Pembina Pipeline Corp (PBA) 2015 Q2 法說會逐字稿

Good morning. My name is Kurt, 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.

(Operator Instructions)

Mr. Scott Burrows, Vice President, Finance and Chief Financial Officer, you may begin your conference.

Thank you, Kurt. 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 Stu 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 financing and financial position. I would like to remind you that some of the comments made today may be forward-looking in nature, and are based on Pembina's current expectations, estimates, judgements, projections and risks. 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 released yesterday, which provide our full results for our 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 continued to demonstrate financial resilience. In spite of a weakened commodity price environment, three of our four businesses saw increased operating margin and revenue volumes, compared to this time last year. Overall, I am pleased with the results, given the macroeconomic environment.

The relative strength of volumes across our business segments demonstrates the strength of the underlying resource supply in the Western Canadian sedimentary basin, which are current and growing business services. During the quarter, we commissioned approximately CAD350 million of fee-for-service assets, representing a modest portion of our over CAD6 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 factor supporting the previously announced 5.2% increase to the dividend.

Stronger performance in the conventional pipeline and gas services businesses, as a result of our new fee-for-service assets placed in service, helped to offset modest declines in our midstream business, associated with lower commodity prices and higher general and administration expenses, for the year-to-date results. In the quarter, Pembina generated EBITDA of CAD226 million, compared to CAD235 million in the second quarter of 2014. On a year-to-date basis, EBITDA totaled CAD466 million, as compared to CAD551 million in the same period of 2014. Adjusted cash flow from operating activity saw a small decrease, to CAD176 million during the second quarter, from CAD191 million for the same quarter last year.

For the first half of 2015, adjusted cash flow from operating activities was CAD389 million, or CAD1.14 per common share, compared to CAD455 million, or CAD1.42 per common share for the same time last year. The decrease in both the three and six months figure was due to a decline in operating results from the midstream business, increased preferred share dividends, and increased tax expenses. Per share metrics were also impacted by an increased share count, primarily as a result of dividend re-investments and debenture conversions.

The Company's earnings decreased to CAD43 million, or CAD0.09 per common share, during the second quarter of 2015, compared to CAD77 million, or CAD0.21 per common share, during the second quarter of 2014. For the six months of the year, earnings were CAD163 million, or CAD0.41 per common share for 2015, as compared to CAD224 million, or CAD0.65 per common share, during the same period. In addition to the factors previously discussed, an increased 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 CAD52 million.

Without this change in tax rate, our earnings for the quarter would have been CAD95 million, or CAD0.28 per common share, a 33% increase over our Q2 2014 numbers. Before moving on, I would note that we have introduced the concept of revenue volumes in the quarter. Revenue volumes in our conventional and 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, were 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 the Vantage pipeline, storage facilities, and new connections, also helped to increase system volumes. These factors contributed to an operating margin of CAD102 million in the second quarter, which is a 32% increase higher than the CAD77 million in the same period last year. On a year-to-date basis, operating margin was CAD200 million, or 30% higher than the CAD154 million recorded in the first half of 2014.

Although our revenue volumes are up on our conventional business, second-quarter revenue volumes were slightly affected by facility construction activities, unplanned third-party turnarounds, and downstream third-party facility outages. In aggregate, we have now secured 767,000 barrels per day of firm volumes under long-term contracts, which include a substantial take or pay component. Included in that figure are significant base systems volumes that were converted from 1 year Evergreen contracts to 10 year contracts with substantial take or pay components.

We look forward to seeing the 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 saw a 24% increase 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 CAD35 million for the quarter, compared to CAD26 million for the same quarter last year. Additionally, these new assets helped increase operating margin for the first half to CAD72 million, which represented a 31% increase over the comparable period in 2014.

August is also set to be a busy month, with both our SEEP and Saturn 2 gas plants coming into service, which serve to support higher volumes for the remainder of the year. In our oil sands and heavy oil business, we saw steady performance, as expected, with operating margin coming in slightly higher over the second quarter of 2014, at CAD35 million versus CAD33 million in 2014, due to higher interruptible volumes.

In the midstream business, operating margin was CAD86 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 CAD199 million, compared to CAD340 million in the first half of 2014. The decrease was largely due to the significant decline in propane prices, where propane prices decreased nearly 60% compared to the first half of 2014. Lower butane and condensate margins were also a contributing factor 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 crude oil prices and narrow price differentials. Our midstream results were somewhat offset by a CAD4 million realized financial gain. In spite of commodity headwinds, we remain committed to execute on our over CAD6 billion of secured growth projects, which are set to contribute CAD700 million to CAD1 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 Pembina's staff demonstrates 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 worked 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 commend our employees enough for their dedication to safety during this busy growth phase.

It's an exciting time at Pembina, as within the next three weeks we will be commissioning approximately CAD600 million of new assets. And we are estimating a total for the year of approximately CAD1.1 billion. These assets will all provide a full-year contribution in 2016. The projects put into service in 2015 represent approximately 18% of our over CAD6 billion in secured growth. In spite of uncertainty in our sector, and weakness in commodity pricing, Pembina secured approximately CAD380 million of new projects, comprised primarily of the CAD125 million for Horizon Pipeline, CAD180 million for North West Redwater partnership terminalling infrastructure, and CAD55 million for the Karr Lateral to support producers in northwest Alberta. Many additional business development opportunities across the value chain continue to percolate, and we hope to be able to provide more detail before year end.

We are beginning to realize the benefits from our over CAD6 billion portfolio of secured growth projects, as demonstrated by the solid operational and financial performance across many of our businesses. This trend is expected to continue over the next two years, as we will be placing new assets into service almost every quarter, ultimately translating into additional fee for service cash flows.

Starting first with our conventional pipeline business, we are committed -- committing significant capital to expand our main line capacity, through the Phase II and Phase III 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 II expansion project, commissioning the crude oil and condensate portion in April, and advancing the NGL portion to a point where it will be placed into service by the end of the month, and ramping up to full operational capacity by the end of the fourth quarter.

Also during the quarter, as part of our Phase III expansion, we brought a CAD35 million, 35 kilometer, 16 inch pipeline segment from Kakwa to Lator into 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 III expansion program, and are pleased with the results to date. Further to Phase III, regarding our plans to construct two additional pipelines between Fox Creek and Namao, Alberta, the Alberta Energy Regulator, or AER, 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 in-service date remains in late 2016 to mid 2017 for these two pipelines. In addition to the secured Phase III expansion project, Pembina has ability to increase the Peace and Northern system capacity by approximately 60%, to 680,000 barrels per day, by adding midpoint 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 III expansion.

The Karr lateral will support growing Montney production, and subject to regulatory and environmental approval, we expect the project will be in service in early 2016. Additionally, during the quarter, we also completed a lateral in the Willesden Green region of Alberta. We also continued to advance our Northeast BC 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-lead items have now been ordered, and subject to regulatory 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 is underpinned by a 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, on to gas services, where the focus is centered on execution of previously announced projects and commissioning activities. Our SEEP 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 Saturn 2 facility, which is 90% complete. I'm very proud what the team has done at 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 Resthaven expansion continues to progress well, with all major items ordered, and plant 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 the processing plant expansion will be placed into service mid 2016.

Further leveraging the design template strategy is our Musreau III facility, where all major equipment has been ordered and engineering is 75% complete. We expect to bring Musreau III online mid 2016. Once these facilities come on-stream, 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 midstream group has been busy executing on previously announced projects, as well as working on new and exciting growth.

In May, we announced that the -- that we will provide terminalling and fractionation services for the North West Redwater partnerships planned refinery, for a total capital of CAD180 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 on site for RFS II. Module fabrication is finished, and overall construction is currently 80% complete. We expect to bring RFS II on-stream in the first quarter of 2016.

We are also pleased to have now received regulatory approval for third fractionator 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 Edmondton 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. Hydro testing of the tanks is now complete, and internal and external coding work has begun. The project is on schedule to be in service mid-2016. Site preparation and commercial discussions for our proposed Canadian Diluent 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 terminalling facilities in Corunna, Ontario, we are progressing a number of initiatives, including the installation of a new brine pond, upgrade to the rail racks, 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 groundwork is now finished on the brine pond. The overall project is expected to be completed in early 2016. Scott?

Thanks, Mick. Pembina continues to have excellent access to the Capital Markets, completing two financings during the quarter, a preferred share offering for gross proceeds of CAD225 million, and CAD600 million of medium-term notes maturing in 2027 and 2043. As of August 7, 2015, our CAD2 billion credit facility is completely undrawn, and we have approximately CAD110 million of cash on hand.

The combination of strong access to capital markets, and an undrawn CAD2 billion credit facility, creates a robust financial foundation to fund the remaining portion of our CAD1.9 billion capital plan for 2015, and positions us well to fund the remainder of our over CAD6 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 center around four key tenants. Firstly, running our operations safely and reliably in support of all stakeholders. Second, further progressing our CAD6 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 and capital costs to the benefit of our shareholders. We are in the early innings of our transformational growth, and we remain committed to our goal of adding CAD700 million to CAD1 billion of EBITDA through the development of our over CAD6 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'll 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.

Good morning, everyone.

Good morning.

Good morning.

So Scott, this -- the first question was, on the [CAD75 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?

Yes. So David, of the 75%, I would say right now, roughly half of that is take-or-pay. But we'll be updating that, I think, in 2016 -- as we move towards 2016, and we have the Phase II NGL portion come into service, as well as RFS II. That's meaningfully going to increase that take-or-pay portion.

So we will be providing further guidance on that in 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 the 5% of the roughly CAD4.8 billion remaining that we have to spend. And so to date, we've had verified savings of approximately CAD60 million. So we are tracking as we expected to this year, and we expect to realize an increase on that 2016 relatively short order here.

All right, perfect. That's all I had.

Your next question comes from the line of David Noseworthy, CIBC World Markets. Your line is open.

Great. Thanks very much.

So just first question, on the conventional system, just noticing that quarter over quarter, you saw volumes fall there. Is that just spring breakup? 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?

Do you want to answer that, Scott, or do you want me to?

David, I think it's a whole bunch of things. Some people are taking down their plants for turnarounds, because of the low commodity price environment.

Clearly, if propane's being re-injected into the gas line, that's also a factor. Breakup is 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 will 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 progress.

Yes, David, just a little bit more precisely on the third-party turnarounds and facility outages. Remember, we commissioned our Phase II pipeline, which meant we had some lines down for a couple days there. So those all equated to roughly 10,000 to 12,000 barrels a day for the quarter.

Okay. That's helpful. Thank you. Great.

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 (inaudible) 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 -- since Pembina owned Empress, we're seeing the highest barrels per million. You're 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. We're taking out the ethane, butane, condi, and then we're often re-injecting 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. Pretty much anybody who can not extract propane is not extracting propane.

Got it.

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? I.e., 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, but with quite a bit of volatility. And of course, outside the basin in the US, 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 US 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 plants 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.

Great. Thank you very much. Those are my questions.

Thanks, David. Have a good weekend.

You, too.

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?

Rob, it's Stu Taylor answering here.

Yes, the Portland terminal, we continue to redevelop. We have a class III cost assessment for our Portland terminal. We continue to work on what permits we can put forward, and work on those.

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 to come 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're -- we always look at everything that 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 is, prices for acquired assets are not dropping yet. But I think as we -- 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 -- 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, 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?

I don't want to comment on spread. It's not just predicting one thing; it's predicting two, and so reluctant to do that. But you raise a good point. 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 you back to 2014, where through 2013, we were buying inventory cheap, and then we had some decent pricing. And that's, of course, the perfect scenario to be in. And so I would let all the callers make up their own mind of where we are in the propane cycle. We think it's pretty low, given prices are negative. So I think some might say that 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 a double win, because we bought the product and inventory so inexpensively. And if you get rising prices when you sell it, of course, that's when it's fun to be in the propane business.

All right. Thank you for the color.

Your next question comes from the line of Andrew Kuske from Credit Suisse. Your line 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 your businesses. So with that kind of backdrop, I guess there's two parts to the question. How should we think about some of your underlying businesses?

Is this a sign of just the 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 that you have, it is clearly -- they are not benefiting from the current environment at all.

Yes, so 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 yes, it's -- 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 -- can't remember the second question.

Credit.

Just on the risk management. Risk management around some of your procedure customers.

Yes, if you're thinking about -- we're the service provider for the basin. So it's just a vast number of producer customers.

If you think about Phase III, the stuff we're building, we have over 30 customers of all sizes. I think if I was going to leave you with one message is that, by far, most of our customers are investment grade. And those are, of course, 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 there's positive cash flow, then the volumes will flow, regardless of stretched balance sheet. And we do a lot of work, in our investment criteria, to make sure that we've got good geology behind our assets.

Okay. That's helpful.

And then one final question, if I may. A lot of the producers obviously have been citing the outage issues on Nova as 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 it was completely unconstrained. How do you think that would have affected your financials?

I don't know. Stu, do you have a view on that?

Yes, we've been -- so we haven't had time to go through -- everyone's been asking. But if you just go through a few of the sales notes for the last couple days, with 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.

Okay. That's very helpful.

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

Good morning.

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?

Yes, Rob, I think that if propane levels out, we can probably make a small margin. Probably something even similar to what we made in Q2. But I wouldn't expect any large uptick, 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, it still takes a while to churn 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?

Yes, 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 the 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?

You know, that's the multi-million-dollar question, maybe the billion-dollar question. I don't know. But is -- how discerning do you want to be?

If you see something in strategy, and maybe you still have to pay up for it, you let that opportunity go? Or -- 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 that on a case-by-case basis.

But we still realize that the finest assets, and particularly the ones that are solidly in strategy for us, we're still going to have to pay a significant price for.

Okay. Got it.

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's digging into the numbers here, but let me just make an overarching comment.

The main things that cause variances in our OpEx are our power and the timing of our integrity work. And so power -- power is significant, but if you think about our integrity work, over the coming years, we are going to peak out at CAD150 million-ish this year, maybe slightly higher next year.

And then we see it 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, post-2016, a steady drop over the years beyond that.

Scott, do you want to add something for the microanalysis?

Yes. Rob, I think I would just add the color, which I think we've talked about in the past, which is on a quarter-by-quarter basis, it does move around, 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 CAD700 million to CAD1 billion of incremental EBITDA? Or is that additive, given that's really been work that's on the existing system?

The CAD700 million to CAD1 billion is largely related to brand-new assets, RFS II, RFS III, Phase III, the Saturn plants, Musreau. So most of that's with new assets. So most of the integrity savings we're projecting is from work on existing assets.

So additive to that number?

Yes, so think about it, anything we're powering up, like Phase II, Phase I, Peace. Anything we're powering up, we needed to spend a lot of money on integrity. And once we're through that, which we're close to through that now, then the integrity on the existing asset base, the integrity costs, we expect to drop. You never predict things like weather, and so you could have some surprises on the way, but definitely trending down.

That's great. Thank you very much.

You're welcome.

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 process was delayed 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 onto that in-service date.

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

We always anticipate a hearing, Matt, so this is our expected case. We -- had the hearing been earlier, we might have been able to accelerate. So we're just back in the expected case.

Okay. Okay, good. Just wanted to confirm that.

Question on financing, Scott. As you guys had a lot of success in the quarter on financing, and with debt, and a conservative manner with term debt, as well. And on the other hand, there's the big CapEx program, and you've said, at some point, you'll need some money externally, on the equity side, and pref markets aren't really cooperating. How are you seeing the timing of that?

Obviously, you would rather wait until some of the new projects come online. Are the rating agencies cooperative on that front?

Yes, we talk to them quarterly. We meet with them every six months. And so they are well aware of the plans and the timing of the cash flow spend. So from that perspective, yes, they are aware.

In terms of our funding plan, again, we're staying consistent with what we've 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 necessarily expect to need that until Q4-ish, if not Q1 2016.

Thank you very much. Those are my questions.

Thanks.

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 are looking at the dividends in a potentially longer and -- lower for longer scenario? Thank you. And do you still see 4% to 6% 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 adding CAD700 million to CAD1 billion, mainly fee-for-service, I think the upward mobility of our dividend remains intact. And to the extent we make more money on our commodity businesses, we view that as a way to pay down debt, or apply it elsewhere.

So the answer to your question is, we don't see any reason to change our guidance of 4% to 6% dividend growth, and 8% to 10% cash flow per share growth, over the next number of years. We wouldn't speculatively reduce the dividend to fund a possible acquisition. I think we would fund acquisitions in a different way.

Okay. That's helpful.

And can you just maybe broaden your LPG egress strategy beyond export lines to -- is there any other rail offloading that you're looking at in North America, et cetera?

We are growing our rail fleet quite significantly. We're looking at all downstream markets for propane, whether they are 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's good news. 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 propane and NGL front, given that you're seeing more propane rejection in Western Canada, is that maybe delaying, on top of weak commodity prices, any filling up of your Phase III system, for the remaining incremental amount that's not contracted currently?

Those are -- they are two different concepts. The current rejection, that's a current year, or next year. You've got to remember, Phase III is mid 2017. So people aren't making those kind of rejection decisions now, based on -- there's a timing difference there in your question.

Yes, I realize there's a timing difference. But to the extent that we're in a lower for longer scenario, do you think that, 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 spot capacity on your Phase III?

The answer to that question is simply, yes. It's going to take longer to, say, for example, see the Phase III expansion. If people are building the shallowest [cut] plant that they possibly can, our NGL build will be slower.

But I think I want to backstop that question by saying, our 420,000 barrel a day expansion is practically full now. And that's all 10 year take-or-pay agreements. So what you're talking about now, I want to put in the context that, it's the timing of the expansion beyond that, that comes to mind.

Okay. Thank you.

(Operator Instructions)

Your next question comes from the line of Steven Paget from FirstEnergy. Your line is open.

Thank you, and good morning.

Could you please comment on the factors affecting the propane market, or that you think will affect the propane market, in the second half of 2015? First, is Western Canadian propane negative right now because there is a shipping bottleneck? And if so, when do you believe that gets resolved?

I think people are building export capacity as quickly as possible. So that -- we don't know exactly how that's going to unfold, Steven. But the cure for -- two 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 a normal winter, then 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 I --

Go ahead.

Thank you. So would the overseas market be there to support all the export terminals being built? Say, another 100,000, 200,000 barrels a day of exports offshore from North America?

I guess if the exported product is priced right, and right now, the ARB would say it can be priced appropriately to displace other volumes. 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 to the Far East currently. And so I don't think it's really making any difference to those markets.

Stu, do you have a view on that?

Yes, no, I tend to agree.

So you're saying the big markets have yet to be tapped from North America?

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

Okay. But that would be -- if that were 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?

Again, I want to preface all of this. I'm not an expert, but it remains uncertain. We've been told it's uncertain how much propane we'll get through the Panama Canal.

Number one, a capacity thing, and number two, not necessarily the highest value good that could pass through the canal, and not a perishable good. And so it's a matter of who can pay the most to go through there.

And we're not sure that it's propane. But again, I want to just say I'm not an expert. That's what we've heard.

So just because the Panama Canal's opening up doesn't necessarily mean Gulf Coast propane rushes through the Panama. It might still have to go around the horn. So it's an extra CAD0.10 or CAD0.15 -- CAD0.10 a gallon, something like that, Stu?

Yes.

Another way to say that is, West Coast exports should -- there's a good chance West Coast exports still retain the shipping advantage.

All right. Thank you, Mick. Those are my questions.

(Operator Instructions)

And we have no questions in queue at this time. I'll turn the call back over to the presenters.

Thanks, everyone. And again, thanks for your continued support, and everyone have a safe weekend. Talk to you soon.

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