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spk03: Good morning, ladies and gentlemen, and welcome to the Pembina Pipeline Corporation Q4 2022 Results Conference Call. At this time, all lines are in listen-only mode.
spk02: Following the presentation, we will conduct a question-and-answer session. If at any time during this call you require immediate assistance, please press the star zero for the operator.
spk05: This call is being recorded today, Friday, February 24th, 2023. I would now like to turn the conference over to Cameron Colbate, Pembina's Chief Financial Officer. Please go ahead, sir.
spk08: Thank you, Melissa, and good morning, everyone. Welcome to Pembina's conference call and webcast to review highlights from the fourth quarter of 2022. On the call today, we have Scott Rose, President and Chief Executive Officer, Sharon Sproat, Senior Vice President and Chief Operating Officer. Anna LaDuca, Senior Vice President, External Affairs and Chief Legal and Sustainability Officer. And Sue Taylor, Senior Vice President, Marketing and New Ventures and Corporate Development Officer. I would like to remind you that some of the comments made today may be forward-looking in nature and are based on some of the 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 were presented on gap measures.
spk09: To learn more about these forward-looking statements and non-GAAP measures, please see the company's management discussion and analysis dated February 23, 2023, for the period ended December 31, 2022, as well as the press release Pemina issued yesterday, which is available online at Pemina.com and on both CDAR and EDGAR. I'll now turn things over to Scott to make some opening remarks.
spk13: Thanks, Cam. In the fourth quarter, Pemina delivered strong financial results, highlighted by adjusted EBITDA of $925 million, leading to full-year record adjusted EBITDA of $3.746 billion, which exceeded the high end of the company's revised guidance range. As we have referenced throughout the year, in 2022, we benefited from rising volumes on key systems and very strong performance within the marketing business. 2022 was also highlighted by a number of accomplishments, the largest of which was the creation of Pemina Gas Infrastructure, or PGI. Along with our partner, KKR, we were excited to bring together three complementary platforms to create a premier, highly competitive Western Canadian gas processing entity with the ability to serve customers from north central Alberta to northeast British Columbia and to pursue future growth opportunities in a capital efficient manner. Since closing, the PGI transaction in August, integration activities have progressed well and operations have performed as expected with no major interruptions to service. Commercially, we have successfully secured incremental volumes through fee-for-service firm contracts with a number of existing customers at both the K3 and Wapiti facilities. In 2022, we also had a number of commercial successes, citing long-term agreements and contracts. We entered into long-term service agreements with three premier Northeast BC Montney producers, renewed contracts and secured incremental volumes on our conventional pipelines and fractionation facilities, enhanced the long-term contractual profile of Alliance Pipeline, which is now fully contracted for the next two years, executed a long-term commitment with an anchor customer to support the reactivation of the Nipissi Pipeline, and extended a key contract on the Tioga portion of the Vantage Pipeline. The commercial success has continued into 2023 with a successful open season for capacity on the coaching pipeline and the extension of a contract to supply ethane on a long-term basis to a key customer. We also continue to progress our portfolio of growth projects in 2022, notably by completing the phase 7 and phase 9 peace pipeline expansions and the Empress Cogen project successfully delivering these projects under budget. We also reactivated construction of the previously deferred Phase 8 Peace Pipeline expansion, and we look forward to placing that project into service in early 2024. Furthermore, as we announced yesterday, we are proceeding with the construction of a new 55,000 barrel per day fractionator at Redwater. The Redwater complex, which including the expansion, will be comprised of RFS 1 through 4, is underpinned by long-term take-or-pay contracts. In recent quarters, Pemina has successfully extended existing contracts and signed incremental new contracts. The existing facility is highly utilized and ARPAS 4 is needed to meet customer demand. The decision to proceed with the expansion ensures Pemina customers will benefit from a timely solution to growing volumes and constraints arising out of high utilization rates across the industry. 2022 was an outstanding year on many fronts. I'd love more to say about 2023 and beyond toward the end of today's call. But for now, I will turn things over to Cam to discuss in more detail the financial highlights for the fourth quarter and full year 2022. Thanks, Scott.
spk09: As Scott noted, Edmonton reported fourth quarter adjusted EBITDA of $925 million, which represents a $45 million or 5% decrease over the same period in the prior year. Fourth quarter adjusted EBITDA was negatively impacted by lower margins on NGL sales, partially offset by higher margins on crude oil sales, both in the marketing and new ventures business, lower contribution from Oxable, a lower contribution from Ruby, lower revenue related to recoverable costs on the Horizon Pipeline system, higher general and administrative expense, largely due to higher long-term incentive costs driven by the change in PEM in the share price, and its share price performance relative to a peer group, as well as higher consulting fees and higher integrity costs. These impacts were partially offset by higher volumes on the Peace Pipeline system and Cochin Pipeline and higher tolls due to inflation mechanisms, the PGI transaction and stronger performance from certain gas processing assets, including the Heights Gas Plant, the Dawson Assets, the Cut Bank Complex and the Rest Haven Facility, the impact of a higher U.S. dollar exchange rate, and a realized gain on commodity-related derivatives compared to a loss in the fourth quarter of 2021. Earnings in the fourth quarter were $243 million, representing a $163 million, or 204% increase over the same period in the prior year. In addition to the factors impacting adjusted EBITDA, earnings were positively impacted by lower impairment expense, lower restructuring costs, and a higher unrealized gain on commodity-related derivatives. These factors were partially offset by our Ruby Pipeline settlement provision. Total volumes of 3.392 million BUE per day for the fourth quarter represented a decrease of approximately 1% over the same period in the prior year. volume decreases were attributable to both the pipelines and facilities divisions, including most notably the Nipissi and Mitsu pipeline system, the Ruby pipeline, the disposition of the E1 and E6 assets at our Empress facility. Excluding the volume impact of the Nipissi pipeline, Nipissi and Mitsu pipelines, the disposition of the E1 and E6 assets and the Ruby pipeline, fourth quarter volumes would have increased approximately 4% over the same period in the prior year. The fourth quarter also contributed to record full year results that included adjusted EBITDA of $3.746 billion, which was 9% higher than in 2021 and exceeded the higher end of the company's guidance range. Earnings of $2.97 billion, which was an increase of 139% compared to 2021. cash flow from operating activities of $2.93 billion, which was 11% higher than 2021, and adjusted cash flow from operations of $2.66 billion, representing a 1% increase over 2021. Thanks to the strong results, Pemina generated meaningful free cash flow, which was allocated to strengthening the balance sheet and returning capital to shareholders. In 2022, we raised the common share dividend by 3.6%, We reached our target to repurchase 350 million common shares. We redeemed 300 million of preferred shares, and we reduced leverage to the low end of our target range. Looking ahead to 2023, we are reiterating our 2023 adjusted EBITDA guidance range of 3.5 billion to 3.8 billion dollars. The midpoint of the guidance range reflects an approximately 5% increase in adjusted EBITDA contribution from Pemina's fee-based business, reflecting higher tolls, growing volumes, and increasing utilization across its assets in the Western Canadian sedimentary basin. While Pemina expects another strong contribution from its marketing and new venture segment in 2023, results are expected to moderate relative to the strong results in 2022. The reiterated guidance includes the impact of a recent incident on the northern pipeline that impacted a substantial portion of the volumes on northern and the northeast BC pipeline system. Service on the northern pipeline has resumed at reduced operating pressure. Pemina does not yet have a confirmed duration for operating at reduced operating pressure, and the northern pipeline system will continue to operate under limited capacity with increasing rates contingent upon continued integrity assessments and approval from the AER. The overall impact to Pemina's adjusted EBITDA for the first quarter of 2023 is estimated to be approximately $30 million, including lost revenue and costs to return to service. In December, we announced our 2023 capital program, which included investments related to the construction of the Phase 8 Peace Pipeline expansion, reactivation of the Nipissi Pipeline, pre-FID development activities for Cedar LNG, engineering activities for the Alberta Carbon Grid, sustainment of our operating assets, and advancing Pemina's portfolio of unsecured development opportunities. Pemina has revised its outlook for 2023 and now estimates a 2023 capital program of approximately $800 million, which relative to the original guidance of $730 million reflects primarily incremental spending related to new revenue generating infrastructure in the conventional business and the sanctioning of RFS IV. 2023 cash flow from operating activities is expected to exceed dividend payments and the capital expenditure program. Additional incremental cash flow generated in 2023 is expected to be used to pay down additional debt, further strengthening our balance sheet and preparing the company to fund future capital projects if sanctioned. Based on the current guidance for 2023, Pemina expects to remain firmly within its financial guardrails with ample liquidity, and our leverage metrics are expected to remain firmly within the range for a strong BBB credit rating. I'll now turn things back to Scott for his remarks.
spk13: Thanks, Cam. In closing out today's call, I wanted to take a moment to touch on the future of Pemina and where we are headed in 2023 and beyond. Over the next 12 to 24 months, a key focus will be growing cash flow by enhancing utilization of our existing assets, gas plants, pipelines, and fractionation facilities to serve our customers' growing volumes. Despite ongoing economic and geopolitical uncertainty, the WCSB is expected to continue to grow at a modest pace in 2023 with the potential for higher growth rates in the future, given major third-party egress projects such as the TMX Pipeline and LNG Canada, which are projected to come into service over the next couple of years. Our outlook for continued growth was further bolstered by the recent announcement by the province of British Columbia and the Blueberry River First Nation regarding the finalization of an agreement allowing oil and gas activity to proceed within certain parts of Northeast BC. While future development is subject to certain provisions, Pemina is optimistic that the agreement will provide the needed clarity for producers to allocate capital to drilling programs and support larger development plans, leading to growing volumes in the area. Pemina has a long history as a Northeast BC service provider. Through our existing Northeast BC pipeline, which has significant expansion potential, we are well positioned with readily available solutions to meet new customer demand. But we are very While we were very well positioned to benefit from this growth and look forward to the anticipation of the next few years, we also have an eye to the future of Pemina. With a longer time horizon in mind and emerging from the COVID pandemic, the board and management viewed 2022 as an opportune time to review Pemina's corporate strategy. Through a year-long detailed undertaking, we challenged ourselves on how Pemina can remain resilient and indeed continue to thrive, not just for several years, but for decades in the face of many uncertainties which continue to evolve. Pemina's four strategic priorities, which we outlined in yesterday's news release, were informed by an analysis of scenarios built around two key themes that we expect will be the driving forces that could most impact our business in the years to come. These two themes are the pace of decarbonization and the extent of globalization in energy markets. Over the course of the last year, we analyzed our business through a commodity-by-commodity lens and considered the potential impacts on Pemina's business, both risks and opportunities under different scenarios. The outcome is a strategy which builds on our strengths by continuing to invest in our core businesses while also capitalizing on opportunities to leverage our assets and expertise into new service offerings to proactively respond to the transition to a lower carbon economy. First, to be resilient, we will sustain, decarbonize, and enhance our business. This priority is focused on strengthening and growing our existing franchise and demonstrating environmental leadership. Second, to thrive, we will invest in the energy transition to improve the basins in which we operate. We will expand our portfolio to include new businesses associated with lower carbon commodities. Third, to meet global demand, we will transform and export our products. We will continue to focus on supporting the transformation of Western Canadian sedimentary basin commodities into higher margin products and enabling more coastal egress. And fourth, to set ourselves apart, we will create a differentiated experience for our stakeholders. We remain committed to delivering excellence for our four key stakeholder groups. If you consider PEMIN as in-flight projects such as the Phase 9 expansion and Phase 8 expansion and the sanctioning of RFS4, along with the proposed projects such as Cedar LNG and the Alberta Carbon Grid, you can see that they fit squarely within this strategy. Similarly, through our efforts to reduce emissions and fill currently unutilized capacity at our existing assets, we will de-carve actively developing new business ideas and projects that we look forward to sharing with you in the fullness of time. Importantly, we remain committed to executing our strategy within our longstanding financial guardrails, and we are confident in our ability to continue to deliver solid per share growth and exceptional returns to our investors. Thank you for joining us this morning. Operator, please go ahead and open the line up for questions.
spk03: Thank you, sir. Ladies and gentlemen, we will now begin the question and answer session. If you would like to ask a question, please press star followed by the number one on your telephone keypad. If your question has been answered and you would like to withdraw from the queue, please press star followed by the number two. And if you are using a speakerphone, please lift your handset before entering any keys. One moment please for your first question. Your first question will come from Jeremy Tenet of JP Morgan. Please go ahead.
spk11: Hello. Good morning.
spk13: Morning, Jeremy.
spk11: Just wanted to start off with a high-level thought on the basin because there's a lot of very positive language in the release and what you've discussed insofar as, you know, money production. And so just wondering if you could sketch out, you know, any numbers or any more detail as far as how you think volume growth uh could grow over the next few years post the blueberry river first nation agreement here uh you know at with these new monty contracts as you outlined in northeast bc just trying to get a flavor for what that means for pamela exactly yeah i i think you know we've seen
spk13: We've seen, you know, upwards of 200 to 250 licenses be issued since the announcement. You know, whether those all get drilled or not, we'll wait to be seed. You know, in terms of specific numbers, Jeremy, I'm not going to give you specific numbers, but I do think what we've been talking about historically is seeing kind of that 3 to 4% growth on the conventional pipeline from 21 into 22. And I think we see that volume continuing for the next couple years on that trend.
spk11: Got it. That's very helpful. Thanks for that. And then just as far as the new FRAC contracts are concerned, just wanted to see there if those are kind of full value chain contracts. So there's upstream integration economics and kind of enhances you across the value chain there.
spk13: Yeah, I mean, every one's kind of different, but on a lot of them, there are value integration across the value chain. But there's multiple contracts there. Some are fully integrated. Some aren't.
spk11: Got it. Just one last one. Marketing keeps succeeding us to the upside. Just wondering, as you see the current environment today relative to the assumptions baked into your guidance for marketing, are things tracking as planned or a bit better? We've seen the frack spread step up here, so just want to get a flavor for how marketing stands today in the current environment relative to when you set guides.
spk13: I mean, we put the sensitivities in the 2023 budget release. If you look at those, we would be up slightly. We've obviously seen gas price come way off. Now, that being said, propane has come off as well, slightly offset by a slightly more favorable FX rate. So all in all, I'd say slightly ahead of where we set budget.
spk07: Got it. I'll leave it there. Thanks.
spk06: Your next question comes from Rob Hope at Scotiabank.
spk03: Please go ahead.
spk16: Good morning, everyone. Two questions on the strategy and maybe diving in there a little bit more. Specifically, you highlight that Pemina wants to meet global demand and transform and export your products. Can you give a little bit more color on this? Historically, we've seen you export Prince Rupert as well as down into the U.S., but are you looking for something larger there potentially on the crude oil side? And then when you're talking about transform the products as well, does that mean you could, once again, look at pet chem?
spk13: So maybe I'll answer the first part and then I'll turn it over over to Stu. You know, as part of the strategy work, one of the conclusions was that global demand remains more resilient 2030 and beyond compared to North American demand. So we continue to think that that having egress out of the basin will continue to be a strategic priority. And so, yes, we have Prince Rupert and we do export quite a bit to both the US and propane to Mexico as well. Obviously, Cedar LNG fits squarely uh within that dynamic in terms of of exporting product as well as uh you know our partnership with wipg as we explore the possibility of what tmx could look like in our portfolio and and the ability to get crude to world markets as well so uh you know i think all of the things we're working on fit squarely within that thesis and maybe i'll turn it over to stew now just to talk a little bit about um uh the changing of products
spk10: Hi, Rob. You know, we've been looking and watching closely the global demand, the need for decarbonization. We've had lots of inbounds. Obviously, Penman is well situated with our red water complex and the lands that we have available and the expertise that we have and the operation capability. And so we've had lots of inbounds and we've been looking at ourselves At energy transition opportunities, the likes of hydrogen, ammonia, methanol and other products. And so we continue to evaluate a low carbon complex. We're referring to it in our red water area. We are looking at how we participate in those. We might be an equity partner, a player in those various entities that I talked about. But at the same time, we also recognize we have the opportunity to provide additional services Pemina has. Again, I mentioned operation capability. We can provide feedstock, which was proposed even with our PDH opportunity. We can provide water and other services that we think would help growing businesses in that area, and we think we have a large role to play there.
spk16: I appreciate the color. And then maybe as a follow up, just taking a look at your capital allocation in 2023. And even in the next year, you know, you've sanctioned RFS for but even still, you have a very strong balance sheet, you have very strong cash flows. When you take a look at paying down debt versus share buyback, is that a function of you are seeing some larger projects may be creeping on to the horizon of when you'll have to start to deploy capital?
spk09: I think that's right, Rob. I mean, when you sort of your point is valid, you know, when you sit there and look forward, I mean, you know, we're still obviously very positive on the Cedar LNG opportunity. And, you know, if we press play on that into next year. Obviously that starts to bring more meaningful capital into 2024 along with the RFS4 opportunity. And so it'll be a function of that. And beyond that, I mean, obviously there's lots of different things that Stu just talked about that we're seeing opportunities with. We continue to see opportunities in our base business to accommodate customers volumes. So I think you can hear from the tone that we are very optimistic about the current outlook over the next few years and where this could go beyond that. So certainly a possibility, but we'll always stay disciplined and evaluate those opportunities against the alternatives being the ones you mentioned, repayment of debt, share buybacks, whatever the most optimal use of funds will be held against that standard.
spk07: Excellent. That's it for me. Thank you.
spk03: Your next question comes from Linda Ezergalis at TD Securities. Please go ahead.
spk04: Thank you. Maybe this is a follow-up in terms of the growth outlook. Looking out over the next year or two, can you just give us a little bit more clarity beyond your conventional pipelines, how much operating leverage you might have, and how we might think of any sort of ramp up in contribution from volumes on existing capacity beyond the 3 to 4% on conventional that you cited.
spk15: Morning, Linda. Jared here. Yeah, so as Scott and Cam mentioned, the 3 to 4% on our conventional system, what we're hearing from customers right now is the customers are essentially constrained by gas egress. and fractionation capacity right hence the rfs4 announcement today so we continue to work with our customers you know we do see some torque in the pgi in continuing to fill some white space um with our customers who who have um uh the um substantial gas egress uh capacity and um you know that that leverages right into uh the liquids onto the pipe You know, Alliance is obviously highly contracted. I think Scott mentioned that earlier. So volumes, they look really good. Pricing is continually to be strong. Even at, let's call it 250 ACO, that's still our customers are doing extremely well. So, yeah, it's looking really good.
spk04: Okay. And then maybe if you can just comment on, with your updated strategy, Does Pemina have the in-house talent to execute on your decarbonization and energy transition-related aspects of your strategy? And how might acquisitions fit into your plans to gain that expertise and maybe accelerate execution? Because, you know, I get a sense that everyone's trying to hire these types of folks.
spk10: Hi, Linda. It's Stu. yeah i mean as we sit here uh you know we brought some in-house expertise we're continuing to grow that team um just as you mentioned as is everyone else it's a it's it's a growth opportunity and and those people are are valuable commodities we think we've added some tremendous staff and some some great expertise we we will look at how to get there faster potentially through partnering, through JVs. M&A, those opportunities do come along. We'll evaluate that as they come around and how does that compare to a greenfield build of what that looks like. But we're continuing to build that team. We've got some tremendous in-house talent right now. We continue to look to expand. That will be a hiring exercise for us. There are other ways to do it, as I mentioned, through JVs and M&A opportunities, as you point out. You know, we're picking where our points are, and we still are determining how we participate in some of those opportunities. We may not be in the facility itself, but we may be providing services, and those services could be what PAMET has been done for 68 years, you know, feedstock provider and such like that. So we're trying to still evaluate exactly how we participate in some of those new opportunities.
spk04: Okay, thank you. And just a quick question on RFS4. What class of estimate is your $460 million number? And can you give us some sense of how maybe you might have a healthier contingency or maybe firmed up more than you might have historically just to indicate your level of confidence in that estimate?
spk15: Hi, Linda. internally we would deem that as as a class four estimate but you know obviously building rfs2 rfs3 in the last you know i would say what is that six years now um our confidence level with respect to our engineering design uh the equipment we need uh the vendors that we will uh utilize to to help support the the execution of this project is extremely high um we do have some rail expansion associated with that um rfs4 That's obviously something that's well within our execution capabilities. Customer demand is extremely high, our confidence in the execution team is obviously extremely high, and our operating capabilities. You know, what we're really focused on is maximizing utilization of the entire complex, right? Utilizing the entire feedstock cavern storage, the spec cavern storage, the rail opportunities, et cetera. So that's really helping us drive the efficiencies in the execution of RFS4.
spk04: Thank you. I'll jump back in the queue.
spk07: Thanks, Linda.
spk03: Your next question comes from Patrick Kenny at National Bank Financial. Please go ahead.
spk01: Thank you. Good morning, guys. Just on the corporate strategy and looking at a high level here at the four key priorities that you've outlined, can you just clarify what would be considered new within the strategy? And then I guess by virtue of omission, what parts of the prior strategy might not be a priority going forward?
spk13: Thanks, Pat. You know, the way we think about it is a natural evolution of the strategy considering the changing dynamics of the world and our industry. So, you know, when you step back, you know, it wasn't a major pivot and that's, you know, partially by design, that's partially by going through the process. I mean, the strategy wasn't broken, but I'm not sure, you know, it was written down anywhere where the average reader could really understand it or see it. I know most of the analysts on this call understood it just through our frequent communication. But it was important for us to step back and kind of relook at it through multiple lenses and test it through various scenarios to make sure that it could be resilient and thrive under various scenarios. So that was really the exercise that we undertook. And through that, you know, we came out with the strategy, which was largely in line with what we had been talking about previously. But I do think there are some subtle things. I think it's important to point out our commitment to the core business. We still see lots of opportunity in the core business, and we see the ability to grow that, and we are committed more than ever to the core business. I think the point around decarbonization was what we're really focused in is decarbonizing our assets and our basins and the basins in which we operate in, because that not only benefits us, but it benefits our customers as well. And I think some of the points there to your question around emissions is, you know, we're not looking at carbon sequestration as a business in Canada. I don't know, the Permian or, you know, in the Midwest where we don't really have a lot of operations. It's really focusing where we're spending our time and energy, and that's really in the basins in which we operate today. You know, I think other points is, you know, we've been getting questions around energy transition projects. And I think, you know, from our perspective, you could see this as a threat or as an opportunity. And I think we're choosing to see it as an opportunity. And we're really getting focused on which of those opportunities that we think we can bring, you know, a competitive advantage or a skill to. And then I'd say for us, really calling out the four stakeholders and how important they are to our strategy was another important point to get that down on paper. And then our commitment to egress and really stepping back and challenging all those assumptions around world demand versus WCSB demand and making sure those are some of the egress projects are the large capital commitments, You know, they require long-term contracts. Will those products be resilient over the next 20 to 40 years? And that was another kind of key part of this, and we came to the conclusion they are. So that was just, you know, again, formalizing our commitment to egress was important. So, you know, I know that was a long-winded answer, but I think the point was there isn't a lot new, which probably shouldn't surprise you, given I think we've had a pretty successful track record, but I think it's important to test all of the assumptions focus it and then write it down. So, you know, all of our investors or potential investors could understand where we're headed.
spk01: Got it. Okay. Well, that's super helpful. Thanks, Scott. And then maybe back to Cedar LNG. I'm just wondering, you know, if you guys have received any feedback from the BC government on your environmental application there, or perhaps the timing of the process. Cause I thought the approval was expected before year end. So I'm just not sure. you know, if there's been any friction or any back and forth that's still needed in order to achieve approval of the application.
spk18: Yeah. Hi, Patrick. It's Janet LaDuca. So we have heard from the BC government that the issuance of the environmental assessment approval is going to be delayed, but we're very optimistic that it will be approved. This is going to be one of the greenest LNG projects in the world, and I think the environmental assessment was very positive from that perspective. So we continue to be in discussions with the BC government, but we are optimistic that we will receive approval in the near term.
spk01: Okay. Thanks for that. And then last one, maybe for Cam here. I know the NCIB will be renewed here in March just as normal course, but if you could just confirm that the intent is still to allocate any discretionary cash flow towards debt repayment, unless of course there's a significant sell-off in the markets to take advantage of, or are you now thinking of more of a balanced capital allocation approach for the year?
spk09: I think you've got it right, Pat. I mean, you know, we sort of look at the market dynamics as they stand and sort of, you know, evaluate it as days and weeks go by. And, you know, obviously interest rates have been volatile and have backed up a little bit, you know, in 2023. You know, obviously, you know, the equity markets are volatile as well. So we think keeping the NCIB in place and, you know, intending to renew it for another year just gives us, you know, all the optionality in the world. to be able to react to markets and allocate our capital optimally. But I would say, you know, as we think about it today, you know, base case is continuing to allocate free cash flow towards debt repayment in, you know, in the immediate term.
spk07: Okay, great. Thanks, everybody.
spk03: Your next question comes from Robert Cattelier of CIBC Capital Markets. Please go ahead.
spk00: Hey, good morning. You've answered most of my questions, but maybe just a couple of follow ups here. How are you managing the construction cost risk on the fractionator? Specifically, do you have a lump sum EPC contract there or is there some form of risk sharing with the customers?
spk15: Right now, Robert, we're just We're actually evaluating doing a lump sum. So on a smaller scale project like this, four hundred and sixty million dollars, we think there is opportunities out there in the market to to de-risk that. So that's that's ongoing as we speak. You know, the confidence level, like I talked to earlier, we want to get out there and start speaking with some of the vendors, you know, really to secure that that labor component. and give them the certainty so they can make some commitments to Pamela and work forward positively.
spk00: And so no risk sharing with the customers then?
spk12: I don't think we're going to talk about our commercial contracts right now, Robert. That's sensitive.
spk00: Okay, just on the strategy here, Would you say there's likely to be any change in your appetite for taking on commodity price risk as you look to transforming products and exporting?
spk13: I think we've always enjoyed a little bit of commodity exposure. Given the stability and underlying contractual profile of the base business, You know, really the commodity side is what gives us the uplift, you know, in good years. So absolutely there is an appetite for slightly more commodity. It has to stay within the guardrails, which is why, you know, as part of this we said and reiterated our commitment to the long-term guardrails. So I think we're still sticking to the, you know, 80% fee-per-service, 20% commodity-exposed. But as our fee-per-service grows, that also allows us to take on slightly more commodity risk.
spk00: Yeah, understood. And then when you look at driving resilience and trying to preserve value in the existing business, what's the biggest risk factor you see there?
spk07: You know, I think we're pretty, it's a good question.
spk13: I mean, I think overall, we're pretty We're pretty, we see more opportunities than we see downside, to be honest with you. I think with some of the volume growth, you know, as we talked about, whether it's TMX coming online, LNG 1, 2, you know, our Cedar project, you know, there's talk of brand new ethane cracker being built in Alberta. There's just, there's a lot of pull on the products to which we transport. So, you know, I'd say we're pretty optimistic about the core business.
spk07: Okay, thanks for all that.
spk03: Ladies and gentlemen, once again, if you would like to ask a question, please press star 1 at this time. Your next question will come from Ben Pham at BMO. Please go ahead.
spk14: Hi, thanks, Martin. A couple questions. On the RFS4, what types of returns and capital do you expect on on a project when you have that that land in place and then he also mentioned deep bottleneck opportunities how did the returns on capital compare on on that as well
spk13: Well, again, we're in a bit of a commercially sensitive time. So what I would say is that RFS is consistent with previous Pemina builds. I mean, we do benefit from some land in place. We benefit from some existing infrastructure. Offsetting that, obviously, is inflation that we've seen over the last couple of years. So all in all, I'd say RFS competes very similarly to previously sanctioned Pemina projects. And then on some of the other kind of smaller debottlenecks, those would come in, you know, typically we like to talk about, you know, smaller kind of bolt-on debottlenecks in kind of four to six times EBITDA. You know, obviously it goes higher as we get into greenfield and then even higher as it goes into M&A. So, you know, the brownfield or the debottlenecks tend to be at pretty attractive returns overall.
spk14: Okay. And maybe the... maybe a clarification on the Nipissi restart. Do you need more contracts on that to push forward with that? And maybe you can maybe expand on how things look and the evolution of that play. Is there a restart and then maybe a potential expansion at some point?
spk15: Good morning. No, we don't need incremental contracts right now, obviously, to sanction the restart. That's proceeding and, you know, expected in service, you know, later this year. The demand, obviously, from our customers is extremely high. And the expansion opportunities, unfortunately, they are limited with respect to that pipeline, but we do see that growing, the volumes growing back to, you know, its ultimate capacity.
spk14: Okay, and then maybe one last cleanup. Ox table, the loss in the quarter, is that more of that year-end sharing that you have with that agreement?
spk13: I think that it was a couple different things. It was the It was the strong collapsing of the AECO Chicago price. There was some hedging losses there for some of the, I guess, the old rich gas premium deals that were still in place that we don't have going forward. So there was a couple, I'd call it, one-off things that impacted the quarter that we wouldn't expect to see going forward because we no longer have hedges in place at OxAble.
spk07: Okay, got it. Thank you.
spk03: Your next question comes from Robert Kwan at RBC Capital Markets. Please go ahead.
spk17: Good morning. I know you don't want to talk about the RFS-4 contract specifically, but maybe when you think about RFS-4 once it's in service, can you talk about what the pro forma percentage would be under take or pay and the average duration across all Redwater fractionators?
spk07: Uh, no. So that gets a little too detailed.
spk13: I think as we've talked about, our base business is highly contracted and continues to be recontracted for the long term. We have significant contracts underpinning Redwater, and we have pretty significant commercial momentum. So given this is in service two and a half years out, I would expect with the pace of conversations that we would be very highly contracted by the time that this comes into service. Okay.
spk17: Is it fair to say that Redwater in its entirety would be consistent with the guardrails?
spk07: Yes.
spk17: Okay. If I can turn to the strategy and particularly the decarbonization side of things, just given what we're seeing in some of those initiatives, either they may involve a new commercial framework or one that just doesn't exist in the market, some sort of technology risk or for established things like renewables, much weaker returns than you're used to. So do you look to change your return expectations to kind of mark to market the realities if it's conventional renewables or do you shift your thinking to accept lower upfront returns or take some different risks thinking you'll get something on the residual or back end?
spk13: First, I'm going to answer probably an omission. I should have spoken about when Pat asked his question just around what we're not doing. I think what we're talking about when we talk about decarbonization really is CCUS, and I'll let Stu talk to ACG and what we're thinking about there, including decarbonization. some of our initiatives to decarbonize our assets. But as I step back, I mean, part of what we're not going into is renewable power. I mean, we've made a commitment that we think we can get the same benefits by taking long-term agreements. You know, you would have seen us over the last year or so take on two pretty significant, you know, 200 megawatt power purchase agreements. We're focused on our code generation facilities, which have, you know, as of right now, very strong returns. And we're looking at a few small behind the fence solar for our specific sites. But Pemina is not planning on getting into the renewable power business. So the question around kind of I'd say lower returns as it relates to renewable power, you know, I just I don't need to comment on that because that's not currently within the strategy. But then maybe I'll turn it over to Stu to talk about more of the CCUS as it relates to decarbonization.
spk10: Yeah, Robert. We're continuing to work with our partner to progress the Alberta carbon grid. We've got approval from the parents to move forward with our appraisal program. That appraisal program is going to be, you know, it's the proving up of the sequestration capability of the lands that we've been granted to go have a look at. We'll evaluate some seismic. We'll maybe shoot some additional seismic and ultimately drill a well. We need to prove up the sequestration capability. Along with that, we'll probably begin securing our pipeline right-of-ways as well. That project is moving forward. We began working with Jared and his teams looking at our assets and the decarbonization and what will that take to capture our emissions. It's a goal of Pemina to move forward with those as well. We're looking at and have a good model of where those emissions are coming from within the Pemina assets. We'll look at and come up with plans on how to go forward with those things. You know, we're not looking, you know, when we talk about energy transition projects, we're not looking at a lower return expectation at all. We're looking at, you know, continuing to move forward. And as I said, we may take an equity position within some of these new energy transition opportunities, or we may just provide services that Pemina has provided historically, you know, looking at how we can work with, you know, those new opportunities, but not at a lower return than what we've historically put forward.
spk17: I appreciate that, Steve, just on the return. I guess as you think about the risk or the contracted cash flows, to the extent you could actually fit it in under the corporate-wide guardrails, would you be willing to take on quite a bit more risk? Or should we think about these projects? You've addressed returns, but from a contracted profile being plus or minus consistent with the guardrail?
spk13: I mean, based on the portfolio of things we're looking at, nothing in there would have a significantly different risk profile than our existing base business.
spk07: Okay, that's great. Thank you.
spk03: At this time, there are no further questions, so I would like to turn the conference back to Scott Burrows for any closing remarks.
spk13: just wanted to say thank you it was another great year so thank you to all of you on the phone for your questions thanks to my team here in the room and thanks to all the investors and our staff we'll chat soon ladies and gentlemen this does conclude your conference call for this morning we would like to thank you all for participating and ask you to please disconnect your
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