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spk09: Good day and welcome to the Pembina Pipeline Corporation 2021 Third Quarter Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Cameron Goldaid, Vice President of Capital Markets. Please go ahead.
spk06: Thank you, Christina, and good morning, everyone. Welcome to Pembina's conference call and webcast to review highlights from the third quarter of 2021. On the call with me today, we have Mick Dilger, President and Chief Executive Officer, Scott Burrows, Senior Vice President and Chief Financial Officer. Janet LaDuca, Senior Vice President, External Affairs and Chief Legal and Sustainability Officer. Jared Sprote, Senior Vice President and Chief Operating Officer for Facilities. Harry Anderson, Senior Vice President and Chief Operating Officer for Pipelines. And Stu Taylor, Senior Vice President, Marketing and New Ventures and Corporate Development Officer. I'd like to remind you that some of the comments made today may be forward-looking in nature and are based on PEMMA'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 November 4th, 2021 for the period ended September 30th, 2021, which is available online at Pemina.com and on both CDAR and EDGAR. With that, I'll now turn things over to Mick.
spk11: Hey, thanks, Cam. Good morning, everyone. I'm very pleased with the strong results we delivered in the third quarter, reflecting continued robust pricing across all commodities in Pemina's value chain, including crude, condensate, natural gas and natural gas liquids. The current commodity environment is supportive of our outlook for 2021 and 2022, including an opportunity for Pemina to maintain an above-average contribution from our marketing business next year. As well, strong pricing has positive implications for volumes on our existing assets and the longer-term prospect for business, including our backlog of currently deferred and potential new growth projects totaling more than $5 billion with attractive returns. Since the onset of the pandemic, producers have maintained discipline with a focus on productivity improvements, debt reduction, cash generation, and returning capital to shareholders. We remain of the view that the robust commodity pricing environment driven by the post-pandemic economic outlook, rising energy demand, with a tight supply curve, set the stage for supply growth into 2022 and beyond. With services across the hydrocarbon value chain, Pemina is poised to benefit from the growing sector activity. Coupled with strong financial performance in the third quarter, Pemina achieved another important strategic milestone with the announcement of our target to reduce the company's greenhouse gas emissions intensity by 30% by 2030 relative to 2019 baseline emissions. The GHG reduction target will help guide business decisions and improve overall emissions intensity performance while increasing Pemina's long-term value and ensuring Canadian energy is developed and delivered responsibly. To meet the target, Pemina will focus initially on operational opportunities, greater use of renewable and lower emission energies, and investments in a lower carbon economy. In addition to the GHG target, Pemina expects to make further ESG progress with the announcement of an equity, inclusion, and diversity target by the end of 2021. As we noted in the release of our materials yesterday, there have been a few other exciting developments recently which support our growing enthusiasm. First, we are encouraged to see a significant announcement from Dow Chemical highlighting plans to build a new world-scale polyethylene cracker in Fort Saskatchewan, Alberta. We estimate over 100,000 barrels per day of new ethane feedstock supply could be required for this project. which should have positive implications for third-party service providers, as new infrastructure will be required for ethane extraction and transportation. Second, we are seeing positive tailwinds on the Alliance pipeline. The recent open seasons for short-term capacity was nearly three times oversubscribed, resulting in Alliance being essentially fully contracted through 2022, and the current outlook also supports contracting of capacity beyond 2022. We look forward to providing further updates by the end of the year. Finally, the completion of Line 3 replacement project represents a major milestone for the industry and meaningful advances in Western Canadian oil egress. In conjunction with the Trans Mountain pipeline expansion currently under construction, we expect the Western Canadian sedimentary basin will soon have up to 750,000 barrels per day of excess takeaway capacity, providing ample opportunity for supply growth meaningfully to fill the gap, with the potential for related benefits to accrue to Pemina also over the long term. I'll now pass this call over to Scott to discuss the financial highlights for the third quarter.
spk10: Thanks, Mick. Overall, Pemina reported strong quarterly results due to new assets placed into service and the rising commodity price environment. We reported adjusted EBITDA of $850 million for the third quarter, 7% higher than the same period last year. The primary driver of the period-over-period increase in adjusted EBITDA was a $75 million higher contribution from our marketing business, which continues to benefit from higher margins on NGL and crude oil sales and the positive impact of higher marketed NGL volumes. Marketed NGL volumes increased as sales have returned to pre-pandemic levels compared to the third quarter of 2020 when Pemina built up storage positions due to lower commodity prices. As we saw in Q1 and Q2 of this year, the benefit of higher prices and volumes was partially offset by realized losses on commodity-related derivatives as part of our systematic hedging program. Excluding the impact of the realized losses on commodity-related derivatives, third quarter adjusted EBITDA increased $127 million over the same period in the prior year, highlighting the potential of the business at current commodity prices. The quarter also benefited from new assets placed into service throughout 2020 and 2021 in our facilities division, including the Prince Rupert Terminal, Empress Infrastructure, Duvernay 3, and Hype Developments. As well, we benefited from higher volumes at Verison Midstream's Dawson assets and on the Peace Pipeline system. Offsetting these positive factors was the impact of a lower U.S. dollar exchange rate, a lower contribution from Ruby Pipeline due to lower contracted volumes, lower revenue from Cochin Pipeline due to the impact of a timing difference in the recognition of deferred revenue, and higher general and administrative expense due to the higher long-term incentive expenses as a result of a change in Pemina's share price. Third quarter earnings of $588 million, were 82% higher than the same period in the prior year. In addition to the factors impacting adjusted EBITDA, earnings were positively impacted by the receipt of the $350 million acquisition termination payment net of the related tax impact, a higher unrealized gain related to certain gas processing fees tied to eco-natural gas prices, and unrealized gain on commodity-related derivatives compared to a loss in the prior period. These positive factors were offset by higher net finance costs, higher transformation and transaction costs, and lower share of profit from Ruby Pipeline. For clarity, I want to note that while the tax expense of $76 million related to the acquisition termination payment was accrued in the third quarter, the cash payment of the tax bill is expected to occur in the fourth quarter of 2021. Total volumes of 3.4 million barrels per day for the third quarter were very similar to the same period in the prior year. In pipelines, lower contracted volumes on Ruby pipeline due to contract expirations, lower interruptible volumes on EGG due to third-party outages, and lower volumes on Vantage pipeline were partially offset by higher volumes on Peace pipeline and Alliance pipeline. In facilities, volumes were lowered due to lower volumes at the Saturn complex due to higher deferred revenue volumes recognized in the same period in the prior year, and lower supply volumes on the ETH NGL system as volumes are now being processed at the Empress NGL extraction facility. Volumes were also lowered due to taker pay relief provided to Redwater Complex customers following a third-party outage. Late in the third quarter and into the fourth quarter, we experienced outages on our systems as a result of a fire at a third-party fractionation facility, as well as an unexpected outage on our northern pipeline system. Both events were relatively short-lived, and Pemina's operations have safely returned to normal. Facility volumes decreases were partially offset by higher volumes at Younger due to a turnaround in the prior year, higher volumes at Verison Midstream's Dawson assets, and higher volumes associated with Duvernay 3 being placed into service in the fourth quarter of 2020. We are also going into the last quarter of the year in a strong financial position with proportionally consolidated LTM net debt to EBITDA of 3.78 times. I'll now turn things back to Mick for some closing comments.
spk11: Thanks, Scott. With strong pricing providing a steady tailwind for our business, we remain optimistic about the future as we continue to advance our ESG strategy and progress development of future growth opportunities. Finally, we remain on track to deliver full year 2021 adjusted EBITDA within our guidance range of $3.3 to $3.4 billion and look forward to providing our outlook for the 2022 and the release of our guidance and capital budget in early December. We would once again like to thank all of our stakeholders for their support. With that, operator will wrap things up and go to questions. Thank you.
spk09: Thank you. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star 1 to ask a question. We'll take our first question from Rob Hope with Scotiabank.
spk15: Good morning, everyone. First question on the alliance recontracting. Can you add a little bit of color here? Because the ARC 7 Gen contract expires at the end of October, so you had a big gap there. So did you just really recontract those last two months? And then I guess, you know, as a follow-up there, just given the strong demand you've seen, you know, why not look to extend those contracts a little bit further?
spk11: Rob, I'm going to pass that over to Harry.
spk00: Hey, Rob. Good morning. So to be clear, the contracts, there was a renewal at the end of October that for contracts that would expire in November 1st of 2022 for basically the 2022-2023 gas year. So when Mick was going through his opening, what we spoke about in terms of Alliance essentially being full for 2022 were the contract expiries that happened October 31st of 2020. So as we look at the 2021-2022 gas year, Alliance is essentially full. For the 2022-2023 gas year going forward, We are still in the middle of a renewal process, and we expect to have further information by the end of the year.
spk15: All right, that's helpful. And then, you know, just taking a look at your LPG export terminal, we've been tracking the chips in and out of Prince River. It seems it's very busy there. So when we look at the potential expansion into Q1 of 2022, Two, is this really just wrapping up engineering because you're at a high utilization? And then secondly, what about moving other products out of there rather than just propane? Jared?
spk14: Good morning, Rob. Yeah, essentially we're just wrapping up and getting to Class 3 estimates on the expansion, so doubling the capacity and moving to the medium gas carriers, so essentially doubling the cargos that we can move through there versus the handies right now. And we expect to make that decision in Q1 of 2022.
spk15: And it's the thing that you have enough propane to export, so you don't need to touch G-tapes?
spk11: We'll eventually look at butane. Right now the focus is on propane. Stu, maybe I think it would be interesting to listeners just to talk about the markets we've hit and the positive feedback we've gotten on our product quality.
spk05: Thanks, Mick. We've been up and running since April. Really happy to report the The logistics coordination from our RFS facility, the rail loading, and we've moved 5,400 rail cars to our PRT site. We've moved 3.3 million barrels of propane through the facility in a nine-month period here, essentially. And we're really excited about the future and the growth. We've got cargoes into Japan, South Korea. China and Mexico. And we did our commissioning cargoes into Hawaii. And so we're really happy with where the destinations have, we've been able to penetrate or move into the market. One of the things that we're excited about is, again, our operating teams, you know, we're producing a low ethane propane. And in particular, we have a very exceptionally low methanol content, which is rare, which is unique for us. We're producing what I'd like to refer to as Petchem quality propane at our RFS facility that allows us, you know, we're getting great feedback on the quality of the product that we're loading, and we believe that opens up premium markets on a go-forward basis.
spk12: Thank you, Dr. Keller. I'll jump back in the queue.
spk09: Go to our next question from Patrick Kenning with National Bank Financial.
spk02: Hey, good morning, guys. Maybe just on the Dow opportunity, can we get your thoughts on when you might need to expand the egg system, perhaps Vantage, and also does it make sense to strip off some methane from Alliance at Fort Saskatchewan? I just want to get a better sense on how you're thinking about feeding Dow that incremental supply over time.
spk11: Hey, good morning Pat. I'm going to just make a quick comment and turn it over to Jarrett. We, as you know, we have assets, SA and extraction assets all over the province. So we're just sorting through the portfolio and frankly the diversification that our customers are asking for. They're not asking for just one source. They want diversified assets. geographically diversified product for obvious reasons. They're putting billions into the ground, and they don't want to be beholden to one supply source. So, Jared, maybe you can add some color. Thanks.
spk14: Yeah, you bet. Thanks. Good morning, Pat. Yeah, like Nick said, so we're just Currently evaluating all of the pipelines that feed our current customers, Pat, so between eggs and Vantage and the peace system, et cetera, and evaluating the red water complex on where do we need to expand to provide our customers with that diversification that Mick talked about. They want to ensure that that the C2 molecules, their feedstock, are coming from a variety of sources. So we're just kind of working through that right now. With respect to Oxable, Oxable does have the contractual rights to straddle the Alliance pipeline and extract ethane volumes outside of our Shanahan facility at the end of the pipeline. And, you know, working with our our fantastic partners over at Enbridge, we're currently evaluating that as well to not only satisfy existing demand, but also as part of the new expansion that potentially might be coming for the province.
spk02: Okay, that's great. Thanks for that, Color Guys. And then just maybe a quick follow-up on Alliance, but more from a longer-term contracting perspective. Curious to get your thoughts on how you build out that asset as a conduit to the Gulf coast. Um, is this more of a greenfield initiative or would you have to look at MNA, uh, more strategic partnerships downstream? Thanks.
spk11: Yeah, Pat, it's, it's very insightful, uh, question. It's like, like you're giving us tips on what to do next, but, uh, uh thanks thanks for that yeah you know a bunch of this gas is making its way to to the gulf coast and with uh 20 plus dollar an mcf uh product you can you can imagine why and uh uh stew told our board yesterday that you know there's a better part of 10 b's a day of new export capacity being uh developed uh on the on the gulf coast and and until more things happen like our heater LNG project, albeit that goes to Asia. We think there's going to be a continued desire for shippers on the lines to get to the coast and certainly that's caught our attention so that is under review and I think some of the You know, Harry mainly touched on the shorter-term contracting, but there's also a very robust activity for longer-term contracts, interest underway, and I'm quite certain some of that has to do with Gulf Coast exports. So, you know, it took us a few years to digest Alliance. I think there is, you know, possibility with Alliance to really put a lot of gas into that line. and to look downstream as we have for, you know, where does the ethane go, where does the propane go, where does the methane go, and keep our vertical integration going downstream. And I know Stu's team is looking at that.
spk02: Great. Thanks, Mick. I'll leave it there.
spk09: We'll take our next question from Shner Gushini with the S.
spk13: Hi, good morning, everyone. Maybe just wanted to start off kind of on the marketing business and how you're thinking about it for 2022. You know, commodity prices have obviously changed dramatically over the last three to six months. FRAC spreads have kind of opened up as well. Also, do you expect to continue a hedging program and would it be programmatic in nature? Do you sort of sit there and kind of watch it and sort of see where this market is going. Just kind of trying to get your thoughts as to how you're thinking about the hedging strategy for next year.
spk11: The thing about hedging is it's only hedging if you do it with regularity and consistency. So in terms of trending, we said in the notes that we're quite or very optimistic on what can happen next year. in marketing, and that is across the board. We also said in the piece that all commodities are doing well, and I think you're seeing our customer quarter releases are jaw-dropping and possibly even better in the fourth quarter. And so when they're making money across all commodities, It certainly helps us to make money, and the differential pricing that we need to have really good outcomes is in place today. So it's shaping up good, and I think we've taken some risk off the table, and we intend to follow our normal process because you're never – You're never absolutely sure what Mother Nature will do in a warm winter or something unforeseen can upset the differential pricing in a hurry because many of our ARBs depend on more than one commodity, as you know, and so we have to be cautious. So we do intend to keep following our systematic program of hedging.
spk13: Great. No, that makes perfect sense. Maybe if we can pivot to the CCUS project that you announced earlier this year that you were exploring. You know, as part of the conversation or announcements at the time, you talked about, you know, repurposing pipeline and so forth. There's been similar discussions in the U.S. and Texas and so forth. And the conversation seems to always show that or the pushbacks rather have been that CO2 pipes are very different than other pipes. Thicker steel wall and pressure and so forth. Just wondering, are the pipes different that you're planning to repurpose? Is it a scenario where it's more you have the right of way and you plan to replace pipe? Just kind of wondering if you can give us a little bit more color or thoughts on how this will come to about from a capital perspective.
spk11: Yeah, I'll start out and then kick it over to Stu. There's There's a couple things. Number one, we're looking at a combination. So in certain circumstances, we have a right-of-way, but to your point, we don't have the right pipe. Let's say we have an oil pipe in a right-of-way. That's not going to have the pressure capability that we need to move CO2. And so that's a situation where we could pull a liner or a high-pressure pipe within the pipe. That's under review with the regulator, our ability to do that. In places we do have high pressure gas pipeline, you know, we've done the work and we think those pipelines can be retrofitted. They need some work. They need crack arresters put in. But the big difference between Alberta and Texas is it's damn cold up in Alberta. And it's cold and the ground temperature remains very cold. And so that is a fundamental tailwind we have and most of the time we're complaining about it. This might be the one time that it's actually a positive and it keeps that CO2 in check. Maybe, Stu, you could elaborate a little bit where we are on the process there and also what our critical path is to take that project off the drawing board and to make it real.
spk05: Sure. Again, I think we have a vision, and as described, we believe there is an advantage to our gathering systems that we have. You've highlighted, is it right-of-ways or is it pipelines? We also believe as a pipeline operator that we have expertise. We move high-pressure pipelines and products. We do appreciate the difference that CO2 is, and we're working exceptionally closely with industry experts. As Mick described, I think you're going to see as we come forward that we will be building some new pipe. We will be putting liners in other pipes and retrofitting some of our pipes. all in an attempt to provide a CO2 solution at the lowest possible cost. We recognize we will be working with others, collaborating on how to do that, where the emissions are going to come from, and so we're working hard. We are part of the government of Alberta's process on the carbon sequestration rights that the government is working through. We're working with the government with our partners, extensively with our partner on how to proceed. And we're excited about the progress. We've got experts helping us along the way. And so as the government's described, we're hoping in early 2022 that the sequestration permit process will be through and the government will be making some decisions on who will have the rights to sequester products in Alberta. we believe we have a strong solution, an industry solution to capture a lot of the emissions in Alberta and working with customers and the government to progress that path and that process.
spk13: Now that makes perfect sense. Really appreciate the technical answer there. Thank you very much and have a great weekend.
spk12: You as well. Thank you.
spk09: And we'll go to our next question from Robert Kwan with RBC Capital Markets.
spk11: Good morning.
spk10: Let's just start with how you're characterizing the nature of the discussions you're having with producers. As you noted, they're holding or they're maintaining a lot of discipline for now, but just what's the pace or how's the pace of inquiries for new capacity and new projects?
spk15: been and do you see a tilt in their thinking with commodity prices just trying to drill into existing capacity to take advantage of high prices quickly or is there a growing willingness that you're seeing to make a long-term infrastructure commitment?
spk11: Robert, you would know that answer as well or almost as well as we do. There's so much excitement in the sector and so much cash and dividends and share buybacks. Even when the producers are allocating a ton of money to both of those activities, I looked through some tables the other day and The average net debt at the end of 2022 for the Canadian junior intermediate sector and the U.S. sector is actually negative on average. People across the sector are not going to have debt. They're going to have cash in the bank. The only people that are going to have remaining net debt are the seniors in Canada, and they're all meeting their targets. I read Synovus' releases. And so the question remains that these prices, you know, and with the economics of oil and gas well drilling, I mean, the silver lining through the horrible pandemic is, man, people learn how to do stuff at low cost. And so the economics of wells, of activities have never been better. The question to me then is when? And, you know, there's lots of talk still out of COP26 and everything that is a headwind. But most producers don't have any reliance whatsoever on capital markets anymore. I mean, they're completely internally funded. They don't need bank debt. They got cash in the bank. And my prediction is, this is one man's prediction, is when they can, you know, drill gas, drill oil with very fast payouts and with hedgeable commodities that they're going to start to take ground, particularly drill-to-fill situations. So if a producer has capacity in their gas plant or we have capacity in our plant or they're paying for service that they're not fully utilizing, as we said in the call, You know, we've got Line 3, so there's no mystery about egress anymore that was all a headwind. So I think that the things that can be done with relatively fast payouts will drive production up. What remains to be seen are there going to be new Seg D trains and things like that. or is the industry just going to slowly scale up to its egress capacity? Even if it did that with Shell coming on in some time and Line 3 there with surplus capacity and Trans Mountain coming, the industry has more running room with the best economics I've ever seen. And they look like they're going to get better not worse I think OPEC is showing a lot of discipline and even there you know we know that there's hiccups from some of the smaller countries not being able to meet their their quotas and demands returning people are getting back on on airplanes so I think things are looking very very good from a cash generation perspective And we have lots of inbound interest. And I think it's not if, it's when. But to your point, and the reason for your question is, this is more disciplined than we've ever seen. Like, I'm a bit surprised the volumes and capital budgets haven't ramped up more significantly. It's just an incredible time in the industry. is making a ton of money and they're shedding i think reliance on on capital markets uh entirely and um there may be good reasons for that i know that's a long answer and that's good color um if i can just turn to marketing and a couple of questions here you had a statement that you expect marketing to be above average in 2022 and i'm just wondering i guess with the changes in your business and the light and over what time period what are you seeing
spk10: As average, the second part, last quarter on the hedging program, you disclosed that pricing on the hedges you added for 22 were in the range or even a little above the prevailing spot frack spreads in the first half of the year.
spk11: I'm just wondering if you can give an update on pricing for the hedges you've added subsequent to the quarter. Scott, that's always a delicate question. Maybe, Scott, you could take that one.
spk10: Yeah, Rob, we added the 25% hedges kind of throughout Q2. So those would have been at roughly prevailing prices as it relates to Q2. Obviously, since Q2, we've seen a continued increase and rally in the prices. So those 25% that we initially put in in Q2 would be slightly out of the money today. uh nothing material i'd say you know 15 call it 15 million dollars roughly out of the money and then the 12 that we added was you know within the the past several weeks here so relatively close to uh where the the spot pricing is for 2022. got it and then just on the overall above average commentary on marketing like how are you calculating what's average for you
spk11: I'll give you a course answer. Like 2020 was like a P10 year. So, you know, on any given 10 year stretch, you know, in the bottom 10%. This year, given the strong second half and the way the towards the year end look will be, you know, a P like an average year. and next year will be a very good year. So I would say, you never know, Robert, so forward-looking information. But it could be a P75 year or better, but we'll wait to see. Remember, it's not just one commodity. It's differential pricing that really is key in how we make money, and it's really difficult. to predict one commodity versus another. But if things were not to change from today's pricing, we'd have a very good year.
spk10: Robert, I would just also add that obviously in early December, we'll be putting out our capital budget and our 2022 guidance. And at that time, I think we'll be able to provide you a little more color to help you with that answer. Fair enough, and maybe just to follow on that, I know it's partly marketing, partly maybe facilities, but just any commentary as to what frack tightness, NGL kind of mix, sloppiness, given the Plains outage and what that means both near term and into 2022?
spk11: Gary, you want to talk about where we sit, how busy you think Redwater and the general Edmonton frack complex is, and maybe that can help Robert out.
spk14: Yeah, Robert, good morning. Yeah, the frack complex, obviously, it did get backed up a little bit with some of the challenges that happened there in the late September. But yeah, overall, even on a run rate basis, the frack complex is in Fort Saskatchewan. They're highly utilized right now. Everyone, including ourselves, we're seeing stronger physical gas volumes. Some of our customers have shifted their their portfolios a little bit to maybe not as heavily condensate weighted and a little bit more into that very liquids rich, but still a lot of gas coming there, which is driving a lot of NGLs down through the value chain. And they're all showing up in Fort Saskatchewan. So highly utilized. Thankfully, everything's rocking and rolling with the assets and we're seeing a lot of high processing rates. So it's going well and it's looking really good for You know, when you talked about, or maybe there was a question earlier about where are the customers asking for incremental services, there are certain segments of the entire value chain where there are bottlenecks, and that would be one where, obviously, Pemina, you know, looking at RFS3, you know, going to, you know, the DF there and going to full C2+, like Redwater, RFS2, et cetera. Those are the types of things we're looking at right now. to help accommodate the customers increasing NGLs.
spk12: Okay, that's great. Thank you.
spk09: Go to our next question from Andrew Koski with Credit Suisse.
spk04: Thank you. Good morning. I guess the question is for Mick, and it's really when you look at your footprint that you've got. and you think about green hydrocarbons attracting premium pricing, to what extent do you start allocating capital to effectively provide your customers a turnkey service on a value chain basis for capturing carbon, moving carbon, and then eventually shipping out green hydrocarbons at premium prices? How do you think that fits into the PEM in the store that you've got?
spk11: Well, I think you're seeing real examples here. I mean, the Cedar LNG project, for example, is using green power. And so it'll probably be the greenest LNG in the world. I can't imagine how it would be better than that. So that's obviously going to be a coveted product. We are not participating in the generation of renewable power, but we're acquiring renewable power from long-term renewable power. We've announced a deal. We see the prospects for doing more of that to help drop our emissions intensity and, if possible, our overall emissions, particularly if we don't keep growing. So that's well underway. We are looking at, on a micro, on a pilot basis, sequestering all the carbon at Redwater. That's our largest single point emission source. And we have suitable geology. And we can be customers of the Alberta Carbon Grid, an existing pipe there ourselves. We're looking at similar kind of micro sequestration opportunities in some of our larger point emission sources in the field where we have the combination of the right geology and where we're using gas. You turn to Barrison midstream. Most people don't know this, but that's all hydroelectric power there too. So we've got a BCF a day of of gross capacity there that's all run on green power. We're well down that road and so we compare pretty well on a benchmark basis and we're going to keep taking ground. Those are the things that we're doing to put Pembina on the right footing and in the right direction. but we're not stopping there. We're actually trying to provide an industry solution as you described. One of the most important things though for the industry solution is that we and our partner TransCanada is the largest pipeline owners in province. We've got most of our pipe in the province as TransCanada in terms of NGTL both open access service providers that we're going to combine and we have combined our efforts to provide a grid, an open access grid like Pemina does in oil and NGL and TransCanada does on NGTL and use our surplus pipe and as Stu said, our capability. But we need the pore space, the sequestration rights to be able to offer those services to customers. So we look forward to doing that. We aspire to do that. But, you know, obviously where you put that stuff is really important to that equation. But we'd love to have that in the Pembina store, and we're going to be users of that store ourselves.
spk04: That's a very helpful coloring context. And I guess maybe just a follow-on, and it relates to, you know, on the sequestration side of it, you know, do you think the pricing regime in Canada is enough and the pricing regime on carbon is enough to really stimulate capital? Or do you need like a 45Q equivalent in Canada to really drive more capital into that industry?
spk12: Janet, do you want to take a crack at that and I'll add my thoughts after?
spk09: One moment while we... It looks like we have lost them for just a moment.
spk12: Okay.
spk11: Okay, I'll take that. I think the carbon grid and the sequestration, the transportation can work at today's carbon pricing. I think the capture The capture is the most capital-intensive part, and that's where the levels of government need to kick in, is really to help producers, the emitters, capture their emitters. It's all well-understood technology. Technology, Pembina knows and has experience with. But it's capital intensive, and so we do need assistance from the government with investment tax credits or fast write-off tax pools or just outright incentives to get that started, and then we'll be good. I think the projected... Carbon tax in Canada is way, way beyond what we see in the U.S. and I think almost anywhere in the world. And so, you know, clearly were that to come to pass, carbon capture could be economic.
spk04: Okay, that's very helpful. Thank you.
spk09: We'll take our next question from Robert Cotelier with CIBC Capital Markets.
spk03: Hey, good morning. You've actually answered the majority of my questions, so just a couple of small ones here. I noticed there was a discussion in MD&A about using rail transportation to position some propane at Corona. I'm wondering what you see in the fundamentals there to support that decision and The second part is, do you see that as just a tactic based on the current market or is that more of a long-term strategy?
spk11: Stu, maybe you and Jarrett want to tag team on that.
spk05: Yeah, I'll start and then Jarrett can jump in. So, Rob, thanks for the question. You know, this is not uncommon for us. We actually have been using our current asset. We've railed products in. Um, you know, we do like, we like the Sarnia market. We like the seasonality of the Sarnia market. Uh, we're coming into a valuable time. So yeah, the economics do justify, uh, you know, the cost to rail, um, our product at this point in time. And it's, it's nothing new for us. We've done it on a regular basis. So Derek, no, nothing further.
spk03: Okay. And then, uh, just with the, uh, the third party outage and the, uh, take or pay fee relief, uh, related to that, do you have any line of sight as to when that, uh, that might mitigate and get back to normal operations there.
spk11: Jared, maybe you can take the operating part, and Scott, if you want to chime in on any financial things you want to talk about there.
spk14: Yeah, Robert, everything's back to 100% operating on our side, and it's been, I don't know, we'd probably have to get it out, but it's been a couple of weeks now that everything's been back to normal for
spk10: Rob, we don't expect any material impact to our Q4 results.
spk12: Okay. Thanks, everyone.
spk09: And we'll take our next question from Matt Taylor with Tudor Pickering Holtz.
spk11: Good morning, everyone. Thanks for taking my questions here. I just wanted to go back to the alliance and if you could provide some commentary on how rates on the renewed contracts compared to the historical rates Just as we saw this spread for Aiko to Chicago was quite tight there for a while and for the past quarter or two. So any comments on that? And then I know there's been a lot of bearishness in the market about Alliance and how the 3X oversubscribed open season is changing your outlook for that pipe longer term. I'm just going to make one comment and then turn it to Harry. Our longer-term outlook on that pipe has never changed, even when we had a $0.60 differential. It's going to move around, but our, and I know our partner Enbridge, our view has always been that's the best pipe from Canada going into the United States, and our outlook's always been very, very positive about that pipe. Harry?
spk00: Thanks, Mick, and good morning, Matt. I'll just follow in behind Mick on the longer-term outlook. Mick's right. The structural advantages that Alliance has enjoyed over its 20 years, we firmly stand behind, and as Stu and Mick have talked about, we're seeing some additional structural advantages come into play for Alliance around the LNG exports off the East Coast and also out of the U.S. Gulf Coast, combined with what we're seeing is still a movement towards switching from coal-fired to gas-fired and nuclear to gas-fired as well. So long-term, the structural advantages that Alliance enjoyed are still there and actually seem to be a bit more robust. From a pricing perspective, I'll talk about in terms of the 2021-2022 gas year. So the volumes that we filled up there were on average about 130% in excess of the current toll. For the 2022-2023 and longer gas year and beyond that, we're currently in a process with working with the shippers up there. So there's not much I can say, but we're expecting to have an update before the end of the year.
spk11: That's great. Thanks for that, Harry and Mick. And then I have one on coaching as well, probably first for Scott. Is that deferred revenue issue material, and is that just a one-off? And then previously you guys have been talking about potentially adding more capacity, and, Nick, you've outlined bullishness on volume CR conversations heating up there. That capacity could be imminent as well? New capacity, that is.
spk10: I'll take the first part of that question and then turn it back to Harry. Matt, no, the overall result was not material, and a lot of it just relates to the timing of make-up rights and other things on our system. So, you know, it was less than $10 million to the quarter. With that, maybe I'll pass it over to Harry.
spk00: Yeah, in terms of increasing the capacity, discussions are ongoing. You know, obviously the condensate market in Alberta is, is very robust and I think we feel positively about the direction Alliance is going both, or sorry, Caution is going both from a volume and a price perspective.
spk12: Great, thanks for that. And then last one for Mick.
spk11: Can you elaborate a bit more on, there's some comments out there in the press about you've seen the benefit of combining some of the CCS projects out there and Some of the pushback we've been hearing is, you know, why pay a third party a premium for that service, you know, and or some of those other competing projects might be a bit more refined in scope. So would you mind just touching on some of those key rebuttals and what your vision is for a broader system in Alberta? Yeah, I mean... It's confusing how someone could say they would need to pay a premium given that our pipes that we're proposing to utilize are fully depreciated and we're only trying to make a return on incremental investment, which we've said to the market we expect to be about $0.50 on the dollar compared to new. whereas other proponents need to build brand new pipes, so I can't really ascertain the root of that comment, but listen, if someone can do it less costly on their own, clearly they're going to do it, and I guess we'll wait and see.
spk12: Great, thanks a lot.
spk09: Go to our next question from
spk08: Thank you. Recognizing we'll get more information in December and I look forward to that. I'm wondering if you could help us understand in the meantime a little bit about, you know, where there might be some operating leverage that you could benefit from in your system in 2022 volumetrically. Any updates you could provide on key sensitivities, whether it be commodity prices, FX, or anything else would be helpful. And then from a model perspective as well, how might we think of inflation puts versus takes on the revenue side versus the cost side in terms of any sort of commercial protections in place and whether that inflation might actually prove to be a net tailwind for your next deal?
spk11: Yeah, I'll take a couple of those. So starting with inflation, when we think about scarcity of goods and services, the number one thing is we've got to take good care of our employees because a lot of the scarcity we're reading about has to do with employees, and so we're very focused on that. And then the next thing, regardless of cost, is making sure you have all the spare parts you need we're all learning in our personal lives it's hard to get stuff right now so we've looked at having critical spares and spare parts and inventory across our systems in terms of the monetary part of inflation number one I think about three quarters of our operating costs are passed through we're obviously very cognizant that that those costs matter to our customers and so we're doing everything we can to drive efficiency and we've literally put tens of millions of dollars of efficiencies into our business since 2020 and that remains an ongoing focus of ourselves and our board. Lastly, we observe that often inflation does correlate relatively well to commodity prices and And so to the extent we're left with remaining residual inflation, we think there's a good hedge. At least that's what's happening now. I would say our ability to make money from our marketing business has been a far outstripped inflation that we see on the financing side. Obviously, inflation can lead to interest rates. And we're really well hedged in terms of long-term interest rates. Maybe Scott wants to add something to that. And then lastly, or second last, I'll open it up probably to Scott next, but where do we have leverage? We have leverage in Verison Midstream. We have quite a bit of capacity there. We have... leverage obviously on caution we have some very low-cost expansions there we have a low-cost expansion on Alliance that we've talked about in the past you never know we have significant leverage across our conventional pipeline business you know we we are still operating in our business around three-quarters to 80% full, and so, you know, tremendous torque on adding barrels there. So, you know, the places were more full, as Jared said, is on our frack business and some of our other gas processing businesses. So, Linda, we can run quite a while within our footprint, and that sounds great and it is great, but it also is dependent on where it comes on the system. You know, like we're building phase nine because the product is coming on at a part of our system, you know, way at the end where we don't have quite enough capacity. So sometimes you still have to deploy a bit of capital depending on where that product comes on. So I'll open it up to my colleagues here to add some color.
spk10: Peter Haslund, And I would just add about about 90 to 91% of our of our debt is on fixed rate, so we do have somewhere in the neighborhood of 900 million that. Peter Haslund, goes to floating rates that you know we're looking at what to do with that here in the short term. We also have short-term rate exposure at Barrison Midstream as well, but we've hedged 50% of that away. And as it relates to sensitivities, if you just bear with us one more month, we'll obviously lay out all of our sensitivities in conjunction with our 2022 budget. So that will form part of that press release.
spk08: Thank you. And on a separate note, some headlines recently that your Oregon LNG pipeline approval was to get a new FERC review, recognizing it's not a high priority initiative now. Just wondering what the thinking is there and, you know, might others in the industry maybe find more value in that initiative or what are the moving parts?
spk11: Janet, are you able to speak to that?
spk01: Yeah, this is Janet and thanks for the question. I think as we've announced previously, we paused the Jordan Cove development at this point. And while we haven't made any decisions, we're continuing to work with FERC, including on So I think we'll have to continue to evaluate. We do see that there's value to this asset in some way, shape, or form. So I think more to come on that.
spk08: Thank you. And maybe as a broader question with respect to maximizing value, how might acquisitions and divestitures be leveraged where outright trading of assets might optimize bigger, lower cost solutions for industry versus partnering like you're doing with the Alberta Carbon Grid?
spk11: You know, Linda, that's a great question. Ultimately, assets ought to end up in the hands of the owners who can utilize them the best. So, you know, swapping assets is a terrific solution if they're respectively worth more to the other party. And so we're, you know, we're looking at things like that. We're looking at the ability to cycle capital maybe a little more than we used to. And so anything's possible. And we come into... 2022, we'll talk more about that again in December. But, you know, extremely, extremely well positioned, generating a ton of cash with a low payout ratio, very, very low levels of debt and a machine that has a lot more upside than downside. So we're feeling really robust about what's possible coming into next year.
spk08: Thanks for answering my questions.
spk12: Cheers, Linda.
spk09: And we'll take our next question from Ben Tam with BMO.
spk10: Hi, thanks. Good morning. I wanted to ask a question on M&A and curious about the activity you're seeing, your appetite, are there more flowing sellers out there given improvement in asset values and or other geographies that you're looking at that you haven't looked before? I mean, what more high-level comments on M&A?
spk11: Yeah, sure. You know, we tend to like to grow with connected assets or assets that are virtually connected through contracts. So what I mean by the latter comment is we're not physically connected to Prince Rupert, but we have long-term rail deals that make it so. So we consider those still connected and vertically integrated. And the reason we like to grow with connected assets is because as we offer services in the field to customers through the value chain, there's always some part of the value chain that has spare capacity. Like in my response to Linda, you know, if we got a huge new NGL contract because, you know, Dow needed ethane and let's say it's C2+. We built a field facility, that would be new capital, but it could flow on our pipe without capital. And so the contribution to our pipe would go right to the bottom line. Maybe we need to build a new frack, but we have extra storage. We have surplus rail for the C3+. and we're pipeline connected to eggs, so no capital there. So you can see in that collage, some activities need new capital and some don't. And the ones that don't add exceptional profitability, some of which we can share with customers, and so we can make nice profits and customers can have better netbacks. And so that's the reason we seek that connectivity. Now, if we If we had a storage terminal in Europe, it's hard to imagine how one plus one equals three there. So we tend to shy away from that. And we've also learned that building from a position of strength and assets and customers, we know Pat's question about what's possible downstream of Alliance. Well, we're down in Chicago. We have major assets there. So we have familiarity with that business, so that would be a good example of places where we could look, where we have knowledge and experience and advantage. And so that really has and will continue to guide what we do next. Okay, and then my second to last question on Ruby, the post-contract financial contribution, is that tracking in line with your expectations, initial expectations of budget? I'm not sure I understand the question, but I'm going to turn it over to Harry. Maybe he understood and he can answer it.
spk00: Yeah, generally, yes. And Cam can give you the specifics.
spk06: Yeah, Ben, I think, you know, obviously the producer contracts rolled off at the end of July. So Q3 was a pretty... decent run rate for Ruby going forward. There's been some short-term deals there that have backfilled some of the volumes on a short-term basis, but not meaningful contributors to revenue just given the current spread. But I would say that where we're at, balance of Q3 and into Q4 is sort of going to be the run rate for Ruby.
spk00: I'm still aligning with you.
spk09: And that concludes today's question and answer session. I'll turn the call back over to Mick for any additional or closing remarks.
spk11: Well, thanks, everyone, for your questions. We do have to jump, too. We have an employee town hall. Lots of interest, I can tell. We rarely take the full hour, so thanks for your interest. You know, we've got a lot of tailwinds right now. existing assets are king and our customers are healthier than I've ever seen them and sky's the limit for them and hopefully that will turn into volumes soon and drive our activity forward. Looking forward to providing our updated 21 insights in December. and further look into 2022 at the same time. So with that, thank you very much, and have a great weekend. Goodbye.
spk09: This concludes today's call. Thank you for your participation. You may now disconnect.
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