-rate for the near term?

Yeah Jeremy. So I think a little a little bit of a color there on this quarter versus last quarter. I mean last year with everything that is going on in Alberta there was a lot of volatility and there was some storage position that we're monetize, whereas in Q3 some of those positions kind of spilled over to Q4 and quite frankly some of those will spill over to Q1. And so, this was a weaker quarter than we're expecting. I don't think we expect Q4 to be back to kind of where we were last quarter or the quarter before that. But we don't think $29 million is the new run rate or somewhere in between we think.

That's helpful thanks. M&A seems like it's a kind a picked up a bit here both kind of asset level and corporate. And I was just wondering if you can provide any updated thoughts on how you view the landscape in especially with regards to the guard rails that you've outlined?

Yeah we see continued activity for sure, but just to take you through the way we think about that. When we exploit our asset base that's clearly where we have the highest return, so that's always our first priority. And looking for example to see if there is an opportunity to add the pump stations to the Fox to Namao portion sometime in ‘18 or ‘19, that would be a very accretive project for us. So those are the kinds of things we’re looking at first. Second, Greenfield, Duvernay one is a great example of our Tier 2 priorities in terms of growing the business. Generally those returns are slightly less favorable than Brownfield, but still very attractive. And then third would be loose asset acquisitions like Kakwa River, again solid returns building new platforms growing the breath of our businesses and then lastly would be corporate. Clearly our peers are trading well and so that would be kind of a last place we’re looking. But we’re always looking in all those areas. I do concur it does seem like there is more M&A opportunity and we are looking at all those opportunities.

Great, thanks. And then just one last one if I could, maybe on the PDH and PPE projects as you’ve been discussing on the call, if you could just refresh us as far as your thoughts on the competitive stack up there versus some of the other alternatives that might be looking to come to market as well?

You mean, how does that opportunity compared to like M&A, is that your question?

Yeah, as far as that, your offering versus others that might have similar offerings might be looking to build as well. Just wondering if you could refresh us on how you think your stacks versus other offerings out there, other potentials competing project?

Absolutely sure. Our preference obviously would be the only one project go ahead, but we’ve always modeled can going ahead. I mean, we came into this with knowing a competitive project without there and so our modeling in terms of market size and things like that. That’s always been our base assumption. But we’re only one project to go ahead that would clearly be better but we've always assume to go ahead in all of our analysis. Stuart , do you have anything to add to that.

No, I mean I agreed with Mick has stated, and point out that, we have the ability to -- we have the supply to fill our entire facility, where we have the connectivity to access all of the fractionators, eventually all the fractionators in the Fort Saskatchewan area to ensure that you know, we have multiple sources of supply to feed the facility on a go-forward basis. We think we have a great site, selected an opportunity with all the interconnectivity that we need to be successful in a large way.

That’s helpful. That’s it from me. Thank you very much.

Your next question comes from Rob Hope from Scotia Bank. Your line is open.

Just maybe a question on the volume outlook for the Phase III expansion, just want to get your thoughts on I guess the balancing impacts of less drilling activity offset by the fact that we’re seeing increasingly high [indiscernible] on some of these new wells for the Montney?

Yeah those things are clearly offsetting, just a reminder that Phase III expansion is fully contracted right now, where the physical volumes will come in as a topic of the discussion around here all the time. Clearly some producers are moving forward less quickly, but we know, you know we see producers like 7G [ph] that are surprising us the other way. So you know as we look that project coming in mid-2017, I'm going to take a gas that will be somewhere around take or pay levels as we start and that’s well within the range of the 600 to 950. And then you over the successive number of quarters or maybe 4 to 8 quarters that you know will be in excess of that, that take or pay. That’s our current crystal ball that as you can appreciate with 40 customers all doing different things it's pretty hard to pretty hard to engage.

No, that’s helpful, and maybe just to follow-up on that same topic. If a, If one producer is going to exceed their take or pay levels, would they be talking to you for incremental contracts, or they potentially be discussing and assignment through add some volumes from a producer that weren’t see less volumes.

Both options are available to the shippers, lot would depend on where the volumes are and where the relative contract the sequence are but, all options are open to the shippers.

Just think about modeling it, if someone is in excess of their take or pay, you know they have got to pay us the greater of the take or pay or the physical and that doesn’t get offset by another customer who is under the take or pay. So when you think about it, it’s pretty hard to imagine us being lower than our take or pay because some people are going to exceed. And for sure Pembina overtime is trying to facilitate the transactions between people who need more capacity above their firm to people who don’t envision needing all their capacity, because we don’t want to have people paying take or pay and while other were asking other people that contract more of that wouldn’t be what we would view as the high level of service. So we’re trying to match make and we have had some success in that area but when you run your model you got to realize some people are going to be over their take or pay and we will get paid for those excess volumes.

Alright that’s helpful. Thank you.

Your next question comes from Robert Catellier from CIBC World Markets. Your line is open.

Believe it or not, I still have a question on the PDH facility. So I’ll start with the first one here, so what really has to happen at this point for that to go to pre FID study?

So Robert that we’re just as an appreciate the key deliverables are pouring in this week. They’re being compiled and the processes to go through the entire package to review by both ourselves and PIC and once compiled and recommendations to take before both for us.

Okay and then just on the China’s carbon price plan was that part of your prior studies and what impact do you think that has on the project?

So it is been included in our economic evaluation, we have putting some levy for carbon obviously it’s a negative to the economics. We’re doing everything we can and you can appreciate from an environmental and emission perspective to reduce that. The facility is largely self-contained and self-generating in power, we do have one of the proposals to put a cogen on site, that will have some emissions but at the same time we see there’s a benefit from a power perspective to proceed that way. We value it’s in the economics it is a negative at this point, we’re doing everything we can to minimize that impact.

But just to put in one sense. What we’ve seen so far we’re pleased with. We have a partner and we can’t run their thinking and we still have some deliverables rolling in and we have a board meeting set on December 16 and we are working towards that.

Understood and then the next question I’ll make on make if you got a lump sum turnkey contract that you could live with and you’ve effectively transferred some capital risk, does that change your appetite for assuming commodity price risk on the project given that might imply that your total risk isn’t all that much different on the returns?

That was the first thing the BD guys asked me.

Thanks Rob.

It’s a guard rail analysis. Our straw dog is that Pembina lays off half of its half in terms of commodity risk and we’re in discussions with some producers that would seem to be excited about taking on half of that half i.e. we would use there propane barrels and they would pay us a fee and we would give them back polypropylene there also, so that’s straw dog is out there. But it’s a guard rail analysis and of course you can appreciate if we for example we’re to build the smaller facility and turnkey that it would change the number billing to dollars off the price and henceforth our risk would be lower and it could give us more capacity that to take on commodity and price risk that doesn’t mean we want to do it because we are a company that does want to have a high degree of fee for service and we’re also a company that has proprietary propane barrels that we can use in other projects so we don’t necessarily want to use up our non-fee for service room all for one project we'd rather see it diversified across the number of projects and the number of commodities to even diversify the small exposure we will have to commodity risk.

Okay, that's very helpful color. Thank you. And just on the Phase III, I guess I shouldn't be surprise given Pembina's history of putting projects into service on time on budget. But Phase III you did have some like I guess you called them regulatory snafu's [ph] against at the front end and the weather does it look like it's all been all that conducive to building up the project. You’re still on trap on budget so just maybe little bit of color there and your comfort level with have any service date?

Yeah the weather we've had actually we looked and I think the last 5 months have been somewhere between 120% and 200% of normal precipitation. And it's creating challenging circumstances right now. But Pembina still believes we can bring that project in on time and under budget. But clearly the weather is a drag on cost, maybe we won't be as under budget as we had hope but we're still trending on time and under budget. And you're right some of the time compression is a result of some of the regulatory items we've had to go through. But I can also say we're having constructive discussions with the one party that we had some issues with. And we think we can end up in a very good place with all communities along the right away.

And just a little more color on the construction side. We're working with our contractors. I mean I guess we're benefiting from the fact there is not a lot of other pipeline projects or the problems that are the size and diameter. So there is equipment around and we just have to double up on the equipment so it’s available and in the midst of negotiating with our contractors and it's going well.

Alright still good availability mix up for perhaps offset the productivity. Thanks for taking my questions.

Thanks.

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

Just coming back to midstream here, wondering if you can comment on how the NGL marketing environment is shaping up into this winter relative to last year. Maybe both on Western Canada and Ontario. And then also maybe just as a quick update on any changes to your fracs spread hedging position relative to last year as well?

Sure. So I think from an overall NGL perspective. I mean if you look at inventory levels, certainly the Canadian inventory levels are in decent shape kind of add as around historical five year averages. So I think the West is slightly below the East is slightly above. So from an inventory perspective in Canada we're setting up nicely. From a North American perspective, I think the U.S. inventories have now as if this week moved slightly below last year which is was an all-time high. So we're back within that five year inventory range all be at the high end of that and you've seen that reflected in the propane price which is continue to in shop over the last couple of months. So we do think its setting up to be a decent winter pattern. Now how much of that come to fruition will depend on the weather which we'll wait to see. But certainly we feel like we're in a better position going into this winter than we did last winter. That being said, we have put on incremental propane hedges compared to where we were last year. So we have about I'm going to call it 75% of our frac exposed barrels hedged going into the winter. Looking forward, you can expect as we grow and our frac spread exposure say as a percentage of EBITDA drops from was 20% in 2014 or slightly higher. We expect to be with our commodity price first of all somewhere in the 1% to 2% by 2018. The need for us to hedge through a peak debt cycle and through a peak construction cycle. The need for and with the hedge is diminishing and so we are thinking about having no hedges in the 2018 timeframe. But that remains to be seen but I think you can expect the hedging activity to diminish as the company grows out of its commodity exposure over the next 12 to 18 months.

That’s great. Thanks for that and then I guess I got to get it on the PDH discussion here. So, I apologize if you already touched on this but if you could just, can maybe confirm the guard rails with respects to contract duration?

Well, that’s so we’re now a way out in the branch here. So, first we have to decide how much of that project will be fee for service and how much will be non fee for service, we haven’t taken that decision I have thrown out a straw dog, but if you observe Pembina over the last number of years, 10 years is always a good number, a lot of our contract are around 10 years that so that might be a good working as option for you to model. Long way to go before we decide that.

Okay. Thanks a lot. And then just lastly I know it’s a small part of the overall business but just on the Western pipeline system, I mean is the outlook for this pipe change it all, the TMX expansion doesn’t perhaps come on line one day?

I don’t think so, the southern portion where suspending at this time. When the northern portion were talking to our single customer about what’s happening next. The overall that pipe doesn’t really impact Pembina very much and we obviously need customers to run it and there are no customers in southern end and if that would change, historically we could restarted just takes a lot of effort and lot of capital to keep that in as new condition which is our standard. Paul do you have anything to ask.

No.

Alright, great. Thank you very much guys.

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

[indiscernible] on the topic a day. You commented that on the PDH PP side that you have a preference on to your head. I guess I’m just wondering do you have any updated thoughts on the potential to combined the project, it seems a little instrumental the beginning given you have a different setup them only being PDH and then tracking to enough ID by the end of this year but now that they are looking at an integrated PDH PP unit and have pushed with their commentary on FID up to mid next year you’re at least a little bit closer is to what you are think on timing so. How do you think about your willingness in the potential try to [indiscernible]?

If that made sense, we consider everything that makes sense Robert and right now our project with our partner and the economics we are seeing and the risk profile we are seeing make sense whether or not another project were to proceed but if at some time that would change and it would make sense to combine project. We’ll do what makes sense.

Okay. So, there is nothing structural even as you think about how much propane you are going to be getting coming off of Redwater when RFS III is built?

The PDH, we like the project based on what we see so far but it’s not the only thing we’re pursuing. I know it’s been a long time but we have never given up on exports, we haven’t given an up now and that our business and to create higher net backs core producers for propane and we’re going to look at all opportunities to do that.

Okay. And if I can just finish on the pipeline side of things, you know we have seen some good data points side of money producers and particular. Just wondering if you had a directional change and you talked a little bit about trying to swap people barrels around but any directional change and kind of thoughts over say the medium to longer-term about the need for new capacity. And I guess where I'm going is you've got the low cost solution for additional capacity for producers. But how do you think about balancing the high return from just taking on new contracts under the existing capacity versus trying to convey some of that cost to advantage to your customer so that you can build the next wave just keep that advantage going.

Yeah, we are looking at our total structure particularly at the very far end of our pipeline. If we can bring on bunch of volumes and do phase for and power it up. I think we have the opportunity to look at totals on the far end of our pipeline for our best customers. And we're going through that exercise right now. Because as long as we make more money we're happy if the producers make more money and we realized way up and the far reaches of our systems it is expensive. And if we can bring volumes on there and capture economies to scale it's always been our way of doing business to share some of that with producer. So we've got the pipeline guys looking at what the possibilities are with this very accretive expansion.

Okay that’s great thank you.

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

Good morning. I'm not going to ask a PDH question. But maybe this one is to Stu and it's more about based on how you guys think about just help of the basin and then obviously some points have been really robust. But when you step back and think about just the pipeline competition that's emerging. And then obviously we have seen some producers like Seven Gen be very proactive and securing capacity on NGPL deal not that long ago. But how do you think about just how the pipeline dynamic on the net gas side really impacts your business on a longer term basis?

So there are things that are transpiring. The gas price today is I think it's okay. I think the most cost effective producers are covering cash cost and making a little bit of money, the margins are there. Obviously some of the regulatory and maybe pipeline discussions that are taking place that would see a lower toll and access to some markets potentially access to markets through those pipelines would be beneficial. We need to we’re gas basin we need to have a gas solution for continuing development. Having said that the opportunity and some of the pricing and the advantage and the lot of the economics is driven being driven by some of the liquid components of the gas stream. And we're seeing people coming and basically drill for those liquids the gas is there in a small rate and they're focus on a liquid recovery. And so the gas is not the biggest driver. And but again we're excited about our price today, we’re excited about future access at economic rates to markets and any gas benefit that the bridge will get does lead to more products being delivered into the pipelines and more facilities meaning to be constructed to move those products.

That's helpful. So may do you for see a situation where tolls come down a greater market assets are secured on the gas side and that's those on even more development than you have anticipated.

That's our view, yes.

Okay very helpful. Thank you.

Next question comes from Brent Watson from Cormark Securities. Your line is open.

Hi thanks. I wonder if you could make a quick comment about cost environment specifically as it pertains to labor, and if you were to restart Phase II or a Phase III project today. What would the cost estimate look like?

It wouldn't be vastly different, I mean we it wasn't very long ago actually that we in last six months we really settled on pricing on track. So we've refreshed from the time that we announced this project we actually had at least one maybe two cost refreshes. And so there wouldn't be in my opinion anyway a real change if we did it today.

Thanks great.

And we have no further questions at this time.

Well thanks everybody for your continued interest and support. Capital programs going well, we do have we're really busy actually most people might not expect it, but our teams are flat out on all kinds of different projects it's exciting place to be and we expect to deliver on the promises that we put out there. So thanks a lot and a have a great weekend.

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