Pembina Pipeline Corp

TSX:PPL

Earnings Call Transcript 2020-Q4

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the Pembina Pipeline Corporation 2020 Fourth Quarter Results Conference call. [Operator Instructions]I would now like to hand the conference over to your first speaker today, Mr. Cameron Goldade, Vice President, Capital Markets. Please go ahead, sir.

[Cameron Goldade, Vice President of Capital Markets]

Thank you, and good morning, everyone. Welcome to Pembina's conference call and webcast to review highlights from the fourth quarter and full year of 2020. On the call with me today are Mick Dilger, President and Chief Executive Officer; Scott Burrows, Senior Vice President and Chief Financial Officer; Jason Wiun, Senior Vice President and Chief Operating Officer, Pipelines; Jaret Sprott, Senior Vice President and Chief Operating Officer, Facilities; and Stu Taylor, Senior Vice President, Marketing & New Ventures and Corporate Development Officer. I'd like to remind you that some of the comments made today may be forward-looking in nature and are based on Pembina's current expectations, estimates, judgments and projections. Forward-looking statements we may express or imply today are subject to risks and uncertainties, which could cause actual results to differ materially from expectations. Further, some of the information provided refers to non-GAAP measures. To learn more about these forward-looking statements and non-GAAP measures, please see the company's management discussion and analysis dated February 25, 2021, for the period ended December 21, 2020, which is available online at pembina.com and on both SEDAR and EDGAR. Before we discuss fourth quarter and annual results, I'd like to first turn things over to Mick to make some opening remarks.

[Michael H. Dilger, President, CEO & Director]

Good morning, everyone. Thanks, Cam. With our fourth quarter release yesterday, we're happy to close the book on 2020 and looking forward to a better 2021. In a very challenging year, I'm proud of what we were able to deliver. From the beginning of COVID-19 pandemic, we were steadfast in our assertion that we remain within our pre-pandemic 2020 adjusted EBITDA guidance range. In the face of numerous pandemic-related challenges and lower commodity prices, we took the difficult but necessary steps to do just that. Thanks to a resilient business model that protected our top line revenue and a focused effort to reducing operating and administrative costs, we were able to deliver annual adjusted EBITDA of nearly $3.3 billion or 97% of the midpoint of our range. As always, Pembina takes great pride in consistently doing what it says it will do. If there's a silver lining to be found in 2020, it would be the clear validation of our long-term strategy, diversification efforts and steadfast commitment to the company's financial guardrails. The resilience, stability and predictability of Pembina's business were once again proven as they were during the 2009 financial crisis and 2015 commodity price downturn. I'm equally proud of what we achieved for our other stakeholder groups. The health of our employees and the communities has been top of mind throughout the pandemic. And I'm pleased to report that the company has not experienced any operational disruptions to its assets as a result of COVID-19, and despite all the new pandemic-related risks, Pembina had its best safety record ever in 2020. Further, we took all the necessary steps to limit the spread of COVID-19 within our communities while fulfilling our role as an essential service provider. At the outset of the pandemic, we quickly determined the essential staff and critical infrastructure required to provide uninterrupted service to our customers, processing and transporting all product tendered while supporting their precious cash flow. We worked with our customers to understand their short- and long-term infrastructure needs, and thanks to long-standing and close personal relationships, we struck many new bargains that were good for both our customers and for Pembina. Despite deferring some early-stage projects, we continued investing in projects that were well advanced or nearing completion, with approximately $1.3 billion of projects entering service in 2020 and early 2021. This provided our customers with important infrastructure and supported our 2021 financial results and strategic direction, thus setting the table for a better 2021. Finally, for our communities, we delivered on every single commitment made. We also matured our ESG reporting and strategies. Within an otherwise successful year, I feel we need to acknowledge the asset impairments we took this quarter. Due to COVID-19, alongside changing commodity price dynamics, combined with changing government priorities, Pembina needed to recognize an impairment in the value of certain assets, including our investment in Ruby Pipeline, Jordan Cove LNG and our CKPC petrochemical investment. We believe these opportunities remain in strategy make economic sense if derisked and are aligned with Pembina's ESG priorities. While we believe the time for these projects may come, since we can no longer predict with certainty when that time may be, we were compelled to reflect their impairments through a noncash charge. Despite the impairments, we remain committed to accessing global markets. The combination of Pembina's integrated value chain, the proximity of the West Coast to reach Asian markets means we are well positioned to deliver value to our customers, including end users and Pembina. Most notably, we are excited about the start-up of our propane export facility, the Prince Rupert Terminal, which will come into the service near the end of this quarter and provide access to a strong international demand for propane. Pembina entered 2021 in a strong financial position, providing the foundation for resumption of accretive growth. Following the pandemic-related project deferrals earlier in the year, we were delighted in December to announce the reactivation of a better Phase VII Expansion as well as the Empress cogeneration facility. The Phase VIII and Phase IX expansions of Peace continue to be deferred, and we are using this time to optimize and reduce costs just as we did with Phase VII. We are also reimagining our Prince Rupert expansion project. We are now evaluating an expansion of the facility capable of accommodating larger vessels, which would improve economies of scale and lower per unit operating costs. Pembina expects to make a decision in the second half of 2021 in regards to all 3 projects. Taken together, they are examples of the opportunities embedded in Pembina's industry-leading footprint. In addition to our announced projects, we are working on an extensive portfolio of unsecured opportunities, which are all accretive and collectively comprise over $4 billion of potential capital investment, including both brownfield and greenfield projects. Momentum with customers behind these opportunities continues to build, and we are confident in the strong rate of conversion into secured project bucket. While COVID-19 is still an urgent global concern and much uncertainty remains, there has been significant progress made on understanding and mitigating the threat. And there is a growing expectation of a return to some normalcy and associated rising energy demand. Higher prices and sector consolidation continue to make our producer customer base stronger, which in turn benefits Pembina. In 2020, we essentially hit the pause button, but in 2021, renewed optimism gives us confidence to hit play once again. With that, I will pass the call over to Scott to discuss the financial highlights for the fourth quarter and full year.

[J. Scott Burrows, Senior VP & CFO]

Thanks, Mick. Pembina reported record adjusted EBITDA in the fourth quarter of $866 million, which represents a 10% increase compared to the same period last year. The increase was primarily from the assets acquired in the Kinder acquisition, new assets being placed into service in the Pipelines and Facilities division and higher deferred revenue recognized on the Peace Pipeline system. We also benefited from monetizing a portion of NGL storage positions built up during the second and third quarter of 2020 as well as lower operating expenses in pipelines and lower general and administrative expenses. This was partially offset by lower margins on crude oil sales and a lower contribution from Alliance Pipeline due to a narrow AECO-Chicago natural gas price differential. Pembina recorded a net earnings loss in the fourth quarter of $1.2 billion due to noncash after-tax impairment charges of $1.6 billion on Pembina's investments in Ruby, Jordan Cove as well as CKPC. Excluding impairments and associated deferred tax recovery, earnings in the fourth quarter would have been $338 million compared to $365 million in the fourth quarter of 2019. Total revenue volumes of 3.6 million BOE per day in the fourth quarter were up 1% compared to the same period last year. The positive contributions from assets acquired in the Kinder acquisition and new assets coming into service were partially offset by lower volumes on other systems due primarily to lower interruptible volumes on certain pipeline assets as a result of lower commodity price environment and lower volumes in certain facilities assets due to lower supply volumes, scheduled turnarounds and COVID-19-related factors. A strong fourth quarter contributed to solid results for the full year. 2020 adjusted EBITDA of $3.28 billion was 7% higher than 2019 and within our pre-COVID guidance range. 2020 adjusted cash flow from operations was 2% higher than 2019 at $2.29 billion and full year volumes of 3.5 million BOE per day were 1% higher than 2019. We delivered these results while remaining within our financial guardrails. In 2020, fee-based cash flow comprised approximately 95% of adjusted EBITDA for the year. Our dividend continues to be fully funded without relying on our commodity-exposed business. Fee-based cash flow more than cover our annual dividend payment with a payout ratio of 72% on this basis or an all-in payout ratio including our marketing group of 61%, providing ample room between the current dividend and cash flow being generated. Roughly 75% of our credit exposure at year-end was with investment-grade and secured counterparties. And we maintained our strong BBB credit rating with a year-end ratio of approximately -- proportionately consolidated senior debt to adjusted EBITDA of 4x. Based on our outlook for the year, we currently expect to generate 2021 adjusted EBITDA of $3.2 billion to $3.4 billion. At the low end of our adjusted 2021 EBITDA guidance range, our 2021 capital program is fully funded by cash flow after dividends. Towards the middle and upper end of the guidance range, we expect to generate excess discretionary cash flow. Pembina has a proven track record of disciplined and strategic capital allocation, and this remains one of our top priorities. I'm confident in our ability to generate long-term shareholder value through maintaining and growing our dividend as well as through further infrastructure investment and accretive growth projects. Investing in growth projects ultimately increases the longevity of our already long-term and stable cash flow streams because it both enhances our strategic capabilities and also our service offering, also known as the Pembina Store. Beyond infrastructure investment, excess cash flow will be available for debt reduction or opportunistic common share purchases. To support potential share purchases, Pembina announced yesterday the acceptance by the Toronto Stock Exchange of Pembina's notice to commence a normal course issuer bid to purchase up to 5% of its outstanding common shares. It is worth noting that in Q4, our cash flow was more than our dividends and our capital investments, making us free cash flow positive. As Mick said in his opening remarks, we are proud of the results we have delivered in a challenging year, and the outlook for 2021 is more positive. Since our business update provided in December, third-party commodity price forecasts have improved, providing confidence in our 2021 volume outlook and supporting results in our marketing business. While still early in the year, given what's happened in the first 2 months of 2021, we are off to a great start. I'll now turn things to Mick for some closing comments.

[Michael H. Dilger, President, CEO & Director]

Thanks, Scott. I'd like to take a moment to provide a few comments on the topic of ESG, which is playing an increasingly significant role in all areas of our business and our strategy and is linked directly to Pembina's long-term value. First, following our inaugural report issued in 2018, this past December, Pembina released its 2020 sustainability report. The report includes enhanced disclosures on emissions, water, waste management and workforce. I'm very pleased with the evolution of our reporting and look forward to continuous improvement in future project -- future reports. In addition to reporting, Pembina advanced other significant developments. We appointed Janet Loduca as General Counsel and Vice President, Legal and Sustainability. With over 30 years of legal, environmental, regulatory and sustainable -- sustainability experience, Janet is a strong addition to our team. And I'm confident Pembina will benefit greatly from her contribution. We also progressed strategies to reduce greenhouse gas emissions intensity. By the end of 2021, Pembina will have taken concrete action within the year as well as published 5-year emission intensity targets. We made progress on both -- on numerous inclusion and diversity initiatives, including setting targets for both Board and executive levels. Starting in 2021, a significant component of Pembina's short-term incentive plan will be tied to ESG metrics. Pembina stands shoulder to shoulder with our customers and peers in ensuring Canadian energy is developed and delivered responsibly with leading ESG standards and practices in place. We are a proud provider of the services that get energy to where the world needs it and remain well positioned to support the growing use of natural gas to reduce global GHG emissions. Our proximity to Asia and its growing energy demand represents another strategic opportunity. Further, Pembina has many of the core competencies needed to adjust to the changing energy mix and is positioned to provide infrastructure services for new forms of energy or carbon sequestration and how it might facilitate hydrogen production. As with everything we do, we will move forward prudently, ensuring we deploy capital, as we always have, by making our existing business more valuable, adhering to our financial guardrails and in service of all of our 4 stakeholder groups. In closing, Pembina proved once again in 2020 that we are resilient, we're agile, we're safe and we're reliable. Pembina led our industry with a decade-long run of outperformance prior to 2020. Following a pandemic-driven pause, we will continue again working hard for another 10-year run. We anticipate 2021 to be a turnaround year with a return to a more traditional growth trajectory in 2022. We will not waver in our commitment to long-term value creation that benefits each stakeholder group, and we are optimistic about the future and the many opportunities in front of us. With that, we'll wrap things up. Operator, please open the line for questions.

[Operator]

[Operator Instructions] Your first question today comes from the line of Jeremy Tonet with JPMorgan.

[Jeremy Bryan Tonet, Senior Analyst]

I just want to revisit, I guess, the guidance a bit here and how the environment stacks up now versus maybe when you created it in November or so. And just wondering if you could quantify maybe a bit more, I guess, how the commodity price environment looks now versus then and how producer activity and outlook looks now versus then. So just trying to see kind of -- it seems like things have gotten better and just want to see if we can kind of quantify a bit more the degree of how much it might have gotten better.

[Michael H. Dilger, President, CEO & Director]

I'll start and then turn it over to Scott or others. It's a good start, Jeremy. I don't think too many people thought we'd be at $60-plus WTI and terrific propane prices, better gas prices. We're seeing some of our producer customers alongside the consolidation. We're seeing their stocks double here in the last 3 months or triple in some cases. And so they're -- I'm watching release after release. They're meeting their debt reduction targets and putting away some money. And we think that will turn into to drilling later in the year, cautious drilling, I'd say. And so obviously, our marketing business is outperforming early in the year what we had in the budget because we budgeted at lower levels. We see volumes slowly coming up in some places. But I think it will be later in the year before we can determine whether producers have the confidence to start drilling more. And when that happens, that's really when we get the torque, right? Because we've got a lot of capacity ready and waiting. And as volumes grow because we're covering our fixed cost anyway, that will go straight to the bottom line. And we'll have a lot more confidence, I think, a few months from now. But we're delighted with the start to this year. It is much better than we had originally forecast.

[J. Scott Burrows, Senior VP & CFO]

Yes. Jeremy, maybe just a few tailwinds. Obviously, the stronger crude price and frac spreads. Both are up pretty material from the time that we set our budget back in November. Crude is up close to 50%. The frac spread is pretty close to that same amount. Now again, we always caution people that we are 50% hedged on the frac spread. So we won't participate fully in that upside. In terms of some of the headwinds, FX has moved in the wrong direction. So the Canadian dollar is now at $0.80. At the time of budget, we were at about $0.75 or $0.74. So that's a bit of a headwind. And the Chicago-AECO has continued to drift down from the time that we set our budget. So we do have some headwinds in addition to the tailwinds. But overall, the tailwinds are definitely more positive than the headwinds.

[Jeremy Bryan Tonet, Senior Analyst]

Got it. And maybe just kind of building on that for marketing. There's a lot of winter storms last week, brought in a lot of volatility to commodity prices there. Just wondering if that had any impact on your businesses and if that -- how that might have impacted your AUX Sable contract.

[Michael H. Dilger, President, CEO & Director]

Yes. I mean we participated in some of that, Jeremy. I can't pull out specific numbers, but again, we're pretty cautious on how we take advantage of commodity volatility. So I'm not going to say windfalls, but it was definitely positive for us.

[Jeremy Bryan Tonet, Senior Analyst]

Got it. Maybe just the last one as far as producer activity. Just wondering if you have a sense for rig activity on your footprint now or what your expectations are for where that could trend over the course of the year and maybe how that has changed versus original expectations.

[Jaret A. Sprott, Senior VP & COO of Facilities]

Jeremy, Jaret Sprott here. Rig activity, actually, in the areas -- we pride ourselves in building our assets in the areas that have great resource, obviously. And in that particular area, we're actually seeing rig activity equal to or slightly above where it was kind of December of 2019 pre-pandemic. It's obviously great for the industry to see the activity coming back in. But when you dissect it down into some of those specific areas in which we have a very large presence, it's looking really good compared to the pandemic in March.

[Jeremy Bryan Tonet, Senior Analyst]

Got it. So you said rig activity ahead of December '19 already? Just want to clarify that point.

[Jaret A. Sprott, Senior VP & COO of Facilities]

Equal to -- you have to get very, very specific down into some of our individual assets, but on a whole, the Northeast B.C. area of Veresen Midstream, in that area, it's very strong. And then as you move into that Kakwa, Pipestone, Wapiti areas of the liquids-rich Montney continues to be very strong, where we also have a very large presence. And then with the acquisition of Jupiter by Tourmaline, Jeremy, obviously, Tourmaline -- Jupiter was a great operator. We like working with them. Tourmaline is a great operator as well. And we're really looking forward to them bringing their expertise into that Deep Basin Cretaceous, where we also have a very large presence.

[Operator]

Your next question comes from the line of Matt Taylor with Tudor, Pickering, Holt & Co.

[Matthew Taylor, Director of Midstream Research]

If I could just start off on capital allocation. Do you mind clarifying your growth comments a bit? Because in my sheet, it looks like you've got brownfield growth that still have the contracts in place you could turn on. But it seems messaging is you have the ability to self-fund at the lower end of guidance and then the flexibility if you get to the upper end. So it seems like growth is there, that can be turned on if customers need the capacity, but you can bring down leverage or buy back stock, if not. Are you guys thinking about it a different way in terms of thoughts in capital allocation?

[J. Scott Burrows, Senior VP & CFO]

So Matt, I think as we've tried to reiterate, the first priority is obviously the dividend and capital to growth projects that fit within the platform, brownfield, greenfield, expansions of the existing assets. So if those expansions, both Phase VIII and IX and Prince Rupert expansion continue to progress through this year, probably our first priority is to re-FID those projects and bring them into service and then after that, look at debt repayment and share buybacks. Now if those projects come back into service, we're not really spending capital on those projects in any material way until late 2022. And those will be spread out over a couple of years. So even in those scenarios where those projects come back online, depending the timing of that, we should be in a position to generate potentially free cash flow. And then we get into the discussion again of what to do after that. And again, after we've made those decisions, really, we'll look at where we are within our financial guardrails. If we're below our debt metrics on our financial guardrails, we'll likely allocate that capital to debt repayment to ensure we're firmly within those guardrails. If we are within the guardrails, then we're going to have to look at where the share price is trading in our view of intrinsic value and opportunistically buy back shares or continue to pay down debt to position ourselves for future growth as well.

[Matthew Taylor, Director of Midstream Research]

Just to dig down a little bit more then. I mean if you're turning on these growth projects, it seems like Peace VIII and IX, you said they still have contracts in place. So it's not as if you're looking at projects that aren't backstopped by customers. Is that fair?

[Michael H. Dilger, President, CEO & Director]

Yes. I mean we can turn them on. When we need them is really the question. So like with Phase VII, we do work collaboratively. I mean we're not the kind of company that gives you something you don't need. And so with Phase VII, we surveyed our customers. There's not ever a perfect consensus. And I'm going back a year. And people said, "I know we're committed. I know you could build, but we sure appreciate it if you delayed a year because we just don't need the capacity." And we're using that kind of a collaborative approach in Phase VIII and IX to time that appropriately. And with Phase VII, it -- when we first deferred it, it wasn't the best thing for Pembina in a way because it kind of took away from our growth. But we came back and we lobbed $150 million off of that project through working with our customers in scope and cost. So it wasn't all bad. I mean we're coming out with a better project, and our customers really appreciated the pause. And when we get the signal, we'll turn VIII and IX on, and we think the signal is going to come second quarter timing. And hopefully, that will give us a consensus to resume in the third quarter.

[Matthew Taylor, Director of Midstream Research]

Great. And then one more, if I may. On Ruby, given the write-off this quarter and challenged outlook, you addressed the liabilities on that asset. And if there needs to be free cash flow directed to it, is there willingness to do it? Just looking at the financial statements, it looked like on a net basis. It's about $39 million of current and $464 million of noncurrent.

[J. Scott Burrows, Senior VP & CFO]

Are you talking about debt at the Ruby level, Matt?

[Matthew Taylor, Director of Midstream Research]

Yes, yes, exactly.

[J. Scott Burrows, Senior VP & CFO]

Well, I mean I think as starters, that's nonrecourse debt. I'd just remind everyone that it's nonrecourse debt. So we have the flexibility to make some decisions around what to do there. I mean at the end of the day, that asset is challenged. There's no doubt about that when you look at where the spread is. And I think it's too early in the process to comment on that other than to say that all parties involved here are going to have to come to the table to come to an agreement in order to make this a viable asset.

[Operator]

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

[Linda Ezergailis, Research Analyst]

Just a follow-up on Jeremy and Matt's questions. You've hit the play button again. Lots of opportunities in front of you. Some might be opportunistic. Lots of change going on beyond ESG considerations evolving, including the recent U.S. presidential elections and some other political and regulatory dynamics. How do you -- what's the appetite for M&A? And what areas would be the most compelling for you if you had some choice? And how do you balance that with respect to some of your other priorities?

[Michael H. Dilger, President, CEO & Director]

Yes. I'll start with the macro, Linda, with that question. I mean Biden came in, and most people were predicting that. And we were on record some time ago talking about Advantage Canada in that scenario. And we believe that to be the case looking forward. Commodity prices surprised us to the good. So delighted about that. Trans Mountain keeps moving forward. Looks like Line 3 will go. KXL looks like it's definitely suspended, I would say. But that's still 1 million barrels a day of new egress, and that oil isn't there today. And we've got Shell LNG. With the cold weather, both continentally and elsewhere, I think it's reminded people that hydrocarbons will play an important role for a long, long time and that if you zoom into the Shell LNG project, there's lots of talk that the 2 Bcf a day currently under construction might turn into 4 Bcf a day. And that's a huge number, 1 million barrels of oil and 2 to 4 Bs a day of gas. Those are huge numbers and those will pull on this basin. And this basin is ready to respond. It's not going to have some of the same headwinds looking forward than it did in the past. I mean we were behind a portion pipe, which drove our pricing down. We could not access international gas pricing or international oil pricing. And Brent is always $5 a barrel, roughly, give or take, higher than WTI. And we'll be on tidewater as a basin. And so we think Advantage Canada for the foreseeable future. And so now getting back to your specific questions, if we were going to do anything, we'd be probably looking more Canada side than state side. And we don't have the Permian Basin envy that we had over the last little while. Now if you look back and you're a student to this, you'll see that Pembina mainly did its acquisitions when we had an EV to EBITDA range favorable to our peers. And we're not quite in that zone yet. We're getting there. And so it is -- I would say we're reactive, and we're going to focus on brownfield and greenfield opportunities, particularly brownfield, when -- not only do we have a lot of embedded capacity within our footprint, within our pipes. We have very inexpensive, very accretive debottlenecks, too. You know both -- we can power up Alliance with just pumps. We can power up Cochin with just pumps. We can power up a lot of Peace just pumps. So we've got a lot of very accretive brownfields, and we have lots of synergies to capture from the acquisitions that we've done. We're early days there. And we're still -- like with Kinder, we're really early days in our 50 plus 50. We want to hit those numbers. We still have unfinished business with Veresen. And as Jaret said, the drilling there looks pretty good. So we have a lot to do. We've got also opportunities to continue to reduce our cost footprint. And so our job #1 is to improve our return on invested capital. And we're going to do that. We've got a lot of running room there.

[Linda Ezergailis, Research Analyst]

And as a follow-up, you mentioned you're going to add pumping to Cochin. You recently announced an open season for that system. Can you talk a little bit more about what you're aiming to achieve there and how that would balance out any sort of increased domestic production if there is a supply response to the added egress from Shell LNG and elsewhere?

[Jason Travis Wiun, Senior VP & COO of Pipelines]

Thanks, Linda. This is Jason. So on Cochin, our first step of capacity evaluation is really around looking at what's there today and seeing if we can optimize it within the existing infrastructure that we have. So as we looked under the hood and got to know the asset, we moved all the operations to our control center up in Edmonton. And we were able to find about 15,000 barrels of capacity on that line that we didn't expect in our acquisition, and we're continuing to look for more. So for our first steps, we're really just looking to optimize the way the system is operated and see how much we can wring out of it from that perspective. In terms of what our vision is there, we think that there's still strong demand for condensate in the market. Obviously, it's driving the drilling activity in Canada, but there's also the condensate or natural gasolines that come up from the U.S. that are price disadvantaged. So they use Cochin to come up into Canada. We think there's room for both the expanded capacity on Cochin and the incremental growth that we're expecting in Canada. And Mick touched on the incremental pipeline capacity that will come into service between TMX and Line 3, and those things are going to create a bit of a gap in terms of heavy oil production that can be produced and demand for condensate to use as diluent.

[Michael H. Dilger, President, CEO & Director]

Yes. And just on your last piece about increased domestic, yes, we believe -- I mean Phase VII and VIII, IX are about domestic increased condensate production. But we know that product will clear because it has to. And when we think about the basin as a whole, our shippers on Cochin are the consumers of the product. And we still -- we've been saying this for years. There's nothing new. We think that Southern Lights is the swing volume. And it will swing based on what happens on Cochin and what's captured domestically on Peace.

[Linda Ezergailis, Research Analyst]

And just as a follow-up, you already put some of the insights on the NGL dynamics. With the recent cold snap, I know -- I believe -- I recall in the last polar vortex, you were shipping propane to Eastern Canada to help out. With the recent cold snap, if your export terminal were operational, would you be turning back barrels to help North American consumption? Or how do those exogenous cold snap shocks -- would they affect any sort of propane export initiatives you would have in the short term?

[Michael H. Dilger, President, CEO & Director]

I think when we look at turning on Rupert, we're going to have a wonderful 1/3, 1/3, 1/3 balance, right? We're going to have exposure to Canadian markets, to U.S. markets and to, say, Asian markets. And we based -- today, if we were on today, we'd probably be 1/3, 1/3, 1/3. And so I guess the answer is we'll go to the highest market. So we have capacity to go to the highest-priced market. And the good news for our customers is that through our VWAP, our weighted average price basket that they're enrolled in, they're going to participate handsomely in that equation. So if [ Bay ] is great, we're going to hit the accelerator to [ Bay ]. And if Sarnia is great, we're going to hit the accelerator to Sarnia. And if Edmonton is great, we can leave barrels domestically. And we've been saying to our customers, and they've been patient with us, that the time will come when they get [ Bay ] exposure. And when we're using -- we're amortizing the fixed cost of our storage and rail, which we had been under-amortizing in the last number of years, I think our value proposition to our customers is going to be absolutely incredible here as we get into the second half of the year. And those shipping on Pembina's pipes are going to get a handsome reward compared to those that are not. Stu?

[Stuart V. Taylor]

Linda, it's Stu. Just to give you a bit of an update, we actually did take advantage, and we looked through 2020. We actually cautiously watched our supply and our ability to move product. We delayed some sales through Q2, Q3 and took -- had the opportunity to participate in better commodity pricing in Q4 and in Q1. And so our system -- the logistic ability that we have and the growth that we're creating with the same markets, we will continue to have that. We'll meet every -- we'll meet all of our commitments, but we have the flexibility to move the products around with our infrastructure, and we will be looking at that on a go-forward basis.

[Michael H. Dilger, President, CEO & Director]

Yes, Linda, one last thing there. Just to recollect, we did turn on our Empress frac, which gives us the ability to swing those barrels anywhere. We can take those barrels South. We can take them, rail them east to Sarnia, if we need to. Or we can take them West. And so it's a whole bunch of more flexibility we have just because we've been doing this long enough to know we don't know when the next hot market will happen and where it will be.

[Operator]

Our next question comes from the line of Rob Hope with Scotiabank.

[Robert Hope, Analyst]

Just want to follow up on a prior question regarding the M&A activity. With CKPC being deferred until the future at some point, there is the potential to add some capacity with the process that's ongoing in the market. Can you maybe talk about your views about being a JV partner in another project? Or is it this -- your existing project just on the shelf until markets improve?

[Michael H. Dilger, President, CEO & Director]

We obviously aren't going to talk about an ongoing process. Right now, we're hunkering down. Like I said, we're focused on increasing our EBITDA dramatically without spending a lot of capital, investing a lot of capital. So filling up our existing assets, doing those really inexpensive debottlenecks, exporting products to Asia. And we've got a lot of running room within the most core part of our business. And so if you think about it as concentric circles, getting more out of the assets we have is, first, debottlenecking assets, like Jason talked about Cochin. Or we've got many hundred million a day of capacity up in the Veresen Midstream footprint we need to take advantage of. And petrochemicals is a concentric circle that's out from there. And it remains in strategy, but it's not our highest priority right now.

[Robert Hope, Analyst]

All right. That's very helpful. And then just in terms of the -- those other projects that you're highlighting that you do have brownfield opportunities, have your discussions with them accelerated over the last couple of weeks, last months just given the commodity price environment? Or when you are looking at projects to restart, are you really going to focus on those ones that you highlighted in the MD&A first?

[Michael H. Dilger, President, CEO & Director]

I would just say that when we made the statement in my remarks, that our confidence in converting probable to confirmed has improved. That's how I would characterize it, as our producer customers, they're getting their mojo back. I mean they were -- just had the hell beaten out of them last year, as did we. And they've done their balance sheet repair. I think they're years ahead of their Southern partners for the most -- in terms of living within cash flow, having good balance sheets. And they're going to return -- I think they're going to cautiously return to drilling within their means. They're not going to rely on capital markets to drill anymore. They're not going to borrow money. They're not going to issue equity, they're going to grow it in their footprint. We've got consolidation happening. And that, in my opinion, is going to turn into volumes. And that's really what's going to power Pembina, is we literally have hundreds of millions of dollars of EBITDA opportunity annually within our existing footprint, and that's going to get pretty exciting.

[Operator]

Our next question comes from the line of Patrick Kenny with National Bank.

[Patrick Kenny, Managing Director]

There's been some capital cost pressures across the pipeline industry of late. And I know Phase VII is still trending on budget. But perhaps you can just comment on how your project is coming out as the outlier in a good way. And I guess looking ahead, if you do turn Phase VIII and IX on later this year, just if you're still comfortable with the initial budgets for those expansions.

[Michael H. Dilger, President, CEO & Director]

Yes. I guess -- recall that we had bought the steel for Phase VII pre-pandemic. And so I think we had, what, $300 million invested. And that represented the steel. So that's done and that worked out well. With TMX -- or not TMX. With KXL being canceled, we've had a flood of interest in participating in our Phase VII project. And so we're pretty optimistic that we can meet or even possibly exceed the number we have out there. And with Phase VIII and IX, there could be cost pressures. But again, when you can deal with a contractor and say, hey, let's do VII, you bid hard on VII, and then you'll be at the top of list for VIII and IX. You can really get a great win-win with the contractor. Maybe their unit rates are lower, but they've got a long fair way of working. So we're looking at not just cost with VIII and IX but also scope. And to date, feeling not bad about it. Jason, anything to add there?

[Jason Travis Wiun, Senior VP & COO of Pipelines]

Yes. I mean, Patrick, I would add because of the time that we've been allowed, the market downturn obviously was not ideal, but it did give us time to evaluate our assets. And so having that extra year, we're able to really pinpoint where the capacity constraints are. And when we talk about what we historically referred to as Phase X, we're now able to actually test out our assets that we've put into service over the last number of years and figure out what they're truly capable of. So up until last year, we were just trying to stay ahead of the production growth, and we weren't really able to plan as well as we would like to. We were just maximizing the amount of capacity we could add. So we're now able to actually look at specifically what areas need debottlenecking, what's the optimal pipe size, pump size, how many pumps do we need, all of those things. And we can actually stage it out in more stages now as we're looking. So we see a much more smaller-stage series of expansions that we can do that are easier to execute and easier to plan.

[Michael H. Dilger, President, CEO & Director]

And then just to round that out, I think it goes without saying but I'll say it anyway, our ability to compete as scope and costs are managed, it's just getting stronger and stronger and stronger. I think unlike other news out there, you're going to hear our costs are going to go down, not up. Jaret?

[Jaret A. Sprott, Senior VP & COO of Facilities]

Pat, it's Jaret here. I just want to also add that you're fairly familiar with our map. Phase VII is essentially La Glace kind of going what we refer to over the top, down into the Fox Creek area. And just the geographical footprint there, it's good terrain, right? You're not into like the foothills. Now if you think of going from Fox Creek, going straight West and through picking up, say, Seven Gens acreage and building out to where our Musreau complex is, Resthaven complex and moving up into North into GP, Grand Prairie, that's the really tough terrain, right? That -- those chunks of our assets, they're in the ground. They're built. Phase VII, it's farmland, for the most part. Phase IX, you're up in that Dawson Creek beautiful planes into Northeast BC. Once again, very good. You do have some river crossings, but essentially, the tough sledding and building, it's in the ground. We don't have to go there anymore. So just keep that in mind as well.

[Patrick Kenny, Managing Director]

Okay. That's great color. And then, Mick, maybe just to go back to your comments around ESG. And I know you're working towards establishing your carbon reduction targets by the end of the year. But just given we've seen a rapid increase in the number of large reputable companies pledging net 0 by 2050, even without a crystal clear path to get there, but call it more of an ESG compass, if you will. So just wondering, what's holding Pembina back from including net 0 as part of your broader capital allocation guardrails?

[Michael H. Dilger, President, CEO & Director]

What's holding us back is we don't announce things like that until we know how we're going to do it. So when we announce it, we'll know how to do it. You're going to see us taking concrete steps. And over the next number of years, I'm going to make maybe a bit of a bold prediction that when you extrapolate the sum/total 3 years from now into the future, you'll conclude for yourself where we're going to get to. But we're going to put some targets out there. We'll meet those targets. And we're going to put some evidence out there this year that we're serious about that. And I don't know when we'll be able to predict carbon neutral, but when we do, we will know how to do it.

[Operator]

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

[Robert Catellier]

Congratulations for managing through 2020. I know that wasn't easy. My question this morning is on ethane. I just wanted an update on where you stand with that. Specifically, if you think the current incentives and government support that's out there is enough to sponsor a cracker otherwise, what do you think needs to have happened for the industry to be in a position to see a new cracker become a reality? And in your answer, maybe you can address the impact of $170 per tonne carbon tax might mean to the outlook there?

[Michael H. Dilger, President, CEO & Director]

Yes. Let's just start with the second question. I think anybody who comes in the province is going to have their carbon situation figured out as part of their base project. These are multibillion-dollar projects and add another $200 million or $300 million to sequester your carbon or do what you need to do as kind of a rounding error. So I don't think that's a huge impediment for that. In terms of how we participate in that, I mean, we move most of the ethane in the province. So we're -- I can't imagine we're not going to be in the middle of that discussion. And we'll work very hard to facilitate it. Ethane is a huge part of our value chain. Some of our largest customers are ethane customers. And it goes right back to the gas plant through pipes, through fracs, through storage. And it's a 50-year demand. So we couldn't be more serious about that, and we'll do everything we can to facilitate it. And I think the government understands it, too. That's the kind of value-add that Pembina and the province needs. Those are jobs that are going to last decades and decades in property tax base and so on and so forth. And they, in turn, can spawn value-added industries. So I think it's a logical place where we have sustained cost advantage as a province. And we think it's going to happen. Province wants it to happen.Stu, do you have any thoughts to add there?

[Stuart V. Taylor]

Yes. No, the only thing I'll add, Robert, is we've been looking at this. We think there are opportunities. There's definitely opportunities to increase the ethane supply competitively in Alberta to support the backstopping of a cracker. It's going to take producer effort, midstream effort and government effort. But I think we're seeing alignment of those things. And so we're excited about the role that we play today, and we think we can play a larger role in the future with the opportunities that are in front of us. Jaret, do you have any comments?

[Jaret A. Sprott, Senior VP & COO of Facilities]

No, you guys said it well.

[Robert Catellier]

Okay. And my last question has to do with the volumes at Younger. There's a lot of competing influences there. Obviously, a turnaround but also the drilling, but there's also some new services on the NGTL system in town. So can you help us sort of attribute which of those factors has had the biggest impact on volumes? In other words, how much could be considered short term? And how much is more of a long-term impact on volume?

[Jaret A. Sprott, Senior VP & COO of Facilities]

Rob, Jaret here. Yes, great question. In Q4, we did have a planned outage. So that impacted the Younger volumes. And you nailed it on the head. The supply coming into that area was altered with the start-up of some competing gas assets. I would say that -- not divulging the exact numbers, but I would say that our marketing business team in conjunction with the gas processing team has done an unbelievable job, getting back out, boots on the ground and increasing the supply into that asset. So we did have a little bit of a hiccup there, and then with the planned outage, Q4 looked a little bit lower than normal. But the demand is picking up.

[Operator]

Your next question comes from the line of Andrew Kuske with Crédit Suisse.

[Andrew M. Kuske]

In terms of risk management, I guess, you've always been very good on knowing what you don't know. And the partnership you have with the Kuwaitis is really representative of that. But maybe more broadly, how do you think about partnership or JV potential just in the context of growing your business?

[Michael H. Dilger, President, CEO & Director]

Oh, that's such an interesting question. We don't like to partner. Let me just say that. Most people know it. We like to control our own destiny. And the reason we like to do that is because most of the projects we do that extend the value chain, whether they're in our current suite of services or extend our current suite of services, they enhance the value of all of our assets. And when you don't control the next step of your value chain, then you lose control of taking the step beyond that. And so when we look at partners, we want to ensure that we're taking them to derisk what we're doing, but also so that we don't impair our ability to keep growing along the value chain. And so for example, if we had no rail facilities, if someone controlled our rail facilities, we probably wouldn't have been able to do Prince Rupert because we would have an unknown in terms of cost and reliability between our Redwater frac and our Prince Rupert terminal. And so because we own the pipes, then we were able to get into fractionation. Because we got into fractionation, we were able to control storage and rail. And then we could push those molecules to Rupert and really because we wanted to. And so we can't imagine having a JV that prohibits us from taking the next step in the value chain. So we'd like to have partners that we need to fill a gap, a knowledge gap, a capability gap, even a financial gap. But they can't impair our ability to control our walk down the value chain path.

[Andrew M. Kuske]

Okay. That's very helpful. And then maybe just more narrowly on risk management. If you think about the efforts you've had, specifically at Redwater with the co-gen, clearly, we've seen a pretty volatile power market as the PPA is rolled off. And we're in a more free market environment. Could you talk maybe a little bit about power cost management and how that's really benefited you and the outlook in the future?

[Michael H. Dilger, President, CEO & Director]

Yes. I mean just on co-gens, like I wouldn't be shocked if we announced one a year for a number of years. I mean they're taking us off a coal-gas mixture to an all-gas mixture. We don't have line losses through transmission. And so that's obviously energy going into the environment we don't need and very cost competitive. So we anticipate continuing to do that. We hedge power. Your question is risk management. We hedge a lot of our power, for example, at Empress because we hedge our gas, we hedge our power because those are the input costs of making propane and butane. And so we're doing that now. I would say, though, our focus is our self-supply power requirements is not merchant. Now we might end up with a few kilowatts of merchant just based on co-gen sizing. I'm not going to rule that out. But our focus is self-supply. And that's a big market. We're one of the biggest power consumers in Alberta. And so that's a big market. We have economies of scale. Consistent with my comments on cost efficiency, we're consolidating all our power needs across our business to a single desk. And we'll have our co-gens in there. And we're looking at renewable sources of power as well, not necessarily to invest in but to consume. And so that's a big opportunity for us from a cost perspective and an efficiency perspective. And again, we do hedge a lot of that. And a lot of what we do is hedging our self-supply. Jaret?

[Jaret A. Sprott, Senior VP & COO of Facilities]

Andrew, I'll also add this on the mitigation side, not only the commodity itself or the energy that you're consuming. But as you build these co-gens, you obviously have to back that up with reducing your reliance on the wires charges for the distribution, right? So as we build out this strategy, taking ourselves off because there is obviously potential that the energy itself increases in price. There's also the risk that the transportation distribution of that energy goes up. And we'll continue to wind those portions of that exposure down as we build those centralized power generation units.

[Operator]

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

[Robert Michael Kwan, MD & Energy Infrastructure Analyst]

If I can just start with some questions on the big gas pipes and starting with Ruby. You took the full write-off of the convertible preferred and recognizing there may be some interplay with that and probabilities around impairment math, but what is that saying if you're taking the full write-off against your expectation for future cash flow?

[J. Scott Burrows, Senior VP & CFO]

Yes. I think, Rob, obviously, the impairment is a bit of an accounting exercise. There's lots to do on that pipeline. There are opportunities in the future. I think the main driver of the impairment is the short-term outlook on that asset base is very challenged with both the Station 2 pricing as well as the Opal to Malin spread. There's just not enough sense in the spread to make that pipeline toll. So we do believe there's potential to recontract that pipeline, albeit at much lower tolls. And longer term, we're looking at some opportunities around that pipeline. But that being said, there's a bunch of things that have to happen, including the note refinancing next year. So there are some things that are possible. Can you put that in an impairment model? No. So based on what we know today, that asset is very challenged. But we're working hard on that. And as I said previously, it's a bit of a complicated structure with ourselves at our preferred distribution. We have Kinder Morgan below us with the common, and then we have the bondholders. And as I said previously, everybody is going to have to come to the table and work together to make this a sustainable pipeline. So in terms of the short-term outlook, I mean, we had already forecasted a lower contribution from Ruby in 2021, and that was implied in our 2021 guidance.

[Robert Michael Kwan, MD & Energy Infrastructure Analyst]

Okay. But the fact that you wrote it to 0, still your expectation is there still is some positive cash flow here in the future. And depending on how the parties come together, it could still be a fairly material number into the medium term. Is that fair?

[J. Scott Burrows, Senior VP & CFO]

Yes, there's still -- I mean there's still contracts, obviously, on that pipeline. One of the contracts goes out to 2026. There's also some interruptible volumes as well as the producer contracts are good for another 6 months. So there is cash flow on that asset. Where it ends up will be determined over the next several months here as we work with all the parties involved.

[Michael H. Dilger, President, CEO & Director]

Robert, we think this thing is going to generate cash flow in the future. We can't point to it now. The foundational contracts were rich, and they were struck in a different time. We think there's going to be replacement there. We just -- for an impairment test, you can't put what you think is going to happen in there. You have to put in what you know is going to happen with certainty. So I guess to some extent, the accountants made us do it. It's not necessarily reflecting what we think the long-term cash flow generation prospects of that line will be. We do think it will have an ongoing source of cash flow.

[Robert Michael Kwan, MD & Energy Infrastructure Analyst]

Do you think we'll get clarity on how this all plays out in 2021?

[J. Scott Burrows, Senior VP & CFO]

I'll turn that to -- let's let Cameron answer that.

[Cameron Goldade, Vice President of Capital Markets]

Yes. I think that it's early on in the process, Robert. So as Scott says, all parties need to come together. I think we're certainly hopeful that that's the case, and we can have a constructive outcome.

[Robert Michael Kwan, MD & Energy Infrastructure Analyst]

Just turning to Alliance, just some thoughts as to how you see that playing out over the next kind of coming years. And do you see any potential to get the regulator more involved, either from rate setting or even just some of the mechanics around tolls? For example, I think the regulatory statement right now is you're a price taker on the bid floor, but there is precedent from the CER for you to be a price setter to essentially incent contracting. Is that something you're looking at?

[Michael H. Dilger, President, CEO & Director]

We haven't had that conversation yet. We're -- obviously, that's a really volatile spread, to say the least. And I think the value of that pipe just at the macro level, Robert, was demonstrated. And it was a pretty important source of energy for the U.S. here recently. It was one of the pipes that kept producing. In fact, I think we saw 200 million, 300 million a day more hit that pipe here through the cold snap. And so you're going to have, I think, producers looking at that. And you're also going to have consumers looking at that. Like when the chips are down, where was the energy? And so we think that pipe will have a better differential than it currently does now. And that it will -- and we've seen this before in my career, I've seen the spreads tighten up and then go to $2 -- above $2. And so we're pretty sure it will get recontracted. Maybe Pembina and Enbridge have to market the space a little bit in the near term. In terms of the rate setting, that is not -- it's a very good idea. I'm going to -- it's a takeaway for us to see what the opportunities are. Maybe I can catch up with you offline on what your brainstorm is there.

[Operator]

And there are no further questions in queue at this time. I turn the call back to Mr. Dilger for closing remarks.

[Michael H. Dilger, President, CEO & Director]

Well, thank you, everybody. I'm sure you're looking forward to 2021 as much as we are. Things are starting to break. It looks like on the COVID front, still some challenges ahead. Probably, having talked to our U.S. directors yesterday, they're ahead and things will clear faster than Canada. We see great energy prices. We're encouraged. We're not ready to say they're going to continue indefinitely, but it's a very good start. We're seeing volumes come up. And so as we close the book on 2020, I want to say thank you to all our -- people on the phone, our shareholders who stuck with us through 2020 and our staff who were amazingly resilient and allowed us to meet our safety, financial and community objectives and our customers for working hard with us to keep paying the bill. So thank you very much, and have a great weekend.

[Operator]

And this concludes today's conference call. Thank you for your participation. You may now disconnect.