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Executives

Bob Michaleski - CEO

Peter Robertson - VP, Finance and CFO

Glenys Hermanutz - VP, Corporate Affairs

Bob Lock - VP, NGL Business

Scott Burrows - Senior Manager, Corporate Development and Planning

Analysts

Linda Ezergailis - TD Securities

Robert Kwan - RBC Capital Markets

Juan Plessis - Canaccord Genuity

David Noseworthy - CIBC

Carl Kirst - BMO Capital

Matthew Akman - Scotia Bank

Robert Catellier - Macquarie

Steven Paget - FirstEnergy

Pembina Pipeline Corporation (PBA) Q2 2012 Earnings Call August 10, 2012 11:00 AM ET

Operator

Good morning everyone. My name is Sarah and I will be your conference operator today. At this time I would like to welcome you all to the Pembina Pipeline Corporation 2012 second quarter results conference call. (Operator Instructions) Thank you. I would now like to turn the call over to our host, Mr. Bob Michaleski, Chief Executive Officer. You may begin your conference.

Bob Michaleski

Thank you Sarah and good morning everyone. And welcome to Pembina’s conference call and webcast to review our second quarter 2012 results. I'm Bob Michaleski, Pembina’s Chief Executive Officer. Joining me on the call today are Peter Robertson, Pembina’s Vice President of Finance, Chief Financial Officer, Glenys Hermanutz, our Vice President of Corporate Affairs, Bob Lock our Vice President of our NGL business and Scott Burrows, our Senior Manager of Corporate Development and Planning.

As usual I'll review the quarterly results we released yesterday and spend a few minutes providing an update on recent developments including our acquisition of Provident Energy and then we will open the line for questions. I'll start with a reminder 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 and I must also point out that some of the information I provide refers to non-GAAP measures.

To learn more about these forward-looking statements and non-GAAP measures please see Pembina’s various financial reports 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.

The second quarter and the first half of the year has been a very busy time. We closed our acquisition of Provident on April 2 and since then we have made a lot of progress on our integration activities. As you know, we are listed on New York Stock exchange and that made substantial progress on bringing our two teams together.

This is the first quarter we are reporting as a combined entity which also means that this is the first time, we’re presenting results that show a consolidated view of our business and includes those assets that are new to Pembina.

Admittedly we are faced with a challenging opening market conditions that impacts our results this quarter, but we maintained steady performance across all areas of our business while managing the integration work we needed to do.

I will give a high level overview of the results in a minute, but I will like to start off by talking a little more specifically about the progress we are making on integration. It's still early in the game for us. We have only owned these assets for just over four months. But so far the integration is going very well.

We are seeing real upside possibilities associated with these assets and we have retained a great group of people, people who have the knowledge and the experience to help us achieve Pembina's future goals.

I am very happy to say that as of mid July, we have moved all of the former Calgary Provident employees to our head office in Calgary which will now give us the chance to begin working even more closely as a single team, focused on common set of goals.

Our employees have to deal with a high volume of change during the quarter. Yet I am proud that they were able to achieve solid results in each of our businesses despite the attention required for the integration.

This integration has tested every aspect of our business. We are not just combining two companies. We’re identifying the best processes and practices to adopt moving forward.

Now let's look at Pembina Q2 results compared to second quarter last year. With such a large acquisition, reported numbers look quite a bit different than what you are used to. So I will try to add some color.

I want to start up by saying that we are confident in the strong fundamental story of our business. We didn’t undertake take this acquisition for few months work of the results, but for the long-term benefits . We see involving from our industry leading suite of integrated assets. To provide a better contacts before getting into specifics the NGL business, we have acquired from Provident is a seasonal business during which the second quarter traditionally contributes lower operating margins due to lower NGL sales and weaker pricing in the summer months.

Propone prices were as low as CAD0.73 per gallon in June of 2012 compared to CAD1.26 per gallon in the first quarter of 2012 and a CAD1.50 this time last year. Current propane prices are CAD0.94 per gallon and the future price for the second half of the year averages about CAD0.95 per gallon. Looking at revenue operating margin, gross profit, EBITDA and earnings you can see that each of these metrics have increased for the quarter and year-to-date largely as a result of the acquisition, continued solid performance of Pembina's legacy businesses.

A significant unrealized gain on commodity related derivative financial instruments also build up our results. Pembina is required to employ mark-to-market accounting for all unrealized gains and losses associated with financial derivative instruments at a point in time and report these against current period earnings.

This can result in quarterly variations that are not necessarily related to current operations. When you look at earnings per share and cash flow per share however you will see that these metrics are down on a year-over-year basis.

The majority of the variances related to the issue is of 116.5 million shares to the complete the acquisition and to the lower than average propane pricing in the second quarter as I previously mentioned is using the softest quarter in the NGL business.

We also incurred higher depreciation and amortization expenses related to our expanded asset base, higher interest and acquisition related expenses as well as a significant increase in working capital which reflects to see more inventory build.

Turning now to look in more detail in each business, throughput on our conventional pipelines averaged 434,000 barrels per day during the quarter, approximately 5% higher than the same period in 2011. Volume was impacted in the second quarter by an outage of the third party facility which caused a portion of NGL volumes to be shut in.

On a year-to-date basis, throughput is up by 12% compared to the first half of 2011. In the second quarter, revenue generated by our conventional pipelines business increased by 8% while operating margin dropped by 5% due to increased operating expenses related to integrity NGL technical work.

With that said revenue and operating margin are both up for the first six months of the year by 13% and 8% respectively. Our oil sands and heavy oil business delivered a 42% increase in revenue and a 39% increase in operating margin in the second quarter of this year.

These increases were largely due to the contributions from our Nipisi and Mitsue pipelines which began operations in the third quarter of 2011. Those pipelines drove up the year-to-date performance as well with revenue and operating margin up by 42% and 47% respectively from the first half of last year.

Our gas services business posted higher volumes at our Cutbank Complex during the quarter and realized an increase in revenue of 19% and a 12% bump in operating margin when compared to the second quarter of 2011.

The same factors drilled up the year-to-date results with revenue and operating margin increasing 23% and 19% respectively compared to the some period of 2011. We've combined the former Provident business results with a midstream groups. So that accounts for the majority of large increases in this segment during the quarter and first half of the year. During the second quarter we saw [205]% increase in revenue net of costs goods sold at 116% increase in operating margin over the same quarter of last year.

For the first six months of 2012, revenue net of cost to goods sold jumped to 119% while operating margin came in 73% higher. Our crude oil midstream business which represents Pembina's legacy midstream and marketing segment contributed operating margin of 30.8 million compared to 26.8 million during the second quarter of 2011.

Year-to-date, operating margin was 60.2 million, up 19% from 50.5 million in the same period last year, driven by higher pipelines volumes, wider margins and new services at Pembina's Nexus terminal.

Redwater West and Empress East both acquired through the acquisition and which represent our NGL midstream business generated operating margin of CAD36.2 million and CAD2.2 million respectively excluding realized losses from commodity related derivative financial instruments.

As I mentioned earlier, we are facing some headwinds with respect to weak propane prices and during the quarter results were impacted by a propane inventory write-down of CAD8.4 million. Industry inventory levels remained high due to the relatively warm winter in North America and the cost of Pembina's NGL inventory was above market price resulting in the writedown.

Once we have emerged from the overhang from the record mild 2011-2012 winter, and assuming typical winter weather this season combined with increased export capacity in the Gulf Coast, we are optimistic that the propane environment will improve as the year progresses.

Also this past quarter, we teamed up our hedging position by buying the remaining portion of Provident's legacy crude oil hedges for 1.1 million, as we believe these were not effective hedges for NGL prices.

As a result, Pembina no longer has any propane or butane hedges linked to oil prices. We have updated our hedging information posted on our website under investor centre. Corporately we incurred G&A expenses of 25.8 million during the quarter compared to CAD12.8 million during the second quarter of 2011 due to the addition of employees who joined Pembina from Provident and increase in salaries and benefits for existing and new employees and increased rent from new and expanded office space.

The same analysis applies to year to date numbers for G&A for the first six months of the year totaled CAD43.3 million up from CAD27.4 million in first half of 2011. To put this things into perspective our administrative staff is almost doubled since this time last year.

Before I move on to discuss our growth projects I would also like to mention that in conjunction with the closing of the acquisition, we increased our monthly dividend CAD0.13 per share per month and CAD1.56 annualized to CAD0.135 per share per month and CAD1.62 annually which became effective with the April 25 record date.

We are confident that the depth and breadth of services we are now able to offer customers is a key differentiator that positions Pembina for significant growth in the years to come and that means we view our dividend as sustainable for the foreseeable future.

Now let's look at how we are progressing on our growth projects. I am not going to go into too much detail here as most of the you here in the call have the information from the second quarter report and we cover off more specific questions once I finish my prepared remarks.

What I would like to stress though is the additional fee for service and take or pay contracts of Pembina is secured in the second quarter. Starting with our conventional pipeline business, we are very happy to announce that during the second quarter, we reached our contractual threshold to proceed with the 52,000 barrel per day Northern NGL expansion.

We expect the expansion to cost approximately CAD100 million in total and have plans to bring 17,000 barrels per day on screen by the end of 2012 and the remaining 35,000 barrels per day by the end of 2013. Now that we've reached satisfactory arrangements with our customers and are well on our way with required environment and regulatory approvals, we are hitting the ground running to construct the first phase of the expansion and in fact we've already begun working on two of the three pump stations as part of the Phase 1 expansion.

We've also recently increased the capacity of our main line by 50,000 barrels per day bringing the total capacity of the system to approximately 190,000 barrels per day by refurbishing our Calmar booster station. This is good news for our customers as the system was constrained due to high levels of future activity in the area. On the pipeline portions of the rest of Resthaven and Saturn projects we are working with our stakeholders and working through the bodies on environmental planning and route selection, and are completing preliminary engineering work.

We are nearing submission of ERCD applications and are finalizing agreements with a number of First Nations communities regarding their interest in the project area and potential business on employment opportunities.

Now turning to gas services, we are pleased to report that over the next few days we will be commissioning the new 50 million cubic feet a day shallow cut expansion at Cutbank Complex. For the new Resthaven and Saturn facilities Pembina is progressing construction at both plant sites. We recently into a long-term arrangement for the remaining 50 million cubic feet a day of spare capacity at Saturn, bringing the total contract capacity to 100%.

With this arrangement both Saturn and Resthaven are 100% contracted. We are still working on the repairs to the Musreau Deep Cut which was first placed into service back in February. At this facility, we have been running for about six weeks before gearbox failure caused us to cease operations. During the other we are still able to prove and process the gas or shale type facilities of the company and as a result we have not had to shut in any customers' production while we work on our repairs.

In our midstream business, we’re working on a number of growth projects and both our legacy business, the crude oil mid-stream group as well as our new NGL midstream group. Over the last couple of quarters, we talked about our plans to expand service truck terminal business; I am pleased to report that we entered in to a 50-50 joint venture agreement with a third-party to develop a new full service terminal at Judy Creek which is expected to be in service by the first quarter of 2013. The new terminal will serve producers in the Beaverhill Lake and Swan Hill areas.

At Redwater West there is going on. In the fourth quarter of this year, we expect to have both our first of seven fee for service cavern storage facilities in service and plan to have the 8,000 barrel per day expansion of our fractionator on stream. On a much large scale, our major projects team is advancing preliminary engineering work for a new 70,000 barrel per day C2 plus fractionator at the Redwater site, for which we are currently soliciting customer support and at the younger plant, we signed and agreement with a third party producer to tie-in up to 60 million cubic feet a day of production to the plant by the first quarter of 2013.

So in addition to these growth projects, we have unrisk capital spending program of CAD4 billion to focus on growing the fee for service component of our business. We are confident that we have the financial strength needed to pursue our growth plan. We’re currently in a position of strong liquidity with cash and unutilized debt facilities at the end of the quarter of about CAD730 million and our drip is raising approximately CAD22 million per month.

And if our past is indicative of the future, we believe that Pembina should continue to access the funds at attractive rates in the event we need to access the capital markets.

To close off the formal portion of this morning and turn it over to questions, I just like to reiterate that this was a very productive quarter for Pembina. Despite the cap challenging conditions for some of our business interest, we believe this quarter consolidated operations and establishes a sound framework from which you tackle the second half of the year. We are confident in our dividend and confident in our ability to continue to identify and lock the value of the expanded asset base. So with that I will ask the operator to open the call for questions and answers. So over to you, sir.

Question-and-Answer-Session

Operator

(Operator Instructions) The first question comes from Linda Ezergailis of TD Securities. Your line is now open.

Linda Ezergailis - TD Securities

Thank you. I just wanted talk a little bit more about your dividend. Clearly, you are confident in the dividend level, but I am just wondering what sort of growth we might expect over the next couple of years given the commodity price headwinds you are facing might the board consider kind of pausing growth until your proportion of fee for service cash flow increase and when you look at a payout ratio would 70% to 80% payout of total free cash flow still be what the board might be targeting or might the board more focused on non-commodity based or product margin based cash c

Unidentified Speaker

Linda I am sorry I will just try to answer the several questions I think that were there embedded in that, first of all I don’t believe that we just had a board meeting yesterday and I don’t think there is any indication for the board that we are going to change our growth targets or plans for the future. Obviously, in the near term we have been impacted by the commodity price environment that impacts had an impact on the second quarter results for the NGL business unit, but longer term we have taken a look at the numbers and we don’t see any material change in our ability to generate growth going forward, we had targeted growth in a range of 8% to 10% per share in a softer commodity price environment, I think that might be off a bit but not lot.

So I think that we are going to stay to course with respect to the growth initiatives that we do have in front of us, I would have to say that the unrisked capital we have in front of us Linda that almost all of that I would say and I think in fact instead to stay that its say that almost all of it is related to fee for service business.

So we will see that commodity related exposure come down overtime and but it will take us to spend CAD3 billion to CAD4 billion a year it’s going to take four year to five years too, so we would expect overtime that commodity related close part of our business will come down and the other part we will have to look at as well is really the commercial terms that we have in the commodity expose business as to whether there is an opportunity for us to look at that business model little bit differently going forward but it’s already (inaudible) so I think we are going to stay the course and do what we have been doing and we will adapt to the environment that we are in.

Linda Ezergailis - TD Securities

And the dividend policy will that be adapted perhaps in the short term or did your dividend policy look at kind of the long-term to growth trajectory and not change in the short-term in terms of the growth rate?

Bob Michaleski

Yeah, I think we are still on the same course that we (inaudible) before our longer term plans for dividend growth within in that 3% to 5% per year I think it will be depended to a certain extent on what happens in the commodity price environment but I think that still remains and payout ratio is 70% to 80% you talked about I think it’s reasonable.

Linda Ezergailis - TD Securities

Great, thank you. And just a quick follow-up question I don’t know if I should be taking this online. I really appreciate your addition of butane strip pricing and your hedging disclosure, would it be possible potentially to provide similar condensate pricing on a historical and strip basin or continue to provide an NGL basket as a percentage of WTI?

Scott Burrows

We will take that under consideration Linda.

Operator

Your next question comes from Robert Kwan of RBC Capital Markets.

Robert Kwan - RBC Capital Markets

Bob you touched on the strong liquidity that you got right now, I am just wondering that as you do look out at the funding plan and the cash flow lease deck at current commodity prices probably has come down versus budget, what are your thoughts on external funding slightly around the need for some common equity and within that are there any, would that cause any potential for some capital rationing to focus in on highest return projects?

Unidentified Company Representative

Well, Robert I think its fair to say that we do look at all of our projects on the basis that those are, there always will be combination, we are going to have some in the near term that are perhaps, will generate what we consider to be modest returns but over time will generate more positive returns, and so we have all those projects underway and they will vary from the gas services business unit to the conventional pipeline business unit to our mid stream and NGL business units and oil sands need to both have, those businesses have different profiles, different risk profiles and different return profiles but I personally like a well balanced approach to it Robert and in terms of financing you know clearly we look at it longer term, we finance our initiatives roughly 50-50 debt and equity so we've got plans to spend somewhere between CAD700 million and CAD800 million this year of the [drip] raise just something in excess of CAD200 million.

So I think that probably by the end of this year early next year we are going to have to be looking at some form of equity issue and then that will be entirely consistent with where we were, you know, a quarter ago. So I don’t think our plans are maturely changes as a result of some of the change in influences commodity prices.

Robert Kwan - RBC Capital Markets

Maybe just a last question with the potential reversal and repurposing of the coach and pipeline works quite well in terms of where they want to run that from compensate going into Redwater as well some ability to move the propane out. Can you just talk about how are you thinking about that balancing Redwater against Nexus terminal and some of the opportunities for you and what you might be doing right now to try to get out in front of that?

Bob Michaleski

Well, there is a number of developments, some of which I can’t talk about Robert. So I'll just say that the reversal of the coach pipeline will result in condensate getting up to Redwater we see that’s going to lead reach another source of condensate per Oil Sands applies so that it fits with our overall strategy, the [PENT] we’re also developing the PNT with us other like connections and other connections that we are also going to use as a hub to launch condensate for till he went five for Oil Sands activity with respect to your question on moving other liquids out. You know, I think it's fair to say that we are not going to sit idle by I think that there has been a lot of changes taking place in the liquids market. We need to find other outlets for liquids out of the Saskatchewan area, including looking at liquids moving to the West Coast possibly and that’s something that we will also look out and consider in terms of go forward position.

So we are looking at a number of things and we will have a number of options to consider here but I think the conditions are changing; they are changing in response increased demand for diluent open oil sands, but also we have to find a way to get product out of Alberta to different markets as well.

Operator

Next question comes from Juan Plessis of Canaccord Genuity. Your line is now open.

Juan Plessis - Canaccord Genuity

As you mentioned in your remarks Bob, you now have four plus months operating the problem assets; going forward do you see yourselves making changes to the NGL hedging strategy and if so what changes do you envision?

Bob Michaleski

You know one, that is under review currently, we have not entered into any new hedges in the last 12 months and we have unbound the one I referred to with respect to the oil hedge. I think it’s fair to say we really want to get understand the business and the business profile going forward before we really commit to a longer-term strategy; it’s not to say that we are not going to look at hedging strategy, but right now I think it’s fair to say that we want to understand the implications that are going forward and I alluded a little bit to the fact that we need to understand the commercial model as well as to whether that commercial model with the exposure to commodity prices makes sense for us long-term.

I think over time we are saying that we are going to spend money on fee for service business and the commodity exposed portion might decrease and if we have a hedged position there that would be totally acceptable. But what we have done so far is really just fall of through with the program that was in place and improved by the provident board and we just want to get smarter about it.

Juan Plessis - Canaccord Genuity

And with respect to the red water fractionator at what level of contracting would you be comfortable with to move forward with the project and can you talk a little bit about the potential capital costs of that project?

Bob Michaleski

Well, with respect to the level of contracting, we reviewed that yesterday and I think we are seeing quite a bit of it, just probably in excess of 100% of the capacity. But I think in terms of commercial commitments I think we will be pretty comfortable moving at ahead at 50 to 60% of contracted capacity on that fractionator; I think there is a number of people that are sort of leading in the -- if you are like wait to see what happens there. In terms of capital costs I think we have given broad guidance in the past, but I would say that we are looking at something between CAD350 million and CAD400 million for 70,000 barrel a day fractionator.

Operator

Your next question comes from David Noseworthy of CIBC. Your line is now open.

David Noseworthy - CIBC

Just wanted to better understand a bit what happened in the quarter in terms of midstream sector and kind of what we are looking at going forward. Historically, your gas supply has been contracted I believe kind of one-third, one-third basis both monthly and long-term has this changed materially?

Bob Michaleski

I don’t believe it’s changed materially during the quarter, although I think the sport market probably is not something that we have been focusing too much on at this stage. One of the issues we have got David, we don’t have a lot of place to store and the production that we can generate we are very pretty much full up for all of our storage for the quarter, so that does have an impact on what we do commercially as well.

David Noseworthy - CIBC

And does that situation both in krone and red water?

Bob Michaleski

Yeah I think that applies to both.

David Noseworthy - CIBC

And then so then when you speak of the extraction premiums reflecting a longer term, higher longer term frac spread, is that so that would be more on your long-term gas supply contract, but certainly not on the spot, like have we seen the spot come down, I guess in terms of when you are processing those volumes?

Bob Michaleski

Yeah, I think we've seen the supply come down more recently the problem we have is we can't really take advantage of that lower priced spot market because we don't have any place to put the product. David I don't think that's similar to a lot of people at this stage, I mean we are long NGL and in North America and so until the market clears, either increasing demand and we are seeing that. The more recent increase in the price for propane is I mean that's a positive development and I think our people also think that there's going to be a fairly significant increase in export capacity in the Gulf Coast here in the next 12 months which should help alleviate some of the oversupply as well.

David Noseworthy - CIBC

In terms of when we look at your results in trying to compare on a year-over-year basis, on a potential basis how does the providence of old commercial service segment operating margins breakout between Redwater West and Empress East?

Bob Michaleski

Yeah, I don't have that level of detail, maybe Scott you want to answer that question?

Scott Burrows

Yeah, about 25% to 35% of commercial services is in Empress East.

David Noseworthy - CIBC

And then finally, in terms of the Alberta ethane prices, have they recovered at all with the completion of the turnaround and I know that and or what are you seeing there.

Bob Michaleski

Yeah, David I don't know specifically, I do know that as a part of our overall programs to offer services to our customers that we’re working with the people in the petrochemical business for them to offer long-term commercial contracts to our customers at prices that are going to be acceptable to them, for you know, 10 to 15 years.

So I can’t speak specifically to the pricing that they are arranging because that's between themselves and the producers but I know that they do want to enter into long-term commitments to back stop capacity additions at their facilities and so that fits very well with our overall strategy of dealing with all the products that come in the NGL business, because we don’t want to control what happens with ethane and ethane pricing, but if the customers can get into long-term contracts that fits very well with the overall service that we are going to offer.

David Noseworthy - CIBC

And your producer in that so far has been positive towards wanting to extract CTU plus mix because of these contracts?

Bob Michaleski

I think that’s a fair comment; yes.

David Noseworthy - CIBC

And maybe just one last question. There was a mentioned about looking for new markets for some of these NGLs. In terms of, what is your tonnage capacity to produce water borne quality, or export quality, propane at red water?

Bob Lock

Currently, I'll turn the question to Bob Lock.

Bob Lock

David, thank you. We’re looking at that certainly. So we are producing a product quality that’s not, I guess at this point water borne, but it is typically water quality or water content in the propane that we would be looking to taking out. So as we expanded our own proprietary, the view of what we might be out there for options for us will be looking to putting additional treatment to that.

David Noseworthy - CIBC

Do you have any idea at this point what kind of equipment that would take or kind of CapEx that would be required?

Bob Lock

It’s certainly days for that, but where we are looking at those options it really comes down to what volume it is we are looking.

David Noseworthy - CIBC

Fair enough and would it make sense do that as part of an expansion of the fractionator or is it totally separate?

Bob Lock

It may.

Operator

Your next question comes from Carl Kirst of BMO Capital. Your line is now open.

Carl Kirst - BMO Capital

Most of my questions have been hit, may be just a couple of cleanups and first actually perhaps starting on the DC market as far as potentially moving liquids west and we kind of generally tend to think all about propane export right now. Is there a possibility of doing other water borne product export or would the market for the West Coast really principally just be a propone one?

Bob Michaleski

I think there will primarily be a propone way; when you look at the liquids that are produced condensate is going to be consumed in Alberta, the butane will like to be consumed in Alberta, the ethane will be like to be consumed in Albert, so it’s really the propone market which would try to find the market like the elsewhere.

Carl Kirst - BMO Capital

And then just another follow-up on Empress East and the extraction premium; is it possible to say what the current mix of extraction premium is right now or what was paid in the second quarter. And I was also trying to get a sense of what that portion that is term supply, what is the tenure of that, is that something that we think the contract year basically being able to April perhaps with the rest of those contracts kind of roll off by April 2013?

Bob Michaleski

I will let Bob address that and I am not sure if there is any commercial issues here that we might be sensitive to Carl, but I will let Bob Lock try to address that question as best as he can.

Bob Lock

Carl, I can answer basically half of that I think. On a term basis the Empress contracts on an annualized basis are on the gas year so these deals are done in conjunction with transportation arrangements on the pipeline so those are November 1st deals, so they would have an exploration profile of November 1st to October 31st every year. As it comes down to breaking up how much of our portfolio would have on the month the to month seasonally and with the daily options that there are out there, we don't really disclose that so the pricing specifically to those terms are not currently available.

Bob Michaleski

And I think there's some sensitivity around pricing because that's obviously a competitive market at Empress Carl.

Carl Kirst - BMO Capital

No, understood and whatever out of market extraction premiums you are paying right now hopefully that will be alleviated soon then.

Peter Robertson

So we have term deals that would expire on October 31st of this year.

Operator

Your next question comes from Matthew Akman of Scotia Bank.

Matthew Akman - Scotia Bank

I just, you know obviously you guys didn't buy provident primarily for Empress, you know having said that, I am sure you expected to make a positive contribution, you know I guess to what degree were you surprised by the extent of swing that could occur there and what have you I guess learned in the last few months in terms of how to at least get it profitable and to avoid this kind of extreme results?

Bob Michaleski

Yeah, I think Matthew, that’s a really good question and I have to say that, you know, we’re learning as we go here too. I think the circumstances during this second quarter and particularly during the month of June, we are not expected. I don’t think expected by anybody when you look at the decline in the commodity pricing.

Some of the product production was hedged but obviously not enough. But I think looking forward, you know, we're looking at Q3 and Q4 as we're turning to fairly solid contributions from Redwater and Empress in response really to, if you like even a fairly conservative estimate of where propane prices might be.

So it's been a bad quarter. It's been a bad month, but I look at this deal like as you alluded to. This deal is a long-term deal. It's going to take us probably a year to two to even identify all of the revenue synergies that we can achieve and after we identify them, there is more to come.

So clearly our view is longer term. As Scott look out, that going forward the results over the next three to four years on an assumed lower commodity price environment. But you know what, it still doesn’t look that bad. In fact it looks very good and you know, the projections that we have been public with I am still prepared to stand behind those in terms of cash flow per share growth and dividend growth. So it's been a bad quarter.

Matthew Akman - Scotia Bank

I guess the other guys that have (inaudible) didn’t do so hard in the quarter either. I mean, Spectra didn’t really make money there. I imagine Plains of looking at this with kind of a new view. I mean there is got to be a feeling among the Empress guys. We’re not going to pay this level of premiums any more. Is that your sense of kind of consensus among the Empress owners?

Bob Michaleski

You know I personally have not talked to. But I know that I do have some conversations that are going to be coming up here with respect to Empress and what needs to be done there. I think that it’s fair to say that there is excess capacity at Empress. I think it’s got this processing capacity of something like 12 Bcf per day with about force going through it. So obviously there is excess capacity and people chasing it quite competitively and perhaps there should be a rationalization that Empress and I think that’s something that needs to be discussed further.

But at this stage it’s a conversation and some people they might be may not be as interested in doing something there because it may not represent a lot of their cash flow, but I still think going forward something should be done there.

Matthew Akman - Scotia Bank

My final question as you touched on it little bit but I want to have some more directly which is on your hedging policy. I am sure you are going to take some time to review the hedging policy, but we have seen a trend among some of the players there to reduce hedging of frac spread in Alberta. I mean [Spectra] doesn’t hedge at. Interpipe I think it’s going to hedge less because fee based is outweighing commodity based cash flow and I think that’s the same with Pembina as you guys grow, it has not hedging at all these frac spreads an option that might be on the table going forward?

Bob Michaleski

I think all the options are on table including that one that’s why I think like I said we want to spend more time understanding, we have got some legacy hedges that were in place in Provident that we will unwind

here in the first quarter of next year and I think it will be fair for us to look at that position and prior to them expiring and so we are looking at that now. We review our hedging position on a monthly basis and I can tell you like for me personally I am not big on hedging, but there could be a scenario here where it does make sense. I would say that longer term to the extent that the commodity exposed part of our business gets less I'd be less inclined to hedge.

Operator

Your next question comes from Robert Catellier of Macquarie.

Robert Catellier - Macquarie

I just want to follow-up a little bit on the Empress conversation. I think as Matthew pointed out the players there aren't making much money. You yourself are one of the more efficient plans and if I take Scott’s comments of 25% to 30% of the commercial revenue of Provident being allocated to Empress, it doesn't look like Pembina made any money on the frac spread business at all.

So the implications there have that the extraction premiums have to come down because nobody is making any money. Do you want to comment on that?

Scott Burrows

Yeah, I think Rob that's a fair comment. I would agree with that that if you are not making any money, why do it. You know that's kind of the business. So we've got to do a fair amount of (inaudible) to see what makes sense long term.

Robert Catellier - Macquarie

Okay, just getting beyond that for a minute on the propane side. You know there's export capacity that is getting to build up. I am wondering what if (inaudible) or the company has a view on assuming a normal winter, how long does it take the propane market to rebalance given the increasing export capacity?

Bob Michaleski

The sense I got Rob, which is expected that it's going to be like some spur around the first quarter of next year if we assume that we have a normal type winter. Apparently the overhang right now is about 20 million barrels. Enterprise would draw about 3.5 million barrels, so we are saying Q1 2013 we should resort to about a normal situation and there's been a number of other petrochemical type developments also which are increasing demand for propane as well, Rob. So I say while it is early innings, we are seeing realistic Q1 of next year.

Robert Catellier - Macquarie

And then further of the hedging question a little bit, Obviously there is some fracs and there is marketing, you know, does the Provident strategy that you re running with now until you make evaluation. Does that hedge any of the marketing exposure at all?

Bob Michaleski

Bob, I can’t answer that question. Rob?

Bob Lock

We do have some clean propane, butane and condensate hedges in for the balance of 2012 but beyond 2012 we’re still evaluating our go forward plan.

Robert Catellier - Macquarie

Okay, and then as the, when you evaluate the plan, I know you are obviously not finished but is the preference to just stick with, are you more concern I guess about the frac spread or the marketing in term of what you might consider hedging?

Bob Lock

I am saying that we are going to say that pretty hard here right now like I said unfortunately it is not like we didn’t to know it but we do have some legacy positions share that we have to get away with through and we are going to be to those in 2013 and I think that we can take a fresh look and we can look and take a fresh look before that as well but it is going to take some next few months to really sort our way through that but I would be interested you know as we talk about we got some of the personal views and I think we like to explore some of your thoughts on the subject as well because I say this is a bit new to us and something that we want to fully understand before we can make any commitment.

Robert Catellier - Macquarie

But the other part I notice on the updated hedging guidance there is a mismatch between the percent of the NGLs hedged and the amount of gas hedged. So more hedge on gas it creates a bit of basis risk, so maybe you can just talk about what sort of exposure you have then to those changing dynamics?

Bob Michaleski

Well that’s part of the legacy situation I discusses Rob there was a higher percentage of a gas that was hedged historically and gas volumes have down as also we are probably 80% hedged on volume which isn’t necessarily where wanted to believe to anybody wanted to be so that’s kind of sort of tell in time out in time so there is a proper balance between the gas and the products.

Robert Catellier - Macquarie

And then just my final question is just housekeeping Provident formerly had maintenance capital reported as Pembina was in fact was exposing everything, so what happens to how do we review the maintenance capital requirements capital requirements that probably going to have previously are those now being expensed?

Bob Michaleski

Probably Peter with answer that question.

Peter Robertson

These are fairly small amounts for the second quarter. If they were capitalized before they will continue to be capitalized, for the quarter that’s only about just over 2 million for the quarter and I would expect for the year, assuming nothing has changed and how we categorize that maintenance capital I would expect CAD8 million to CAD10 million for the nine months for 2012.

Robert Catellier - Macquarie

So Peter I will ask you this question so what our intention that we would be capitalized how do we…

Peter Robertson

Maintenance capital as you know is not a GAAP measure so how we define its subjective so we really have to see if this additional capital is that we get additional revenue out of this additional capital certainly on our legacy assets, we spend capital on our conventional systems and generally that additional capital attracts the toll in the following year, so we view that as development capital the Provident assets may be a little bit different if we can get additional revenue on those front lines of capital.

Robert Catellier - Macquarie

Just keep on with the modeling we have previously with Provident till you tell us there is a change in the treatment?

Peter Robertson

Yeah I think that’s fair.

Operator

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

Steven Paget - FirstEnergy

Just noticing your oil sands net operating income is off a bit versus the first quarter I am wondering if you could let us know if there are drivers behind some of that?

Bob Michaleski

Yeah I think on the Nipisi, Mitsue puddling, Steven we were slightly off on the commitment of that resulted in lower operating income for the second quarter compared to first quarter. I think the situation has been rectified with it really had to do with the ground temperature conditions impacted the amount of product we can move plus change in diluent sucks so those things have now I think been pretty much behind us and so we expect the third quarter to return to more normal proposition for the Nipisi pipeline.

Steven Paget - FirstEnergy

You mentioned that both (inaudible) would it make sense or maybe you are doing this already to being moving out NGLs in any and always possible whether it’s real or I guess a truck is probably not economic but moving things by rail of the Gulf Coast?

Bob Michaleski

I will let Bob Lock answer that question Steven.

Bob Lock

Thanks Steven. Without question our marketing folks are spending in an intense amount of time and effort for trying to place product, but the challenge we've got is placing into a market that's really soft in this quarter.

So to the extent possible we are looking at working with folks that have offshore capacity, the cost to get there obviously is a fact and what the net factor we would realize it as a factor, so we are trimming back our supply a little bit and we are trying to manage within our storage constraints. Certainly, August is our bench point for storage, so expect sales in our traditional markets to start picking up here in September.

Steven Paget - FirstEnergy

And how should we be looking at third quarter volumes at Empress East and red water west given the performance of the storage?

Bob Lock

So again I think we are tight-spot here for containing supplies in the summer months, because we pass along with every other player in the storage business for propane and started the summer with higher than average inventories, so once we are through that our expected sales profile should we very similar to our historical performance.

Bob Michaleski

Yeah, the only comment that is Bob we have an expansion under we had at red water, is that going to impact our production for September?

Bob Lock

So Bob is right we are undergoing a debottleneck project at red water for about 48,000 barrels a day and we expect that to be online for October. So it won't have a tremendous impact on the third quarter, but fourth quarter we will be having more product available.

Bob Michaleski

Thank you. So that so I guess ignore the last part of that conversation Steve.

Steven Paget - FirstEnergy

So third quarter for production volumes looks pretty good then?

Bob Michaleski

Yeah, compared to, it’s comparable to the past.

Operator

(Operator Instructions) Your next question comes from David Noseworthy of CIBC.

David Noseworthy - CIBC

Just a few questions here on the oil sands, we have some recent announcements by IPL and Trent regarding new oil sands pipeline and can you talk about what you see in terms of need for additional oil sands, (inaudible) transportation capacity over the next two to four years?

Bob Michaleski

Well what we can see, there was an announcement, I think that there is a number of different that require services in the oil sands and so we are still looking at supply and return to areas that are we are familiar and I think we will have more to say in time. But we still that there is going to sufficient demand and I think one of the advantage is that we have now to the Provident acquisition and development of our storage facility is sourcing diluent from a number of different places that we think very attractive to potential customers in the oil sands area.

David Noseworthy - CIBC

That kind of leads into my next question; in terms of providing logistics contracts we have seen with the coal project I guess I recover there, tried up a dulient logistics contract. Do you see an opportunity on the expanded Polaris pipeline to provide some more?

Bob Michaleski

I really cant comment on that.

David Noseworthy - CIBC

And then just on for the capacity I think it was 60 ounces per day that you expect to see there; will that additional capacity require any kind of capacity expansion at (inaudible)?

Bob Michaleski

No.

Operator

At this time I would like to turn the call back over to the presenters for closing remarks.

Bob Michaleski

Okay, well thanks for participating this morning and obviously there is a lot of interest in what’s going on in the NGL business and we are quite interested in that as well. We are learning as we go, but I think that we are still very optimistic about what the Provident transaction will mean to us. We are still very positive on all the projects that we have and these haven’t changed there. So we will have more to say as we progress to the next couple of quarters, but we are pretty optimistic about what the future looks like.

So thanks for your participation this morning and if you got any other questions, you can talk to Glenys, or Scott or Peter because I am nearly away for a week.

Operator

This concludes today’s conference call and you may now disconnect.

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