Pembina Pipeline Corporation (PBA) Q4 2018 Earnings Report, Transcript and Summary

Good morning my name is Adam and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Pembina Pipeline Corporation Fourth Quarter Results Conference Call. All lines have been placed on mute to prevent any background noise, and after the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I'd now like to turn the call over to your host Scott Burrows, Senior Vice President and Chief Financial Officer. Please go ahead.

Thank you, Adam. Good morning, everyone, and welcome to Pembina Pembina's conference call and webcast to review highlights from the fourth quarter and full year 2018. I'm Scott Burrows, Pembinas Senior Vice President and Chief Financial Officer. On the call with me today are Mick Dilger, Pembina’s President and Chief Executive Officer; Jason Wiun, Senior Vice President and Chief Operating Officer, Pipelines; Jaret Sprott, Senior Vice President and Chief Operating Officer, Facilities; and Stuart Taylor, Senior Vice President, Marketing & New Ventures. Before we start, I like to remind you that some of the comments made today maybe 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 refer to the company's various financial reports, which are available at Pembina.com and on both SEDAR and EDGAR. Pembina once again delivered strong quarterly financial and operational performance. Adjusted EBITDA was CAD750 million, a 6% increase compared to the same period last year. The increase was driven by strong demand on existing assets and increased utilization on assets placed into service in the Pipelines and Facilities Divisions in addition to a realized gain on commodity-related derivative financial instruments in the Marketing & New Ventures division. While earnings of CAD368 million during the quarter was 17% decrease when compared to the same period last year this was largely due to a one-time increase in deferred tax expense relative to the fourth quarter last year which was positively impacted by the one-time impact of U.S. tax reform. A strong fourth quarter contributed to record financial results for the full year. On an annual basis, 2018 earnings of CAD1.3 billion was 45% higher than 2017. Adjusted EBITDA was 67% higher at CAD2.8 billion and adjusted cash flow from operations per share was 31% hire at CAD4.27 per share, all three metrics that new records for Pembina. These results were driven by the full year contribution from assets included in the acquisition of Veresen in October of 2017 in addition to CAD4.8 billion of new projects placed into service throughout route 2017. Further, the year-over-year increase was realized broadly across the organization with all three divisions, Pipelines, Facilities, and Marketing & New Ventures contributing to our growth. We delivered these record results while remaining firmly within our financial guardrails. In 2018, fee-based cash flow comprised approximately 85% of adjusted EBITDA; our dividend was supported by 75% of our fee-based cash flows. Roughly 77% of our credit exposure is with investment-grade and secured counterparties and we are well above our strong BBB credit rating with a ratio of FFO-to-debt of approximately 23%. As well we finished the year with a ratio of proportionally consolidated debt-to-adjusted EBITDA of approximately 3.5 times, below the lower bound of our target of 3.75 to 4.25 times, positioning us very well for the next wave of capital spending. Recall that in December we announced a 2019 capital program of CAD1.6 billion and 2019 adjusted EBITDA guidance range of CAD2.8 billion to CAD3 billion. Finally, I want to note that when comparing where we are now to wear we were 10 years ago, we have grown volumes by 180%, cash flow per share by 171%, and our dividend per share by 50%. Over the same 10 year period, shareholders have realized a total return of about 380% or 17% per year assuming a reinvestment of their dividends. We are proud of the results we've achieved over this period, and look forward to continuing to deliver for our shareholders. Now, I will turn things over to Mick to share us perspective on 2018 and our strategy to access global markets.

Good morning, everyone. Thanks, Scott. 2018 was simply said, an outstanding year for Pembina. We placed approximately CAD900 million of projects into service, and secured over CAD1.8 billion of new capital projects. In 2019, we have already added VIII Peace Pipeline expansion as well as sanctioned our PDH/PP facility, bringing our total capital backlog of secured projects to about CAD5.5 billion. In 2018, we saw the first full year of contribution from the Veresen acquisition. The acquisition was transformational for Pembina, and we are realizing the strategic and financial benefits of the combination. The Veresen acquisition was designed to offer Pembina greater diversification, and ultimately provide our customers a more comprehensive service offering. I was very pleased to see this vision come together with the high development projects announced in November. This was the first truly integrated deal utilizing Pembina's full value chain, including natural gas gathering and processing at Veresen midstream transmission on Alliance Pipeline, liquids transportation on Peace Pipeline and fractionation at Redwater. Integration is at the heart of Pembina's strategy, and we are keen to add more deals like this in the future. The prospects for future growth, both within the base business and our further extensions of the value chain are strong. Our customers continue to approach their businesses as we do with a long-term outlook. We are planning for continued investment many years into the future, and are looking ahead for egress securities. We are able to deliver timely and reliable solutions for our customers and our growth prospects remain bright. Finally, I want to touch on the next evolution in Pembina's corporate strategy, which we announced in May of 2018, seeing the move towards accessing global markets. We are pursuing new developments that will contribute to ensuring that hydrocarbons produced where we operate and reach the highest value markets throughout the world. In the past year, we began construction of our Prince Rupert LPG Export Terminal, and continue to progress our work on Jordan Cove. But of course the highlight is the recent approval of our CAD4.5 billion integrated PDH/PP facility with our partners of EICF, Kuwait. Through this project, we will capitalize on Alberta’s of funds, supply of propane and undertake value-added processing that benefits all eminent stakeholders, the province of Alberta and indeed all of Canada. By partnering with CIC, we combine the relative strength of each party and substantially mitigate the risk of Pembina's entry into this market. And as promised, we will develop this project firmly within Pembina's publicly stated guardrails. We have already achieved, a level of fee-for-service of 40% and expect Pembina's adjusted EBITDA from this project and based on ongoing negotiations, we are confident in achieving our stated goal of 50%. Through Prince Rupert Terminal, our PDH/PP joint venture and ongoing progress on Jordan Cove, I'm pleased that we've been able to take such meaningful steps in our efforts to secure global market pricing for our customers, and we are excited to continue to development of these and other projects. In closing, I once again like to thank all stakeholders for their support. We are proud of what we've accomplished in 2018, and very excited for the year ahead. With that, I'll wrap things up. Operator, please go ahead and open up the lines for questions.

[Operator Instructions] And your first question comes from Jeremy Tonet from JPMorgan. Jeremy, your line is open.

Just want to check out, we are a couple months into the year here, right, and we've had kind of the production cuts in Alberta play out a little bit here and commodity prices moved a bit. Just wondering, how these developments stack up versus when you contemplate your guide, if this is kind of in line with what you are expecting or if there's any kind of changes, where you see things landing in the upper end and lower end of the or any color you could provide on that would be helpful?

Thanks, Jeremy. This is Jason. The pipelines position, I think the curtailments are really focused on the producers who produce crude oil over 10,000 barrels a day. It has an impact on some of the heavy oil producers. We're not -- on our oil sense side, we've seen a bit of a reduction in volume, but those pipelines are operated on a cost for service that doesn't really have a direct impact on our guidance. In terms of the impact on our conventional systems, we're not expecting to see a very material impact to those production volumes, as you recall, those are mostly NGLs, conventional crude and condensate. The conventional crude are generally not impacted by the curtailment because the magnitude is over 10,000 barrels a day of production. And then the condensate isn't expected to be directly impacted.

Got you. Also just kind of…

Overall on the guidance, like anything on a month-to-month basis, there's a few puts and takes, but there's nothing that's materially changed since the time that we put out the guidance to impact that range.

Got you. That's great. I was also kind of thinking on the marketing side, just given how commodity prices have changed and relative spreads have changed. Is that kind of impact your outlook or how much -- the marketing could makeup within the guidance this year?

You know I think if you step back for a second and you think about the diversity of our marketing business and all the optionality that we have, for every spread that tightens, there tends to be something else where we can make some money. So when we set the guidance as you move through December maybe the marketing business would have come down, but as we move through February, it's come back up, so we're comfortable with where the marketing is versus where we set the budget back at the end of November.

That's helpful. Thanks. And then if I look at the balance sheet, Scott, you noted 23% FFO to debt. Clearly, things are trending up here. I'm just wondering is the target here and upgrade would make sense? Is that what you're kind of targeting here or do you see more growth in CapEx on the horizon they just want to have flexibility or would it make sense to kind of step up the dividend a bit here, just wondering how you see these options trending given…?

Yeah with our guardrail being strong BBB, we're really targeting something around kind of 18%, 19% FFO to debt which is at the high-end of the BBB range. And our debt to EBITDA of 3.75 to 4.25, this year obviously with an outperformance of the business, it brought those matrices into ranges that were stronger than what we were targeting. But I think we are comfortable with that because as we move forward we obviously have a very heavy capital spend. As Mick pointed out another CAD5.5 billion of capital still to spend with many more projects that we are potentially considering so it’s more about positioning ourselves because of course with a multiyear build out two or three years into those projects you reach peak leverage with no EBITDA. And we want to make sure that the lower end and that kind of peak leverage that we are still in the BBB range. So we're more positioning ourselves to go into a capital spend from a position of strength and we are chasing an upgrade.

That's helpful thanks. And maybe just last one. Alliance and Veresen mid-stream seem like they performed quite nicely in the quarter just wondering if there was anything as one-time beneficial of nature or are you see this kind of trajectory of growth sustainable?

Jeremy this is Jason again. Alliance continues to perform really well. It's generally chock-full on a daily basis, has been since we've become part owner of that asset. There is certain swings and differentials between Chicago and Alberta in certain scenarios where some of the IT volume generates some incremental uptick in revenue there, but it's nothing that I would say would be materially different than what you would expect.

And your next question comes from Linda Ezergailis from TD Securities. Linda, your line is open.

Thank you. I'm wondering if you've assess the impact of the accelerated CCA incentives announced by the government of Canada in November on your cash tax outlook in 2019 and 2020 and how we might think about that going forward?

Yeah. I mean Linda I mean without at a highest level it’s obviously positive. In terms of giving numbers we're still working through it. It's obviously not legislation yet. So until it's passed we would be remiss to put out or revise our guidance. If it does go through, it's notionally positive. And I think at that time we'd obviously update our current tax expense forecast that we have out there but I think until then, we'll just be cautious on that.

Okay. That's helpful context. Thank you. And just with respect to your phased expansions IV and V was slightly over budget. And six is trending a little bit over budget as well. Is it for the same systemic reason and can we assume that for whatever reason those are slightly over budget they're not systemic and we might not see that in your subsequent phased expansions as well?

Thanks, Linda, this is Jason. So Phase IV and V were impact that impacted by some weather constraints and access to certain sites on particularly on the Phase V segments. We've gotten to the point with our pump stations that we're very comfortable with our ability to execute those and we generally execute them at or below budget. The challenge sometimes is on the pipe side where weather and access conditions can be a problem. And that's really what happened with our Phase V portion of the project to push the cost slightly above budget. Phase VI is a trend. We're seeing -- at the time that we started the procurement on the Phase VI, we started to see some of the contracting services try to increase. And we've actually sort of backed off on procuring some of those services and we're actually going out in the first quarter and looking at those again. So you know it's a trend. We haven't really spent a lot of the money in Phase VI yet, so we're expecting or hoping to be able to drive those down. And we also used those higher trend costs to forecast our VII and VIII expansion. So we're pretty optimistic that we're well within target on those as well.

Hi, Linda, it's Mick. When we look forward though, we think it's more anomalously. We think it will have a very positive trend right now on Phase VII and Phase VIII Stu that I’ll to comment. Over the fullness of the phases, we firmly expect to be consistent with past history which is on time and on or under budget.

That's helpful context. Thank you. And I realize that we’ve got a significant backlog of secure projects at this point, but I'm wondering if there is beyond, I guess, Jordan Cove, which is a focus as well. Are there any significant projects that you're starting to contemplate? There's been some rumblings that maybe you'd be interested in ethane, upgrading locally in Western Canada, and might you see a demand in your LPG export facility to consider expanding that. And how does some of the financial guardrails and your capacity as an organization both from a financing as well as kind of resources of people and management time affect your appetite for looking at these other projects?

Sure. I'll try to answer those six questions, as I can. Good one, Linda. You see I have future in the parliament. So if you read the interview that Pembina did in the National Post that talked about in terms of ethane upgrading. And the rest of the sentence in that article that wasn't printed was we were mainly interested in that as a supplier, not necessarily at a partner in polyethylene. I mean, that could happen, but more as a fee-for-service supplier. You're original question, do we see lots of growth opportunities? Man, do we ever. I mean, there -- every division is full of ideas. And it's super exciting. We couldn't be more optimistic about the things that we can do for our customers and bring lasting advantage to our stakeholders. You not going to be surprised when I say that everything we look at will be in the guardrails, whether it's providing fee for service ethane, whether it's even participating in a polyethylene plant. You know we’re going to be fee-for-service guys and gals. Otherwise, we just don't do it. You know how we finance. We’re just going to keep doing what we’re doing – what we have been doing. And there's going to be -- we have no kind of new anticipated risks for doing any kind of business that would disappoint our stakeholders

And in terms for demand for LPG, could you see one of those projects over the next little while potentially be some sort of expansion on that front or --?

For sure. Butane, we could see this coming, obviously. Butane is not getting good value. Propane isn't either, but we see the fix. The fix is in our LPG project AltaGas is the two PDH's and the fix is in for propane. We need a fix for butane literally. And we need a fix for ethane. And maybe these government grants that are being proposed, we'll start the fix for ethane. I don't know how they start the fix for butane yet, but that's clearly on our drawing board. We need to get our customers better butane pricing, without a doubt, and will put our minds to that.

And your next question comes from Matthew Taylor of Tudor Pickering Holt. Matthew, your line is open.

Hey, good morning. Thanks for taking my questions here. You talked about Phase IX they're powering up existing capacity. I'm just curious what discussions are to expand and think through going even further northwest of Gordondale, as it seems like you’ve increasingly talked about by producers and that’s where the focus for growth plans is?

I'll just make that opening comment, and Jason will follow on. We still have capacity on Phase VIII. Ink is barely dry on that press release. But there's still potential, up and down our line, and we're considering all possibilities for getting more producers volumes to market. Jason?

That's accurate. I think bringing on Phase IV and V and VI this year, they're getting us at least keep up with our producers in terms of what they're producing. Phase VII and VIII give us running room. And after Phase VIII when we talk about Phase IX, a lot of it is about how we operate the system and less about necessarily capacity, so we've already got with the mainline going into Fort Saskatchewan in Edmonton. We've got the ability to power up to 1.1 million barrels a day on BC. We have room there. Seven and the phases before really created access for us to get all the volume to Fox Creek from basically LaGlace. So when we think West of LaGlace it’s some pretty specific sort of small looping projects, pump station projects and things like that to be able to allow us to access the capacity that East I guess is Gordondale. And so we are looking at those and there is a lot of activity up in that area.

Okay. That's great. And what about going further northwest, do you still have some room on the northeast BC expansion or would you need to look at doing some additional expansion to bring more BC volumes down as producers start focusing on [indiscernible]?

Yeah we have the ability to power that line. It's not anywhere near its capacity at the moment. And we do have room to contract volume, but we also have room to power that system up. We can add booster stations on it and get it up into the 100,000 barrels a day range.

And the contractual nature of that line is cost of service. So as producers can essentially manufacture their own toll collectively, as Jason said that, line gets full, the toll drops. And so the people, the impediment people may perceive of being that far away is mitigated somewhat by tolls dropping as volumes increase out there.

Yes, that's great color. Thanks for that. And then one more question on ethane there. Do you have any potential to rethink or reverse Vantage given structurally long in Canada? Obviously, probably need to connect into overbuilt third-party pipes. I'm just trying to think if there's some way to get ethane more -- ethane out of the province?

That's under a really long-term contract with the key shipper so that would be our decision to make in the next 15 years anyway. But is it physically possible? Perhaps.

And then just on NGL services, notice an uptick in volumes there quarter-over-quarter and then kind of year-over-year. I didn't notice kind of a corresponding marketing volume uptick. Just trying to think through that disconnect and how we should be thinking of capturing more marketing volumes through 2019 as you're processing more volumes in your facility segments?

I don't know the answer to that. I think a couple things. I mean -- so, volumes that flow through the frac not all are pure frac spread barrels which get the full margin. We have different marketing arrangement, some we have returned. These were returned back to the producers, our best two and three under slightly different marketing arrangements and others. I think, quite frankly, you saw prices come off pretty hard in December. So, we went into -- if you follow the trend of NGLs, they tended to trend up all year. There wasn't the usual seasonality factor, so you went into Q4 with I'd say probably higher than average COGS. And then what we saw in late November and all of December was pretty reduced pricing and so that really squeezed margins for that month.

All right. Yes. That's helpful color there. And just one more on the conventional business. Can you just talk about -- I mean is marginal downtick in volumes and higher OpEx? So, I'm trying to think of the main drivers there and how you're seeing those drivers potentially play out in 2019?

Yes, I'll just make one comment and I'll turn it over to Jason to talk. I mean -- no one, I think, should be surprised by the higher OpEx. If you recall Q2, Q3 conference calls, everyone was asking us about the full year guidance. We've warned people that we had pretty substantial integrity in geotechnical programs that tends to happen in Q4 due to winter access only. So, that's something that we had discussed pretty openly. So, that shouldn't have caught too many people off guard, but maybe, Jason, I'll let you talk about volumes.

Yes, I think on the volume side, it's actually more related to the IFRS treatment of volumes and makeup rates. And as we go through the year, we make estimates of the rates that we expect people to be able to make up their shortfalls to take-or-pay. And really the volume difference that you're seeing in the fourth quarter versus the third quarter is really accounting adjustments, not physical volume reduction.

We recognized quite a bit more in Q3 versus Q4. If you would have averaged those two IFRS recognitions, you would be roughly the same quarter-over-quarter, absent a marginal uptick in OpEx due to integrity. So, it was -- I'd say it's more noise than anything fundamentally or structurally wrong with the business.

Your next question comes from Patrick Kenny of National Bank Financial. Patrick, your line is open.

Hey, good morning, guys. I'll let you off easy here and just stick to two questions. First one, just on the contracting efforts for Jordan Cove, given the level of interest year, exceeds the capacity of the plant. Is this process through the rest of Q1 simply a bidding war amongst the off-takers and you’re just letting that process play out? Or are these customers waiting for certain milestones yet either on capital cost estimates, pipeline regulatory progress, or any other state level support that still might need to be firmed up?

Patrick, it’s Stu. It’s essentially – we’re turning paper with all of the parties, and working through that there is nothing on the commercial side that we’re waiting for a milestones. The first one done is if the price is to get the agreements done as fast as we can where we continue to progress all the commercial conversations at the same time.

Okay, that's great. And the second question, now that KKR has a new partner in Montney. I wondering if that changes anything for Veresen Midstream with respect to appetite for future growth, or perhaps does this increase the tension around the ownership structure. Just trying to get a sense as to whether or not anything has changed for Veresen Midstream since that deal was announced a month or so ago?

Hey, Pat, Jaret here. Right now, no, it doesn’t increase, I would say, the tension within our partnership. Veresen Midstream is really focused northwest of Grande Prairie and northeast B.C. with a fairly large footprint with a great long-term 30 year area of dedication. In down where the new entity is, I would say that gets more into Pembina's traditional processing, and liquid transportation business. But, no, based on your original question, we don't see increased tensions or crossing over of borders there.

VMLP is an exploitation focused entity right now within the area of dedication. So they are not focused on new geographic areas at all. So if you think about the hype project that was exploiting existing capacity, and we're sweating those assets to make them as profitable as we can with full support from our partner KKR. But it’s not a growth mandate.

Your next question comes from Rob Hope from Scotiabank. Rob, your line is now open.

Good morning, everyone. Just maybe a follow-up on Pat's question there. Just we have seen some producers talk a bit more openly about willing to shed some assets. Just I want to get your sense of the M&A market in Western Canada right now, whether or not there are some pieces of infrastructure that could be of interest to you?

I mean, not surprisingly, we do look at everything. What we ask ourselves when assets are for sale is does this make us better or just bigger? It really is an important question. And so if buying something, just makes us bigger not better, even if it's slightly accretive, it may not be compelling to us. We're more focused on things that diversify us at a higher level of customer service, rate, synergies, reduce risk, enhance our guardrails, things like that. Just adding, for example, more and more gas plants, particularly ones where we already transport the liquids and provide fractionation services, so on and so forth, maybe a little less interesting to us than projects which have the characteristics that I just outlined.

All right, thank you for that. And just as a follow-up, turning attention to Jordan Cove, I appreciate the commentary on the contracting there. But when you look at that project over the next year, what do you think the key chokepoints are? What are -- do you think will be the impediments to an FID there?

Robert, it's Stu. We continue to progress the regulatory process, our teams continually are in contact with both the federal and the state permitting bodies for answering questions were progressing all the conversations. We are again hoping to have our commercial range is completed here in the first quarter. We've talked about an equity sell-down process of which we will kick off very soon after that, and progress that we hope quickly. There isn't a chokepoint or a bottleneck. At this point we’re continue to anticipate our FERC draft EIS here in the next few weeks followed up by the actual certificates in 2019. And those things are all-in on track for what our expectations are.

Your next question comes from Robert Catellier from CIBC Capital Markets. Robert, your line is open.

Yes. There's been a bit of senior management change at Chevron, and there's been some other producers leaving the basin. I wonder, if there's been any change to the outlook of the rollout in the pace of the program you have with Chevron for the Duvernay.

Robert, Jaret here. No, everything is business as usual. We're currently executing the first expansion for that we announced in Q4 2018, the next phase of [indiscernible]. And in short order no change.

Okay. And just for on the producer side there's a Redwater case of abandonment liabilities and things like that. And there's also IFRS 16. I'm wondering if IFRS 16 is going to require producers to capitalize G&P arrangement so whether the Redwater case will limit access to debt and maybe curtail capital spending a bit. Do you have a take on that?

Yeah, I think when it comes to IFRS 16, maybe just start there. I can't to what's going to happen to the E&P space. From our own perspective, we have certain assets that will be leases that will go on the balance sheet. And we have some lesser arrangements as well. We're still finalizing all of that analysis and will probably update the market with our Q1 results just on the overall impact the pluses and minuses of that. But I can't speak from a producers perspective. In terms of Redwater abandonment, and I assume your talking to the liability of a abandoned wells. Those are not -- that kind of hasn’t come up in our conversations today. I'm looking around the room to my colleagues to see if they've had those discussions with their customers. Certainly, I haven't heard anything. Yeah, Jason?

No.

No feedback.

Okay. And just my last question here is more of a curiosity. The press release referenced creativity a few times. Does this refer to commercial structures sort of trading over fees for extending the term or things like that? What are you referring to the creativity reference?

Well, two things really, its the creativity I think of our customers. I mean, if you look back, to say the middle of 2014 and you said we are going to have a growing base, we keep expanding piece, so the base is growing. And if you would have said, we're going to have a rapidly growing base at these kinds of commodity prices, people would have said you're crazy. And so the creativity of our customers to persevere with top Capital Markets and top pricing, I think our hats are off to them and we're going to do everything we can to improve their net back which brings us to our creativity, taking on a global strategy and getting propane onto Tidewater, converting propane into polypropylene, a brand-new market. We hope to slay butane at some point. And we want to supply ethane to make sure that that product isn't kept in the gas stream and sold based on methane pricing. So I think we can take a little bit of credit for being creative as well to change the face of the basin.

Okay. You have mentioned butane a couple times now. What are the options as you see them to increase other than expanding LPG capacity?

We're in the early stages of that, Robert, so more to come. But when products trade down like they do, it attracts attention. So even if it's not imminent, I'm sure there are other companies working on how to solve that.

Your next question comes from Andrew Kuske from Credit Suisse. Andrew, your line is open.

Thank you, good morning. Mick, I think you mentioned sort of a few times the number of market dislocations that exist in Western Canada and how Pembina can graciously fix some of those challenges. I guess, if you sort of step back a little bit and you think about just your business development capital that you allocate to opportunities. How do you divide it among sort of down the fairway kind of projects that are really network extensions of your existing asset base versus the amount of capital you allocate too, really the bigger boulder lower probability things that are maybe complete business extensions or brand-new opportunities? How do you think about that?

Well, that's actually a topic of our next strategy session and our executive strategy session as well as the board, because it's tough. I think you're trying to balance a bunch of things. Your ratio of projects spending for large capital projects like Jordan Cove. You have to keep that ratio of spending on those to your overall EBITDA at a minimum. But yet, the flipside is you have to do think that are going to make a difference to your company and to the basin. So there's that trade-off. There's trade-off on geographic basin diversity, currency diversity, Pembina to be spending more money for example, in the Bakken or elsewhere in the U.S. to diversify, which may not be quite as accretive as doing things in our backyard, where we leverage our entire value chain. Those inner plays are what is both difficult but also exciting. The great news for Pembina is as Scott talked about the balance sheet. We have thanks to all you folks. We have a strong share price. And so we can't have options to do many things that make sense at the same time. And so if we are confronted with numerous opportunities, we may do them all. We're at a very good spot.

Appreciate that. And then maybe just thinking on the core business again, realistically when we look at the next five years, how many more Peace expansions are possible and how many more Redwater's are possible? The numbers just keep going up and up and up on the expansion capability given the nature of the basin itself.

Well we are about fives further passivity already. So I honestly -- I really believe that we are only just getting started in the Montney and the Duvernay. If we have III or IV Chevron type deals in the basin and LNG, maybe shale not being the last LNG project, we're just getting started. The resource is abundant. So if the Duvernay like the Eagle Ford rockets up to 500,000 or 1 million barrels a day, we're just getting started. Of the resource is there; we just have to get some of these export pipes, export terminal bills and then we're just getting started. So we are thinking very long-term. You think about what we're trying to do with Phase VIII and Phase IX to have four completely segregated pipelines to as Jason said operate the pipelines much more efficiently and need less storage, less product contamination and all hopefully ending up with lower tolls as well due to operating and capital efficiencies. We are planning for growth way beyond Phase VIII.

And your next question comes from Robert Kwan of RBC Capital Markets. Robert, your line is open.

Great, good morning. Mick, maybe I can just kind of start and continue on the pipeline side of things. First in terms of bringing on Phase IV and Phase V in your system was quite false. I think volumes being tracked around on some other parts of the system Can you just talk about how the volumes have ramped up on IV and V but feeding kind of that into the whole Phase IX discussion. What are you seeing just out there in terms of really indications general customer sentiments particularly given some of the competitive options out there?

Yeah I am going to let Jason answer that question. The only thing I'm going to say is, it is always very tough on us and our producers when we can't be ready fast enough and we had a situation like that where we couldn't quite get all our producers’ condensate to CRW until we got expansions done. And we really sincerely try our hardest to stay have those, but of course it's give-and-take. You need commitments to spend capital and sometimes they commitments are a little slow. And the rate at which producers can drill now, they get a six well pad and hundreds of fracs. They can bring on volumes so quickly, more quickly than we can react given the regulatory constraints we have. So we are trying very hard to stay ahead of that. And one of the nice things about going from being a $10 billion to $20 billion to a $30 billion hopefully to a $40 billion company as we can start to front run some of that capacity and engineering which we’re starting to have the balance sheet to do so. We never let our producers down.

So just maybe directly to the first part of your question about ramp up, I’d say, if you think about it, it was the end of December that we brought those on stream, so talking about ramp up is a little bit premature I would say. But the volumes are continuing to grow, and we continue to talk to customers all across our basin. I do think Phase VII and VIII give us some breathing room to mix point. And our next round of expansion will be smaller and more trying to access some of the capacity that that gives us. So I think we're in a good spot right now in terms of being able to quickly get to those volumes. I'd also say, we're optimistic about the way things are going on our Phase VII and VIII projects already from the perspective of regulatory and are part of the world as well. So I think all things are looking positive from that point of view.

That's great. And if I can just insert a couple of smaller cleanups. Scott, you mentioned you're still assessing IFRS 16. So I assume that your EBITDA guidance does not include the impact of the expected IFRS 16 on at least the EBITDA side of things?

That's correct, Robert.

Okay. And then on Alliance, just looking in the quarter, they distributed quite a bit less than cash had generated, which is a little out of line with prior quarters, I was just wondering if something was going on if there's a change in the distribution policy.

No, there's no change. I mean the way that that pipeline pays out is typically the cash gets paid out two months after the EBITDA is seen. So despite a strong EBITDA performance in Q4, those distributions likely show up in Q1 of 2019. Some of it is just timing.

Okay. Even though the distribution in Q4 was lower than prior quarters?

Correct.

And your next question comes from Jeremy Tonet of JPMorgan. Jeremy, your line is open.

Thanks for squeezing me in for a follow-up here. I just want to kind of build off some of the points you discussed here in the call and you talked about since you announced last May, you talk about wanting to extend the value chain further down and get the molecule to premium market to enhance producing netbacks there. And just kind of thinking out loud, whatever makes sense to build more pipes kind of further south crossing the border, and get the molecule on pipes into more of the U.S. market? I realize it's a long distance and probably costly, but just wanted to ask would it ever make sense to pair up with the U.S. players south of the border to try to provide that type of solution?

We're just learning the box and we’re learning where does product go after Aux Sable processes it. So it still is early days. We've been focused hard in the fourth quarter and the first quarter with PDH and Phase VIII and doing engineering for Phase IX and those kind of things. I know we've been saying it for a long time, but we are looking at projects like you're describing at other geographic locations, but our success in other areas is keeping us a bit too busy. But we feel we've brought in just some terrific people through Alliance. And, Jeremy, we're operating Aux Sable and we're starting to get to know those folks, and they're super impressive. And they have had ideas for a long period of time that they haven't been able to execute. And, Jaret and Jason are collaborating closely to see what's possible all along that corridor, where we believe we have a good franchise and a position of strength and what can be done around those assets. So I think it's promising to – for us to be looking in those areas.

Got you. Understood on the Aux Sable side, but just curious on an Edmonton sale of NGL pipeline, that's probably cost prohibitive?

The thing with NGL, Jeremy, it's the same with West Coast NGL discussion is, to build a long haul pipeline, you kind of need a 0.5 million barrels a day just to make the economies of scale work. And the entire propane market in Western Canada is about 200. So you just don't tend to have the economies of scale. The only pipeline that met that description was Cochin when it was moving propane south and now it's in higher value molecule service. And so, that's just not easy. I know it looks good on a map, but when you do the math on the economies of scale, with 100, let's be optimistic 200,000 barrels a day NGL, the math just doesn't work. You're better off railing.

And your next question comes from Ben Pham of BMO. Ben, your line is open.

Okay. Thanks. On that – the data point, propane 200,000 barrels a day, how does that look, supply/demand in Western Canada 2025 year, you're adding in your PDH/PP plant there? Is there room for an expansion there or new export facilities?

There's a ton of propane, butane and ethane being left in the gas stream right now. So those numbers can grow dramatically and swiftly if people choose to take them out of the gas stream. Pembina hasn't really built a deep cut plant for, what, five or six years here, because the value hasn't been there. So it kind of goes back to price signal. If the price signal for propane, butane, ethane changes in Alberta, those molecules are readily available. So it's kind of – if you can get the price, which hopefully conversion from propane to polypropylene nets back a higher propane price, the producers will get the right signal and want a deep cut their gas streams and/or drill additional liquids rich wells. So, again, the resource is massive. I'm never worried about running out of propane, butane or ethane. It just needs the right price signal. So when you look at that 200,000, that could be a lot more if we just had decent pricing for short while. And, hopefully, we're doing the right things as an industry. At least, I can say with confidence on propane right now, to create that price signal.

Okay. Thanks. And you had also a comment earlier around heading to strategic planning and growth. It sounds like there's a lot of things you're looking at right now. And you certainly waited against yourself funding model of 1 billion to 2 billion. But I wanted to clarify, does that sound like the 1 billion or 2 billion, that's not going to necessarily constrain you with growth, and that you could look to preferred shares, turn another drip, external equity if good growth opportunities arise?

We can always raze equity for terrific projects. I don't think we feel constrained by that necessarily, particularly now that we’re – again we've got a share prices starting to come into the range of fair value, albeit on the low side still. So when you're trading at $40, and you should be trading at $50, it just hurts to raise equity. Scott and Cam are vigilant and making sure we don't have dilution and the 2 billion avoid that. But it's not necessarily a ceiling, it's a guideline. Scott, you want to add anything?

I think it's well said. I mean, right now as you guys well know, we’re tapped out from a preferred share basis, but we will be looking to change our threshold at our upcoming AGM, which would allow us access to increment the preferred shares, if we get approval for that resolution.

Okay. Thanks. And my last one, clean up. Are you able to share your recent frac spreads sensitivity?

Yeah, I think that something that will usually update with our Investor Day. So, I might just pause that until our Investor Day.

All right, everybody. Thanks for your support. Hopefully you feel better about story that we’re introducing some uptick in share price to raise everybody experience, which were a bit down at the end of last year, and just -- to keep doing what we've been doing. So, thank you for your support.

And that concludes today’s conference call. You may now disconnect.