Pembina Pipeline Corp Q3 FY2023 Earnings Call

Good morning, ladies and gentlemen, and welcome to the Pembina Pipeline Corporation Q3 2023 Results Conference Call. This call is being recorded on Friday, November 3, 2023. I would now like to turn the conference over to Cameron Goldade, Chief Financial Officer. Please go ahead.

Thank you, Julie, and good morning, everyone. Welcome to Pembina's conference call and webcast to review highlights from the third quarter of 2023. On the call with me today are Scott Burrows, President and Chief Executive Officer, along with other members of Pembina's senior leadership team including Jaret Sprott, Janet Loduca, Stuart Taylor, and Chris Scherman. 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 November 2, 2023, for the period ended September 30, 2023, as well as the press release Pembina issued yesterday, which are available online at pembina.com and on SEDAR and EDGAR. I'll now turn things over to Scott to make some opening remarks.

Thanks, Cam. We were pleased yesterday to report our third quarter results which included earnings of $346 million and record quarterly adjusted EBITDA of just over $1 billion. The record quarter reflects the strength of Pembina's business, including growing volumes and rising utilization across many systems, along with another strong contribution from Pembina's marketing business. Whereas first half results were impacted by wildfires and a Northern Pipeline outage, we believe the third quarter more accurately reflects the underlying positive momentum in the Western Canadian Sedimentary Basin. This is demonstrated most notably by the nearly 6% year-over-year increase in third quarter volumes in the conventional pipeline business. Given year-to-date results and our outlook for the fourth quarter, we've raised our 2023 adjusted EBITDA guidance range to $3.75 billion to $3.85 billion. And Cam will address that more fully in a moment. On the commercial front, we signed new long-term contracts for 25,000 barrels per day on the Peace Pipeline system. At our Redwater Complex, we extended an existing 25,000 barrel per day contract that was set to expire in 2027 and now runs through 2032. Further, we continue to advance discussions with customers related to the ongoing contracting of the recently announced RFS IV expansion. On October 3, 2023, we reactivated the approximately 100,000 barrel per day Nipisi Pipeline system to serve customers in a rapidly growing Clearwater oil play. The reactivation was supported by a significant long-term commitment with an anchor customer. Given the outlook for continued growth in the Clearwater, discussions continue with several producers in the area regarding potential additional long-term contractual commitments. On the major project front, we continue to progress our Phase VIII Peace Pipeline expansion and our RFS IV expansion at the Redwater Complex. Most notably, the Phase VIII project capital budget has been revised lower by $55 million to $475 million. The revised cost reflects highly effective project management and execution, favorable weather conditions, and productive contractor relationships. We will continue to bring new pump stations into service before year-end and expect the pipeline to be in service in the first half of 2024. Our experience with Phase VIII is another example of supporting Pembina's track record of strong project execution. We continue to progress our Cedar LNG project with our partner, the Haisla Nation. The remaining final investment decision deliverables continue to progress, including finalizing the lump-sum engineering, procurement, and construction contract, the definitive liquefaction tolling agreements, and the inter-project agreements with Coastal GasLink and LNG Canada, as well as project financing. Target FID continues to be by the end of 2023. However, given the need to align multiple work streams, FID may move into early 2024. Finally, given the volume of public and stakeholder interest in the TMX divestment process as it pertains to Pembina, I would like to clarify our perspective on this situation. In 2021, Pembina was honored to have been selected by the Western Indigenous Pipeline Group, or WIPG, as its industry partner to form Chinook Pathways, an Indigenous-led partnership in pursuit of ownership in the Trans Mountain Pipeline. The Federal government recently initiated the first phase of the Trans Mountain divestiture process to progress their commitment to meaningful Indigenous economic participation in the asset. There is no defined timeline for completion of this phase, and neither Chinook Pathways nor Pembina is eligible to participate in the first phase. A subsequent phase for the sale of the remaining equity interest is still undefined. Based on public information, the earliest that a divestment of the asset could likely occur is the end of 2024. There appear to be outstanding regulatory, construction, and tolling issues that pose further schedule, cost, and divestment timing uncertainty. Pembina, like any other prudent commercial purchaser, requires the many outstanding issues related to the project to crystallize in order to prudently and appropriately assess the opportunity and determine next steps. Further, as we evaluate any potential role in the TMX process, or just like any other organic or M&A opportunity, you can expect Pembina to maintain its financial discipline and commitment to the financial guardrails, including maintaining a strong balance sheet and strong BBB credit rating as we have in the past. Pembina continues to have a robust portfolio of in-strategy investment opportunities, and any opportunity, internal or external, will have to compete for capital against alternative uses. I will now turn things over to Cam to discuss in more detail the financial highlights for the third quarter of 2023.

Thank you, Scott. As Scott noted, Pembina reported third quarter adjusted EBITDA of $1.021 billion, which represents a $54 million or 6% increase over the same period in the prior year. In pipelines, factors impacting the quarter primarily included higher revenues due to higher volumes on certain assets and higher tolls due to inflation, primarily on the Cochin Pipeline and Peace Pipeline system. Those were partially offset by a lower contribution from Alliance, higher integrity spending, and higher repairs and maintenance costs. In facilities, factors impacting the quarter included the PGI transaction and strong performance from the former Energy Transfer Canada plants and the Dawson Assets, as well as a gain resulting from a contract renewal of an asset now recognized as a finance lease. In Marketing & New Ventures, third quarter results reflect the net impact of a lower contribution from Aux Sable as a result of lower NGL prices, lower natural gas and crude oil margins, lower realized losses on commodity-related derivatives, and higher margins on NGL sales. Finally, in the corporate segment, third quarter results reflect higher labor expenses, including higher incentives, higher information technology expenses, and partially offset by lower consulting and higher shared service revenue. Earnings in the third quarter were $346 million, representing a $1.483 billion or 81% decrease over the same period in the prior year. The decrease was primarily due to the $1.1 billion gain on the PGI transaction recognized in the third quarter of 2022. In addition to the factors impacting adjusted EBITDA, earnings were impacted by higher depreciation and unrealized loss on commodity-related derivatives compared to an unrealized gain in the third quarter of 2022, an increase in the provision at Aux Sable, and lower legal fees. Total volumes of 3.398 million barrels per day for the third quarter represent a decrease of approximately 1% over the same period in the prior year. Volume decreases were attributable to the Facilities Division, which were partially offset by increases in the Pipelines Division. The change includes the net impact of the disposition of the E1 and E6 assets at our Empress facility, higher volumes at the Peace, Northern, and Drayton Valley pipelines, lower volumes at the Redwater Complex and at Younger due to planned outages in the third quarter of 2023, and increased gas processing volumes primarily at the former ETC plants and the Dawson Assets. Adjusting for the impact of the E1 and E6 disposition, total volumes in the quarter would have grown by approximately 2% over the third quarter of 2022. Based on the results through the first 3 quarters and the outlook for the remainder of the year, Pembina has raised its 2023 adjusted EBITDA guidance range to $3.75 billion to $3.85 billion from a previous range of $3.55 billion to $3.75 billion. The revised range reflects the stronger-than-expected results in the third quarter across all divisions, as well as the current outlook for commodity prices and an expectation of continued volume growth in the fourth quarter. Based on our 2023 guidance, cash flow from operating activities is expected to exceed dividends and capital expenditures. Today, Pembina has repurchased $50 million of common shares and paid down proportionally consolidated debt by approximately $300 million using proceeds from the sale of PGI's interest in the KAPS Pipeline, as well as cash flow from operating activities. We will continue to evaluate the merits of debt repayment relative to additional share repurchases for the remainder of the year. At September 30, 2023, based on the trailing 12 months, the ratio of proportionally consolidated debt-to-adjusted EBITDA was 3.4x, reflective of our strong balance sheet and supporting a strong BBB credit rating. I'll now turn things back to Scott.

Thanks, Cam. In closing, we are enthusiastic about our business given the current momentum in the WCSB and expect continued volume growth through the end of 2023 and into 2024. Our broader outlook remains unchanged as we see the potential for significant growth driven by near-term catalysts, including new egress from the West Coast LNG projects and the Trans Mountain Pipeline expansion, as well as potential new developments in Alberta's petrochemical industry. Given the scope and reach of its assets and existing long-term commercial agreements, Pembina is uniquely positioned to capture new volumes and benefit from this growth. As we work to successfully close out 2023 and plan for 2024, we cannot be more excited for what's ahead for Pembina and its stakeholders. Thank you for joining us this morning. Operator, please go ahead and open up the line for questions.

Your first question comes from Jeremy Tonet from JPMorgan.

I just wanted to start off with the guidance raised, if I could. I just wanted to see if there was anything in the third quarter that was strong and non-repeating because if I look at what it implies for fourth quarter, it looks like 4Q is kind of flattish versus 3Q, yet I think you noted a number of tailwinds, and plus marketing is usually stronger in 4Q. So just trying to get a sense for how that all mixes together and how you think about, I guess, base business growth at this point. I think you talked about mid-single-digit EBITDA growth as something that was possible.

It's Cam here. I mean, obviously, the third quarter reflected a couple of different things that were particular to it. First of all, we did have a turnaround in a couple of our facilities. Typically, Q3 is an active turnaround season, but obviously, we did have a major turnaround at our RFS I facility during the quarter. That was one piece. The second piece would obviously be the gain that we recognized on the conversion of a contract to a finance lease at Vancouver Wharves upon renewal. That was sort of in the range of about $15 million, and so there's a couple of things there that sort of contribute to the 2 of those things together. I mean, I think we're probably down to splitting hairs a little bit after those 2 things. But I would say that we are seeing, as much as in some elements of the marketing business, we're approaching cautiously as we sort of look at propane inventories for the balance of the year. Obviously, the volatility in the crude complex and what we've seen there continues to show strong results month after month. We continue to see strong volumes and strong spreads in the transmission assets, particularly on the Cochin side. And obviously, in the gas and pipelines operations or the Conventional Pipelines operations, we continue to see our customers coming strongly out of sort of the headwinds of 2023, namely some operational upsets and the wildfires. And frankly, it's been an opportunity for some of our customers. For example, our customers in Northeast BC, some have been able to optimize their assets and secure interruptible gas takeaway, which otherwise wouldn't have been available and allowed them to produce more than they otherwise would have. So a few different things there have contributed to it. And then obviously, a couple of things in Q3 that were non-recurring.

The only other thing I'd add there is we typically have a higher integrity spend in Q4 just due to areas of the basin that need frozen ground to access so that we tend to typically have a slightly higher OpEx spend in Q4.

And just want to pivot here towards capital allocation and wanted to get latest thoughts from you guys on that. We're in a bit of a higher interest rate environment now than we were last time when we talked. I'm just wondering how that influences, I guess, your thought process. At the same time, Pembina's leverage seems to be really tracking quite nicely lower here. So just wondering how this all kind of mixes together in your mind at this point.

Yes, I believe we have anticipated this situation for some time and have been preparing accordingly. Our strategy involves careful management of our balance sheet, focusing not only on leverage but also on the timing of our debt maturities. We have aimed to structure our debt in a way that limits our annual maturities to around $500 million or $600 million, which represents approximately 6% to 7% of our total. We have consistently sought to extend our maturities for as long as possible. Currently, we have $600 million to $650 million due in January 2024. As you might have noticed, we’ve utilized a significant portion of our free cash flow to reduce our debt, which has been our consistent approach. In high-interest environments like this, maintaining a strong balance sheet and effectively using our cash flow has provided us with clear advantages given the current costs of debt. We have also been deliberate in balancing this with our capital investments, engaging in low-risk projects with attractive returns. Additionally, we have taken advantage of market opportunities to repurchase shares, both last year and this year, and we continue to assess this. For now, our primary strategy remains focused on using our cash flow to further reduce debt, as we believe it is beneficial. We have observed a downward trend in balance sheets and leverage ratios within our sector, driven by investor demand, and we plan to continue responding to this feedback while making sound risk-balanced decisions.

One last one, if I could. Should we be expecting, I guess, a '24 look in December or might that wait for a kind of Cedar at this point? And what are the final, I guess, gating items to Cedar and FID at this point? If you could just expand a bit more on that.

Why don't we start with Stu answering the second question, and then we'll circle back to your first one?

Yes. I mean, I think as Scott stated, we're continuing to push to complete all of the FID deliverables for the Cedar project in 2023. I can assure you that we're putting our backs into that process. But good responses with the counterparts to complete all of that work. It's a large project, complex agreements that we're taking our time and working our way through. Again, we expect it to be completed in 2023. We have to complete all that work prior to kicking them off and going for our project finance. Unfortunately, we're coming up on year-end at the same time in vacation. So we remain optimistic to complete the FID deliverables for Cedar. And then just it'll be timing for our project finance process, which may move us into '24.

Yes, Jeremy, regarding your initial question, we currently have no reasons to adjust our usual timeline for the outlook of 2024. You can expect an update likely in December.

Your next question comes from Robert Catellier from CIBC.

Just a clarification on Cedar LNG. It sounds to me that any time pressure you're facing is related really just to the complexity of the various work streams rather than something in the macro environment like low pricing or anything else or financing availability causing the time pressure. Is that correct?

Yes, that's our view, Rob. Again, we continue to make great progress and work through the agreements. There's multiple work streams and they must all line up simultaneously. So it's the process and we remain confident in the support of the project.

We saw the contract addition on Peace, but what does the risk in producer development activity in Northeast BC mean for your Montney growth and demand for Pembina's infrastructure? If you have those important agreements with key producers, when do you expect those will start to contribute to further demands on your infrastructure?

So I'd say from Pembina's perspective, we continue to be extremely optimistic about Northeast BC, especially as we're starting to see positive signs towards LNG Phase I completion and obviously, our confidence around Cedar LNG. So we've started to look at the system. As we disclosed last quarter and into this quarter, we continue some Northeast BC developments, including expansion of our Northeast BC pipeline, including a new pump station. When we look at the agreements we have with the various producers, most of that volume tends to show up in '25 and '26 and then through the rest of the decade. But as we move through the end of this year and into '24, we are starting to see signs of people preparing for LNG Canada. So we remain optimistic for volume growth in 2024. But a lot of the kind of larger-scale agreements we've signed really go into effect in '25 and '26.

Just to add to that, Rob, that pump station and the terminal work that Scott was mentioning in Northeast BC, I think that that comes on in the latter half of '24. That's coming out at roughly 40,000 barrels of capacity to our system. And then once Phase VIII is up and running, which will be roughly Q2 of '24, we're expecting that 40,000 barrels of incremental capacity to be able to flow all the way into the Edmonton-Fort Saskatchewan market.

And then just as you look to advance RFS IV, you have one extension of a contract at Redwater, but what in general do you think is possible in terms of what kind of term you can achieve in your contract?

First, maybe I'll just talk a little bit about the execution of RFS IV. So it's going extremely well. We still plan on having that on in the first half of 2026. Capital is still trending in the right direction. It's obviously a little bit different than building a pipeline. It's different equipment, different vendors. You're building in a different location. So we're expecting that to still trend on budget. We've done all the earthworks to date. When we had our RFS IV shutdown that Cam mentioned earlier, we got 15 tie-ins executed during that shutdown, which is great work by the team. On the contracting front, we look at this as an entire complex. We don't really look at each individual frac anymore, but it's highly contracted. People want tenure, right? People need to get their barrels fracked because if you can't frack your barrel, you can't produce your gas and/or your condensate and oil. So it's pretty critical to our customers that they have that certainty to be able to break that NGL mix apart and put it into a saleable product. So with that said, there's high demand. I'm not worried about the asset being full. I'm really focused on making sure that RFS IV in the team, it's on when we need it for our customers' demand. And then the commercial teams are worrying about the next expansion.

Your next question comes from Robert Kwan from RBC Capital Markets.

If I can just talk or ask about how you're thinking about your cash flow generation, specifically, you pointed out, you're free cash flow positive. As you go forward and just some of the larger projects like Cedar, do you see being free cash flow positive or at least neutral as a strategy or is this more of just a byproduct of a bit of a lull in the CapEx opportunities?

Well, Rob, as you know, last year and this year, we were both free cash flow positive. Part of the strategy, as Cam outlined around capital allocation, was always preparing the balance sheet for what could be a slightly heavier capital spend. We've consciously done that over the last 2 years. I think it spoke to our confidence around the visibility we had to future growth. As we sit here today, we still expect to be free cash flow positive or neutral going into 2024. Now, should we sanction a few more projects, that may push us slightly, and when I say slightly, I mean slightly into free cash flow negative. But I think what's important is to look at that over a couple of year periods versus any 1 given year because we have been free cash flow positive for 2 years, preparing ourselves for potentially a heavier capital spend. Now for that to happen, we obviously have to sanction a few more projects. So we're not in that position today. We're still looking to be free cash flow positive or neutral next year, but it could tip slightly if we sanction a few projects.

And then I know you're going to give your 2024 outlook at the end of the year. But just as we think about the guidance that you set for this year; you've talked about optimism for volume growth into next year. Let's hope we don't have the wildfires or the Northern outage that impacted this year. So that's all arguing for upward pressure. But as you pointed out, you've got the wildcard on the marketing side. Is there anything else we need to be thinking about? And just, I guess, as it relates to marketing, can you just talk about where the current environment sits today versus, say, where we were sitting a year ago and as you were thinking about what 2023 might have looked like?

Sure. It's Chris Scherman. I'll take that on. I think as we sit here today and like you were sort of framing it, trying to look at '24 compared to what we might have been looking at a year ago, I think it's a real mixed bag. I think we're fairly optimistic on most of the crude markets. We don't think the back radiation will hold in, but there are some potential headwinds, in particular, on propane. Propane inventories are much higher looking into '24 than they were looking into '23. And I think that's something that's definitely on our radar. But other than that, I would say it's relatively similar to a year ago.

And maybe I'll just add to that. I think historically, we've talked about marketing business as a range of $200 million to $400 million, and that was really sort of informed post-resegmentation and also looking back. And I think, obviously, what we've observed, and we're all sort of dealing with the new realities of sort of post-COVID and how energy is changing and so forth. If you look back historically at what that business has been, say, over the last 5 years, ignoring this year because we're only partially through, you obviously had 3 years where that business has kind of generated right around $400 million of EBITDA. Then you've got 1 year of COVID, where it sort of hit the bottom of that range, and then 1 year in 2022 for a bunch of different reasons where obviously it went well through that and generated in excess of $700 million of EBITDA. So I think as we sit there and think about the long-term range for this business in the new realities, I think we probably need a few more data points. But certainly, it feels like relative to that historical range, things have been reset a little bit, and it's probably moved upward instead of staying constant with that range.

If I can just finish with one on what you're seeing around just the nature of the discussions you're having with the customers contracting trends. You had a couple of contract announcements now. I think you alluded to additional negotiations and things are just getting tight. Do you think we're starting to get into a bit more of a cycle here where we can see additional announcements around contracting new capacity, extending term for anything that's coming up soon, and then additional contracts just to underpin various expansions in the system?

Yes, the demand we’ve discussed is extremely high. Revenue volumes for the conventional system increased by 6% from the second half of 2023 compared to 2022. We are seeing customers responding positively to our service offerings, which include extended reach, low operating costs, high reliability, and access to multiple CRW and CDH, as well as all the fracs in Fort Saskatchewan. It presents a very attractive offer. The demand for PGI assets is also very high, and we have opportunities to expand and increase utilization there. Gas egress is currently very important, making that asset highly sought after. Cam highlighted that demand for Cochin is strong at the moment, so we are experiencing several positive trends. With these trends comes increased customer confidence, leading to many ongoing discussions.

Your next question comes from Rob Hope from Scotiabank.

In the release and actually through the call, volumes upwards has been highlighted as kind of a driver of the outperformance this year and into next year. In the MD&A, tolls were also highlighted as moving up. So can you maybe talk about your ability to move up tolls, whether it's to capture higher costs or increase margins?

Rob, I'll start with that and maybe ask Jaret to add some thoughts. We have a strong foundation in our business, which is primarily characterized by long-term contracted tolls, many of which include built-in inflation adjustments related to CPI or other inflation metrics. This is evident in our conventional business, our transmission business, and parts of our natural gas liquids sector. We also have some shorter-term contracts that are more flexible and market-oriented. We are actively engaging with customers to address their needs and to align the pricing of our services with the value we provide. The recent increases that contributed to the Q3 2023 variance are mainly due to those pre-set inflation mechanisms, which account for the majority of the changes.

And just to add to that, Rob, would be obviously on the unregulated assets, the IT toll, we obviously have some torque there. But our goal is really to work with our customers, and we prefer to convert that into a longer-term contract commitment with our customers versus higher IT tolls, to be honest.

And then just regarding the comments that 2024 could be a heavier capital year if some projects come to fruition. When you take a look at the development backlog, how do you look at pacing other smaller organic projects or midsized projects in the context of Cedar or potentially Trans Mountain? Just want to get a better sense of how you're thinking about pacing capital with some larger unknowable variables out there.

Our capital program primarily responds to customer needs. As a service provider, we aim to align our capital expansions with what our producers require. There's not much pacing in the conventional part of the business; we are focusing on preparing for the volume growth we anticipate. This spending tends to follow a natural rhythm driven by customer demand. For 2024, it will be significant for RFS IV regarding capital spending, as we wrap up Phase VIII. When we look at our backlog, it's clear that as we approve new projects in the last two months of this year or into 2024, most of them will not incur heavy capital expenses in 2024. The majority of that spending will be deferred to '25 and '26. I want to emphasize not to overly focus on 2024. Based on current insights, we expect to be either free cash flow positive or neutral in 2024. Most expenses will take place in '25 and beyond, except possibly for the Cedar project. If Cedar is approved, there will be some equity contributions into the joint venture in 2024, which might make 2024 slightly negative in free cash flow terms, but only by about $100 million, not $600 million. This is a very modest situation. Historically, it could turn back positive based on spending timing. For 2025 and beyond, if we finalize decisions on Cedar, we’ll have better clarity on future capital expenditures, which we will supplement with organic capital. I want to emphasize that achieving free cash flow positivity or neutrality is a long-term goal, while also ensuring we invest in solid organic projects in our core business.

Your next question comes from Ben Pham from BMO.

Can you clarify your definition of self-funding that you've mentioned today? In the past, it was highlighted as being between $1 billion and $2 billion. Does your current definition exclude the debt that can be added to new projects?

Yes, Ben, that's right. When we're talking free cash flow positive or free cash flow neutral, we're talking about that strictly as cash flow from operating activities, less dividends, less capital. Not talking about the additional investment capacity that would come from incremental leverage on top of it. It's a challenging question to address, Ben, because we have a varied portfolio of assets, and the amount of potential growth differs in each case. Our Alliance and Cochin assets are currently operating close to their capacity, and we have been working with customers to optimize capacity there. As we've previously mentioned, the frac business, which has driven RFS IV, is becoming tighter across the board, and our assets are no exception. When we focus specifically on the conventional business, capacity is a general term, but it really depends on the segment, the sources of volumes entering the pipeline, and which volumes are being handled. One of the advantages of our system is that we transport all types of products, including ethane, propane, condensate, and crude, and we can provide service from Northeast BC to Edmonton. As the system develops over time, it is tailored to meet customer needs. There are different capacities, pipe sizes, and pumping configurations to consider. The answer isn't straightforward. You can refer to the capacity figures we have publicly shared for the conventional business; we have been transparent about those. The Duvernay is often referred to as the bottom of the funnel and serves as the main constraint, but there are variations upstream in the different stages of the system.

And maybe to close off, some comments you had on TMX and timing of divestments. You're indicating late '24. Is that a reference to transaction announcement versus close? And do you also get a sense that the government needs clarity on the first phase before moving over to the second phase?

Yes. I would say that those comments are based on what we've seen publicly coming out of Trans Mountain. So it's not necessarily our specific view; it's what we've seen publicly from Trans Mountain. In terms of your second question, I think that's a question for the government. We have no special insight.

I would just say, Ben, I mean, to your point and to our message, that is one of the many uncertainties that underlie this asset and this situation, and so you can just throw that in with the mix.

Yes. I'd say, Ben, as this has transpired, the more time has gone on, the more the market seems to want some sort of certainty. But at the same time, on the actual asset level, there seems to be more uncertainty. I think that was the point of the message; I understand people want more certainty. But the fact of the matter is, as time has gone on, there's just that much more uncertainty around this file.

Your next question comes from Patrick Kenny from National Bank Financial.

Just on the Dow Chemical opportunity with their FID potentially around the corner, could you just update us on what the potential scope of investment could look like in and around your Fort Saskatchewan footprint or surrounding AEGS and Vantage? And just how we can think about the timing of capital spend as well as potential in-service dates?

Jaret here. While I won't specify a dollar amount, I can discuss the opportunities we see. We are a major transporter of ethane, specifically the C2+ that moves into Fort Saskatchewan, which is processed at various facilities, including RFS and Vantage, supporting the petrochemical sector in Alberta. There's an expected demand surge of 100,000 to 120,000 barrels of ethane, prompting us to consider potential expansion of AEGS for Pembina. We designed RFS III to accommodate a DIF Tower, allowing us to replicate the capabilities of RFS I and RFS II, with opportunities in Empress and along straddles. Pembina possesses significant expertise in deep cuts, particularly in residue gas extraction in Western Canada. This is integral to our operations, and we have the right partnerships in place. Pipeline expansions align well with our expertise, indicating substantial opportunities for Pembina. We anticipate a favorable final investment decision not only for us but for others in the industry and province, which would be very beneficial. Additionally, we may need to start investing capital around 2026 to prepare for a deep cut gas plant, considering an 18-month build time. Currently, a major factor is the high demand for electrical equipment transformers in data centers, which has extended lead times, but we remain within the timeframe necessary to construct a large-scale, net-zero cracker.

And then maybe just sticking with the petchem theme here, so just with Heartland now up and running, I know there's a lot of moving parts, and you touched on the propane inventory picture into next year. But any change to your marketing strategy going forward into next year around propane? And then maybe just playing the hypothetical here, but if an opportunity does come up to own a portion or all of the facility, how might this stack up as a strategic fit versus, say, the TMX opportunity or other egress type assets that might shake loose from your larger pipeline peers?

It's Chris. I can talk about the propane strategy. With Heartland up and running, there's no real change to our strategy. We continue to be big fans of Access and the West Coast and the global markets as well. We think Heartland helps the market generally as well. So no changes for us now that it's up and running. As far as the marketing plan, who's taking the question on?

Yes, Pat. I'll take the second one. I mean, I think, to be honest, we're happy to see, as Chris said, that asset up and running and contributing to incremental propane demand for the province. Quite frankly, we haven't spent a lot of time on thinking about that lately because we've been waiting for it to get up and running. And I don't mean that in a negative way. I just mean that these projects are complex and they take a while to get up and running. In terms of where it stacks strategically, we get asked about M&A all the time. We continue to say that we're in reactive mode, not proactive mode right now. We are very happy with our organic backlog and are focused on executing that, hopefully getting Cedar across the line and executing. We will react if something comes to the market and evaluate it just like we would any other opportunity, but we are not proactively out trying to shake the trees right now.

And your next question comes from Linda Ezergailis from TD Cowen.

Maybe we can just expand on kind of the decision set in terms of optimizing your capital allocation between longer lead time and strategic build-out that might be lower multiple, but that kind of delayed contributions versus maybe reacting to opportunistic M&A that falls in your lap. Do you expect to see more opportunities given what's going on in the broader markets with your peers? And can you also help us understand kind of how you might be not constrained by access to capital, but what your capacity might be for tuck-in acquisitions, including whether you potentially leverage any sort of relationships you have with indigenous groups and other partners to buy certain businesses or packages through consortiums?

This is Cam. One of the advantages we gained from our work last year, which led to a reassessment of our strategy, is a clearly defined set of criteria for evaluating investments and determining where to allocate our time and resources. As a team, we now have a much clearer understanding of where we want to focus our efforts and what ranks highest on our list for capital allocation. This focus is based on the four pillars we have publicly discussed. While we pursue these priorities, we also aim to develop a growing enterprise that can deliver dividend growth for our shareholders, opportunities for our employees, and value for our communities. To succeed, it is essential to maintain a balanced portfolio of opportunities that are significant over time and foster growth. This requires the ability to quickly recycle capital and cash to drive that growth. Looking ahead to the next two to three years, our portfolio reflects this, particularly with the strategic importance of Cedar. In the long term, we also have some promising early-stage opportunities within the New Ventures group, though they are still developing. Additionally, we are focused on traditional projects that we have undertaken for decades, such as pipe expansions, fracs, and debottlenecking existing assets, which tend to yield quicker returns. Acquisitions provide immediate cash flow, but they also require the organization to integrate these new assets, which must be balanced against internal opportunities and our overall focus. In the current environment, capital has become more expensive, and our return rates need to align accordingly to maintain positive economic value. We note that there has been consolidation among our customers and a relative decrease in activity on the infrastructure side, but how this evolves in the coming years is uncertain. We are confident in our position and pleased with our organic portfolio, as Scott mentioned. If there are opportunities that align with our strategic pillars or complement some of them, we will consider them. However, it is crucial that the returns justify any such moves in this environment, and we must ensure we can integrate these opportunities without overextending ourselves or losing focus on our core business.

And just as a follow-up, in the past, Pembina has mused about potentially entering a new geography at scale, recognizing that some basin diversification might have some strategic value, but balancing that with your incumbency in Western Canada, how do you think about the long-term possibility of that? And then in terms of a strategic imperative of pivoting to an energy transition, do you see the possibility to maybe leapfrog or accelerate that transition through a strategic acquisition that, of course, would fit your guardrails?

I'd say no to both of those. I think we updated our strategy last year. Through that, we continue to be here over the next little while last year, this year, and into next year, very focused on the WCSB. We continue to see volume growth. We are extremely optimistic on the Montney and what that means, especially as we start to see the basin get rid of some egress constraints through LNG Phase 1 and TMX and potentially the Dow Chemicals projects, so we are very focused on the WCSB right now. That's where we're spending our time and effort. As it relates to the energy transition, I think we've been pretty clear that we will look at projects that complement our existing asset base or help our customers decarbonize. We are not out looking at any sort of major acquisition. In fact, we're not looking at any acquisitions at all in the energy transition space. We like the couple of organic projects that we have, and we will continue to pursue those.

And there are no further questions at this time. I will turn the call back over to Scott Burrows, CEO, for closing remarks.

Thank you all for joining our call today. I want to express my gratitude to all our employees for their efforts during a fantastic quarter. One key takeaway is our business's resilience and the contributions from all divisions. We not only had a strong performance in marketing but also saw exceptional results in our Pipelines and Facilities division. This highlights the overall strength of our business. We are looking forward to what the rest of this year and 2024 will bring. Thank you.

So ladies and gentlemen, this concludes your conference call for today. We thank you for joining, and you may now disconnect your lines. Thank you.