Pembina Pipeline - Q2 2024

Transcript

Operator (participant)

Thank you. Good morning, and welcome to the Pembina Pipeline Corporation Q2 2024 Results Conference Call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. If at any time during this call you need assistance, please press star zero for the operator. This call is being recorded on Friday, August 9th, 2024. I would now like to turn the conference over to Dan Tulk, VP of Capital Markets. Please go ahead.

Dan Tulk (VP of Capital Markets)

Thank you, Joanna. Good morning, everyone. Welcome to Pembina's conference call and webcast to review highlights from the second quarter of 2024. On the call today, we have Scott Burrows, President and Chief Executive Officer, Cameron Goldade, Senior Vice President and Chief Financial Officer, along with other members of Pembina's leadership team, including Jaret Sprott, Janet Loduca, Stu 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 MD&A, dated August 8, 2024, for the period ended June 30th, 2024, as well as the press release Pembina issued yesterday. All of these documents are available online at pembina.com and on both SEDAR and EDGAR. I will now turn things over to Scott to make some opening remarks.

Scott Burrows (President and CEO)

Thanks, Dan. Another strong quarter was highlighted by record Adjusted EBITDA of CAD 1.091 billion. Record-adjusted cash flow from operating activities of CAD 837 million and record-adjusted cash flow per share of CAD 1.44. Record results were driven in part by the closing of the Alliance Aux Sable acquisition, effective April first, as Pembina benefited from increased ownership in those assets. Both Aux Sable and Alliance have been performing well, and we are excited to welcome new employees to the Pembina team. With the release of our second quarter results yesterday, we were also pleased to announce that we have acquired the remaining 14.6% interest in Aux Sable U.S. operations from Williams, effective August 1st.

Since the Williams Aux Sable acquisition and the Aux Sable assets have been outperforming Pembina's expectations, and we are pleased to now have fully consolidated ownership of all Aux Sable assets, thereby further simplifying corporate reporting and enhancing the ability to pursue long-term opportunities. Pembina's business continues to deliver exceptional results. Volume growth across the Canadian energy industry is leading to higher volumes in our pipelines, gas plants, and fractionators. And while we would prefer to see higher natural gas prices for our producing customers, the current weakness, along with robust NGL pricing and strong oil prices, is leading to continued strength in Pembina's marketing business.

Given the strong year-to-date results, the incremental benefit of the latest Aux Sable acquisition and our outlook for the remainder of the year, Pembina has raised its 2024 Adjusted EBITDA guidance range to CAD 4.2 billion-CAD 4.35 billion, which at the midpoint represents a CAD 100 million increase over the previous range. Finally, the second quarter was further highlighted by three other exciting developments. The first was the positive final investment decision on the Cedar LNG Project. We are excited to be moving forward with a project that will deliver industry-leading, low-carbon, cost-competitive Canadian LNG to overseas markets and contribute to global energy security while delivering jobs and economic prosperity to the local region. The Cedar LNG Project aligns squarely with Pembina's strategy, offers attractive economics, and is supported by a contracting strategy that prudently mitigates cost risk.

The second was PGI's transaction with Whitecap Resources, which included the acquisition of a 50% interest in Whitecap's Kaybob Complex and an obligation to fund further Lator area infrastructure development. We also signed long-term take-or-pay agreements on Pembina's pipelines and fractionators. The deal is another example of PGI and Pembina's ability to provide unique and value-added solutions to support the growth demands of our customers. A third was bringing the Phase VIII Peace Pipeline expansion into service, marking the culmination of more than 10 years and more than CAD 4 billion expansion program that was driven by growing customer demand for transportation services to support development in the WCSB, including the Montney, Duvernay, and other resource plays.

The Peace Pipeline system plays an important role within Pembina's integrated value chain, and I would like to thank our many customers, employees, and communities that have supported Pembina to deliver this major infrastructure build-out. As a result of the expansions and ongoing optimization efforts, Pembina is confident that its extensive pipeline network is best positioned to capture future volume growth and allow the company to continue to offer customers unparalleled advantages through safe, reliable, flexible, and cost-competitive services together with differentiated market access. I will now turn the call over to Cam to discuss highlights from our second quarter.

Cameron Goldade (SVP and CFO)

Thanks, Scott. As Scott noted, Pembina reported a record second quarter adjusted EBITDA of CAD 1.091 billion. This represents a 33% increase over the same period in the prior year and remaining a 21% increase, adjusting for the Alliance Aux Sable ownership. In pipelines, factors impacting the second quarter primarily included: higher adjusted EBITDA from Alliance due to stronger asset performance, combined with increased ownership following the Alliance Aux Sable acquisition. The Northern Pipeline System outage and wildfires in the second quarter of 2023, which had an impact of CAD 29 million, with no similar impact in the second quarter of 2024. Contractual inflation adjustments on tolls and the earlier recognition of take-or-pay deferred revenue on the Peace Pipeline system, and the reactivation of the Nipisi Pipeline in the third quarter of 2023.

In facilities, factors impacting the second quarter included the inclusion within facilities of adjusted EBITDA from Aux Sable, following the Alliance Aux Sable acquisition, the Northern Pipeline System outage and wildfires in the second quarter of 2023, which had an impact of CAD 18 million, with no similar impacts in the second quarter of 2024.

And higher interruptible volumes on certain PGI assets. In marketing and new ventures, second quarter results reflect the net impact of increased ownership interest in Aux Sable, following the Alliance Aux Sable acquisition, as well as higher NGL margins at Aux Sable. Higher margins from the Western Canadian NGL marketing business due to higher marketed volumes, lower natural gas prices, and higher propane, butane, and condensate prices. Realized losses on NGL-based derivatives compared to gains in the second quarter of 2023, partially offset by higher realized gains on crude oil-based commodity-related derivatives, as well as higher general and administrative expense. Finally, the corporate segment was largely unchanged. Earnings in the second quarter were CAD 479 million. This represents a 32% increase over the same period in the prior year.

In addition to the factors impacting Adjusted EBITDA, earnings in the second quarter were impacted by unrealized losses recognized by PGI on interest rate derivative financial instruments compared to gains in the second quarter of 2023. Gains associated with the derecognition of the provisions related to the financial assurances provided by Pembina, which were transferred to Cedar LNG following the positive FID in June. Larger unrealized losses on renewable power purchase agreements. An unrealized loss on NGL-based derivatives compared to an unrealized gain in the second quarter of 2023. Higher depreciation and amortization, net finance costs, and acquisition and integration fees. Pipeline volumes of 2.7 million barrels per day in the second quarter represent an 11% increase compared to the same period in the prior year.

The increase was primarily due to the increase in ownership interests in Alliance Pipeline, higher volumes on the Peace Pipeline system, resulting from earlier recognition of take-or-pay deferred revenue, and the impact of the Northern Pipeline System outage and the wildfires in the second quarter of 2023, combined with the reactivation of the Nipisi Pipeline. Facilities volumes of approximately 0.9 million bbl per day in the second quarter represent a 14% increase compared to the same period in the prior year. The increase was primarily due to Aux Sable volume recognition following the Alliance-Aux Sable acquisition. Higher volumes at Younger, as the second quarter of 2023 was impacted by the Northern Pipeline System outage and the wildfires, combined with higher interruptible volumes on certain PGI assets. Turning to our outlook for 2024.

In addition to raising our 2024 Adjusted EBITDA guidance, as Scott mentioned previously, Pembina has also revised its 2024 capital investment program to CAD 1.3 billion. The revised outlook reflects an approximate CAD 140 million net increase when compared to our original 2024 budget of CAD 1.16 billion, inclusive of then unsanctioned additional growth capital. Drivers of the increase primarily include the sanctioning of PGI's Wapiti expansion and K3 cogeneration facility, other increases in revenue-generating capital within pipelines, and additional non-recoverable sustaining capital. The revised capital investment program reflects approximately CAD 300 million for contributions to equity accounted investees, including CAD 240 million of equity contributions to Cedar LNG incurred in the first half of 2024, with no further contributions to Cedar expected in 2024.

Pembina continues to expect the capital program to be funded with cash flow from operating activities net of dividends, maintaining its strong balance sheet. At June 30th, based on the trailing 12 months, the ratio of proportionally consolidated senior debt to adjusted EBITDA was 3.6x, which is at the low end of our target range. It's important to note, however, that given the April 1st closing date of the Alliance/Aux Sable acquisition, the ratio includes all the debt associated with the transaction, but is currently only capturing one quarter of EBITDA contribution. On a normalized basis, this ratio would be approximately 3.3x. I'll now turn things back to Scott.

Scott Burrows (President and CEO)

Thanks, Cam. In closing, I'd like to reiterate that for all of us at Pembina, it has been a strong first half of 2024, and we are looking forward to continued strength throughout the remainder of the year. Amidst the backdrop of industry momentum and an expectation of robust volume growth, we continue to see increased utilization across our systems, pursue many opportunities to creatively invest capital, and execute our strategy within our financial guardrails. Thank you for joining us this morning and for your continued support. Operator, please open the line up for questions.

Operator (participant)

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. Should you have a question, please press the star followed by the one on your touchtone phone. You will hear a prompt that your hand has been raised. If you are using a speakerphone, please lift the handset before pressing any keys. Your first question comes from Jeremy Tonet at JPMorgan Chase. Please go ahead.

Jeremy Tonet (Research Analyst, Managing Director)

Hi, good morning.

Scott Burrows (President and CEO)

Morning, Jeremy.

Jeremy Tonet (Research Analyst, Managing Director)

Just want to dial in on the acquisitions a little bit more. Aux Sable Alliance here, it seems like they're outperforming our expectations, and just wondering if you could talk a bit more, I guess, about the outperformance in... You know, really curious about looking forward, I guess. It seems like full ownership would bring new opportunities to Pembina and how that kind of impacts, I guess, the marketing opportunities as well. Just any more color on how we should think about what's possible there going forward?

Scott Burrows (President and CEO)

Yeah, Jeremy, a lot of the strength really was driven at the Aux Sable level. Obviously, the low gas price and high NGL prices had a strong impact on that business. As we pointed out in our call comments, we'd obviously like a little higher gas price for all of our producing community and hopefully add to increase drilling. But in the short term here, that low gas price has really led to strong frac spreads across the business, especially at Aux Sable.

You know, when you go back to our acquisition presentation and thesis, we talked about some of the longer term synergies, you know, more towards the end of the decade, and we think, having full control of Aux Sable will allow us to continue to capture those and give us a leg up in terms of capturing those. It's a little too early to start talking about what exactly those are, in terms of where we're headed, but we're actively working and planning on those today.

Jeremy Tonet (Research Analyst, Managing Director)

Got it. Fair enough. Thank you for that. In the release, I think there's language that highlights the expectations for 6% and 4% conventional and gas processing volume growth, respectively in 2024. And just wondering, is this a similar trajectory you kinda see in the near term, post 2024 in general at a high level? And I guess my question is: if you're expecting kind of a mid-single-digit growth, is this filling latent capacity in the system, or is this more capital intensity? Effectively, how much capital investment will be required to attain that mid-single-digit growth, mid-cycle, as could be possible?

Jaret Sprott (SVP and COO)

Well, hey, Jeremy, it's Jaret here. So first, I'll talk a little bit about what we're seeing kind of in 2024 with respect to our conventional volume growth, and then I'll touch on PGI just for a second. So you saw in our-- I think in our press release, we dropped it from roughly 9%-6%. You know, that really equates to approximately-- it's not that much material amount of volume. It's roughly 30,000 bbl. And what we did see in the first half of the year, which you'll probably recall from the previous quarters, was we saw a significant reduction in volumes in January here in Western Canada with some extreme weather. That obviously set a lot of our customers back, and they really didn't, really didn't make that up.

We saw a larger turnaround season kind of in that May-June than we expected from some of our third parties. All of the PGI turnarounds went as expected, and the Phase VIII commissioning went extremely well. And then we had a short, unplanned outage at our frac complex, specifically, RFS I, that restricted some C2+ volume. So that's a big portion of the overall reduction. And then in the latter half of the year, you know, across a couple of hundred receipt points in the conventional system, it's really just timing of development. You know, that we're seeing from our customers, it's not that they're not drilling in these liquid-rich areas, it's just, you know, that forecasting of when the volumes are coming on.

That kinda leads into, you know, there's been some public disclosure recently around some drier gas either being shut in or not completed. We're not really seeing the effects of that. As you know, like, the majority of our PGI assets, or all of our PGI assets, they produce significantly liquids rich gas. And you're actually seeing that in the overall, revenue volume increase in PGI. I think we talked from 3%-4% or 4%-5%. You know, we're seeing... And that we haven't brought on any new gas plants, so we're seeing really strong gas growth where we have the lots of condensate and lots of NGLs, which is extremely positive. And I think one of the features of our footprint, is that we, we don't process a lot of the drier gas.

With all that said, you know, our overall thesis for Western Canadian, you know, liquids growth hasn't really changed in that mid digit. And as we think about latent capacity versus expanded capacity, when you're in Alberta, kind of now that Phase VIIIs in service, kinda Gordondale, follow the map all the way down to Fox Creek into Edmonton, that's gonna be kind of latent capacity use and/or pump station. No more linear assets required to get those volumes into the Edmonton market. And then as you go west of Gordondale into Northeast BC, that's where we'll require some incremental pipelines, et cetera. So that's kind of the distinction, and that's kind of all been built into our, you know, three-year capital forecast and all part of our three-year cash flow per share guidance that we gave at Investor Day.

Anything else to add, Cameron or Scott?

Scott Burrows (President and CEO)

So maybe just, I guess, mid-cycle CapEx or near-term CapEx run rate levels, any high-level thoughts there? Is there more processing CapEx that's required to kinda hit that mid-single-digit growth?

Cameron Goldade (SVP and CFO)

Yeah, Jeremy, I think I'd sort of go back to our message from Investor Day, which was, you know, if you sort of look at this year, next year, you know, we're probably running right around that free cash flow neutral level. You know, so the levels that you're seeing in 2024, you know, 2025, you know, it's somewhere in between that CAD 1 billion-CAD 1.25 billion range is probably the run rate for the next couple of years, assuming we continue to execute on the plan and the projects that Jaret outlined. As Jaret mentioned, you know, obviously, big part of that is obviously completing RFS IV, which comes into service in the first half of 2026.

Likewise, as we continue to move forward and build out that Northeast BC capital, Northeast BC transportation capital that Jaret referred to, you know, that'll be in that same time frame as well, providing that, you know, all sort of goes ahead with that. So, and then once you get to sort of the 2026 time frame outward, obviously, you know, the base core business capital starts to trail off as some of those assets come into service. Our BD teams are obviously very hard at work, and we continue to see opportunities. But, for the next couple of years, I think that's probably the way we're thinking about it.

Jeremy Tonet (Research Analyst, Managing Director)

Got it. That's very helpful. Thank you.

Operator (participant)

Thank you. The next question comes from Praneeth Satish at Wells Fargo. Please go ahead.

Praneeth Satish (Senior Equity Analyst)

Hi, all. Thanks. Good morning. Maybe just on Cedar, if you can give us an update here in terms of reassigning the capacity that you hold with third parties. Are you seeing, you know, strong interest from customers there? What's the timeline to announce that contract? And also, how committed are you to kind of reassigning that entire 1.5 MTPA, and could you keep more of it, and end up marketing more than 0.3 MTPA with your marketing group?

Stu Taylor (SVP Marketing and New Ventures, Corporate Development)

Hi, it's Stu. So we're now following the FID announcement and progress. We are ramping up our marketing efforts, looking at the remaining capacity of Cedar. I will say that, as our project became more real with the FID announcement, our interest is high. We've been working with, you know, a number of potential offtakers that we've had conversations for a long period of time, but we do have some renewed and new interest coming in as well. So we're excited and optimistic of progressing those conversations to completion with a target to have, you know, as much of that, you know, completed in 2024. So we're optimistic and excited and continue to make progress with potential offtakers.

Praneeth Satish (Senior Equity Analyst)

Got it. And maybe just switching gears and moving over to the Bakken. I have two questions here on the Vantage Pipeline. First, if you can kind of remind us what the utilization is on the pipe and whether Vantage can be expanded any further with pumps. And then secondly, to the extent that there is excess capacity and it can be expanded at a low cost, can you satisfy all of your Dow ethane contract with Vantage? I guess what would the cost be of moving ethane on Vantage versus some of the other options that you're considering?

Jaret Sprott (SVP and COO)

Good morning. Thanks for the question. So yeah, we currently do have some white space on the Vantage Pipeline that is capable, obviously, of bringing more ethane up into the AEGS and then into the petrochemical feedstock takers there in Western Canada. With respect to our portfolio with respect to Dow, we're kinda taking a more diversified approach to this. So please think of it as ethane that comes out of our RFS complex. That is C2+ being extracted in Western Canada and then broken into its parts and fed into the crackers here. In Alberta, there is the C2 extraction component that's more like mainline extraction, like our Empress or Younger facilities, that feed straight ethane into the system, into the crackers.

And then you have the Vantage system that can bring product up from North Dakota. So across those kinda three portfolios, right now, we're just evaluating what's the best use of capital to basically fulfill our entire Dow commitment. So we won't really specifically talk to, you know, where the majority of that capital is gonna go right now. I think in, at Investor Day, we talked about here in the next couple of quarters, we'll be able to provide some more insight on where that capital will be going. But Vantage is definitely a part of the overall portfolio consideration to meet that contract.

Praneeth Satish (Senior Equity Analyst)

Got it. Thank you.

Operator (participant)

Thank you. Next question comes from Patrick Kenny at National Bank Financial. Please go ahead.

Patrick Kenny (Managing Director and Research Analyst)

Hey, good morning, guys. Just maybe quickly on the Aux Sable or Alliance and Aux Sable consolidation. I know there's some accounting noise in there, but maybe you can just walk us through the headline, you know, CAD 600 million loss on disposal of your equity interest and maybe what that means for your corporate effective tax rate going forward.

Cameron Goldade (SVP and CFO)

That-- It's Cam here. You just made our accounting team's day with the question. You know, it's not a really straightforward explanation other than to say that the accounting standards are pretty clear about how you have to treat a step acquisition. You basically have to act as if you've disposed what you've got as the equity accounted investment and then realize you know, the entire fair value acquisition like you would any other acquisition. So obviously, you do the fair value on the existing interest and mark that to market. Obviously, I think what's important in recognizing that accounting is that there's an offsetting deferred tax recovery on that derecognition, which effectively nets you to about zero or so.

It's about a CAD 9 million gain when you net those two out. Then, obviously, you go forward and you consolidate. Then, with the consolidation, now, obviously, we own 100% of Alliance, and now 100% of Aux Sable. But in Q2, obviously, there was a small non-consolidated interest on Aux Sable, which just gets netted out on the back end.

Patrick Kenny (Managing Director and Research Analyst)

Great. And then, I guess going forward, just, any, any impact, positively or negatively on the effective tax rate?

Cameron Goldade (SVP and CFO)

Yeah, I think there will be some positive effect on the effective tax rate. You know, as you've seen, there is some benefit to the acquisition, potentially the larger acquisition as a result of some opportunities in the U.S. And so we do get a benefit there, and I think that shows up in terms of the updated tax guide. So, you know, you'll see it come down ever so slightly.

Patrick Kenny (Managing Director and Research Analyst)

Okay, great. Thanks for that. And then maybe just on the cost pressures here you're experiencing on RFS IV, maybe you can just walk us through some of the scope changes that might be embedded in that new budget. And then also, you know, just given construction activity really picking up here for large scale projects in the Heartland area, just how we should be thinking about your ability to lock in costs from a labor productivity standpoint?

Jaret Sprott (SVP and COO)

Great question, Pat. So think of the project increase kind of in the following three buckets. The first bucket being project scope changes and design modifications. This is really to enhance the overall operability of RFS IV specifically, and the overall complex. As you know, like, we can spread molecules to any one of the fracs, and it's specifically to accommodate a wider range of C3+ feedstock composition. So depending on where your customer, if your customer is extracting NGLs from a deep basin well, versus a very, you know, oily Montney well, you get a wide range of NGL composition. So this, we made a decision just to enhance the overall operability, to have a wider range to take that product composition.

The second bucket is we saw some incremental inflation over and above what we expected in the latter half of 2023, when obviously there was a very large project sanctioned in Alberta here. So that was unexpected and caused some of the increase. And then the third bucket is our decision. When we sanctioned this project in February 2023, it was gonna be a typical Pembina project where we do all of the oversight and the execution.

As we saw these labor concerns, as you identified, the Heartland area getting busy, we decided to move to a lump sum to make sure that we could procure a tier one contractor, you know, that we were confident could get the fabrication shop space, make sure they had access to high quality labor, make sure that they were gonna execute with respect to our safety expectations and values and indigenous content, and deliver a high quality project on time. So we've shifted roughly 70% of that total project as we stated, to a lump sum. We'll execute kind of more of that outside the lease boundary, outside the frac area. We'll do a lot of that execution.

But we have made that shift, and we did see, you know, with shifting that risk from yourself to a third party, who's gonna deliver that high quality labor and safety expectations, there is a little bit of a cost with that. So that's kind of how we break up those three buckets. And overall, the project, like we said, is still planned on being delivered on time, which is great. And then with respect to the commercial side, you know, with this project coming out of the ground as we speak, we've been able to secure incremental contracts at the overall base complex, RFS I, II, and III, which is obviously great for business.

And then we've secured a lot of new contracts over and above, our original base case when we sanctioned this with the board in February of 2023. And with the incremental cost, we have seen that the overall, sanction metrics have actually gone up. And then with respect to the overall portfolio, I'll just talk like, the Heartland is seeing a little bit of increase, but overall, our portfolio is still, of projects, is still industry leading, and, we have the full confidence in our team to continue with the current projects, to deliver on time, on budget, and, the future ones.

Patrick Kenny (Managing Director and Research Analyst)

Okay, that's great color, Jaret. Appreciate that. And maybe just real quick, were the incremental costs here contemplated when with the PGI Whitecap transaction as well? In other words, like the online economics of the deal, I know some of it has some downstream benefits embedded in the returns. Just wondering if those returns are still in line with your expectations with the new costs on RFS IV?

Jaret Sprott (SVP and COO)

Absolutely.

Patrick Kenny (Managing Director and Research Analyst)

Yeah. Okay, I'll leave it there. Thank you.

Jaret Sprott (SVP and COO)

Thanks, Pat.

Operator (participant)

Thank you. Next question comes from Rob Hope at Scotiabank. Please go ahead.

Rob Hope (Director)

Morning, everyone. Wanna follow up on the frac discussion. You know, I guess two parts there. First one is, are the incremental contracts that you signed on for the entire RFS complex reflective of the incremental capital for RFS Four? And then how much white space do you have at RFS, and kinda when could you need some incremental capacity beyond what you're building?

Jaret Sprott (SVP and COO)

There's limited white space, Rob, at the complex, and even with RFS Four coming into service. So right now, very focused on project execution of step one with respect to the execution teams. But obviously, the commercial teams are in constant conversations with our other customers. And, you know, it's a balancing act between ensuring that we have the base load of the first three fracs, long-term, contract extensions, filled for under long-term deals, and then, you know, then get focused on sanctioning number five. But right now it's really focused on number four and getting that customer interaction for five going. I'd say that's a little bit further out. With respect to your first question, I think you were asking about incremental contracts.

Like, has anything changed specific due to the cost increase? Is that accurate?

Rob Hope (Director)

Yeah. Like, are the incremental, you know, were fees adjusted up for the new capital cost, and that's how returns were put back on site?

Jaret Sprott (SVP and COO)

Yeah, it's a combination of, specifically, that's a combination of volume, fees, and then you also have the downstream auxiliary fees, such as rail loading and terminaling, et cetera. And then obviously, the marketing business as well. Some customers, you know, choose Pembina to do their full suite of marketing, and some customers obviously, you know, do their own marketing. But we are, you know, advancing a lot of that business and, you know, and then you're obviously seeing the upside through the marketing arm as well.

Rob Hope (Director)

All right. Thanks for that. And then maybe just switching over to the ethane opportunities that were highlighted at the Investor Day. How are those progressing? And then just given the, you know, we'll call it a tightening labor market in the Heartland, you know, could this de-emphasize an RFS III DS and kind of focus more out in the field?

Jaret Sprott (SVP and COO)

You know, I would say no right now, Rob, because, you know, that's a fairly, that's a fairly small project, you know, as we've stated before, RFS III, and we just really need the tower. So, it's not an extensive like, you know, it's not 500 people on site, and it's, you know, it's building a few pieces of equipment in some select fab shops. So, you know, you might see a little bit of cost pressure in there, but I don't think that would be enough to deter us away from looking at that project. But since Investor Day, we have accelerated a handful of projects through Gate 1 funding, so that's, you know, small dollar amounts to get pre-FEED kicked off.

Then we'll be evaluating that near in the upcoming, you know, couple of quarters and making a decision on which projects go through Gate 2 and ultimately Gate 3, and which ones won't be.

Scott Burrows (President and CEO)

Yeah, I think, Rob, we'll be able to understand kind of what the current labor costs and what current costs are, which will help guide us in terms of which decision we make, which is, as Jaret pointed out previously, one of the advantages we have is we do have, you know, numerous sources that we can source the ethane from. And so any updated capital cost will go into that mix in our decision making.

Rob Hope (Director)

Thank you.

Operator (participant)

Thank you. The next question comes from Robert Catellier from CIBC Capital Markets. Please go ahead.

Robert Catellier (Energy Infrastructure Analyst)

Hey, you've answered most of my questions by this point, but I just wondered, given the massive development of the Peace system over the last several years, what's your vision for developing it from here? What further optimizations are possible from this point?

Scott Burrows (President and CEO)

So, Rob, I think there's a few different things. And again, this question, given the breadth of the system, really depends on where the volumes show up. And so, you know, when you're in Alberta, for the most part, we will focus on optimization now that we have segregated lines and where can we use pump optimization, product optimization to increase throughput. You know, we've already found some wins across the system to unlock some incremental volumes. We do have other areas where we can add low-cost pumps, like from Fox Creek to increase volumes there. And then we'll continue to look at opportunities in Northeast BC as LNG comes on, LNG phase one and other opportunities come online, and we see incremental growth there.

It's a tough question to answer. There's certain areas that are tight, where we'll have to expand, and there's certain areas where we have utilization opportunities.

Robert Catellier (Energy Infrastructure Analyst)

Okay, understood. I'm just wondering what the thought is on frac spread hedging in light of both the current prices and your increased exposure now that you've consolidated AUX?

Scott Burrows (President and CEO)

So, Rob, we have a pretty, you know, programmatic hedging program based on where frac spreads are, in terms of, you know, from a statistical basis, P-10 to P-90, with very limited discretion as it relates to the hedging program. You know, one of the benefits we did talk about on the original Aux Sable acquisition, as well as with the new contract, was it made it a lot simpler to hedge. And so, you know, as we stand today, we're about 50% hedged in Canada, and we actually have about just under 50% of Aux Sable hedged for 2024 as well.

You know, based on how frac spreads have trended the forward curve, we're somewhere in the neighborhood of 10%-15% hedge for 2025, but we'll likely be locking in incremental hedges, just given where forward frac spreads are compared to, I'll call it the 5-10 year historical average.

Robert Catellier (Energy Infrastructure Analyst)

Understood. And, last question, just a clarification from Cam. I think I understood from your previous discussion of taxes, that the 2024 current tax is not materially changed despite the increased marketing guidance. Is that correct?

Cameron Goldade (SVP and CFO)

That's correct, Robert.

Robert Catellier (Energy Infrastructure Analyst)

Yeah, thanks.

Operator (participant)

Thank you. The next question comes from Ben Pham at BMO. Please go ahead.

Ben Pham (Managing Director)

Hi, thanks. Good morning. Can you guys talk about the M&A opportunities in Western Canada? Do you expect more of the Whitecap JV sort of structure? Do you think key firms will be looking to monetize or even strategics looking to dispose of assets?

Scott Burrows (President and CEO)

Hey, Ben. You know, it's really—it's a really hard thing to predict. I mean, we couldn't have predicted that the Whitecap transaction was gonna happen, you know, 6-7 months ago. You know, I don't know. You know, we're not seeing necessarily a lot right now. And there's still a fair number of producers that wanna own that infrastructure, so it's very producer specific. But we're certainly, you know, we don't have line of sight to a large M&A pipeline. And then as it relates to PE firms, again, I can't really speculate. Still feels like a lot of the assets are relatively in their kind of early fund life. So, you know, we don't see anything that's kind of being driven by fund life.

I don't have a good insight now as to what PE firms may or may not be doing.

Ben Pham (Managing Director)

Okay, understood. And I know there's also some comments on Alliance Aux exceeding expectations and then the tuck-in of Aux to maybe solidifying the synergies a bit. Is that comment more suggesting that you might beat that 8x multiple that you've commented about? And then what about that acceleration of the marketing volume? Does that change now?

Cameron Goldade (SVP and CFO)

Yeah, Ben, I guess I would just say that I think, obviously, as Scott mentioned earlier, you know, we've, we've been fortunate in the sense that obviously, the commodity complex has strengthened since we made the original acquisition, and continues to show strength, you know, in this year and, you know, even outlooking next year. In terms of the synergies, I think it does. I mean, you know, anytime you've got sort of full control of an asset, it obviously does, you know, put the wheel squarely in your hands to execute on those synergies. So I think it does support us in that regard.

And I do believe that, you know, we will see additional opportunities as we, you know, sort of get our arms wrapped around and sort of keep moving things forward, as we've done with other assets. You know, are we at a point yet where we're ready to put our hand in the fire and start to quantify those? Not yet, but I think, you know, we're definitely seeing things evolve positively and so far, you know, very pleased with the acquisition, the timing, and the returns that it's generating.

Ben Pham (Managing Director)

Okay. Thank you.

Operator (participant)

Thank you. Next question comes from Robert Kwan at RBC Capital Markets. Please go ahead.

Robert Kwan (Managing Director)

Thanks. Good morning. If I can start with guidance and just kind of some of the thinking around the asymmetric increase, and just, you know, is that just more of conservatism on the high end, whether it's around some of the volumes that Jaret talked about earlier, or maybe potentially anything you see on the rail side of things, versus the low end coming up, and just the confidence you've got with some of the-- some of, well, just the mechanical changes with the Aux Sable acquisition in the way?

Cameron Goldade (SVP and CFO)

Yeah, I think that's a fair comment, Rob. And as you suggest, I mean, there's a number of things that go into it. I think we obviously had confidence to bring the low end up meaningfully from where it was last time, just based on you know, such a strong first half. When we look at the second half of the year, I mean, there's a couple things obviously that are coming into effect, which you know, some with certainty, some with less certainty. And so obviously, as we look forward to the second half of 2024, we've got you know, the Cochin firm tolls are now under the revised tolling structure.

You know, while we continue to see strength, you know, at the moment, obviously, you know, when you sort of look out in terms of interruptible flows through Q3 on Alliance, you know, some uncertainty there. Could exceed our expectations, but obviously taking, you know, taking sort of what we know at the moment. And then lastly, clearly, the big outstanding item or range is obviously the marketing book and how that shapes up. Obviously, you know, some backwardation in the crude market here. You know, this forward strip currently shows some strength in the gas market as we close out the year, but those are all uncertain. And so as we look at that...

And then on top of it, as you point out, a couple of things which are outside of our control. You know, you've got a rail issue, you know, we're hopefully coming towards the tail end of wildfires in Alberta and Western Canada for the year. But you know, that obviously always remains a risk through the summer here. So, a few things on our mind, that we bake in there, and obviously, wanted to show strength by bringing up the bottom end and obviously, you know, bringing up the top end as well, but recognizing the uncertainty in the back end of the year.

Scott Burrows (President and CEO)

Yeah, the only thing I'd add, Rob, too, is just given, you know, we don't control the closing of Whitecap, none of that transaction is in that outlook.

Robert Kwan (Managing Director)

Okay. Got it. Thanks. If I can just turn to the RFS for costs, and really just how do you think about the parallels, if any, or lack of parallels, I guess, with that, versus what you're seeing from Cedar? One thing just to touch on is, I think Cedar had some off-site fabrication, and so is that gonna put pressure on that component at a minimum on-

Scott Burrows (President and CEO)

None.

Robert Kwan (Managing Director)

- the project?

Scott Burrows (President and CEO)

None. None, Rob.

Robert Kwan (Managing Director)

And what-

Scott Burrows (President and CEO)

Cedar, we had the lump sum at the time we press released, so that's all reflected in the cost and all the fabrications being done overseas. Not really anything in the Fort. So, we see zero parallels between the two.

Robert Kwan (Managing Director)

Okay, perfect. And then just the last, just on the Whitecap deal, you know, can you just talk about- you know, within PGI, you've got kind of the return that makes sense for the joint venture. How do you think about the upsides you can get from all of the, the other pieces? I don't know if you wanna quantify it, but just what are the different pieces that give you that upside? And, and specifically, can you just comment on the Musreau, FA and Angle, and the Dow contract?

Jaret Sprott (SVP and COO)

Good morning, Robert. Yeah, so downstream, so obviously, there's the base acquisition of the Kaybob facility through PGI. And then there's the capitalization of the Lator Battery that Whitecap will be executing, and then we'll be executing the pipeline to tie into Musreau. So really, filling in white space through our KA facility as we connect that to the Kaybob facility down into the southeast. And then when you go west, right, maximizing the utilization of our original Cutbank Complex or Musreau Complex, as we call it. You know, and then ultimately, we have the opportunity to take more of that more gas through the deep cut at Musreau. So obviously, that, I think, can be part of our overall diversification portfolio to satisfy a Dow contract.

And then obviously, you know, you have current liquids that are extracted at K3 and the Kaybob facility. And then with incremental gas going through the Kaybob facility, obviously, there's incremental contracts required on through Peace and through the fractionator, and then ultimately through the back end of the frac, like terminalling and rail, et cetera. And then when you shift over to Lator, all of the incremental condensate will flow on the Peace system. The incremental C3+, that will be extracted from the gas, and the C2+ will obviously flow down the Peace system. And all of those barrels, the condensate will be guided to various condensate outlets in Edmonton, and the NGLs will go through the RFS complex. So that's kind of in totality, how the entire deal works.

Base extensions on contracts and then new incremental volumes, through the value chain.

Robert Kwan (Managing Director)

Got it. Thanks, dude. That's, that's helpful. Could you see the magnitude of the stuff outside of the PGI, approaching the magnitude in terms of contribution of, of the acquired assets or?

Scott Burrows (President and CEO)

Rob, sorry, it's Scott. I'm just not sure what the ... how to ask ... Like, what ... can you rephrase the question maybe? I think we're just-

Robert Kwan (Managing Director)

Well-

Scott Burrows (President and CEO)

-a little...

Robert Kwan (Managing Director)

Yeah, like, you've talked about, I don't know, maybe we put it kind of in the build multiple or acquisition multiple context, presumably what you did within the joint venture has to stand alone. So, you know, how much more of a kicker are you gonna get from all the stuff that you would get downstream?

Scott Burrows (President and CEO)

Yeah, I mean, that's obviously would disclose confidential information that I just don't think we can disclose at this stage. I mean, I think suffice to say, Jaret tried to highlight the fact that in addition to the standalone PGI returns, you know, we secured incremental utilization of our facilities through existing and expanded contracts. So, you know, I think we've said what we needed to say on the actual acquisition release. And then upon close, you know, we'll update 2025. But overall, you know, we've found the consolidated multiple in line with previous acquisitions, if not slightly better.

Robert Kwan (Managing Director)

Okay, that's great. Thank you.

Jaret Sprott (SVP and COO)

Thank you. We have no further questions. I will turn the call back over to Scott Burrows for closing comments.

Scott Burrows (President and CEO)

Well, well, thank you, and especially thanks to the analysts, who I know have had a, a busy two weeks, and we're at the tail end here. Appreciate all the questions and the quality notes last night. To any of our employees or to all of our employees listening to the call, thanks for all the hard work. It was a really good quarter. Thanks, everyone. We'll see you again in November.

Jaret Sprott (SVP and COO)

Thanks.

Operator (participant)

Ladies and gentlemen, this concludes your conference for today. We thank you for participating.