Pembina Pipeline Corporation (PBA) Q2 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to Pembina Pipeline Corporation's Second Quarter 2020 Results Conference Call. [Operator Instructions]. I would now like to hand the conference over to your first speaker today, Scott Burrows, Senior Vice President and Chief Financial Officer. Thank you. Please go ahead, sir.

Thank you, Julianne. Good morning, everyone, and welcome to Pembina's conference call and webcast to review highlights from the second quarter of 2020. I'm Scott Burrows, Senior Vice President and Chief Financial Officer. On the call with me today are Mick Dilger, President and Chief Executive Officer; Jason Wiun, Senior Vice President and Chief Operating Officer Pipeline; Jaret Sprott, Senior Vice President and Chief Operating Officer, Facilities; Stu Taylor, Senior Vice President, Marketing and New Ventures and Corporate Development Officer; and Cam Goldade, Vice President, Capital Markets. First, I hope everyone listening to this call today is safe and healthy. 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 management's discussion and analysis dated August 6, 2020, for the period ended June 30, 2020, which is available online at pembina.com and on both SEDAR and EDGAR. Before we discuss the second quarter results, I'd like to first give Mick a chance to make some opening remarks. Mick, over to you.

Thanks, Scott. Good morning, everyone. Hope you're all doing well. The world has certainly changed a lot since our call in early May, and even the second quarter results feel like distant memory. However, the second quarter was a very important one for Pembina because it was proof of concept for many of the themes you've heard us talk about for many years. First and foremost remains our commitment to each of Pembina's stakeholders: customers, investors, communities and employees. COVID-19 assessed us all and provides a challenge unlike any in our company's history. We remain proud of the actions we've taken to balance the needs of all stakeholders. Pembina's business continues to operate safely and reliably throughout the pandemic, ensuring uninterrupted service to our customers, which is a testament to the company's dedicated staff. We also continued projects in flight to ensure customers had the service as they needed. Second is our commitment to the financial guardrails. Our strong contractual underpinning, fee-based take-or-pay revenue streams, prudent dividend payout, commitment to a credit -- BBB credit rating and focus on working with solid counterparties, all are elements that have contributed to Pembina's resilience through this historic crisis. Indeed, the delivered diversification of Pembina's business across geographies, basins, commodity types, and counterparties has positioned us very well. With this strong foundation, we expect to exit 2020 in solid financial position, providing flexibility to restart various capital projects when it is prudent to do so. Further, we remain confident in our ability to provide stable and growing dividend, as we have through past recessions. It's worth noting, too, that our top customers, many of which have just reported their own Q2 results, are performing well under the circumstances. Although higher prices are likely needed to incent significant growth in the basin, given the recovery in commodity prices, many are generating free cash flow after dividends and CapEx and are focused on paying down debt and strengthening their balance sheet. This is very supportive of Pembina's counterparty credit portfolio. I congratulate all of them. Now I'll pass it back to Scott to discuss the second quarter highlights and our outlook for 2020.

Thanks, Mick. In addition to the impact of COVID-19 and the decline in commodity prices, the major factors impacting the second quarter relative to the same period in prior year was the Kinder acquisition. The acquisition continues to outperform our expectations for 2020, and the quality of the customers and cash flows from these assets has shone through in the second quarter, providing greater stability during a challenging time. One of the major drivers of the Kinder acquisition was the opportunity to diversify and strengthen the quality of Pembina's cash flow. The acquisition of strategically located assets supported by strong contracts with investment-grade counterparties strengthen Pembina's financial guardrails and provide enhanced diversification of basins, currencies and markets. Adjusted EBITDA for the quarter was $789 million, a 3% increase compared to the same period last year. The increase was due to the contribution of new assets following the Kinder acquisition and a realized gain on commodity-related derivatives. These positive contributions were partially offset by lower margins on crude oil and NGL sales in the marketing business and lower interruptible volumes on Alliance as a result of the narrow AECO-Chicago price spread. Second quarter earnings of $253 million were down 62% over the same period in the prior year, largely due to noncash factors, including higher deferred taxes due to the enactment in the second quarter of the prior year of Alberta's Bill 3, which reduced Alberta corporate income tax rate from 12% to 8%; higher unrealized losses on commodity-related derivatives; and lower contribution from marketing and Alliance. As mentioned previously, these declines were somewhat offset by the contribution of additional assets from the Kinder acquisition and lower G&A and other expenses. During the second quarter, the impact of low crude oil and NGL prices was seen through lower producer activity and a temporary decline in physical volume in certain Pembina's businesses. Total volumes during the second quarter were just over 3.4 million BOE per day, up 1% over the same period in 2019 or down 2% when compared to the first quarter of 2020. I'd like to highlight 2 important points regarding volume. Firstly, it is worth noting that the vast majority of the quarter-over-quarter reduction was contained in our Conventional Pipelines business unit. Volumes in our other pipeline business units as well as the Facilities division were essentially flat from the first to the second quarter. Secondly, the high proportion of take-or-pay contracts in our business leads to a catch-up of volumes and revenue in the second half of the year. Pembina continues to expect 2020 adjusted EBITDA to remain within the previously disclosed guidance range of $3.25 billion to $3.55 billion, albeit near the low end of the range. This outlook contains an expectation that the 2020 adjusted EBITDA contribution from the Marketing & New Ventures Division will be approximately $125 million lower than was assumed in the midpoint of the original guidance range. The impact of lower interruptible revenue in the asset-based business is expected to be largely offset by operating and administrative cost savings. We predict the majority of these savings can be maintained in 2021. Turning to our balance sheet and funding ability. Pembina further enhanced its liquidity position during the second quarter by terming out approximately $850 million of debt drawn on the company's credit facility and establishing a new $800 million revolving credit facility. Following the early redemption in July of $200 million in senior notes originally due in 2021, Pembina's liquidity position currently stands at $2.8 billion. With no debt maturities for the balance of 2020 and $600 million of maturities distributed throughout 2021, Pembina's liquidity position is ample. The recent debt issuances at a weighted average term to maturity of 17 years at a rate of approximately 3.2% provide a strong endorsement from a broad cross-section of the debt capital market. Combined with the recent affirmation of Pembina's BBB credit rating by both S&P and DBRS, we believe the company's strong financial position is fully affirmed. Moving on to the capital investment program. During the first quarter, the company took the prudent steps of deferring $4.5 billion of capital projects. Pembina is on track to realize a reduction to its 2020 capital investment plan of approximately $1.1 billion. However, challenging weather conditions and COVID-19-related precautions and delays resulted in capital cost overruns in 2020 of approximately $100 million. Additionally, during the second quarter, Pembina also added approximately $90 million of projects. With the modest improvement in commodity prices, many investors are asking about our deferred projects and the conditions under which they would restart. We view the deferred projects in 3 groups. Firstly, the Phase VII, VIII, IX Peace expansions will continue to be evaluated in consultation with our customers based on their needs and an assessment of future transportation requirements in the Western Canadian Sedimentary basin. Pembina is well positioned to handle all customers' volumes. Secondly, regarding CKPC PDH/PP facility, the project team has substantially completed the activity specifically and cost effectively deferred the project. The fabrication of critical long-lead items has continued and key talent and knowledge are being retained, all to preserve project value for efficient potential restart. Pembina and its joint venture partner continue to evaluate a number of factors related to the project. First, a necessary condition is the safety of all personnel to be assured. Second, while the immediate incremental costs associated with COVID-19 were contained by the decision to defer the project, the future and ongoing risks needs to be understood and priced into the project cost estimate. Third, the full impact of COVID-19 on the global economy and future demand for polypropylene remains uncertain and needs to be carefully evaluated. Fourth, with both the federal and provincial governments as well as our project financing indicating extensions have or will be drafted, we remain confident for the original investment parameters to be reconfirmed. Finally, the project restarted is subject to CKPC Management Committee approvals and each partner's Board. Thirdly, the Prince Rupert Terminal expansion and the Empress co-gen facility are progressing for a potential restart. These projects are entirely discretionary and commence at any time. With that, I'll turn it back to Mick.

In closing, in the first half of 2020, we've seen Pembina rise to an unprecedented challenge, reacting quickly and effectively in service of its stakeholders. Pembina's growth and diversification over recent years, combined with an unwavering commitment to its financial guardrails, ensured the company was well positioned for adversity. Pembina expects to deliver financial results within its original guidance range and exit 2020 in strong financial position. This will allow the company to resume its deferred capital projects and continue its long track record of growth by providing customers valuable integrated services. As always, thank you to all of our stakeholders for your support. With that, we'll wrap things up. Operator, please go ahead and open the line for questions.

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

Just want to start off with how volumes are looking today. Have all the kind of shut-ins returned as you expected? And just want to get a sense for kind of producer discussions. What you're seeing right now? And how you think volumes could trend over the -- in the different basins over the balance of the year? Just trying to get a feeling for how that resumption is going.

Yes. We'll pass that question to Jason. As Scott said, most of the wobble is in conventional, and so we'll -- Jason will address that.

Jeremy, so I guess, May, as we mentioned in our release, was kind of the low point for our volumes. We had 1 week in May where volumes hit their low point, and then they've slowly been recovering since then. As of this moment, we're not quite back up to where we were in January, February, but we are seeing things sort of recover steadily in that direction. I think our discussions with our customers continue to be positive. There are still positive developments out there. Customers are still committed to their forecast. But obviously, they're looking at their budget right now and what they're planning to do for the 2021 year. There's some M&A activity I'm sure you've seen going on in the market that we think is positive and will lead to continued strength in some of those areas. But at the moment, things are recovering slowly. It's kind of an unprecedented situation. So I wouldn't really say whether it's as expected because I don't know necessarily what to expect. It kind of depends on the demand for the commodities.

Got it. That makes sense. And so, I mean, obviously, some -- a lot of moving pieces here, but just was wondering, as we think about 2021 and CapEx there, would you expect it to kind of be in line with what you're doing in 2020 or really kind of step down from there? Granted, some of the projects could kind of come back into focus as you're describing there. Just trying to get a sense for how it might shake out?

So maybe I'll speak first to the Peace expansion. So obviously, we are evaluating Phase VII, VIII, IX. I guess, the first thing to recognize on all of those are all of those expansions, including the Peace base business, are highly contracted, so -- including the expansion. So there -- we have the ability to go out and execute those projects and they'd be underpinned by the contracts that are in place. We thought it was prudent to go out and poll our customers and find out what their timing and expectations were for those expansions before we just go and execute them. So we're in the process of wrapping up those conversations with most of our customers, and we would expect to make a decision on the timing of those expansions before the end of this year.

Jeremy, Mick, if -- we have a lot of flexibility in '21. I mean we're -- our capital program is sub $0.5 billion, I mean, of the stuff we know we're doing. So kind of contrast that with where we thought we would be coming into 2020. 2019, we were $2.5 billion. We saw at $1 billion, give or take, off of that. And then our CapEx program in '21 would be yet another $1 billion lower. So we have a lot of dry power with cash flow in excess of capital in 2021. And so as Jason indicates, and same with CKPC, we have the capability to bring those back. It's just what makes sense for our customers. I mean the last thing they need is more capacity and take-or-pays with no volumes going through it. So our deferral is really in line with customer needs.

Got it. That makes sense. And just want to hit marketing real quick here, if I could, and just want to get a sense. You said $125 million lower off the midpoint guide is expectation for marketing at this point. Just wanted to get a feeling, directionally speaking, for guidance for marketing in the back half of '20, into 2021. Just think -- just want to see is marketing kind of hit a new -- kind of a lower trend line based on the current commodity prices here? Just want to get a sense for -- directionally, how that could shake out based on where the curve is.

Yes. Jeremy, it's Stu. So we've -- yes, well, I think you've seen we hit a low coming out of the commodity price collapse. We're seeing some strengthening, and we believe it will strengthen through the last half of 2020 related to volume increase as well as some commodity price uplift. And we see some further strengthening into 2021 as well. So yes, we believe we've come out of the low period and will strengthen for the remainder of the year and going into 2021.

Yes. I mean the thing to watch -- I mean what kind of crossed us this year was resilience in gas and imploding liquids. So that frac spread got squeezed. And so those are the key things that are going to unlock hundreds of millions of dollars if we get kind of to a stable gas price with liquids prices going up into 2021. That will unlock our full capability again. So you can watch that, Jeremy, and kind of gauge where -- what you think is going to happen in 2021.

Got it. Just real quick, does the caps deferral, has that been impacting, I guess, recontracting on Peace at all? Has that been helpful in any sense?

I think existing infrastructure always has advantages because it's real, it's reliable. And so if you're a customer, you've got to think, am I going to count on the pipeline that's there or am I going to count on a pipeline that might be there. And so we think, overall, it's been positive for our discussions with customers.

Our next question comes from Matt Taylor from Tudor, Pickering, Holt.

Just wanted to follow up on Jeremy's question on marketing. The $125 million impact, does that include any offsetting assumptions on realizing once you're contango? I noticed that you had proactively added some lower-cost NGLs. And then also, is the sharp recovery in crude pricing and volumes returning in that $125 million impact as well?

Yes. Matt, it's Scott here. I mean that forecast is as of a couple of weeks ago. So it reflects the best information at that time. I think it's also -- since we're talking about marketing, important to point our two other points. Number 1, we did have a $10 million cavern loss in Q2, which was a onetime event, which dragged down earnings that quarter. We also -- if you look at the NGL sales volume, you'll see Q2 to Q2, they were down quite a bit. And just given where margins were, we decided to store incremental NGLS, which we hope to monetize through the back half of this year and potentially in early 2021. So part of the weakness in this second quarter was also a conscious decision to defer some of our NGL sales volumes as well.

Great. And then I wanted to move over to baseline. Can you comment on the expansion potential there and how you're thinking about adding tankage at the facility ahead of TMX? I know we're a couple of years out, but I'd imagine customers are starting to think about -- as we're getting closer to that? Any color on that?

Matt, it's Jason. So we're currently working with our partner there, evaluating the cost of that expansion. We're currently looking at the site starting to get some of the prep work done on the ground to get that site ready for expansion, putting the estimates together to figure out exactly what that expansion would cost. But we're aligned with your thoughts there. Once TMX comes into service, we believe there's an opportunity to provide both storage and terminaling services to be able to provide batches on to TMX and things like that for our customers as well and storing products. So that does seem to be a catalyst, and just trying to narrow in on the timing of when that is, is a bit of the science that we're trying to do at the moment.

Great. And then one last one for me. You talked about interruptible revenues being offset by OpEx and G&A savings. Is that target still $100 million? I know that's what you disclosed on Q1, and I'm just wondering how much of that is left to be realized in the back half of this year.

We have high confidence that we'll achieve that. We're currently running at or above that in our forecast. So good -- very good confidence. And we anticipate those savings to continue, especially if you consider that our committed capital is $1 billion lower than -- in '21 than it was in '20. We don't see any reason we can't maintain the $50 million of G&A and $50 million of OpEx savings through '21.

Just to clarify, is -- that $100 million was realized in Q2?

Not. It'll be realized by the end of the year. Like we recall, we kind of announced at early Q2, by the time we've got really organized it, we were starting those savings kind of in the June time frame. And so that $100 million was really realized in, call it, 6 months, give or take, over the back half of the year. But we're forecasting meeting or exceeding that right now and expect to be able to continue that level of efficiency through 2021.

Your next question comes from Linda Ezergailis from TD Securities.

I'm wondering if we can follow up a little bit in drilling down to understanding some of the moving parts in your marketing business in the quarter. Can you elaborate a little bit more on the nature of the operational issue in the storage cavern? Has it been resolved? Is it discrete to this one particular cavern? Or is there some systemic things that you might want to remedy across your franchise?

Linda, Jaret here. Yes, it was contained to 1 cavern, and it has been mitigated as we speak. So it's not a systemic issue, no.

And can you describe a little bit what happened in the product? Or...

Product was C2+. And I won't get into the technical nature of the loss, but yes, it was C2+.

Okay. And with respect to the guidance range, I'm wondering what might move the 2020 results to the upper end of the range? Is it purely volumes and margin? Or are there other factors? And maybe you can talk about the main things to look at beyond liquids pricing?

Yes. Linda, I can unfortunately safely say we're getting to the top end of the guidance range, which is $150 million. I guess, $3.55 billion is not in the cards. We're going to be between the midpoint and the low point, at least that's what we're projecting now. For us to move from the low point, we need to see a decent resurgence from fields like Drayton Valley where we're still off quite a bit. As you know, that's the -- 1 of 2 systems, the other being Swan Hills where we don't have a great deal of take-or-pay contracts. So we need to see some resurgence down in the Drayton Cardium, and we need to see wider crude WCS spreads. I know they're trending in the right direction. And then we need to see a nice pop in the price of propane. As Scott says, we've got a lot of propane in the ground. We didn't pay that much for that propane because of commodity prices through the second quarter. And if propane popped, then we'd have a healthy margin in the fourth quarter. So those are the kinds of things that could get us to trend from the low point trending back towards the midpoint, but we don't see a scenario where we're above the midpoint at this point.

Okay. And just as a follow-up, with respect to your piece of Northern systems, you've got about 0.25 million barrels per day of currently available physical capacity. I'm wondering how much of that is take-or-pay capacity? Or is that all your spot capacity? I'm just wondering if -- as that fills up, it just -- some of the margins might not be entirely additive as they're displacing, releasing other customers from their take-or-pay obligations.

Linda, it's Jason. So in terms of the take-or-pay, most of our customers are operating somewhat close to their take-or-pay. So when you think about how much take-or-pay revenue we're actually recognizing in the back half of the year, it's not a huge amount of take-or-pay revenue. So all incremental volumes that we do get is really going to be profit from that perspective. Yes, so I think like if we do get incremental volume from customers under contract, that will add incremental margin. And then some of the trucking volumes are where you see some of the volume back out, whether they come through third-party terminals or our own track terminal. So that's where some of the opportunity lies for us at the moment.

Your next question comes from Rob Hope from Scotiabank.

A follow-on question on the deferred projects. When we take a look at Phase VII, VIII and IX of the Peace expansions, are you looking to pick those up as they were originally planned? Or do you have some flexibility to alter some of those projects to better suit your customers' volume outlooks?

Yes. I mean that's a great question. And we -- actually, probably in the last 6 weeks, we did look at different derivatives of the master plan as it were. And we certainly have less capital-intensive options that are near term. But where we remain focused is building the right system for the future, and that remains more products, more pipelines, almost all the way from the B.C. border in. It just gives us a ton of flexibility, way less reliance on storage, allows us to tie products in kind of mid-pipe rather than just at storage hubs. It allows us to partially loop systems, and it just gives us incredible future flexibility. And so as it stands today, we remain focused on building the right master plan.

All right. That's helpful. And then just a follow-up question. Can you comment on the changes that were made with the PG&E/Ruby contracts?

We can't specifically comment on customer contracts. But I think, really, I guess, the way to characterize it is to give both them and us more flexibility.

Your next question comes from Andrew Kuske from Crédit Suisse.

The question really relates to the producer M&A that we've seen and the reduction of counterparty risks that it does for you in the front end. I guess, when you think about it on a longer-term basis, what does it mean for you? Do you wind up having better counterparties and effectively bigger volumetric opportunities? Or do you see a little bit of competition for some of the producers that like to do their own thing on the processing side?

I guess, it's customer by customer. I think your intuition that the deals are going to get bigger and more integrated, that's probably, on balance, correct. Case in point, in the last 5 years, our transaction with the Chevron/KUFPEC JV kind of an area Alliance where we built processing. We transport, we frac, and then we collaborate on product and marketing. We think those larger deals can make a lot of sense because they bring the kind of economies of scale that I think the modern oil and gas business needs to amortize costs over large amounts of volume and be very, very competitive. And they're just so capital-intensive to drill 6 or 12 well pads with many, many horizontal segments and huge liquids handling capability, water needs. So those are really capital-intensive and -- but they deliver incredible longevity and economies of scale. So those are going to be what impacts Pembina the most. Of course, we're really happy to work with some of the smaller producers. They might live kind of more in the Drayton Valley, Swan Hills areas where we still have surplus pipeline capacity. They don't need to sign big, big agreements. And -- but they'll be a little more commodity sensitive, I think. Jaret, do you want to add anything to that?

No, I think you nailed it, Mick. I think in this new world where everyone needs a higher netback, I think not only will you see consolidation on the upstream side, Andrew, but I think, as Mick said and Jason said, like we've got a lot of capacity on the pipe. We need to stop overbuilding our infrastructure and consolidating a lot of this and putting maximum amount of molecules through these facilities. So even though some customers, I would say, may typically have wanted to build those assets themselves, I think they may be looking at alternative solutions to focus their core competencies on what they do and let people like ourselves focus our competencies on what we do great.

Okay. That's helpful. And then I'll go from the big broad to a bit more narrow. And just on the Vancouver Wharves business, how are you thinking about that and, I guess, about the year that you've added on the books, thereabouts?

Well, I mean, for people who are familiar with it, not a lot of that terminal is hydrocarbon based. And so we are assessing the opportunity for hydrocarbons there. I mean, as an example, there is diesel being handled through that facility currently. There are hydrocarbon tanks. There's a bunch of spare land. The births aren't fully utilized, but you're in the middle of a big city and that city is Vancouver. So we're weighing all of that and trying to find out what the appropriate use and -- is for our company versus what it might be worth in other people's stands.

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

Just wanted to kind of come back to some of the mothballed projects. And you laid out the 3 buckets. And as it stands right now, which of those three buckets -- or can you order which ones you think are most likely to come back the fastest?

Well, that's like a great question. It's like trying to judge what's going to happen next with COVID, I think, because COVID drives demand. And if demand were -- for example, if the U.S. wouldn't have had all the cases, then I'd be saying we're probably going to bring all of those projects back. But trying to judge, Robert, what demand is going to be for hydrocarbons and what pricing falls out of that, which will be drilling, it's difficult. I would say, though, the positive quarters that our customers, as I said, in the Peace, is really encouraging. And so we're going to be consulting with them. And we're going to put the bat in their hands on go, no go, and we'll go from there. I think the little bit more opaque one is CKPC because we need to get comfortable with global GDP marching forward, and that's really quite opaque right now. Of course, nobody knows exactly what's going to happen. I think, Stuart, 2025, would be the onstream date now. So that is a long way out, so we're making some educated guesses there. But I can tell you, in the next 8 weeks, we've got to make some decisions whether it's this winter or -- we're going to reaffirm those this year or we're going to wait another year. So stay tuned. These are really difficult decisions. I hope you can appreciate that.

And I guess, Mick, at the beginning of the call, you made a statement that you have a focus to exit 2020 strong and you're looking at the ability to resume the growth when prudent. I guess, if you pair that with your outlook that the business is still uncertain and you're trending to that lower half of the guidance range based on the outlook you've got, is there any reasonable possibility that you bring these projects and start putting them into construction in 2020? Or is this very squarely 2021 at best?

Well, I mean, I guess, yes, there is a chance that we come forward and say, yes, we're going to go in 2021. The start date for CKPC would be March of '21. The start for Phase VII -- we've got 65 kilometers in the ground in Phase VII and stockpile of the pipe, so we've got a class re-estimate. We're approved. So I mean we could bring that one back faster. So literally, we'll be calling customers here in the next 4 weeks. And conversation kind of goes like this: you've got a contract, we can start. Do you want to start or do you want to delay? And if they say, on balance, we want to start, we're going to start. So we'll have to see what they say.

Okay. And then just last on this topic. Can you maybe square some of that up with -- it's a pretty small number admittedly, but the new growth that you put on the books, is the nature of that just kind of high-return, quick payback? And if that's the case, how do you think about, Phase VII, VIII, IX versus some of the lower-capital, more configuration options versus laying new pipe in the ground?

I mean, yes, some of the smaller projects, like Prince Rupert expansion or Empress cogeneration, those are projects we can unilaterally start when we think the time is right. We want to see what the lay of the land is on export tier coming into the fall, so that'll gauge whether we start that one up or not. Cogeneration, I mean, we can start that at any time, so we'll be assessing that. But fair point, those can come back anytime. They aren't as reliant -- like the cogeneration is self-supplied power. And we're doing very well at our other cogeneration facilities. And so we may well bring that back. We talked about the baseline tank project, that's something that we could we could bring back. Certainly, our marketing group could become the customer of that for many good reasons, or we could farm that out for customers on a fee basis or the TMX coming into service. So we have lots of projects and many more that we didn't pull back or defer that we're getting what we call shovel ready, which means adequate precision and engineering and regulatory approvals so that we can really respond quickly to market developments. I mean getting regulatory approval and engineering in the scheme of the size of our capital program is a rounding error. And that's one thing we can do in these slower times is get ahead of that. Instead of always being a little bit behind on those 2 factors, we can get ahead of that, and it's going to give us a lot of flexibility. Overall, we're cautiously optimistic that we will see gradually improving circumstances for the sector.

Okay. And if I can just finish with a question on marketing. So the $125 million down from your original midpoint, has this changed recently? Or is this just you giving more granularity to The Street? And I'm just wondering some -- it doesn't look like your 5% to 10% of EBITDA coming from commodity has changed from prior disclosures.

Yes. Robert, I mean, really, again, this is kind of the best information we have at the time. This is our current forecast. This is really about giving incremental disclosure, trying to give people the information that the vast majority of the kind of reduction to the low end of the guidance range was from the commodity-exposed portion of the business. Most of this is COVID related and the downturn in pricing. But to be honest, some of this was starting to kick in, in February when we had the initial kind of price war between Saudi and Russia. So this has kind of been a trend throughout the year and to the point where we are today. And then as incremental disclosure, we thought we'd let The Street know. So you're right, our kind of commodity-exposed portion of the business, we've kind of talked about in that 5% to 10% range. If we were to update that today, it would be 5% or less, maybe 5% to 3%. And I'll just build on that. I mean when we set our guidance, we truly set it at the midpoint of what we think is going to happen. And the wiggle in our guidance is usually highly correlated to kind of 1090 on marketing, net of what we think we might be able to mitigate in a down market. So going two years back when we raised our guidance twice because we were kind of at C95. And then last year, we were in the upper end of our guidance, and so it did cover the positive wiggle in guidance. And this year, through a bit of hard work, it still is covering the negative wiggle in marketing outcomes. And so I think looking back, the way we do guidance has served us quite well.

Your next question comes from Robert Catellier from CIBC Capital Markets.

I was wondering if you could give an update on the outlook for Alliance pipeline with respect to the eventual renewal there in light of the AECO-Chicago differential and some recent customer comments about the fee structure. And maybe if you could add to that, how the outlook for associated gas in the Bakken, how it plays into the equation?

Robert, it's Jason. So 2020 has been a kind of a different year for Alliance in terms of the strategy between Chicago and AECO. Historically, it's always been buried in the money, and this year has been a bit of an anomaly. So when you look out beyond Q3, Q4 and into 2021, we're seeing those spreads come back. So we're pretty optimistic in the second half of the year that [indiscernible] volumes start to recover. And we think there is reason for hold in terms of renewals. Historically, it's always been a good negative market for our customers. So we believe they're going to still like that diversification. And we also think, you've kind of mentioned the associated gas in the Bakken. And if you think about the whole sort of lower 48 gas production picture, we think there's reason for optimism that gas prices will be pretty strong in the Chicago market for the long term. So I think that we're fairly confident that over time, things will start to look better for Alliance in terms of recontracting than it has in first half of 2020.

Yes. And I would just add, if you zoom out and Jason's comments are wrong, we're going to make a lot more money on our extraction business because that means gas prices are lower. And so whether it's at an Aux Sable or at Empress, there kind of is a bit of a natural hedge in there.

Right. Just moving to the CKPC and what's required to restart there, you had some pretty good color. But I just want to make sure I understand the nuance here and what you're looking for on the future polypropylene demand, given that you do have some contracts. So are those contracts still in place and still valid? And what do you really need to see in light of those contracts from the demand side of the equation? Or is it just a question of you have a partner and everyone has to be comfortable on where they see demand?

Robert, it's Stu. We're looking at, I think, the global context. We'll revisit and look at the project economics, ensuring that the investment thesis is still valid and whole to drive through. We still believe that, again, the Western Canadian Sedimentary Basin provides a cost advantage to produce the polypropylene product. We think we are in a logistic advantaged location for market access. And we'll rerun the economics here in the third quarter and update our perspective of our ability to be a low-cost polypropylene provider into the North American and global markets. That's the intent of the statement.

And then in terms of contracts, just like the phases of Peace, those contracts remain good and valid, and they don't have any kind of outside date concern at this time. So when we go, those contracts will go as well.

Okay. And just on the security about the propane supply, I know you're working on the project at Empress to help with that. But in light of the decreased production of NGLs, that might be temporary, but they're also increasing export options. So how do you -- how comfortable are you with the -- like, being a low-cost supplier in the context of the propane situation?

We remain comfortable. I mean whenever this basin has seen any kind of a price signal -- so let's just play it out. The West Coast terminals start to pull hard on propane, there's a temporary blip that starts to become more valuable, then people just cool down their plant and take out more propane or somebody builds another deep cut. If you look at the -- we've always looked at how the ethane business has done over the last 40 years. And these concerns -- I guess, I'm getting old, but these concerns have arisen from time to time in situations like this. And things look like there wouldn't be enough supply for the polyethylene business, I think that's 0.25 million barrels a day. And now ethane -- every single gas pipeline is -- whether it's the Enbridge system or TCPL or Alliance, we're all running at complete max heat capacity and there's tons and tons of ethane being exported from the province, and so we're awash in ethane. So we think that this basin is just so prolific and good. As soon as there's a price signal sense, we'll react. And it's just because of the quality of the rock at the end of the day.

Your next question comes from Ben Pham from BMO.

I also had a question on CKPC and 1 of the references, the 3 you mentioned with respect to the federal and commercial government. And I was wondering, is that anything to do with the royalty credits there in terms of expiration dates, your ability to monetize those credits?

Yes. We've gone back and we have confirmed and reconfirmed our -- both the provincial and the federal government's commitments to the funding. Again, the royalty credits, the Alberta government has come and stated that those are theirs, and we're working with them on documentation for the extensions. And we're working as well with the federal government on the SIF program grants that we received and are confident that everything will be extended as per the government grants.

Okay. So it sounds like when this was set up in 2016 or so, there was some sort of expiration that you might be hitting into. And it sounds like you're -- you feel pretty good about extending that.

Yes. Everything ahead of schedule, and then there's requirements for information filings. And so we've been diligently working with the -- both the federal and provincial governments of providing all the documentation and working through extensions of those agreements.

Okay. All right. Is there anything in the way of -- you've issued some really low-cost debt, and it looks like we're in this world of almost 0% interest rate there. Is there anything to do with balance sheet optimization? Do you see -- whether buying back preferred shares or calling some debt? Is there anything that looks interesting right now?

Ben, it's Scott. We did capitalize on some of those low interest rates recently. As we disclosed, subsequent to Q2, we did refinance one of our existing 2021 note at an interest rate 3% to 4% below where that note was issued at. So we started to chip away at that. We also have roughly $800 million on our credit facility, which will likely look to term out in the back half of the year as well to capture some of that long-term interest rate savings. But in terms of optimization of the preferred shares, we've looked at it, but ultimately, doing a normal course issuer bid for your preferred shares, there's just no liquidity in that market. So those -- that would be very, very tough to enact. So it's something we've thought about, but at this time, not something we're pursuing.

Okay. Can I ask you then lastly, there's big news flow around Dominion and Warren Buffett, and I guess, just your own thoughts on capital allocation M&A. I mean if your stock price wasn't so mispriced, and you wanted to get into a boxing to match with Warren Buffet, I mean, is that strategically -- those type of assets, is that -- would that strategically fit with Pembina?

I mean I think he made a hell of a deal, like, he bought the railroads, what, a decade ago at the right time and looks pretty smart now. And I think he looks -- he's going to look really smart again here. I mean those assets have a long life, and there's a scarcity value associated with them because in that part of the world, it's hard to build new ones. But for us to do that, again, we're trying to grow our business so that 1 plus 1 plus 1 equals 5 and not 4 through the value chain. And so we've been disciplined. We'll continue to be disciplined to make sure that whatever we buy has synergy. And notwithstanding, that was a good buy. It doesn't create the kind of synergy that we've seen when we bought Provident and added a downstream piece to our pipes or Kinder Morgan with the storage and then the cross-border pipes that attach to our infrastructure or export facilities that connect through our rail fleet. But those are the kinds of things that we think can create exceptional results over time. And it is tough to watch good deals come and go that maybe aren't as synergistic but are nevertheless good deals, but we remain on our path.

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

Just to clarify on CKPC, if the project might be eligible for these additional grants that are being rolled out by Alberta this fall, I believe, on top of the royalty credits that you've already secured? And then also, just any thoughts on how this new program might bring some of your ethane-based infrastructure opportunities more into focus over the near term.

So we're investigating that. Again, our facility was granted under PDP 1 with royalty credits. PDP 2 was put forward by the Alberta government, and they've since then come out with the new program. You cannot, as we understand, collect both PDP 2 and the new program credits. We are investigating whether there would be additional opportunity for us, given that we were in the PDP 1 program. We look at it, and we're trying to manage that, and we have meeting set up to go and investigate more of that.

At a macro level, ethane is being sold for gas value right now. It's just being sold as heat and no premium. And so it seems like the sector is ripe for additional ethane consumption infrastructure, and we're well positioned to be the ethane production infrastructure.

As far as the new program, again, I think the government has listened, and it's trying to look at how other jurisdictions have gone about they're incentivizing development and infrastructure development. This is a program that is not a onetime event. It's ongoing, which I think from an investment cycle purposes, that's advantageous. And the government isn't picking winners and losers. Here, they're saying if you go forward and you build your assets, there are credits that could be made available to you. So I think it is an improvement. As far as the ethane development, I think it opens up for more people and perhaps greater competition for development as well.

Okay. That's good stuff. And then on the potential sale of the $200 million to $500 million of noncore assets, I guess, given all the actions you've taken over the past few months to boost your liquidity position, doesn't seem to be the same financial incentive to sell these assets, at least relative to maybe earlier in the year. So maybe just to comment on what the benefits might be from synergies or strategic rationale perspective that still support the decision to dispose of these assets?

Yes, Pat. The decisions to potentially monetize some assets were made kind of well before COVID-19 hit. We had started some of this work late last year and in the early part of this year. Really, we just disclosed it in March with the rest of the initiatives that were going on since it was underway, but really just started pre-COVID. And the point there is that these were never done for liquidity or balance sheet reasons. These were really born out of some pretty significant inbounds that we got, and we thought it was our job to at least explore them. So I think the point I'm trying to make through all this is we're in the process of investigating some of those but at the end of the day, if bids don't hit our retention value, then we won't sell. We don't have to sell. We weren't selling specifically for COVID-19 or balance sheet reasons. So we'll assess the bids in the context of our retention value. And if we get good value, we'll make the decision at the time. And if we don't get good value, we're happy to own the assets.

Got it. Okay. And then also, I appreciate the updated disclosure on your frac spread hedges. Just back to your comments, though, on looking to monetize your propane storage position that you've been building here recently ahead of next winter, are you also looking to lock in some of your propane marketing margins on top of your frac spread exposure? Or will those barrels be mainly exposed to an open position?

Pat, we do have -- in addition to our frac spread positions that we talked about in our release, we also do have some of our winter inventory hedged as well. So we do have price protection through the winter.

Your next question comes from Shneur Gershuni from UBS.

Don't want to beat the question to death here, just a follow-up on all these -- the propane-related questions and the fact that you've introduced this variability in your guidance on the $125 million. Given the fact that you've sort of hedged it and so forth, is it really just kind of a timing thing? You've got -- you got the NGLs in storage right now. Some of it, based on where frac spreads shake out, means you could realize it in 4Q or could roll into 1Q and so forth. And is it really just a timing issue, and that's why you've kind of introduced this variability here? Or was $125 million opportunity completely -- it's an opportunity loss at this point right now?

Yes. I think a large portion of it, the vast majority of it would be pricing, so degradation in margin. But there is a small piece of it that's timing depending on when we monetize some of the volumes that we stored in Q2. Some of those will likely be monetized in Q1 of 2021. So there's a small portion of that, that's timing, but the majority of it is generally lower volumes on the crude oil side just due to shut-ins that we've seen in kind of Q2 and into Q3 and then NGL margins as well.

And if everything came back, I realize this is a hypothetical, but everything comes back full boat volume wise, do you have the capacity to take everything out of storage while running your systems full boat at the same time? Or would that create a timing issue or capacity issue as well?

No. Obviously, we couldn't do it instantaneously. But no, we do have the infrastructure and the capacity to process all the incoming NGL volumes and be taking adequate storage out the back end.

Okay. And just one last question on cost. You've done a great job on it. I think we've sort of seen this kind of across the board within the industry. But the thing that has been notable as of late is how depth -- how deep some of the costs have been at some of the midstream companies and some of the broader energy companies as well, too. I realize that you've definitely delivered on it. But are you challenging your staff to potentially double the type of cost reductions that you've seen, or go even more than that? Just like the fact that you've gone through a whole shelter in place type of environment, have you been able to like reassess everything? And do you think that there's opportunities that we could see significantly more cost reductions being announced over the next couple of quarters?

We're really proud, and thank you for saying we've done a good job, I agree with that. The -- we're not looking at further staff reductions. Like, we think we want to maintain the capability that we have. We do think things are going to come back. And so having people that can win commercial contracts, build facilities, make sure we have the flexibility in IT and systems, we need those people, and we're going to keep them. We do think there is future opportunity. I'm not going to nail it to any given quarter. But a lot of those opportunities are going to come with technology. For example, we're completing a brand-new telecom system along our Peace right away that will give us incredible bandwidth to do things remotely with cameras and telemetry and things like that, that we didn't have before. And so it opens up a new possibility with machine learning and other ways to -- and Jason talked about Peace Phase X, that -- a lot of that -- unearthing another 50,000 or 100,000 barrels a day capacity by optimizing your pipeline flows, that's very, very possible. We've just never really had a lull like this. If you think about -- we've, I think, employed roughly $15 billion in green and brownfield projects over the last 10 years. We've never really caught our breath and said, okay, well, here's what we got, let's really optimize it. So I think there's not just cost synergies but revenue synergies that we're going to work really hard on. And we've set as our top priority for 2021 to improve the return on our invested capital. And there's a lot of enthusiasm in the company to do that. I think maintaining the synergies that we've outlined in 2020 into 2021, that is our near term objective. But that's not the end of the journey at all. We think we can take more ground, but it's going to take some time.

I completely appreciate those comments. And just to clarify, I wasn't thinking about further layoffs, I was thinking more about productivity enhancements, as you were able to assess. And it sounds like you're seeing opportunities to see those enhancements on kind of -- on a revenue optimization basis. Is that a fair characterization?

Revenue and cost. What we're trying to do is -- along with getting projects shovel ready, the question we're asking ourselves is, and if we built all those projects, how would we do that without adding people? And so the way to do that, to amortize your people costs and your asset cost, is through technology is having people -- every person at Pembina be able to do more through technology. And so it's not just a cost in our existing business, it's how do you grow without adding people. And I think that's really where technology can help you. So I do think it's revenue synergies, it's going to be cost synergies. It's G&A synergies, but it's also growing without adding fixed costs. And I think that's -- the last thing I mentioned is perhaps where the biggest opportunity is into the future.

Your next question comes from [indiscernible] from Wells Fargo.

Just one quick question for me. I think you mentioned in the prepared remarks that you're seeing higher spot volumes on Ruby this quarter. I guess, what's driving that? And is there any opportunity to turn some of those interruptible volumes into longer-term contracts?

Yes. So it's really just driven by the spreads between Malin, Opal and Alberta. And so with the stronger gas prices in Alberta, we're seeing some opportunity to move spot barrels on the Ruby pipeline. And yes, we do -- we are looking at -- with Kinder Morgan at how to actually lock those into some long-term contracts and, obviously, looking at that as we speak.

Yes. I mean, as a macro, you can see it at the E&Ps in our basin, which I know better than in the U.S. basin. There's some buoyancy for gas-based producers these days. And that means, obviously, gas prices are going up, which means gas volumes can go up. That buoyancy continues, we're -- back to an earlier call, we get evermore optimistic that the Alliance recontracting will continue, as it has, positively, as well as Ruby. That all kind of hangs together. If you're optimistic on prices, then you're going to be optimistic on volume. So we'll see. It's early days.

I'd also just add that, I mean, it goes to show you over the last couple of years, all these different pricing points have changed over time. So most producers like to have diversity of endpoints because you actually can't predict which market is going to be making more money than the other. So we still think that having the Alliance and the Ruby, Milan and Chicago exposure is great because lots of producers are going to want a diversity of supply points.

Okay. That's great. And do you think these spot opportunities will persist for the next several quarters? Or do you think it's just kind of a one quarter benefit?

We've seen it on and off over the last year, so at least from my perspective, fairly positive that it will continue for some period of time. But with the market as volatile as it is, it's kind of hard to predict.

We have no further questions. I would like to turn the call over to Mick Dilger for closing remarks.

Yes. Well, thanks, everybody, for your interest. I'm really proud of what we were able to do through the second quarter. If you think about how we all felt in March and where we sit today, there's -- world is still of challenges, but it does seem to be slowly getting more constructive, thanks to the hard work of all of our staff and the resilience of our customers. Hats off to our customers. And we are starting to feel more and more constructive as time goes on. Have a great balance of your summer and stay safe.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.