Pembina Pipeline Corp. Ordinary Shares (Canada)

Ladies and gentlemen, thank you for standing by and welcome to Pimpina Pipeline Corporation's second quarter 2020 results conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to your first speaker today, Scott Burrows, Senior Vice President and Chief Financial Officer. Thank you. Please go ahead, sir.

Thank you, Julianne. Good morning, everyone, and welcome to Pemina's conference call and webcast to review highlights from the second quarter of 2020. I'm Scott Burrows, Senior Vice President and Chief Financial Officer. On the call with me today are Mick Dilger, President and Chief Executive Officer, Jason Boone, Senior Vice President and Chief Operating Officer Pipeline, Jaret Sprott, Senior Vice President and Chief Operating Officer Facilities, Stu Taylor, Senior Vice President, Marketing and New Ventures and Corporate Development Officer, and Cameron Goldade, Vice President, Capital Markets. First, I hope everyone listening to this call today is safe and healthy. I'd like to remind you that some of the comments made today may be forward-looking in nature and are based on PEMNA's 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. Scott Burrows C.F.A., Cameron Goldade, Jaret Sprott PEng, Janet Loduca, Stuart Taylor, Allan Charlesworth, Scott Burrows C.F.A., Cameron Goldade, Jaret Sprott PEng, Janet Loduca, Stuart Taylor, Allan Charlesworth, Scott Burrows C.F.A., Cameron Goldade, Jaret Sprott PEng, Janet Loduca, Stuart Taylor, Allan Charlesworth, Scott Burrows C.F.A.

and even the second quarter results feel like a distant memory. However, the second quarter was a very important one for Pemina because it was proof of concept for many of the themes you've heard us talk about for many years. First and foremost remains our commitment to each of Pemina's stakeholders, customers, investors, communities and employees. COVID-19 has tested us all and tried to challenge unlike any in our company's history. We remain proud of the actions we've taken to balance the needs of all stakeholders. Feminist business continues to operate safely and reliably throughout the pandemic, ensuring uninterrupted service to our customers, which is a testament to the company's dedicated staff. We also continue to project in-flight to ensure customers have the services they needed. Second is our commitment to the financial guardrails. Our strong contractual underpinning, fee-based, take-or-pay revenue streams Scott Burrows C.F.A. Scott Burrows C.F.A. Thank you for joining us today. Many are generating free cash flow after dividends and capex and are focused on paying down debt and strengthening their balance sheet. This is a very supportive feminist counterparty credit portfolio. I congratulate all of them. Now I'll pass it back to Scott to discuss the second quarter highlights and our outlook for 2020.

Thanks, Mick. In addition to the impact of COVID-19 and the decline in commodity prices, the major factors impacting the second quarter relative to the same period in the prior year was the kinder acquisition. The acquisition continues to outperform our expectations for 2020, and the quality of the customers and cash flows from these assets has shone through in the second quarter, providing greater stability during a challenging time. One of the major drivers of the Kinder acquisition was the opportunity to diversify and strengthen the quality of Pemina's cash flows. The acquisition of strategically located assets supported by strong contracts with investment-grade counterparties strengthened Pemina's financial guardrails and provided enhanced diversification of basins, currencies, and markets. Adjusted EBITDA for the quarter was $789 million, a 3% increase compared to the same period last year. The increase was due to the contribution of new assets following the Kinder acquisition and a realized gain on commodity-related derivatives. These positive contributions were partially offset by lower margins on crude oil and NGL sales in the marketing business and lower interruptible volumes on alliances as a result of the narrow AECO Chicago price spread. Second quarter earnings of $253 million were down 62% over the same period in the prior year, largely due to non-cash factors, including higher deferred taxes due to the enactment in the second quarter of the prior year of Alberta's Bill 3, which reduced Alberta's corporate income tax rate from 12% to 8%, higher unrealized losses on commodity-related derivatives, and lower contribution from marketing and alliance. As mentioned previously, these declines were somewhat offset by the contribution of additional assets from the Kinder acquisition and lower G&A and other expenses. During the second quarter, the impact of low crude oil and NGL prices was seen through lower producer activity and a temporary decline in physical volume in certain Pembina's businesses. Total volumes during the second quarter were just over 3.4 million BOE per day, up 1% over the same period in 2019, or down 2% when compared to the first quarter of 2020. I'd like to highlight two important points regarding volume. Firstly, it is worth noting that the vast majority of the quarter-over-quarter reduction was contained in our conventional pipeline business unit. Volumes in our other pipeline business units as well as the facilities division were essentially flat from the first to the second quarter. Secondly, the high proportion of take-or-pay contracts in our business leads to a catch-up of volumes and revenue in the second half of the year. Pemina continues to expect 2020 adjusted EBITDAs to remain within the previously disclosed guidance range Scott Burrows C.F.A., Cameron Goldade, Jaret Sprott PEng, Jason Metcalf Scott Burrows C.F.A., Cameron Goldade, Jaret Sprott PEng, Jason Metcalf Turning to our balance sheet and funding ability, Temna further enhanced its liquidity position during the second quarter by terming out approximately $850 million of debt drawn on the company's credit facility and establishing a new $800 million revolving credit facility. Following the early redemption in July of $200 million in senior notes originally due in 2021, Temna's liquidity position currently stands at $2.8 million. With no debt maturities for the balance of 2020, 600 million of maturities distributed throughout 2021, Pemina's liquidity position is ample. The recent debt issuances at a weighted average term to maturity of 17 years and a rate of approximately 3.2% provide a strong endorsement from a broad cross-section of the debt capital market. Combined with the recent affirmation of Pemina's BBB credit rating by both S&P and DBRS, we believe the company's strong financial position is fully affirmed. Moving on to the capital investment program, During the first quarter, the company took the prudent steps of deferring $4.5 billion of capital projects. Cameron is on track to realize a reduction to his 2020 capital investment plan of approximately $1.1 billion. However, challenging weather conditions and COVID-19 related precautions and delays resulted in capital costs overrun in 2020 of approximately $100 million. Additionally, during the second quarter, Cameron also added approximately $90 million of projects. With the modest improvement in commodity prices, many investors are asking about our deferred projects and the conditions under which they would restart. We view the deferred projects in three groups. Firstly, the Phase 789 piece expansions will continue to be evaluated in consultation with our customers based on their needs and an assessment of future transportation requirements in the Western Canadian Sedimentary Basin. Kevin is well positioned to handle all customers' volumes. Regarding CKPC's PDHPP facility, the project team has substantially completed the activities to safely and cost-effectively defer the project. The fabrication of critical long-lead items has continued, and key talent and knowledge have been retained, all to preserve project value for an efficient potential restart. Pemina and its joint venture partner continue to evaluate a number of factors related to the project. First, the necessary condition is that the safety of all personnel should be assured. Second, while the immediate incremental costs associated with COVID-19 were contained by the decision to defer the project, the future and ongoing risks need to be understood and priced into the project cost estimate. Third, the full impact of COVID-19 on the global economy and future demand for polypropylene remains uncertain and needs to be carefully evaluated. Fourth, with both the federal and provincial governments, as well as our project financing syndicate indicating expenditures have or will be drafted, we remain confident that the original investment parameters can be reconfirmed. Finally, the Project Restart is subject to CKPC Management Committee approval and each partner's board. Thirdly, the Prince Rupert Terminal Expansion and the Empress Cogent Facility are progressing for a potential restart. These projects are entirely discretionary and commence at any time. With that, I'll turn it back to Mitch.

In closing, the first half of 2020 in Pemina arrived to an unprecedented challenge, reacting quickly and effectively in service of its stakeholders. Femina's growth and diversification over recent years, combined with an unwavering commitment to its financial guardrails, ensured the company was well positioned for adversity. Femina expects to deliver financial results within its original guidance range and exit 2020 in strong financial position. This will allow the company to resume its deferred capital projects and continue its long track record of growth by providing customers valuable, integrated services. As always, thank you to all of our stakeholders for your support. With that, we'll wrap things up. Operator, please go ahead and open the line for questions.

Thank you. As a reminder, to ask a question, please press star followed by the number one on your telephone keypad. Your first question comes from Jeremy Toney from JP Morgan. Your line is open.

Hi, good morning. Hi, Jeremy. I just want to start off with, you know, how volumes are looking today. Have all the kind of, you know, shut-ins returned as you expected? And just want to get a sense for kind of producer discussions, what you're seeing right now and how you think, you know, volumes could trend over the, in the different basements over the balance of the year, just trying to get a feeling for how that, you know, resumption is going.

Yeah, we'll pass that question to Jason. As Scott said, most of the wobble is in conventional, and so Jason will address that.

Hi, Jeremy. So, you know, I guess May, as we mentioned in our release, was kind of the low point for our volumes. We had one week in May where volumes hit their low point, and then they've slowly been recovering since then. As of this moment, we're not quite back up to where we were in January, February, but we are seeing things sort of recover steadily in that direction. You know, I think our discussions with our customers continue to be positive. There's still, you know, positive developments out there. Customers are still committed to their forecast, but obviously they're looking at their budget right now and what they're planning to do for the 2021 year. There's some M&A activity I'm sure you've seen going on in the market that we think is positive and will lead to continued strength in some of those areas. But at the moment, things are recovering slowly. It's kind of an unprecedented situation, so I wouldn't really say whether it's as expected because I don't know necessarily what to expect. It kind of depends on the demand for the commodities.

Got it. That makes sense. So, I mean, obviously, a lot of moving pieces here, but just was wondering, as we think about 2021 and CAPEX there, would you expect it to kind of be in line with what you're doing in 2020 or really kind of step down from there? You know, granted, some of the projects could kind of come back into focus, as you're describing there, just trying to get a sense for how it might shake out.

So, maybe I'll speak first to the piece expansions. So obviously we're evaluating phase 7, 8, and 9. I guess the first thing to recognize, I guess, on all of those are all of those expansions, including the piece-based business, are highly contracted, so including the expansion. So we have the ability to go out and execute those projects and they'd be underpinned by the contracts that are in place. We thought it was prudent to go out and poll our customers and find out what their timing And expectations were for those expansions before we just go and execute them. So we're in the process of wrapping up those conversations with most of our customers. We would expect to make a decision on the timing of those expansions before the end of this year.

Jeremy, Mick, we have a lot of flexibility in 21. I mean, our capital program is sub half a billion, I mean, of the stuff we know we're doing. You know, kind of contrast that with where we thought we would be coming into 2020. In 2019, we were $2.5 billion. We saw the billion give or take off of that. And then our CapEx program in 2021 would be yet another billion lower. So we have a lot of dry powder with cash flow in excess of capital in 2021. And so, as Jason indicates, you know, and same with CKPC, we have the capability to bring those back. It's just, you know, what makes sense for our customers. I mean, the last thing they need is more capacity and take-or-pays with no volumes going through it. So, part of Pearl is really in line with customer need.

Scott Burrows C.F.A., Cameron Goldade, Jaret Sprott PEng, Janet Loduca, Stuart Taylor, Allan Charlesworth, Scott Arnold, Christopher Scherman, Eva Bishop, Jason Metcalf Marketing kind of hit a new, you know, kind of a lower trend line based on the current commodity prices here. Just want to get a sense for, you know, directionally how that could shake out based on where the curve is.

Yeah, Jeremy, it's Stu. So we've, yeah, I think you've seen we hit a low coming out of the commodity price collapse. We're seeing some strengthening and we believe we'll strengthen through the last half of 2020. Scott Burrows C.F.A., Cameron Goldade, Jaret Sprott PEng, Janet Loduca, Stuart Taylor, Allan Charlesworth,

The key things that are going to unlock hundreds of millions of dollars if we get to a stable gas price with liquid prices going up into 2021. That will unlock our full capability again. So you can watch that, Jeremy, and kind of gauge what you think is going to happen in 2021.

Got it. Thanks so much. Just real quick, does the CAPS deferral, has that been impacting, I guess, recontracting on piece at all? Is that, you know, been helpful in any sense?

You know, I think existing infrastructure always has advantages because it's real, it's reliable. And so, you know, if you're a customer, you've got to think, you know, am I going to count on the pipeline that's there or am I going to count on a pipeline that might be there? We think overall it's been positive for our discussions with customers.

Great. That's it for me. Thanks for taking my questions.

Your next question comes from Matt Taylor from Tudor Pickering Holt. Your line is open.

Hey, guys. Thanks for taking my questions here. I just wanted to follow up on Jeremy's question on marketing. There's the $125 million impact. Does that include any offsetting assumptions on realizing once you're contango? I noticed that you had proactively added some lower-cost NGLs. And then also, is the sharp recovery in crude pricing and volumes returning in that $125 million impact as well?

Yeah, Matt, it's Scott here. I mean, that forecast is as of a couple weeks ago, so it reflects the best information at that time. I think it's also, since we're talking about marketing, important to point out two other points. Number one, we did have a $10 million cavern loss in Q2, which was a one-time event which dragged down earnings that quarter. We also, if you look at the NGL sales volume, you'll see Q2 to Q2, they were down quite a bit. And just given where margins were, we decided to store incremental NGLs, which we hope to

Great. Thanks for that, Scott. And then I wanted to move over to baseline. Can you comment on the expansion potential there and how you're thinking about adding tankage at this facility ahead of TMX? I know we're a couple years out, but I'd imagine customers are starting to think about, you know, as we're getting closer to that, any color on that?

Hi there, it's Jason. So we're currently working with our partner there, evaluating the cost of that expansion. We're currently looking at the site, starting to get some of the prep work done on the ground to get that site ready for expansion, putting the estimates together to figure out exactly what that expansion would cost. But we're aligned with your thoughts there. Once TMX comes into service, we believe There's an opportunity to provide both storage and terminaling services to be able to provide batches onto TMX and things like that for our customers as well as storing products. So that does seem to be a catalyst and just trying to narrow in on the timing of when that is is a bit of the science that we're trying to do at the moment.

Great, thanks for that. And then one last one for me. You talked about interruptible revenues being offset by OpEx and G&A savings. Is that target still $100 million? I know that's what she disclosed on Q1, and I'm just wondering how much of that is left to be realized in the back half of this year.

We have high confidence that we'll achieve that. We're currently running at or above that in our forecast. Thank you. Just to clarify, is that $100 million was realized in Q2? No, it'll be realized by the end of the year. Like we recall, we kind of announced it early Q2. By the time we got real organized, you know, we were starting those savings kind of in the June timeframe. And so that $100 million was really realized in, call it six months, give or take, or the back half of the year. But we're forecasting meeting or exceeding that right now and expect to be able to continue that level of efficiency through 2021.

Thanks for the call there, Mick. That's it for me.

Your next question comes from Linda Ezergales from TD Securities. Your line is open.

Thank you. I'm wondering if we can follow up a little bit and drilling down to understanding some of the moving parts in your marketing business in the quarter. Can you elaborate a little bit more on the nature of the operational issue in the storage cavern? Has it been resolved? Is it discrete to this one particular cavern, or is there some systemic things that you might want to remedy across your franchise?

Morning, Linda. Jaret here. Yes, it was contained to one cavern, and it has been mitigated as we speak. It's not a systemic issue, no.

And can you describe a little bit what happened in the product?

Product was C2+, and I won't get into the technical nature of the loss, but yeah, it was C2+.

Okay, thank you. And with respect to the guidance range, I'm wondering what might move the 2020 results to the upper end of the range. Is it purely volumes and margin, or are there other factors? And maybe you can talk about the main things to look at beyond liquids pricing.

Yeah, Linda, I can unfortunately safely say we're getting to the top end of the guidance range, which is $150 million, well, I guess $3.55 billion. is not in the cards. We're going to be between the midpoint and the low point, at least that's what we're projecting now. For us to move from the low point, we need to see a decent resurgence from fields like Drayton Valley, where we're still off quite a bit. As you know, that's one of two systems, the other being Swan Hills, where we don't A great deal of take-or-pay contracts. So we need to see some resurgence down in the Drayton Cardium and we need to see wider crude WCS spreads. I know they're trending in the right direction. And then we need to see a nice pop in the price of propane. As Scott says, we've got a lot of propane in the ground. We didn't pay that much for that propane because Thank you. And just as a follow-up with respect to your piece on northern systems,

You've got about a quarter of a million barrels per day of currently available physical capacity. I'm wondering how much of that is take or pay capacity or is that all your spot capacity? I'm just wondering if as that fills up, some of the margins might not be entirely additive if they're displacing, releasing other customers from their take or pay obligations.

Hi Linda, it's Jason. So in terms of the take or pay, most of our customers are operating somewhat close to their take or pay. So when you think about how much take or pay revenue we're actually recognizing in the back half of the year, it's not a huge amount of take or pay revenue. So all incremental volume that we do get is really going to be profit from that perspective. Yeah, so I think if we do get incremental volume from customers under contract, that'll add incremental margin. And then some of the trucking volumes are where you see some of the volume back up, whether they come through third-party terminals or our own truck terminals. So that's where some of the opportunity lies for us at the moment.

Great, thank you. I'll jump back in the queue.

Your next question comes from Rob Hope from Scotiabank. Your line is open.

Good morning, everyone. A follow-on question on the deferred projects. When we take a look at phase 7, 8, 9 of the piece expansions, are you looking to pick those up as they were originally planned, or do you have some flexibility to alter some of those projects to better suit your customers' volume outlooks?

Yeah, I mean, that's a great question. And we actually, probably in the last six weeks, we did look at Thank you for joining us today. Allianz on Storage allows us to tie products in kind of mid-pipe rather than just at storage hubs. It allows us to partially loop systems and it just gives us incredible future flexibility. And so, as it stands today, we remain focused on building the right master plan.

All right, that's helpful. And then just a follow-up question. Can you comment on the changes that were made with the PG&E Ruby contracts?

We can't specifically comment on customer contracts, but I think really, I guess the way to characterize it is it gave both them and us more flexibility.

All right, thank you.

Your next question comes from Andrew Kuski from Credit Suisse. Your line is open.

Thank you. Good morning. The question really relates to the producer M&A that we've seen and the reduction of counterparty risks that that does for you in the front end. I guess when you think about it on a longer term basis, what does it mean for you? Do you wind up having better counterparties and effectively bigger volumetric opportunities? or do you see a little bit of competition for some of the producers that like to do their own thing on the processing side?

I guess it's customer by customer. I think your intuition that deals are going to get bigger and more integrated, that's probably on balance correct. Case in point, in the last five years, our transaction with the Chevron, Coupec, JV, kind of an area alliance where we build processing, we transport, we frack, and we collaborate depending on product and marketing. We think those larger deals can make a lot of sense because they bring the kind of economy to scale that I think the modern oil and gas business needs to amortize Scott Burrows C.F.A. Incredible longevity and economies of scale. So those are going to be what impacts Pembina the most. Of course, we're really happy to work with some of the smaller producers. They might live kind of more in the Drake Valley, Swan Hills areas where we still have surplus pipeline capacity. They don't need to sign big agreements. But they'll be a little more commodity sensitive, I think. Jaret, do you want to add anything to that?

So I think you nailed it, Mick. I think in this new world where everyone needs a higher net back, I think not only will you see consolidation on the upstream side, Andrew, but I think, as Mick said and Jason said, we've got a lot of capacity on the pipe. We need to stop overbuilding our infrastructure and consolidating a lot of this and putting maximum amount of molecules through these facilities. So even though some customers, I would say, may typically have wanted to build those assets themselves. I think they may be looking at alternative solutions to focus their core competencies on what they do and let people like ourselves focus our competencies on what we do great.

Okay, that's helpful. And then I'll go from the big broad to a bit more narrow. And just on the Vancouver Wars business, how are you thinking about that and I guess about the year that you've had it on the books thereabouts?

Well, I mean, for people who are familiar with it, not a lot of that terminal is hydrocarbon-based. And so, you know, we are assessing the opportunity, you know, for hydrocarbons there. I mean, as an example, there's diesel being handled through that facility. Currently, you know, there are hydrocarbon tanks. There's a bunch of spare land. The berths aren't fully utilized. But you're in the middle of a big city, and that city is Vancouver. So we're weighing all of that and trying to find out what the appropriate use is for our company versus what it might be worth in other people's hands.

Okay, that's great. Thank you very much.

Your next question comes from Robert Quan from RBC Capital Markets. Your line is open.

Good morning. Just wanted to kind of come back to some of the mothballed projects and you laid out the three buckets and as it stands right now, which of those three buckets or can you order which ones you think are most likely to come back the fastest?

Well, that's like a great question. It's like trying to Thank you all for joining us. Robert, what demand is going to be for hydrocarbons and what pricing falls out of that, which will be drilling? You know, it's difficult. I would say, though, you know, the positive quarters that our customers, as I said in the piece, is really encouraging. And so we're going to be consulting with them and we're going to put the bat in their hands on go, no go. We'll go from there. I think the little bit more opaque one is CKPC because we need to get comfortable with global GDP, you know, marching forward and that's really quite opaque right now. Of course, nobody knows exactly what's going to happen. I think 2025 would be the on-stream date now. So, you know, that is a long way out. So we're making some educated guesses there. But I can tell you in the next eight weeks, we've got to make some decisions whether it's this winter or we're going to reaffirm those this year or we're going to wait another year. So stay tuned. These are really difficult decisions. I hope you can appreciate that.

And I guess, Mick, at the beginning of the call, you made a statement that you have a focus Thank you for joining us today.

Well, I mean, I guess, I guess, yes, there is a chance that we come forward and say, yeah, we're going to go in 2021. The start date for CKPC would be March of 21. You know, the start for, you know, phase seven, we've got 65 kilometers in the ground in phase seven and stockpiles of pipe. So, you know, we've got a class three estimate. We're approved. So, I mean, we could bring that one back faster. So, literally, you know, we'll be calling customers here in the next four weeks. And the conversation kind of goes like this. You've got a contract. We can start. Do you want to start or do you want to delay? And if they say, yeah, on balance, we want to start, we're going to start. So, you know, we'll have to see what they say. Okay.

And then just last on this topic, can you maybe square some of that up with, it's a pretty small number admittedly, but the new growth that you put on the books, is the nature of that just kind of high return, quick payback? And if that's the case, how do you think about, you know, phase 7, 8, 9 versus some of the, you know, lower capital, you know, more configuration?

I mean, yeah, some of the smaller projects like, you know, Prince Rupert expansion or Empress cogeneration, those are, you know, those are, you know, projects we can unilaterally start when we think the time's right. We want to see what the lay of the land is on exports here coming into the fall. So, you know, that'll gauge whether we start that one up or not. Cogeneration, I mean, we can start that at any time. So we'll be assessing that. But, you know, fair point. Those can come back any time. They aren't as reliant. Like the cogeneration is self-supply power. You know, we're doing very well at our other cogeneration facilities. And so we may well bring that back. We talked about the baseline tank project. That's something that we could bring back. Certainly our marketing group could become the customer of that for many good reasons or we could farm that out for customers on a fee basis for the TMX coming into service. So we have lots of projects and many more that we didn't Scott Burrows C.F.A. Thank you for joining us today.

And if I can just finish the question on marketing. So the $125 million down from your original midpoint, has this changed recently or is this just you giving more granularity to the street? And I'm just wondering because it doesn't look like your 5% to 10% of EBITDA coming from commodity has changed from prior disclosures.

I mean, really, again, this is kind of the best information we have at the time. This is our current forecast. This is really about giving incremental disclosure, trying to give people the information that the vast majority of the kind of reduction to the low end of the guidance range was from the commodity-exposed portion of the business. Most of this is COVID-related and the downturn in pricing, but to be honest, Some of this was starting to kick in in February when we had the initial kind of price war between Saudi and Russia. So this has kind of been a trend throughout the year and to the point where we are today. And then as incremental disclosure, we thought we'd let the street know. So you're right, our kind of commodity exposed portion of the business, we've kind of talked about in that 5% to 10% range. You know, if we were to update that today, it would be 5% or less, maybe 5% to 3%.

And I'll just build on that. I mean, when we set our guidance, you know, we truly set it at the midpoint of what we think is going to happen. And the wiggle in our guidance is usually highly correlated to kind of a 1090 on marketing, you know, net of what we think we might be able to mitigate in a down market. So we go two years back when we raised our guidance twice because we were kind of at a P95 and then Last year we were in the upper end of our guidance and so it did cover the positive wiggle in guidance and this year, through a bit of hard work, it still is covering the negative wiggle in marketing outcomes. I think looking back, the way we do guidance has served us quite well.

That's great. Thank you very much.

Your next question comes from Robert Cattelier from CIBC Capital Markets. Your line is open.

Hi, good morning, everyone, and thanks for your comments so far. I was wondering if you could give an update on the outlook for Alliance Pipeline with respect to the eventual renewal there in light of the ACO Chicago differential and some recent customer comments about the fee structure. And maybe if you could add to that how the outlook for Scott Burrows C.F.A., Cameron Goldade, Jaret Sprott PEng, Janet Loduca, Stuart Taylor, Allan Charlesworth,

When you look out beyond Q3, Q4 into 2021, we're seeing those spreads come back, so we're pretty optimistic. In the second half of the year, those IT volumes start to recover, and we think there's reason for hope in terms of renewals. Historically, it's always been a good market for our customers, so we believe they're going to still like that diversification. and we also think you kind of mentioned the associated gas in the Balkan and if you think about the whole sort of lower 48 gas production picture we think there's reason for optimism that gas prices will be pretty strong in the Chicago market for the long term so you know I think that you know we're fairly confident that over time things will start to look better for Alliance in terms of Scott Burrows C.F.A. Scott Burrows C.F.A.

TKPC, and what's required to restart there. You have some pretty good color. But I just want to make sure I understand the nuance here and what you're looking for on the future polypropylene demand, given that you do have some contracts. So are those contracts still in place and still valid? And what do you really need to see in light of those contracts from the demand side of the equation? Or is it just a question of Robert Stue, Robert Stue,

We still believe that the Western Canadian Sedimentary Basin provides a cost advantage to produce the polypropylene product. We think we are in a logistic advantage location for market access. We'll rerun the economics here in the third quarter.

And then in terms of contracts, just like the phases of peace, those contracts remain good and valid. And they don't have any kind of an outside date concern at this time. So when we go, those contracts will go as well.

Okay. And just on the security of the propane supply, I know you're working on the project at Embrace. You know, to help with that. But in light of the decreased production of NGLs, you know, that might be temporary. But they're also increasing export options. So how do you, how comfortable are you with the, being a low cost supplier in the context of the propane situation?

We remain comfortable. I mean, whenever this basin has seen any kind of a price signal, so let's just play it out. The West Coast terminals start to pull hard on propane. There's a temporary blip. It starts to become more valuable and people just cool down their plants and take out more propane or somebody builds another deep cut. We've always looked at how the ethane business has done over the last 40 years and these concerns, I guess I'm getting old, These concerns have arisen from time to time in situations like this and things look like there wouldn't be enough supply for the polyethylene business. I think that's a quarter of a million barrels a day and now every single gas pipeline is, whether it's the Enbridge system or TCPL or Alliance, we're all running at Thank you very much guys.

Your next question comes from Ben Pham from BMO. Your line is open.

Okay, thanks. Good morning. I also have a question on the TKPC and one of the references, the three you mentioned, is respect to the federal government. And I was wondering, is that anything to do with the royalty credit? Is there something to know about in terms of expiration dates or ability to monetize those credits?

Yeah, we've gone back and we have confirmed and reconfirmed both the provincial and the federal government's commitments to the funding. Again, the royalty credit, the Alberta government has come and stated that those are theirs and we're working with them on documentation for the extensions and we're working as well with the federal government on the CIF program grants that we receive and are confident that everything will be extended as per the government grants.

Okay, so it sounds like when this was set up in 2016 or so, there was some sort of expiration that you might be heading into, and it sounds like you feel pretty good about extending that.

Yeah, everything had a schedule, and then there's requirements for information filings, and so we've been diligently working with both the federal and provincial governments of providing all the documentation and working through extensions of those agreements. Okay.

All right. Is there anything in the way of, you see Bishop, some really low cost debt and it looks like we're in this world of almost 0% interest rates there. Anything to do with balance sheet optimization, you see, you know, whether buying back preferred shares or calling some debt, is there anything that looks interesting right now?

Hey Ben, it's Scott. We did capitalize on some of those low interest rates We did refinance one of our existing 2021 notes at an interest rate 3% to 4% below where that note was issued at. So we've started to chip away at that. We also have roughly $800 million on our credit facility, which will likely look to term out in the back half of the year as well to capture some of that long-term interest rate savings. But in terms of optimization of the preferred shares, You know, we've looked at it, but ultimately doing a normal course issuer bid for your preferred shares, just no liquidity in that market. So that would be very, very tough to enact. So it's something we've thought about, but at this time, not something we're pursuing.

Okay. Can I ask you then, lastly, this big newsflower around Dominion and Warren Buffett, and I guess just your own thoughts on capital allocation M&A. I mean, if your stock price wasn't so mispriced and you wanted to get into a boxing match with Warren Buffett, is that strategically, those type of assets, would that strategically fit with Pemina?

I mean, I think he made a hell of a deal. Like, you know, he bought the railroads a decade ago at the right time and looks pretty smart now. And he looks like he's going to look really smart again. Scott Burrows C.F.A., Cameron Goldade, Jaret Sprott PEng, Janet Loduca, Stuart Taylor, Allan Charlesworth, Scott Burrows C.F.A., Cameron Goldade, Jaret Sprott PEng, Janet Loduca, Stuart Taylor, Allan Charlesworth, Those are the kinds of things that we think can create exceptional results over time, and it is tough to watch good deals come and go that maybe aren't as synergistic but are nevertheless good deals, but we remain on our path. Okay.

Thanks, everybody.

Your next question comes from Patrick Kenny from National Bank Financial. Your line is open.

Hey guys, just to clarify on CKPC, if the project might be eligible for these additional grants that are being rolled out by Alberta this fall, I believe, on top of the royalty credits that you've already secured. And then also just any thoughts on how this new program might bring some of your ethane-based infrastructure opportunities more into focus over the near term.

So we're investigating that. Again, our facility was granted under PDP-1 with royalty credits. PDP-2 was put forward by the Alberta government and they've since then come out with the new program. You cannot, as we understand, collect both PDP-2 and the new program credits. We are investigating whether there would be additional opportunity for us given that we were in the PDP-1 program. We look at it and we're trying to manage that and we have meetings set up to go and investigate more of that.

At a macro level, methane is being sold for gas value right now. It's just being sold as heat and no premium and so it seems like the sector is ripe for Thank you. Thank you. Thank you. Thank you.

I think from an investment cycle purposes, that's advantageous. And the government isn't picking winners and losers. Here they're saying if you go forward and you build your assets, there are credits that could be made available to you. So I think it is an improvement. As far as the FAA development, I think it opens up more people and perhaps greater competition for development as well.

Okay, that's good stuff. Thanks for that. And then on the potential sale of the Scott Burrows C.F.A., Cameron Goldade, Jaret Sprott PEng, Janet Loduca, Stuart Taylor, Allan Charlesworth,

The decisions to potentially monetize some assets were made well before COVID-19 hit. We started some of this work late last year and in the early part of this year. Really, we just disclosed it in March with the rest of the initiatives that were going on since it was underway. but really just started pre-COVID. And the point there is that these were never done for liquidity or balance sheet reasons. These were really born out of some pretty significant imbalance that we got and we thought it was our job to at least explore them. So I think the point I'm trying to make through all this is we're in the process of investigating some of those, but at the end of the day, if bids don't hit our retention value, Scott Burrows C.F.A., Cameron Goldade, Jaret Sprott PEng, Janet Loduca, Stuart Taylor, Allan Charlesworth,

Scott Burrows C.F.A., Cameron Goldade, Jaret Sprott PEng, Jason Metcalf

Your next question comes from Grishuni from UBS. Your line is open.

Hi, good morning, everyone. Glad to hear everyone is well and surviving COVID well. Don't want to beat to death here. Just a follow up on all these, the propane related questions and the fact that, you know, you've introduced this variability in your guidance on the 125 million. Given the fact that you've sort of hedged it and so forth, Is it really just kind of a timing thing? You've got the NGLs in storage right now. Some of it, based on where frac spreads shake out, means you could realize it in 4Q or could roll into 1Q and so forth. And is it really just a timing issue and that's why you've kind of introduced this variability here? Or was $125 million opportunity completely – it's an opportunity loss at this point right now?

Yeah, I think a large portion of it, the vast majority of it, would be pricing, so degradation and margin. But there is a small piece of it that's timing, depending on when we monetize some of the volumes that we stored in Q2. Some of those will likely be monetized in Q1 of 2021. So there's a small portion of that that's timing, but the majority of it is generally lower volumes on the crude oil side, just due to and then NGL Margins as well.

And if everything came back, I realize this is hypothetical, but everything comes back full boat volume wise, do you have the capacity to take everything out of storage while running your systems full boat at the same time or would that create a timing issue or capacity issue as well?

No. Obviously, we couldn't do it instantaneously, but no, we do have the infrastructure and the capacity to, you know, process all the incoming NGL volumes and be taking adequate storage out the back end.

Okay. And just one last question on costs. You've done a great job on it. I think we've sort of seen this, you know, kind of across the board within the industry. The thing that has been notable as of late is how deep some of the costs have been at some of the midstream companies and some of the broader energy companies as well, too. I realize that you've definitely delivered on it, but are you challenging your staff to potentially double the type of cost reductions that you've seen or go even more than that? The fact that you've gone through a whole shelter-in-place type of environment, Have you been able to reassess everything and do you think that there's opportunities that we could see significantly more cost reductions being announced over the next couple of quarters?

We're really proud and thank you for saying we've done a good job. I agree with that. We're not looking at further staff reductions. We think we want to maintain the capability that we have. We do think things are going to come back and so having people that can win commercial contracts, build facilities, make sure we have the flexibility in IT and systems, we need those people and we're going to keep them. We do think there is future opportunity. I'm not going to nail it to to any given quarter. But a lot of those opportunities are going to come with technology. For example, we're completing a brand new telecom system along our piece right away that will give us incredible bandwidth to do things remotely with cameras and telemetry and things like that that we didn't have before. And so it opens up a new possibility with machine learning and other and Jason talked about PSPACE 10. A lot of that unearthing another 50 or 100,000 barrels a day capacity by optimizing your pipeline flows, that's very possible. We've just never really had a lull like this. If you think about, we've employed roughly $15 billion in green and brownfield projects over the last 10 years. We've never really caught our breath and said, okay, well, here's what we got. Let's really optimize it. So I think there's not just cost synergies, but revenue synergies that we're going to work really hard on. And we've set as our top priority for 2021 to improve the return on our invested capital. And there's a lot of enthusiasm in the company to do that. I think maintaining the synergies that we've outlined in 2020 into 2021, that is our near-term objective. But that's not the end of the journey at all. We think we can take more ground, but it's going to take some time.

I completely appreciate those comments. And just to clarify, I wasn't thinking about further layoffs. I was thinking more about productivity enhancement. You know, as you were able to assess and it sounds like you're seeing opportunities to see those enhancements on kind of on a revenue optimization basis. Is that a fair characterization?

Revenue and cost. You know, what we're trying to do is, you know, along with getting projects shovel ready, the question we're asking ourselves is, and if we built all those projects, how would we do that without adding people? And so the way to do that, to amortize your people cost and your asset cost is through technology, is having people, every person at Pemina be able to do more through technology. And so it's not just cost in our existing business, it's how do you grow without adding people? And I think that's really where technology can help you. I do think it's revenue synergies, it's going to be off-cost synergies, it's G&A synergies, but it's also growing without adding fixed costs. And I think, you know, that's the last thing I mentioned is perhaps where the biggest opportunity is in the future.

That makes perfect sense. Really appreciate the colour, guys. You know, have a safe day and enjoy the weekend.

As well.

Your next question comes from Parnis. Satish from Wells Fargo, your line is open.

Hi, thank you. Just one quick question for me. I think you mentioned in the prepared remarks that you're seeing higher spot volumes on Ruby this quarter. I guess what's driving that and is there any opportunity to turn some of those interruptible volumes into longer term contracts? Thanks.

Yes, it's really just driven by the spreads between, you know, Malay, Nopal and Alberta. And so we're, you know, with the stronger gas prices in Alberta, we're seeing some, you know, some opportunity to move spot barrels on the Ruby Pipeline. And yes, we do, we are looking at, you know, with Kinder Morgan at how to How to actually lock those into some long-term contracts and obviously looking at that as we speak.

Yeah, I mean, as a macro, you can see it at the E&Ps in our basin, which I know better than in the U.S. basin. There's some buoyancy for gas-based producers these days. And, you know, that means obviously gas prices are going up, which means gas volumes can go up. So if that buoyancy continues, we're back to an earlier call. We get ever more optimistic that the Alliance recontracting will continue as it has positively, as well as Ruby. That all kind of hangs together. If you're optimistic on prices, then you're going to be optimistic on volume. So we'll see its early days.

I'd also just add that it goes to show you over the last couple years, all these different pricing points have changed over time. So most producers like to have diversity of endpoints because you actually can't predict which market's gonna be making more money than the other. So we still think that having the Alliance and the Ruby, Malin, and Chicago exposure is great because lots of producers are gonna want a diversity of supply points.

Okay, that's great. And do you think these spot opportunities will persist for the next several quarters or do you think it's just kind of a one quarter benefit?

We've seen it on and off over the last year, so it looks, from my perspective, fairly positive that it will continue for some period of time, but with the market as volatile as it is, it's kind of hard to predict.

Great. Thank you.

We have no further questions. I would like to turn the call over to Mick Dilger for closing remarks.

Yeah, well, thanks everybody for your interest. You know, I'm really proud of what we were able to do through the second quarter. If you think about how we all felt in March and where we sit today, there's a world so full of challenges, but it does seem to be slowly getting more constructive thanks to the hard work of all of our staff and the resilience of our customers. Hathoff to our customers and We are starting to feel more and more constructive as time goes on. Have a great balance of your summer and stay safe.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.