Pembina Pipeline's (PBA) CEO Michael Dilger on Q4 2015 Results - Earnings Call Transcript

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Pembina Pipeline Corp. (NYSE:PBA)

Q4 2016 Earnings Conference Call

February 24, 2017 10:00 AM ET

Executives

Scott Burrows – Vice President of Finance and Chief Financial Officer

Michael Dilger – President and Chief Executive Officer

Paul Murphy – Senior Vice President, Pipeline and Crude Oil Facilities

Stuart Taylor – Senior Vice President, NGL and Natural Gas Facilities

Analysts

David Galison – Canaccord Genuity

David Noseworthy – Macquarie Capital

Linda Ezergailis – TD Securities

Ben Pham – BMO Capital Markets

Jeremy Tonet – JP Morgan

Robert Hope – Scotia Capital Inc.

Robert Catellier – CIBC World Markets

Patrick Kenny – National Bank Financial

Robert Kwan – RBC Capital Markets

Andrew Kuske – Credit Suisse

Operator

Good morning. My name is Jodie and I will be your conference operator today. At this time, I would like to welcome everyone to the Pembina Pipeline Corporation’s 2016 Fourth Quarter Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session [Operator Instructions]. Thank you.

Mr. Scott Burrows, Vice President of Finance and Chief Financial Officer, you may begin your conference.

Scott Burrows

Thank you, Jodie. Good morning everyone and welcome to Pembina’s conference call and webcast to review highlights from the fourth quarter and full year 2016 results. I’m Scott Burrows, Pembina’s Vice President, Finance and Chief Financial Officer.

On the call with me today are Mick Dilger, Pembina’s President and Chief Executive Officer; Stu Taylor, Pembina's Senior Vice President NGL and Natural Gas Facilities and Paul Murphy, Pembina’s Senior Vice President and Pipelines and Crude Oil Facilities.

Before passing the call over to Mick for a review of quarterly highlights, I’d like to remind you that some of the comments made today maybe forward-looking in nature and are based on Pembina’s current expectations, estimates, judgments, projections and risks. 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 various financial reports, which are available at pembina.com and on both SEDAR and EDGAR. Actual results could differ materially from the forward-looking statements we may express or imply today.

Over to you Mick.

Michael Dilger

Thanks Scott. Good morning everyone. Looking back we felt 2016 was a great year for Pembina. We had record financial and operating performance and maintained an exemplary safety record. Our staff worked 2.9 million hours in 2016 without a single lost time incidents. This is a third year in a row we've had no lost time employee incident. We completed approximately 1.2 billion in major projects, representing a meaningful portion of our secured growth projects, including, our second Redwater fractionator expansions of two gas processing facilities totaling 200 million cubic feet per day. The expansion of the Horizon Pipeline System among other projects, the remainder of our growth projects are also progressing well.

Overall, Phase III is now 60% complete and we're actually commissioning the pump stations right now. RFS III is expected to come on schedule, actually ahead of schedule in July. Initial connectivity in our Diluent Hub in CDH is now operational. These projects alone totaled approximately 3 billion in our scheduled to be completed by the middle of this year. In 2016, we secured over 750 million in new growth, which helped to augment our competitive positioning in two of the basins premier resource play, the Alberta, Montney and the Duvernay.

We have begun work on the next wave of growth opportunities. We completed our feasibility study for a PDH/PP project, which we will discuss later on in the call. We’ve purchased approximately 22 acres of highly strategic lands in the Alberta Industrial Heartland directly adjacent to our Redwater site. We just announced an exciting opportunity with Chevron in the Duvernay, which Stu will also discussed later on call.

2017 is said to be a transformational year for Pembina as we complete approximately 4 billion in project, three quarters of which will be completed by the middle of this year. The incremental fee-for-service cash flow from these projects will strengthen Pembina’s financial foundation and ideally position us to pursue growth opportunities, which continue to drive shareholder value over the long-term.

I'm very proud of the year Pembina had and excited for what the future holds. I'd also like to thank our stakeholders, customers, community, investors and employees for their integral support during such an exciting time for Pembina.

Now Scott will provide a few financial highlights from our operational perspective.

Scott Burrows

As Mick, mentioned Pembina realized record operational and financial performance in 2016. Fourth quarter adjusted EBITDA was $342 million, an all time quarterly high and $1.189 billion for the year, as a result of stronger performances across all businesses, including new assets placed into service in the Kakwa River acquisition. Respectfully, adjusted EBITDA was 27% and 21% higher in the comparable last year. The strong business performance partially offset by additional preferred share dividends resulted in adjusted cash flow of $292 million for the quarter and $986 million for the year. Per share metrics were largely in line with last year as a result of share issuances to partially fund our organic program, part of which won't contribute to results until later this year and partially to fund the Kakwa River acquisition.

Our gas services business process, a record 976 million cubic feet per day in the quarter and 836 million cubic feet per day for the year. Revenue volumes were 61% and 21% higher respectively to the comparable periods in 2015. Increased revenue volumes from new assets in the Kakwa River acquisition translated to operating margin of $60 million for the fourth quarter, 82% higher than the comparable quarter last year. For the year gas services reported operating margin of $195 million, a 35% jump from 2015. NGL sales volumes were also at a record level, had 164,000 barrels per day for the fourth quarter and 143,000 barrels per day for the year.

A combination of increased NGL sales volume and a higher commodity margin helped support increased operating margin in our Midstream business. Operating margin for NGL midstream activities was 30% percent higher than for both the fourth quarter and full year of 2016 at $112 million and $334 million, respectively.

Operating margins for crude oil midstream activities increased to $46 million compared to $37 million for the comparable quarter as a result of increased storage revenue. For the full year, operating margin was 5% lower at $162 million, as a result of lower commodity margin due to tighter differentials and the exit from the full service terminal business. Conventional pipeline volumes were 639,000 barrels per day for the fourth quarter and 650,000 barrels per day for 2016, increases of 3% and 6%.

During the fourth quarter, routine maintenance on Peace Pipeline modestly impacted revenue volumes, due to a turnaround for our expansion coming online. Without this outage revenue volumes for the fourth quarter would have been approximately 675,000 barrels per day or 6% higher than reported figures. Operating margin and conventional pipelines increased by 8% to $118 million for the fourth quarter as a result of higher revenue, somewhat offset by increased operating costs.

For the year, Conventional Pipelines realized operating margin of $494 million, 23% higher than last year, as a result of higher revenue and lower operating costs, which were mainly due to ongoing refinements in our integrity management program. Our oil sands business continues to perform in line with previous periods as expected.

Pembina continues to maintain one of the strongest balance sheets in our sector, further supported by very strong liquidity position. For the last 12 months, Pembina’s debt-to-EBITDA ratio was 3.5 times. After year-end we completed a very successful $600 million medium term note offering and as of February 22, our $2.5 billion credit facility was completely undrawn, which allows Pembina to have ample liquidity to fund the remaining 2017 capital program.

I will now pass the call over to Paul, who will provide an update on growth projects within our condensate and crude oil value chain.

Paul Murphy

Thanks, Scott. Good morning everyone. As I mentioned on our last quarterly call, we are now in full construction mode with over 3,000 people in the field working on our various Phase III expansion projects, which is now is 60% complete. Our teams are currently working on the largest section of the project between Fox Creek and Namao, Alberta. In spite a very unseasonable weather last fall, we feel confident about the projects’ scheduled completion by the middle of the year in its previously disclosed budget. I want to commend the great job our teams have done, managing Pembina’s largest greenfield project to date, in spite of Mother Nature’s challenges.

We also continue to advance our portfolio of lateral pipelines. These projects represent strategic opportunities to increase the reach of our mainline system. After receiving approval from the British Columbia Oil and Gas Commission, we have begun construction activities with our Northeast BC expansion. This $235 million project is underpinned by cost-of-service agreement and will provide strategic egress capacity from the liquids rich Montney production growth.

Development of the Altares Lateral is also underway, which will connect into the Northeast BC expansion. Both of these projects are expected to be completed by the end of the year. In 2016, we completed two projects within our Oil Sands & Heavy Oil. The Horizon expansion was completed in July, which increased the system capacity to 250,000 barrels per day. Later in the year, a modest expansion of the Cheecham Lateral is also put into service.

Moving over to our crude oil midstream business, initial connectivity as the Canadian Diluent Hub is complete. This phase of development provides connectivity between Pembina’s conventional pipeline infrastructure into the Diluent takeaway capacity at our Redwater sites. We are currently flowing condensate volumes into Access, Cold Lake and for Saskatchewan pipeline systems and our pleased with the initial demand from customers, as well as, the operational performance of the facilities.

Construction of the 500,000 barrels of storage at CDH is now 90% to 95% complete. We are expecting the overall CDH project to be finished by the middle of this year and it continues trend under budget.

I well now pass the call to Stu to provide an update on growth projects within our NGL value chain.

Stuart Taylor

Thanks Paul, good morning everyone. 2016 was a successful year for Pembina gas services business, as we added approximately 450 million cubic feet per day, growth of new processing capacity. Expansions were completed at both our Resthaven and Musreau facilities early in the year and in April we closed the acquisition of the Kakwa River facility, which represents in this first sour gas processing. Pembina continues to advance our infrastructure platform in the Duvernay, engineering is 85% complete. All major equipment has been ordered and site ready and piling activities are now finished for 100 million per day Duvernay I facility.

At the Filed Hub, all required regulatory approvals have been received, engineering is 65% complete, initial civil work is done, both projects are expected to be brought into service in the fourth quarter of 2017 and the expected total investment is approximately $240 million. We are very pleased to have been selected by Chevron Canada Limited to be the midstream service provider of choice to support the Duvernay development. As we recently announced, Pembina and Chevron have entered into a 20 year infrastructure development and service agreement.

The agreement includes an area of dedication by Chevron in excess of 10 gross operated townships over 230,000 acres, concentrated in the prolific liquids-rich Kaybob region of the Duvernay resource play near Fox Creek. Under the agreement and subject to Chevron’s sanctioning regional development. Pembina will construct own and operated gas gathering, pipelines and processing facilities, liquid stabilization facilities and other supporting infrastructure. Additionally, Pembina will provide long-term service for Chevron on its pipelines and its fractionation facilities. In the aggregate, in subject to internal Chevron and regulatory approvals, the infrastructure developed over the term of this agreement has the potential to represent multi-billion dollar investment for Pembina. While this agreement and respective obligations of binding, the infrastructure development remains contingent upon Chevron’s sanctions, as well as, necessary environmental and regulatory approvals.

The development of our proposed PDH and PP facility is well under way. We’ve completed our detailed feasibility study, which yielded encouraging initial results. We're also encouraged by the conditional award of $3 million in royalty credits from the Alberta government special chemical diversification program late last year. We hope to make a decision about fees by the end of the first quarter of 2017. Key deliverables of the fee base include regulatory applications, a Class 3 cost estimate, project execution plan among other items. We're aiming to make a final investment decision on this project by the second quarter of 2018.

Subject regulatory environmental and Pembina’s board approval, the project could be in service by 2021. Overall, construction of RFS III is that at 90% and certainly will be effectively complete by early in the second quarter of 2017, which will be followed by commissioning activities. We expect to be able to bring our RFS III in the service early in the third quarter of 2017, ahead of our original expectations.

Pembina continuous progress construction on infrastructure in support of the North West Redwater partnership planned refinery. Overall, approach is now 70% complete. Engineering and procurement activities are over 90% finished and nearly all materials and equipment have arrived on site. Various phases of the project will be placed into service throughout 2017 and by year's end our project will be complete.

Michael Dilger

Thanks Stu. Pembina made meaningful strides in 2016 towards achieving our goal of $600 million to $950 million of incremental EBITDA as compared to 2015. 2017 will be a very exciting year for Pembina as we will realize a full year benefit from the approximately $1.2 billion in major projects we completed in 2006. Further, with approximately $4 billion of projects to complete it in 2017, substantial fee-for-service cash flow is imminent. Our balance sheet remains among the least levered in our sector and we continue to maintain robust liquidity and are hard at work on our next wave of growth. This combination creates an parallel foundation for Pembina as we continue to drive long-term shareholder value.

As always we will keep a sharp focus on operating and growing our business in safe, reliable and cost effective manner. We look forward to speaking to you again in May in conjunction with our Q1 results.

With that, we’ll wrap things up and open the line for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from David Galison of Canaccord Genuity. Your line is open.

David Galison

Hi, good morning everyone. So my first question is with all these assets coming online, including the Phase 3 in 2017 and with the cash flows we’ll be generating. How should we think about the potential uses for those cash flows? Will they be focused on additional growth or will they be focused on maybe a staged increase in the dividend? Or just your thoughts on how to use the cash?

Michael Dilger

I think the answer is yes. We’ve been growing our dividends 4% to 6% for a long period of time. We see room to be, the higher end of asset that will be up to the board here in the next number of months to decide. But yeah, we're going to continue growing the dividend and I think we've been saying for some time we have confidence in the basin and continued opportunity in the basin, I think the Chevron transaction exemplifies that. We expect to keep growing at at least $1 billion a year, that's what's in my objectives for the year. In some years, it’s a lumpy business, some years it might be $3 billion, in some years it might be $1 billion. But we've been generating that kind of growth even through these last two kind of recessionary years, so we're pretty confident in how to use the proceeds towards growing our asset base.

David Galison

Okay. And just on the Chevron agreement, how do you envision the contracts. Will they be fee-for-service or they'd be more of a cost of service take or pay type of contracting system?

Stuart Taylor

This is Stu, they're going to be a combination part of our – the agreements are cost of service depending on the infrastructure, the remaining are fee-for-service type contracts with growing commitments as we continue to build and develop the infrastructure working with Chevron.

David Galison

Okay. And will those, would the assets all be dedicated to just servicing Chevron or will they be dedicated be open to other volumes as well if it should warrant?

Stuart Taylor

One of the big important points for us Pembina was to ensure that we have the ability to overbuild any infrastructure we saw in the areas such that we could have third parties come through that infrastructure and utilize that. We have rates depending on what the infrastructure is to bring third parties and that revenue will be attributed to Pembina’s account.

David Galison

Okay, all right. Thank you very much.

Operator

Next question comes through the line of Rob Hope with Scotia Bank. You line is open.

Robert Hope

Good morning and congratulations on a good year.

Michael Dilger

Thank you.

Robert Hope

Just taking a look up into the Montney, into the Duvernay, we’re saying a number of third party plants being sanctioned and seeing a pretty good activity levels. Just want to get a sense over the last three or six months if you've been able to continue to translate that activity levels and to increase contracted volumes on your infrastructure being Phase IIIs.

A – Paul Murphy

Yeah, I mean, every time a new plant is built, if it’s very small, at this point they come to us for more service. So, we're in the middle of looking at the feasibility of our Phase IV which would be, we talked about it before. Some small pipeline segments and powering up the pipeline that we’re building right now.

Michael Dilger

Yeah, so, we’re doing engineering and we’re clearing land for Phase IV right now. It doesn't mean it's going to go ahead, we need a certain volume threshold. But it’s certainly possible.

Robert Hope

And can you share kind of where you are on the volumes and where you need to be on the volumes for Phase IV? If you're clearing land already I would imagine you’re getting closer.

Michael Dilger

You Know how the producing community is. They're very cautious when they sign up, but once they sign up they want the pipeline right away. And so we are on our account defending a relatively modest amount of money, I think about $20 million to make the time between the date they sign and the onstream date, a one year period versus a multi-year period like we saw with, it’s tough to get the approvals overnight. And so we’re preemptively seeking all the approvals and having the rights away and doing our consultation in anticipation that those volumes will be signed up. Because once they are signed up, our experience is that you just can't react quick enough.

Robert Hope

Okay. And then one last question, and then I’ll jump back in the queue. Looking at it another way the $600 million to $950 million of EBITDA that you sight for your projects. I just want to get a sense of how quickly you’re migrating from that $600 million north towards $700 million, $800 million.

Scott Burrows

Well, Robert, if we just go through the math again, remember the $600 million is really the contractual threshold that assumes no volume. So the upside from $600 million to $900 million is if you think that the volume through CDH, which I think as we mentioned in this call we’re already starting to see volumes go through CDH. There's marketing revenue from both RFS II and RFS III. Obviously, RFS II is up fully running, we are marketing barrels off the back end of that, and then higher utilization above our take or pay, which I think we'll have a better view as we move throughout the year and get closer to the Phase III in service date. But I think it's fair to say that that we will be above the bottom of that $600 million range. Yeah, there's significant apportionment right now behind our systems, so that’s an indication that people are trying to do what they need to do to at least get their take or pay threshold with physical volumes.

Robert Hope

Thank you.

Operator

Your next question comes from a line of David Noseworthy of Macquarie. Your line is open.

David Noseworthy

Thank you very much. Let me add my congratulations on the great financial result and ongoing safety track record.

Michael Dilger

Thanks, David.

David Noseworthy

So maybe just starting off on Chevron, do you have an idea in terms of timing of when you might see the sanctioning of the first project?

Stuart Taylor

Yeah, David its Stu, again. So, we're optimistic that Chevron is – we’ve been working with them, the D1 plant will process some of their existing wells have been drilled to date here, soon as that’s in service. We expect as they continue with their development that sometime in the next 12 months to 18 months that the first service call will be coming in. But it is totally a Chevron's call and subject to all their internal sanctioning. But we're excited about the Duvernay results. We’re excited about the activity levels and we think, will be busy here working fairly quickly.

Michael Dilger

I think we’ve started some engineering on the infrastructure already.

Stuart Taylor

Yeah, we've spend some money in advance, recognizing, obviously our D1 facility in the NPS, the infrastructure we’re building to date plus looking at some enhancements to that. We’re spending some preliminary engineering dollars. So, again as mixed in on the pipeline, so that we can move forward quickly with the designs and trying to shorten our service time.

David Noseworthy

All right. And then just so I'm clear with respect to Chevron and their internal approval for this year. I mean, to move forward is there something that they have to do above and beyond, the required sanctioning in terms of approvals at this juncture? Or is it just at this point everything has been fine and it’s just sanctioning of projects going forward?

Stuart Taylor

At this point, the agreement that was covered, it included all of the infrastructure and the overriding structure of the arrangement. And upon their sanctioning all the agreements are ready to be completed and they’re in execution phase as they ask for that infrastructure.

Michael Dilger

The land’s dedication is binding, so if they're going to do anything, they have to do it with us. The timing of the different modules that they called for is still up to them. But the land dedication is the done deal.

David Noseworthy

Okay. And then maybe just staying on the Musreau Deep [ph] side of things which is another area. Your Kakwa plant acquisition came with the design for 6 to 18 plants. Has there been any positive development on that front? Or has the change of ownership really cooled the opportunity of our further growth there?

Stuart Taylor

Like most things, so we’ve continued work with Seven Gen and I think like most things as you have, a new acquirer takes a bit of time to sort out the acquisition before. I'm happy to say that I think we're making progress and ramping up here quite rapidly without a Seven Generation. We've been working with them on the expansion opportunities, looking at our existing infrastructure and how to utilize that as well. So we're excited about moving forward with Seven Gen in a meaningful way here in the next few years.

Michael Dilger

I’d just add, that plant wasn't completely capable of being built given its front-end liquids capability, so we're spending significant money, I think $50 million to enhance the ability so that plant could take liquid. So that’s well under way and when we ran economics, we've had a thought of three year build, to build out plant and with the enhanced liquids front-end, we think we can accelerate that and improve essentially the MPV and IRR of that project.

David Noseworthy

That’s great to hear. I’ll get back in the queue. Congratulations.

Operator

Your next question comes from a line of Jeremy Tonet of JPMorgan. Your line is open.

Jeremy Tonet

Good morning.

Michael Dilger

Good morning.

Jeremy Tonet

Just wanted to pull up on the Chevron opportunity a little bit more. As far as the spending as you guys envision is it compared to same kind of, a couple of years out. It could start to tick up and then kind of be a multi-year window at that point? Or is it more ratable over a longer period of time? Or any color that you could provide there?

Scott Burrows

Again, just to emphasize this totally at Chevron’s request as far as the timing. I do believe that we're going to have, infrastructure gets added in lumps. I think as we go to do the first expansion, the processing we’ll require some substantial stabilization of deal plus gas and liquid pipelines to be built. So, it'll be I think a significant capital expenditure initially and then it will be lumpy as we move through. But we see continued development as Chevron ramps up and delineates their Duvernay play on their liquid-rich acreage. So I think we’re have it, it’s going to be lumps, it’s going to be for a long period of time and we’ll be working with them. We do the work at their request and they come back and then we build the infrastructure as go forward with them.

Michael Dilger

With plays like this, it's about repeatability and taking costs out of the equation. So, that your question is actually challenging because we don't know what commodity prices are going to do. But let's say if we could assume commodity prices would stay relatively stable, it would make sense to put rigs to work and keep them at work and get that repeatability. If they're pursuing repeatability then we get to pursue repeatability. It's entirely conceivable that Duvernay site has four, five D1 equivalents, NPS, condensate facilities, stabilization, gathering, processing and then, of course driving our Phase IV expansion and also filling our fractionators. So that's our hope, I'm sure, it's got Chevron’s hope and commodity modest price is willing we think this could be a really exciting decade long initiative.

Jeremy Tonet

Great. Thanks for that. Then just want to build off a couple of comments that you guys had said before, talking about a portion behind your systems and capturing growth of $1 billion to $3 billion. How do you see kind of base and takeaway right now, as far as, constraints overall and how the trends, and when that can lead to kind of more, the next wave discrete project announcements coming?

Michael Dilger

Yeah, in terms of base and takeaway, I mean, there's obviously a ton of natural gas takeaway.we encouraged with the TransCanada open season to make our Western Canadian gas more competitive. So that’s indirectly a good thing for Pembina, very good for the producers and also I think sensible thing for TransCanada to do. A lot of the product that's coming out of the Kakwa area or the Duvernay is condensate. So there's a lot of running room in terms of condensate demand right now and of course, we still have a couple of hundred maybe 250,000 barrels a day of condensate being imported. So, our view is that condensate, it’s got a lot of running room and where the condensate demand built in Alberta imports would be displaced first. So we don't really see a big constraint on supply in condensate into the basin. Then as we think about oil pipeline, we're rooting for our Kinder Morgan and break in TransCanada to get the project started and that hopefully will – between those three projects, great egress for another couple of decades and then that will face the next platform for us to continue to grow. So, I guess, in short we don't how a lot of concerns about egress right now. We were actually more worried about it sometime ago. And on top of everything, I just said, there’s also rail egress and it’s not well utilized right now, but that is the safety valve as well. So, I think we’ve got a lot of, licensed to keep doing what we've been doing for a long period of time.

Jeremy Tonet

Got you. Or even maybe just on basin levels, as far as, takeaway and just outside of the basin strong Montney to add intent as far as what that could mean for opportunities for you guys in next wave of discrete project?

Stuart Taylor

Well, I mean, as Paul said in a not too distant future, we might need another pipeline between Kakwa area into Fox Creek and then from Fox Creek and we have the power up ability, we can add another 300,000 barrels a day or so. So that project is in our gun sight, so we’re not at the volume threshold, we need to be yet. As Scott said earlier in the call, how the supply/demand of physical barrels, we know the contractual side, but the physical side will become more clearer in the third quarter and that would be an essential time for us to assess whether there's enough physical barrels to support an expansion.

Jeremy Tonet

Great. And then just one last one, because NGL midstream, seemed quite strong in the quarter and I imagine there were some benefit from propane uplift. Just wondering if you see that kind of continue into 1Q 2017 propane prices have given back a bit here. Is 4Q 2016 a good run rate or should we expect a little bit of a downstep in 1Q 2017?

Scott Burrows

Yeah, I mean, as you know Q4 and Q1 are always our strongest quarters in that business unit, just due to the winter heating season. So, you put me on the spot a little by trying to predict prices for another two months. I think it’s generally and in line with - Q1 is looking generally in line with Q4, but that's going to be dependent on pricing for the remainder of the quarter. Also as you would have noticed in our results, we have layered on some incremental hedging and really that was to protect the cash flow and the margin as we kind of exited this heavy capital build. So, to the extent there is upside, some of that will be offset by hedging.

Jeremy Tonet

That makes sense. That's it for me. Thank you.

Operator

Your next question comes from the line of Linda Ezergailis of TD Securities. Your line is open.

Linda Ezergailis

Thank you. Just have more questions on the Chevron MOU. I can imagine the number of reasons why an entity like Chevron would want to partner with Pembina. One of them would also be to kind of minimize their costs. So, can you comment on whether the scale of the opportunity for you and the uncertainty around the dedicated reserves, are area allowed you to kind of accept a lower return? Or should we think of it more as kind of a full value chain pass actually translated into a typical or higher return than your smaller projects that you would do historically?

Scott Burrows

Well I mean, our view on the reason we got picked was we have a great safety record, our reliability is high and it's no secret that the integrated value chain is a differentiating factor. Having just real asset, a real fractionators, real pipelines to provide multi-product service is a differentiating factor. Our ability to construct on time, on budget all those things, I think played into it. We can't get too much into the - I think Stu has highlighted that some of its cost of service, some of its fee-for-service that the commitments that they have ramp up with their call for facilities. But what I would say Linda it’s a normal Pembina deal.

Linda Ezergailis

Okay, that's helpful. Maybe we can move on to something else then, in terms of your financing plans. In terms of putting in permanent financing beyond the credit facility, how might we think of your current sense of the relative attractiveness of various options including prefs. How you think about kind of pre-funding projects as they get built and derisking the financing plan versus avoiding dilution by putting in permanent financing as projects are already built?

Scott Burrows

Linda, you know, as we look forward to kind of from mid-year on or maybe even from start of 2018. We expect to generate around $500 million of cash flow after dividend. If we just reinvent that and borrow against it that's $1 billion of cash that we can deploy into the projects. So we had $1 billion a year of growth at least for the next few years, we really don't need to have the drep [ph] or do prefs anything, it's just kind of like finishing our program this year and then we have a great ability to just grow with internally generated capital. So that's our plan right now, but if something comes and we make an acquisition or we start to grow above that $1 billion a year. Then we're going to finance things the way we always do with a combination of long-term debt dreps [ph] and prefs.

Linda Ezergailis

Okay, thank you. Maybe just one final cleanup question. As we look out over 2017, should we be mindful of any major facility maintenance or expansion outages? If so, kind of what quarter and what might be financial impact there?

Scott Burrows

Yeah, you know the hard stuff, once we get to the middle of the year, the hard stuff is knock on wood behind us. I mean, we've done the integrity work, we have been spending $150 million a year on pipeline integrity for a bunch of years. All in service are being readied by the middle of this year and we're going to put a whole bunch of brand new facilities into service. And yes, there will be some commissioning headaches, the way there are. But everything we have done to get to the end of this year will put our facilities and add new condition. That's what's so exciting about it is, our expense as we expect our integrity burn and expenses to start to drop, while our revenue is going up at the same time and that’s kind of what's exciting about 2018 for us.

Linda Ezergailis

Great. Thank you.

Operator

Your next question comes from a line of Robert Catellier of CIBC World Markets. Your line is open.

Robert Catellier

Hi, good morning. I have a question, I think you partially answered in responding to Linda. But I'm curious, probably Duvernay agreement with Chevron might impact how you look at dividend policy. Given it is a binding agreement, but you don't really have certainty in terms of the timing the capital calls. So, do you see need to maintain a lower payout ratio in order to be able to respond?

Scott Burrows

No, I mean, the Chevron deal is, it’s obviously a major deal and we’ve said pretty much as we can. But nevertheless it's still a pretty small part of Pembina and it's not going to influence our dividend policy. If we keep growing our dividends 6% to 8% a year with our guardrail of 80% fee-for-service and we expect our payout ratio to keep dropping over the foreseeable future to the point where our dividend payments are entirely come out of fee-for-service. The Chevron deal won't change that. It's well within the guardrails of staying on track.

Robert Catellier

Okay. And then just with respect to the PDH, I think the original plan was to go to into a feed by the end of the year. I'm just curious why there was a little bit of a timing delay there.

Stuart Taylor

Rob, its Stu. So, we probably underestimated the amount of time, as you go from the feasibility study into the feed work. The first time bit of engineering that needs to be completed is with your technology providers. That is about a four month to six month process of them working through their engineering and their work. And we probably underestimated initially that timeframe. And so upon further work we’ve added that and yeah, I mean, on the time, you’re right initially we thought we'd be going into the – be declaring our FID process before that, but we had to build in that extra schedule. The other thing is Rob; we’ll like along with our partner to get much more detail is that the agreement. So at a time when we announced feed we have a lot of granularity on how the joint venture is going to work. Who’s jobs, different aspects of it are. So, it's not going to be a mystery when we come out of feed, house things are going to work. It's a pretty significant amount of money, feed could reach $100 million. So, both sides agreed that we better know what the deal is before we spend that money. So, it’s been time well spent.

Robert Catellier

Okay. That's helpful. Then my follow-on question here is on the impact of a line to a outage? What impact do you think that will have on industry activity, specifically on Pembina?

Michael Dilger

I can't comment on, I don’t know.

Stuart Taylor

Yeah, right. We haven’t felt anything yet upstream, so.

Robert Catellier

Okay. Thank you.

Operator

Your next question comes from the line of Ben Pham of BMO. Your line is open.

Ben Pham

Okay. Thanks. Good morning. I wanted to follow-up on your comments about what you characterize as than normal pattern of our returning because that's unchanged over the years. With the Chevron agreement you mentioned potential opportunities with cost of service of the pipelines a Saracen pipelines. And you U.S. looking, probably just going back to Linda’s initial question. Are you looking at returns more from a integrated and consolidated perspective now, maybe a little bit but more we had in the past when you're underwriting new projects.

Scott Burrows

You know, and I think if start to us over the three years, you know our deals are very integrated and where the profit lies within any business units, it’s almost a little arbitrary. You know when we kind of back 3 years we talk about our $6 billion growth profile and we said it would add $600 million to $950 million of EBITDA. They're by multiple of what a normal Pembina’s yield is. Whether that profit ends up in the pipeline or the gas line or the profitability or the marketing, will be situation specific. But it’s the reason we have integrated value chain because we can touch the molecules many times and hopefully make above-average returns. But I think it's pretty well delineated what a normal Pembina deal is. If you look back at the last $6 billion we spent.

Ben Pham

Okay. Next, and just thinking about you know this new agreement and FID and the PDH and 12 to 18 months kind of squares up with first module potentially. Are you perhaps less enthusiastic about petrochemical than maybe before because it is potentially a little more concerned to the returns and their construction?

Scott Burrows

No, actually the more we learn, the better we like it. It's kind of going the other way. We're getting a lot of confidence from the engineering firms we’re talking both the turnkey, a good portion of this project. We've got confidence that the market will be there, North American market eventually. But the international markets perhaps, so in the short-term we're getting confidence with our partner and their capabilities. We're getting interest from the producing community to turn their propane into polypropylene on a fee basis, so all those things combined. Our return expectations really haven’t changed over the last year. But I think what's making us feel better and better is we are proceeding that we can reduce the risk. As we contemplate these types of facilities. In fact, if you kind of go back when Pembina entered the fractionation business, most of the agreements were frac spread business. Now roll-forward five years and probably 70%, going on 80% of our frac capacity is on fee basis. So, we do have a track record of changing the way businesses operate. We believe that to a point we can also add in a petrochemical business.

Ben Pham

Okay. Thanks. And just a quick final question on the NGL midstream margins, $112 million. If you compare that to Q3 and you look at just a change in frac spreads over those – or with that quarter. It seems to be a little bit inconsistent with some of the sensitivity announces that you’ve put out there. So, is that mostly the hedges that you highlighted earlier, that’s driving it?

Scott Burrows

Yeah, that hedges, also remember that RFS II is not really a frac spread business, it's a fee-for-business with marketing revenue that that is essentially more like commission versus the frac spread.

Ben Pham

Okay. All right. Thanks for taking my questions.

Operator

Your next question comes from a line of Andrew Kuske of Credit Suisse. Your line is open.

Andrew Kuske

Thank you. Good morning. Maybe just following up on the operating margins on the mainstream business, so to the degree that you see this is really being a structural expansion versus a cyclical one. Is it fair to really characterizes, that businesses now much more structurally strong from a margin standpoint quarter-after-quarter?

Scott Burrows

I mean, the business as a whole is becoming ever more fee-for-service oriented. Absolutely, the way we’re running it now with some pretty significant hedging, I think that’s taking volatility out of the business. But the original asset base we bought when we merged with Provident and that cash flow stream that character really hasn't changed too much. What's changed is everything else around that business is diluting that volatility in our overall cash flow streams.

Michael Dilger

If I just look at it you Q4 2016 versus Q4 2015, 50% of the difference on Redwater was really fee-for-service uptick from RFS II and a few incremental projects, but of course. The uplift in the East is strictly marketing because that's our [indiscernible] assets. So overall about 25% to 30% of the overall business – was the increase with fee-for-service, the remainder was commodity exposed.

Andrew Kuske

Okay, that's very helpful.

Michael Dilger

And so, there is a difference.

Andrew Kuske

So, okay, great. And then maybe a broader question and it speaks to just the resiliency you're building up in the business in the fee-for-service service model. Clearly, you’re positioning yourself for a lot of growth opportunities in the west whether it's the PDD, the PP and the activities you have gone on with the numbers of the producers and land position that you're building. How do you think about allocating capital in effectively your own backyard versus any opportunities you see just elsewhere in any basin in North America at this point in time? Do you have a temptation to look elsewhere and really build up another business or enhance what you've got elsewhere say around Sarnia, for example.

Michael Dilger

Well, I mean, we would like to be more diversified, someday we hope to do that. But where we are now is brownfields are always the most accretive, then Greenfield, then acquisitions and then usually what’s leased is creative because we don't have the integrated value chain to squeeze extra dollars is acquisitions or refuels in a different basin. So we tend to do things in that order, but at some point we would like to begin more than one basin for sure, and we’d actually like to have a different currency cash flow stream at some point as well. But we look at everything, but just nothing so far. I mean Vantage pipeline came up a few years, both so that met the criteria. But nothing right now is meeting our criteria.

Andrew Kuske

Okay. Great. Thank you.

Operator

Yeah next question comes from the line Robert Kwan of RBC Capital Markets. Your line is open.

Robert Kwan

Just in terms of the Montney previously, you've talked about producers coming to you, some wanted more capacity, some wanted less and you were really just focusing, just on trading amongst the customers. I'm just wondering, I guess, with the 2017 capital budgets out and generally up and recent well results. Are you seeing demand now really for just net increase and trying to eat away the remaining capacity on the system?

A – Paul Murphy

Yeah, I think it's starting to, I get the swap of capacity that’s starting to settle down. I'm not sure that's probably in part the people. I could see coming, what they needed, so they’ve basically completed their business. But as we talked about earlier, we have had, I’ll say a material amount of interest in the capacity, which is why we're getting close, I guess, a decision on our Phase IV. So, it'll be ever evolving I think for the next – probably the next year as once the facilities come on, people see how much room there is. As Mick talked about earlier, we really wanted to know what the physical volumes are before we make any big moves.

Robert Kwan

So, just so I’m clear on Phase IV because there were a few comments earlier about – it sounded like there was new build and them powering up. So, Phase IV though, are you looking at past as essentially the pump station expansion Phase III. Or are we talking about substantially and a new build of capacity?

A – Paul Murphy

You’re bringing out a good point. We need to name things, so that you guys can understand it. Phase IV used to be –with just pumps, just powering up the pipe between box and amayo [ph] and now we have a separate part of that project, which is essentially looping from Kakwa in because that’s really where we're short of capacity. So I don't know, we should maybe call that Phase IV, which is a separate pipeline project. Both are under investigation right now. But you're absolutely right, there's a power up, which was what we talked about being Phase IV. Now there's also, you are storing capacity kind of Kakwa in because really, the likes of Seven Gen are just really, that whole, Seven Gen phenomenon has happened since we announced Phase III, and we frankly don’t, the hike is too small out there by my law, so, that's under investigation as well.

Robert Kwan

Okay, so when you’re thinking about kind of this Phase V concept. Is that really from your perspective more bottleneck driven and almost you need to do? Or is it more of a strategic decision to kind of pre-build parts of the system to continue to maintain that advantage you have over competitors of some that spare capacity?

Michael Dilger

Just back of the Phase III, your rent recall, we built all those pipes upstream of Fox Creek say between Kakwa and Fox Creek, a number of years ago. So, they've been that part of Phase III has been in service for quite some time and we do not have enough capacity. There like barrels going around because they can't get on a pipe, so we're already short of capacity there. So, our Phase III 3 is done and it's not adequate. So, it's not strategic at all. It's just what’s the critical math to justify Phase V. I mean you can't build a brand, new pipeline for 10,000 barrels a day, you need critical mass. We're not quite at the critical mass for what we've decided during this call, the call Phase V.

Robert Kwan

Okay. Maybe I'll just finish with a question here on that PDH/PP project. I think historically you've talked about wanting to contract half on a fee base and being comfortable within the guardrails of having roughly the other half exposed. I guess, as you think about what's developed in your business, you're thinking about things like Phase IV and Phase V, which I assume would be fee based and the Duvernay agreement here with Chevron. Does that cause you to directionally be more comfortable being open then, on that facility? Or coming back to maybe the capital allocation question, if you can get all the fee-based stuff in the rest of your business, you don't feel the need to take any quantity or material commodity exposure, if you don't have to?

Michael Dilger

It’s interesting question. I mean, we’ve been aware how its taking our half, entirely as a commodity business, if we wanted to, the guardrails which show we could do that. But using all of our 20% room for one project, it really does limit what we might be able to do that next, right. So, we're still gunning for half of our half to be fee-based because there might be other projects that we want to do and take a little bit of a position to get them built. So, we thought about it, we could do that, but we're still hoping to go half fee-based just to create a room for future initiatives.

Robert Kwan

Got it. Thank you very much.

Operator

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

Patrick Kenny

Thank you. Good morning guys. I think that Duvernay has been well covered, so I’ll switch gears and wanted to get your thoughts on the pipestone region. It looks like that will be one of the hot pockets of the mine you’re going forward. Obviously it will be quick competitive year, but just wanted to get a sense as to; A, that a play that you’re going after aggressively, and B, what your main competitive advantages might be?

Stuart Taylor

Yeah, supply that is of significant interest to Pembina, obviously from – speaking first on my pipe side. Our Phase III expansion and a lot of the Duvernay players are Phase III customers already. We've been working with them for a number of years, as they've grown their production, as the Montney is matured from Alberta, way through into North East BC. Paul mentioned earlier our North East BC expansion that’s largely Montney focused and driven. There's no question in my mind, that Montney is a world-class play. There is going to be additional infrastructure requirements. We're excited about where we're sitting with our pipeline, with our gas processing expertise with our value chain, we think we can work with Montney producers, both large and small, getting them access to the infrastructure, getting that growth and the value chain that we can bring to the table. So, we're going to be aggressive, I think looking at Montney opportunities. We love the resource itself. We love the liquid content in that gas and are excited about continuing to work with our existing customers and future customers.

Patrick Kenny

All right. Thanks, Stu. Then this might be a bit of a tough question to quantify, but I’ll ask you anyway. Any risk or material impact that you might see on your NGL marketing business from the border adjustment tax, if it does get implemented?

Stuart Taylor

Who knows, I think you're right very, very hard to, whether that would happen and in what form it would happen and who would ultimately bear the cost for that is the second equally challenging question whether Pembina or the customers or a combination. It's really difficult to answer, but I think one thing we can say is it does support having alternative markets for Alberta hydrocarbons. It’s just a classic example that our basin has all of the eggs in one basket and we’ve got to change that.

Patrick Kenny

I'm not sure, if you’ve ever provided this or not, but just - so we have a back pocket, what percentage of NGL sales on normalized basis might be in the U.S.?

Scott Burrows

I mean, if you look at Alberta on the whole, I think we have produced about 2,000 barrels a day. Stu, somewhat down?

Stuart Taylor

Yeah, probably, on the high side there, but probably in 150,000 to 200,000.

Scott Burrows

Yeah, by the time we’ve done all our expansion and we consume 30,000 locally, so there is your ratio for the basin and we’re the biggest player in that basin, but it’s probably a decent guess on what we're doing. Again that’s where the polypropylene plant makes a difference because 22 of that, the new stuff could be used locally and propane exports could reduce the U.S. exports as well. So we’re continuing to work on both of those.

Stuart Taylor

I mean, we're not the only ones, so, I mean obviously all of the frac operators are largely putting their barrels into rail cars at this point time and moving them to available markets. We do move into Eastern Canada, obviously through our eastern assets. But we’ve continued to load railcars in Access markers.

Michael Dilger

Pembina thinks it has a leading role to play in balancing without a balance, a basin that produces 7 times as much NGL that consumes. We want to play a leading role in trying to balance that market out.

Patrick Kenny

All right. That’s great. Appreciate the color. That’s all I had.

Michael Dilger

Well, I think we've got to wrap it up now, Haley. Thanks everybody. We do very much appreciate and value your support. Thanks for being part of this journey. So far so good, another bunch of months and we will have the wall of cash flow please starting come at us and it will be a lot of fun. So, anyways have a great weekend and thanks for your support.

Operator

This concludes today’s conference call. You may now disconnect.

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