Q4 2020 Pembina Pipeline Corp Earnings Call
Yeah.
Ladies and gentlemen, thank you for standing by.
And welcome to the Pembina pipeline Corporation 2021, part of our conference call.
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The other session.
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I would now like to hand, the conference over to your first speaker of today.
The camera Golding Vice President of capital markets. Please go ahead Sir.
Thank you and good morning, everyone welcomed the permanence 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 viewed 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 current as 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 of non-GAAP measures. Please see the company's management discussion and analysis dated February 22021 for the period ended December 21, 2020, which is available online at Penn and the Dot com and on both SEDAR and Edgar before we discuss fourth quarter on annual results I'd like the first turn things over to Mick to.
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'm 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 in.
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 kind of focused effort to reducing operating and administrative costs. We were able to deliver annual adjusted EBITDA of nearly $3 $3 billion or 97% of the midpoint of our range as always Pat me on it takes great pride in.
Only 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 of 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 of the new pandemic related risks.
Came in ahead of 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 the long standing and close personal relationships. We struck on many new bargains that were good for both of our customers and for Pembina.
Despite the 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 of table four of 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.
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 of 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 compelled to reflect their impairments through a non cash charge.
Despite the impairment we remain committed the accessing global markets the.
Combination of permanent the 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 the strong international demand for propane.
Pembina enter 2021 in a strong financial position, providing the foundation for resumption of accretive growth.
Following the pandemic related project.
Earlier in the year, we were delighted in December to announce the reactivation of a better phase seven expansion as well as the interest cogeneration facility.
The phase eight in the phase nine 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 lower per unit operating costs.
Pembina 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 impairment is 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're confident in the strong.
Rate of conversion into secured project bucket.
While COVID-19 is still on urgent global concern and much of 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, Nick 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 pipelines and facilities division and higher deferred revenue recognized on the peace.
Line 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 margin on crude oil sales and a lower contribution from the lines pipeline due to a narrow of 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 compared to $365 million in the fourth quarter of 2019.
Total revenue volumes of $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 turnaround 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 the 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.
Roughly 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 a proportionately 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'm 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.
Vesting of growth projects ultimately increases the longevity of our already long term and stable cash flow streams because of both enhances our strategic capabilities and also our service offering also known as the Pembina store.
Beyond infrastructure investment excess cash flow will be available for debt reduction or opportunistic common share purchases to support potential share purchases Pembina announced yesterday of 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.
For our cash flow was bore than our dividends and 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 providing confidence in our 2021 volume outlook and supporting results in our marketing business.
I'll 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 reported includes enhanced disclosures on emissions water waste management and workforce I am very pleased with the evolution of our reporting and look forward to continuous improvement and future project fusion.
The reports.
In addition to reporting Pembina advanced other significant developments, we appointed Janet <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 her 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 of emission intensity targets.
We made progress on both on numerous inclusion and diversity initiatives including of.
Setting targets for both board and executive levels, starting in 2021, a significant component of Pembina 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 the Canadian energy has developed and delivered responsibility responsibly with leading ESG standards and practices in place.
We are proud of provider of the services that get energy toward of the world's need needs it and remain well positioned to support the growing use of natural gas to reduce global GHT emissions are proximity to Asia and its growing energy demand represents another strategic opportunity.
Further as many of the 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 four stakeholder groups in.
In closing pattern on approved once again in 2020 debt we are resilient.
We're agile we're safe and we're reliable Pembina led our industry with a decade long run of outperformance prior to 2020 following of pandemic driven pause we will continue again working hard for.
For another 10 year run, we anticipate 2021 to be of turnaround here with the 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 in the press Star and then on the one on your telephone keypad.
Again, that's star then one to ask the question.
Your first question today comes from the line of Jeremy Tonet with J P. Morgan. Please proceed with your question.
Hi, good morning.
Morning, Jeremy just I just want to.
Revisiting I guess, the the guidance a bit here and how the environment stacks up now versus maybe when you created it in November or so.
Just wondering if you could quantify maybe a bit more I guess, how the commodity price.
This environment looks now versus versus debt 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.
The good start Jeremy.
I don't think too many people thought we'd be at 60, plus dollar Delta ATI and <unk>.
Sure.
Terrific propane prices better gas prices.
We're seeing.
Some of our producer customers alongside of 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 am watching release after release, there they're meeting their debt reduction targets and.
Putting away some money and we think that will turn into two of drilling later in the year.
Cautious drilling I'd say.
<unk>.
So obviously, our marketing businesses is outperforming in the early in the year.
What we had in the 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 <unk>.
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 for now, but but we're delighted with the start to this year. It is much better than we had originally forecast yet.
Yes, 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.
<unk> to 50% hedge the frac spreads are pretty close to that same amount now again, we always caution people that we are 50% hedged on the frac spreads. So we won't we won't.
Participate fully in that upside.
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 and maybe just kind of building on that from marketing.
There was a lot of the.
Winter storms last week brought in a lot of volatility to commodity prices. There just wondering if that had any impact on your businesses.
If that how that might have impacted the oct 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.
Im not going to say windfalls, but it was definitely positive for us.
Got it and maybe just the last one as far as producer activity. Just wondering if you of a sense for 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.
And in that particular area, we're actually seeing our rig activity.
Two are slightly above where it was kind of December of 2019 pretax pre pandemic.
It's 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.
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 and in that area. It's very strong and then as you move into the cash pipestone.
The wapiti areas of 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 of great operator, we'd like to working with them terminally and is of 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.
Debt still have the contracts in place you could turn on but it seems the messaging is you have the ability to self fund that the lower end of guidance and then the flexibility if you get to the upper end, but.
But it seemed like you know growth is there that can be turned on of 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 in terms of of thoughts on capital allocation.
So Matt I think as we as we've tried to reiterate the first priority is obviously the dividend.
And capital too.
Two 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 in and then we get into the discussion again of of what to do after that and again. After after we 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 prices 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.
Yeah. Thanks, Thanks for that Scott I, just just to dig down a little bit more than I mean, if you're turning on these growth projects. It seems like piece of eight nine you said they still have contracts in place. So it's not as if youre looking at.
Projects that aren't backstopped by customers is that fair.
Yes.
Yes, I mean, we can we can turn the 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 of perfect consensus on Im 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.
To the time that appropriately.
With phase seven.
When we when we first day.
<unk> debt.
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 the 150 million box off of that project through working with our customers and in scope and cost. So it wasn't all bad.
We're coming out with a better project and our customers really appreciated the.
Pause and.
When we get the signal.
We'll turn turn eight nine on and we think the signal is going to come.
Second quarter timing and hopefully the that'll that'll give us the consensus two to resume in the third quarter.
Great. Thanks, Mick and then 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 as the willingness to do just looking at the financial statements look like on the net basis, it's about $39 million of current and $464 million of non current.
Are you talking about debt at the <unk> level Matt.
Yeah, Yeah exactly yes.
Well I mean, I think of starters.
That's non recourse debt of just 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 to have 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.
Okay.
Your next question comes from the line of Linda and the dialogue 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 that.
Might be opportunistic lots of change going on beyond ESG considerations evolving, including the recent U S presidential elections, and some other political and regulatory dynamics.
How do you know.
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 al.
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 of 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 of new egress and that oil isn't isn't there today.
And we've got shell LNG with the.
The cold weather, both the Continentally and Els elsewhere, I think it's reminded people that.
Debt hydrocarbons will play an important role for a long long time.
And debt.
If you zoom into the shell LNG project. There is there's lots of talk that the.
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.
And those will pull on the 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 of 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'll 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 NV debt we had.
Over the last little while now.
If you look back and you're a student at S. Youll see that Pembina, mainly did its acquisitions when we had.
EBIT EBIT 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.
We can power up alliance with just pumps, we can power of kocian with just pumps, we can power up a lot of piece of that 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 on our 50, plus 50, we want to hit those numbers, we still have unfinished business with with Varicent and as Jarrett said.
The drilling there looks looks pretty good.
So.
We have a lot to do we've got also 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 the.
If there is a supply response to the added growth from shell LNG and elsewhere.
Thanks, Linda this is Jason.
So on <unk> our first.
First step of capacity of 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.
The strong demand for condensate in the market.
Obviously, it's driving driving the drilling activity in Canada, but theres also.
The the condensate or natural gasolines that come out from the U S share price disadvantage so they use <unk>.
Kocian 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, 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.
Two to use as diluent.
Just on your last piece about <unk>.
Increased domestic yes, we believe I mean phase 789 or about.
The domestic increased condensate production, but we know of that product will clear because it has too and when we think about the basin as a whole.
The our shippers on on Kocian are the consumers of the product.
And we still we've been saying this for years. So 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 what's captured domestically on peace.
Thank you and just as a follow up on your own.
With some of the insights on the NGL dynamics with the recent cold snap I know I believe I recall on the 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.
With the effect any sort of propane export initiatives you would have in the short term.
I think when we when we look at turning on Rupert we were going to have a wonderful thing.
A third of third balance right, we were going to have exposure to Canadian markets to the 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 of third and so I guess the answer is we'll go to the highest market. So we.
We have capacity to go to the highest mark highest price market.
And the good news for our customers is that through our the WAF, our weighted average price basket that theyre enrolled and they're going to participate handsomely in that equation.
So if phase great we're going to hit hit the accelerator to pay and if Sarnia is great. We're going to hit the accelerator the Sarnia and Edmonton is great. If 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 the exposure and when we're using we're amortizing the fixed cost of 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 pipes are going to get a handsome rewards compared to those that are not stoop.
Linda it's true just to give you a bit of on update we actually did take advantage of and we look through 2020.
We actually cautiously watched our supply.
Our ability to move product, we delayed some sales through Q2 Q3.
And two could have the opportunity to participate in better commodity pricing in Q4 and in Q1 and so our system.
The the logistic ability that we have and the within the growth that we're creating one part with the Fei 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 of that on a go forward basis.
Yeah.
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.
Where we can take those barrels south we can take them rail on east of the Sarnia, if we need to or we can take them west and so.
It's the 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 and where it will be.
The 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 the on a prior question regarding the M&A activity.
With CK PC being deferred until the future at some point there is the potential to add some capacity with the 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 that the.
Your existing project just on the shelf until markets improve.
We obviously are kind of talk about.
An ongoing process.
Now.
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 it 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 on.
Do 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.
Many hundred millions of 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.
On your discussions with them accelerated over the last couple of weeks last month.
Just 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.
The probable too.
Confirmed as improved that's how I would characterize it as is our producer customers, they're 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 the years ahead of their their southern partners for the most of the firm's of living within cash flow having.
Good balance sheets, and they're going to return I think theyre going to cautiously return too.
The 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 have 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 have 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 Ho.
There's nothing.
Please with your question.
Hey, good morning, guys.
It's been some capital cost pressures across the pipeline industry of late.
And I know phase seven is still trending on budget.
But perhaps you can just comment on how your project is coming out is the outlier in a good way.
And I guess looking ahead, if you do turn the page eight and nine on later this year.
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 that.
It's done on it that worked out well.
With with TNX or non <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 and.
With phase eight of nine.
Is 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 of hard on seven and then <unk>.
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.
We're looking at not just cost with eight nine but also scope and to date.
I feel on not that about adjacent anything to add there I mean, Patrick I would add.
Because of the time that we've been on 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 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 theyre truly capable of so up until.
Last year, we were just trying to stay ahead of the production growth and we werent really able to tip 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.
The bottlenecking, what's the optimal pipe size of pump size, how many pumps do we need all of those things and we can actually stage it out and 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.
As scope and costs are managed.
It's 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.
Hey, Brad it's Jaret here I just wanted to also add debt.
We're fairly familiar with of with our map.
The phase seven is 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 Muslim complex is the rest haven complex and moving up into north and the 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 farmland 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 Mike 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 without a crystal clear path to get there, but call it more of a of an ESG compass. If you will so just wondering what's holding pembina back from including net zero as part of your 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 will 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 of bold prediction that when you extrapolate the sum total of 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.
No.
Carbon neutral, but when when 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 just wanted an update of where it is.
And with the specifically if you think the current incentives on government support that's out there.
It was enough to.
The sponsor of Cracker.
Otherwise what do you think needs to have happened.
For the industry to be in a position to okay.
So the new cracker of become a reality.
And then your answer maybe you can address the.
Part of the.
$170 per tonne of carbon tax might mean to the Oh.
I'll look 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 of your carbon or do what you need to do.
The 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.
I 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 pipe through Fracs sort.
Storage and.
And it's it's.
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 the that's the kind of value added the pembina.
And the.
Of the province needs of those are those are jobs that they're going to last decades, and decades of 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.
We think it's going to happen province wants it to happen.
Stuart you of any thoughts out there.
The other thing I'll add Robert is we.
We've been looking at this we think there are opportunities theres definitely opportunities.
To increase increase the ethane supply competitively in Alberta to support the Backstopping of of Crocker, 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 the.
The opportunities that are in front of us Jared do you of any color you guys started well.
Okay. Thanks for that.
Last question has to do with the bones of younger.
There's a lot of competing influences there obviously the turnaround but also.
On the drilling, but Theres also on some new services on the NGL system.
So can you help us.
And sort of attribute.
No.
Each of those factors is that the.
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 Yeah, Great question on Q4, we did have a planned outage so that.
The younger volumes.
And you.
You nailed it on the head of the supply coming in.
Two into that area was was altered with the startup of some.
From competing assets.
I'd say that.
No not divulging the exact numbers, but I would say that our marketing business team in conjunction with the the gas processing team has done an unbelievable job.
Getting back out boots on the ground and.
Increasing the supply into the 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.
The demand is picking up.
Okay. That's great. Thank you guys.
Your next question comes from the line of Andrew Kuske.
Credit Suisse. Please proceed with your question.
Thanks, Good morning in terms of risk management.
I guess, you've you've always been very good on knowing what you don't know.
And the partnership the hardwood equate is was really representative of that but maybe more broadly how do you think about partnership or JV potential just in the context of ROE on your business.
All of that 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.
The enhanced the value of all of our assets.
And.
When you don't control of the next step of your value chain than.
And then you lose control of taking the step beyond that.
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 do.
Don't impair our ability to keep growing along the value chain.
And so for example, if we had no rail facilities if someone control of our rail facilities, we probably wouldn't have been able to do Prince Rupert.
Because we would have an unknown in terms of cost and reliability between our red water Frac in our Prince Rupert terminal.
So because we owned 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 of JV that prohibits us from taking the next step in the value chain. So we'd like to have partners that debt we need to fill.
While our GAAP of knowledge gap of capability gaps even of financial GAAP.
But they can't impair our ability to control our walk down the value chain Pal.
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.
The talk maybe a little bit about power cost management on how thats really the pattern of how did you and 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, there they're taking us off.
Coal gas mixture of two and all the gas next year, we don't have.
Line losses through transmission and so thats obviously.
The energy going into the environment, we don't need.
And very cost competitive.
We anticipate continuing to do that we hedged power.
The 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'm not going to rule that out, but our focus of self supply and that's the big market, where one of the biggest power consumers in alber.
Later, and so that's a big big market, we have economies of scale.
Consistent with my comments on cost efficiency works consolidating all of our power needs across our business to a single desk.
And we.
We 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 the that's a big opportunity for us from a cost the cost perspective and efficiency perspective.
And again, we do hedge a lot of that and a lot of what we do is hedging our self supply.
Sure Andrew I'll also add this on the on the mitigation side not only the the commodity itself of the or the energy that youre consuming but as you build these co gens 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 the strategy taking ourselves off because there is obviously potential that the energy itself increases in price. There is also the rest of the transportation distribution of that energy goes up and we will continue to wind those portions of.
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.
If I could just start from questions on the big gas pipes, and starting with with Ruby.
You took the full write offs of stick.
The convertible preferred and recognizing there may be some interplay with that and probabilities around impairment amount.
Alright.
Is that saying if you're taking the full write off against.
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 old pallets on the Linde spread theres just not enough.
And the spread to make that pipeline total. So we do believe there is potential the re contract that that pipeline, albeit at much lower tools and longer term, we're looking at some opportunities around that pipeline.
But that being said.
There's a bunch of things that have to happen, including the 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 that our preferred distribution, we of Kinder Morgan below of the comment and then we have the bondholders and as I said previously everybody is going to have to come to the table.
And work together to make this the 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.
Fact that you wrote it zero still.
On the expectation is 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 term is that true.
Yes, there is still I mean, there is still contracts obviously on that pipeline one of the contracts goes out to 2026.
Theres 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.
Yeah, Robert we think so 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 on you you have to put in what you know what's going to happen with certainty. So.
I guess.
To some extent the accountants made us do it it's not necessarily reflecting what we 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 don't know.
Okay, that's the camel answer that.
I think that is.
It's early on in the process Robert So as Scott says all parties need to come together I think.
We're certainly hopeful the that's the case and we can of a constructive outcome.
Just turning to alliance just some thoughts on the debt.
How do you see on playing out over the next.
Kind of many years.
Do you see any potential.
On the regulator.
More involved either from rates setting or or even just some of the mechanics around tools for example, the Reg.
The spring season, right now is your price taker on.
The floor, but there is precedent from the <unk> to be a price setter Q.
Essentially 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.
The value of that pipe just at the macro level of Robert was was demonstrated then it was it was a.
A pretty important source of energy for the us here recently.
It 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're also going to of consumers looking at that like when the chips are down where was the energy.
And so we think that the pipe will have.
<unk>.
Or.
Better differential than it currently does now and debt it will and we've seen this before in my career Ive seen the.
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 half the market.
The space.
A little bit in the.
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 takeaway for us to see what the opportunities are maybe I can catch up with you.
Offline on.
On what Youre Brainstorm is there.
That sounds great I'll leave it there thank you.
And there are no from.
Further questions in queue at this time I turn the call back to Mr. Douglas for closing remarks.
Okay.
Well.
Thank you everybody.
I'm sure you are looking forward to.
2021 as much as we are the things that 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 of clearer.
The 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.
The people on the phone our shareholders.
Who stuck with us through 2020, and our staff, who were amazingly resilient and allowed us to.
To meet our safety financial and community.
Objectives.
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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