Pembina Pipeline Corp (PBA) 2014 Q2 法說會逐字稿

Good morning, my name is Jeremy and I will be your conference operator today. At this time, I would like to welcome everyone to the Pembina Pipeline Corporation 2014 second-quarter results conference call. (Operator Instructions). I would now like to turn the call over to Senior Vice President and Chief Financial Officer, Mr. Peter Robertson. Please go ahead.

Thank you, Jeremy. Good morning, everyone and welcome to Pembina's conference call and webcast to review our second-quarter 2014 results. I am Peter Robertson, Senior Vice President and Chief Financial Officer. Joining me today on the call are Mick Dilger, President and Chief Executive Officer and Scott Burrows, Vice President of Capital Markets.

This morning, I will start the call off by reviewing our second-quarter results that we released on Friday after markets closed. Mick will then provide an update on Pembina's growth projects and strategy, including our third fractionator that we announced in May. Following that, I will discuss our financial position, then turn the call back to Mick once again for closing comments before finally opening up the line for questions.

I'd like to remind you that some of our comments made today may be forward-looking in nature and are based on Pembina's current expectations, estimates, projections, risks and assumptions. I must also point out that some of the information provided refers to non-GAAP and additional GAAP measures. To learn more about these forward-looking statements, non-GAAP and additional GAAP measures, please see Pembina's various financial reports, which are available at Pembina.com and on both SEDAR and EDGAR. Actual results could differ materially from the forward-looking statements we may express or imply today.

I am pleased to report that both our financial and operating performance during the second quarter and first half of 2014 were very strong. Given our positive first and second quarters, we are off to a great start to the year. In general, higher propane prices, which benefited our midstream business, as well as growing customer activity in our operating areas, combined with the completion of our Saturn I facility and Phase I expansions in October and December of last year drove our improved results. These factors contributed to a 27% increase in EBITDA, which grew to CAD235 million in the second quarter from CAD185 million in the same period last year.

Year-to-date EBITDA has increased by over 39% to CAD551 million compared with CAD396 million for the same period last year. Cash flow from operating activities also saw a small increase to CAD155 million during the second quarter from CAD151 million for the same quarter last year. This increase was primarily due to improved operating results and a larger decrease in noncash working capital during the 2014 period than in the second quarter of 2013.

For the first half of 2014, cash flow from operating activities was CAD416 million or CAD1.30 per common share, compared to CAD383 million or CAD1.27 for the same period last year. The year-to-date increase was primarily due to improved operating activities and a decrease in noncash working capital in 2014 compared with a slight increase in 2013.

Adjusted cash flow from operating activities increased over 27% to CAD191 million during the second quarter from CAD150 million for the same quarter last year. On a per-share basis, adjusted cash flow from operating activities grew over 20%. This increase was mainly due to higher cash flow from operating despite increased current taxes, share-based payment expenses and preferred dividends declared.

For the first six months of the year, adjusted cash flow from operating activities was CAD455 million compared with CAD352 million for the same period last year. Our positive financial performance was supported by the strong results generated by our businesses for the second quarter and the first six months of the year.

For our conventional pipeline business, average throughput during the second quarter increased by over 18% to 573,000 barrels per day compared to the second quarter last year with peak day volumes reaching over 599,000 barrels per day. For the first six months of the year, average throughput increased by 15% compared with the first six months of 2013. Increased throughput is mainly a result of the Phase I expansions being placed into service in December 2013, as well as higher truck terminal volumes and additional throughput from new connections. Volumes from the Saturn I facility also contributed to the increased throughput.

Higher volumes in the second quarter drove revenue up by almost 21% to CAD122 million from CAD101 million in the same quarter last year. On a year-to-date basis, revenue grew by over 21% to CAD239 million in the first half of 2014 from CAD197 million for the first half of 2013. This revenue jump was due to increased volumes for the same reasons I previously noted, along with higher tolls.

Offsetting higher revenue and conventional pipelines were operating costs, which increased by approximately 16% and 15% during the second quarter and first six months of the year respectively compared to the same periods last year. This was mainly because of higher costs related to pipeline integrity, environmental and safety matters, as well as increased expenses associated with the Phase I expansions and new facilities. As a result, operating margin conventional pipeline saw increases of 18% for the second quarter and 22% for the first half of 2014 compared to the previous year.

Our oil sands and heavy oil business generated improved results for the first half of 2014 compared to the same period in 2013. This was largely due to higher volumes on the Nipisi pipeline resulting from a pump station that was placed into service in the second quarter of 2013. The operating margin increased by almost 5% for the first six months of the year compared to the previous year.

Looking at the second quarter of 2014 compared to the second quarter of 2013, operating margin in the business was essentially flat due to lower flow-through operating costs. Guest services increased average processing volumes by 80% to 522 million cubic feet per day compared to the second quarter of last year. Peak day volumes during the second quarter reached 582 million cubic feet per day. On a year-to-date basis, volumes have increased 78% compared to the first half of last year. These increases were largely a result of bringing our Saturn I facility onstream in late 2013, which operated above its nameplate capacity of 200 million cubic feet per day during the second quarter and first half of 2014.

Placing Saturn I into service and the associated new volumes, higher throughput at the Cutbank Complex and improved facility reliability, particularly at the Musreau deep cut facility, drove a 39% increase in revenue during the second quarter and 45% for the first half of 2014 compared to the same periods in 2013.

Offsetting revenue increases were higher operating expenses, which were largely associated with Saturn I being placed into service, as well as higher volumes at the Cutbank Complex, including turnaround costs at the Cutbank gas plant. The turnaround costs occurred in the first two weeks of June and the expenses have flowed through to customers. Overall, operating margin in gas services increased by 53% for the second quarter and first half of the year compared to the same periods last year.

Midstream also continued to deliver impressive results. Our NGL-related operating margin increased over 22% and NGL sales volumes increased by almost 12% in the second quarter of 2014 compared to the same period last year. Factors benefiting the second-quarter results included better propane pricing at Empress East, as well as higher fee-for-service storage revenue related to two caverns at Redwater West that went into service during the second and third quarter of last year. Year-to-date NGL sales volumes increased by 10% and operating margin jumped almost 58%. A significantly stronger year-over-year propane market during the first several months of the year, combined with higher production rates at both our Redwater and Empress facilities helped drive the strong results in the first half of the year.

Operating margin generated by our crude oil-related midstream activities grew over 86% during the second quarter and by 48% for the first half of the year due to higher volumes and wider margins, expansion of the condensate-related services, crude oil unit train-loading and increased volumes at our full-service truck terminals. Increased storage opportunities that materialized in the first quarter of the year also benefited our year-to-date results. Thus far, we are very happy with the financial and operating results that we were able to produce in 2014. I will now turn the call over to Mick Dilger, who will give an update on how we are progressing with our growth projects and plans.

Thanks, Peter and good morning. Before I begin my update on our growth projects, I want to highlight our previously announced successes in the second quarter. Not only did we secure CAD460 million in new capital projects, we also increased our dividend by 3.6%, which is supported by our continued growth and sustainable cash flows and both the completion of our Phase I expansions in our conventional pipeline business and the startup of our Saturn I facility. The dividend increase was announced with our first-quarter results in May of this year.

I also want to mention that 2014 is really an execution year for Pembina. We have a substantial growth profile ahead of us and a significant number of projects currently under construction or coming onstream this year. With that in mind, it is important that we remain focused on reaching our targets and maintaining our budgets in order to accomplish our goals.

Even more vital to our future success will be ensuring that our work is done safely. I can't stress enough how important the safety of our employees, contractors and the general public is to me and Pembina as a company. As you saw in our news release, I am very proud to share that so far this year across all our operations Pembina has had zero recordable lost time injuries. We have also logged over 100,000 man hours at our RFS II project without any incidents. That is an incredible accomplishment. For anyone who has been at the site, they know that there is a huge amount of work being undertaken. This will not be a small facility. Our project team is doing a great job of progressing the facility with safety as a top priority.

I will now move on to our growth projects starting with our first midstream business. As mentioned on May 12, 2014, we announced having secured an additional CAD460 million in new capital projects, which includes RFS III, our new 55,000 barrel per day propane plus fractionator at our existing Redwater complex. RFS III is underpinned by long-term take-or-pay contracts with multiple producers and is expected to cost approximately CAD400 million, including associated caverns and the capital for RFS III prebuild as previously announced in July 2013.

The facility will be our third fractionator at the Redwater complex and will leverage the design and engineering work completed for Pembina's first and second fractionators, RFS I and RFS II. I am pleased to report that we secured additional volume commitments for the majority of the remaining capacity that was available at RFS III this past week.

With the addition of RFS III, our fractionation capacity will total 210,000 barrels per day. This will almost triple our capacity and make our Redwater complex the largest fractionation facility in Canada. Subject to regulatory and environmental approvals, we expect RFS III to be in service in the third quarter of 2017. Again, project announcements such as these continue to demonstrate the value of our integrated strategy and our ability to leverage off our existing assets.

As I alluded to a few minutes ago, construction is continuing to progress at our previously announced CAD450 million, 73,000 barrel per day fractionation facility, RFS II. Long lead equipment purchasing is substantially complete with all major items expected to be delivered to the site by the end of the third quarter in 2014. The mechanical contractor mobilized to the site at the start of 2014 and the structural steel piping are currently being installed. The project is tracking on schedule and is expected to be onstream late in the fourth quarter of 2015.

On June 16, 2014, we placed our new full-service terminal at Cynthia, Alberta into service. The terminal will help bring additional crude oil volumes onto our pipeline systems. This is the first facility like this that Pembina constructed and will now operate on a standalone basis as our other FSTs are under joint venture arrangements. At our Edmonton terminal, we have progressed our detailed engineering and began construction with a view of bringing an additional 540,000 barrels of aboveground storage tanks into service mid-2016.

In our conventional pipeline business, we are undertaking considerable expansions. I will focus on a few main details contained in our second-quarter report. In conjunction with building RFS III, as previously discussed, we also announced plans to construct two new pipeline laterals into the Willesden Green area in south central Alberta, underpinned by long-term take-or-pay contracts at an estimated cost of approximately CAD60 million.

One portion of the project entails installing a new high vapor pressure pipeline that will connect our Brazeau pipeline with our conventional pipeline business and will be capable of transporting ethane plus natural gas liquids into the Fort Saskatchewan area. The other portion involves installing a new low vapor pressure pipeline that will be tied into Pembina's Drayton Valley system and will deliver condensate into the Edmonton market. Subject to regulatory and environmental approval, Pembina expects both laterals will be in service by mid-2015.

For the crude oil and condensate portion of our Phase II expansions, we expect the project to be mechanically complete late in 2014 and commissioned in early 2015 and subject to regulatory approval, we expect the NGL component of the project to be in service in mid-2015. Our previously announced project to expand capacity between Simonette and Fox Creek, Alberta is now complete and was placed into service on August 6.

We are also making progress on our early announced plans to increase our presence in the Edson, Alberta area. We are expecting to spend around CAD100 million to build out an NGL system, which will consist of a new dedicated pipeline for NGL from Edson to Fox Creek and transitioning an existing pipeline into dedicated condensate service from Edson to Windfall, as well as an NGL and condensate truck terminal near Edson.

The estimated capital includes approximately CAD23 million associated with the pipeline acquisition announced in November 2013. This is another great example of our ability to use and repurpose existing assets to find solutions for customers. Having segregated pipelines for NGL and condensate allows for better operational efficiency and will help producers in the area better move their product to market.

The NGL pipeline will have a capacity up to 50,000 barrels per day and when combined with the existing pipeline, Pembina will be able to deliver dedicated condensate and propane plus services out of the Edson area. Subject to regulatory approval, we expect to bring the NGL pipeline into service and transition the other pipeline into segregated condensate service in early 2016 and the truck terminal into service in late 2016. Volumes aggregated from these pipelines and the truck terminal will access capacity on Pembina's Phase III expansion from Fox Creek into Edmonton, Alberta.

We also continue to work diligently on our Phase III expansion. Stakeholder consultation is ongoing and we anticipate filing regulatory applications for the projects later in the third quarter this year, which should allow us to stay on track for late 2016 and mid-2017 in-service dates. During the second quarter, we secured an additional commitment of approximately 20,000 barrels per day of capacity under a long-term contract. Any further commitments made will support increasing the design capacity, as well we will be making our final decision on pipeline size over the next few months in order to secure long lead equipment orders.

Turning to gas services, construction of the Resthaven, Musreau II and Saturn II gas plants is advancing well. The Resthaven facility is tracking on scheduled for third-quarter startup with precommissioning activities progressing and 90% of site construction complete to date. The Musreau II and Saturn II facilities are also tracking on schedule and are expected to be onstream in the first quarter of 2015 and late 2015 respectively. With these three facilities in service by the end of 2015, we expect our net processing capacity to reach approximately 1.2 billion cubic feet per day.

Oil sands and heavy oil, we are continuing to move forward with work related to the potential Cornerstone pipeline project under an engineering support agreement with Statoil. We are still waiting for their final investment decision on the upstream oil sands development, which the pipeline would support. But regarding the work we are doing, the regulatory application will be ready to submit in the fourth quarter of this year. Accordingly, we are still on schedule to bring the pipeline into service in conjunction with an upstream development subject to project sanctioning and regulatory approvals.

I will also mention that work on the potential propane export terminal has not stopped. This is proceeding slower than we originally expected. So at this time, we don't have anything new to report. We continue to see this type of project as a great addition to our growth portfolio and we have internal resources dedicated to advancing it.

Overall, I am very happy with the progress we are making on executing on our growth plans. A substantial amount of work and effort has got us to where we are happy today and I'd like to commend Pembina's employees and contractors for doing such a great job of safely and responsibly moving these projects forward. With approximately CAD1 billion of assets under construction, I am pleased to report that we are on time and on budget. We are continuing to work towards reaching the CAD1.7 billion capital expenditure target planned for 2014, but want to note that some of the project spending profiles are shifting and so there is a potential that a portion of this spending may be reallocated to 2015. I will now pass the call back to Peter to give an update on our finances.

Thank you, Mick. We continue to remain focused on maintaining the financial strength and flexibility to execute on our robust growth plans that we have ahead of us. So far this year, we have had two successful financings. On January 16, we closed our third preferred share offering for gross proceeds of CAD250 million and in April, we issued CAD600 million in 30-year notes. At the end of the second quarter, we had approximately CAD300 million in cash and our CAD1.5 billion credit facility is completely undrawn. Combined with strong participation in our DRIP program, Pembina remains well-positioned to continue to fund our growth initiatives moving forward.

Thanks, Peter. In summary, 2014 is shaping up to be another successful year for Pembina. Our financial and operating performance for the second quarter and first six months of 2014 has been very positive. Given our solid cash flows produced from our expanding operating activities, combined with our attractive growth profile, we are in a great position to continue generating attractive returns and providing long-term value for Pembina shareholders well into the future. With that, we can start the Q&A. Operator, please go ahead and open up the line for questions.

(Operator Instructions). Robert Catellier, JMP Securities.

Good morning. Thanks for taking my question. I was just curious on the Cornerstone pipeline. It seems like the wording has changed a little bit with respect to the in-service date. I think previously you had third quarter 2017 and now you are discussing in conjunction with the in-service date for the upstream project. So does that mean that Pembina is willing to take some of the timing risk associated with the upstream project?

No, it simply refers to that the final investment decision timing we've been informed by Statoil will be in October and so we are not going to issue the regulatory application until FID. It doesn't refer to anything in terms of assuming timing risk.

Okay. And then just on Phase III, I want to make sure I understand the commentary. You secured some additional commitments, but it sounds like any other commitments might cause you to need to upsize the pipe. So maybe can you give us a sense on the timing as to when you are going to order that long leadtime equipment and if you are still on track for regulatory apps to be filed on third quarter?

So we are on track for regulatory applications. You may recall we did, in terms of our regulatory applications, we are running with two pipelines between Fox Creek and Edmonton area. We still expect some additional incremental volumes between now and the end of the year. Originally, we expected to need to make our final pipeline sizing decision in the August/September timeframe and now with further due diligence, we know we have the luxury to push that decision out until a little later in the year. Our hope remains that we get enough volume for two pipelines there, but keep in mind that our existing pipeline fully powered still has almost 200,000 barrels a day of incremental capacity. So it would have to be a significant stepup between now and the end of the year to justify that second pipe, but that remains our hope.

Okay. And then I just want to elaborate on Peter's comments on the shift of timing in CapEx. As you probably are aware, some of your peer group hasn't fared quite as well on the project execution side as Pembina has, so the risk of maybe reallocating some of the CapEx to 2015, is there any risk to slippage in some of the in-service dates?

Currently, we believe we are trending on time and on budget and that the capital spend delay was simply weather-induced and we will be catching up in terms of our activity. That being said, our CapEx just between the time of commitment and the time of outflow is taking a little bit longer.

Okay. I mean weather-induced implies a little bit that there is an impact on schedule, but, at this point, you are saying there is nothing notable that is of significance?

There is nothing at all, not even anything small that we see right now that would take us to trend away from being on time and on budget, so nothing whatsoever to make us believe that.

Okay, thank you.

David Noseworthy, CIBC.

Thank you and good morning. Congratulations on a great quarter.

Thank you.

First, just wanted to talk a bit about your midstream and can you give us an idea of the operating margin that was shifted from NGL midstream to crude oil midstream as a result of the consolidation of the condensate-related services?

David, I am not going to break it down into that level of detail, but what I will tell you is that when you look at kind of the new services, whether it is crude by rail, storage or additional FST or the condensate business, that equated to about 40% of the increase over the previous quarter.

Okay. That's helpful. That might answer a couple of my questions then. Yes, actually that helps a lot. Okay, then I guess the other question I had was, with respect to your crude by rail activity, is what we've seen then in the last -- like you have had kind of three quarters now of that, have you hit a run rate where you feel comfortable with that and kind of where do you see those volumes and those cash flows going looking forward?

We couldn't hear the very front end of your question. Could you please repeat it?

Oh, sorry. Yes so, you have had about three quarters now of operation of your crude by rail unit train-loading facility. I was just wondering now that you have that under your belt what are you seeing -- have you hit a run rate? Are you still kind of ramping up in terms of volumes and cash flows activity and what do you see going forward with a number of crude by rail facilities starting up?

Over the next year or so, we think the run rate is sustainable. We don't have long-term contracts behind that business, so we have some work to do to continue to sustain it. Eventually, David, we are going to need all that loading infrastructure for the NGL business when RFS II starts up and our plan was to transition that over to Heartland. So there's going to be some changes required in any rate.

Robert Kwan, RBC Capital Markets.

Good morning. I was just wondering, when you are looking at the incremental discussions that you are having over and above what you have contractor for both the Phase III pipe and anything that is left on RFS III, just wondering -- I know you don't want to talk about specific producers. I am wondering just in aggregate if you can talk about where you are seeing the most demand, whether that is coming out of the Montney, the Duvernay or kind of other parts of the basin?

From there, but also just your old cash registers, the Deep Basin Cardium. It's across the board along the whole pipeline. It is amazingly uniform.

Okay. And I guess just staying on Phase III, Mick, you mentioned the need to just be given -- you can power up Phase III, but you talked about you would need to see a substantial commitment by the end of the year to consider a scope change. At least that is what I interpreted, so correct me if I am wrong, but how do you think about balancing that though against the value of upsizing the pipe anyways just to maintain a competitive advantage, as you mentioned, segregated lines in addition to having sufficient excess capacity, which would take a very attractive return right now down to maybe something attractive until you can get more volumes on the system?

It's a fantastic question and something we are wrestling with all the time. I mean in our ideal state, we've got four commodity types, we have four products flowing out of Fox Creek to Edmonton. That helps us in a lot of ways. Number one, all the pipelines are flowing at much less than MOP. Number two, we are not batching anymore, so both our C3 plus and C2 plus fractionation facilities in the future will have ratable flow versus batch flows and interface to deal with. So it's very good for industry.

You are right; we may have to take a little bit of a haircut in short-term IRR, but we remain very optimistic about what the Montney and Duvernay and the Deep Basin, for that matter, will become and it might be a risk that we are willing to take on our own behalf and on behalf of industry. And then the economies of scale, of course, of building that fourth pipeline sooner are tremendous. And so that does set us up for some very good returns if we were to proceed and the volumes were to evolve. So it's a very tough decision to make, but it will be driven by the amount of stepup we see in terms of nomination between now and the end of the year. So we are not going to upsize unless we do get a significant incremental volume.

Okay, that's great. And if I could just ask one last question, when you look at the midstream and marketing segment, I'm wondering are you able to provide a breakdown between how much of that segment now is fee-based versus commodity-exposed. And if you can, within commodity-exposed, how much is frac spread and how much is basis margin or quality spreads?

Robert, why don't we take that off-line?

Okay, that's great. Thank you.

Rob Hope, Macquarie.

Thank you. Congratulations on another good quarter.

Thank you.

Maybe just on the gas processing side, most of my questions have been answered, but where are you seeing most of the opportunities to expand your footprint on the gas side? Are you having conversations on that side right now?

We only focus on expanding our operations along our existing pipeline right-of-way, so we are always looking down in the Brazeau, Drayton Valley area. We are always looking along the Peace corridor. We have focus in the Duvernay, in the Montney, in the Deep Basin. More plants in the areas we are at, but also plant opportunities up in the Duvernay and the Montney would be the two other primary focus areas. We continue though, as I say, to look down in the Brazeau area.

And are you having discussions with producers right now?

We are having discussions with producers all along our pipeline rights-of-way.

Okay, that's great. And then maybe just a bit of a smaller question. Just on the agreement to sell the noncore trucking assets, is that the entirety of your trucking assets or is that just a smaller portion?

Yes, it's the entirety.

And then maybe just as a follow-up on that vein, are there any other asset businesses that you are looking to potentially view as noncore?

Not at this time.

All right, great. Thank you.

Linda Ezergailis, TD Securities.

Thank you. Congratulations on a strong quarter.

Thanks, Linda.

Just don't want to beat this up too much, but maybe you can talk about the nature of your discussions with producers in terms of how much of a bundled service they want versus discrete parts of the value chain for your fractionator and pipeline and other services?

Sure. It really depends. I mean some producers who you know -- we'll use Paramount as an example -- they like to own their own plants and so we are obviously not spending too much time talking to them about gas plants, but other producers who have made the leap that it is a service better outsourced we are talking to. It ranges in size from very small to super majors, but it just is company-specific. I think it depends on how much control they feel they have in an area, how much land they have acquired in the area, whether they observe being able to build plants more cost-effectively than we can or not. It really does vary, but it really is a whole cross-section of industry. What I would say to you though is the majority of producers want a bundled service.

Okay, that's helpful. And I realize there is not anything hugely new on the LPG export side, but the slower pace of that on a number of fronts in terms of customer offtake agreements, as well as siting considerations, my understanding is the upstream side shouldn't be as much work for you as the other parts, but maybe you can comment on that.

Yes, we have the unique ability in Western Canada, Pembina does, to point a lot of supply at a terminal. So we observe ourselves to be the only company that has critical mass to build a world-scale propane export facility. I would say that we have -- we are running with multiple locations. We have a favorite and we are working really hard at that.

In terms of offtakers, we have satisfied ourselves that there is a liquid and substantial offtake market and so if we are able to deliver product that there will be many buyers. So we are less focused on offtake and we think that if we construct and we have product available, there is a very large and transparent market that we can exploit for the benefit of our customers in terms of pricing.

Okay, that's helpful. And this is a question maybe for Peter. Can you just give us an update on your outlook for cash taxes this year and next?

I think on our last call we gave guidance. I think it was in the range of CAD100 million to CAD125 million, so that projection is still valid. We made a number of adjustments in the last quarter as a result of finalizing our tax returns halfway through the year for 2013. 2015 is a little bit more difficult. A lot depends on the growth of the business, how profitable we are. So we will have to leave that until we get closer to the end of 2014.

And just, Linda, keep in mind we have Resthaven coming online. We have two other gas plants in 2015 and a fractionator, which are all high write-off type assets, so you will have to keep that in mind as well.

Great, thank you.

Steven Paget, FirstEnergy Capital.

Good morning, everyone. You've said in the past that Pembina had CAD1 billion in uncommitted opportunities. Would this number still be applicable given what you discussed in the call?

Steven, I think we are going to stick with that for now just based on how we define it, but we could see that number grow before the end of the year.

Excellent. Maybe more specifically, you are expanding the pipelines into Edmonton from the northwest. Is there an opportunity for you to increase the size of the systems coming into Edmonton from the southwest?

Yes, we certainly could, but we still have quite a bit of capacity. Last time I looked on Drayton, I think we were around 150,000 barrels a day and we could see that grow on the existing systems to 180,000, possibly 200,000 depending on the type of commodity, the density of the commodity that we are taking in and on Brazeau, we still have some spare capacity as well. So a little bit of running room before we have to make that decision.

Thanks, Mick. Can you comment on the impact of the shutdown of Cochin on Pembina and the new opportunities that might have generated?

Yes, the impact has been that we have had to increase our rail fleet, so we can move all the product we need to move by rail without the propane export capacity of Cochin and in terms of bringing in condensate, that's a pipeline we expect to connect to in the future for the benefit of our customers having multiple sources of diluent.

So you will be connecting to the Cochin line soon?

I hope we will be, yes. I can't say that definitively yet, but it would be our expectation that we will get a connection at some point.

And it seems that your railcars, you are not constrained by the amount of railcars you have?

No.

Excellent. Thanks. Those are my questions.

Matthew Akman, Scotiabank.

Good morning. A question on the midstream marketing business. We've been around this a little bit, but there's a bunch of puts and takes, oil by rail positive and some reallocation of revenues. I am just wondering how you guys saw the quarter and how you would characterize the quarter in oil marketing and oil midstream in particular relative to your expectations.

Well, overall, it was the best ever second quarter we had by I think quite a vast majority. We are not -- I mean certainly commodity prices were favorable, but they weren't favorable by a large margin. So just slightly better than average. So it is really all of our businesses outperforming. Oil sands, which they outperformed our conventional pipeline business. We had peak day volumes of darn near -- well, call it 600,000 barrels a day. We are running pretty much at nameplate for our gas services business. We are at some locations overprocessing greater than nameplate. So across the board, all our businesses are doing well, not just marketing and that is really what is driving the quarter because our midstream businesses have the ability to make a lot of money, but only if they have a lot of volume. And so the job of oil sands and conventional and gas services is to get a lot of feedstock into our midstream businesses. And that is really a big part of what is driving our favorable second-quarter results.

Okay, thanks for that. And separately, a quick question on Empress, just your general outlook for it now that TransCanada has signed up a bunch more volumes on the mainline for the next couple years?

I think you are doing a good job of leading your question. We are feeling pretty good about border flows. We see good pricing there. We see liquids content trending up favorably and we see volumes trending up favorably. And as you know, we have the lowest cost plant there and so we are continuing to run I think north of -- I actually can't say what we are trending at there, but we are doing very well there.

Okay, thank you very much. Those are my questions.

David Noseworthy, CIBC.

Sorry about the early exit there earlier.

No worries.

And I apologize if these questions have already been asked, but just one on the Phase III expansions. You mentioned the incremental 20,000 barrels contracted subsequent to the quarter. Does that just add onto the 230,000 that you had announced previously so we are looking at a total now of contracted capacity of 250,000?

That's correct.

Okay, perfect. And then next one, on the RFS III, with that now largely contracted, what are your plans for RFS IV?

That will be driven by how people step up on Phase III. So if we do get a large volume of incremental nominations, some will be crude, some will be condensate, but there is always NGL in its own right and also associated NGL. So we will have to have a hard look at what the stepup volumes are on Phase III and go from there and it will also be -- I think it was Linda was asking us about the bundled service. It will depend a little bit on which of those customers want gas processing fractionation with their offering. Generally, I can't believe that we are getting questions on RFS IV, but it's a good thing and we are pinching ourselves because, two years ago, we had RFS I 80% full and now we are talking about RFS IV. It is possible; it really is possible that that becomes part of the dialogue by late this year or early next year.

Fantastic. And perhaps just one last question. Any initial thoughts on the Kinder Morgan acquisition of (inaudible) and what it might mean for the M&A market in Canada?

David, I think that we will be assessing that today. So in this five minutes, I don't think we have an answer for you.

All right. And maybe just if you could follow up with me as well on the midstream breakdown between fee-for-service and commodity breakdown, I would appreciate that as well.

Yes, I mean I am not going to be able to provide a lot of color there, but we are pretty transparent with all of our fee-for-service projects and our returns on those. So I can lead you to where to find the information to get a reasonable answer.

All right. Thank you very much. Those are my questions.

And we have no further questions at this time. I would like to turn the call back over to Mick Dilger for closing remarks.

Well, thanks, everybody and thanks to all the Pembina employees who pulled off another great quarter safely and reliably and enjoy the rest of your summer and be safe. Bye.

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