Pembina Pipeline Corporation
Q1 2021 Earnings Call Transcript

Published: 7 May 2021

[Operator:]

Good day and thank you for standing by. Welcome to the Pembina Pipeline Corporation 2021 First Quarter Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please be advised that today’s call -- conference is being recorded.

[Cameron Goldade:]

Thank you, Christy. Good morning, everyone. And welcome to Pembina’s conference call and webcast to review highlights from the first quarter of 2021. On the call with me today are Mick Dilger, President and Chief Executive Officer; Scott Burrows, Senior Vice President and Chief Financial Officer; Harry Andersen, Senior Vice President and Chief Operating Officer, Pipelines; Jaret Sprott, Senior Vice President and Chief Operating Officer, Facilities; Stu Taylor, Senior Vice President, Marketing and New Ventures and Corporate Development Officer; and Janet Loduca, Senior Vice President, External Affairs and Chief Legal and Sustainability Officer. I would like to remind you that some of the comments made today may be forward-looking in nature and are based on Pembina’s current expectations, estimates, judgments and projections. Forward-looking statements we may express or imply today are subject to risks and uncertainties, which could cause actual results to differ materially from expectations. Further, some of the information provided refers to non-GAAP measures. To learn more about these forward-looking statements and non-GAAP measures, please see the company’s Management Discussion and Analysis dated May 6, 2021 for the period ended March 31, 2021, which is available online at pembina.com and on both SEDAR and EDGAR. I will now turn things over to Mick to make some opening remarks.

[Mick Dilger:]

Good morning, everybody. Hope you’re all doing well and enjoying the recovery of our sector. As you may have noticed from the introduction, and as we announced yesterday, Pembina has recently undertaken certain executive changes. Two of Pembina’s longstanding officers, Paul Murphy, Senior Vice President and Corporate Services Officer; Jason Wiun, Senior Vice President and Chief Operating Officer, Pipelines retired at the end of March. As a result of these retirements, Janet Loduca has been promoted to Senior Vice President, External Affairs, and Chief Legal and Sustainability Officer; and Harry Andersen has been appointed to Senior Vice President and Chief Operating Officer, Pipelines. On behalf of everyone at Pembina, I congratulate Paul and Jason on their retirements and thank them for their decades long contributions to Pembina’s success. I congratulate both Harry and Janet and excited to work with them in their new roles.

[Scott Burrows:]

Thanks, Mick. Pembina reported strong first quarter adjusted EBITDA of $835 million consistent with the same period in the prior year. The first quarter was highlighted by increased marketed NGL volumes and higher margins on NGL and crude oil sales, combined with new assets placed into service and facilities, and higher supply volumes at the Redwater Complex. These positive factors were largely offset by lower interruptible volumes on certain systems and pipelines, an increase in realized losses on commodity related derivatives, and higher general and administrative costs and other expenses, largely driven by an increased long-term incentives offset by lower salaries and wages and lower acquisition related costs. The increased mark-to-market and long-term incentives was driven by an increasing share price in the first quarter of 2021, compared to a decreasing share price in the first quarter of 2020. Fundamentally, our marketing business was particularly strong this quarter. Excluding the realized impact of commodity related derivatives, first quarter adjusted EBITDA and marketing and new ventures improved $140 million or 368% relative to the first quarter of 2020 and $97 million or 120% compared to the fourth quarter of 2020. The underlying marketing business improved significantly. However, our frac spread hedges and other commodity related derivatives offset some of the increases. Pembina reported strong earnings in the first quarter of $320 million consistent with the same period in the prior year. In addition to the factors positively impacting adjusted EBITDA, as I previously noted, earnings were positively impacted by a decrease in net finance costs due to lower foreign exchange losses. Earnings were also positively impacted by a decrease in current tax expense as a result of lower taxable income and a reduction in the Alberta corporate tax rate.

[Mick Dilger:]

Thanks, Scott. The improvement we’ve seen in commodity prices resulted in strong first quarter, but it also supports our constructive view of the future activity in the WCSB. We continue to believe that a post-pandemic economic recovery will drive higher activity in the basin, which we believe is only beginning. Higher prices are allowing our producer customers to generate higher than expected cash flow, which is currently driving their aggressive debt reduction and shareholder returns. Ultimately, we expect producer to sanction new drilling activity and Pembina is well-positioned to capitalize on that activity, particularly to serve growing volumes in the Northeast BC, Montney and Alberta Duvernay areas.

[Operator:]

Our first question will come from the line of Matt Taylor with Tudor, Pickering, Holt & Co.

[Matt Taylor:]

Hey. Thanks for taking my questions here. I wanted to start first with your bullish comments there on physical volume improvement and customer behavior. Can you help bridge the gap with what’s you’re seeing and hearing from customers on new capital being put to work at the drillbit versus what investors are seeing in terms of producers still at maintenance levels is the torque you’re seeing and expecting coming from certain areas or customers?

[Mick Dilger:]

We’re seeing growth in Northeast BC and the Cardium. Our NGL business volumes are quite good at Redwater and so you’re seeing it throughout. I mean we did reach pre-pandemic levels in April, certain areas, Drayton Valley been very strong, and of course, that all feeds our marketing business as well.

[Matt Taylor:]

Great. And just as a follow-up to that too, it looks like your EBITDA guidance is predicated on levels compared to last year versus new growth. So can you just frame how this torque fits into that EBITDA guidance and then -- and even potentially restarting projects?

[Mick Dilger:]

When we set the guidance, we had a much different price deck and I think most people on the globe would be pleasantly surprised that the price of oil is in the mid-$60s and propane price, I think, is $0.90 at Belvieu and gas prices are sneaking up on $3 Canadian up here $2.70, I think, it is. So we’re seeing something we don’t see very often, which is all three volume streams working at the same time. Normally, at least one isn’t working or many times two are not working and we’re seeing all three working. And so, notwithstanding, I think, the sense you have is people are mainly focused on debt reduction, I would agree with that. But people are starting to return to the drillbit quietly and we think that’ll accelerate as people meet, I’m reading the very lovely reports of our customers and they’re paying down debt at -- in record amounts and their share prices are going up, which makes me think, they’re only going to buy back their shares for so long before they return to growth. And they’ve been assessing where to grow and so we -- I think we can assume they know exactly how to maximize their capital deployment. We think that’s coming later in the year and into next year. And we sit with still a good amount of capacity. We’re just kind of breaking through that take-or-pay level and it’s going to go to us. So we are pretty excited about where we are in the first quarter. I mean, yeah, we were slightly over hedged, wouldn’t do anything differently. We put on those hedges in the second wave of the pandemic. I think that was prudent. I think you guys pay us to be careful and we were. But a lot of those, well, over half of our hedges were discretionary, not part of our non-discretionary program. Those all end at the end of the quarter. And we’re pretty optimistic being at pre-pandemic volumes and sensing the bill starting to happen with. If these prices keep up, it’s going to get exciting.

[Matt Taylor:]

Yeah. Thanks for that color there, Mick. Maybe just to clarify your comments there, like, my understanding is, is that guide is looking at 2020 levels and if there’s an incremental interruptible in the system or various other pieces your business that see improvement, so is it really what you’re framing here is torque that gets you to the top end of the guide and beyond as opposed to the level that looks achievable at least from your base business perspective thus far this year?

[Mick Dilger:]

We thought long and hard about what we would say about the guidance range. I think it’s just not prudent in the first quarter to be looking out to the fourth quarter. This is a very uncertain world. We’re really pleased with where we are in the first quarter, both from a volume and from a pricing perspective. I think our marketing business is very well situated. But we just don’t think it’s prudent to predict in this world that you’re going to go through the top end of the guidance range. So we’ve stayed in within the guidance range. We’re comfortable there.

[Scott Burrows:]

Yeah. Matt, maybe I’ll just add a couple points of color. I think, unhedged, the first quarter would have set us up nicely to move into the upper half of that range. Mick pointed out, obviously, we had some incremental discretionary hedges that that lower down a little bit. As we look forward, we’re still facing a few headwinds like, FX. Obviously, FX has come down pretty materially from the budget and so that’s a headwind. And you got to remember that the back half of the year we’ll see lower contributions from Ruby with those contracts generally rolling off midyear. Now I think that’s offset by, as Mick said, the strong physical volumes throughout April. We’ve also seen the commodity curve generally been in backwardation through most of the year, but every month we move along, it tends to get pushed out a month or two. So, I think, our view is that the commodity curve should continue to remain robots throughout the back half of the year. But that’s slightly different than what the current forward curve is showing us in backwardation. And of course, we still have our focus from 2020 on maintaining costs and keeping those cost savings in 2021. So, I think we’re feeling pretty optimistic, but it’s just a little too early in the year to provide guidance.

[Matt Taylor:]

Okay. Yeah. Thanks for all that good detail there. I’ll leave it there.

[Operator:]

Our next question comes from the line from Jeremy Tonet with JPMorgan.

[Jeremy Tonet:]

Hi. Good morning.

[Mick Dilger:]

Hi, Jeremy.

[Jeremy Tonet:]

Just want to dive in, I guess, a little bit to the moving pieces here. I was wondering for hedging, if you could provide a bit more color on what’s locked in for the back half of the year, just how much open versus hedged at this point? And how do those hedges look, I guess, relative to the strip. I mean, as you noted there, I think, there was what $88 million of upside that would have been captured without hedging, and of course, prudent to hedge. But just trying to get a sense for how the back half of the year could look versus the current strip, given your hedging book.

[Mick Dilger:]

I’ll turn it over to Scott in a minute. The hedging program at the highest level is really just the non-discretionary program that we have, which is kind of half of our NGL business and excluding Aux Sable. So, we stopped the discretionary, oh, sorry, the non-discretionary part effective this quarter, realizing that commodity prices are looking much more robust than we anticipated, say, in the fourth quarter of last year. Scott, do you want to add anything to that?

[Scott Burrows:]

Yeah. Sure, Jeremy. When you look out, we -- based on the current strip, we still have the frac spreads in place that we put in place in 2020. So those are obviously underwater. And again, just as a reminder for the rest of the year, it’s only on the frac spread business, the winter storage or Aux Sable are unhedged. Based on the current strip, we’re looking at forecasts of losses in the neighborhood of $20 million to $25 million on the NGL side of the business.

[Jeremy Tonet:]

Got it. That’s helpful. Thanks. And then with the -- the corporate expenses a bit higher than what we expected this quarter, I guess, what should we be thinking about as a run rate, appreciate there was an LTIP noise and retirement noise, and there’s made a bit higher, but just thinking about what kind of normalized at this point?

[Scott Burrows:]

Yeah. Jeremy, I think, in the first quarter, obviously, as you pointed out, there’s the mark-to-market on some of the incentives. And by way of background, at least to provide a sensitivity that, a $1 change in our share price is roughly $1 million of G&A, just as a sensitivity. And so, with the share price going from $32 to $30 -- $38 at quarter end and obviously had an impact on the quarterly results. We also had some one-time consulting fees that we’re working on as we work through some of our optimization initiatives. So there’s a few -- there’s a little bit of noise in the quarter. On the long run, we’re probably looking at roughly $40 million per quarter or sorry, sorry, yeah, $40 million per quarter on the corporate costs.

[Jeremy Tonet:]

Got it. Okay. So it doesn’t seem like corporate is really that different maybe than what you budgeted for the year. Because if I’m looking at just Pipeline and Facilities segment, that’s $800 this quarter and if I annualize that without even thinking about marketing that gets you $3.2 at the bottom end of the range. And if you talk about the kind of improved producer outlook, granted there are some roll-offs, but it seems like quite well-positioned within the range. So just wondering, is this first quarter kind of match here? What you are expecting here? Are there any kind of benefits that maybe wouldn’t repeat in subsequent quarters?

[Mick Dilger:]

I think, again, I would just want to temper what I’m about to say that, it’s early in the year, but we think volumes are going to continue to build and marketing is going to continue to improve and that we’ll be able to manage our G&A at kind of budgeted levels, which I think is around $300 million total for the year.

[Mick Dilger:]

Yeah. Jeremy, I should -- we just got to make sure we’re talking apples-to-apples. My $40 million was roughly corporate. We also have obviously G&A within the businesses. So, on an absolute basis aggregate it’s about $60 million to $65 million per quarter.

[Jeremy Tonet:]

Got it. Understood. I will leave it there. Thank you.

[Operator:]

Our next question comes from the line of Ben Pham with BMO.

[Ben Pham:]

Hi. Thanks. Good morning. On your wind project you announced with TransAlta, I am just curious how do you weigh or consider the relative difference between a building wind yourself versus getting somebody else to do it, because you’ve done some of the cogen stuff in-house. So I was curious how you look at that relative difference?

[Mick Dilger:]

We just look at it like any other project. With that particular project, as you know, we -- you may not know we have a small wind project already that we got with Veresen, I think, its 20-megawatt project. We look at like any capital allocation decision. We’re learning. We’re studying it. We do have an option on that wind farm to participate up to 50%. But at this time, we’ve decided not to allocate our own capital to it. But we do have a huge demand of power. So we have big economies of scale. We can develop strategic relationships for wind power and then we’re leaving open the option to participate in that and self supply to a point. But at this point, it has not attracted capital.

[Ben Pham:]

All right. And there was some reference to rising power costs in a quarter and that’s at the Alberta power price. Is -- can you remind me is that, do you recover that in your business as a way your EBITDA instead? And then maybe just an overall comment on inflationary pressures you are seeing, any sort of protections you have there?

[Mick Dilger:]

Yeah. The -- generally our variable costs, well, almost to -- to a very large degree our variable costs flow through. The only place they don’t are in our extraction business where are like our straddle plants where we warehouse that power costs and that’s one of the reasons we’re building cogeneration at our all of our big plants as we can lower our both our missions and our -- and take kind of control over our future prices and have electricity aligned with gas pricing rather than with grid pricing.

[Ben Pham:]

And that -- what about trade, labor, steel, like, you start to build at least expansion, anything to consider on inflationary pressures potentially?

[Mick Dilger:]

Not right now. Really the -- if you think back about our largest projects, like, Phase VII, we bought the steel pre-pandemic, so that was sitting -- the pipe was sitting in inventory. Recall we’d invested about $300 million. That was largely for the tangibles. And so that was all hedged at yesteryears pricing. And most of our big projects are completely locked in. So we locked a lot of that cost in at a very favorable time actually on that -- on the heels of Keystone XL being cancelled. We -- our skilled staff locked in a bunch of costs on that. Harry?

[Harry Andersen:]

Yeah. They are done on the steel side. That’s a good answer, Mick. On the labor side, we’re seeing, frankly, a really positive trend from our end. We have our contracts in place with two mainline contractors on the two spreads per se Phase VII. We’ve seen really directionally good pricing on both the mainline contracting and then the HDDs that need to happen as well. So we’re very happy with that as we sit here today.

[Ben Pham:]

All right. That’s great. Okay. Thank you everybody.

[Operator:]

Your next question comes from the line of Linda Ezergailis with TD Securities.

[Linda Ezergailis:]

Thank you. I’m wondering as we look at the energy transition, I think, most people use some of the political and economic constraints as dictating the pace as to be more of an evolution than a revolution. But I’m wondering if there might be some opportunities to accelerate your journey through either potentially acquiring divesting or repurposing certain parts of your business or assets. I’m thinking specifically of maybe carbon capture or hydrogen and maybe even purchasing late-stage development technologies or expertise that you might not have currently. Can you comment on what you might be seeing out there that that would kind of fill out some of the blank spaces in your long-term strategy and vision?

[A - Mick Dilger:]

Sure, Linda. We’re thinking a lot about that. We don’t really think we bring anything to solar that -- what things does Pembina bring to solar, well, not much to wind, limited again, and hence we’re partnering with people rather than building wind ourselves. But when it comes to carbon capture, we are -- we have been running a pilot that Redwater, that’s early stages to capture the CO2 from Redwater to see how all that works. We do currently already produce hydrogen, so that’s within the skill set. So the whole -- that whole field of electric generation from gas and then sequestering it and we’re good at all parts of that. A carbon capture system is really an aiming train that we have and operate. The transportation, I think, through pipes that speaks for itself and then the injection, the industry has been injecting acid gas for decades. So we’re really good at that. So we have all the skills and you’re right, we do have a great footprint, great right away that we can leverage. So we’re thinking a lot about that. And when you think about supplying CO2 to EORs, most of the great EOR targets are within our footprint. And so if whether we do it or someone else inject CO2 into the Cardium, which is one of the best reservoirs are up in Swan Hills are down in Bonnie Glen area, that all gets returned tripped on our facility. So we kind of have an advantage in that area and we’re -- it’s one of the things do spending a lot of time on right now.

[Linda Ezergailis:]

Thank you. Maybe also on a slightly separate note, there’s -- you mentioned that you’re reviewing your hedging profile. There’s a lot of change going on in the industry and there’s a lot of change in your asset mix as well with your recent LPG export capabilities being quite notable on that front. Can you talk about how the hedging might evolve to reflect all of these changes going on and whether that might create opportunities to either increase your exposure as you integrate along the value chain to commodity prices or reconsider your financial guardrails and the level of contracting that’s appropriate?

[Mick Dilger:]

We like our guardrail still. We just recently finished a strategy session with our Board. They’re very supportive. And I look forward to the AGM kind of reviewing all that this afternoon. But those guardrails served us really, really well. I mean, we pretty much hit our midpoint of our guidance and set -- if you zoom out, we actually had a record year for EBITDA last year and that’s really, the diversification, the guardrails and all those things. So very pleased with how that served us and sometimes it bites you like with our first quarter hedging losses. But we get paid to produce steady and growing dividends and we’re good at that and that’s why people buy the stock. So we’re going to keep going. As it relates to hedging and Rupert, recall, only a quarter of those volumes are our proprietary volumes, three quarters through our marketing pool, our producer volumes. So they’re the ones who are going to get this great Bay price. We’ll get some. They’ll get a lot. And we differentiate ourselves, I think, from competition by bringing customers markets -- customer volume, so markets rather than just our own and that’ll start to flow through and there’s going to be some smiles on people’s faces when they get that pay net back. So there isn’t really a ton of incremental hedging to do there. On Rupert, from our perspective, it’s just a nice diversification beyond Edmonton, Sarnia Conway and Belvieu, just have this brand new market and our off taker reflects the way we want to go with, it’s slowly go more global and have some demand for customers.

[Linda Ezergailis:]

Thank you. I’ll jump back in the queue.

[Operator:]

Our next question comes from line of Robert Kwan with RBC Capital Markets.

[Robert Kwan:]

Thanks. Good morning. Start with the Conventional Pipeline System and first in the near-term, you talked about record volumes in April. I’m just wondering if you can square up because I know you report revenue volumes. But how did physical volumes look in Q1 and how’s that squaring up with your comments for April?

[Scott Burrows:]

Yes. So on a physical basis, Robert, I think, we saw a pretty steady increase throughout the first quarter, especially in March where we saw volumes, just about get back to pre-pandemic volumes. We’ve seen that strength continue throughout April. In fact, April, physical volumes were in the neighborhood of call it 2% to 3% above where we saw in March and actually, April physical volumes on the Conventional System were almost back to all time highs in line with where we exited 2019. And in April, volumes were above where we saw any monthly volume in 2020. So we’re continuing to see strength on the Conventional Pipeline System.

[Mick Dilger:]

Yeah. And just a reminder, Robert, like, we’re -- those are only attracting a small fixed cost burden. As you know the variable costs flow through and every barrel gathered is a barrel market. So we’ve got great torque here from this point forward.

[Robert Kwan:]

And Mick, I think, that’s probably what you’re getting at. So not only do you have the physical volumes on the pipeline system, but what percentage of those incremental volumes do you have that further torque of they are feeding into Redwater? I’m not sure if the contractual take-or-pay levels are similar, but as well, the ability for you to take that barrel and then make a bunch more money marketing and touch again?

[Mick Dilger:]

For oil it’s very highly correlated, almost every barrel that we bring in as a barrel marketed for NGL not quite as much. But I think a quarter of the barrels roughly coming out of the back end of Redwater belong to us, as well as all the frac spread barrels, right, at Empress a tailor. And so there we’re fully exposed and this is a good time to be exposed. Go ahead, Jaret.

[Jaret Sprott:]

Hi, Robert. It’s Jaret here. I just wanted to add that, we’re also seeing a fundamental shift on where our customers are ultimately drilling. They’re moving away from that really volatile oil, very liquid rich condensate into the gaseous space with AECO and Chicago pricing staying strong. And with that, we’re also seeing record 30-day and 180-day IPs on the gas side. Like if you look at any reports now, they’re just phenomenal rates, like, 15 million, 20 million a day for a sustained period. So with that what’s not changing is the richness of the NGLs in the gas. So the more gas that we’re seeing through our physical processing plants, I think roughly on a quarter-to0quarter, Q4 to Q1 we saw an incremental 200 million a day of physical volume going through our gas processing assets, obviously, with the frac spreads being very strong. We’re seeing a lot of NGLs come. Obviously, those obviously flow through Conventional into Redwater, and then, ultimately, through our marketing business, which that’s kind of that torque that Mick was talking about. So you’re seeing the two things, the change of the types of wells and the increase of the volume.

[Robert Kwan:]

Got it. Can you talk about within Conventional as well, the discussions that you are having with customers and specifically thinking about, how you bring back just 8 and 9, you did mention that the customer contracts are still there. But can you also frame the discussions? Are you seeing any slippage now that caps is going forward and if you have any comments as well, with respect to the Northeast BC Connector project filing and what that might mean for you?

[Mick Dilger:]

We’re advancing key conversations, Robert, and we will stay with the guidance we provided earlier this year that, by the second half of the year, we’ll be able to say something about Phase VIII, IX, as well as the Rupert expansion. But we are on track to make some comments like that later in the year. It’s just a little bit too early.

[Robert Kwan:]

Generally speaking, are you are you seeing though the outlook is more of a rising tide or more of a zero sum game?

[Mick Dilger:]

We are very comfortable that we can announce those projects later in the year and that they’ll be very well anchored.

[Robert Kwan:]

Okay. If I can just finish, oh, sorry, go ahead.

[Harry Andersen:]

So, Robert, the way I think about it is, it’s really three-fold. Jaret absolutely nailed it when he talked about HVP volumes started. So that’s the first piece. We -- on the Conventional System, we really started to see early in the first quarter a rise in HVP volumes across all our systems. And then what came secondly was a corresponding rise in LVP volumes. And if you haven’t look at Drayton Valley, in particular, they are just above in April pre-pandemic levels. So it’s been really positive. The third thing we’ve been watching is we’ve been watching how volumes respond, because we’re right in about the middle of breakup. And the volumes have been really strong throughout the middle of break up. And then the fourth thing is in our customer conversations, customers have been focused on getting to their take-or-pay levels during the first quarter. And conversation is now starting to return to additional volumes above that. So we feel really positive directionally for those four reasons. One we’re going and I think we also feel confident speaking into the mic in the back half of the year in Phases VIII and IX.

[Mick Dilger:]

Yeah. The one intricacy that maybe people don’t fully understand in Northeast BC is, the system that reaches into the heart of any BC is a cost of service system and so as the customers feel that their per unit tolls drop, and so that system gets ever more competitive. It used to be a pretty expensive system when Petronas anchored it like five years ago and now it’s getting super competitive as it fills and as we consider looping it for not a lot of money. So the customers up there are creating their own future and driving down their own fees. And so that’s a key pipe. And it’s really key competitive advantage that customers have really created for themselves up there.

[Harry Andersen:]

And then when you look at Northeast BC, Robert, I think we all know that 2,000 and 3,000 or 5,000 barrels isn’t going to do it, you have to have a material volume. And so we’re working hard with those customers that have that and we feel really competent directionally.

[Robert Kwan:]

Thanks. And I just finished here, any commentary, whether it’s volumes or -- and/or pricing, especially just comparing to the 2020 year just for the NGL here?

[Mick Dilger:]

Yeah. I mean, I’ll turn it over to Stu. Yeah. But, I mean, the pricing now it’s like way better than last year. I think I’m trying to remember my AGM numbers, but I think it was $0.50 last year and we’re at $0.90 Belvieu, I think those are the numbers and then I’m going to present this afternoon. So it’s -- yes, gas prices are a little more, but you’re talking $2 roughly to maybe $2.70. So you’ve got a double, let’s call it, rounded a double on NGL pricing and you’ve only got a 50% increase in gas pricing year-over-year. So that’s a lot to us. So we’re -- I don’t know where exactly we’re heading to in terms of the full year. But we’re way ahead of where we thought we’d be in the first quarter.

[Stu Taylor:]

Robert, I won’t add a lot more, I think, Mick covered it. We had a great gas re-contracting, our NGL recovery at our facilities when we’re out, securing gas, we’re really pleased where we are. I think we’ve already covered we’re seeing strong pricing. There will be some softening through the summer months as we go. But we are expecting to come back with very, very strong pricing in the fourth quarter. But across the Board some significant improvement over 2020 and excited about where we’re going.

[Robert Kwan:]

And I’m sorry, I was just asking about on the procurement side. Did you -- were you able to capture similar volumes and with headline NGL prices moving higher? Are you seeing a similar percentage shift in your procurement cost?

[Mick Dilger:]

On the buy side.

[Stu Taylor:]

On the buy side, we’ve paid up to obviously with the pricing going up there. But, again, it’s not substantially different. So we were very, very pleased with our procurement of the gas on the gas side of where we ended up.

[Robert Kwan:]

Okay. Thank you.

[Operator:]

Our next question comes from the line of Chris Tillett with Barclays.

[Chris Tillett:]

Hey, guys. Good morning. Thanks for taking my question. I guess maybe to just to shift gears ere a little bit, can you talk about the progression of Phase VIII and IX? How the discussions are going there? And then the contracts that you have in place that you mentioned in the release, are those with new customers, or are those sort of expansions of contracts with existing customers, just curious to hear sort of an update on that?

[Mick Dilger:]

We’re doing the engineering for those projects. As you saw with Phase VII, we’ve kind of delaminated Phase VII a little bit. I mean, we took a lot of costs out of VII, a lot of it was outright saving, some of it was scope. And so we’re getting a little forensic on VIII, IX, and maybe IX goes before VIII we’ll see. So we’re trying to mix and match that. The tricky part is you only get to put the pipe in the ground once and so what size do you put in, and that’s kind of what we’re waiting for with the see which remaining anchor tenants we can land and that’ll drive the physical design, so we’re carrying different options. But the original customers, I mean, they’re signed, so they remain in place, but there are some very exciting developments up in Northeast BC. I’m sure you’re all aware of them. And we’re working hard to capture those before we announce exactly what Phase VIII, IX look like.

[Chris Tillett:]

Okay. And then obviously, you sort of need to know the sizing there before you can have a better grasp on capital expectations. But is there anything, you might be able to tell us at this point in terms of where those might land relative to prior expectations?

[Mick Dilger:]

I think that if things work out, we will have possibly a lot more volume and a lot longer runway to grow there. That’s kind of what we’re seeing right now. Then we thought before. Jaret, go head?

[Chris Tillett:]

Okay.

[Jaret Sprott:]

I just add, Harry, talked about some of the procurement, et cetera. Yeah. There is inflationary pricing, but I think we’re making excellent headway on driving down our overall diameter, branch mile cost as well?

[Scott Burrows:]

Let me summarize it by saying, we believe NEBC is more exciting than we thought when we applied at the first time.

[Chris Tillett:]

Okay. Great. Thanks so much for that. And then, I guess, last one for me is, obviously, the last six months have seen quite a bit of M&A activity in Western Canada. I guess, particularly and specifically in areas that are served by the Peace System. So we’ll just be curious to know kind of your thoughts about where in that cycle you think we are today and how you think the M&A impacts you guys moving forward?

[Mick Dilger:]

Can you just specify what kind of M&A you mean like loose assets, corporates or just in general?

[Chris Tillett:]

Yeah. Sort of all of the above I guess.

[Mick Dilger:]

Sure. I mean, we’re -- we have got a great value chain. And so we’d normally have kind of embedded advantages when it comes to lose asset purchases, we’re always on the lookout there of course. We’ve really focused through 2020 on our profitability, our return on invested capital and I think the full impact of that will start to show in 2022. So we’re still very focused on cost and I think we took about $150 million out of our cost structure last year. We’re working hard to maintain that. And so that’s our primary focus. As our share price comes up, our currency improves, more things become possible. But we are right now focus more on profitability and that torque as we’ve been trying to message, when we fill up existing assets, it’s almost infinite return and we look absolutely outstanding. If we can improve our utilization say from 75%, 80% to 90% to keep our costs in check. We just think and that’s our primary focus.

[Chris Tillett:]

Right. Okay. That’s helpful. I think, I guess, maybe just to clarify, I meant more, how has the upstream M&A impacted…

[Mick Dilger:]

Oh! Okay. So…

[Chris Tillett:]

… your assets?

[Mick Dilger:]

Positively, like, we -- from a counterparty credit we’ve seen like with the Arc/Seven G merger, we had -- they became investment grade. They became more capable. They’ve all taken their debt down like I’m looking across the universe, everyone is just getting after their debt. I mean, I looked at 10-Qs released the other day and so that’s really positive. We tend to see the biggest producers who have huge plans, they like dealing with real pipe and that’s in the ground that they know they can rely on. And so, generally, not just from a financial guardrails perspective, but from a commercial perspective, people -- the biggest companies tend to transact with us. So we were pretty pleased with how that’s working out.

[Chris Tillett:]

Okay. Perfect. Thank you very much.

[Operator:]

Our next question comes from the line of Robert Catellier with CIBC Capital Markets.

[Robert Catellier:]

You’ve answered most of my questions here. I’m just curious on the Ruby Pipeline term loan that was repaid in April and any other financial support that might be needed going forward? What level of support is required from the owners to make those payments?

[Mick Dilger:]

Yeah. Robert, you’re correct. The Ruby Pipeline term loan was repaid in April with funds at Ruby. There’s no additional support required with Ruby from the owners.

[Robert Catellier:]

Okay. Great. And then just a clarification here, if in the event we get a shutdown on Line 5, how that impacts your business. And what mitigation plans you have in place, and specifically, is the Prince Rupert Terminal and some of the other port options available on the NGL side now enough through to effectively mitigate that with respect to an exposure you might have and any headwinds getting to your guidance?

[Mick Dilger:]

Robert, when we built the Empress fractionation facility which came into service. We built it to make money and it’s making money. It’s working out great. But we also built it as a hedge in case East down volumes, west to east volumes ran into problems. And so, we can rail out of that facility now and we can rail to Sarnia, if we need to. That line shuts down Sarnia is going to get pretty expensive, but we can get our product there still. But you’re absolutely correct. We can also get those volumes elsewhere, whether it’s south or west. So again, partially we primarily built that to make money. But we also built it in a defensive way just in case this happened. So it would be terrible and unprecedented for this to occur. But we do have contingency plans in place. Jaret, anything to add?

[Jaret Sprott:]

Yeah. Just to add that, Mick mentioned in Sarnia, look, we moved those volumes from west to east and frac them out there. But we also have a large storage position in Corona with rail and trucking inbound and outbound. So if in the unfortunate event that what happened, that asset would be highly coveted.

[Robert Catellier:]

Okay. And then, I just want to make sure I understand the risk transfer on the Mitsui agreement, it seems like most of the spreads benefit things accrue to the -- to your marketing customers. So are you effectively on that piece of the business now sort of in a fee for service some of tolling type contractual arrangement?

[Mick Dilger:]

Yeah. The way the marketing pool works, Robert, is all of our volumes including Pembina. So roughly a quarter of the volumes are ours and three quarters of the volumes were the agent for. They get what we get. So if we shipped to Conway, we rail to Conway, we deduct the rail cost, if we take it through PRT, we deduct the toll at PRT and the rail costs, and so it’s just three quarters fee for service and one quarter is proprietary to us. So it’s kind of like, that’s the reason our marketing pool is so successful is, is that we have the greatest economies of scale in the sector to get to premium markets. And because we give our customers what we get. And so there -- we’re shoulder to shoulder and that creates tremendous alignment and we think it’s the winning model.

[Robert Catellier:]

Yeah. I appreciate that aspect of the model. I’m just curious on the Mitsui agreement and if you’re still and the whole marketing pool is long the spread to Asia or as Mitsui has admitting to Asia spread?

[Scott Burrows:]

It’s the former Robert at this point time, like, again, we deliver the product, we load the vessel and Mitsui is selling that product. And as Mick said, we’re covering our costs for 75%, but it’s essentially those barrels are selling into the Asian market at this point and so that’s how the deal is struck with Mitsui.

[Robert Catellier:]

Okay. Thank you.

[Operator:]

Our next question comes from the line of Shneur Gershuni with UBS.

[Shneur Gershuni:]

Hi. Good morning, everyone. Most of my questions have been asked and answered. I just wanted to come back to the VIII and IX expansion for a second year. Is a consumer listening to your responses to the various questions? I’m trying to wonder -- I am trying to think about, how to think about when it actually gets FIDed, whether you’re fourth and goal or not, just like if you’re at the point where you’re discussing scope and size and so forth, does that mean that we’re pretty close to the point where you can FIDed and it’s something that could be spent potentially in 2021 or mostly in 2022, or am I miss reading data and it’s probably going to still take some time, just given the recovery where it’s at?

[Mick Dilger:]

Consider we FIDed those projects once already and then pull them back. So they’re very well understood from a routing regulatory perspective. It’s just a matter of what is physically required given the rapidly emerging picture and NEBC and what that prize might look like. So we just need a little bit, we’re just measuring twice before we cut there and we have some things we’d like to get done before we move that thing forward. Harry, anything to add there?

[Harry Andersen:]

I think, Mick hit the nail on the head, it’s looking really, really good. I think, as Mick’s alluded to earlier in the call, you could probably see Phase IX resection earlier. But there’s probably a twofold reality is, how the industry and our producer community are thinking about what they need next is shifted slightly. So we are adjusting with them in the context of Phase VIII and IX. And then, secondly, I believe Mick and the team have talked about the optimization process we are going through here. And that’s resulted in clearly some optimization across our Conventional business and we’re looking to take advantage of that initially before we spend money on new capital. So there’s -- I think, safe to say some pros freed up through our optimization process that is really helped that. We’re looking to fill that first and then I’m getting into the new capital.

[Mick Dilger:]

Yeah. Just on that, we used to call that Phase X just for those who heard about Phase X. So as we do kind of a sweeping review of our pipe across the Board, we realize Quotion has way more capacity embedded in it then, than we thought before, and we’re already using a bunch of that incremental capacity with more to come. Peace, we’ve freed up tens of thousands of barrels a day through optimization. And again with technology, we expect that to continue to improve. And so when you’re -- let’s just say hypothetically, we could move 50,000 or 60,000 barrels a day more down Peace that obviously impacts our design. And so those things are all in a iteration right now cross referenced against what the demands and when of those demands from customers will evolve and in NEBC. So, again, we’re working it. We’re optimistic we can say more about it in the second half of this year along with the Prince Rupert expansion.

[Shneur Gershuni:]

If I can just clarify my understanding to your response there, because it sounds very interesting, are you essentially saying through the optimization process that you’ve effectively been able to create essentially one of the phases synthetically? Is that sort of the way to think about it, so it sort of delays the need for some capital, but you can still actually capture the volumes and the associated cash flow. Is that the right way to be thinking about it?

[Mick Dilger:]

That is correct. That we are creating parts of those phases through just getting more through the pipe. I mean, could consider the rap -- if you kind of go back five years, 10 years, we’ve been building, building, building, we never had a pandemic to stop and look what the systems can actually do. And so we’ve had that time to engineer, re-engineer and we are producing that capacity synthetically at no cost throughout our systems or throughout our pipeline universe. We’ve never had that opportunity before. And so that is partially what led to Phase VII. We didn’t have to build out all of Phase VII, because we realized Phase VII optimize could move virtually as much capacity is all a Phase VII. So we took $150 million out of that cost estimate. So that is what is going on. And part of the reason that we’re taking for any to say a pause for the cause to make sure we don’t over capitalize these assets and all that leads to lower tolls for our customers.

[Scott Burrows:]

Yeah. A good way…

[Shneur Gershuni:]

Okay. And -- yeah, sorry, please?

[Scott Burrows:]

No. A good way to look at it, because Peace is obviously a much more complicated system. The example, Mick, gave on Quotion is perfect is, when the team looked at Quotion, we were able to find 14,000 barrels a day that are flowing today that weren’t flowing before with no capital.

[Shneur Gershuni:]

Right. Okay. Perfect. No. I really appreciate the color there. And I was just wondering if we can go back to the Prince Rupert expansion potential as well too. I guess what I sort of think about the LPG demand in Asia. When I think about shipping, vessel rates have gone up as well also, which is indicative of the strength of that market there. Have you been able to handle some of the larger vessels? I think you were talking about an MDC , I can’t remember what the names are correctly. In -- is the demand there to easily expand and it’s something that is also potentially a fourth integral type of expansion and it could be opportunity from a pricing perspective be pretty strong just given a global market dynamics?

[Mick Dilger:]

100% the demand is there right now. We could have sold a lot more than we did through our process. We’re very pleased with Mitsui as a partner there. The question is, do we expand? If you recall, our original FID was put in a few more spheres and upgrade the rails somewhat and kind of go from 25,000 to 40,000 barrels a day. And that’s still a legitimate plan and we’re realizing that, even though we’re using the smaller Handysize ships, they are very handy, they can get into some really great niche markets and Mitsui is helping us understand that. So we may choose not to go to larger ship size, because we can access niche markets that no one else can access in smaller markets, Hawaii, Alaska, South America, Mexico. They’re very well suited for smaller cargoes, because if you had VLDC, they’d have to stop in Alaska, partially unload and then sales to Hawaii partially unload and that’s just not economic. So the Handys aren’t necessarily a liability. But that said, we have realized, we can get the larger and the larger ships don’t refrigerate onboard. So we’d have to refrigerate on shore. That’s a little more capital intensive. So we are studying those options. Right now, I think, we have at least two options in parallel. Jaret, anything else?

[Janet Loduca:]

Yeah. Just -- I would just add like, Mick said, customer demand is high. The relationship with the community of Prince Rupert, the ports and the surrounding indigenous communities is excellent. And just evaluating the two different work streams that stick with the Handys and/or go from 150,000 to roughly 250,000 barrels per vessel. So, just that works ongoing and we expect to have that wrapped up mid-to-later this year.

[Shneur Gershuni:]

All right. Perfect. Really appreciate the color and the discussion towards the end here. Thank you very much and have a great weekend.

[Scott Burrows:]

You as well. Thanks for your interest.

[Operator:]

Your last question comes online to Patrick Kenny with National Bank.

[Patrick Kenny:]

Good morning, Mick. Just to clarify your comment there around providing more of a growth update in the second half of the year? Are you in live discussions today with shippers with respect to the timing and the need for building out incremental frac capacity, whether at Redwater or in the field NEBC? And perhaps dovetailing these discussions into rolling over whatever’s left on the near-term contract expires on Peace or is that simply your expectation as we step into the second half of the year?

[Mick Dilger:]

We’re live discussions, every single place in the value chain, whether it’s processing, whether it’s increases in what we need on Peace, filling Peace, building alliance, fractionation, it’s soup to nuts through, but we talked about Rupert. Things are coming around and like, when we think we -- when we say we think we’re going to be Pembina of 2017 to 2019. In 2022, we believe that wholeheartedly that will get our capital program back to $1.5 billion to $2 billion a year without too much difficulty we’ll keep our costs flat. And we’ll do a bunch of things that you know of and we’ll probably do a bunch of stuff that might surprise you, as we always have over the last decade. So we are feeling, we’re hit play and we’re emerging. So our morale is very good.

[Patrick Kenny:]

Okay. That is excellent. And then just maybe one less cleanup question, back to the PPA with TransAlta, obviously, checks the ESG box nicely there. But given where power prices were in the quarter, are you now looking to ramp up your contracted power portfolio just as much from a financial standpoint or do you prefer to keep more of an open position as it relates to power costs?

[Mick Dilger:]

It’s mixed. We always have to be careful of how we do it. I mean, places like Empress, where we bear all the costs for power. It’s game on and we’re looking to contract a lot of that out places. Where we flow through we have to be very mindful that we’re making the best deal possible on behalf of our customers. So far all the deals we’re doing are to our account. We’ll investigate going beyond that in the future. But this won’t be the last PPA we do. We think it’s a good part of the energy mix for us, and as you know, we do what we say and when we say we’re going to reduce the emission intensity of every business, we will do that. We’re just not going to make grandiose claims about 2050 when we have no idea how to get there. That’s not who we are.

[Patrick Kenny:]

Okay. That’s great. All makes sense. Thanks, Mick.

[Operator:]

At this time, there are no further questions. Are there any closing remarks?

[Scott Burrows:]

Yeah. It’s Scott here. I’ll just clarify one question before I turn it over to Mick to wrap up. Hey, Jeremy, just circling back to your question on hedging for the remaining of the year. Your previous question asked me for a quarterly run rate on G&A. So I actually answered your question. I didn’t answer it on a quarterly -- I answered it on a quarterly basis, not a yearly basis. So we expect to have losses of about $20 million per quarter when it relates to NGL and that’s pricing as of March 31st. So I just wanted to clarify that my $20 million was per quarter for the rest of the year.

[Mick Dilger:]

Yeah. Thanks Scott. Listen, everybody, look forward we have our AGM at 2 p.m. Looking forward to having you tuned in for that. We’ve got a very positive message to deliver on the way we got through 2020, which we’re extremely proud of and what we see upcoming and we’ll have a nice little video at the end, which is something new realizing you’re all online of the little more entertaining and you’ll get to meet Janet in person. So looking forward to having you all meet her. So that’s 2 p.m. Mountain Time. Talk to you soon.

[Operator:]

This includes today’s conference call. Thank you for participating. You may now disconnect.