Q4 2020 Pembina Pipeline Corp Earnings Call
Ladies and gentlemen, thank you for standing by.
And welcome to the Pembina pipeline Corporation 2020 force for him.
Conference call.
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After the speaker's presentation, there will be a question answer session.
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I would now like to hand, the conference over to your first speaker today, Mr. Cameron Golding, Vice President capital markets. Please go ahead Sir.
Thank you and good morning, everyone welcome to permanent conference call and webcast to review highlights from the fourth quarter and full year of 2020 on the call with me today are Mick Dilger, President and Chief Executive Officer, Scott Burrows, Senior Vice President and Chief Financial Officer, Jason <unk>, Senior Vice President and Chief operating Officer pipeline.
Jaret Sprott, senior Vice President and Chief operating officer facilities, and Stu Taylor Senior Vice President marketing, New ventures, and corporate development Officer.
I'd like to remind you that some of the comments made today may be forward looking in nature and are based on <unk> current expectations estimates judgments and projections forward looking statements. We may express or imply today are subject to risks and uncertainties, which could cause actual results to differ materially from expectations. Further some of the information provided refers to non-GAAP measures.
To learn more about these forward looking statements on non-GAAP measures. Please see the company's management discussion and analysis dated February 25, 2021 for the period ended December 21, 2020, which is available online at Pembina Dot com and on both SEDAR and Edgar before we discuss fourth quarter on annual results I'd like to first turn things over to Mick to make.
Some opening remarks.
Good morning, everyone. Thanks Cam.
With our fourth quarter release yesterday, we're happy to close the book on 2020, and looking forward to a better 2021.
In a very challenging year I am proud of what we were able to deliver from the beginning of COVID-19 pandemic. We were steadfast in our assertion that we remain within our pre pandemic 2020, adjusted EBITDA guidance range and.
In the face of numerous pandemic related challenges and lower commodity prices, we took the difficult.
But necessary steps to do just that thanks.
Thanks to our resilient business model that protected our topline revenue and a focused effort to reducing operating and administrative costs, we were able to deliver annual adjusted EBITDA of nearly $3 3 billion.
Or 97% over the midpoint of our range as always Pat me on it takes great pride in consistently doing what it says it will do.
If there is a silver lining to be found in 2020, it would be the clear validation of our long term strategy diversification efforts and steadfast commitment to the company's financial guardrails.
The resilience stability and predictability of permanent business, where once again proven as they were during the 2009 financial crisis and 2015 commodity price downturn.
I'm equally proud of what we achieved for our other stakeholder groups.
The health of our employees and communities has been top of mind throughout the pandemic and I am pleased to report that the company has not experienced any operational disruptions to its assets as a result of COVID-19, and despite all the new pandemic related risks.
<unk> had its best safety record ever in 2020 further we took all the necessary steps to limit the spread of COVID-19 within our communities, while fulfilling our role as an essential service provider.
At the outset of the pandemic, we quickly determine the essential staff and critical infrastructure required to provide uninterrupted service to our customers processing and transporting all product tendered while supporting their precious cash flow.
We work with our customers to understand their short and long term infrastructure needs and thanks to long standing and close personal relationships. We struck many new bargains that were good for both our customers and for Pembina.
Despite deferring some early stage projects, we continued investing in projects that were well advanced or nearing completion with approximately $1 3 billion of projects entering service in 2020 and early 2021.
He has provided our customers with important infrastructure and supported our 'twenty and 'twenty, one financial results and strategic.
Direction, thus setting the table for a better 2021.
Finally for our communities we delivered on every single commitment made we also matured our ESG reporting and strategies.
Within on otherwise successful year, I feel we need to acknowledge the asset impairments we took this quarter.
Due to COVID-19, alongside changing commodity price dynamics combined with changing government priorities permanent needed to recognize an impairment in the value of certain assets, including our investment in Ruby pipeline.
Jordan Cove, LNG and our <unk> petrochemical investment we believe these opportunities remain strategy make economic sense, if de risked and are aligned with permanent ESG priorities, but we believe the time for these projects may come since we can no longer predict with certainty when that time may be we were.
We're compelled to reflect their impairments through a non cash charge.
Despite the impairment we remain committed to accessing global markets.
Combination of permanent integrated value chain, the proximity of the west coast to reach Asian markets.
It means we are well positioned to deliver value to our customers, including end users and pembina.
Most notably we are excited about the startup of our propane export facility, the Prince Rupert terminal, which will come into the service near.
Near the end of this quarter and provide access to a strong international demand for propane.
Pembina enter 2021 in a strong financial position, providing the foundation for resumption of accretive growth.
Following the pandemic latest projected from calls earlier in the year, we were delighted in December to announce the reactivation of a better phase <unk> expansion as well as the Empress cogeneration facility.
The phase eight in phase I and expansions of piece continued to be deferred and we are using this time to optimize and reduce costs. Just as we did with phase seven. We're also re imagining our Prince Rupert expansion project. We are now evaluating an expansion of the facility capable of accommodating larger vessels, which would improve economies of scale and low.
Our per unit operating costs.
<unk> expects to make a decision in the second half of 2021 in regards to all three projects taken together. They are examples of the opportunities embedded in impermanent industry leading footprint.
In addition to our announced projects we are working on an extensive portfolio of unsecured opportunities, which are all accretive and collectively comprise over $4 billion of potential capital investment, including both brownfield and greenfield projects momentum with customers behind these opportunities continues to build and we are confident in our strong.
Rate of conversion into secured project bucket.
While COVID-19 is still on urgent global concern and much uncertainty remains there has been significant progress made on understanding and mitigating the threat and there is a growing expectation of a return to some normality and associated rising energy demand.
Prices on sector consolidation continued to make our producer customer base stronger, which in turn benefits Pembina.
In 2020, we essentially hit the pause button, but in 2021 renewed optimism gives us confidence to hit play once again.
With that I will pass the call over to Scott to discuss the financial highlights for the fourth quarter and full year.
Thanks, Mick Pembina reported record adjusted EBITDA in the fourth quarter of $866 million, which represents a 10% increase compared to the same period last year. The increase was primarily from the assets acquired in the Kinder acquisition, new assets being placed into service in the pipeline and facilities Division and higher deferred revenue recognized on the peace.
<unk> system. We also benefited from monetizing a portion of NGL storage positions built up during the second and third quarter of 2020.
As well as lower operating expenses and pipelines and lower general and administrative expenses. This was partially offset by lower margins on crude oil sales and a lower contribution from alliance pipeline due to a narrow Chicago eco Chicago natural gas price differential.
Pembina recorded a net earnings loss in the fourth quarter of $1 2 billion.
Due to noncash after tax impairment charges of $1 6 billion.
On permanent investments in Ruby Jordan Cove, as well as seek APC.
Excluding impairments and associated deferred tax recovery earnings in the fourth quarter would have been $338 million <unk>.
Compared to $365 million in the fourth quarter of 2019.
Total revenue volume to $3 6 million Boe per day in the fourth quarter were up 1% compared to the same period last year. The positive contributions from assets acquired in the Kinder acquisition and new assets coming into service were partially offset by lower volumes on other systems due primarily to lower interruptible volumes on certain pipeline assets as a result of lower commodity price.
<unk> and lower volumes in certain facilities assets due to lower supply volumes scheduled turnarounds and COVID-19 related factors a strong fourth quarter contributed to solid results for the full year 2020, adjusted EBITDA of $3 to $8 billion was 7% higher than 2019 and within our pre COVID-19 guidance range.
2020, adjusted cash flow from operations was 2% higher than 2019 at 229 billion and full year volumes of $3 5 million Boe per day were 1% higher than 2019.
We delivered these results while remaining within our financial Guardrails in 2020 fee based cash flow comprised approximately 95% of adjusted EBITDA for the year, our dividend continues to be fully funded without relying on our commodity exposed business fee based cash flow more than covered our annual dividend payment with a payout ratio of 72% on this basis.
We're on all in payout ratio, including our marketing group of 61%, providing ample room between the current dividend and cash flow being generated.
At least 75% of our credit exposure at year end was with investment grade and secured Counterparties and we maintained our strong triple B credit rating with the year end ratio of approximately <unk>.
Fortunately consolidated senior debt to adjusted EBITDA of four times.
Based on our outlook for the year. We currently expect to generate 2021, adjusted EBITDA of $3 two to $3 4 billion.
At the low end of our adjusted 2021 EBITDA guidance range. Our 2021 capital program is fully funded by cash flow after dividends.
Towards the middle and upper end of the guidance range, we expect to generate excess discretionary cash flow.
Pembina has a proven track record of disciplined and strategic capital allocation and this remains one of our top priorities I am confident in our ability to generate long term shareholder value through maintaining and growing our dividend as well as true further infrastructure investment and accretive growth projects.
Investing in growth projects ultimately increases the longevity of our already long term and stable cash flow streams, because it both enhances our strategic capabilities and also our service offering also known as the Pembina store.
Beyond infrastructure investment.
Yes, cash flow will be available for debt reduction or opportunistic common share purchases to support potential share purchases Pembina announced yesterday the acceptance by the Toronto stock exchange of Pembina as noted to commence a normal course issuer bid to purchase up to 5% of its outstanding common shares. It is worth noting that in Q4, our cash flow was more than our dividends.
On our capital investments, making us free cash flow positive.
As Mick said in his opening remarks, we are proud of the results. We have delivered in a challenging year on the outlook for 2021 is more positive since our business update provided in December 3rd party commodity price forecasts have improved.
<unk> confidence in our 2021 volume outlook and supporting results in our marketing business.
While still early in the year given what's happened in the first two months of 2021, we are off to a great start I'll now turn things to make for some closing comments.
Thanks Scott.
I'd like to take a moment to provide a few comments on the topic of ESG, which is playing an increasingly significant role in all areas of our business and our strategy and is linked directly to Pembina has long term value.
First following our inaugural report issued in 2018. This past December Pembina released its 2020 sustainability report. The report includes enhanced disclosures on emissions water waste management and workforce I'm very pleased with the evolution of our reporting and look forward to continuous improvement and future project future.
Our reports.
In addition to reporting Pembina advanced other significant developments, we appointed Janet <unk>.
<unk> General Counsel, and vice President legal and sustainability with over 30 years of legal environmental regulatory and sustainable sustainability experience. Janet is a strong addition to our team and I'm confident pembina will benefit greatly from per contribution.
We also progressed strategies to reduce greenhouse gas emissions intensity by the end of 2021 Pembina will have taken concrete action within the year as well as published five year emission intensity targets.
We made progress on both on numerous inclusion and diversity initiatives, including <unk>.
Setting targets for both board and executive levels.
Starting in 2021, a significant component of permanent short term incentive plan will be tied to ESG metrics.
I'm on a stand shoulder to shoulder with our customers and peers and ensuring Canadian energy has developed and delivered responsibility responsibly with leading ESG standards and practices in place.
We are proud provider of the services that get energy toward the world's need needs it and remain well positioned to support the growing use of natural gas to reduce global tht emissions are proximity to Asia and its growing energy demand represents another strategic opportunity.
Further as many of our core competencies needed to adjust to the changing energy mix and is positioned to provide infrastructure services for new forms of energy or carbon sequestration and how it might facilitate hydrogen production.
As with everything we do.
The board prudently, ensuring we deploy capital as we always have by making our existing business more valuable adhering to our financial Guardrails and in service of all of our force stakeholder groups.
In closing Perm on approved once again in 2020 that we are resilient.
We're agile we're safe and we're reliable Pamela led our industry with a decade long run of outperformance prior to 2020 following a pandemic driven pause we will continue again working hard for.
For another 10 year run, we anticipate 2021 to be a turnaround year with a return to a more traditional growth trajectory in 2022.
We will not waver on our commitment to long term value creation that benefits each stakeholder group and we are optimistic about the future and the many opportunities in front of us.
With that we'll wrap things up operator, please open the line for questions.
At this time, ladies and gentlemen, if you would like to ask a question. Please go ahead on the press Star and then on to one on your telephone keypad.
Again Thats Star then one to ask a question.
Your first question today comes from the line of Jeremy Tonet with J P. Morgan. Please proceed with your question.
Hi, good morning.
Good morning, Jeremy.
Just wanted to.
Revisit I guess the guidance a bit here and how the environment stacks up now versus maybe when you created it.
On November or so.
Just wondering if.
You could quantify maybe a bit more I guess, how the commodity price environment looks now vs versus then and how producer activity and outlook looks now versus then.
So just trying to see kind of.
It seems like things have gotten better and just wanted to see if we can kind of quantify a bit more of the degree of how much it might have gotten better.
I'll start and then turn it over to Scott or others.
It's a good start Jeremy.
I don't think too many people thought we'd be at 60, plus dollar Delta ATI.
No.
Terrific propane prices better gas prices.
We are seeing.
Some of our producer customers alongside the consolidation we're seeing their stocks double here in the last three months, our Tripoli in some cases.
And so they are there.
I'm watching release after release there they are meeting their debt reduction targets.
And.
Putting away some money and we think that will turn into.
Drilling later in the year cautious drilling.
Hey.
So obviously, our marketing businesses is outperforming in early in the year.
What we had in our budget because we budgeted it at lower levels, we see volume slowly coming up in some places.
But I think it'll be later in the year before we can determine whether producers have the confidence to start start drilling more and when that happens that's really one when we get the pork right because we've got a lot of us.
Capacity ready and waiting and.
As volumes grow because we're covering our fixed cost anyway that will go straight to the to the bottom line and we'll have a lot more confidence I think a few months from now but.
We're delighted with the start to this year. It is much better than we had originally forecast.
Jeremy maybe just a few tailwind obviously the stronger crude price in Frac spreads both both are up pretty material from the time that we set our budget back in November crudes up close to 50% hedge the frac spreads are pretty close to that same amount now again, we always caution people that we are 50%.
<unk> hedged on the Frac spread so we won't we won't.
Participate fully in that upside in.
In terms of some of the headwinds FX has moved in the wrong direction.
The Canadian dollar is now at 80.
At the time of budget, we were at about 75 or 74, so that's a bit of a headwind and the Chicago Eco has continued to drift down from the time that we set our budget. So we do have some some headwinds in addition to the tailwind, but overall the tailwind are definitely more positive than the headwinds.
Got it.
Maybe just kind of building on that from marketing.
There was a lot of.
Winter storms last week brought in a lot of volatility to commodity prices. There just wondering if that had any impact on your businesses.
How that might have impacted on sable contract.
Yes, I mean, we participated in some of that Jeremy.
I can't call out specific numbers, but.
But again.
We're pretty cautious on on how we.
Take advantage of commodity volatility so.
I'm not going to say windfalls, but it was definitely positive for us.
Got it maybe just a last one as far as producer activity. Just wondering if you have a sense per rig activity on your footprint now or what your expectations are.
For where that could trend over the course of the year and maybe how that has changed versus original expectations.
Good morning, Jeremy Jaret, Jared Sproat here, our rig activity actually in the areas.
We pride ourselves in building our assets in the areas that have great resource obviously.
<unk>.
And in that particular area, we're actually seeing our rig activity.
<unk> are slightly above where it was kind of December of 2019 per.
Pre pandemic.
Obviously, great for the industry to see the activity coming back in but when you when you dissect it down into some of those specific areas in which we have a very large presence.
It's looking really good compared to.
On the pandemic in March.
Got it. So you said predict rig activity ahead of December 19 already just wanted to clarify that point.
Equal to you have to get very very specific down into some of our individual assets, but on a whole the northeast BC area of various in midstream in there.
That area, it's very strong and then as you move into the cash pipestone.
Wapiti areas.
The liquids rich Montney continues to be very strong where we also have a very large presence.
And then with the acquisition of Jupiter by terminally, Jeremy Obviously, Terminalling Jupiter was a great operator, we'd like to working with them terminally and is a great operator, as well and we're really looking forward to them, bringing their expertise into the deep basin Cretaceous.
Where we also have a very large presence.
Got it that's encouraging I'll stop there. Thank you.
Your next question comes from the line of Matt Taylor with Tudor Pickering Holt <unk> Company. Please proceed with your question.
Yeah. Thanks for taking my questions here guys. If I could just start off on the capital allocation would you mind clarifying your growth comments a bit because in my seat it looks like you've got brownfield growth on that.
Still have the contracts in place you could turn on but it seems messaging as you have the ability to self fund at the lower end of guidance and then the flexibility if you get to the upper end so.
But it seemed like you know growth is there that can be turned on if customers need the capacity that you can bring down leverage or buy back stock. If not are you guys thinking about it a different way.
Thoughts on capital allocation.
Okay.
So Matt I think as we as we've tried to reiterate the first priority is obviously the dividend and capital too.
<unk> growth projects that fit within the platform brownfield Greenfield expansions of the existing assets. So.
If those expansions both phase eight and nine and Prince Rupert expansion continue to progress through this year.
Probably our first priority is to refi those projects and bring them into service and then after that look at look at debt repayment and share buybacks now if those projects come back into service, we're not really spending capital on those projects in any material way until late 2022, and those will be.
Spread out over a couple of years, so even in those scenarios, where those projects come back on line, depending the timing of that we should be in a position to generate potentially free cash flow and then we get into the discussion again of what to do after that and again. After after we've made those decisions really will look at where we are.
Within our financial Guardrails, if we're below our debt metrics on our financial Guardrails.
We'll likely allocate that capital to debt repayment to ensure we're firmly within those guardrails. If we are within the Guardrails. Then we're going to have to look at where the share price is trading and our view of intrinsic value in and Opportunistically buy back shares or continue to pay down debt to position ourselves for future growth as well.
Okay. Thanks for that Scott just to dig down a little bit more than I mean, if youre turning on these growth projects. It seems like PC 90 day, you said they still have contracts in place. So it's not as if youre looking at projects.
Projects that aren't backstopped by customers is that fair.
Yes.
Yes, I mean, we can we can turn them, we can turn them on.
When we need them is really the question so like with phase seven we do work collaboratively.
We're not the kind of company that gives you something you don't need and so.
With phase seven we surveyed our customers theres not ever a perfect consensus on I'm going back a year and people said I know were committed I know you could bill, but we sure appreciate it if you delay the year, because we just don't need the capacity and we're using that kind of a collaborative approach and phase eight and nine.
Two to time that appropriately.
With phase seven.
When we when we first day.
<unk> it.
It wasn't the best thing for Pembina in a way because it kind of took away from from our growth, but we came back and we loved $150 million box off of that project through working with our customers.
In scope and cost so it wasn't all bad I mean, we're.
We're coming out with a better project and our customers really appreciate it.
Pause and.
When we get the signal.
We'll turn turn eight nine on and we think that signal is going to come.
Second quarter timing, and hopefully that'll that'll give us a consensus to to resume in the third quarter.
Great. Thanks, Mick and one more if I may on on Ruby given the write off this quarter and challenged outlook you addressed the liabilities on that asset.
And if there needs to be free cash flow directed to it is that our willingness to do just looking at the financial statements look like on a net basis, it's about $39 million of current and $464 million of non current.
Are you talking about that at the <unk> level Matt.
Yes, yes, exactly yes.
I think as starters.
That's non recourse debt.
Just remind everyone that is non recourse debt. So we have the flexibility to make some decisions around around what to do there I mean at the end of the day that asset is challenged there's no doubt about that when you look at where the spread is and I think it's too early in the process to comment on that other than to say that all parties involved here are going on.
To come to the table to come to an agreement.
In order to make this a viable asset.
Okay. Thanks, Scott Thanks for taking my question.
Your next question comes from the line of Linda <unk> with TD Securities. Please proceed with your question.
Thank you.
Just to follow up on Jeremy Max questions.
You've hit the play button again lots of opportunities in front of you.
So it might be on opportunistic lots of change going on beyond our ESG considerations evolving, including the recent U S presidential elections, and some other political and regulatory dynamics.
How do you.
What's the appetite for M&A and what areas would be the most compelling for you is if you had some choice and how do you balance that with respect to some of the other priorities.
Yes.
Start with the macro Linda with that question I mean.
Biden came in and and most people are predicting that in.
And we were on record some time ago talking about advantage, Canada in that scenario and we believe that to be the case.
Looking forward commodity price surprises to the good so delighted about that.
Mountain keeps moving forward it looks like line three will go <unk>.
<unk> it looks like it's indefinitely suspended.
I would say.
And but that's still that's still a million barrels a day of new egress and that oil isn't isn't there today.
And we've got shell LNG with.
The cold weather, both Continentally and Els elsewhere, I think it's reminded people that.
That hydrocarbons will play an important role for a long long time.
And that.
Zoom into the shell LNG project. There is there's lots of talk that.
The two Bcf a day currently under construction might turn into four Bcf a day and that's a huge number of 1 million barrels of oil and and two to four BS a day of gas those are huge numbers.
And those will pull on this space in this basin is ready to respond.
It's not going to have.
Some of the same headwinds looking.
Looking forward that it did in the past I mean, we were we were behind a portion pipe, which drove our pricing down we could not we could not access international gas pricing or international oil pricing and brand to always five bucks, a barrel roughly give or take higher than <unk>.
And we will be on Tidewater.
As a basin and so we think advantage, Canada for the foreseeable future and.
So.
Now getting back to your specific questions. If we were going to do anything we would we'd be probably looking more canada side than state side, and we don't have the Permian basin envy that we had.
Over the last little while now.
If you look back and you're a student of this youll see that Pembina, mainly did its acquisitions when we had a.
EBIT EV to EBITDA range favorable to our peers.
And we're not quite in that zone, yet, we're getting there and so.
It is it is.
I would say, we're we're reactive and we're going to focus on brownfield and greenfield opportunities, particularly brownfield win win not only do we have a lot of embedded capacity within our footprint within our pipes.
We have very inexpensive very accretive debottleneck too.
But we can power up alliance with just pumps, we can power up caution with just pumps, we can power up a lot of peace with just pumps.
We've got a lot of very accretive brownfields.
We have lots of synergies to capture from the acquisitions that we've done we're early days there and we're still like with Kinder. We're really early days in our 50, plus 50, we want to hit those numbers, we still have unfinished business with with Varicent and as Jarrett said.
Drilling there looks looks pretty good.
So.
We have a lot to do we've got also the opportunities to continue to reduce our cost footprint.
And so our job number one is to improve our return on invested capital.
And we're going to we're going to do that we've got a lot of running room there.
Thank you and as a follow up you mentioned you did on pumping to Cochin.
You recently announced an open season for that system.
Can you talk a little bit more about.
What you are aiming to achieve there and how that.
Would balance out any sort of increased domestic production if.
If there is a supply response to the added growth from shell LNG and elsewhere.
Thanks, Linda this is Jason.
So on cogent on our first.
First step of capacity evaluation is really around looking at what's there today and seeing if we can optimize it.
Within the existing <unk>.
Infrastructure that we have so as we as we looked under the Hood and got to know the asset.
Moving on all of the operations to our control center up in Edmonton, and we were able to find about 15000 barrels of capacity on that line that we didn't expect and our.
In our acquisition model and we're continuing to look for more so our first for our first steps. We're really just looking to optimize the way the system is operated in.
And see how much we can wring out of it from that perspective.
In terms of.
What are what our vision is there.
We think that there is.
Strong demand for condensate in the market.
Obviously, it's driving driving the drilling activity in Canada, but theres also.
The condensate or natural gasolines that come up from the U S share price disadvantage so they use <unk>.
<unk> to come up into Canada, We think there is room.
For both the expanded capacity on on <unk> and the incremental growth that we're expecting in Canada and Mick touched on the incremental pipeline capacity that will come into service between <unk> and line three and those things are going to create a bit of a.
GAAP in terms of heavy oil production that can be produced and demand for condensate.
To use as diluent.
Just on your last piece about.
Increased domestic yes, we believe I mean phase 789 or about.
Domestic increased condensate production, but we know that product will clear because it has too and when we think about the basin as a whole.
Our shippers on on Kocian are the consumers of the product.
And we still we've been saying this for years, it's nothing new we think that southern lights is the swing volume and it will it will it will swing based on what happens on caution on whats capture domestically on peace.
Thank you and just as a follow up on you've already put some insights on on the NGL dynamics with the recent cold snap I know I believe I recall non last polar vortex, you were shipping propane to eastern Canada to help out.
With the recent cold snap if your export terminal, where operational would you be turning back barrels to help north American consumption or how.
How do those exogenous cold snap shocks.
Would they affect any sort of propane export initiatives you would have the short term.
I think when we when we look at turning on Rupert we were going to have a wonderful.
Third a third a third balance right. We are going to have exposure to Canadian markets to U S market center and to say Asian markets and we face today.
We were on today, we'd probably be a third a third a third and so I guess the answer is we will go to the highest market. So we.
We have capacity to go to the highest highest price market.
And the good news for our customers is that through our <unk>, our weighted average price basket that theyre enrolled in they're going to participate handsomely in that equation.
So if phase great we're going to hit hit the accelerator to pay in Sarnia is great. We're going to hit the accelerator to Sarnia and Edmonton is great. We can leave barrels domestically and we've been we've been saying to our customers and they've been patient with us.
The time will come when they get Fei exposure and we're using <unk>.
<unk> the fixed cost of our storage and rail, which we had been under amortizing in the last number of years I think our value proposition to our customers is going to be absolutely incredible here as we get into the second half of the year and those shipping on Pembina is pipes are going to get a handsome.
Reward compared to those that are not stoop, Linda it's true just to give you a bit of a on update we actually did take advantage of and we look through 2020, we actually cautiously watch star supply.
And our ability to move product, we delayed some sales through Q2 Q3 and took could have the opportunity to participate in better commodity pricing in Q4 and in Q1 and so our system.
On the logistic ability that we have and then the growth that we're creating one part with the free markets. We will continue to have that we will meet every will meet all of our commitments, but we have the flexibility to move the products around with our infrastructure.
And we will be looking at that on a go forward basis.
Thank you I'll jump back on the Q.
Yes, Linda one last thing there just to recollect, we did turn on our Empress Frac, which gives us the ability to swing those barrels anywhere we can take those barrels south we can take them rail on east Sarnia, if we need to or we can take them west and so.
As a whole it's a whole bunch of more flexibility we have.
Just because we've been doing this long enough to know we don't know when the next hot market will happen on where it will be.
Next call things operator.
Your next question comes from the line of Rob Hope with Scotiabank. Please proceed with your question.
Good morning, everyone. Just wanted to follow up on a on a prior question regarding M&A activity.
With CK PC being deferred until the.
At some point there is the potential to add some capacity with a process. That's ongoing in the markets can you can you maybe talk about.
Your views about being a JV partner in a and another project or is this your existing project just on the shelf until markets improve.
We obviously are going to talk about.
An ongoing process right.
Right now we're.
We're hunkering down like I said, where we're focused on focused on.
Increasing our EBITDA dramatically without spending a lot of capital investing a lot of capital so filling up our existing assets doing those really inexpensive day bottlenecks exporting products to to Asia, and we've got a lot of running room within the most core part of our business and so if you.
Think about it as concentric circles.
Getting more out of the assets. We have is first debottlenecking assets like like Jason talked about ocean are.
We've got 100.
Mainly 100 million a day of capacity up in the various on midstream footprint, we need to take advantage of and and.
Petrochemicals is concentric circle that's out from there.
And.
It remains on strategy, but it's not it's not our highest priority right now.
Yes.
Alright, Thats very helpful.
And then just in terms of the other projects that youre highlighting that you do have brownfield opportunities have your discussions with them accelerated over the last couple of weeks last month.
Given the commodity price environment or when you are looking at projects to restart are you really going to focus on those ones that you highlighted in the MD&A.
I would just say that.
When we made the statement in my remarks that our.
Confidence in converting.
Probable too.
Confirmed as improved that's how I would characterize it as is our producer customers Theyre getting our Mojo back I mean, they were just have the hell beaten out of them last year.
As did we.
And they've they've done their balance sheet repair I think they are years ahead of their their southern partners for the most of it in terms of living within cash flow having.
Good balance sheets, and they're going to return I think theyre going to cautiously return too.
Drilling within their means they're not going to rely on capital markets to drill anymore, they're not going to borrow money theyre not going to issue equity theyre going to growth in their footprint. We've got the consolidation happening and that in my opinion is going to turn into to volumes and that's really what's going to power power Pembina.
Is is we literally.
Really have one hundreds of millions of dollars of EBITDA opportunity annually within our existing footprint and that's going to get pretty exciting.
Excellent. Thank you.
Your next question comes from the line of Patrick.
Nothing.
Please proceed with your question.
Hey, good morning, guys.
Theres been some capital cost pressures across the pipeline industry of late.
And I know phase seven is still trending on budget.
Perhaps you can just comment on how your project is coming out is the outlier in a good way.
I guess looking ahead, if you do turn phase eight and nine on later this year, just if youre still comfortable with the initial budgets for those expansions.
Yes, I guess.
Recall that we had bought the steel for phase seven pre pandemic and so I think we had $300 million invested and that represented the steel so.
That's done on it that worked out well.
With with <unk> or <unk> with <unk> being canceled we've had a flood of interest in participating in our phase seven project and so we're pretty optimistic that we can meet or even possibly exceed the number we have out there.
<unk>.
With phase eight and nine.
There could there could be cost pressures, but again when you can deal with the contractor and say hey, let's do.
Let's do seven EBIT hard on seven and then.
It'll be at the top of list for eight nine you can you can really.
Get a great win win with the contractor.
Maybe their unit rates are lower but they've got a long fairway of working so.
We're looking at not just cost with eight nine but also scope and to date.
Feel on not that about adjacent anything to add there I mean, Patrick I would add.
Because of the time that we've been allowed.
The market downturn, obviously was not not ideal, but it did give us time to evaluate our assets and so.
Having that extra year, we're able to really pinpoint where the capacity constraints are.
And when we talk about what we've historically referred to as Phase 10, we're now able to actually test out our assets that we've put into service over the last number of years and figure out what they are truly capable low so up until.
Last year, we were just trying to stay ahead of the production growth and we weren't really able to two to plan as well as we would like to we were just maximizing the amount of capacity we could add so we're now able to actually look at specifically.
What areas need.
<unk> bottlenecking, what's the optimal type sized pump size, how many pumps do we need all of those things and we can actually stage without an in more stages now as we're looking so we see a much more.
Smaller staged series of expansions that we can do that that are easier to execute and easier to plan and then just just to round that out I think it goes without saying, but I'll say it any way our ability to compete.
Our scope and costs are managed.
Getting stronger and stronger and stronger I think unlike other news out there youre going to hear our costs are going to go down not up share.
Hey, Brad it's Jaret here I just wanted to also add that.
We're fairly familiar with with our map.
Phase seven has essentially look loss kind of go on what we referred to over the top down onto the Fox Creek area and just the geographical footprint there.
It's good train right youre not into like the foothills now if you think of going from Fox Creek on straight west and through picking up say seven gens acreage and building out to where our <unk> complex is rest haven complex and moving up into north into GP Grand Prairie.
That's the really tough train right that's that those chunks of our assets there in the ground. They are built based seven its farm loans for the most part phase nine youre up on that Dawson Creek beautiful planes.
Into northeast BC once again very good you do have some river crossings, but essentially the tough sledding.
And building it's in the ground, we don't have to go there anymore. So just keep that in mind as well.
Okay, that's great color. Thanks.
And then Mick maybe just to go back to your comments around ESG.
I know youre working towards establishing your carbon reduction targets by the end of the year, but just given we've seen a rapid increase in the number of large reputable companies pledging net zero by 2050.
Even though without a crystal clear path to get there, but call it more of a from an ESG compass. If you will so just wondering what's holding pembina back from including net zero as part of your broader capital allocation guardrails.
What's holding us back is we don't announce things like that until we know how we're going to do it.
When we announced it will we'll know how to do it.
Youre going to see us taking concrete steps and over the next number of years I'm going to make a maybe a bit of a bold prediction that when you extrapolate the sum total three years from now.
Into the future you will conclude for yourself, where we're going to get to but we're going to put some targets out there we'll meet those targets.
And we're going to put some evidence out there this year that we're serious about that and I don't know when we'll be able to predict.
Carbon neutral, but when we do we will know how to do it.
That's great. Thank you very much.
Your next question comes from the line of Robert <unk> with CIBC capital markets. Please proceed with your question.
Hey, good morning folks on the congratulations for managing through 2020, and although it wasn't easy.
My question. This morning is on on ethane I was just wondering update where each day.
And with that specifically if you think the current incentives on government support that's out there isn't.
It was enough to.
Sponsor a cracker.
Otherwise what do you think needs to happen.
So for the industry to be in a position to.
On a new cracker become a reality.
Your answer maybe you can address the impact of.
$170 per ton carbon tax might mean to the year.
There.
Yes, let's just start with the second question I think anybody who comes in the province is going to have their carbon situation figured out as part of their base project.
These are these are multi billion dollar projects and add another two or 300 million to sequester carbon or do what you need to do that.
Kind of a rounding error. So I don't think that's a huge impediment.
For that in terms of how we participate in that I mean, we move most of the ethane in the province. So we're.
Can't imagine, we're not going to be.
In the middle of that discussion and we will work very hard to facilitate it.
Ethane is a huge part of our value chain some of our largest customers on our ethane customers and it goes right back to the gas plant.
Through pipes through fracs through storage and and.
It's a 50 year demand so.
We couldnt be more serious about about that and we will do everything we can to facilitate it and I think I think the government understands it too.
That's that's the kind of value added that pembina.
And the.
The province need sales or those are jobs that they're going to last decades, and decades property tax base and so on and so forth and they in turn can spawn value added.
Industries.
So.
I think it's it's a logical place where we have sustained cost advantages of province and.
We.
We think it's going to happen province wants it to happen.
Stewart do you have any thoughts to out there yes, no. The only thing I'll add Robert is.
We've been looking at this we think there are opportunities theres definitely opportunities.
To increase increase be ethane supply competitively in Alberta to support the Backstopping of a cracker, it's going to take producer effort midstream effort and government effort.
But I think there we're seeing alignment of those things and so we're excited about the role that we play today and we think we can play a larger role in the future with.
On the opportunities that are in front of us Derek do you have any comments you guys started well.
Okay. Thanks for that.
Last question has to do with the volumes of younger.
There's a lot of competing influences there obviously a turnaround but also the.
The drilling, but there's also some new services on the NGL system.
In town, so can you help us.
And sort of attribute.
No.
Those factors.
The biggest impact on volumes in other words, how much could be considered short term and how much is.
More of a long term impact on volume.
Rob Jaret here, yes, great question on Q4, we did have a planned outage so.
So that impacted the younger volumes.
And you.
You nailed it on the head the supply coming in.
Two into that area was was altered with the startup of some competing assets.
I would say that.
Not divulging the exact numbers, but I would say that our marketing business team in conjunction with the gas processing team has done an unbelievable job.
Getting back out boots on the ground.
Increasing the supply into that asset.
So we did have a little bit of a hiccup there and then with the planned outage.
Q4 looked a little bit lower than normal but.
On the.
The demand is picking up.
Okay. That's great. Thank you guys.
Your next question comes from the line of Andrew Kuske with Credit Suisse. Please proceed with your question.
Thanks, Good morning in terms of risk management.
I guess, you've always been very good on knowing what you don't know.
And the partnership you have with equate is was really representative of that but maybe more broadly how do you think about partnership or JV potential just from a context on your business.
Oh Thats such an interesting question.
Yes.
We we don't like to partner, let me just say that most people know it we like to control our own destiny and the reason we like to do that is because most of the projects. We do that extend the value chain, whether they're in our current suite of services or extend our current suite of services.
They enhance the value of all of our assets.
And.
When you don't control the next step of your value chain.
Then you lose control of taking the step beyond that.
And so when we look at partners, we want to ensure that.
We're taking them to de risk what we're doing but also so that we.
Don't impair our ability to keep growing along the value chain.
And so for example, if we had no rail facilities is somewhat controlled our rail facilities, we probably wouldn't have been able to do Prince Rupert.
We would have an unknown in terms of cost and reliability between our red water Frac in our Prince Rupert terminal and so because we own the pipes than we were able to get into fractionation, because we got into fractionation, we were able to control storage and rail and then we could push those molecules to Rupert.
And really because we wanted to and so we can't imagine having a JV that prohibits us from taking the next step in the value chain. So we'd like to have partners that we need to.
Fill a gap in knowledge GAAP capability gaps, even our financial GAAP.
But they can't impair our ability to control our walk down the value chain path.
Okay. That's very helpful. And then maybe just more narrowly on risk management. If you think about the efforts you've had specifically at red water with the co Gen.
Clearly, we've seen a pretty volatile power market as the PPA is rolled off and we're in a more free market environment.
Can you talk maybe a little bit about power cost management on how Thats really benefited you in the outlook on the future.
Yes, I mean, just on co gens.
I wouldn't be shocked if we announced one on a year for a number of years I mean, they're they're taking us off coal gas mixture to on all gas next year, we don't have.
Line losses through transmission and so thats obviously.
Energy going into the environment, we don't need.
And very cost competitive.
We anticipate continuing to do that we hedged power your questions risk management, we hedge a lot of our power for example at Empress because we hedge our gas we hedge our power because those are the input costs of making propane and butane and so we're doing that now.
I would say, though our focus is our self supply power requirements. It's not merchant now we might end up with a few kilowatts of merchant just based on co. Gen sizing I am not going to rule that out, but our focus is self supply and that's a big market, where one of the biggest power consumers.
In Alberta, and so that's a big big market, we have economies of scale.
Consistent with my comments on cost efficiency works consolidating all our power needs across our business to a single desk.
We.
We'll have our co gens in there and we're looking at renewable sources of power as well.
Not necessarily to invest in but to consume and so that's a that's.
That's a big opportunity for us from a cost cost perspective and efficiency perspective.
<unk>.
Again, we do hedge a lot of that and a lot of what we do is hedging our self supply.
Sure.
Ill also add this on the on the mitigation side not only the commodity itself on the energy that you're consuming but as you build these co. Gen. You obviously have to back that up with.
Reducing your reliance on the wires charges for the distribution right. So as we as we build out this strategy taking ourselves off because there is obviously potential that the energy itself increases in price. There is also the risk that the transportation distribution of that energy goes up and we will continue to wind those portions.
Some of that exposure down as we build those centralized.
Power generation units.
That's great. Thank you.
Your next question comes from the line of Robert Kwan with RBC capital markets.
Please proceed with your question.
Perfect Good morning.
I can just start with some questions on the big gas pipes, and starting with with Ruby.
You took the full write off.
Convertible preferred and recognizing there may be some interplay with Dod and probabilities around impairment math.
Alright.
Does that change if you're taking on hold right off against you.
On your expectation for future cash flow.
Okay.
Yeah, I think Rob obviously, the impairment is a bit of an accounting exercise.
There's lots to do on that pipeline there are opportunities in the future.
The main driver of the impairment is the short term outlook on that asset base is very challenged.
With both the station to pricing as well as the pallets on the Linde spread theres just not enough.
And the spread to make that pipeline tool. So we do believe there is potential to re contract that pipeline, albeit at much lower tools and longer term, we're looking at some opportunities around that pipeline.
But that being said.
Theres, a bunch of things that have to happen, including the note refinancing next year. So there are some things that are possible can you put that on an impairment model no. So based on what we know today that asset is very challenged but we're working hard on that and as I said previously.
It's a bit of a complicated.
Structure with.
Ourselves at our preferred distribution, we have kinder Morgan below it to the common and then we have the bondholders and as I said previously everybody's going to have to come to the table.
And work together to make this a sustainable pipeline. So in terms of the short term outlook I mean, we had already forecasted a lower contribution.
From Ruby in 2021 and that was implied in our 2021 guidance.
Okay.
That you wrote it zero still.
On your expectations. There still is some positive cash flow here in the future and depending on how the parties come together it could still be a fairly material number into the medium terms next year.
Yes, there is still I mean, there are still contracts, obviously on that pipeline one of the contracts goes out to 2026.
There is also some interruptible volumes as well as the producer contracts are good for another six months. So there is there is cash flow on that asset where it ends up will be determined over the next several months here as we work with all the parties involved.
Yes, Robert.
And we think this thing is going to generate cash flow in the future.
We can't point to it now the foundational contracts.
We're rich in they were stuck in a different time.
We think theres going to be replacement there.
Just for an impairment test.
You can't put what you think is going to happen in there you have to put in what you know what's going to happen with certainty. So.
No.
I guess.
To some extent the accountants made us do it it's not necessarily reflecting what we think the long term cash flow generation prospects of that line will be we do think it will have on <unk>.
Ongoing source of cash flow.
Do you think we'll get clarity on how this all plays out in 2021.
I'll turn that to a camel answer that.
I think that.
It's early on in the process Robert.
As Scott says all parties need to come together I think.
We're certainly hopeful that thats the case and we can have a constructive outcome.
Just turning to alliance just some thoughts on that.
How you see that playing out over the next.
I mean years and do you see any potential.
And the regulator.
More involved either from rates setting or or even just some of the mechanics around sales for example.
<unk> right now is your price.
Price taker on the bid floor, but there is precedent from the <unk> to be a price setter Q.
We incent contracting is that something youre looking at.
We havent had that conversation yet.
We're.
Obviously, that's a really volatile spread.
To say, the least and I think the value of that pipe just at a macro level. Robert was was demonstrated then it was it was a.
Pretty important source of energy for the us here recently.
Was one of the pipes that kept producing in fact I think we we saw two or $300 million day more hit that pipe here through the cold snap in and so youre going to have I think producers are looking at that and you are also going to have consumers looking at that like when the chips are down where was the energy.
And so we think that that pipe will have.
<unk>.
No.
Better differential than it currently does now and that it will and we've seen this before in my career Ive seen the spreads tighten up and then.
Go to two $2 above $2.
So.
We're pretty sure it'll it'll get re contracted maybe maybe.
Pembina on Enbridge have to market.
The space.
A little bit in the near term.
In terms of the rate setting that is that is not.
It's a very good idea and I'm going to take away for us to see what the opportunities are maybe I can catch up with you.
Offline on what Youre Brainstorm is there.
And there are no further.
Further questions in queue at this time I turn the call back to Mr. Douglas for closing remarks.
Okay.
Well.
Thank you everybody.
I am sure you are looking forward to.
2021 as much as we are things are starting to break it looks like on the Covid front, there's still some some challenges ahead.
Probably having talked to our U S directors yesterday.
They are ahead and things will clear it.
Faster than Canada.
We see great energy prices, we're encouraged we're not ready to to say theyre going to continue indefinitely, but it's a very good start we're seeing volumes.
Come up and so as we close the book on 2020 I want to say, thank you to all our.
People on the phone our shareholders.
Who stuck with us through 2020, and our staff, who were amazingly resilient and allowed us to to.
To meet our safety financial and community.
Objectives, and our customers for working hard with us to keep paying the bill. So thank you very much and have a great weekend.
And this concludes today's conference call. Thank you for your participation you may now disconnect.
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