CALGARY, Alberta – Pembina Pipeline Corporation (“Pembina” or the “Company”) (TSX: PPL; NYSE: PBA) announced today its financial and operating results for the first quarter of 2023.
- First Quarter Results – reported earnings of $369 million and adjusted EBITDA of $947 million.
- Common Share Dividend Increase – the board of directors declared a common share cash dividend for the second quarter of 2023 of $0.6675 per share, representing an increase of 2.3 percent, to be paid, subject to applicable law, on June 30, 2023, to shareholders of record on June 15, 2023.
- KAPS – the sale of Pembina Gas Infrastructure’s (“PGI”) interest in the Key Access Pipeline System (“KAPS”) was completed on April 26, 2023.
- Cedar LNG – during the quarter, Cedar LNG received its Environmental Assessment Certificate from the British Columbia Environmental Assessment Office and a positive Decision Statement from the federal Minister of Environment and Climate Change.
- Guidance – reiterated 2023 adjusted EBITDA guidance range of $3.5 billion to $3.8 billion.
- Strong Balance Sheet – at March 31, 2023 the ratio of proportionately consolidated debt-to-adjusted EBITDA was 3.6 times and Pembina expects to exit the year with a ratio of 3.3 to 3.6 times.
Financial and Operational Overview
|3 Months Ended March 31|
|($ millions, except where noted)||2023||2022|
|Earnings per common share – basic and diluted (dollars)||0.61||0.81|
|Cash flow from operating activities||458||655|
|Cash flow from operating activities per common share – basic (dollars)||0.83||1.19|
|Adjusted cash flow from operating activities(1)||634||700|
|Adjusted cash flow from operating activities per common share – basic (dollars)(1)||1.15||1.27|
|Common share dividends declared||359||347|
|Dividends per common share (dollars)||0.65||0.63|
|Total volumes (mboe/d)(2)||3,188||3,369|
|(1)||Refer to “Non-GAAP and Other Financial Measures”.|
|(2)||Total revenue volumes. Revenue volumes are physical volumes plus volumes recognized from take-or-pay commitments. Volumes are stated in thousand barrels of oil equivalent per day (“mboe/d”), with natural gas volumes converted to mboe/d from millions of cubic feet per day (“MMcf/d”) at a 6:1 ratio, and also include revenue volumes from Pembina’s equity accounted investees.|
Financial and Operational Overview by Division
|3 Months Ended March 31|
|($ millions, except where noted)||Volumes(1)||Reportable
|Marketing & New Ventures||—||120||169||—||217||267|
|(1)||Volumes for Pipelines and Facilities divisions are revenue volumes, which are physical volumes plus volumes recognized from take-or-pay commitments. Volumes are stated in mboe/d, with natural gas volumes converted to mboe/d from MMcf/d at a 6:1 ratio. Volumes do not include Empress processing capacity. Marketed natural gas liquids (“NGL”) volumes are excluded from volumes to avoid double counting. Refer to “Marketing & New Ventures Division” in Pembina’s Management’s Discussion and Analysis dated May 4, 2023 for the three months ended March 31, 2023 for further information.|
|(2)||Refer to “Non-GAAP and Other Financial Measures”.|
For further details on the Company’s significant assets, including definitions for capitalized terms used herein that are not otherwise defined, refer to Pembina’s Annual Information Form for the year ended December 31, 2022 filed at www.sedar.com (filed with the U.S. Securities and Exchange Commission at www.sec.gov under Form 40-F) and on Pembina’s website at www.pembina.com.
Financial & Operational Highlights
Pembina reported first quarter adjusted EBITDA of $947 million, representing a $58 million or six percent decrease over the same period in the prior year.
Pipelines reported adjusted EBITDA of $525 million for the first quarter, representing a $4 million or one percent increase compared to the same period in the prior year, reflecting the net impact of the following factors:
- higher volumes and higher recoverable project costs on the Peace Pipeline system;
- higher revenues from Cochin Pipeline, Vantage Pipeline, and AEGS;
- lower revenues and higher operating expenses resulting from the Northern Pipeline system outage;
- lower adjusted EBITDA contribution from Ruby; and
- lower revenue related to recoverable costs on the Horizon Pipeline system in the first quarter of 2022.
Facilities reported adjusted EBITDA of $298 million for the first quarter, representing a $17 million or six percent increase over the same period in the prior year, reflecting the net impact of the following factors:
- the creation of PGI on August 15, 2022 (the “PGI Transaction”) and stronger performance from certain gas processing assets, including the former Energy Transfer Canada (“ETC”) plants and the Dawson Assets; and
- lower supply volumes at the Redwater Complex as a result of the Northern Pipeline system outage.
The combined impact across Pipelines and Facilities from the Northern Pipeline system outage was approximately $54 million in the first quarter.
Marketing & New Ventures reported adjusted EBITDA of $169 million for the first quarter, representing a $98 million or 37 percent decrease compared to the same period in the prior year, reflecting the net impact of the following factors:
- lower NGL margins as a result of lower propane and butane prices and lower margins on crude oil resulting from the lower prices across the crude oil complex, coupled with lower marketed NGL volumes;
- realized gains on commodity-related derivatives for the quarter compared to losses recognized during the first quarter of 2022; and
- lower contribution from Aux Sable as a result of lower NGL prices and recontracting in the fourth quarter of 2022.
Corporate reported adjusted EBITDA of negative $45 million for the first quarter, representing a $19 million or 30 percent increase compared to the same period in the prior year. The change over the prior period was the result of lower corporate general and administrative expense primarily due to lower long-term incentive costs, partially offset by higher information technology-related maintenance costs.
Pembina reported first quarter earnings of $369 million, representing a $112 million or 23 percent decrease over the same period in the prior year.
Pipelines had reportable segment earnings before tax of $376 million, representing a $15 million or four percent increase compared to the same period in the prior year. The increase was attributable to the factors impacting adjusted EBITDA, as noted above, excluding the lower contribution from Ruby.
Facilities had reportable segment earnings before tax of $135 million, representing a $115 million or 46 percent decrease over the same period in the prior year. In addition to the factors impacting adjusted EBITDA, as noted above, the first quarter was negatively impacted by lower unrealized gains on commodity-related derivatives. Further, in the first quarter, the positive impacts captured in adjusted EBITDA from PGI were offset by interest expense on long-term debt, income tax expense, and depreciation resulting from the PGI assets recorded at fair value, which are all included in share of profit from PGI following the PGI Transaction.
Marketing & New Ventures had reportable segment earnings before tax of $120 million, representing a $97 million or 45 percent decrease over the same period in the prior year. The decrease was largely due to the same items impacting adjusted EBITDA, discussed above.
In addition to the changes in reportable segment earnings for each division discussed above, the change in first quarter earnings compared to the prior period was due to the net impact of the following factors:
- lower other expense largely as a result of lower acquisition fees incurred during the period; and
- lower income tax expense due to lower current period earnings and the tax impact of the PGI transaction.
Cash Flow From Operating Activities
Cash flow from operating activities of $458 million for the first quarter represents a $197 million or 30 percent decrease compared to the same period in the prior year. The decrease was primarily driven by a decrease in the change in non-cash working capital due mainly to the Ruby settlement, lower operating results, and higher share-based compensation payments, partially offset by a decrease in taxes paid and higher distributions from equity accounted investees.
On a per share (basic) basis, cash flow from operating activities was $0.83, representing a decrease of 30 percent compared to the same period in the prior year.
Adjusted Cash Flow From Operating Activities
Adjusted cash flow from operating activities of $634 million for the first quarter represents a $66 million or nine percent decrease compared to the same period in the prior year. The decrease was largely due to the same items impacting cash flow from operating activities, discussed above, excluding the change in non-cash working capital, taxes paid, and share-based compensation payments, partially offset by lower current tax expense and lower accrued share-based payments.
On a per share (basic) basis, adjusted cash flow from operating activities was $1.15 per share, representing a decrease of nine percent compared to the same period in the prior year.
Total volumes of 3,188 mboe/d for the first quarter represent a decrease of approximately five percent over the same period in the prior year.
Pipelines volumes of 2,467 mboe/d in the first quarter represent a one percent decrease compared to the same period in the prior year, reflecting the net impact of the following factors:
- approximately 62 mbbls/d reduction in volumes due to the Northern Pipeline system outage;
- lower volumes on the Ruby Pipeline;
- higher volumes on the Peace Pipeline system resulting from increased upstream activity; and
- higher volumes at AEGS and on the Vantage Pipeline due to third-party outages in the first quarter of 2022.
Facilities volumes of 721 mboe/d in the first quarter represent an 18 percent decrease compared to the same period in the prior year, reflecting the net impact of the following factors:
- the disposition of Pembina’s interest in the assets comprising the Empress I Plant, Empress I Expansion Plant, and the Empress VI Plant (collectively, “E1 and E6”), in exchange for a processing agreement that provides Pembina the right to first priority for gas processing at all Plains-operated assets at Empress;
- approximately 70 mboe/d reduction in volumes at the Redwater Complex and Younger due to the Northern Pipeline system outage; and
- increased volumes from PGI, primarily at the former ETC plants and the Dawson Assets.
Excluding the impact of the disposition of Pembina’s interest in the E1 and E6 assets at Empress, Facilities volumes would have decreased by seven percent compared to the same period in the prior year.
Marketed NGL volumes of 194 mboe/d in the first quarter represents a six percent decrease compared to the same period in the prior year, reflecting reduced ethane and butane sales as a result of lower supply volumes from the Redwater Complex following the Northern Pipeline system outage.
Quarterly Common Share Dividend
Pembina’s board of directors has declared a common share cash dividend for the second quarter of 2023 of $0.6675 per share, representing an increase of 2.3 percent, to be paid, subject to applicable law, on June 30, 2023, to shareholders of record on June 15, 2023. The common share dividends are designated as “eligible dividends” for Canadian income tax purposes. For non-resident shareholders, Pembina’s common share dividends should be considered “qualified dividends” and may be subject to Canadian withholding tax.
For shareholders receiving their common share dividends in U.S. funds, the cash dividend is expected to be approximately U.S. $0.4902 per share (before deduction of any applicable Canadian withholding tax) based on a currency exchange rate of 0.7344. The actual U.S. dollar dividend will depend on the Canadian/U.S. dollar exchange rate on the payment date and will be subject to applicable withholding taxes.
Quarterly dividend payments are expected to be made on the last business day of March, June, September, and December to shareholders of record on the 15th day of the corresponding month, if, as and when declared by the board of directors. Should the record date fall on a weekend or on a statutory holiday, the record date will be the next succeeding business day following the weekend or statutory holiday.
Executive Overview and Business Update
First Quarter Results and 2023 Outlook
First quarter results reflect continued strength in the Western Canadian Sedimentary Basin (“WCSB”) and growing demand for services from customers.
First quarter volumes across the conventional pipelines were consistent with the same period in the prior year as volume growth from rising industry activity sufficiently offset the impact of the Northern Pipeline system outage. For the full year 2023, Pembina is forecasting approximately four to six percent growth in conventional pipelines volumes, with the volume profile building quarterly throughout the year.
Based on first quarter results and the outlook for the remainder of the year, Pembina is reiterating its 2023 adjusted EBITDA guidance range of $3.5 billion to $3.8 billion. Excluding the contribution from the Marketing & New Ventures segment, the midpoint of the guidance range reflects an approximately four percent increase in adjusted EBITDA relative to 2022. Pembina’s fee-based business is expected to benefit from growing volumes and increasing utilization across its assets in the WCSB, and higher tolls. The reiterated guidance range includes the impact of the Northern Pipeline system outage and widening frac spreads due to lower natural gas prices.
In 2023, cash flow from operating activities is expected to exceed dividends and capital expenditures. Pembina regularly evaluates the merits of debt repayment relative to share repurchases over the course of the year, taking into account prevailing market conditions and risk-adjusted returns. Pembina currently expects excess free cash flow in 2023 to be used to pay down debt, further strengthening the balance sheet and preparing the Company to fund future capital projects. In support of maintaining flexibility to optimize capital allocation, the Toronto Stock Exchange accepted Pembina’s renewal of its normal course issuer bid during the quarter. At March 31, 2023, the ratio of proportionately consolidated debt-to-adjusted EBITDA was 3.6 times and Pembina expects to exit the year with a ratio of 3.3 to 3.6 times, supporting a strong BBB credit rating.
Pembina’s business resiliency is being enhanced as it builds on the strengths of its core business in support of one of North America’s premier basins, the WCSB. Basin growth is being underpinned by strong liquids prices combined with financially well-positioned and capable producers. Longer term, the industry is readying itself to capitalize on new egress options including LNG development on Canada’s West Coast and the Trans Mountain pipeline expansion, and a continued build-out of Alberta’s petrochemical industry. Given these developments, Pembina continues to have an expectation of growing volumes across the WCSB, including most notably the northeast British Columbia (“NEBC”) Montney formation, where certain large producers continue to signal the potential for significant, visible, multi-year growth.
Against this backdrop, Pembina has continued to achieve many commercial successes, securing and strengthening the contractual profile of its business. Customers continue to demonstrate the value they place on the Peace Pipeline system, the backbone of Pembina’s integrated value chain. Given its many advantages, including its extensive reach, capacity of 1.1 million barrels per day, product segregation across four commodities, high reliability, low operating cost, and multiple delivery points, service on the Peace Pipeline continues to be in high demand.
As previously announced, the Company’s recent commercial successes are highlighted by the long-term midstream service agreements with three premier NEBC Montney producers that include the transportation of liquids. In addition, since mid-2022, Pembina’s commercial successes in its conventional pipelines business include:
- Securing one additional production dedication and one facility dedication. These long-term commitments are from a strategically located, creditworthy counterparty and represent 100 percent of the nameplate capacity from the associated third-party facilities in the Gordondale, Alberta area.
- Recontracting all volumes from recent and near-term contract expirations on the Peace Pipeline and executing new contracts with existing customers for approximately 65,000 barrels per day of incremental volume. Included within this total is a long-term take-or-pay commitment with an existing area-of-dedication customer to build a new gathering system to a strategically located gas plant. The new contracts have a weighted average term of approximately six years. Approximately half of the incremental volumes are now being serviced with the balance of the contracts taking effect from late 2023 to early 2026. Incremental new volumes will continue to fill capacity on systems extending from NEBC to Edmonton, Alberta. Further, given increasingly longer average distances, the economic benefit from incremental volumes is expected to exceed the impact of any volumes lost to new competing pipeline alternatives.
Given ongoing customer discussions in light of growing volumes in NEBC, Pembina continues to engineer and develop additional NEBC system infrastructure, including new terminals, pump stations, and pipeline laterals needed to fulfill customer requests in a timely manner.
Additionally, following completion of a recently sanctioned lateral pipeline project, all former ETC plants, now owned by PGI, will be connected to the Peace Pipeline system. Full integration of the PGI assets with the Peace Pipeline system is another important step towards realizing incremental efficiencies and enhancing our customer service offering as contemplated when PGI was created.
At Pembina’s Redwater Complex, since the decision to proceed with the RFS IV expansion, producer response has been positive as expected. Pembina has renewed existing contracts, and executed incremental contracts, with both current and new producers. Together with momentum and encouraging signals from key NEBC contracted producers regarding their development plans, Pembina is pleased with the ongoing RFS IV progress.
Northern Pipeline Update
As previously disclosed, on January 18, 2023, a release of natural gas liquids on the Northern Pipeline system occurred. The outage impacted a substantial portion of the volumes on the Northern and NEBC pipeline systems; however, Pembina and its customers were able to mitigate a portion of the impact using truck terminals and directing volumes to the Peace Pipeline system. With a primary focus on the safety of our workers, the communities and the environment, service on the Northern Pipeline system resumed on February 23, at a reduced operating pressure, following repair work, comprehensive testing, including internal and external inspections, and approval by the Alberta Energy Regulator.
Including the resumption of service at reduced operating rates and further mitigation by transporting incremental volumes on the Peace Pipeline system, Pembina has been able to transport approximately 70 percent of the liquids that would have otherwise been transported on the Northern Pipeline. Further, Pembina has worked closely with customers to mitigate, where possible, the impact on their businesses, prioritizing customer barrels ahead of Pembina’s proprietary barrels, most notably through the Younger plant.
The overall impact to Pembina’s adjusted EBITDA for the first quarter of 2023 was $54 million, including lost revenue and costs to return to service. Compared to the previously disclosed estimated impact to first quarter adjusted EBITDA of approximately $30 million, the incremental costs are related to return-to-service, reclamation activities, and integrity work to facilitate the safe return to higher pressure operations, all of which were higher than originally forecasted. The impact to adjusted EBITDA for the second quarter is estimated to be approximately $25 million to $30 million, assuming resumption of full service in the latter half of the second quarter.
Projects and New Developments
- The Phase VIII Peace Pipeline expansion will enable segregated pipeline service for ethane-plus and propane-plus NGL mix from Gordondale, Alberta, which is centrally located within the Montney trend, into the Edmonton area for market delivery. The project includes new 10-inch and 16-inch pipelines, totaling approximately 150 kilometres, in the Gordondale to La Glace corridor of Alberta, as well as new mid-point pump stations and terminal upgrades located throughout the Peace Pipeline system. Phase VIII will add approximately 235,000 bpd of incremental capacity between Gordondale, Alberta and La Glace, Alberta, as well as approximately 65,000 bpd of capacity between La Glace, Alberta and the Namao hub near Edmonton, Alberta. Pipe manufacturing is complete and construction progressed at several locations in the first quarter of 2023. The project has an estimated cost of approximately $530 million and is trending on-time and under budget. Phase VIII is expected to enter service in the first half of 2024, with three pump stations expected to enter service throughout 2023.
- During the first quarter of 2023, Pembina approved construction of a new 55,000 bpd propane-plus fractionator (“RFS IV”) at its existing Redwater fractionation and storage complex (the “Redwater Complex”). RFS IV is expected to cost approximately $460 million and will leverage the design, engineering and operating best practices of its existing facilities. The project includes additional rail loading capacity at the Redwater Complex. Subject to regulatory and environmental approvals, RFS IV is expected to be in-service in the first half of 2026. With the addition of RFS IV, the fractionation capacity at the Redwater Complex will total 256,000 bpd.
- Consistent with Pembina’s and KKR’s intention to divest upon announcing the PGI Transaction, and pursuant to a subsequent agreement with the Competition Bureau, on December 11, 2022 a subsidiary of PGI entered into an agreement to sell its 50 percent non-operated interest in KAPS, which was contributed to PGI as part of the PGI Transaction.