Pembina Pipeline Corp Q4 FY2022 Earnings Call

Good morning, ladies and gentlemen, and welcome to the Pembina Pipeline Corporation Q4 2022 Results Conference Call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. This call is being recorded on Friday, February 24, 2023. I would now like to turn the conference over to Cameron Goldade, Pembina's Chief Financial Officer. Please go ahead, sir.

Thank you, Colin, and good morning, everyone. Welcome to Pembina's conference call and webcast to review highlights from the fourth quarter of 2022. On the call today, we also have Scott Burrows, President and Chief Executive Officer; Jaret Sprott, Senior Vice President and Chief Operating 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's Discussion and Analysis dated February 23, 2023, for the period ended December 31st, 2022, as well as the press release Pembina issued yesterday, which is available online at pembina.com and on both SEDAR and EDGAR. I will now turn things over to Scott to make some opening remarks.

Thanks, Cam. In the fourth quarter, Pembina delivered strong financial results, highlighted by adjusted EBITDA of $925 million, leading to full year record adjusted EBITDA of $3.746 billion, which exceeded the high end of the company's revised guidance range. As we have referenced throughout the year, in 2022, we benefited from rising volumes on key systems and very strong performance within the marketing business. 2022 was also highlighted by a number of accomplishments, the largest of which was the creation of Pembina Gas Infrastructure or PGI. Along with our partner, KKR, we were excited to bring together three complementary platforms to create a premier, highly competitive Western Canadian gas processing entity with the ability to serve customers from North Central Alberta to Northeast British Columbia and to pursue future growth opportunities in a capital-efficient manner. Since closing the PGI transaction in August, integration activities have progressed well, and operations have performed as expected with no major interruptions to service. Commercially, we have successfully secured incremental volumes through fee-for-service firm contracts with a number of existing customers at both the K3 and Wapiti facilities. In 2022, we also had a number of commercial successes signing long-term agreements and contracts. We entered into long-term service agreements with three premier Northeast BC Montney producers, renewed contracts and secured incremental volumes on our conventional pipelines and fractionation facilities; enhanced the long-term contractual profile of Alliance Pipeline, which is now fully contracted for the next two years; executed a long-term commitment with an anchor customer to support the reactivation of the Nipisi Pipeline; and extended a key contract on the Tioga portion of the Vantage Pipeline. The commercial success has continued into 2023 with a successful open season for capacity on the Cochin Pipeline and the extension of a contract to supply ethane on a long-term basis to a key customer. We also continue to progress our portfolio of growth projects in 2022, notably by completing the Phase VII and Phase IX Peace Pipeline expansions and the Empress Cogen project, successfully delivering these projects under budget. We also reactivated construction of the previously deferred Phase VIII Peace Pipeline expansion, and we look forward to placing that project into service in early 2024. Furthermore, as we announced yesterday, we are proceeding with the construction of a new 55,000 barrel per day fractionator at Redwater. The Redwater complex, which including the expansion will be comprised of RFS I through IV, is underpinned by long-term take-or-pay contracts. In recent quarters, Pembina has successfully extended existing contracts and signed incremental new contracts. The existing facility is highly utilized, and RFS IV is needed to meet customer demand. The decision to proceed with the expansion ensures Pembina customers will benefit from a timely solution to growing volumes and constraints arising out of high utilization rates across the industry. 2022 was an outstanding year on many fronts. I'll have more to say about 2023 and beyond towards the end of today's call. But for now, I will turn things over to Cam to discuss in more detail the financial highlights for the fourth quarter and full year 2022.

Thanks, Scott. As Scott noted, Pembina reported fourth quarter adjusted EBITDA of $925 million, which represents a $45 million or 5% decrease over the same period in the prior year. Fourth quarter adjusted EBITDA was negatively impacted by lower margins on NGL sales, partially offset by higher margins on crude oil sales, both in the Marketing & New Ventures business, lower contribution from Aux Sable, a lower contribution from Ruby, lower revenue related to recoverable costs on the Horizon Pipeline system, higher general and administrative expense largely due to higher long-term incentive costs, driven by the change in Pembina's share price and its share price performance relative to a peer group, as well as higher consulting fees and higher integrity costs. These impacts were partially offset by higher volumes on the Peace Pipeline system and Cochin Pipeline and higher tolls due to inflation mechanisms. The PGI transaction and stronger performance from certain gas processing assets, including the Hythe gas plant, the Dawson assets, the Cutbank Complex, and the Resthaven facility, the impact of a higher US dollar exchange rate, and a realized gain on commodity-related derivatives compared to a loss in the fourth quarter of 2021. Earnings in the fourth quarter were $243 million, representing a $163 million or a 204% increase over the same period in the prior year. In addition to the factors impacting adjusted EBITDA, earnings were positively impacted by lower impairment expenses, lower restructuring costs, and a higher unrealized gain on commodity-related derivatives. These factors were partially offset by our Ruby pipeline settlement provision. Total volumes of 3.392 million BOE per day for the fourth quarter represented a decrease of approximately 1% over the same period in the prior year. Volume decreases were attributable to both the Pipelines and Facilities divisions, including most notably the Nipisi and Mitsue Pipeline system, the Ruby Pipeline, and the disposition of the E1 and E6 assets at our Empress facility. Excluding the volume impact of the Nipisi and Mitsue pipelines, the disposition of the E1 and 6 assets, and the Ruby Pipeline, fourth quarter volumes would have increased approximately 4% over the same period in the prior year. The fourth quarter also contributed to record full-year results that included adjusted EBITDA of $3.746 billion, which was 9% higher than in 2021 and exceeded the higher end of the company's guidance range. Earnings of $2.97 billion, which was an increase of 139% compared to 2021. Cash flow from operating activities of $2.93 billion, which was 11% higher than 2021, and adjusted cash flow from operations of $2.66 billion, representing a 1% increase over 2021. Thanks to the strong results, Pembina generated meaningful free cash flow, which was allocated to strengthening the balance sheet and returning capital to shareholders. In 2022, we raised the common share dividend by 3.6%. We reached our target to repurchase $350 million common shares. We redeemed $300 million of preferred shares, and we reduced leverage to the low end of our target range. Looking ahead to 2023, we are reiterating our 2023 adjusted EBITDA guidance range of $3.5 billion to $3.8 billion. The midpoint of the guidance range reflects an approximately 5% increase in adjusted EBITDA contribution from Pembina's fee-based business, reflecting higher tolls, growing volumes, and increasing utilization across its assets in The Western Canadian Sedimentary Basin. While Pembina expects another strong contribution from its marketing and New Ventures segment in 2023, results are expected to moderate relative to the strong results in 2022. The reiterated guidance includes the impact of a recent incident on the Northern pipeline that impacted a substantial portion of the volumes on the Northern and Northeast BC Pipeline systems. Service on the Northern Pipeline has resumed at reduced operating pressure. Pembina does not yet have a confirmed duration for operating at reduced operating pressure, and the Northern Pipeline system will continue to operate under limited capacity with increasing rates contingent upon continued integrity assessments and approval from the AER. The overall impact to Pembina's adjusted EBITDA for the first quarter of 2023 is estimated to be approximately $30 million, including lost revenue and cost to return to service. In December, we announced our 2023 capital program, which included investments related to the construction of the Phase VIII Peace Pipeline expansion, reactivation of the Nipisi pipeline, pre-FID development activities for Cedar LNG, and engineering activities for the Alberta Carbon Grid, sustainment of our operating assets, and advancing Pembina's portfolio of unsecured development opportunities. Pembina has revised its outlook for 2023 and now estimates a 2023 capital program of approximately $800 million, which relative to the original guidance of $730 million reflects primarily incremental spending related to new revenue-generating infrastructure in the conventional business, and the sanctioning of RFS IV. 2023 cash flow from operating activities is expected to exceed dividend payments and the capital expenditure program. Additional incremental cash flow generated in 2023 is expected to be used to pay down additional debt, further strengthening our balance sheet and preparing the company to fund future capital projects if sanctioned. Based on the current guidance for 2023, Pembina expects to remain firmly within its financial guardrails, ample liquidity, and our leverage metrics are expected to remain firmly within the range for a strong BBB credit rating. I'll now turn things back to Scott for closing remarks.

Thanks, Kim. In closing out of today's call, I wanted to take a moment to touch on the future of Pembina and where we are headed in 2023 and beyond. Over the next 12 months to 24 months, a key focus will be growing cash flow by enhancing utilization of our existing assets, gas plants, pipelines, and fractionation facilities to serve our customers' growing volumes. Despite ongoing economic and geopolitical uncertainty, the WCSB is expected to continue to grow at a modest pace in 2023, with the potential for higher growth rates in the future, given major third-party egress projects such as the TMX Pipeline and LNG Canada, which are projected to come into service over the next couple of years. Our outlook for continued growth was further bolstered by the recent announcement by the Province of British Columbia and the Blueberry River First Nation regarding the finalization of an agreement allowing oil and gas activity to proceed within certain parts of Northeast BC. While future development is subject to certain provisions, Pembina is optimistic that the agreement will provide the needed clarity for producers to allocate capital to drilling programs and support larger development plans leading to growing volumes in the area. Pembina has a long history as a Northeast BC service provider. Through our existing Northeast BC Pipeline, which has significant expansion potential, we are well-positioned with readily available solutions to meet new customer demand. While we are very well-positioned to benefit from this growth and look forward to the anticipation in the next few years, we also have an eye to the future of Pembina. With a longer time horizon in mind and emerging from the COVID pandemic, the Board and management view 2022 as an opportune time to review Pembina's corporate strategy. Through a yearlong detailed undertaking, we challenged ourselves on how Pembina can remain resilient and indeed continue to thrive, not just for several years, but for decades in the face of many uncertainties, which continue to evolve. Pembina's four strategic priorities, which we outlined in yesterday's news release, were informed by an analysis of scenarios built around two key themes that we expect will be driving forces that could most impact our business in the years to come. These two themes are the pace of decarbonization and the extent of globalization in energy markets. Over the course of the last year, we analyzed our business through a commodity-by-commodity lens and considered the potential impacts on Pembina's business, both risks and opportunities under different scenarios. The outcome is a strategy that builds on our strength by continuing to invest in our core businesses, while also capitalizing on opportunities to leverage our assets and expertise into new service offerings to proactively respond to the transition to a lower-carbon economy. First, to be resilient, we will sustain, decarbonize, and enhance our business. This priority is focused on strengthening and growing our existing franchise and demonstrating environmental leadership. Second, to thrive, we will invest in the energy transition to improve the basins in which we operate. We will expand our portfolio to include new businesses associated with lower carbon commodities. Third, to meet global demand, we will transform and export our products. We will continue our focus on supporting the transformation of Western Canadian Sedimentary Basin commodities into higher-margin products and enabling more coastal egress. And fourth, to set ourselves apart, we will create a differentiated experience for our stakeholders. We remain committed to delivering excellence for our four key stakeholder groups. If you consider Pembina's in-flight projects such as the Phase IX expansion and Phase VIII expansion and the sanctioning of RFS IV, along with the proposed projects such as Cedar LNG and the Alberta Carbon Grid, you can see that they fit squarely within this strategy. Similarly, through our efforts to reduce emissions and fill currently unutilized capacity of our existing assets, we will actively develop new business ideas and projects that we look forward to sharing with you in the fullness of time. Importantly, we remain committed to executing our strategy within our long-standing financial guardrails, and we are confident in our ability to continue to deliver solid per-share growth and exceptional returns to our investors. Thank you for joining us this morning. Operator, please go ahead and open the line up for questions.

Thank you, sir. Ladies and gentlemen, we will now begin the question-and-answer session. Your first question will come from Jeremy Tonet of JPMorgan. Please go ahead.

Hello, good morning.

Good morning, Jeremy.

Just wanted to start off with a high-level thought on the basin because there's a lot of very positive language in the release and what you've discussed in so far as Montney production. And so just wondering if you could sketch out any numbers or any more detail as far as how you think volume growth could grow over the next few years post the Blueberry River First Nation agreement here with these new Montney contracts, as you outlined in Northeast BC. Just trying to get a flavor for what that means for Pembina exactly?

Yes. I think we've seen upwards of 200 to 250 licenses be issued since the announcement. Whether those all get drilled or not, we'll wait to see. In terms of specific numbers, Jeremy, I'm not going to give you specific numbers, but I do think what we've been talking about historically is seeing kind of that 3% to 4% growth on the conventional pipeline from 2021 into 2022. And I think we see that volume continuing for the next couple of years on that trend.

Got it. That's very helpful. Thanks for that. And then just as far as the new frac contracts are concerned, I just wanted to see if those are kind of full value chain contracts, so there's upstream integration economics and kind of enhances you across the value chain there?

Yes. I mean everyone is kind of different, but on a lot of them, there are value integration across the value chain. But there are multiple contracts there. Some are fully integrated, some aren't.

Got it. Just one last one. Marketing keeps exceeding the upside. Just wondering, as you see the current environment today relative to the assumptions baked into your guidance for marketing, are things tracking as planned or a bit better? We've seen the frac spread step up here, so just want to get a flavor for how marketing stands today in the current environment relative to when you set guide?

I mean we put the sensitivities in the 2023 budget release. If you look at those, we would be up slightly. We've obviously seen gas prices come way off. Now that being said, propane has come off as well, slightly offset by a slightly more favorable FX rate. So all-in-all, I'd say, slightly ahead of where we set budget.

Got it. I’ll leave it there. Thanks.

Your next question comes from Rob Hope at Scotiabank. Please go ahead.

Good morning, everyone. Two questions on the strategy and maybe diving in there a little bit more. Specifically, you highlight that Pembina wants to meet global demand and transform and export your products. Can you give a little bit more color on this? Historically, we've seen new export Prince Rupert as well as down into the US. But are you looking for something larger there potentially on the crude oil side? And then when you're talking about transforming the products as well, does that mean you could once again look at pet chem?

So maybe I'll answer the first part, and then I'll turn it over to Stu. As part of the strategy work, one of the conclusions was that global demand remains more resilient in 2030 and beyond compared to North American demand. So we continue to think that having egress out of the basin will continue to be a strategic priority. And so yes, we have Prince Rupert, and we do export quite a bit to both the US and propane to Mexico as well. Obviously, Cedar LNG fits squarely within that dynamic in terms of exporting products as well as our partnership with WIPG as we explore the possibility of what TMX could look like in our portfolio and the ability to get crude to world markets as well. So I think all of the things we're working on fit squarely within that thesis. And maybe I'll turn it over to Stu now just to talk a little bit about the changing of products.

Hi, Rob. We've been closely monitoring global demand and the need for decarbonization. We've received a significant number of inquiries. Pembina is well-positioned with our Redwater Complex, the lands we have available, and our operational expertise. We are actively exploring energy transition opportunities such as hydrogen, ammonia, methanol, and other products. We are assessing our role in the low carbon complex in the Redwater area and considering options for participation, which may include being an equity partner in various ventures. Additionally, we recognize our ability to offer extra services through Pembina, such as operational capabilities, feedstock provision as proposed with our PDH opportunity, water, and other services that could support businesses in this area. We believe we have a significant role to play.

All right. I appreciate the color. And then maybe as a follow-up, just taking a look at your capital allocation in 2023 and even in the next year, you sanctioned RFS IV, but even still, you have a very strong balance sheet. You have very strong cash flows. When you take a look at paying down debt versus share buyback, is that a function of you are seeing some larger projects maybe creeping on to the horizon of when you'll have to start to deploy capital?

I think that's right, Rob. I mean when you sit there and look forward, I mean, we're still obviously very positive on the Cedar LNG opportunity and if we play on that into next year, obviously, that starts to bring more meaningful capital into 2024, along with the RFS IV opportunity. And so it will be a function of that. And beyond that, I mean, obviously, there are lots of different things that Stu just talked about that we're seeing opportunities with. We continue to see opportunities in our base business to accommodate customers' volumes. So I think you can hear from the tone that we are very optimistic about the current outlook over the next few years and where this could go beyond that. So certainly a possibility, but we'll always stay disciplined and evaluate those opportunities against the alternatives being the ones you mentioned: repayment of debt, share buybacks, whatever the most optimal use of capital will be held to get to that standard.

Excellent. That’s it for me. Thank you.

Your next question comes from Linda Ezergailis at TD Securities. Please go ahead.

Thank you. Maybe just as a follow-up in terms of the growth outlook. Looking out over the next year or two, can you just give us a little bit more clarity beyond your conventional pipelines, how much operating leverage you might have? And how we might think of any ramp-up in contribution from volumes on existing capacity beyond the 3% to 4% on conventional that you cited?

Good morning, Linda. This is Jaret. As Scott and Cam mentioned, we are looking at a 3% to 4% growth in our conventional systems. Currently, our customers are facing limitations due to gas egress and fractionation capacity, which is why the RFS IV announcement was made today. We are actively collaborating with our customers and noticing some positive developments in the PGI, as well as expanding opportunities with those who have significant gas egress capacity. This directly supports our liquid transportation. Alliance is well contracted, as Scott pointed out earlier, and the volume levels are strong. Pricing remains robust, and at around 250 AECO, our customers are performing exceptionally well. Overall, things are looking very positive.

Okay. And then, maybe if you can just comment on, with your updated strategy, does Pembina have the in-house talent to execute on your decarbonization and energy transition-related aspects of your strategy? And how might acquisitions fit into your plans to gain that expertise and maybe accelerate execution, because I get a sense that everyone is trying to hire these types of folks.

Hi, Linda, it's Stu. Yes, I mean, as we sit here, we brought some in-house expertise. We're continuing to grow that team, just as you mentioned, as is everyone else. It's a growth opportunity, and those people are valuable commodities. We think we've added some tremendous staff and some great expertise. We will look at how to get there faster, potentially through partnering through JVs, M&A. Those opportunities do come along. We'll evaluate that as they come around. And how does that compare to a greenfield build of what that looks like. But we're continuing to build that team. We've got some tremendous in-house talent right now. We continue to look to expand. That will be a hiring exercise for us, but there are other ways to do it, as I mentioned, through JVs and M&A opportunities, as you point out. We're picking where our points are, and we still are determining how we participate in some of those opportunities. We may not be in the facility itself, but we may be providing services and those services could be what Pembina has been done for 68 years, feedstock provider and such like that. So we're trying to still evaluate exactly how we participate in some of those new opportunities.

Okay. Thank you. And just a quick question on RFS IV. What class of estimate is your $460 million number? And can you give us some sense of how maybe you might have a healthier contingency or maybe firmed up more than you might have historically, just to indicate your level of confidence in that estimate?

Hi, Linda. We consider that a Class IV estimate internally. Having built RFS II and RFS III over the past six years, we have a very high level of confidence in our engineering design, the equipment needed, and the vendors we will collaborate with for this project. There are some rail expansions tied to RFS IV, which is well within our execution capabilities. Customer demand is very strong, and we have significant confidence in our execution team and operational capabilities. Our main goal is to maximize the utilization of the entire complex, including feedstock cavern storage, spec cavern storage, and rail opportunities. This approach is helping us achieve efficiencies in executing RFS IV.

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

Thanks, Linda.

Your next question comes from Patrick Kenny at National Bank Financial. Please go ahead.

Thank you. Good morning, guys. Just on the corporate strategy and looking at a high level here at the four key priorities that you've outlined. Can you just clarify what would be considered new within the strategy? And then, I guess, by virtue of omission, what parts of the prior strategy might not be a priority going forward?

Thanks, Pat. The way we think about it is a natural evolution of the strategy, considering the change in dynamics of the world in our industry. So when you step back, it wasn't a major pivot. And that's partially by design, that's partially by going through the process. I mean, the strategy wasn't broken. But I'm not sure it was written down anywhere where the average reader could really understand it or see it. I know, most of the analysts on this call understood it just through to our frequent communication. But it's important for us to step back and kind of relook at it through multiple lenses and test it through various scenarios to make sure that it could be resilient and thrive under various scenarios. So that was really the exercise that we undertook. And through that, we came out with the strategy, which was largely in line with what we had been talking about previously. But I do think there are some subtle things. I think it's important to point out our commitment to the core business; we still see lots of opportunity in the core business. And we see – and we see the ability to grow that, and we are committed more than ever to the core business. I think the point around decarbonization was – what we're really focused on is decarbonizing our assets and our basins and the basins in which we operate in because that not only benefits us but it benefits our customers as well. And I think some of the points there to your question around emissions is we're not looking at carbon sequestration as a business in, I don't know, the Permian or in the Midwest where we don't really have a lot of operations. It's really – it's really focusing where we're spending our time and energy, and that's really in the basins in which we operate today. I think the other point is we've been getting questions around energy transition projects. And I think from our perspective, you could see this as a threat or an opportunity, and I think we're choosing to see it as an opportunity. And we're really getting focused on which of those opportunities that we think we can bring a competitive advantage or a skill to. And then I'd say for us, really calling out the four stakeholders and how important they are to our strategy was another important point to get that down on paper. And then our commitment to egress and really stepping back and challenging all those assumptions around world demand versus WCSB demand and making sure those are some of the egress projects are the large capital commitments that require long-term contracts, will those products be resilient over the next 20 to 40 years? And that was another kind of key part of this, and we came to the conclusion they are. So that was just, again, formalizing our commitment to egress was important. So I know that was a long-winded response. But I think the point was, there isn't a lot new, which probably shouldn't surprise you given I think we've had a pretty successful track record. But I think it's important to test all of the assumptions, focus it and then write it down so all of our investors or potential investors could understand where we're headed.

Got it. Okay. Well, that's super helpful. Thanks, guys. And then maybe back to Cedar LNG. I'm just wondering if you guys have received any feedback from the BC government on your environmental application there or perhaps the timing of the process. Because I thought the approval was expected before year-end. So I'm just not sure if there's been any friction or any back and forth that's still needed in order to achieve approval of the application.

Hi, Patrick, it's Janet Loduca. So we have heard from the BC government that the issuance of the environmental assessment approval is going to be delayed. But we're very optimistic that it will be approved. This is going to be one of the greenest LNG projects in the world, and I think the environmental assessment was very positive from that perspective. So we continue to be in discussions with the BC government, but we are optimistic that we will receive approval in the near term.

Okay. Thanks for that. And then last one, maybe for Cam here. Just I know the NCIB will be renewed here in March, just as normal course. But if you could just confirm that the intent is still to allocate any discretionary cash flow towards debt repayments, unless, of course, there's a significant sell-off in the markets to take advantage of, or are you now thinking of more of a balanced capital allocation approach for the year?

I think you've got it right, Pat. I mean we sort of look at the market dynamics as they stand and sort of evaluate it as days and weeks go by. And obviously, interest rates have been volatile and have backed up a little bit in 2023. Obviously, the equity markets are volatile as well. So we think keeping the NCIB in place and intending to renew it for another year just gives us all the optionality in the world to be able to react to markets and allocate our capital optimally. But I would say as we think about it today, base case is continuing to allocate free cash flow towards debt repayment in the immediate term.

Okay. Great. Thanks, everybody.

Your next question comes from Robert Catellier of CIBC Capital Markets. Please go ahead.

Hey, good morning. You've answered most of my questions, but maybe just a couple of follow-ups here. How are you managing the construction cost risk on the fractionator? Specifically, do you have a lump sum EPC contract there, or is there some form of risk sharing with the customers?

Currently, we are evaluating the possibility of a lump sum for the project, which amounts to $460 million. We believe there are opportunities in the market that can help mitigate risks associated with this project. This assessment is ongoing. As I mentioned earlier, we want to engage with vendors to secure the labor needed, providing them with the certainty required to make commitments to Pembina and proceed in a positive direction.

And so no risk sharing with the customers on

Well, I don't think we're going to talk about our commercial contracts right now, Robert. That's sensitive.

Okay. Just on the strategy here. Would you say there's likely to be any change in your appetite for taking on commodity price risk as you look to transform products into exporting?

I believe we have always benefited from some level of commodity exposure. Given the stability in the underlying contractual profile of our core business, it is really the commodity aspect that contributes to our growth in favorable years.

Yes. Understood. And then when you look at driving resilience and trying to preserve value in the existing business, what's the biggest risk factor you see there?

I think it's a good question. Overall, we see more opportunities than challenges, to be honest. With the volume growth we've discussed, including TMX coming online, LNG 1 and 2, and our Cedar project, there is also talk of a new ethane cracker being built in Alberta. There is substantial demand for the products we transport. So, I would say we're quite optimistic about the core business.

Okay. Thanks for all that.

Your next question will come from Ben Pham at BMO. Please go ahead.

Hi, thanks. Good morning. A couple of questions. On the RFS IV, what type of returns on capital do you expect on a project when you have that land in place? And then you also mentioned debottleneck opportunities. How did the returns on capital compare on that as well?

We are currently navigating a commercially-sensitive period. I would mention that RFS IV aligns with our previous Pembina projects. We have some land secured and existing infrastructure that work in our favor. However, we also face the impact of inflation we've experienced over the last few years. Overall, I would say that RFS IV is competitive with past sanctioned Pembina projects. Regarding our smaller debottleneck initiatives, we generally consider these to yield returns in the range of four to six times EBITDA. This multiple tends to increase with greenfield projects and rises even further for mergers and acquisitions. As such, brownfield projects and debottlenecking usually demonstrate attractive overall returns.

Okay. And maybe the – maybe a clarification on the Nipisi restart. Do you need more contracts or not to push forward with that? And maybe you can expand on how things look and the evolution of that play. Is there a restart and then maybe a potential expansion at some point?

Good morning. We don't require additional contracts at this moment to proceed with the restart, which is on track and expected to be in service later this year. Our customers are showing extremely high demand. However, the expansion opportunities related to that pipeline are somewhat limited, but we do anticipate that the volumes will return to their maximum capacity.

Okay. And then maybe one last clean-up. Aux Sable, the loss in the quarter, is that more of that year-end share that you have with that agreement?

I think there were a few different factors at play. One was the significant decline in the AECO-Chicago price. Additionally, we faced some hedging losses related to previous rich gas premium deals that are no longer in place. These were one-time issues that affected the quarter, and we do not expect to see them in the future since we no longer have hedges in place at Aux Sable.

Okay, got it. Thank you.

Your next question comes from Robert Kwan at RBC Capital Markets. Please go ahead.

Good morning. I know you prefer not to discuss the RFS IV contract in detail, but could you share your thoughts on what the pro forma percentage would be under take-or-pay and the average duration across all of Redwater fractionators once RFS IV is in service?

No. So, I think as we've talked about, our base business is highly contracted under and continue to be recontracted for the long-term. We have significant contracts underpinning Redwater, and we have pretty significant commercial momentum. So given this is in service 2.5 years out, I would expect with the pace of conversations that we would be very highly contracted by the time that this comes into service.

Okay. Is it fair to say that Redwater in its entirety would be consistent with the guardrails?

Yes.

Okay. If I can turn to the strategy and particularly the decarbonization side of things, just given what we're seeing in some of those initiatives, either they may involve a new commercial framework or one that just doesn't exist in the market, some technology risk or for established things like renewables, much weaker returns than you are used to. So do you look to change your return expectations to mark-to-market realities, if it's conventional renewables, or do you shift your thinking to accept lower upfront returns or taking different risks, thinking you'll get something on the residual or back-end?

First, I want to address what Pat asked earlier regarding what we are not pursuing. When we discuss decarbonization, we are really referring to carbon capture, utilization, and storage (CCUS), and I'll let Stu elaborate on ACG and our initiatives to decarbonize our assets. However, I want to clarify that we are not entering the renewable power sector. We believe we can achieve the benefits we seek through long-term agreements. Over the past year, we have entered into two significant 200-megawatt power purchase agreements and are concentrating on our cogeneration facilities, which are currently providing strong returns. We are also exploring a few small behind-the-fence solar projects for specific sites, but Pembina does not plan to venture into renewable power. Regarding concerns about lower returns associated with renewable energy, I don't need to address that because it's not part of our current strategy. Now, I'll hand it over to Stu to discuss CCUS in relation to decarbonization.

Yes, Robert, we are actively collaborating with our partner to advance the Alberta Carbon Grid. We have received approval from our partners to proceed with our appraisal program, which involves validating the sequestration capability of the lands we've been authorized to explore. We will conduct evaluations, possibly perform additional seismic assessments, and ultimately drill a well to confirm sequestration capability. Additionally, we plan to start securing our pipeline right-of-way. This project is making progress. We have also begun working with Jared and his team to assess our assets in relation to decarbonization and what it will take to capture our emissions. Pembina is committed to moving forward with these initiatives. We have a solid model for identifying the sources of emissions within our assets, and we will develop plans for addressing them. When discussing energy transition projects, we are not anticipating lower return expectations. Our focus is on continuing our growth. As noted, we may consider taking equity stakes in some new energy transition opportunities, alongside providing services we've historically offered, while ensuring we do not accept lower returns than we have traditionally achieved.

Appreciate that, Stu, just on the return. And just I guess as you think about the risk or the contracted cash flows, like to the extent you could actually fit it in under the corporate-wide guardrails, would you be willing to take on quite a bit more risk, or should we think about these projects you've addressed returns? But from a contracted profile being plus or minus consistent with the guardrail?

I mean based on the portfolio of things we're looking at, nothing in there would have a significantly different risk profile than our existing base business.

Right. That's great. Thank you.

At this time, there are no further questions. So I would like to turn the conference back to Scott Burrows for any closing remarks.

I just wanted to say thank you. It was another great year. So thank you to all of you on the phone for your questions. Thanks to my team here in the room, and thanks to all the investors and our staff. We'll chat soon.

Ladies and gentlemen, this does conclude your conference call for this morning. We would like to thank you all for participating and ask you to please disconnect your lines.