Pembina Pipeline Corp

TSX:PPL

Earnings Call Analysis

Pembina Reports Strong Q3 with Growth Outlook

Pembina's Q3 results showcased earnings of $346 million with a notable adjusted EBITDA of just over $1 billion—a reflection of growing operations, including a nearly 6% year-over-year increase in pipeline volumes. Consequently, Pembina's 2023 adjusted EBITDA guidance has been raised to $3.75-3.85 billion. Project budgets have notably been reduced, with Phase VIII capital revised down by $55 million to $475 million. The company maintains strong financial discipline with a debt-to-EBITDA ratio of 3.4x, cash flow expected to exceed dividends and capital expenses, and a continuous approach to evaluating debt repayment versus share repurchases. Despite the Trans Mountain divestiture process advancing, Pembina remains cautious, upholding its strong BBB credit rating and balance sheet. The outlook is bright, with expectations for continued volume growth into 2024, potential from LNG projects, and the Trans Mountain Pipeline expansion.

Steady Growth and Strong Fundamentals

In the third quarter, Pembina Pipeline Corporation showcased a strong performance with record quarterly adjusted EBITDA of just over $1 billion, highlighting the company's robustness. The company reported a nearly 6% year-over-year increase in third quarter volumes in the conventional pipeline business, illustrating growing operational momentum.

Raising the Bar: Revised 2023 EBITDA Guidance

A testament to Pembina's strong year-to-date performance and positive fourth quarter outlook, the company has uplifted its 2023 adjusted EBITDA guidance range from $3.55 billion to $3.75 billion to a higher range of $3.75 billion to $3.85 billion. This adjustment reflects not just past performance but also expectations of future growth and favorable commodity price outlooks.

Strategic Commercial Moves

Pembina inked new long-term contracts for pipeline services and continued discussions for further long-term commitments, setting the stage for sustained revenue streams. The company also tactically reactivated pipeline systems to cater to growing oil plays, underscoring its responsive commercial approach.

Capital Efficiency and Cost Optimization

Striking a note of cost-consciousness, Pembina proactively revised its Phase VIII project budget down by $55 million to $475 million, thanks to effective project management, favorable weather, and productive contractor relationships.

Navigating the Earnings Landscape

Earnings reported for the third quarter stood at $346 million, an 81% decrease compared to the prior year's quarter, primarily attributed to a one-time gain in the previous year. Despite a minor decrease in total volumes of approximately 1%, when accounting for dispositions, there was actually an underlying volume growth of about 2%.

Robust Financial Maneuvers

Pembina demonstrated financial prudence by repurchasing $50 million worth of common shares and reducing its consolidated debt by approximately $300 million. Operational cash flows are slated to outpace both dividends and capital expenditures, reinforcing the company's strong financial foundation.

Leverage and Liquidity: A Disciplined Approach

The company's rigorous financial strategy is illustrated by a healthy debt-to-EBITDA ratio of 3.4x. This disciplined approach is indicative of Pembina's focus on maintaining a robust balance sheet and a strong BBB credit rating, key indicators of financial health and resiliency.

Looking Ahead: The Fourth Quarter and Beyond

Expected higher operational expenditures in the fourth quarter due to seasonal factors like integrity spending are part of Pembina's forward-looking statements. However, they remain committed to using cash flow for reducing debt, leveraging the advantage of a strong balance sheet for strategic benefits.

Earnings Call Transcript 2023-Q3

[Operator]

Good morning, ladies and gentlemen, and welcome to the Pembina Pipeline Corporation Q3 2023 Results Conference Call. [Operator Instructions] Following the presentation, we'll conduct a question-and-answer session. [Operator Instructions]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.

[Cameron Goldade, executive]

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 both, SEDAR and EDGAR.I'll now turn things over to Scott to make some opening remarks.

[J. Burrows, executive]

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 in 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. And at our Redwater Complex, we extended an existing 25,000 barrel per day contract that was set to expire in 2027 and now runs through 2032. Further, we continue to advance discussions with customers related to the ongoing contracting of the recently announced RFS IV expansion. And 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. And given the outlook for continued growth in the Clearwater, discussions continue with several producers in the area regarding potential additional long-term contractual commitments.On the major project front, we continue to progress our Phase 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. And we continue to progress our Cedar LNG project with our partner, the Haisla Nation.The remaining final investment decision deliverables continue to progress, including finalizing the lump-sum engineering, procurement, and construction contract, the definitive liquefaction tolling agreements, 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. And 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 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 Pathwaysnor 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, and there appears 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.

[Cameron Goldade, executive]

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.

[J. Burrows, executive]

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.

[Operator]

[Operator Instructions] Your first question comes from Jeremy Tonet from JPMorgan.

[Jeremy Tonet, analyst]

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.

[Cameron Goldade, executive]

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 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 I guess the headwinds of 2023, namely some operational upsets and the wildfires. And frankly, it's been an opportunity for some of our customers. 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.

[J. Burrows, executive]

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.

[Jeremy Tonet, analyst]

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.

[Cameron Goldade, executive]

Yes. I mean, I think us, Jeremy, like many have sort of seen this coming for a while and we've been preparing for it. So and it goes all the way back to our strategy around managing the balance sheet, not only the leverage, but how we ladder our debt maturities. We were very focused for a very long time on setting up our debt tower in a very rateable fashion. So we don't have more than generally $500 million or $600 million which is sort of 6%, 7% of our maturities coming due every year. We've always termed out our maturities generally as long as possible. And so when you look at our maturities in this environment, we've got $600 million -- $650 million coming due in January of 2024. As you've seen us use the lion's share of free cash flow to reduce debt, it's consistently been the same message from our perspective where in these high-rate environments that we've got free cash flow, there is a benefit, firstly, to having a very strong balance sheet and also an economic advantage of using that cash flow, especially with interest rates and cost of debt the way they are.That said, we have consistently tested that against, obviously, the capital investments that we've been making. And we've got some very attractive returning and very low-risk projects that we've been investing in. But we've also been opportunistic and stepped into the market and acquired shares from time to time. We obviously did so last year. We did so this year at varying points and we continue to monitor that. I would say that at the moment, our sort of base case is still to continue to use that cash flow towards reducing debt because we think it continues to be an advantage. Obviously, we've seen balance sheets and leverage ratios and the demand from investors for that trend down in our sector over time. And so we want to continue to heed that piece from our investors and make sort of strong risk balance decisions on an ongoing basis.

[Jeremy Tonet, analyst]

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.

[J. Burrows, executive]

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

[Stuart Taylor, executive]

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. We are -- 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. And 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.

[Cameron Goldade, executive]

Yes. And Jeremy, just turning to your original question, I mean, I think at this stage, we see no reason to sort of move off our typical timeline for sort of the outlook for 2024. So I think you can expect something in -- likely in the December timeframe.

[Operator]

Your next question comes from Robert Catellier from CIBC.

[Robert Catellier, analyst]

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?

[Cameron Goldade, executive]

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 simultaneous. So it's the process and we remain confident as -- in the support of the project.

[Robert Catellier, analyst]

We saw the contract addition on Peace but what does the risk 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?

[J. Burrows, executive]

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.

[Cameron Goldade, executive]

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.

[Robert Catellier, analyst]

And then just as you look for 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?

[J. Burrows, executive]

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 executedduring 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. And people want tenure, right? People are -- people need to get their barrels fracked because if you can't frack your barrel, you can't produce your gas and/or your condensate and oil. 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 whenwe need it for our customers' demand. And then the commercial teams are worrying about the next expansion.

[Operator]

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

[Robert Kwan, analyst]

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?

[J. Burrows, executive]

Well, Rob, as you know, last year and this year, we were both free cash flow positive. And so 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. And so 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 kind of 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 period 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.

[Robert Kwan, analyst]

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?

[Chris Scherman, executive]

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's some potential headwinds, in particular, on propane. Propane inventories are much higher looking into '24 than they were looking into '23. And I think that's something that's definitely on our radar. But other than that, I would say, it's relatively similar to a year ago.

[Cameron Goldade, executive]

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 obviously energy is changing and so forth. And so if you sort of look back historically at what that business has been, say, over the last 5 years, ignoring this year because we're only partially the way through, you obviously had 3 years where that business has kind of generated right around $400 million of EBITDA. And 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 as opposed to kind of staying constant with that range.

[Robert Kwan, analyst]

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?

[Jaret Sprott, executive]

Jaret here. Short answer is yes. The demand, I think, that we've talked about is -- it's extremely high. Revenue volumes, for example, on the conventional system back half to back half, '23 to '22 is up 6%. So we're continuing to see that. So customers, they like our service offering, extended reach on the conventional system, for example, low operating cost, high reliability, access to multiple CRW, CDH, all the fracs in Fort Saskatchewan. It's a very compelling offer.And I've mentioned previously, the demand for the PGI assets is extremely high. We have opportunities to continue to expand there and increase utilization. Alliance, egress is obviously -- gas egress is obviously king right now. So that asset is in high demand. Cam mentioned Cochin's demand with respect to spreads are fairly strong right now. So a lot of tailwinds. So with the tailwinds, obviously, brings customer security. So lots of conversations ongoing.

[Operator]

Your next question comes from Rob Hope from Scotiabank.

[Robert Hope, analyst]

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 kind of capture higher costs or increase margins?

[Cameron Goldade, executive]

Rob, I'll start with that and maybe ask Jaret to chime in. I think, obviously -- first of all, I'd say we have a very high complement of our business, which is sort of long-term contracted tolls, many of which have sort of inflator provisions built right into them. So they're a function of CPI or other inflation indexes. We see that in our conventional business. We see that in our transmission business, some of our natural gas liquids business as well. And then obviously, we've got some contracts where they're shorter and more evergreen and sort of more market facing. And so those are opportunities where we're obviously working with the customers on meeting their needs first and foremost and sizing the pricing of our offering relative to the value.And so we -- most of the increases that we've seen that you saw drove the Q3 2023 variance are a function of those locked in inflator mechanisms. That would be the lion's share of it.

[J. Burrows, executive]

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.

[Robert Hope, analyst]

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.

[J. Burrows, executive]

Yes. Well, for the most part, our capital program is driven by our customer needs. And as a service provider, we do our best to match the capital expansions to our producers' needs. So first and foremost, there's not really a lot of pacing in the conventional side of the business. I'd say we're just trying to get ahead of volume growth that we see. So that spend kind of happens on a natural cadence, I'd say, driven by customer demand. When it comes to 2024, obviously, it's a big year for RFS IV in terms of capital spend as well as finishing off of Phase VIII. As we talk about our backlog, you can imagine as we sanction incremental projects, either through the last 2 months of this year or into 2024, most of those projects that potentially could be sanctioned won't have a very heavy capital spend in 2024.Most of that capital will be into '25, '26 onwards. So I don't want people to over-index on 2024. I think the comment really was, I think, based on what we see today, we'll be, either be free cash flow positive or neutral in 2024 based on what we know today. As we sanction new projects, most of that spend will be in '25 onwards, other than potentially Cedar. Obviously, if we sanction Cedar, there will be some equity contributions into the joint venture in 2024. So it's really Cedar that might tip 2024 slightly into free cash flow slightly negative. When I say slightly negative, I'm talking $100 million. We're not talking $600 million. So just to be clear, it's -- we see that as extremely modest. And based on history, it could even go back to positive just based on the timing of spend.And so when we go out 2025 onwards, we'll -- if we have FID and Cedar, we'll have a lot more visibility into the future capital spend and then we'll backfill it with the organic capital. And I want to just go back to Robert Kwan. Free cash flow -- being free cash flow positive or neutral is certainly something that we strive to do over the long term, balancing that with what we see as really solid organic good returning projects in the base business.

[Operator]

Your next question comes from Ben Pham from BMO.

[Benjamin Pham, analyst]

Maybe just keep going on the free cash flow conversations, can you clarify -- I think in the past, you've highlighted self-funding as $1 billion or $2 billion. I think maybe that was the number previously. Is your definition you've communicated today that does not include the debt that you can add on to new projects?

[Cameron Goldade, executive]

Yes, Ben, that's right. I mean when we're talking free cash flow positive or free cash flow neutral, we're talking about that strictly as cash flow from operating activities, less dividends, less capital. Not talking about the additional investment capacity that would come from incremental leverage on top of it.

[Benjamin Pham, analyst]

And you also mentioned of going to the quarter specifically, the conventional volume is up 6%, record for the quarter. Can you talk about the volumes maybe from the perspective of utilization versus your capacity? And any sense or ability to maybe break out some of the deferred take or pay up uploaded into the quarter from the first half?

[Cameron Goldade, executive]

It's a tricky question to answer, Ben, because obviously, there's -- first of all, we've got a diverse portfolio of assets. And in some cases, there's more white space than others. Obviously, like our Alliance and our Cochin assets are flowing very close to capacity. And in fact, we've sort of worked with customers there to try and find as much capacity as possible. Obviously, the frac business, as we've talked about for quite a while and which drove RFS IV was getting tight across the board basin-wise and our assets were no different. And then when you zero in specifically on the conventional business, we talk about capacity in a generic form, but really, it sort of varies by segment and where the volumes come into the pipe and what volumes come in.I think one of the value or the benefits of our system and our offering is, obviously, we do transport all product types, meaning ethane plus propane plus condensate and crude, and we can provide service all the way from Northeast BC down into Edmonton. And obviously, as a system is built out over time, you size it appropriately to the customers' requirements. And so there's various capacities, various sizing of pipe, various pumping configurations across the board. It's not a simple answer. I think you can look at the capacity that we've disclosed publicly for the conventional business. We've been quite clear about that. That's really sort of the Duvernay ineffectively. That's -- we always talk about that as the bottom of the funnel, and that's the main governor.But obviously, upstream of that in the different straws, it does vary across the board.

[Benjamin Pham, analyst]

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?

[J. Burrows, executive]

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.

[Cameron Goldade, executive]

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

[J. Burrows, executive]

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

[Operator]

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

[Patrick Kenny, analyst]

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 Sprott, executive]

Jaret here. So I won't give a specific dollar amount, but I can talk about the opportunities. So obviously, we're a very large mover of the ethane molecule, either through the C2+ that goes into Fort Saskatchewan, it gets fracked at various fracs including RFS and then also Vantage and AEGS that supplies the petchem industry here in Alberta. So obviously, with an incremental, they're talking 100,000 to 120,000 barrels publicly of ethane demand. We will need to -- well, depending on where their demand is coming from, we will need to obviously evaluate AEGS expansion potentially for Pembina. RFS III, we built that with the ability to put a DIF Tower on the back end to basically make it look like RFS II and RFS I opportunities in Empress, on straddles, et cetera.So Pembina obviously has a lot of deep cuts. I think we probably have the majority of field-based deep cuts that are doing residue gas extraction kind of in Western Canada. So that's core to our business. We know how to do it. We have alignment with the right contractors to be able to do those things. Pipeline expansions are right in our wheelhouse. So with all that said, there is going to be a lot of opportunity for Pembina to participate. We hope that there is a positive FID, not only for Pembina, but the rest of our industry and our province, and our country, which -- it's going to be extremely positive. And then further to that, I think they're talking -- we'd probably have to start deploying capital in that '26 time frame to start getting ready for that, assuming like an 18-month build for a deep cut gas plant and stuff.I think the real wild card right now, Pat, is a lot of the equipment is -- we're seeing electrical equipment transformers that are being consumed in data centers and stuff like that. The long lead for these types of things are extremely long, but it's well within the time period to build a world-scale net zero cracker.

[Patrick Kenny, analyst]

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?

[Chris Scherman, executive]

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?

[J. Burrows, executive]

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 it's -- these projects are complex and they take a while to get up and running. In terms of where it stacks strategically, we get asked obviously about M&A all the time. And we continue to say that we're in reactive mode, not proactive mode right now.We are very happy with our organic backlog and are focused on executing that, hopefully getting Cedar across the line and executing. So we will react if something comes to the market and evaluate it just like we would any other opportunity, but we are not proactively out trying to shake the trees right now.

[Operator]

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

[Linda Ezergailis, analyst]

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?

[Cameron Goldade, executive]

This is Cam. I think one of the benefits of the work that we undertook last year, which culminated in, I guess, what you'd call sort of a restamp, a refresh, a revalidation of our strategy was a really defined set of parameters, both sort of qualitatively, but also internally, quantitatively to sort of judge investments, where we wanted to spend our time and capital. And so I would say that as a team, as an organization, we have a much clearer perspective today than we ever have on where we want to be spending time and what sort of gravitates to the top of the list in terms of where we put our capital. And those really are founded on those 4 pillars that we've spoken about publicly.And so when we look at those things, at the same time, we continue to want to build a growing enterprise to generate dividend growth for our shareholders and opportunities for our employees and value for our communities. And so to do that, obviously, you need a balance in a portfolio of opportunities, which are meaningful over time and generate growth. And obviously, you need to be able to sort of recycle capital and recycle cash quickly to be able to generate that growth. And I think that's a little bit of what you see in our portfolio as we look out for the next 2 to 3 years, which is, obviously, we've got something really, really important, really strategically important, really meaningful in Cedar as an opportunity. Longer term, we've got some other sort of early-stage opportunities in the New Ventures group, which could be really interesting but are sort of still at the earlier stages.And then you sort of got the type of projects that we've done for decades like pipe expansions, like fracs, like debottlenecks on those assets. And those are sort of the projects that turn capital more quickly. I mean I think that one of the benefits of M&A, obviously, is that you sort of acquire cash flow immediately. But at the same time, it does place a need on the organization to integrate -- it's a new item. And so you have to sort of weigh that against the opportunities that you have internally and the focus. And that's what we continue to do. So I think in this environment, obviously, capital has gotten more expensive. And I think rates of return have to follow that after move in concert to continue to generate positive economic value. And I think we see that.Obviously, there's been consolidation among our customers. I have seen less probably activity on a relative sense in the infrastructure side. How that shakes out over the next few years, I guess, remains to be seen. But we really like the way we're positioned. We really like our organic portfolio, as Scott mentioned. And if there's opportunities that we can add, which are additive to all those strategic pillars or complement a number of them, then obviously, we'll take a look at it. But I think, obviously, first and foremost, the returns have to be there to justify it in this type of environment. And you have to be able to sort of integrate and fold those in without putting additional strain and getting your eye off the core -- the ball of your core business.

[Linda Ezergailis, analyst]

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 like 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?

[J. Burrows, executive]

I'd say no to both of those. I think we updated our strategy last year. And 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. And 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. And that's where we're spending our time and effort.As it relates to energy transition, I think we've been pretty clear that we will look at projects that complement our existing asset base or help our customers decarbonize. So we are not out looking at any sort of major acquisition. In fact, we're not looking at any acquisitions at all in the energy transition space. We like the couple of organic projects that we have, and we are going to continue to pursue those.

[Operator]

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

[J. Burrows, executive]

Well, thanks, everyone. I appreciate you taking the time to listen to our call today. Thanks to all of our employees who contributed to a fantastic quarter. I'll just leave it with one note that we -- the one thing that we are really positive about the quarter is the resilience of the business and the contribution from all of our divisions. Not only did we have a strong marketing quarter, but we also had an extremely strong quarter in our Pipelines and our Facilities division. And I think it just speaks to the strength of our business overall. And so we're pretty excited for the remainder of this year and 2024. So thanks, everyone.

[Operator]

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.