Q2 2022 Pembina Pipeline Corp Earnings Call
Good day, ladies and gentlemen, and welcome to the Pembina Pipeline Corporation 2022 second quarter results Conference call. Today's conference is being recorded at this time I like to turn the conference over to Cameron Goldade Pembina in term Chief Financial Officer. Please go ahead.
Yeah.
Thank you Keith and good morning, everyone welcome to Penn minutes Conference call and webcast to review highlights from the second quarter of 2022.
On the call today, we have Scott Burrows, President and Chief Executive Officer, Jerry <unk>, Senior Vice President and Chief operating Officer.
<unk> Senior Vice President external affairs, and Chief legal and sustainability Officer, Stu Taylor Senior Vice President marketing, New ventures, and corporate development Officer.
I would like to remind you that some of the comments made today may be forward looking in nature and are based on payment as current expectations estimates judgments and projections.
We're looking statements May 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 and non-GAAP measures. Please see the company's management's discussion and analysis dated August four 2022 for the period ended June 32022, as well as the press release issued yesterday, which are available online at <unk> dot com and on both SEDAR.
I will now turn things over to Scott to make some opening remarks. Thanks.
Thanks, Cam and detailed with our release yesterday permanent delivered another strong quarter with adjusted EBITDA of $849 million, which was a record for our second quarter, while we typically see a sequential lower contribution in the second quarter from permanent NGL marketing business. Our results benefited from continued growth in volumes across many of permanent systems higher end.
Margins and a strong contribution from the crude oil marketing business as.
As Ken will detail in a moment with strong year to date results and a positive outlook for the rest of the year. We have raised our 2022 adjusted EBITDA guidance to $3 $5 75 to $3 67 5 billion.
Throughout the second quarter, we continued to progress our portfolio of growth projects, notably by bringing phase seven peace pipeline expansion into service in June ahead of schedule and $150 million under budget by reactivating a phase eight expansion likewise construction on the phase <unk> expansion is ongoing and we continue to look forward to bringing that project into service later this year.
Are these.
These expansions deliver a multitude of benefits, including full product segregation across the piece system and creating additional egress capacity to enhance 10 minutes customer service offering and accommodate future growth.
We have also advanced the in service date for Empress Cogeneration facility to Q3 of this year one quarter earlier than previously expected the co general reduce overall operating costs and contribute to annual ghd reductions at the Empress NGL extraction facility to the utilization of cogeneration waste heat and the low emission power generated.
And alongside our partners, we continue to advance two significant proposed development, the Alberta carbon grid and Cedar LNG, both of which are exciting and transformative projects on.
On the Alberta carbon grid permanent Tc energy progress work on several fronts, including continued discussions with the government of Alberta surface, and subsurface engineering and planning and engagement with customers and stakeholders on Cedar LNG project with the high as the first nation front end engineering design and commercialization work streams are both underway.
Through ongoing commercial discussions we observed considerable interest you get WCS be natural gas to international markets. While at the same time diversifying to new supply sources.
In addition to another strong financial quarter and continued progress on our major projects. There were several other positive developments during the first quarter second quarter first all regulatory approvals have been received in respect of the joint venture transaction with KKR and we are working to satisfy the remaining conditions to close which is expected in August these efforts.
The sale of a 50% interest in the <unk> pipeline, which is consistent with our intention when we announced the transaction and was part of the agreement with the competition Bureau second Pembina has now executed the previously referenced long term agreement with a third leading northeast BC montney producer being terminal.
These agreements include the commitment or significant volumes from another multi phased northeast BC Montney development and allow terminally day call for future firm transportation and fractionation services on a take or pay basis at the acreage has developed our agreement with Terminalling together with the previously announced service agreements with Conocophillips, Canada, and another unnamed customer provide three leading montney producer.
With certainty of transportation egress from this key area for their future development and access to the remainder of permanent integrated value chain, including fractionation and marketing services.
As we have been saying for a while <unk> has a very positive outlook for northeast BC development and with existing infrastructure in our integrated service offering we feel poised to benefit as a result of long term commitments under these agreements that we have announced recently as well as through our ownership in Paris in midstream, we expect to have secured the transportation fractionation and marketing rights with significant portion.
Forecasted future growth in the northeast BC Montney.
Capturing these incremental volumes will collectively support improved the utilization of our existing assets as well as capital efficient expansion projects into the future as a specific example, permanence currently engineering and evaluating up to an incremental 55000 barrels per day of propane plus fractionation capacity at the parent is red water complex the red.
Water complex allows for capital efficient expansion due to existing cavern storage ownership had significant contiguous land holdings and industry, leading rail and pipeline connectivity significant existing infrastructure provides coming out of that flexibility.
To right size, the incremental fractionation capacity to meet recently announced customer commitments as well as incremental demand and a de risked timely and cost effective manner.
Third the contracting of alliance pipeline continues to progress very well during the second quarter of 2022 Alliance offered three open seasons to the market. The largest of the open seasons resulted in approximately 270 million cubic feet per day of incremental long term firm service with a volume weighted average term of 15 years commencing in November 2022.
Other two open seasons were for short term service recent open seasons have resulted in alliance being contracted over 90% for the current and next gas here through November 2023.
And finally timing of continues to advance execution of its ESG strategy in July we established a $1 billion sustainability linked revolving credit facility, allowing permanent finance strategy with its ESG priorities. The facility contains pricing adjustments that reducer increased borrowing cost based on permanent performance relative to greenhouse gas emissions.
Intensity reduction performance target.
<unk> is facility further highlights having as ESG commitment and ongoing efforts to integrate ESG into our business and financing strategy.
Additionally, we entered into a power purchase agreement 105 megawatts of renewable energy and associated renewable attributes with a wholly owned subsidiary of Capstone infrastructure Corporation.
View power purchase agreements as an efficient tool to support development of renewable energy infrastructure lower emissions and support the transition to a lower carbon energy system. The PPA with Capstone also benefit Avenova security and cost competitive renewable energy and fixing the price for a portion of the power permanent consumes and further to permanent ESG strategy.
Im going to continues to demonstrate its commitment to equity diversity and inclusion in the workplace over the past year <unk> has made tremendous progress toward this goal, including expanding representation in executive leadership roles. Both at the Vice President and senior Vice President levels and also on the board. The company is well positioned to deliver on its targets and broader Adi initiatives.
Enabling <unk> to create a safe and inclusive workplace and attract and retain a broad and diverse talent pool at all levels of the organization.
Given industry tailwind I am looking forward to continued strength and momentum into the back half of this year and beyond I will now pass the call over to Tom to discuss in more detail the financial highlights for the second quarter.
Thanks Scott.
As Scott noted parameter reported quarterly adjusted EBITDA of $849 million.
Representing a $71 million or 9% increase over the same period in the prior year rare.
Relative to the same period last year second quarter results benefited from stronger marketing results due to higher margins on crude oil and NGL sales.
Combination of higher volumes on the peace pipeline system.
Higher tolls largely due to inflation as well as higher contributions from our stable and alliance.
These positive factors were partially offset by a lower contribution from Ruby due to Ruby pipeline filing for bankruptcy protection on March 31 2022.
Higher realized losses on commodity related derivatives.
Lower contracted volumes on the <unk> and Mitsui pipeline systems due to the expiration of contracts.
And higher general and administrative costs, primarily due to higher long term incentive costs driven by permanent relative share price performance.
Pembina recorded earnings in the second quarter of $418 million, representing $164 million or 65% increase relative to the same period in the prior year.
In addition to the factors impacting adjusted EBITDA earnings in the second quarter were positively impacted by lower <unk> expense and impairment and a higher unrealized gain on commodity related derivatives.
Second quarter earnings were negatively impacted by higher income tax expense and higher net finance costs due to foreign exchange losses compared to gains in the second quarter of 2021.
Total volumes of 334 million barrels of oil equivalent per day in the second quarter were down approximately 4% compared to the prior period of last year.
A 6% decrease in pipeline volumes was largely driven by our Ruby pipeline filing for bankruptcy protection and lower contracted volumes of <unk> and the two pipeline systems due to contract explorations combined with lower volumes on the Alberta ethane gathering system due to third party outages.
These factors were partially offset by higher volumes on the peace pipeline system, the vantage pipeline, great value pipeline and cogent pipeline.
A 1% decrease in facilities volumes was largely due to lower volumes at the Saturn complex as a result of scheduled maintenance, partially offset by higher contracted volumes at the cutbank complex.
It is worth noting that excluding the volume impact of contract expirations on the <unk>.
<unk> and Mitsui pipeline systems as well as the Ruby pipeline entering bankruptcy protection second quarter volumes would have increased approximately 1% over the same period in the prior year.
As Scott noted based on the strong year to date results and the outlook for the remainder of the year <unk> has raised its 2022 adjusted EBITDA guidance range to $3 $5 75 to $3 675 billion.
Relative to the previous guidance the revised outlook for 2022, primarily reflects stronger marketing results.
Higher contributions the alliance and cogent pipelines as well as certain assets in the gas services business and the anticipated closing of the nuclear transaction later this month.
Year to date <unk> has generated cash flow from operating activities of nearly $1 3 billion, which.
Which has been used to fund dividend payments and the capital program with the excess used to repurchase common shares and reduce debt, thereby strengthening the company's leverage metrics.
Since late 2021, <unk> now repurchased $2 7 million common shares at a total cost of approximately $122 million.
Pembina remains committed to common share repurchases up to 350 million subs.
Subject to the closing of the new car transaction additional excess cash flow in the year. If any is expected to be used to reduce debt and position the company for the future.
I'll now turn things back to Scott for closing remarks.
Thanks, Ken as I reflect at the mid point of the year I am pleased with our results and our prospects.
With stronger than expected performance, we've been able to raise guidance twice, we expect to close our new co transaction. This month and through the combination of three complementary platforms create a premier highly competitive western Canadian gas processing entity, we continue to advance our multibillion dollar portfolio of projects, including Cedar LNG in Alberta carbon grid, we've allocated capital.
Both the common share repurchases and paid down debt strengthening our balance sheet and positioning us well for the future and we are executing on our ESG strategy and making progress towards the targets. We set last year more broadly in our view the potential opportunities within the western Canadian sedimentary basin remain under appreciate it Ken.
We continue to observe steady volume growth on key systems and a positive outlook for additional future growth is being informed by a number of factors, including the sound financial position of permanence customers price strength across all commodities and permanent value chain the quality of the WCS formations such as the Montney. The Duvernay the development of LNG facilities on western.
Canada's West coast, the expansion of the Trans mountain pipeline and potential growth and diversification within Alberta petrochemical sector overall <unk> outlook for meaningful medium term volume growth in the WCS remains unaltered and is being supported by customer commitments and contracting success success, hence materializing prospective future growth projects.
Thank you for joining us this morning and for your continued support. Please go ahead and open up the line for questions.
Thank you, ladies and gentlemen, if you'd like to ask a question you may do so by pressing star one on Touchtone telephone star one for questions. Please make sure the mute function on your phone is turned off so the signal can be read by our equipment will pause a moment to assemble the queue.
We will take our first question from Jeremy Tonet with.
With J P. Morgan. Please go ahead.
Hi, good morning.
Hey, Jeremy.
Hey, Scott.
Scott I was running a little bit of math Tonight, you saw in the first half of the year EBITDA is repeated in the second half you guys I think Michael over the top end of your New guide there and so I was just wondering.
With the guidance raise how much of that was predicated on I guess fee based cash flow versus commodity cash flow are there other headwinds in the second half of the year that we should be thinking about.
Jeremy.
Again, if you recall typically.
Our marketing business said, the two largest quarters historically have been Q1 and Q4, we obviously had a very strong Q1. This year. If you look at the pricing at the forward curve. It does continue to remain backward dated.
<unk>.
Helps inform our view as we set the guidance range, but also.
Q1 of this year benefited obviously from adding inventory.
<unk>.
Q2, and Q3 of last year, and then a rapid appreciation in prices, whereas this year.
Propane remained quite strong so our inventory and our carrying cost of inventory is a lot higher than it was last year, which just means as you go into the winter there is potentially less margin based on the curve. We see so I would I would suggest that that we always.
Get nervous when people annualize Q1, or even half point of the year because there is seasonality in the marketing business, which helps drive.
Probably a lower outlook for marketing through the back half of the year all that being said, we do see some of that offset by continuing volume increases across the system.
Jeremy It's Cam I'll, just add to that that it's worth reminding.
Reminding everyone that the second half of the year typically Q3 and early Q4 is when our our integrity teams are their most active as well and so we typically see some profiling.
Higher costs through Q3, and early Q4, so it does contribute to some of the seasonality as well.
Got it thanks for that.
Maybe just picking up on the propane point there I was wondering if you could provide updated thoughts on how you see the propane balance in the basin right now.
Is there a need for more exports or do you think things are balanced or just kind of curious I guess, where you see things heading at this point.
Jeremy It's Stu.
The propane market is as you know.
The IPL facilities coming online we are seeing.
Pardon me the market is in relatively good balance.
Were excited about increasing volumes of propane.
As more volumes build on the pipeline systems, and then dimension of US looking at additional fractionation capacity, we think theres opportunity to export additional volumes.
But the market is pretty balanced right now, but we are looking at incremental growth.
Got it and just with capital allocation I know you talked about higher interest costs, I guess impacting how you think about deploying excess cash here, but as it relates specifically to the buyback portion up to $3 50, as you mentioned there.
With timing of buybacks be more a function of balance sheet capacity or share price or how do you balance those factors.
I mean, I think obviously the balance sheet capacity is strong Jeremy comment around.
The economic benefits of repaying debt at this time I mean, I think we just look at at where.
Where the fixed income markets have gone and obviously.
It popped up here and so in terms of being a strong free cash flow position.
It does certainly make some sense to be repaying debt.
In the interim in the short term here, obviously with the view that as our growth program continues to take shape over the next couple of years that will be calling on that at a later date.
As for the share buybacks, obviously, I think I would characterize us as being on track.
Hit that $3 50 for the first for the first half of the year, obviously that was reliant on $150 million of proceeds coming back from the pulp excuse me from the Newco transaction.
And.
And using that in the second in the second half of the year.
Yes.
We're obviously going to look to be.
To be opportunistic as we as we do that through the balance of the year, but we do feel strong commitment to that that $3 50.
Got it thanks, just real quick last one Scott the CFO process. Just wondering if there's any update you can provide a certain timeline. It seems like the CFO functions being performed very well right now, but just curious what you can say.
Yes. Thanks for the question Jeremy I would agree with you Ken is doing an excellent job, which has allowed us to run a full and thorough process.
Would say that we are in the ninth inning of that process and we would look to update the market in I'll call. It the next.
Month or so.
Okay.
Got it that's helpful. Thank you.
Yeah.
We will take our next question from Linda <unk> with J D Securities. Please go ahead.
Hello. Thank you just as a follow up to Jeremy's question about share buybacks and to build on that can you provide some updated thoughts on your dividend policy and philosophy.
The market is anticipating the increased after the nuclear transaction closes but beyond that how.
Do you view future increases being matched it would it be an annual or would it be again.
Opportunistic related to big projects or accretive transaction.
And how do you think about balance.
Current ratio with Sun.
Retaining.
Capital for for growth investments.
Yes, Linda so so as we've publicly stated we will be increasing the dividend off the closing of the new code transaction. So expect an update on that in the next couple of weeks.
As I look forward really we want to tie our dividend growth to our form of cash flow per share growth.
So we would expect to resume normal course dividend increases.
And then we always look at in terms of closing of major acquisitions or closing of large greenfield opportunities coming into service. We've typically looked at our second dividend increase in overtime.
But as we stand right now I do think we we'd aspire to getting back to normal course annual dividend increases obviously those were paused in 2020 in 2021, just with the uncertainty around the pandemic.
Far as our payout ratio is concerned.
Somewhere in the neighborhood of 55% to 60%. So we feel pretty good about take amount of capital, we are retaining and that ability to either buy back shares or pay down debt and I think really positions assets. Some of that growth comes back in into being more visible.
Thank you.
The update.
And then maybe if you could just help us with.
The timing of potential <unk> until at your other larger projects I guess.
The frac that Youre looking at.
When do you expect to be in a position to me again.
Vision on that and can you give us.
Guesstimate of what magnitude of cost we're looking at in this inflationary environment and how the contractual attributes might differ versus prior.
Prior Frac commitments.
Commitments and agreements you've had.
Good morning, Linda it's Gerry.
Yeah, obviously with the recent announcements with respect to the large swaps of land that we have dedicated to permanent through transport and fractionation and some marketing services.
As we've stated before and as I think everyone's aware that the overall fractionation complex in Edmonton.
Is extremely full.
We will need about a two year lead time in order to meet our customer demand for that so we are feverishly working and as Scott said in his.
<unk>, there, we're really focusing on what what incremental outside the frac.
Lease boundary.
Utilities do we need such as spec storage front end storage incremental rail connectivity et cetera, So just really working through that.
We expect to have line of sight into exactly what that looks like here by fourth quarter and then sub.
Subsequently, we would be looking to make a decision.
But we do still have some work to do so it's a little bit early right now.
And with respect to.
The inflation, we obviously like everyone else have seen significant inflation, but with that said over the last I think 14 weak steel prices have come down substantially so waiting a little bit times actually in your favor when sanctioning large projects right now.
We just continue to evaluate and watch that and make sure we pull the trigger at the appropriate time.
That's helpful context, and then just as a broader bigger picture follow up.
10 minutes.
Ollie's.
[laughter] never constrained itself with the with the corporate capacity to look at opportunities that are opportunistic.
Maybe an update on what Youre seeing in terms of additional M&A and how you balance that with all the opportunities organically that you have.
Any any thoughts on what youre seeing and what excites you right now on that front would be of interest.
Yes, Linda I think our short term priority here really is to close.
The existing acquisition Newco transaction.
We expect to close that in the next couple of weeks and there is a heavy lift once that gets closed that's when the real work begins in terms of integration and quite frankly getting after all the commercial opportunities we see on that asset base that we just haven't been able to do due to obviously pre close being under.
Restrictions with the competition Bureau, so I think we're pretty focused on that asset. We also have the cap disposition underway as well.
So so those those are our focuses right now bigger.
Bigger picture at some point, we will return to look at opportunistic M&A, but in the current environment and we're focused in what's in front of us.
Thank you I'll jump back in the queue.
Yes.
We will take our next question from Rob Hope with Scotiabank. Please go ahead.
Good morning, everyone I wanted to circle back on the Frac.
Maybe to clarify and maybe further understand.
Are the three agreements in North East BC the area dedications, there how far does that get you to support the 55000 barrel a day Frac and secondly, how are you thinking about area dedications versus firm volumes to backstop such an investment.
Yes, Robert.
First of all.
Those agreements take us a decent way down the path you got to remember that we also have underlying frac contracts underneath that debt that we're balancing the renewals of those the timing of those with the timing of the new contracts coming in to consideration. So it's a bit dynamic.
I would say.
But assuming the frac stay full with existing production. It has taken us a long way there secondly, as it relates to.
The agreements we have in place, obviously I have to be careful with what I say because they are confidential, but we do get visibility into the drilling plans and add the production profiles on those assets and while they are not solely land dedications. They are land dedications with take or pay arrangements once once.
Projects get sanctioned.
We look at the producer track record of our of our customers. We have a high degree of confidence that those are going to turn into development and ergo take or pay arrangements.
Alright, good color. Thank you.
And then as a follow up just on Cedar LNG can you provide an offer an update on that project you have spent a little bit of capital there, but where are we in terms of commercial agreements and how have those changed.
Through our we'll call it.
The last six months as well as the permanent side.
Rob it's too yeah, we've been we've been progressing the Cedar project across the board.
Continuing to work, our EPC or pricing.
And our contractual arrangements with the EPC contracts, we've been working the regulatory process filing all of the regulatory documents.
On a consultation basis with all of the communities while at the same time progressing our commercial conversations we have considerable interest in the Cedar project. It is a unique opportunity that has been secured by the <unk> nation to through the pipeline being constructed by ITC and the accepted.
And value that the hydro nation see in an LNG project.
The conversations are progressing commercially there is as not.
Not surprising LNG pricing today, there is a frenzy of LNG activity and people see diversification as a major success in Canada brings substantial access to a stranded some stranded gas that can get to Asian markets quite cheaply. So conversations are progressing we're moving.
At Lightning speed in an LNG world.
Trying to progress those along as quickly as possible, but the conversations are are very good.
Thank you.
We'll take our next question from Robert.
Kevin <unk> with CIBC capital markets. Please go ahead.
Thanks, Rob.
Good morning, everyone I just wanted to follow up first on a couple of things just on the Frac.
Discussion.
So two things there.
Curious, what your appetite might be to take.
Any any capacity there on spot.
You mentioned the well.
Other question, whether it's the need for spec storage.
So just curious about your appetite there and given the reality of the environment. We're in.
With respect to inflation is there any opportunity to risks here on the cost side with the.
Potential customers there.
Rob It's jaret ill, maybe take the first question, what I said spec stores I meant specificity spec product so right in that product.
Yeah on the back end of the on the Frac there sorry.
And then with respect to the cost sharing.
With the customers, what we've actually seen as an appetite.
On the build side for people to do.
Potential lump sum, so taking that risk premium on.
And taking that away from from from Pembina. So traditionally we we manage that but we have seen the appetite.
For that on these types of assets. So that is definitely something we're looking at and as I. Previously stated obviously, we saw a significant increase in cost and a very very rapid time period. We're also seeing that contract just as quickly.
The timelines the delivery of equipment hasn't been as quick to to come in but but as we're evaluating over the next few months, we expect to have a significantly better line of sight and mitigation strategy to anything incremental we would've seen.
Maybe in Q1 of 2022.
Okay and then.
Moving onto.
Just the launch pipeline on our table.
I'm curious if you're at Liberty to disclose how much capacity on alliance Akshay will might have.
How much of a couple of the 90% contracted in 'twenty, two and 'twenty three.
And separately.
How is that exposure being managed for example are you doing anything to hedge the Chicago Eco differential.
Sorry, Rob I'm not sure I understood. The question on Alliance could you just clarify it.
Yes, I'm just curious as to.
It's got a high level of contract and Carrie.
Currently and I'm curious.
How much of Sable represents of that level of contract in this.
To the extent they do have exposure on alliance is there anything being done to hedge.
The hedge the differential.
Hi, Rob.
So currently stable does have some capacity.
Talking into the new gas here.
That all goes to essentially zero that'll be upstream customers taking that capacity.
Three minimal long term exposure.
But to the extent our short term exposure, we are hedging a portion of the of the eco to Chicago differential.
Okay.
At the <unk> level not at the <unk> level.
Alright got it.
So last question for me then is I'm curious what the opportunity and the vision is for reducing emissions at Newco wants us closed for.
For example are there opportunities more renewable power or even Ccs further down the road.
So I can take that Rob so.
I'll break it into three buckets, so various in midstream primarily.
Is hydro electric power so.
A little bit of opportunity, there, but limited opportunity due to the nature of the power of that.
Yes.
That's powering those assets.
<unk> so permanent wholly owned business, we have a lot of opportunities there to it won't be more <unk> because it is going to be more asset focus reducing flaring.
Focusing on our emissions future.
Fugitive emissions and gas consumption, 80% of our our emissions are from the consumption of natural gas to power compression et cetera, et cetera, burners and heat mediums, so really focusing on the efficiency around consumption of natural gas that is one of our biggest levers and that will be essentially the same focus as the <unk>.
Into the energy transfer accounted asset really really focusing on natural gas consumption reduction.
Essentially some more co gens and certain areas, where it makes sense like we have at Empress.
And red water previously, but those would be the real big ones Rob.
We're looking at.
Okay fantastic. Thank you.
We will take our next question from Andrew <unk> with Credit Suisse. Please go ahead.
Thanks, Good morning, maybe a big picture question and you touched upon some of the LNG dynamics and you are inherently longer term, but there's some stuff happening on the front end.
When you look across your platform and your footprint.
Did you see an opportunity on a longer term basis to have maybe a smaller scale red water look alike on the PC side.
We have looked at that previously Andrew.
We've essentially shelved that opportunity and the real reason for that is due to the connectivity.
Frac by itself. If you had the same rail connectivity to get barrels to the west coast does make a lot a lot of sense, but.
In inability due to just the quality of the rail infrastructure in northeast BC for example, and getting our unit train out of there, it's just actually impossible.
Well, I guess nothing's impossible with the right amount of capital, but it's economically not feasible it does make.
Economic more sense to bring that into the Edmonton market and in rail it out of there.
In a unit train capacity.
So we've pretty much all that shelf that opportunity.
Okay, Great I appreciate that and then maybe just sort of building upon the economic opportunities.
The compounding of your asset base, when you think about Ccs.
What are the three distinct elements capture transport and storage.
Which areas you are the most appealing.
Clearly you have the Alberta carbon grid.
But how do you think about just return profiles for those three buckets and then risk management on those three buckets.
Right now as a corporation, we are looking at the capture aspect as Darius mentioned I mean, there is ongoing work for our own emissions.
And we continue to progress.
Our own assessment of the capture capability of those assets with the Alberta carbon grid. It is essentially it is a gathering of emissions. It is.
Our hub.
Hub for those emissions and then transportation and sequestration from that so we see that as something.
Very along the lines of permanence capabilities, we gather product, we upgrade product and we transported to move that product. So we think it's right in line with our capabilities, we like where we're sitting with the Alberta carbon grid. The asset that we've worked with the government and we are we're continuing to progress.
Those opportunities.
As far as the return that we're looking at our normal pipeline returns would continue to.
Have conversations with potential customers, we're continuing to.
Bring forward, our our engineering cost estimates is what that's going to take and what is the price of carbon on a go forward basis, and where does it makes sense. So I think we're in line right now it's early days still for us and those conversations are ongoing but theres nothing different I would say from a permanent normal course business.
Okay. Thank you appreciate it.
We will take our next question from Matthew Weekes with IAA capital markets. Please go ahead.
Good morning, and thanks for taking my question.
Just looking at the contracts that you've signed with producers in northeast BC.
Just wondering if you take into account.
Volume commitments and then looking at your asset footprint.
Are you able to provide.
An idea of where you are in terms of utilization at this point and how much more room you out.
Sorry to just expand volumes without really deploying too much capital.
Incremental capacity.
Good morning, Matt right now.
The <unk> system, obviously with phase <unk> coming into service in condensate service that allows us to repurpose some different pipes to give us incremental NGL service.
Phase nine is being executed as we speak and phase eight has been sanctioned.
Where I'm going with all of that once that is essentially built out on average across the system. You have to recall that we have a system that goes all the way from northeast BC into Edmonton. So.
One hundreds of kilometers long and it moves for different products, Cte plus the three plus crude and condensate with all that said.
Currently we're around 72% utilized across that system. So we do have significant.
Running room to accommodate future volumes across those four products into the Edmonton market.
Okay. Thanks, that's helpful I'll turn the call back thanks.
Yeah.
We will take our next question from Robert Kwan with RBC capital markets. Please go ahead.
Hey, good morning.
If I can just start at a higher level yes.
Commentary just around inflation and the impact it may have I guess, maybe just some caution statements around future projects.
I'm just wondering as you go forward.
<unk> you haven't had capital cost protection is that something that you would consider and as you talk with your customers just given that hasn't generally been the norm for your types of infrastructure is that something that are available today.
Yes, Rob maybe I'll start big picture on the projects and I'll, let Cam talk about the impacts on the on the base business.
I think as Jerry had pointed out.
Inflation is volatile right now and we're seeing it move all over the place.
A lot of a lot of the capital projects.
We're seeing steel increases through the first half of the year, we've seen that come down dramatically.
The one thing I'd say is we're probably more apt to push some of that risk off the engineering firms as Jerry pointed out for example on on Cedar and feed work. We're doing there we're looking at securing that or the majority of that under our lump sum turnkey arrangement as well as some of the other projects.
We're looking at so as it relates to some of the larger scale projects I'd say, we're more so looking at pushing that risk off the engineering firms than say to customers, but as it relates to things like the pipe business. I think there were pretty comfortable I think thats, our core business, we do it very well.
So that that scenario, where I think <unk> will continue to warehouses that risk.
Tim you want to talk with the base business.
On the base business, Robert I mean, I think we've structure.
We structured our business to have a fair amount of.
Insulation from inflation, what I would say is that.
Where we're seeing the most inflation is really a couple of points, obviously on the labor side as everyone else's.
Can ask yourself, whether that's just a function of.
Coming out of the pandemic and catching up or whether it's more systemic and it's sometimes it's hard to differentiate between those two but we have seen a bit of inflation. There more recently and then the second piece would be on the commodity side more generally and that goes to to John's earlier comment certainly on the capital projects on the steel side.
Although it has obviously moderated more recently.
In the past couple of months, it's moderated quite significantly.
But also.
Clearly on the power side.
Has.
That's been a big change this year and obviously commercially.
Much of that is is protected for permanent account.
While there has been inflation as you can see from the results we restructured the business.
Insulet ourselves quite significantly.
That's great and if I just.
Kind of think about a more cautious statements here and tie it back to capital allocation I just wanted to be clear I'm, sorry, you said earlier and why you're committed to the buybacks it sounds like at this point.
Instead of scaling the buyback higher.
You are seeing a lot more.
Optionality and basically warehousing that capital on the balance sheet, reducing leverage whether that's temporarily or permanently is that fair.
I think thats, a fair comment Robyn ultimately I think it goes to I mean, if you look at where where that that balancing point has been throughout the year. So far.
It's kind of flipped.
To favor both both ends of that spectrum at various points along the way. So we're obviously going to continue to pay close attention to it and make the decision that creates the most value.
Based on the opportunities ahead of us, but as the market stands today, we do see considerable value and retiring some debt in the short term and obviously positioning ourselves for strength in the future.
Yes.
If I can just finish with that.
Couple of follow ups from earlier questions.
On RFS for Scott You mentioned, obviously look you want to contract our S. Four.
Importantly, you need to secure what's fair is there an update as to where you are in terms of.
Okay.
Getting all the contracts you need and extending term.
Our customers amenable to <unk>.
Extending term.
For what.
One through three.
Good morning.
Robert Jaret customers.
Very active in executing extensions across our current Frac complex.
Obviously, the pricing is extremely high activity volumes are growing and customers are seeing that that spare capacity is becoming.
Various parts. So yes, we have been successful in doing that.
Okay, and when you say SaaS like what percentage of the.
The capacity is where you need to start looking at four.
I don't have that off top of my head, Robert but we could.
Probably have a follow up.
Okay, that's great and then just for alliance.
And the results that we're seeing this quarter very strong and our proportionate EBITDA.
How does that compare to you as you look forward factoring in the new contracts and whatever those rates would be but as well how much of this quarter. It came about.
From any of the.
The interruptible volumes or any other kind of volumes that would have been subject to beds that may have been inflated due to basis.
Yes, I think theres, a few different dynamics going on an alliance, so clearly with where the spread wise.
We saw strong interruptible bids on short term volume that being said as we've done as we've re contracted that pipeline there's less space.
On the interruptible, but thats the space that we do have has been quite strong.
I think we also highlighted in the second quarter that we typically get due to seasonality have line pack sales and historically that's been.
Relatively modest just due to the pricing, but if you look at where we would have acquired that line pack.
Last year to where gas prices today.
As you know.
An uplift in Q2 from that that will unlikely to be reoccurring.
And then lastly, we also have.
U S recourse rates that have step down next year.
So there is there is a.
Bunch of noise on on alliance some positive some negative.
And so is there kind of just a bit of it.
Let me put it this way as you think about your guidance for the year and sighting Alliance.
Is that largely due to what we've already seen in the first half or do you expect certain aspects to continue.
In the second half of the year and possibly into 2023.
I think the aspect that we continue to see will be high high utilization.
Going into the year, we werent fully utilized whereas now we're we're basically fall on that pipeline.
And we are seeing a stronger differential through the back half of the year, which should lead to continued strength in any of the short term kind of daily monthly contracting efforts there.
Okay. That's great. Thank you.
Okay.
Ladies and gentlemen. This concludes today's question and answer session. At this time I would like to turn the conference back to Scott Burrows for any additional or closing remarks.
Yeah.
Just a few closing remarks, just wanted to thank everyone for their time today and your questions. We're really excited about what we achieved in the first half of the year and are equally excited as we move through the back half of the year. So I hope everyone has a safe and healthy summer and we'll chat soon.
Ladies and gentlemen. This concludes today's conference. We appreciate your participation you may now disconnect.
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Okay.
Yeah.
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Yes.