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spk07: to the Pembina Pipeline Corporation Q3 2023 results conference call. At this time, all lines are in an assembly mode. Following the presentation, we'll conduct a question and answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Friday, November 3rd, 2023. I would now like to turn the conference over to Cameron Goldade, Chief Financial Officer. Please go ahead.
spk05: Thank you, Julie, and good morning, everyone. Welcome to Pemina's conference call and webcast to review highlights from the third quarter of 2023. On the call with me today are Scott Burrows, President and Chief Executive Officer, along with other members of Pemina's senior leadership team, including Jared Sprote, Janet LaDuca, Stu Taylor, and Chris Sherman. I would like to remind you that some of the comments made today may be forward-looking in nature and are based on Pemina's current expectations, estimates, judgments, and projections. Forward-looking statements we may express or imply today are subject to risks and uncertainties which could cause actual results to differ materially from expectations. Further, some of the information provided refers to non-GAAP measures. To learn more about these forward-looking statements and non-GAAP measures, please see the company's management discussion analysis dated November 2, 2023, where the period ended September 30, 2023, as well as the press release Pemina issued yesterday, which are available online at Pemina.com and on both CDAR and EDGAR. I'll now turn things over to Scott to make some opening remarks.
spk04: Thanks, Cam. We were pleased yesterday to report our third quarter results, which included earnings of $346 million and record quarterly adjusted EBITDA of just over $1 billion. The record quarter reflects the strength of Pemina's business, including growing volumes and rising utilization across many systems, along with another strong contribution from Pemina's marketing business. Whereas first half results were impacted by wildfires and northern pipeline outage, We believe the third quarter more accurately reflects the underlying positive momentum in the Western Canadian sedimentary basin. This is demonstrated most notably by the nearly 6% year-over-year increase in third quarter volumes in the conventional pipeline business. Given year-to-date results and our outlook for the fourth quarter, we have raised our 2023 adjusted EBITDA guidance range to $3.75 billion to $3.85 billion, and Cam will address that more fully in a moment. On the commercial front, we signed new long-term contracts for 25,000 barrels per day on the Peace Pipeline system. And at our Redwater complex, we extended an existing 25,000 barrel per day contract that was set to expire in 2027 and now runs through 2032. Further, we continue to advance discussions with customers related to the ongoing contracting of the recently announced RFS4 expansion. And on October 3rd, 2023, we reactivated the approximately 100,000 barrel per day Nipissi pipeline system to serve customers in the rapidly growing Clearwater oil play. The reactivation was supported by a significant long-term commitment with an anchor customer, and given the outlook for continued growth in the Clearwater, discussions continue with several producers in the area regarding potential additional long-term contractual commitments. On the major project front, we continue to progress our Phase 8 Peace Pipeline expansion and our RFS4 expansion at the Redwater Complex. Most notably, the Phase 8 project capital budget has been revised lower by $55 million to $475 million. The revised cost reflects highly effective project management and execution, favorable weather conditions, and productive contractor relationships. We will continue to bring new pump stations into service before year end and expect the pipeline to be in service in the first half of 2024. Our experience with Phase 8 is another example supporting Pemina's track record of strong project execution. And we continue to progress our CEDAR LNG project with our partner, the Haisla Nation. The remaining final investment decision deliverables continue to progress, including finalizing the lump sum engineering procurement and construction contract, the definitive liquefaction tolling agreements, the inter-project agreements with Coastal Gas Link and LNG Canada, as well as project financing. Target FID continues to be by the end of 2023. However, given the need to align multiple workstreams, FID may move into early 2024. And finally, given the volume of public and stakeholder interest in the TMX divestment process as it pertains to Pemina, I would like to clarify our perspective on this situation. In 2021, Pemina was honored to have been selected by Western Indigenous Pipeline Group, or WIPG, as its industry partner to form Chinook Pathways, an Indigenous-led partnership in pursuit of ownership in the Trans Mountain Pipeline. The federal government recently initiated the first phase of the Trans Mountain divestiture process, to progress their commitment to meaningful Indigenous economic participation in the asset. There's no defined timeline for completion of this phase, and neither Chinook Pathways nor Pemina is eligible to participate in the first phase. A subsequent phase for the sale of the remaining equity interest is still undefined. Based on public information, the earliest the divestment of the asset could likely occur is the end of 2024, and there appears to be outstanding regulatory construction and tolling issues that pose further schedule costs and divestment timing uncertainty. Pemina, like any other prudent commercial purchaser, requires the many outstanding issues related to the project to crystallize in order to prudently and appropriately assess the opportunity and determine next steps. Further, as we evaluate any potential role in the TMX process, or just like any other organic or M&A opportunity, you can expect Pemina to maintain its financial discipline and commitment to the financial guardrails, including maintaining a strong balance sheet and strong BBB credit rating as we have in the past. Pemina continues to have a robust portfolio of in-strategy investment opportunities, and any opportunity, internal or external, will have to compete for capital against alternative uses. I will now turn things over to Cam to discuss in more detail the financial highlights for the third quarter of 2023. Thank you, Scott.
spk05: As Scott noted, Pemina reported third quarter adjusted EBITDA of $1.021 billion, which represents a $54 million or 6% increase over the same period in the prior year. In pipelines, factors impacting the corridor primarily included higher revenues due to higher volumes on certain assets and higher tolls due to inflation, primarily on the coaching pipeline and peace pipeline system. Those were partially offset by a lower contribution from alliance, higher integrity spending, and higher repairs and maintenance costs. In facilities, factors impacting the corridor included the PGI transaction and strong performance from the former Energy Transfer Canada plants and the Dawson assets. as well as a gain resulting from a contract renewal of an asset now recognized as a finance lease. In marketing and new ventures, third quarter results reflect the net impact of a lower contribution from OxABLE as a result of lower NGL prices, lower natural gas and crude oil margins, lower realized losses on commodity-related derivatives, and higher margins on NGL sales. Finally, in the corporate segment, third quarter results reflect higher labor expenses including higher incentives, higher information technology expenses, and partially offset by lower consulting and higher shared service revenue. Earnings in the third quarter were $346 million, representing a $1.483 billion or 81% decrease over the same period in the prior year. The decrease was primarily due to the $1.1 billion gain on the PGI transaction recognized in the third quarter of 2022. In addition to the factors impacting adjusted EBITDA, earnings were impacted by higher depreciation, an unrealized loss on commodity-related derivatives compared to an unrealized gain in the third quarter of 2022, an increase in the provision at auxable, and lower legal fees. Total volumes of 3.398 million barrels per day for the third quarter represent a decrease of approximately 1% over the same period in the prior year. Volume decreases were attributable to the facilities division which were partially offset by increases in the pipelines division. The change included the net impact of the disposition of the E1 and E6 assets at our Empress facility, higher volumes at the Peace, Northern and Drayton Valley pipelines, lower volumes at the Redwater complex and at Younger due to planned outages in the third quarter of 2023, and increased gas processing volumes primarily at the former ETC plants and the Dawson assets. Adjusting for the impact of the E1 and B6 disposition, total volumes in the quarter would have grown by approximately 2% over the third quarter of 2022. Based on the results through the first three quarters and the outlook for the remainder of the year, Pemina has raised its 2023 adjusted EBITDA guidance range to $3.75 to $3.85 billion from a previous range of $3.55 to $3.75 billion. The revised rain reflects the stronger than expected results in the third quarter across all divisions, as well as the current outlook for commodity prices and an expectation of continued volume growth in the fourth quarter. Based on our 2023 guidance, cash flow from operating activities is expected to exceed dividends and capital expenditures. Today, Pemina has repurchased $50 million of common shares and paid down proportionately consolidated debt by approximately $300 million using proceeds from the sale of PGI's interest in the CAF's pipeline, as well as cash flow from operating activities. We will continue to evaluate the merits of debt repayment relative to additional share repurchases for the remainder of the year. At September 30th, 2023, based on the trailing 12 months, The ratio of proportionally consolidated debt adjusted EBITDA was 3.4 times, reflective of our strong balance sheet and supporting a strong BBB credit rating. I'll now turn things back to Scott.
spk04: Thanks, Cam. In closing, we are enthusiastic about our business given the current momentum in the WCSB and expect continued volume growth through the end of 2023 and into 2024. Our broader outlook remains unchanged as we see the potential for significant growth driven by near-term catalysts, including new egress from the West Coast LNG projects and the Trans Mountain Pipeline expansion, as well as potential new developments in Alberta's petrochemical industry. Given the scope and reach of its assets and existing long-term commercial agreements, Pemina is uniquely positioned to capture new volumes and benefit from this growth. As we work to successfully close out 2023 and plan for 2024, we cannot be more excited for what's ahead for Pemina and its stakeholders. Thank you for joining us this morning. Operator, please go ahead and open up the line for questions.
spk07: Thank you. Ladies and gentlemen, if you'd like to ask a question, please press the star followed by the one on your touchtone phone. If you'd like to withdraw your question, please press the star followed by the two. If you're using a speakerphone, please lift your handset before pressing any keys. One moment, please, for your first question. Your first question comes from Jeremy Tonette from J.P. Morgan. Please go ahead.
spk08: Good morning.
spk04: Good morning, Jeremy. Good morning.
spk08: Just wanted to start off with the guidance raised, if I could. Just wanted to see if there's anything in the third quarter that was strong and non-repeating, because if I look at what it implies for fourth quarter, it looks like 4Q is kind of flattish versus 3Q, yet I think you noted a number of tailwinds, and plus marketing is usually stronger in 4Q. So just trying to get a sense for how that all mixes together and how you think about, I guess, base business growth at this point. I think you talked about mid-single-digit EBITDA growth as something that was possible.
spk05: Good morning, Jeremy. It's Cam here. Obviously, the third quarter reflected a couple different things that were particular to it. First of all, we did have a turnaround in a couple of our facilities. Typically, Q3 is an active turnaround season, but obviously, we did have a major turnaround at our RFS 1 facility during the quarter. That was one piece. The second piece would obviously be the gain that we recognized on the conversion of a contract to a finance lease at Vancouver Wharves upon renewal. That was sort of in the range of about $15 million. And so there's a couple things there that sort of contribute. The two of those things together, I mean, I think we're probably down to splitting hairs a little bit after those two things. I would say that we are seeing as much as in some elements of the marketing business, we're approaching cautiously as we sort of look at propane inventories for the balance of the year. Obviously, the volatility in the crude complex and what we've seen there continues to show strong results month after month. We continue to see strong volumes and strong spreads. in the transmission assets, particularly on the caution side. And so, and obviously in the gas and pipelines operations or the conventional pipelines operations, you know, we continue to see our customers coming strongly out of sort of the, I guess, the headwinds of 2023, namely some operational upsets and the wildfires. And frankly, it's been an opportunity for some of our customers, you know, for example, you know, Our customers in northeast BC, some have been able to optimize their assets and secure interruptible gas takeaway, which otherwise wouldn't have been available, allowed them to produce more than they otherwise would have. So a few different things there have contributed to it. And then obviously, you know, a couple of things in Q3 that were non-recurring.
spk04: The only other thing I'd add there is we typically have a higher integrity spend in Q4 just due to areas of the basin that need frozen ground to access, so that we tend to typically have a slightly higher OPEX spend in Q4.
spk08: Got it. That's very helpful. Thank you for that. And just wanted to pivot here towards capital allocation and wanted to get latest thoughts from you guys on that. We're in a bit of a higher interest rate environment now than we were last time we talked. I'm just wondering how that influences, I guess, your thought process. At the same time, Pemna's leverage seems to be really tracking quite nicely lower here. So just wondering how this all kind of mixes together in your mind at this point.
spk05: Yeah, you know, I mean, I think Us, Jeremy, like many have sort of seen this coming for a while and we've been preparing for it. So, you know, and it goes all the way back to our strategy around managing the balance sheet, not only the leverage, but how we ladder our debt maturities. You know, we were very focused for a very long time on setting up our debt tower in a very rateable fashion. So, you know, we don't have more than generally $500 or $600 million, which is sort of 6%, 7% of our maturities coming due every year. We've always termed out our maturities generally as long as possible. And so when you look at our maturities in this environment, we've got $600 million, $650 million coming due in January of 2024. As you've seen us use the lion's share of free cash flow to reduce debt, it's consistently been the same message from our perspective where in these high rate environments that we've got free cash flow, there is a benefit firstly to having a very strong balance sheet and also an economic advantage of using that cash flow, especially with interest rates and cost of debt the way they are. That said, we have consistently tested that against obviously the capital investments that we've been making and we've got some very attractive returning and very low risk projects that we've been investing in. But we've also been opportunistic and stepped into the market and acquired shares from time to time. We obviously did so last year. We did so this year at varying points and we continue to monitor that. I would say that at the moment, our sort of base case is still to continue to use that cash flow towards reducing debt because we think it continues to be an advantage. Obviously, we've seen balance sheets and leverage ratios and the demand from investors for that trend down in our sector over time. And so we want to continue to heed that piece from our investors and make sort of strong risk balance decisions on an ongoing basis.
spk08: Got it. That's very helpful. One last one, if I could. Should we be expecting, I guess, a 24 look in December or might that wait for kind of CEEDAR at this point? And what are the final, I guess, gating items to CEEDAR FID at this point? If you could just expand a bit more on that.
spk04: Why don't we start with Stu answering the second question, and then we'll circle back to your first one. Hey, Jeremy.
spk15: Yeah, I mean, I think as Scott stated, you know, we're continuing to push to complete all of the FID deliverables for the CEEDAR project in 2023. I can assure you that we're putting our backs into that process, but good response with the counterparts to complete all of that work. It's a large project, complex agreements that we're taking our time and working our way through. Again, we expect to be completed in 2023. We have to complete all that work prior to kicking off and going for our project finance. And unfortunately, we're coming up on year end at the same time in vacation. So we remain optimistic to complete the FID deliverables procedure. And then just it'll be timing for our project finance process, which may move us into 24.
spk05: Yeah. And Jeremy, just starting to your original question, I mean, I think at this stage, you know, we see no reason to sort of move off our typical timeline for, you know, sort of the outlook for 2024. So I think you can expect something likely in the December timeframe.
spk08: Got it. That's helpful. I'll leave it there. Thanks.
spk07: Your next question comes from Robert Cattelier from CIBC. Please go ahead.
spk01: Hi, good morning. Just a clarification on Cedar LMG. It sounds to me that any time pressure you're facing is related really just to the complexity of the various work streams rather than something in the macro environment like low pricing or anything else or financing availability causing the time pressure? Is that correct?
spk15: Yeah, that's our view, Rob. Again, we continue to make great progress and work through the agreements. There's multiple work streams and they must all line up simultaneously. So it's the process and we remain confident as the support of the project.
spk01: Right. We saw the contract addition on piece, but what does the producer development activity in Northeast BC mean for your montany growth and demand for feminist infrastructure? Do you have those important agreements with key producers? When do you expect those will start to contribute to further demands on your infrastructure?
spk04: uh so i'd say from pamela's perspective you know we continue to be extremely optimistic uh about northeast bc especially you know as we're starting to see positive signs towards uh lng phase one completion and obviously our confidence around cedar lngs so we've started to to uh you know look at the system as we disclosed last quarter and into this quarter we continue some northeast bc developments including expansion of our Northeast BC pipeline, including a new pump station. You know, when we look at the agreements we have with the various producers, most of that volume tends to show up in 25 and 26, and then through the rest of the decade. But as we move through, you know, the end of this year and into 24, you know, we are starting to see signs of people preparing for LNG Canada. So we remain optimistic for volume growth in 2024. But a lot of the kind of larger scale agreements we've signed really go into effect in 25 and 26.
spk11: Just to add to that, Rob, that pump station and the terminal work that Scott was mentioning in northeast BC, I think that comes on in the latter half of 24. that's coming out of roughly 40,000 barrels of capacity to our system. And then once phase eight's up and running, which will be roughly Q2 of 24, we're expecting that 40,000 barrels of incremental capacity to be able to flow all the way into the Edmonton, Port Saskatchewan market.
spk01: Yeah, that's helpful. And then just as you look to advance RFS for... You have one extension of a contract at Redwater, but what in general do you think is possible in terms of what kind of term you can achieve in your contract?
spk11: First, maybe I'll just talk a little bit about the execution of RFS 4. So it's going extremely well. We still plan on having that on in the first half of 2026. Capital is still trending in the right direction. It's obviously a little bit different than building a pipeline. It's different equipment, different vendors. You're building in a different location. So we're expecting that to still trend on budget. We've done all the earthworks to date. When we had our RFS4 shutdown that Cam mentioned earlier, we got 15 tie-ins executed during that shutdown, which is great work by the team. On the contracting front, Rob, we look at this as an entire complex. We don't really look at each individual frack anymore. Um, but it's highly contracted and, um, you know, people want tenure, right? People are, people need to get their barrels fracked because if you can't frack your barrel, you can't produce your gas and, or your condensate and oil. Um, so it's, it's pretty critical to our customers that they have that certainty, um, to be able to, you know, break that NGL mix apart and put it into a saleable product. Um, so with that said, there's high demand, um, I'm not worried about the asset being full. I'm really focused on making sure that RFS4 and the team, it's on when we need it for our customers' demand. And then the commercial teams are worrying about the next expansion.
spk01: Thank you very much. Thanks, Rob.
spk07: Your next question comes from Robert Kwan from RBC Capsule Markets. Please go ahead.
spk14: Thank you. Good morning. If I can just talk or ask about how you're thinking about your cash flow generation specifically. You pointed out your free cash flow positive. As you go forward in just some of the larger projects like Aceder, do you see being free cash flow positive or at least neutral as a strategy, or is this more of just a byproduct of a bit of a lull in the CapEx opportunities?
spk04: Well, Rob, as you know, last year and this year, we were both free cash flow positive. And so, you know, part of the strategy as Cam outlined around capital allocation was always, you know, preparing the balance sheet for what could be a slightly heavier capital spend. And so, you know, we've consciously done that over the last two years. I think it spoke to our confidence around, you know, the visibility we had to future growth. You know, as we sit here today, we still expect to be, you know, free cash flow positive or neutral kind of going into 2024. Now, should we sanction, you know, a few more projects that may push us slightly? And when I say slightly, I mean slightly into free cash flow negative. But I think what's important is to look at that over, you know, a couple year period versus any one given year, because we have been free cash flow positive for two years, preparing ourselves for, you know, potentially have our capital spend out. For that to happen, we obviously have to sanction a few more projects. So we're not in that position today. We're still looking to be, you know, free cash flow positive or neutral next year. But it could tip slightly if we sanction a few projects.
spk14: Got it. Okay. And then I know you're going to give your 2024 outlook at the end of the year. But just as we think about, you know, the guidance that you set for this year, And you've talked about optimism for volume growth into next year. Let's hope we don't have the wildfires or the northern outage that impacted this year. So that's all arguing for upward pressure. But as you pointed out, you've got the wild card on the marketing side. Is there anything else we need to be thinking about? And just, I guess, as it relates to marketing? Can you just talk about where the current environment sits today versus, say, where we were sitting a year ago and as you were thinking about what 2023 might have looked like?
spk10: Sure. It's Chris Sherman. I'll take that on. You know, I think as we sit here today and, you know, like you were sort of framing it, trying to look at 24 compared to what we might have been looking at a year ago, I think it's a real mixed bag. I think we're fairly optimistic on most of the crude markets. We don't think the back radiation will hold in. But there's some potential headwinds in particular on propane. Propane inventories are much higher looking into 24 than they were looking into 23. And I think that's something that's definitely on our radar. But other than that, I would say it's relatively similar to a year ago.
spk05: And maybe I'll just add to that. You know, I think historically we've talked about the marketing business as, you know, a range of two to 400 million. And that was, you know, that was really sort of informed post resegmentation and also looking back. And I think obviously what we've observed and we're all sort of dealing with the new the new realities of sort of post-COVID and how obviously, you know, energy is changing and so forth. And so, you know, if you sort of look back historically at what that business has been, say, over the last five years, ignoring this year because we're only partially the way through, you know, you obviously had three years where that business has kind of generated right around $400 million of EBITDA. And then you've got one year of COVID where it sort of hit the bottom of that range. And then one year in 2022 for EBITDA. a bunch of different reasons where it obviously went well through that and generated in excess of 700 million dollars of EBITDA. So I think as we sit there and think about the long term range for this business in the new realities, I think we probably need a few more data points. But certainly it feels like relative to that historical range, things have been reset a little bit and it's probably moved upward as opposed to kind of staying constant with that range.
spk14: That's great. If I can just finish with one on what you're seeing around just the nature of the discussions you're having, the customers contracting trends. You had a couple of contract announcements now. I think you alluded to additional negotiations and things are just getting tight. Do you think we're starting to get into a bit more of a cycle here where We can see additional, you know, announcements around, you know, contracting new capacity, extending term for anything that's coming up soon, and then, you know, different contracts just to underpin, you know, various expansions in the system.
spk11: Good morning. Robert Jarrett here. Short answer is yes. The demand, I think that's, you know, we've talked about is it's extremely high revenue volumes, for example, on the conventional system, back half to back half, 23 to 22 is up 6%. So we're continuing to see that. So customers, you know, they like our service offering, you know, extended reach on the conventional system, for example, low operating costs, high reliability, access to multiple CRW, CDH, all the fracks in Fort Saskatchewan. It's a very compelling offer. And, you know, I've mentioned previously, you know, the demand for the PGI assets is extremely high. We have opportunities to continue to expand there and increase utilization. Alliance egress is obviously, gas egress is obviously king right now. So, you know, that asset's in high demand. Cam mentioned, you know, quotient demand with respect to spreads are fairly strong right now. So a lot of tailwinds. So with the tailwinds obviously brings customer security. So lots of conversations ongoing. That's great. I appreciate it, Tyler. Thank you.
spk03: Thank you.
spk07: Your next question comes from Rob Hope from Scotiabank. Please go ahead.
spk12: Morning, everyone. In the release and actually through the call, volumes upwards has been highlighted as kind of a driver of the performance this year and into next year. In the MB&A, tolls were also highlighted as moving up. So can you maybe talk about your ability to move up tolls, whether it's to kind of capture higher costs or increase margins?
spk05: Sure, Rob. I'll start with that and maybe ask Jared to chime in. You know, I think obviously, first of all, I'd say, you know, we have a very high complement of our business, which is sort of long-term contracted tolls. many of which have sort of inflator provisions built right into them. So they're a function of CPI or other inflation indexes. And we see that in our conventional business. We see that in our transmission business, some of our natural gas liquids business as well. And then obviously we've got some contracts where they're shorter and more evergreen and sort of more market facing. And so those are where we're obviously working with the customers on meeting their needs first and foremost and sizing the pricing of our offering relative to the value. And so most of the increases that we've seen that you saw drove the Q3 2023 variants are a function of those locked-in inflator mechanisms. That would be the lion's share of it.
spk11: And just to add to that, Rob, would be obviously on the unregulated assets, the IT toll, we obviously have some torque there, but our goal is really to work with our customers and we prefer to convert that into a longer term contract commitment with our customers versus higher IT tolls, to be honest.
spk12: Thank you. And then just regarding the comments that 2024 could be a heavier capital year if some projects come to fruition, when you take a look at the development backlog, how do you look at pacing other smaller organic projects or mid-sized projects in the context of Cedar or potentially Trans Mountain? Just want to get a better sense of how you're thinking about pacing capital with some larger unknowable variables out there.
spk04: Well, for the most part, you know, our capital program is driven by our customer needs. And, you know, as a service provider, we do our best to match the capital expansions to our producers' needs. So first and foremost, you know, there's not really a lot of pacing in the conventional side of the business. I'd say we're trying to get ahead of volume growth that we see. So that spend kind of happens on a natural cadence, I'd say, driven by customer demand. When it comes to 2024, obviously it's a big year for RFS 4 in terms of capital spend as well as finishing off of phase 8. As we talk about our backlog, you can imagine as we sanction incremental projects either through the last two months of this year or into 2024, most of those projects that, you know, potentially could be sanctioned won't have a very heavy capital spend in 2024. Most of that capital will be into 25, 26 onwards. So, you know, I don't want people to over-index on 2024. I think the comment really was, you know, I think based on what we see today, you know, we'll either be free cash flow positive or neutral in 2024. based on what we know today. As we sanction new projects, most of that spend will be in 2025 onwards, other than potentially CEDAR. Obviously, if we sanction CEDAR, there will be some equity contributions into the joint venture in 2024. So it's really CEDAR that might tip 2024 slightly into free cash flow slightly negative. When I say slightly negative, I'm talking $100 million. We're not talking $600 million. So just to be clear, we see that as extremely modest. And based on history, it could even go back to positive just based on the timing of spend. And so when we go out 2025 onwards, if we FID Cedar, we'll have a lot more visibility into the future capital spend. And then we'll backfill it with the organic capital. And I want to just go back to Robert Kwan. You know, free cash flow, being free cash flow positive or neutral is certainly something that we strive to do over the long term, balancing that with, you know, what we see as really solid, organic, you know, good returning projects in the base business.
spk02: Thank you.
spk07: Your next question comes from Ben Maham from BMO. Please go ahead.
spk13: Hi, thanks. Maybe just keep going to free cash flow conversations. Can you clarify? I think in the past you've highlighted self-funding one or two billion, I think. Maybe that was a number previously. Is your definition you've communicated today that does not include the debt that you can add on to new projects?
spk05: Yeah, Ben, that's right. I mean, when we're talking free cash flow positive or free cash flow neutral, we're talking about that strictly as cash flow from operating activities, less dividends, less capital. Not talking about the additional investment capacity that would come from incremental leverage on top of it.
spk13: Okay, got it. And I also mentioned going to the quarter specifically, the convention volumes up 6% record for the quarter. Can you talk about volumes maybe from the perspective of utilization versus your capacity and any sense or ability to maybe break out some of the deferred, take your pace, upload them to the quarter from the first half?
spk05: It's a tricky question to answer, Ben, because obviously, you know, there's, first of all, we've got a diverse portfolio of assets. And in some cases, you know, some cases, there's more white space than others, obviously, like our Our alliance and our coaching assets are flowing very, you know, very close to capacity. And in fact, you know, we've sort of worked with customers there to try and find as much capacity as possible. You know, obviously the frack business, as we've talked about for quite a while and which drove RFS4, you know, was getting tight across the board basin-wise and our assets were no different. And then when you zero in specifically on the conventional business, You know, we talk about capacity in a generic form, but really it sort of varies by segment and where the volumes come into the pipe and what volumes come in. I think one of the value, the benefits of our system and our offering is obviously we do transport all product types, meaning ethane plus, propane plus, condensate and crude, and we can provide service, you know, all the way from northeast BC down into Edmonton. And obviously, you know, as a system is built out over time, you know, you size it appropriately to the customer's requirements. And so there's various capacities, various sizing of pipe, various pumping configurations across the board. It's not a simple answer. You know, I think you can look at the capacity that we've disclosed publicly for the conventional business. We've been quite clear about that. That's really sort of, you know, sort of... the duvernay in effectively. We always talk about that as the bottom of the funnel, and that's the main governor. But obviously upstream of that, in the different straws, it does vary across the board.
spk13: Okay, thanks. And maybe to close off, some comments you had on TMAC, some timing of the investments, you're indicating late 24s. Is that reference to... transaction announcement versus close. And do you also get the sense that the government needs clarity on the first phase before moving over to the second phase?
spk04: Yeah, I would say that those comments are based on what we've seen publicly coming out of Trans Mountain. So it's not necessarily our specific view. It's what we've seen publicly from Trans Mountain. In terms of your second question, I think that's a question for the government. We have no special insight.
spk05: I would just say, Ben, I mean, to your point and to our message, I mean, that is one of the many uncertainties that underlies this asset and this situation. And so you can just throw that in with the mix.
spk04: I'd say, Ben, as this As this has transpired, the more time has gone on, the more market seems to want some sort of certainty. But at the same time, on the actual asset level, there seems to be more uncertainty. And so, you know, I think that was the point of the message is I understand people want more certainty. But the fact of the matter is, as time has gone on, there's just that much more uncertainty around this file.
spk02: Okay, understood. Okay, well, thank you.
spk07: Your next question comes from Patrick Kenny from National Bank Financial. Please go ahead.
spk09: Hey guys, just on the Dow Chemical opportunity with their FID potentially around the corner, could you just update us on what the potential scope of investment could look like in and around your Fort Saskatchewan footprint or surrounding eggs in Vantage and just you know, how we can think about the timing of capital spend as well as potential in service dates.
spk11: What about Jared here? So I won't give a specific dollar amount, but I can talk about the opportunities. So obviously we're a very large mover of the ethane molecule, either through the C2 plus that goes into Fort Saskatchewan that gets fracked at various fracks, including RFS. And then also Vantage in eggs that supplies the pet chem industry here in Alberta. So obviously with an incremental, you know, they're talking, you know, 100 to 120,000 barrels publicly of ethane demand. You know, we will need to, well, depending on where their demand's coming from, we will need to obviously evaluate eggs expansion, you know, potentially for Pemina. RFS 3, we built that with the ability to put a DF tower on the back end to basically make it look like RFS 2 and RFS 1. You know, opportunities in Empress, you know, on straddles, et cetera. So, you know, Pemina obviously has a lot of deep cuts. I think we probably have, you know, the majority of field-based deep cuts that are doing residue gas extraction kind of in Western Canada. So, you know, that's core to our business. We know how to do it. We have alignment with the right contractors to be able to do those things. Pipeline expansions are right in our wheelhouse. So with all that said, there is going to be a lot of opportunity for Pemina to participate. We hope that there is a positive FID, not only for Pemina, but the rest of our industry and, you know, our province and our country, which it's going to be extremely positive. And then further to that, you know, I think they're talking, you know, Pat, we'd probably have to start deploying capital in that 26 timeframe to start getting ready for that, you know, you know, assuming like an 18 month build for a deep cut gas plant and stuff. I think the real wild card right now, Pat, is a lot of the equipment is we're seeing electrical equipment, transformers that are being consumed in, you know, data, data centers and stuff like that. The long lead for these types of things are extremely long, but, you know, it's, it's well within the time period to build a world scale net zero cracker.
spk09: Got it. Thanks for that, Jarrett. Um, and then maybe just sticking with the pet cam theme here. So just with heartland now up and running, I know there's a lot of moving parts. Um, and you touched on, you know, the propane inventory picture into next year, but any change, uh, to your marketing strategy going forward into next year around propane. And then, you know, maybe just playing the hypothetical here, but, um, if an opportunity does come up to own a portion or, or all of the facility, how might this stack up as a,
spk10: know strategic fit versus say the tmx opportunity or other egress type assets that might you know shake loose from your larger pipeline peers it's chris i can talk about the propane strategy uh with with our land up and running there's no real real change to our strategy um we continue to be big fans of uh access to the west coast and to and the global markets as well. You know, we think Heartland helps the market generally as well. So no changes for us now that it's up and running as far as a marketing plan. Who's taking the question on?
spk04: Yeah, Pat, I'll take the second one. I mean, I think to be honest, you know, we're happy to see, as Chris said, that asset up and running and contributing to incremental propane demand for the province. Quite frankly, we haven't spent a lot of time on thinking about that lately because we've been waiting for it to get up and running. And I don't mean that in a negative way. I just mean that, you know, these projects are complex and they take a while to get up and running. In terms of where it stacks strategically, you know, we get asked obviously about M&A all the time. And we continue to say that we're in reactive mode, not proactive mode right now. You know, we are very happy with our organic backlog. and are focused on executing that, hopefully getting Cedar across the line and executing. So we will react if something comes to the market and evaluate it just like we would any other opportunity, but we are not proactively out trying to shake the trees right now.
spk09: Okay, that's great, guys. Thanks for the comments.
spk07: Your next question comes from Linda Azargelis from TD Cohen. Please go ahead.
spk00: Thank you. Maybe we can just expand on kind of the decision set in terms of optimizing your capital allocation between longer lead time strategic build-out that might be lower multiple, but kind of delayed contributions versus maybe reacting to opportunistic M&A that falls in your lap. do you expect to see more opportunities given what's going on in the broader markets with your peers and can you also help us understand kind of how you might be not constrained by access to capital but what your capacity might be for tuck-in acquisitions including whether you potentially leverage any sort of relationships you have with indigenous groups and other partners to to buy certain businesses or packages through consortiums.
spk05: I think one of the, you know, one of the benefits of the work that we undertook last year, which culminated in, and I guess what you'd call sort of a re-stamp, a refresh, a revalidation of our strategy was a really defined set of parameters, both sort of qualitatively, but also internally quantitatively to sort of judge investments where we wanted to spend our time and capital. And so I would say that as a team, as an organization, we have a much clearer perspective today than we ever have on where we want to be spending time and what sort of gravitates to the top of the list in terms of where we put our capitals. Those really are founded on those four pillars that we've spoken about publicly. When we look at those things, at the same time, we continue to want to build a growing enterprise to generate dividend growth for our shareholders and opportunities for our employees and value for our communities. And so to do that, obviously, you need a balance in a portfolio of opportunities which are meaningful over time and generate growth. And obviously, you need to be able to sort of recycle capital and recycle cash quickly to be able to generate that growth. And I think that's a little bit of what you see in our portfolio as we look out for the next two to three years, which is obviously we've got something really, really important, really strategically important, really meaningful in Cedar as an opportunity. Longer term, we've got some other sort of early stage opportunities in the new ventures group, which could be really interesting, but are sort of still at the earlier stages. And then you've sort of got the type of projects that we've done for decades, like like pipe expansions, like fracks, you know, like the bottlenecks on those assets. And those are sort of the projects that churn capital more quickly. I mean, I think that one of the benefits of M&A, obviously, is that, you know, you sort of acquire cash flow immediately. But at the same time, it does place, you know, a need on the organization to integrate It's a new item. And so, you know, you have to sort of weigh that against, you know, the opportunities that you have internally and the focus. And that's what we continue to do. So I think in this environment, obviously, you know, capital's gotten more expensive. And I think rates of return, you know, have to follow that, have to move in concert to continue to generate positive economic value. And I think we see that. Obviously, there's been consolidation among our customers. I've seen less probably activity on a relative sense in the infrastructure side. How that shakes out over the next few years, I guess, remains to be seen, but we really like the way we're positioned. We really like our organic portfolio, as Scott mentioned, and if there's opportunities that we can add, which are additive to all those strategic pillars or complement a number of them, then obviously we'll take a look at it. But I think obviously, first and foremost, the returns have to be there to justify it in this type of environment. And you have to be able to sort of integrate and fold those in without putting additional strain and getting your eye off the ball of your core business.
spk00: Thank you. And just as a follow-up, in the past, Pamena has mused about potentially entering a new geography at scale, recognizing that some basin diversification might have some strategic value, but balancing that with your incumbency in Western Canada. How do you think about the long-term possibility of that? And then in terms of strategic imperative of pivoting to an energy transition, Do you see the possibility to maybe leapfrog or accelerate that transition through a strategic acquisition that, of course, would fit your guardrails?
spk04: I'd say no to both of those. You know, I think we updated our strategy last year. And through that, we continue to be, you know, here over the next little while, last year, this year and into next year. very focused on uh the wcsb we continue to see volume growth we are extremely optimistic on the montney and what that means and especially as we start to see the basin uh get rid of some egress constraints through lng phase one and tmx and and potentially the dow chemicals uh project so we are very focused on the wcsb right now and that's where we're spending our time and effort to As it relates to energy transition, I think we've been pretty clear that we will look at projects that complement our existing asset base or help our customers decarbonize. So we are not out looking at any sort of major acquisition. In fact, we're not looking at any acquisitions at all in the energy transition space. We like the couple of organic projects that we have, and we are going to continue to pursue those.
spk07: Great, thank you. And there are no further questions at this time. I will turn the call back over to Scott Burroughs, CEO, for closing remarks.
spk04: Well, thanks, everyone. I appreciate you taking the time to listen to our call today. Thanks to all of our employees who contributed to a fantastic quarter. You know, I'll just leave it with one note that we, you know, the one thing that we are really positive about the quarter is the resilience of the business and the contribution from all of our divisions. You know, not only did we have a strong marketing quarter, but we also had an extremely strong quarter in our pipelines and our facilities division. And I think it just speaks to the strength of our business overall. And so we're pretty excited for the remainder of this year and 2024. So thanks, everyone.
spk07: Ladies and gentlemen, this concludes your conference call for today. We thank you for joining and you may now disconnect your lines. Thank you.
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