Pembina Pipeline Corp. Ordinary Shares (Canada)

Thank you for standing by and welcome to the Pemina Pipeline Corporation 2021 Second Quarter 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 this session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Cameron Goldade, Vice President, Capital Markets. Thank you, sir. Please go ahead.

Good morning, everyone, and welcome to Pemina's conference call and webcast to review the highlights from the second quarter of 2021. On the call with me today are Mick Dilger, President and Chief Executive Officer, Scott Burrows, Senior Vice President and Chief Financial Officer, Harry Anderson, Senior Vice President and Chief Operating Officer, Pipelines, Jaret Sprott Senior Vice President Chief Operating Officer Facilities Stuart Taylor Senior Vice President Marketing and New Ventures and Corporate Development Officer Janet Loduca Senior Vice President External Affairs and Chief Legal and Sustainability Officer I'd like to remind you that some of the comments made today may be forward-looking in nature and are based on Pemina'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. To learn more about these forward-looking statements and non-GAAP measures, please see the company's management discussion and analysis dated August 5, 2021 for the period ended June 30, 2021, which is available online at Pemina.com and on both CDAR and EDGAR. With that, I'll now turn things over to Mick.

Thanks, Cam. Good morning, everyone. We were pleased yesterday to announce that based on the year-to-date results and the outlook for the remainder of the year, Pemina has updated its 2021 adjusted EBITDA guidance by raising the low end of the range. Adjusted EBITDA is now expected to be $3.3 to $3.4 billion, effectively positioning us in the upper half of our original guidance range. Excuse me. Similar to what we have seen in our year-to-date results, growing confidence in our 2021 outlook reflects stronger-than-expected full-year marketing results, net of significant realized hedging losses, and modestly higher volumes across many of Pemina Pipeline systems and facilities. Relative to our original guidance range, these positive factors are being partially offset by stronger-than-expected Canadian dollar relative to the U.S. dollar, increased operating costs due to higher integrity spending and higher power costs in the conventional and oil sands pipeline businesses and lower contributions from certain assets. In addition, the revised outlook reflects higher general and administrative expense due to Pemina's rising share price and the resulting increase in the long-term incentive compensation costs. While supporting Pemina's 2021 guidance update, Stronger commodity prices and rising volumes also mean Pemina's customers are in ever better financial positions, generating significant free cash flow and improving their balance sheets, with many reaching their leverage targets earlier than expected. This sets the stage, we believe, for increased drilling activity and increased capital spending by producers into 2022, with positive implications for Pemina's business. Constructive outlook for the WCSB and customer demand for incremental service led to the reactivation of the PEACE Phase 9 pipeline expansion to supporting customers' long-term development plans while furthering product segregation on the PEACE pipeline system. Further decisions on the PEACE 8 pipeline expansion and the Prince Rupert terminal expansion are expected later this year. The same outlook also supports our confidence in the development of a portfolio of growth projects totaling more than $5 billion. This quarter, Pembina announced three significant and transformational and strategic partnerships with compelling ESG attributes. A partnership with the Haisla Nation to develop the Peter LNG project, a partnership with TC Energy Corporation, which envisions development of the Alberta Carbon Grid, and Chinook Pathways, a partnership with the Western Indigenous Pipeline Group to pursue ownership of the Trans Mountain Pipeline once that project is de-risked. Collectively, these partnerships support PEMNA's global market access strategy, allow for meaningful Indigenous participation in Canadian energy development, and provide important large-scale infrastructure platforms to assist Alberta-based industries to manage their greenhouse gas emissions and contribute to a lower carbon economy. We are proud of this work with communities and our role in creating meaningful solutions. Finally, in recent weeks, Pembina announced and ultimately terminated its proposed acquisition of InterPipeline. The industrial logic of a combined Pembina and InterPipeline remains unparalleled and the value creation between certain of our assets is impossible to replicate. While we are disappointed with this outcome, we will continue to seek opportunities for growth through focused acquisition. I say that not as a signal for any imminent or specific targets, but as a reminder that such acquisitions have been part of Pemina's success story over many years and will continue to be. The execution of Pemina's long-term strategy is never reliant on a single investment. The record continues to show that while acquisitions may be a tool to execute our strategy, we will remain disciplined, prioritizing shareholder returns and our financial guardrails, But for now, we are enjoying the receipt of a $350 million termination fee. We're studying the options available to best invest the termination fee, including business reinvestment, debt repayment, and share buybacks. With that, I'll pass it over to Scott to discuss the financial highlights.

Thanks, Mick. Pemina reported adjusted EBITDA of $778 million for the second quarter, 1% lower than the same period last year. Within our core business segments, We saw strong performance from existing assets along with Prince Rupert Terminal, Empress Infrastructure, and Duvernay III being placed into service and facilities and higher interruptible volumes on the Peace Pipeline System. In the marketing business, Pemina benefited from higher margins on NGL and crude oil sales and the positive impact of higher marketed NGL volumes. However, a portion of this improvement in marketing fundamentals was offset by an increase in the realized loss of commodity-related derivatives as part of our systematic hedging program. Thank you for joining us today. Scott Burrows C.F.A. As well, comparatively, the current quarter was impacted by lower revenue at the Edmonton South rail terminal due to a one-time $11 million leasing adjustment made in the second quarter of last year that resulted in that quarter being better than it would have otherwise been. In contextualizing our second quarter and year-to-date results, as well as our outlook for the full year of 2021 adjusted EBITDA, it is worth pausing on the impact of changes in foreign exchange rates. Approximately 25% of Pemina's business is exposed to foreign currency. This exposure primarily resides in our transmission assets in the pipeline division, as well as our marketing business, where the primary pricing benchmarks for the purchase and sale of commodity products occur in U.S. dollars. As part of Pemina's frack spread hedging program, we hedge the currency exposure embedded in those hedges. Over the last 12 months, the Canada to U.S. dollar exchange rate has exhibited significant volatility. During the second quarter of 2020, the Canadian dollar averaged nearly US$1.39, while in the second quarter of 2021, it averaged nearly US$1.23. For the balance of 2021, for each $0.01 change in the Canadian-US exchange rate, it equates to roughly $6 million of adjusted EBITDA, with $2 million being attributed to the transmission assets and $4 million attributable to the marketing business. Furthermore, Given the seasonal profiles of our marketing business, these sensitivities will vary when applied to quarterly results. Second quarter earnings of $254 million were 2% lower than the same period in the prior year. In addition to the factors impacting EBITDA, earnings were positively impacted by a lower unrealized loss on commodity-related derivatives and lower current tax expense, as well as various other factors outlined in our second quarter report. Total volumes of 3.5 million barrels per day for the second quarter represent approximately a 2% increase over the same period in the prior year. In pipelines, higher interruptible volumes on Peace and Quotient pipelines as well as higher seasonal volumes on Alliance were offset by lower interruptible volumes on Vantage as market conditions exist for end users to source their supply from the Redwater Complex and lower volumes on Ruby Pipeline due to contract expiries. In facilities, increased revenue volumes associated with DuVernay III being placed into service in the fourth quarter of 2020 was largely offset by lower supply volumes on the East NGL system as these assets are now being processed at the Empress NGL extraction facility. Overall, however, as Mick highlighted, we have seen strong year-to-date results and our outlook for the remainder of the year and into 2022 remains very positive, reflecting a stronger economic backdrop, robust energy prices, and improved outlook for producer activity levels. I'll now turn things over to make the closing comments.

Thanks, Scott. In closing, what has emerged over the course of an exciting past few months reflects continued progress towards a clear vision for Pembina's future. Our ambitions are being realized and we look forward to continuing to build out our diversified and integrated value chain, providing an exceptional customer service offering, including global market access for their products. At the same time, we remain committed to providing industry-leading total shareholder returns, including a stable and growing dividend, and furthering our ESG strategy, collectively in service of our employees, communities, customers, and investors. We would once again like to thank all of our stakeholders for their support. And with that, we'll wrap things up. Operator, please open up the line for questions.

As a reminder, if you would like to ask a question, that is star followed by the number 1 on your telephone keypad. Once again, that is star 1 if you would like to ask a question. Your first question comes from Ben Tam from BMO.

Hi. Thanks, Tamara, everybody. I wanted to first start off with the Upward Carbon Grid. When you first announced that project, it referenced the time it was Interpipeline Acquisition. You still have that project in your package this morning. So is that still an opportunity for you regardless of you not moving forward on the IPL?

Yes, it is.

Okay. Okay. So and then to give any comments on the USRFX strategy, Hedging, Natural Hedges, how you think about that going forward?

Hello? Ben, can you repeat the question? Sorry, we had trouble hearing you.

I've got a question about the US dollar FX strategy or hedging strategy as you think about the share sensitivity levels and how do you think about that in the next 6 to 12 months?

Ben, I think as we think about the US dollar, for some time we've been talking about diversification of currencies as being core to our strategy. and through that, you know, looking at a more global enterprise and that naturally occurring. So, you know, part of our strategy there has been obviously to hedge the marketing cash flows because across the board, you know, including the commodities as well as some of the foreign exchange on the frack spread business, knowing that that is, you know, some of the more variable cash flows in our business At the same time, we have been in the past having a reasonably large U.S. dollar-denominated capital spend as well, and so we've always been somewhat naturally hedged, a little bit less so in the last couple quarters, which is why we've left the currency unhedged. But as we look forward, it's always something that we're thinking about as we execute our strategy.

Okay, great. And maybe to close off on acquisitions, I'm curious, what do you think the biggest sources of acquisitions could be for you in the next couple of years, even more consolidating the Canadian side, some of those Canadian assets that come with U.S. exposure? But now as you look at the landscape, there's just not many names left in Canada. Do you need to go to the U.S. more? Is there still a lot of opportunity still you see in Canada, of course, with Hopkins?

Scott Burrows C.F.A., Cameron Goldade, Jaret Sprott PEng, Janet Loduca, Stuart Taylor, Allan Charlesworth C.F.A., Cameron Goldade, Jaret Sprott PEng, Janet Loduca, Stuart Taylor, Allan Charlesworth So we have and continue to look at everything and see what has the biggest strategic importance to us, which generally relates to vertically integrating our value chain and pushing to tidewater on all products. So things that help us realize those two goals are most in scope. Okay, got it.

Thank you.

Your next question is from Nour Gershani from UBS.

Start off with a discussion about PDH, just sort of following, you know, the IPL merger, given the fact that it's no longer proceeding. Just kind of thinking, just wondering actually how we should sort of be thinking about your PDH needs, you know, with respect to Pemina. Do you consider potentially pursuing a JV option with Brookfield to build both? Are you looking at the amount of volume that you control? Can you potentially get an equity stake in a project through an MVC? I'm just wondering what the strategy is on a go-forward basis and how you're thinking about it. I truly recognize that you're probably very early in the process right now.

Yes and no. I mean, when we laid down the hammers on PDH the first time, it was really because of the pandemic and the lump sum turnkey contracts got away from us. But we never said that project was canceled. We said it was suspended. We said LNG. and Value Added Projects remained in strategy. And so if you zoom out from that, for us to get products to tidewater, sometimes we need to turn them into something different. So we're trying to create demand for our customers' products and that might be direct export of propane or turning propane into propylene or propylene into polypropylene and then exporting it. It's all got the same root. To the extent we can build fee-for-service infrastructure in the petrochemical business, that's an avenue for us to create local demand and get our customers' products to the highest value markets. And sometimes that's the product in its current form. Sometimes you've got to liquefy. Thank you for joining us today.

Okay, so the point is that you're probably still pursuing this option. Is that kind of the takeaway?

Yes, we've stated LNG and value-added projects including production of polypropylene provided they meet our guardrails. They are petrochemical infrastructure and not necessarily being in a commodity chemical business. They remain in strategy, yes.

All right, perfect. Maybe to just pivot to a quick discussion about your guidance that you just laid out. You know, from our perspective, you know, to you is a bit of a challenge, but yet you definitely have raised your guidance for this year. I'm kind of curious what you're thinking about with respect to your kind of your exit rate for 4Q as we sort of think about, you know, what that means as we set up for 2022.

Yeah, I mean, we've We think we're building through the year. I think clearly raising the lower end is a good thing. I know some analysts were hoping we would raise the top end but it's still pretty early in the year and I sure don't know what I'm going to read in the newspaper next week and so there's still a lot of moving pieces. We just didn't think that There was compelling evidence to do more than what we've done, but we're definitely building through the year. Some of the quarterly results I've read, I think like CNRL, I think they bumped their capital spending for the year. So we're starting to see people drill one extra pad, for example, and one pad can be Scott Burrows C.F.A., Cameron Goldade, Jaret Sprott PEng, Jason Metcalf There's a tipping point where producers are going to start to drill because that's a better investment than their shares. When they're trading at three or four times cash flow, you can't blame them for buying back their shares, but lots of wells have a 100% rate of return too. When that tipping point is, we don't think it's necessarily now until debt targets have been reached, but we think for a lot of producers that's going to That's going to change and I'm kind of waiting for 2022 capital guidance like a kid waiting for Christmas because I think it's going to be pretty exciting to see what the basin does next.

So the key takeaway here is that we should, outside of seasonal factors which are always there, we should, you know, on the base business be seeing sequential improvements like 3Q versus 2Q, 4Q versus 3Q, and it sets up for 2022 if the tipping point that you just articulated comes to fruition. Is that kind of the fair way to think about it?

Yeah, that's how I think about it. I mean, you heard the forward-looking information waiver. A lot can happen in this crazy world we're in right now. But yeah, and listen, our second quarter is usually our weakest quarter. Last year was kind of anomalous because we made all of our storage revenue in one month versus kind of ratably through the year. So We feel pretty good about the way the year is going to finish. We're seeing some nice signs like alliances back in the money. The basis differential, we haven't seen that. The Canadian dollar actually dropped a little bit, I think, from the end of the second quarter. Oil prices are stabilizing around 70 U.S. So there's some positive things going on that... Thank you very much. We really appreciate the call today and have a great weekend. You as well.

Your next question is from Robert Kwan from RBC Capital Markets.

Good morning. I'm going to come back to how you're approaching or how you approach acquisition. You had IPL and other corporate deals you have. It's kind of fairly seamless. I know there is some friction, but seamless where the equity gets placed. As you think about doing discrete asset deals where, let's say, the seller doesn't want to take equity, how much does the financing size

I'll just give you my layman's perspective and then I'll turn it over to Cam and Scott who have a much deeper knowledge. But, you know, if you look at the Kinder, I'll give you a real-life example. I mean, the bid-ask spread with Kinder after it was close to a year of negotiating was really conquered 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, I would hazard to say if we had a closed InterPipe, a bunch of those shareholders would have been very happy as well as the synergies unfolded. So it's an important part of value sharing between buyers and sellers. Cameron Scott, do you have anything to add to that?

Maybe I'll just jump in here. I mean, obviously, Robert, to the extent that we do anything in the public market, there's pretty significant friction costs that come along with that. Our preference has always been to work directly with sellers and use our shares directly, but backing up a step and I think answering the question more directly as it relates to kind of discrete assets. You know, I think from our perspective, you know, with access to the equity markets, the debt markets, hybrids, press, what I can say is that we haven't run across a transaction that's been inhibited by our ability to access capital. We feel pretty comfortable and not just our own opinion, but advice of our third party advisors, our ability to raise pretty significant capital. Now, that being said, I think what has evolved over the last couple of years is our thinking around capital recycling. So to the extent that we are limited by capital markets or it makes sense, we have options as it relates to capital recycling. and also over the last couple of years, we've developed some pretty significant relationships and could look at various partnerships or JV opportunities as well to help bridge financing. So all that to be said is it's certainly something that we think a lot about, but to date haven't run into any major roadblocks as it relates to that.

Got it. Just as part of the guidance, you had a quote tempering Scott Burrows C.F.A., Cameron Goldade, Jaret Sprott PEng, Janet Loduca, Stuart Taylor, Allan Charlesworth,

As we looked at Q2 specifically, we had slightly lower contributions as it relates to Ruby. Alliance volumes were okay. I think the interruptible tolls were slightly lower. Our Kinder tanks had slightly lower revenue this quarter, and as we stated previously, There was some lower interruptible volumes on Vantage. So I wouldn't say, Robert, it was any kind of one specific asset. It was kind of a small amount across a couple different assets.

Got it. And if I can just finish with a question here on hedging, I think the 22 hedges based on your disclosure were all added either in Q2 or subsequent to the quarter if you've had additional activity. Can you just frame as best you can what that pricing I was just going to say I think your point is accurate in terms of when those hedges have been added and you can look across

Thank you for joining us today. The losses from this year have been realized obviously for hedges that were put on sort of throughout the balance of 2020 through till really the end of October of 2020 on a relatively rateable basis. And if you look back those levels are sort of close to half of where we are today. So I think that gives you a bit of a framework of how the losses might calibrate to what we're seeing currently and looking forward to 2022. Okay, that's great.

Thank you very much.

Your next question is from Robert Cattelier from CIBC Capital Markets.

Hey, good morning. Most things are going to be follow-ups, but I wondered if you could provide a little bit more Scott Burrows C.F.A., Cameron Goldade, Jaret Sprott PEng, Jason Metcalf

Robert, it's the same debate we always have internally, you know, the finance guys want to pay off debt and I want to invest it in future projects and, you know, others want to support the stock because we think it's, you know, the yield is very high and it's a little underappreciated. So that debate is alive and well and I think, you know, we're sitting down as a management team and and really assessing how and when our business grows. It would be a shame to buy back stock and then pay a big commission, kind of further to Robert Kwan's comment, pay a big commission to raise new money. You'd look a little foolish then. On the other hand, it's kind of a windfall and we weren't counting on that money 90 days ago and here it is. have some fun with it. But we don't know, honestly. Every use is a good use among the three choices.

Yeah, that's a fair answer. A little bit more of a detailed question here, but just on the Alberta crude terminal capacity, can that be repurposed, for example, for biofuels or anything else, or what's the plan there?

Great question. It can be repurposed, but I think as we talked about it, it's under long-term contract with our partner there, so obviously that would be subject to a negotiated arrangement with our partner.

Yeah, I mean, it's way underused, Robert. I mean, you're spot on. It's a shame the rate of underutilization of that asset. So that's on our to-do list.

Okay, great. And just last... Last question there, you know, given the change in Baseless Differential, have you seen much improvement in activity on Alliance, not the volumes, but the recontracting efforts?

Yeah, we're seeing really positive signs, and even before probably more of the shorter-term improvement in the Baseless Differential, we've seen an uptick in interest, so feeling directionally really positive about it, Robert.

Yeah, it's kind of fitting, like, It's always hard when you've got a little pinch, but if you look back over a long period of time, that pipe's in the money, particularly when you consider the valuable cargo of NGLs it carries. That's a great pipe. It's unique, and things tend to revert to the mean there. It is nice, though, to see it come back in the money, I'm not going to lie, but it's doing what we expected.

On a more macro basis, we feel really strong in some of the structural advantages that Alliance has with 10 BCF of LNG facilities still being constructed and commissioning, and I think our longer-term perspective and perspective we're seeing from the market is that the U.S. is going to be on a net basis with LNG exports short So we feel like the alliance is in a longer-term basis, a really positive structural position.

Okay. Thanks, guys. Have a great weekend. Cheers.

Your next question is from Patrick Kinney from National Bank Financial.

Hey, good morning, everybody. Maybe just to start with some of the higher maintenance and integrity costs in the quarter, just curious, If there were any unforeseen geotechnical issues or any acceleration of activities that might actually reduce integrity expense going forward?

On the geotechnical perspective, Patrick, there have been no surprises. I think given the relatively dry spring season we had, it's been good from that perspective. The integrity work was really a rollover of some deferred work from last year. Scott Burrows C.F.A., Cameron Goldade, Jaret Sprott PEng, Janet Loduca, Stuart Taylor, Allan Charlesworth,

How far are you able to go out and hedge the remaining one-third? How you might be thinking about mitigating your longer-term exposure? Perhaps, you know, a refresh on other co-gen opportunities across the portfolio. That'd be great.

Good morning, Pat. Jaret here. With respect to the co-gen, so, yeah, you're fairly accurate on the two-thirds that is recoverable. The co-gen that's going in at Empress, So that is a permanent marketing asset. So once that's in service Q4 2022, that'll mitigate a significant chunk of power there and exposure to those costs. We're also, we have two other sites that we're actively pursuing the engineering and doing our front end feed in our gas processing business with cogens, which will mitigate another pretty big chunk of power. and then I'll let Stu talk about the recent PPA that we signed going forward that will help mitigate those costs in the future.

Hey Patrick. So yeah, we're really pleased working with TransAlta on our first PPA contract, 100 megawatts of power. We obviously really like the pricing and at the same time the credits and the benefits that will come with that. That power is being built. We are on some short-term benefits and some additional power that are coming in and will grow from 50 megawatts to 100 megawatts over the next two years. So we're excited about the first 100 megawatts. We are active in conversation. We're very active on the larger scale power PPA contracts. We're looking at smaller opportunities as well as we look at some of our assets and Jaret's mentioned some of the co-gens, but there's There's additional opportunities to pursue what we believe is some cheaper power pricing for Pemina's assets for both the benefit of Pemina itself and our customers.

Excellent. That's great, Kelly, guys. Last one for me, just on the Cedar LNG. I'm just curious how the Coastal Gas Link cost overrun might jeopardize the economics and I guess your chances of reaching a positive FID on the project. I know you still have until Scott Burrows C.F.A., Cameron Goldade, Jaret Sprott PEng, Janet Loduca, Stuart Taylor, Allan Charlesworth, Scott Arnold, Christopher Scherman, Eva Bishop, Jason Metcalf

The benefit of a floating LNG project, our ability to have that built in a, I'll call it a lump sum environment overseas, to bring that here, the uniqueness of the size and the great work done by the Haisla in securing that capacity, we take it into account, Patrick, some cost increase there. We are working closely with obviously LNG Canada As the major contractor on the Coastal GasLink Pipeline, there'll be many conversations with Coastal GasLink themselves, but we've taken that into account in the economics and still believe Cedar is economically advantaged from a cost structure perspective of delivering LNG into the Asian markets on a go-forward basis. As you said, we've got lots of work to do as we work through the feed engineering. There will be many conversations over the next little while. I believe those will be intense and accelerated as there's a lot of money on the ground already from for many, many people, and so we're anxiously watching, but we do enjoy the benefit of the great work that the Haisla did in securing the capacity and the commercial arrangements on Coastal GasLink.

Okay, great. Thanks for that, Stu, and enjoy the rest of the summer, guys. Thanks. Thanks, Matt.

There are no further questions in queue. I would now like to turn the conference back to Mr. Mick Bilger from closing comments.

Well, Thanks everybody for your support through the Kwan call it the IPL saga. Thanks to all my colleagues here for the great work. It wasn't what we hoped for, as I mentioned, but it was still a good outcome for us. And I think it was kind of a window into the future for Pemina and all the things we can do and will be focused on over the years to come. Have a great summer everybody and hope to see you in person sometime soon. Bye.

This does conclude today's conference call. Thank you for your participation. You may now disconnect.