Ladies and gentlemen, thank you for standing by and welcome to Pembina Pipeline Corporation's Second Quarter 2020 Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I'd 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, 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, Stuart Taylor, Senior Vice President, Marketing and New Ventures and Corporate Development Officer, and Cameron 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's management's discussion and analysis dated August 6th, 2020 for the period ending 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 a 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 has tested us all and provided 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 services 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 BBB credit rating, and focus on working with solid counterparts, all are elements that have contributed to Pembina's resilience through this historic crisis. The deliberate 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. We remain confident in our ability to provide a stable and growing dividend as we have through past recessions. It is 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 the 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 flows. The acquisition of strategically located assets supported by strong contracts with investment-grade counterparties strengthened Pembina's financial guardrails and provided enhanced diversification of basins, currencies, and markets. Adjusted EBITDA for the quarter was CAD 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 CAD 253 million were down 62% over the same period in the prior year, largely due to non-cash 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 of Pembina's businesses. Total volumes during the second quarter were just over 3.4 MMboepd , up 1% over the same period in 2019 or down 2% when compared to the first quarter of 2020. I'd like to highlight two important points regarding volume. Firstly, it is worth noting that the vast majority of the quarter-over-quarter reduction was contained in our conventional pipeline 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 CAD 3.25 billion-CAD 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 and New Ventures division will be approximately CAD 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 CAD 850 million of debt drawn on the company's credit facility and establishing a new CAD 800 million revolving credit facility.
Following the early redemption in July of CAD 200 million in senior notes originally due in 2021, Pembina's liquidity position currently stands at CAD 2.8 billion. With no debt maturities for the balance of 2020 and CAD 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 and 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 CAD 4.5 billion of capital projects. Pembina is on track to realize a reduction to its 2020 capital investment plan of approximately CAD 1.1 billion.
However, challenging weather conditions and COVID-19 related precautions and delays resulted in capital cost overrun in 2020 of approximately CAD 100 million. During the second quarter, Pembina also added approximately CAD 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 three groups. Firstly, the phase VII, VIII, IX Peace expansions will continue to be evaluated in consultation with our customers based on their need 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's PDH/PP facility, the project team has substantially completed the activities to safely and cost-effectively defer 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 an 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 that the safety of all personnel can 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 need 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 syndicate indicating exemptions have or will be granted, we remain confident that the original investment parameters can be reconfirmed.
Finally, the project restart is subject to CKPC management committee approval and each partner's board. Thirdly, the Prince Rupert terminal expansion and the Empress Cogeneration facility are progressing for a potential restart. These projects are entirely discretionary and can commence at any time. With that, I'll turn it back to Mick.
In closing, the first half of 2020 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.
Thank you. As a reminder, to ask a question, please press star followed by the number one on your telephone keypad. Your first question comes from Jeremy Tonet from JP Morgan. Your line is open.
Hi, good morning.
Hi, Jeremy.
Hi. Just wanted to start off with how volumes are looking today. Have all the shut-ins returned as you expected? Just want to get a sense for producer discussions, what you're seeing right now and how you think volumes could trend in the different basins over the balance of the year. Just trying to get a feeling for how that resumption is going.
Yeah. We'll pass that question to Jason. As Scott said, most of the wobble is in conventional, Jason will address that.
Hi, Jeremy. I guess May, as we mentioned in our release, was the low point for our volumes. We had one week in May where volumes hit their low point, they've slowly been recovering since then. As of this moment, we're not quite back up to where we were in January, February, we are seeing things sort of recover steadily in that direction. I think our discussions with our customers continue to be positive. There's still positive developments out there. Customers are still committed to their forecast, 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 out in the market that we think is positive and will lead to continued strength in some of those areas. 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. Obviously a lot of moving pieces here, but just was wondering, as we think about 2021 and CapEx there, would you expect it to 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.
Maybe I'll speak first to the Peace expansions. Obviously we're evaluating phase VII, VIII and phase IX. The first thing to recognize on all of those are all of those expansions, including the Peace phase business, are highly contracted, so including the expansion. 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. 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, we have a lot of flexibility in 2021. Our capital program is sub CAD 0.5 billion, of the stuff we know we're doing. Kind of contrast that with where we thought we would be coming into 2020. 2019, we were CAD 2.5 Billion. We saw it CAD 1 billion, give or take off of that. Our CapEx program in 2021 would be yet another CAD 1 billion lower. We have a lot of dry powder with cashflow in excess of capital in 2021. As Jason indicates, and same with CKPC, we have the capability to bring those back. It's just what makes sense for our customers. The last thing they need is more capacity and take-or-pays with no volumes going through it. Part of Peace is really in line with customer needs.
Got it. That makes sense. Just wanted to hit marketing real quick here if I could, and just want to get a sense. You said CAD 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 2020 into 2021. Just wanted to see is marketing kind of hit a new 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.
Jeremy, it's Stuart. I think you've seen we hit a low coming out of the commodity price collapse. We're seeing some strengthening. We believe we'll strengthen through the last half of 2020 related to volume increase as well as some commodity price uplift. We see some further strengthening into 2021 as well. We believe we've come out of the low period, and we'll strengthen for the remainder of the year and going into 2021.
Yeah. What kind of crushed us this year was resilience in gas and imploding liquids, so that frac spread got squeezed. Those are the key things that are going to unlock hundreds of millions of CAD if we get to a stable gas price with liquids prices going up into 2021. That will unlock our full capability again. You can watch that, Jeremy, and gauge for what you think is going to happen in 2021.
Got it. Thanks so much. Just real quick, does the CapEx deferral, has that been impacting, I guess, recontracting on Peace at all? Is 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?" We think overall, it's been positive for our discussions with customers.
Great. That's it for me. Thanks for taking my question.
Your next question comes from Matt Taylor from Tudor, Pickering, Holt. Your line is open.
Hey, guys. Thanks for taking my questions here. Just wanted to follow up on Jeremy's question on marketing. Does the CAD 125 million impact, does that include any offsetting assumptions on realizing winter contango? I noticed that you had proactively added some lower cost NGLs. Also, is the sharp recovery in crude pricing and volumes returning in that CAD 125 million impact as well?
Yeah, Matt, it's Scott here. That forecast is as of a couple of weeks ago, it reflects the best information at that time. I think it's also, since we're talking about marketing, important to point out two other points. Number one, we did have a CAD 10 million cavern loss in Q2, which was a one-time 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. 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. Part of the weakness in this second quarter was also a conscious decision, to defer some of our NGL sales volumes as well.
Great. Thanks for that, Scott. I wanted to move over to Base Line. Can you comment on 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, I'd imagine customers are starting to think about, as we're getting closer to that. Any color on that?
Hi, Matt, it's Jason. 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. 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 onto TMX and things like that for our customers, as well as storing products. That does seem to be a catalyst, and just trying to narrow in on the timing of when that is a bit of a science that we're trying to do at the moment.
Great. Thanks for that. One last one from me. You talked about interruptible revenues being offset by OpEx and G&A savings. Is that target still CAD 100 million? I know that's what you disclosed on Q1. 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. Very good confidence, and we anticipate those savings to continue, especially if you consider that our committed capital is CAD 1 billion lower than in 2021 than it was in 2020. We don't see any reason we can't maintain the CAD 50 million of G&A and CAD 50 million of OpEx savings through 2021.
Thanks. Wait, just to clarify, is that CAD 100 million was realized in Q2?
No, it'll be realized by the end of the year. Recall, we kind of announced it early Q2. By the time we got real organized, we were starting those savings kind of in the June timeframe. That CAD 100 million was really realized in, call it six months, give or take, or the back half of the year. We're forecasting meeting or exceeding that right now and expect to be able to continue that level of efficiency through 2021.
Thanks for the color there, Mick. That's it for me.
Your next question comes from Linda Ezergailis from TD Securities. Your line is open.
Thank you. I'm wondering if we can follow up a little bit, 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?
Morning, Linda. Jaret here. It was contained to one cavern, and it has been mitigated as we speak. It's not a systemic issue, no.
Can you describe a little bit what happened and the product, or?
Product was C2+. I won't get into the technical nature of the loss, but yeah, it was C2+.
Okay, thank you. 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? Maybe you can talk about the main things to look at beyond liquids pricing.
Linda, I can unfortunately safely say we're getting to the top end of the guidance range, which is CAD 150 million. Well, I guess CAD 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 the low point, we need to see a decent resurgence from fields like Drayton Valley, where we're still off the Drayton Cardium. We need to see wider crude WCS spreads. I know they're trending in the right direction. We'd 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. If propane pops, we'd have a healthy margin in the fourth quarter.
Those are the kinds of things that could get us to trend from the low point trending back towards the midpoint. We don't see a scenario where we're above the midpoint at this point.
Okay. Thank you. Just as a follow-up, with respect to your Peace and Northern systems, you've got about 250,000 bpd 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, some of the margins might not be entirely additive if they're displacing, releasing other customers from their take-or-pay obligations.
Hi, Linda. It's Jason. In terms of the take-or-pay, most of our customers are operating somewhat close to their take-or-pay. 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. All incremental volume that we do get is really going to be profit from that perspective. I think if we do get incremental volume from customers under contract, that'll add incremental margin. Some of the trucking volumes are where you see some of the volume back up, whether they come through third-party terminals or our own truck terminal. That's where some of the opportunity lies for us at the moment.
Great. Thank you. I'll jump back in the queue.
Your next question comes from Rob Hope from Scotiabank. Your line is open.
Morning, everyone. A follow-on question on the deferred projects. When we take a look at phase VII, VIII, 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?
That's a great question. We, actually, probably in the last six weeks, we did look at different derivatives of the master plan, as it were. We certainly have less capital-intensive options that are near-term. Where we remain focused is building the right system for the future, that remains four products, four pipelines almost all the way from the B.C. border in. It just gives us a ton of flexibility, way less reliance on storage. It allows us to tie products in mid-pipe rather than just at storage hubs. It allows us to partially loop systems, it just gives us incredible future flexibility. As it stands today, we remain focused on building the right master plan.
All right. That's helpful. Then just a follow-up question. Can you comment on the changes that were made with the PG&E Ruby contract?
We can't specifically comment on customer contracts, but I think, really, I guess the way to characterize it is it gave both them and us more flexibility.
All right. Thank you.
Your next question comes from Andrew Kuske from Credit Suisse. Your line is open.
Thank you. Good morning. The question really relates to the producer M&A that we've seen and the reduction of counterparty risks that does for you on 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? 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 deals are going to get bigger and more integrated, that's probably on balance, correct. Case in point, in the last five years, our transaction with the Chevron KUFPEC JV, kind of an area alliance where we build processing, we transport, we frack, and then we collaborate depending 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 competitive. There's just so capital-intensive to drill 6 or 12 well pads with many horizontal segments and huge liquids handling capability, water needs. Those are really capital-intensive But they deliver incredible longevity and economies of scale.
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 more in the Drayton Valley, Swan Hills areas, where we still have surplus pipeline capacity. They don't need to sign big agreements. 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 net back, I think not only will you see consolidation on the upstream side, Andrew, but I think as Mick said and Jason said, 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. 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. 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 had it on the books, thereabouts?
Well, 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. As an example, there's diesel being handled through that facility. Currently, there are hydrocarbon tanks. There's a bunch of spare land. The berths aren't fully utilized, but you're in the middle of a big city and that city is Vancouver. We're weighing all of that, and trying to find out what the appropriate use is for our company versus what it might be worth in other people's hands.
Okay. That's great. Thank you very much.
Your next question comes from Robert Kwan from RBC Capital Markets. Your line is open.
Good morning. Just wanted to kind of come back to some of the mothballed projects and you laid out the three 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?
Wow, that's a great question. It's like trying to judge what's going to happen next with COVID, I think, because COVID drives demand. 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. Trying to judge, Robert, what demand's going to be for hydrocarbons and what pricing falls out of that, which will see drilling, it's difficult. I would say, though, the positive quarters that our customers, as I said in the piece, is really encouraging. 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 2025 would be the on-stream date now. That is a long way out, so we're making some educated guesses there. I can tell you in the next eight weeks, we've got to make some decisions whether it's this winter or if we're going to reaffirm those this year or we're going to wait another year. Stay tuned. These are really difficult decisions. I hope you can appreciate that.
I guess, Mick, at the beginning of the call, you made a statement that you have a focus to exit 2020 strong. 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? Is this very squarely 2021 at best?
Well, I guess, yes. There is a chance that we come forward and say, "Yeah, we're going to go in 2021." The start date for CKPC would be March of 2021. The start for phase VII, we've got 65 km in the ground in phase VII and soft pile to pipe. We've got a class re-estimate. We're approved. We could bring that one back faster. Literally, we'll be calling customers here in the next four 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?" If they say, "Yeah, on balance, we want to start," we're going to start. We'll have to see what they say.
Okay. 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? 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?
Yeah, some of the smaller projects like Prince Rupert expansion or Empress Cogeneration, those are projects we can unilaterally start when we think the time's right. We want to see what the lay of the land is on exports here coming into the fall. That'll gauge whether we start that one up or not. Cogeneration, we can start that at any time. We'll be assessing that. Fair point, those can come back any time. They aren't as reliant, like the cogeneration is self-supply power. We're doing very well at our other cogeneration facilities, we may well bring that back. We talked about the Baseline Tank project. That's something that 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 for the TMX coming into service.
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 approval so that we can really respond quickly to market developments. 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 two factors. We can get ahead of that, and it's just going to give us a lot of flexibility. Overall, we're cautiously optimistic that we will see gradually improving circumstances for the sector.
Okay. If I can just finish with a question on marketing. The CAD 125 million down from your original midpoint, has this changed recently, or is this just you giving more granularity to The Street? I'm just wondering because it doesn't look like your 5%-10% of EBITDA coming from commodity has changed from prior disclosures.
Yeah. Robert, really, again, this is 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 reductions below into the guidance range was from the commodity-exposed portion of the business. Most of this is COVID related and the downturn in pricing. 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. This has kind of been a trend throughout the year and to the point where we are today. As incremental disclosure, we thought we'd let The Street know. You're right, our kind of commodity-exposed portion of the business, we've kind of talked about in that 5%-10% range.
If we were to update that today, it would be 5% or less, maybe 5%-3%.
I'll just build on that. 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 a 1090 on marketing, net of what we think we might be able to mitigate in a down market. When we go two years back when we raised our guidance twice, that was because we were at a C95, and then last year, we were in the upper end of our guidance. It did cover the positive wiggle in guidance. This year, through a bit of hard work, it still is covering the negative wiggle in marketing outcomes. I think, looking back, the way we do guidance has served us quite well.
That's great. Thank you very much.
Your next question comes from Robert Catellier from CIBC Capital Markets. Your line is open.
Hi, good morning, everyone. Thanks for your comments so far. 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? Maybe if you could add to that, how the outlook for associated gas in Alberta can play into the equation?
Hi, Robert, it's Jason. 2020 has been a kind of a different year for Alliance in terms of the spread between Chicago and AECO. Historically, it's always been very in the money, and this year it's been a bit of an anomaly. When you look out beyond Q3, Q4 into 2021, we're seeing those spreads come back. We're pretty optimistic in the second half of the year that those ID volumes start to recover and we think there's reason for hope in terms of renewals. Historically, it's always been a good
A good market for our customers. We believe they're going to still like that diversification. We also think, you 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. 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 the first half of 2020.
Yeah. 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. Whether it's 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. I just want to make sure I understand the nuance here, and what you're looking for on the future propylene demand, given that you do have some contracts. Are those contracts still in place, and still valid? What do you really need to see in light of those contracts from the demand side of the equation? Is it just a question of, you have a partner and everyone has to be comfortable on where they see demand?
Robert, it's Stuart. 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 advantage location for market access. 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.
In terms of contracts, just like the phases of Peace, those contracts remain good and valid and they don't have any kind of a outside date concern at this time. When we go, those contracts will go as well.
Okay. 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. How comfortable are you with being a low-cost supplier in the context of the propane situation?
We remain comfortable. Whenever this basin has seen any kind of a price signal, let's just play it out. The West Coast terminals start to pull hard on propane. There's a temporary blip. It starts to become more valuable, and people just pull down their plants and take out more propane, or somebody builds another deep cut. 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 looked like there wouldn't be enough supply for the polyethylene business.
I think that's a quarter of 1 MMbpd . Every single gas pipeline is, whether it's the Enbridge system or TCPL or Alliance, we're all running at complete max heat capacity. There's tons and tons of ethane being exported from the province. We're awash in ethane. We think that this basin is just so prolific and good. As soon as there's a price signal sent, we'll react and it's just because of the quality of the rock at the end of the day.
Okay. Thanks very much, guys.
Cheers.
Your next question comes from Ben Pham from BMO. Your line is open.
Okay. Thanks. Good morning. I also had a question on CKPC, and one of the references, the three that you mentioned, is respect to the federal and provincial government. I was wondering, does that have anything to do with the royalty credits there? Something to know about in terms of expiration dates or ability to monetize those credits?
Yeah. We've gone back. We have confirmed and reconfirmed both the provincial and the federal government's commitments to the funding. Again, the royalty credit, the Alberta government has come and stated that those are theirs. We're working with them on documentation for the extensions. 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.
It sounds like when this was set up, I think 2016 or so, there was some sort of expiration that you might be hitting into, and it sounds like you feel pretty good about extending that.
Yeah, everything had a schedule, and then there's requirements for information filings. We've been diligently working with both the federal and provincial governments of providing all the documentation and working through extensions of those agreements.
Okay. All right. On the 0% interest rates there, anything to do with balance sheet optimization you see, whether buying back preferred shares or calling some debt? Is there anything that looks interesting right now?
Hey, 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 notes, at an interest rate 3%-4% below where that note was issued at. We've started to chip away at that. We also have roughly CAD 800 million on our credit facility, which we'll likely look to term out in the back half of the year as well to capture some of that long-term interest rate savings. In terms of optimization of the preferred shares, we've looked at it, but ultimately doing a normal course issue or bid for your preferred shares, there's just no liquidity in that market. That would be very, very tough to enact. It's something we've thought about, but at this time, not something we're pursuing.
Okay. Can I ask you then, lastly, this big news floating around Dominion and Warren Buffett and, I guess just your own thoughts on capital allocation, M&A. If your stock price wasn't so mispriced and you wanted to get into a boxing match with Warren Buffett, strategically, those type of assets, would that strategically fit with Pembina?
I think he made a hell of a deal. He bought the railroads, what, a decade ago at the right time and looks pretty smart now, and I think he's going to look really smart again here. Those assets have a long life and there's a scarcity value associated with them because that part of the world, it's hard to build new ones. For us to do that, again, we're trying to grow our business so that 1 + 1 + 1 = 5 and not four through the value chain. 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. Those are the kinds of things that we think can create exceptional results over time. It is tough to watch good deals come and go that maybe aren't as synergistic, but are nevertheless good deals. We remain on our path.
Okay. All right. Thanks, everybody.
Your next question comes from Patrick Kenny from National Bank Financial. Your line is open.
Hey, guys. 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. Just any thoughts on how this new program might bring some of your ethane-based infrastructure opportunities more into focus over the near term?
We're investigating that. Again, our facility was granted under PDP1, with royalty credits. PDP2 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 PDP2 and the new program credits. We are investigating whether there would be additional opportunity for us given that we were in the PDP1 program. We look at it and we're trying to manage that and we have meetings set up to go and investigate more of that.
At a macro level, ethane's being sold for gas value right now. It's just being sold as heat and no premium. It seems like the sector is ripe for additional ethane consumption infrastructure. We're well-positioned to be the ethane production infrastructure.
As far as the new program, again, I think the government has listened and is trying to look at how other jurisdictions have gone about their incentivizing development and infrastructure development. This is a program that is not a one-time event. It's ongoing, which I think from an investment cycle purposes, that's advantageous. 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. 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. Thanks for that. On the potential sale of the CAD 200 million- CAD 500 million of non-core assets, I guess, given all the actions you've taken over the past few months to boost your liquidity position, it doesn't seem to be the same financial incentive to sell these assets, at least relative to maybe earlier in the year. Maybe just to comment on what the benefits might be from a synergies or strategic rationale perspective that still support the decision to dispose of these assets?
Yeah, Pat. The decisions to potentially monetize some assets were made 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. Really this started pre-COVID. 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. I think the point I'm trying to make through all this is we're in the process of investigating some of those, the bids in the context of our retention value. If we get good value, we'll make the decision at the time.
If we don't get good value, we're happy to own the assets.
Got it. Okay. 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? Will those barrels be mainly exposed to an open position?
No, Pat, we do have, in addition to our frac spread position that we talked about in our release, we also do have some of our winter inventory hedged as well. We do have price protection through the winter.
Okay, that's great. That's it for me, guys.
Cheers.
Your next question comes from Shneur Gershuni from UBS. Your line is open.
Hi, good morning, everyone. Glad to hear everyone is well and surviving COVID-19 well. Don't want to beat it 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 CAD 125 million. Given the fact that you've sort of hedged it and so forth, is it really just a timing thing? 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 it could roll into 1Q and so forth. Is it really just a timing issue and that's why you've introduced this variability here? Or was CAD 125 million opportunity completely, it's an opportunity lost at this point right now?
Yeah, I think a large portion of it, the vast majority of it would be pricing, so degradation and margin. 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. 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 Q2 and into Q3, and then NGL margins as well.
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? Would that create a timing issue or a 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.
What would it take us?
Okay. Just one last question on costs. You've done a great job on it. I think we've sort of seen this, kind of across the board within the industry. The thing that has been notable as of late is 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. Are you challenging your staff to potentially double the type of cost reductions that you've seen or go even more than that? Just in the fact that you've gone through a whole shelter-in-place type of environment, have you been able to reassess everything? 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. Thank you for saying we've done a good job. I agree with that. We're not looking at further staff reductions. We think we want to maintain the capability that we have. We do think things are going to come back. 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 t elemetry and things like that we didn't have before.
It opens up a new possibility with machine learning and other ways. Jason's talked about Peace phase X. A lot of that, unearthing another 50,000 bpd or 100,000 bpd capacity by optimizing your pipeline flows, that's very possible. We've just never really had a lull like this. If you think about, we've, I think, employed roughly CAD 15 billion in green and brown field 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." I think there's not just cost synergies, but revenue synergies that we're going to work really hard on. We've set as our top priority for 2021 to improve the return on our invested capital. 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. 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. Just to clarify, I wasn't thinking about further layoffs. I was thinking more about productivity enhancements as you were able to assess them. It sounds like you're seeing opportunities to see those enhancements 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, if we built all those projects, how would we do that without adding people? The way to do that, to amortize your people cost and your asset cost, is through technology, is having people, every person at Pembina, be able to do more through technology. It's not just cost in our existing business, it's how do you grow without adding people? I think that's really where technology can help you. I do think it's revenue synergies. It's going to be op-cost synergies. It's G&A synergies, it's also growing without adding fixed costs. I think the last thing I mentioned is perhaps where the biggest opportunity is into the future.
No, that makes perfect sense. Really appreciate the color, guys. Have a safe day, and enjoy the weekend.
You as well.
Your next question comes from Praneeth Satish from Wells Fargo. Your line is open.
Hi, thank you. Just one quick question from 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? Thanks.
It's really just driven by the spreads between Malin, Opal, and Alberta. With the stronger gas prices in Alberta, we're seeing some opportunity to move spot barrels on the Ruby Pipeline. Yes, 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.
Yeah. At the macro, you can see it at the E&Ps in our basin, which I know better than in the U.S. basin. That means obviously gas prices are going up, which means gas volumes can go up. If that buoyancy continues, we're back to an earlier call. We get ever more optimistic that the Alliance recontracting will continue as it has, positively, as well as Ruby. That all hangs together. If you're optimistic on prices, you're going to be optimistic on volume. We'll see. It's early days.
I'd also just add that it goes to show you over the last couple of years, all these different pricing points have changed over time. Most producers like to have diversity of endpoint because you actually can't predict which market's going to be making more money than the other. We still think that having the Alliance and the Ruby, Malin, and Chicago exposure is great because lots of producers are going to want a diversity of supply partners.