Good day, ladies and gentlemen, and welcome to the Pembina Pipeline Corporation 2022 second quarter results conference call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Cameron Goldade, Interim Chief Financial Officer, Pembina Pipeline. Please go ahead.
Thank you, Keith, and good morning, everyone. Welcome to Pembina's conference call and webcast to review highlights from the second quarter of 2022. On the call today, we have Scott Burrows, President and Chief Executive Officer, Jaret Sprott, Senior Vice President and Chief Operating Officer, Janet Loduca, Senior Vice President, External Affairs and Chief Legal and Sustainability Officer, and Stu Taylor, Senior Vice President, Marketing and New Ventures and Corporate Development Officer. I would like to remind you that some of the comments made today may be forward-looking in nature and are based on Pembina's current expectations, estimates, judgments, and projections. Forward-looking statements we may express or imply today are subject to risks and uncertainties which could cause actual results to differ materially from expectations. Further, some of the information provided refers to non-GAAP measures.
To learn more about these forward-looking statements and non-GAAP measures, please see the company's Management's Discussion and Analysis dated August 4th, 2022, for the period ended June 30th, 2022, as well as the press release Pembina issued yesterday, which are available online at pembina.com and on both SEDAR and EDGAR. I will now turn things over to Scott to make some opening remarks.
Thanks, Cam. As detailed with our release yesterday, Pembina delivered another strong quarter with adjusted EBITDA of CAD 849 million, which was a record for a second quarter. While we typically see a sequential lower contribution in the second quarter from Pembina's NGL marketing business, our results benefited from continued growth in volumes across many of Pembina's systems, higher NGL margins, and a strong contribution from the crude oil marketing business. As Cam will detail in a moment, with strong year-to-date results and a positive outlook for the rest of the year, we have raised our 2022 adjusted EBITDA guidance to CAD 3.575 billion-CAD 3.675 billion.
Throughout the second quarter, we continued to progress our portfolio of growth projects, notably by bringing phase VII Peace Pipeline expansion into service in June, ahead of schedule and CAD 150 million under budget by reactivating the phase VIII expansion. Likewise, construction on the phase IX expansion is ongoing, and we continue to look forward to bringing that project into service later this year. These expansions deliver a multitude of benefits, including full product segregation across the Peace system and creating additional egress capacity to enhance Pembina's customer service offering and accommodate future growth. We've also advanced the in-service date for our Empress cogeneration facility to Q3 of this year, one quarter earlier than previously expected. The cogen will reduce overall operating costs and contribute to annual GHG reductions at the Empress NGL extraction facility through the utilization of cogeneration waste heat and the low-emission power generated.
Alongside our partners, we continue to advance two significant proposed developments, the Alberta Carbon Grid and Cedar LNG, both of which are exciting and transformative projects. On the Alberta Carbon Grid, Pembina and TC Energy progressed work on several fronts, including continued discussions with the government of Alberta, surface and subsurface engineering, and planning and engagement with customers and stakeholders. On Cedar LNG, our project with the Haisla First Nation, front-end engineering design and commercialization work streams are both underway. Through ongoing commercial discussions, we have observed considerable interest to get WCSB natural gas to international markets, while at the same time diversifying to new supply sources. In addition to another strong financial quarter and continued progress on our major projects, there were several other positive developments during the second quarter.
First, all regulatory approvals have been received in respect of the joint venture transaction with KKR, and we are working to satisfy the remaining conditions to close, which is expected in August. These efforts include the sale of a 50% interest in the CAPS Pipeline, which is consistent with our intentions when we announced the transaction and was part of the agreement with the Competition Bureau. Second, Pembina has now executed the previously referenced long-term agreements with a third leading Northeast B.C. Montney producer, being Tourmaline. These agreements include the commitment of significant volumes from another multi-phase Northeast B.C. Montney development and allow Tourmaline to call for future firm transportation and fractionation services on a take-or-pay basis if the acreage is developed.
Our agreement with Tourmaline, together with the previously announced service agreements with ConocoPhillips Canada and another unnamed customer, provide three leading Montney producers with certainty of transportation egress from this key area for their future development and access to the remainder of Pembina's integrated value chain, including fractionation and marketing services. As we have been saying for a while, Pembina has a very positive outlook for Northeast B.C . Development. With existing infrastructure and our integrated service offering, we feel poised to benefit. As a result of long-term commitments under these agreements that we have announced recently, as well as through our ownership in Veresen Midstream, we expect to have secured the transportation, fractionation, and marketing rights to a significant portion of forecasted future growth in the Northeast B.C. Montney.
Capturing these incremental volumes will collectively support improved utilization of our existing assets, as well as capital-efficient expansion projects into the future. As a specific example, Pembina is currently engineering and evaluating up to an incremental 55,000 barrels per day of propane plus fractionation capacity at Pembina's Redwater complex. The Redwater complex allows for a capital-efficient expansion due to existing cavern storage, ownership of significant contiguous land holdings, and industry-leading rail and pipeline connectivity. Significant existing infrastructure provides Pembina the flexibility to right-size the incremental fractionation capacity to meet recently announced customer commitments, as well as incremental demand in a de-risked, timely, and cost-effective manner. Third, the contracting of Alliance Pipeline continues to progress very well. During the second quarter of 2022, Alliance offered three open seasons to the market.
The largest of the open seasons resulted in approximately 270 million cubic feet per day of incremental long-term firm service with a volume-weighted average term of 15 years, commencing in November 2022. The other two open seasons were for short term service. Recent open seasons have resulted in Alliance being contracted over 90% for the current and next gas year through November 2023. Finally, Pembina continues to advance execution of its ESG strategy. In July, we established a CAD 1 billion sustainability-linked revolving credit facility, aligning Pembina's finance strategy with its ESG priorities. The facility contains pricing adjustments that reduce or increase borrowing costs based on Pembina's performance relative to a greenhouse gas emissions intensity reduction performance target. Establishing this facility further highlights Pembina's ESG commitment and ongoing efforts to integrate ESG into our business and financing strategy.
Additionally, we entered into a power purchase agreement, 105 MW of renewable energy and associated renewable attributes with a wholly owned subsidiary of Capstone Infrastructure Corporation. We view power purchase agreements as an efficient tool to support development of renewable energy infrastructure, lower emissions, and support the transition to a lower carbon energy system. The PPA with Capstone also benefits Pembina by securing cost-competitive, renewable energy and fixing the price for a portion of the power Pembina consumes. Further to Pembina's ESG strategy, Pembina continues to demonstrate its commitment to equity, diversity, and inclusion in the workplace. Over the past year, Pembina has made tremendous progress toward its goal, including expanding representation in executive leadership roles, both at the vice president and senior vice president levels, and also on the board.
The company is well-positioned to deliver on its targets, and broader EDI initiatives are enabling Pembina to create a safe and inclusive workplace and attract and retain a broad and diverse talent pool at all levels of the organization. Given industry tailwinds, I am looking forward to continued strength and momentum into the back half of this year and beyond. I will now pass the call over to Cam to discuss in more detail the financial highlights for the second quarter.
Thanks, Scott. As Scott noted, Pembina reported quarterly adjusted EBITDA of CAD 849 million, representing a CAD 71 million or 9% increase over the same period in the prior year. Relative to the same period last year, second quarter results benefited from stronger marketing results due to higher margins on crude oil and NGL sales, a combination of higher volumes on the Peace Pipeline system and higher tolls, largely due to inflation, as well as higher contributions from Aux Sable and Alliance. These positive factors were partially offset by a lower contribution from Ruby due to Ruby Pipeline filing for bankruptcy protection on March 31st, 2022.
Higher realized losses on commodity-related derivatives, lower contracted volumes on the Nipisi and Mitsue pipeline systems due to the expiration of contracts, and higher general and administrative costs, primarily due to higher long-term incentive costs driven by Pembina's relative share price performance. Pembina recorded earnings in the second quarter of CAD 418 million, representing a CAD 164 million or 65% increase relative to the same period in the prior year. In addition to the factors impacting adjusted EBITDA, earnings in the second quarter were positively impacted by lower further expense and impairments and a higher unrealized gain on commodity-related derivatives. Second quarter earnings were negatively impacted by higher income tax expense and higher net finance costs due to foreign exchange losses compared to gains in the second quarter of 2021.
Total volumes of 3.34 million barrels of oil equivalent per day in the second quarter were down approximately 4% compared to the prior period of last year. A 6% decrease in pipeline volumes was largely driven by Ruby Pipeline filing for bankruptcy protection and lower contracted volumes on Nipisi and Mitsue pipeline systems due to contract expirations, combined with lower volumes on the Alberta Ethane Gathering System due to third-party outages. These factors were partially offset by higher volumes on the Peace Pipeline system, Vantage Pipeline, Drayton Valley Pipeline, and Cochin Pipeline. A 1% decrease in facilities volumes was largely due to lower volumes at the Saturn complex as a result of scheduled maintenance, partially offset by higher contracted volumes at the Cut Bank Complex.
It is worth noting that excluding the volume impact of contract expirations on Nipisi and Mitsue pipeline systems, as well as the Ruby Pipeline entering bankruptcy protection, second quarter volumes would have increased approximately 1% over the same period in the prior year. As Scott noted, based on the strong year-to-date results and the outlook for the remainder of the year, Pembina has raised its 2022 adjusted EBITDA guidance range to CAD 3.575 billion-CAD 3.675 billion. Relative to the previous guidance, the revised outlook for 2022 primarily reflects stronger marketing results, higher contributions from the Alliance and Cochin Pipelines, as well as certain assets in the gas services business and the anticipated closing of the NewCo transaction later this month.
Year to date, Pembina has generated cash flow from operating activities of nearly CAD 1.3 billion, which has been used to fund dividend payments and the capital program, with the excess used to repurchase common shares and reduce debt, thereby strengthening the company's leverage metrics. Since late 2021, Pembina has now repurchased 2.7 million common shares at a total cost of approximately CAD 122 million. Pembina remains committed to common share repurchases up to CAD 350 million, subject to the closing of the NewCo transaction. Additional excess cash flow in the year, if any, is expected to be used to reduce debt and position the company for the future. I'll now turn things back to Scott for closing remarks.
Thanks, Cam. As I reflect at the midpoint of the year, I am pleased with our results and our prospects. With stronger than expected performance, we've been able to raise guidance twice. We expect to close our NewCo transaction this month and, through the combination of three complementary platforms, create a premier, highly competitive Western Canadian gas processing entity. We continue to advance our multi-billion dollar portfolio of projects, including Cedar LNG and Alberta Carbon Grid. We've allocated capital both to common share repurchases and pay down debt, strengthening our balance sheet and positioning us well for the future. We are executing on our ESG strategy and making progress towards the targets we set last year. More broadly, in our view, the potential opportunities within the Western Canadian Sedimentary Basin remain underappreciated.
Pembina continues to observe steady volume growth on key systems, and a positive outlook for additional future growth is being informed by a number of factors, including the sound financial position of Pembina's customers, price strength across all commodities in Pembina's value chain, the quality of the WCSB formations, such as the Montney and the Duvernay, the development of LNG facilities on Western Canada's west coast, the expansion of the Trans Mountain pipeline, and potential growth and diversification within Alberta's petrochemical sector. Overall, Pembina's outlook for meaningful medium-term volume growth in the WCSB remains unaltered and is being supported by customer commitments and contracting success, and is materializing in prospective future growth projects. Thank you for joining us this morning and for your continued support. Please go ahead and open up the line for questions.
Thank you. Ladies and gentlemen, if you'd like to ask a question, you may do so by pressing star one on touch-tone telephone. Star one for questions. Please make sure the mute function on your phone is turned off so the signal can be read by our equipment. We'll pause a moment to assemble the queue. We'll take our first question from Jeremy Tonet with JP Morgan. Please go ahead.
Hi, good morning.
Hey, Jeremy.
Hey. Scott, I was running a little bit of math, and I saw if the first half of the year EBITDA is repeated in the second half, you guys, I think you might go over the top end of your new guide there. I was just wondering, with the guidance raise, how much of that was predicated on, I guess, fee-based cash flow versus commodity cash flow? Or are there other headwinds in the second half of the year that we should be thinking about?
Jeremy, you know, again, if you recall, typically, our marketing business, the two largest quarters historically have been Q1 and Q4. We obviously had a very strong Q1 this year. If you look at the pricing of the forward curve, it does continue to remain backwardated, which you know, helps inform our view as we set the guidance range. Also, Q1 of this year benefited obviously from adding inventory in kinda Q2 and Q3 of last year, and then a rapid appreciation in prices, whereas this year, you know, propane's remained quite strong, so our inventory and our carrying cost of inventory is a lot higher than it was last year, which just means as you go into the winter, there's potentially less margin based on the curve we see.
I would suggest that, you know, we always get nervous when people annualize, you know, Q1 or even half point of the year because there is seasonality in the marketing business, which helps drive, you know, probably a lower outlook for marketing through the back half of the year. All that being said, we do see some of that offset by continuing volume increases across the system.
Jeremy, it's Cam. I'll just add to that it's worth reminding everyone that, you know, the second half of the year, typically Q3 and early Q4, is when our integrity teams are at their most active as well. We typically see some profiling, you know, higher costs, through Q3 and early Q4. That does contribute to some of the seasonality as well.
Got it. Thanks for that. Maybe just picking up on the propane point there. I was wondering if you could provide updated thoughts on how you see the propane balance in the basin right now. Is there a need for more exports, or do you think things are balanced? Or just kind of curious, I guess, where you see things heading at this point.
Jeremy, it's Stu. You know, there's the IPL facilities coming online. We are seeing, pardon me, the market is in relatively good balance. We're excited about increasing volumes of propane, as more volumes build on the pipeline systems and then the mention of us looking at additional fractionation capacity. We think there's opportunity to export additional volumes. The market's pretty balanced right now, but we are looking at incremental growth.
Got it. Just with capital allocation, I know you talked about higher interest costs, I guess, impacting how you think about deploying excess cash here. As it relates specifically to the buyback portion, up to CAD 350 million, as you mentioned there, would timing of buybacks be more a function of balance sheet capacity or share price or how do you balance those factors?
Yeah, I mean, I think obviously the balance sheet capacity is strong, Jeremy. You know, our comment around you know the economic benefits of repaying debt at this time, I mean, I think we just look at where the fixed income markets have gone and obviously they've you know they've popped up here. In terms of being in a strong free cash flow position, you know, it does certainly make some sense to be repaying debt in the interim, in the short term here, you know, obviously with the view that as our growth program continues to take shape here over the next couple of years, that we'll be pulling on that at a later date.
As for the share buybacks, obviously, you know, I think I would characterize this as being on track to hit that CAD 350 million for the first half of the year. Obviously, you know, that was reliant on CAD 150 million of proceeds coming back from the NewCo transaction, and using that in the second half of the year.
You know, we're obviously gonna look to be opportunistic as we do that through the balance of the year. We do feel a strong commitment to that CAD 350.
Got it. Thanks. Just a real quick last one, Scott. The CFO process, just wondering if there's any updates you could provide us there in timeline. Seems like the CFO function's being performed very well right now, but just curious what you can say.
Yeah. Thanks for the question, Jeremy. I would agree with you. Cam's doing an excellent job, which has allowed us to run a full and thorough process. I would say that we are in the ninth inning of that process, and we would look to update the market in, I'll call it, the next month or so.
Got it. That's helpful. Thank you.
We'll take our next question from Linda Ezergailis with TD Securities. Please go ahead.
Thank you. Just as a follow-up to Jeremy's question about share buybacks and to build on that, can you provide some updated thoughts on your dividend policy and philosophies? I mean, the market is anticipating the increase after the NewCo transaction closes. But beyond that, how do you view future increases being matched? Would it be an annual or would it be again opportunistic related to big projects or accretive transactions? And how do you think about balancing a payout ratio with retaining capital for growth investments?
Yeah. Linda. As we've publicly stated, we will be increasing the dividend off the closing of the NewCo transaction. Expect an update on that in the next couple weeks. You know, as I look forward, really we want to tie our dividend growth to a form of cash flow per share growth. We would expect to resume normal course dividend increases. You know, then we always look at in terms of closing of major acquisitions or closing of large greenfield opportunities coming into service. We've typically looked at a second dividend increase in over time. As we stand right now, you know, I do think we'd aspire to getting back to normal course annual dividend increases.
Obviously, those were paused in 2020 and 2021 just with the uncertainty around the pandemic. You know, as far as our payout ratio is concerned, you know, we're somewhere in the neighborhood of 55%-60%. We feel pretty good about the amount of capital we're retaining, and that ability to either buy back shares or pay down debt, and I think really positions us as some of that growth comes back into being more visible.
Thank you. That's a helpful update. Maybe if you could just help us with the timing of potential FID on some of your other larger projects, I guess, the frac that you're looking at. When do you expect to be in a position to make a decision on that? Can you give us some guesstimate of what magnitude of cost we're looking at in this inflationary environment, and how the contractual attributes might differ versus any prior frac commitments and agreements you've had?
Morning, Linda. It's Jaret. Yeah, obviously with the recent announcements with respect to the large swaths of land that we have dedicated to Pembina through transport and fractionation and some marketing services, as we've stated before and as I think everyone's aware, the overall fractionation complex in Edmonton is extremely full. We will need about a two-year lead time in order to meet our customer demand for that. We are feverishly working, and as Scott Burrows said in his prelude there, you know, we're really focusing on what incremental outside the frac lease boundary utilities do we need such as spec storage, front-end storage, incremental rail connectivity, et cetera. Just really working through that.
We expect to have, you know, line of sight into exactly what that looks like here by fourth quarter. Subsequently, we would be looking to make a decision after that. We do still have some work to do, so it's a little bit early right now. With respect to the inflation, you know, we obviously, like everyone else, have seen significant inflation. With that said, over the last, I think, 14 weeks, steel prices have come down substantially. Waiting a little bit. Time's actually in your favor when sanctioning large projects right now. We just continue to evaluate and watch that and make sure we pull the trigger at the appropriate time.
That's helpful context. Maybe just as a broader, bigger picture, a follow-up. Pembina's always never constrained itself with corporate capacity to look at opportunities that are opportunistic. Just maybe an update on what you're seeing in terms of additional M&A and how you balance that with all the opportunities organically that you have. Any thoughts on what you're seeing and what excites you right now on that front would be of interest.
Yeah. Linda, I think our short-term priority here really is to close the existing acquisition, the NewCo transaction. You know, we expect to close that in the next couple weeks, and there's a heavy lift once that gets closed. That's when the real work begins in terms of integration. Quite frankly, getting after all the commercial opportunities we see on that asset base that we just haven't been able to do due to obviously pre-close being under restrictions with the Competition Bureau. I think we're pretty focused on that asset. We also have the CAPS disposition underway as well. Those are our focuses right now. You know, bigger picture, at some point, we will return to look at opportunistic M&A, but in the current environment, we're focused on what's in front of us.
Thank you. I'll jump back in the queue.
We'll take our next question from Rob Hope with Scotiabank. Please go ahead.
Morning, everyone. I wanna circle back on the frac. Maybe to clarify and maybe further understand, are the three agreements in Northeast B.C., the area of dedications there, you know, how far does that get you to support the 55,000 barrel a day frac? And secondly, how are you thinking about area dedications versus firm volumes to backstop such an investment?
Yeah, Rob, it's. First of all, those agreements take us a decent way down the path. You gotta remember that we also have underlying frack contracts underneath that that we're balancing, you know, the renewals of those, the timing of those with the timing of the new contracts coming into consideration. It's a bit dynamic, I would say, but assuming the fracks stay full with existing production, it has taken us a long way there. Secondly, as it relates to the agreements we have in place, obviously, I have to be careful with what I say because they're confidential, but we do get visibility into the drilling plans and the production profiles on those assets.
While they are not solely land dedications, they are land dedications with take-or-pay arrangements once projects get sanctioned. You know, when we look at the producer track record of our customers, we have a high degree of confidence that those are going to turn into developments and ergo take-or-pay arrangements.
All right, good color. Thank you. As a follow-up, just on Cedar LNG, can you provide an update on that project? You have spent a little bit of capital there, but where are we in terms of commercial agreements and how have those changed, you know, through, you know, we'll call it the last six months as well as the permitting side?
Rob, it's Stu. Yeah, we've been progressing the Cedar project across the board. We're continuing to work our EPC, our pricing, and our contractual arrangements with the EPC contracts. We've been working the regulatory process, filing all of the regulatory documents, reaching out on a consultation basis with all the communities, while at the same time progressing our commercial conversations. We have considerable interest in the Cedar project. It is a unique opportunity that has been secured by the Haisla Nation to, you know, through the pipeline being constructed by TC and the acceptance and value that the Haisla Nation see in an LNG project. The conversations are progressing commercially. There is, as is not surprising, LNG pricing today.
There is a frenzy of LNG activity, and people see diversification as a major success, and Canada brings substantial access to a stranded, you know, some stranded gas that can get to Asian markets quite cheaply. Conversations are progressing. We're moving at lightning speed in an LNG world, and trying to progress those along as quickly as possible. The conversations are very good.
Thank you.
We'll take our next question from Robert Catellier with CIBC Capital Markets. Please go ahead.
Thanks, Operator. Rob Catellier. Good morning, everyone. I just wanted to follow up first on a couple things just on the frack discussion. So two things there. Just curious what your appetite might be to take any capacity there on spec. I heard you mention the question whether there's a need for spec storage. Just curious about your appetite there. You know, given the reality of the environment we're in with respect to inflation, is there any opportunity to risk share on the cost side with potential customers there?
Rob, it's Jaret. I'll maybe take the first question. When I said spec storage, I meant specific, like, spec products.
Right.
Finished product storage.
Got it.
Yeah, on the back end of the frac there, sorry. Then with respect to the cost-sharing with the customers, what we've actually seen is an appetite on the build side for people to do, you know, potential lump sums, so taking that risk premium on, you know, and taking that away from Pembina. Traditionally, we, you know, we manage that, but we have seen the appetite for that on these types of assets. That is definitely something we're looking at. As I previously stated, obviously we saw a significant increase in cost in a very, very rapid time period. We're also seeing that contract just as quickly.
The timelines, the delivery of equipment hasn't been as quick to come in, but as we're evaluating over the next few months, we expect to have a significantly better line of sight and mitigation strategy to anything incremental we would've you know, seen maybe in Q1 of 2022.
Okay. Moving on to just Alliance Pipeline and Aux Sable. I'm curious if you're at liberty to disclose how much capacity on Alliance Aux Sable might have, you know, how much to make up of that 90% contracted in 2022 and 2023. Separately, how is that exposure being managed? For example, are you doing anything to hedge the Chicago -AECO differential?
Sorry, Rob, I'm not sure I understood the question on Alliance. Could you just clarify it?
Yeah, I'm just curious as to you know, it's got a high level of contract and carry currently, and I'm curious to know how much Aux Sable represents of that level of contractedness. To the extent they do have exposure on Alliance, is there anything being done to hedge the differential?
Hi, Rob. Jaret. Currently, Aux Sable does have some capacity. Heading into the new gas year, that all goes to essentially zero. That'll be upstream customers taking that capacity.
Very minimal long-term exposure. But to the extent our short-term exposure, we are hedging a portion of the AECO- Chicago differential.
Okay.
At the Aux Sable level, not at the Pembina level.
Right. Got it. Last question for me then is, I'm curious, what the opportunity and the vision is for reducing emissions at NewCo once that's closed. For example, are there opportunities for more renewable power or even CCS further down the road?
I can take that, Rob. I'll break it into three buckets. Veresen Midstream primarily is hydroelectric power. You know, a little bit of opportunity there, but limited opportunity due to the nature of the power that's powering those assets. GBU, Pembina's wholly owned business, we have a lot of opportunities there. It won't be more CCUS , cause it's gonna be more asset-focused, reducing flaring, you know, focusing on our emissions, fugitive emissions and gas consumption. 80% of our emissions are from the consumption of natural gas to power compression, et cetera, et cetera, burners and heat mediums. Really focusing on the efficiency around consumption of natural gas, that is one of our biggest levers. That'll be essentially the same focus as you move into the Energy Transfer Canada assets.
Really focusing on natural gas consumption reduction, potentially some more cogens in certain areas where it makes sense, like we have at Empress and Redwater previously. Those would be the real big ones, Rob, that we're looking at.
Okay. Fantastic. Thank you.
We'll take our next question from Andrew Kuske with Credit Suisse. Please go ahead.
Thanks. Good morning. Maybe a big picture question. You touched upon some of the LNG dynamics and, you know, inherently longer term, but there's some stuff happening in the front end. You know, when you look across your platform and your footprint, do you see an opportunity on a longer term basis to have maybe a smaller scale Redwater lookalike on the B.C. side?
We have looked at that previously, Andrew. We've essentially shelved that opportunity, and the real reason for that is due to the connectivity. A frac by itself, if you had the same rail connectivity to get barrels to the West Coast, does make a lot of sense. But the inability due to just the quality of the rail infrastructure in Northeast B.C., for example, and getting a unit train out of there is just actually impossible. Well, I guess nothing's impossible with the right amount of capital, but it's economically not feasible. It does make more economic sense to bring that into the Edmonton market and rail it out of there, you know, in a unit train capacity. We've pretty much all but shelved that opportunity.
Okay, great. Appreciate that. Maybe just sort of building upon the economic opportunities and, you know, the compounding of your asset base. When you think about just CCS and sort of the three distinct elements of, you know, capture, transport and storage, you know, which areas to you are the most appealing? I mean, clearly you have the Alberta Carbon Grid, but how do you think about just return profiles for those three buckets and then risk management on those three buckets?
You know, right now as a corporation, you know, we are looking at the capture aspect, as Jaret's mentioned. I mean, there's ongoing work for our own emissions, and we continue to progress our own assessment of the capture capability of those assets. With the Alberta Carbon Grid, essentially it is a gathering of emissions. It is a hub, you know, for those emissions and then transportation and sequestration from that. So, you know, we see that as something very along the lines of Pembina's capabilities. We gather product, we upgrade product and we transport and move that product. So we think it's right in line with our capabilities.
We like where we're sitting with the Alberta Carbon Grid, the asset that we've worked with the Alberta government, and our work continuing to progress those opportunities. You know, as far as the return of that, you know, we're looking at, you know, our normal pipeline returns. We continue to have conversations with potential customers. We're continuing to bring forward our
Our engineering cost estimates is what that's going to take and, you know, what is the price of carbon on a go-forward basis and where does it make sense? I think we're in line right now. It's early days still for us, and those conversations are ongoing, but there's nothing different, I would say, from what Pembina's normal course business is.
Okay. Thank you. Appreciate it.
We'll take our next question from Matthew Weekes with iA Capital Markets. Please go ahead.
Good morning, and thanks for taking my question. Just looking at the contracts that you've signed with producers in Northeast B.C., I'm just wondering if you take into account those volume commitments and then looking at your asset footprint, you know, are you able to provide an idea of where you are in terms of utilization at this point and how much more room you have to sort of just expand volumes without really deploying too much capital into incremental capacity?
Good morning, Matthew and Jaret. Right now, the Peace system, obviously with phase VII coming into service, in condensate service, that allowed us to repurpose, you know, some different pipes to give us incremental NGL service. phase IX is being executed as we speak, and phase VIII has been sanctioned. Where I'm going with all that, once that is essentially built out, on average across the system, you have to recall that we have a system that goes all the way from Northeast B.C. into Edmonton, so, hundreds of kilometers long, and it moves four different products, C2+, C3+, crude and condensate. With all that said, you know, currently we're around 72%, utilized across that system, so we do have significant running room to accommodate future volumes across those four products into the Edmonton market.
Okay, thanks. That's helpful. I'll turn the call back. Thanks.
We'll take our next question from Robert Kwan with RBC Capital Markets. Please go ahead.
Great. Good morning. If I can just start at a higher level. You had some commentary just around inflation and the impact it may have, and I guess maybe just some cautious statements around future projects. I'm just wondering, though, as you go forward, typically, you haven't had capital cost protection. Is that something that you would consider and as you talk with your customers, just given that hasn't generally been the norm for your types of infrastructure, is that something they're amenable to?
Yeah. Rob, maybe I'll start big picture on the projects, and I'll let Cam talk about the impacts on the base business. You know, I think as Jaret pointed out, inflation is volatile right now and we're seeing it move all over the place. You know, a lot of the capital projects, we're seeing steel increases through the first half of the year. We've seen that come down dramatically. The one thing I'd say is we're probably more apt to push some of that risk off to the engineering firms, as Jaret pointed out. For example, on Cedar and the FEED work we're doing there.
You know, we're looking at securing that or the majority of that under a lump sum turnkey arrangement, as well as some of the other projects we're looking at. As it relates to some of the larger scale projects, I'd say we're more so looking at pushing that risk off to engineering firms than say to customers. As it relates to things like the pipe business, I think there we're pretty comfortable. I think that's our core business. We do it very well. That's an area where I think Pembina will continue to warehouse that risk. Cam, do you wanna talk about the base business?
Yeah. On the base business, Robert, I mean, I think we've structured our business to have a fair amount of insulation from inflation.
What I would say is that, you know, where we're seeing the most inflation is really a couple points, you know, obviously on the labor side as everyone else is. You can ask yourself whether that's just a function of coming out of the pandemic and catching up or whether it's more systemic and it's sometimes hard to differentiate between those two. We have seen, you know, a bit of inflation there more recently. The second piece would be on the commodity side more generally. That goes to, you know, Jaret's earlier comment, you know, certainly on the capital projects on the steel side, although it has obviously moderated more recently, you know, in the past couple of months, it's moderated quite significantly.
Also, you know, clearly on the power side, that has you know, that's been a big change this year. Obviously, you know, commercially, much of that is protected for Pembina's account. You know, while there has been inflation, you know, as you can see from the results, you know, we've structured the business, you know, to insulate ourselves quite significantly.
That's great. If I just kinda think about the more cautious statements here and tie it back to capital allocation, I just wanna be clear on something you said earlier. While you're committed to the buyback, it sounds like at this point, instead of scaling the buyback higher, you're seeing a lot more optionality in basically warehousing that capital on the balance sheet, reducing leverage, whether that's temporarily or permanently. Is that fair?
I think that's a fair comment, Rob. Ultimately, I think it goes to, I mean, if you look at where that balancing point has been throughout the year so far, you know, it's kinda flipped, you know, to favor both ends of that spectrum at various points along the way. We're obviously gonna continue to pay close attention to it and make the decision that creates the most value, you know, based on the opportunities ahead of us. You know, as the market stands today, you know, we do see considerable value in retiring some debt, you know, in the short term and obviously positioning ourselves for strength in the future.
If I can just finish with a couple of follow-ups from earlier questions. On RFS IV, Scott, you mentioned obviously, look, you wanna contract RFS IV, but importantly, you need to secure what's there. Is there an update as to where you are in terms of getting all the contracts you need and extending term? You know, are customers amenable to extending term, you know, for what's one through three?
Morning, Robert here. Customers, we've been very active in executing extensions across our current frac complex. You know, obviously the pricing's extremely high. Activity volumes are growing and customers are seeing that spare capacity is becoming very sparse. Yes, we have been successful in doing that.
When you say success, like what percentage of the capacity is where you need to start looking at IV?
I don't have that off the top of my head, Robert, but we could probably have a follow-up.
Okay. Yeah, that's great. Just for Alliance and the results that we're seeing this quarter, very strong kind of proportionate EBITDA. How does that compare to as you look forward, you know, factoring in the new contracts and whatever those rates would be, but as well, how much of this quarter came about from any of the interruptible volumes or any other kind of volumes that would've been subject to bids that may have been inflated due to basis?
Yeah, I think that there's a few different dynamics going on on Alliance. Clearly with where the spread was, we saw strong interruptible bids on short-term volume. That being said, you know, as we've recontracted that pipeline, there's less space on the interruptible. But the space that we do have has been quite strong. You know, I think we also highlighted in the second quarter that we typically just due to seasonality have line pack sales. Historically that's been you know relatively modest just due to the pricing. But if you look at where you know we would've acquired that line pack last year to where gas price is today, there was you know an uplift in Q2 from that that will unlikely to be recurring.
Lastly, we also have U.S. recourse rates that have stepped down next year. There's a bunch of noise on Alliance, some positive, some negative.
Is there kind of just a bit of a like, let me put it this way. As you think about your guidance for the year and citing Alliance, is that largely due to what we've already seen in the first half? Or do you expect, you know, certain aspects to continue in the second half of the year and possibly into 2023?
I think the aspects that we continue to see will be high utilization. You know, going into the year, we weren't fully utilized, whereas now we're basically full on that pipeline. We are seeing a stronger differential through the back half of the year, which should lead to continued strength in any of the short term, kinda daily, monthly, contracting efforts there.
Okay. That's great. Thank you.
Ladies and gentlemen, this concludes today's question and answer session. At this time, I'd like to turn the conference back to Scott Burrows for any additional or closing remarks.
Just a few closing remarks. Just wanted to thank everyone for their time today and your questions. We're really excited about what we achieved in the first half of the year and are equally excited as we move through the back half of the year. Hope everyone has a safe and healthy summer, and we'll chat soon.
Ladies and gentlemen, this concludes today's conference. We appreciate your participation. You may now disconnect.