Pembina cuts capital spending for 2020 to balance energy price decline
In response to the COVID-19 pandemic and the recent significant decline in global energy prices, Pembina Pipeline Corporation is taking action to protect its stakeholders.
Pembina's action plan is focused on protecting the health of employees and communities and ensuring a decisive response for customers and investors, including a $900 million to $1.1 billion overall reduction to the Company's 2020 capital spending plans.
"In these challenging times, Pembina's priorities include protecting the health and safety of our staff and communities, ensuring critical infrastructure continues to operate safely and reliably, and maintaining our strong financial position. We are confident we are taking the necessary steps to allow us to successfully achieve these objectives," stated Mick Dilger, Pembina's President and Chief Executive Officer.
Mr. Dilger added, "Over the past many years, Pembina has been making its business better, not just bigger, through focused diversification efforts. The acquisition of high-quality assets such as the Alliance and Cochin pipelines and the Edmonton Terminal storage assets, combined with the development of highly contracted assets such as the Peace Pipeline system and the Duvernay Complex, has diversified Pembina across commodities and credit-worthy counterparties, while also substantially growing our basin and currency diversification. These actions, combined with our self-funding model, strong balance sheet and high contract quality all result in a high-quality, resilient cash flow stream, which allows us to protect our dividend, as we have always done through past downturns.
We have many levers at our disposal. We entered 2020 expecting a more tempered contribution from our commodity business relative to the past two years, as reflected in our guidance range. Based on the resilience of the business and the decisive actions we are announcing today, we remain within our projected guidance range, while still maintaining significant future upside given our suite of high-quality growth projects and strong financial position."
"I want to thank our amazing employees who have successfully transitioned to a 'work-from-home' environment in such a short time. Despite recent events, we are executing well and are confident that we can meet the expectations of all of Pembina's stakeholders," concluded Dilger.
Doing its part to protect people and communities
Safety is the first priority, Pembina states, and the company will take steps to protect the health of staff and the public in response to the COVID-19 pandemic.
COVID-19 is a global public health challenge and Pembina is supporting government and community efforts to slow down the spread of the virus. In line with recommendations from health authorities, it has restricted business travel, cancelled large group meetings and requires non-essential employees and contractors who can work from home to do so.
Pembina has taken steps to determine the essential staff and critical infrastructure required to ensure uninterrupted service to customers while maintaining the safety of assets, employees and other stakeholders. It is focused on processing and transporting the maximum amount of product for customers, thus supporting their cashflow.
Taking immediate and decisive action for investors
In light of the rapid and significant decline in global energy prices and uncertainty as to the duration of this downturn, Pembina has made the prudent decision to defer some of its previously announced expansion projects to reflect the current market reality. The following projects will be deferred:
- Peace Pipeline Phase VII, VIII and IX expansions, representing $1.55 billion of total capital;
- Empress Co-generation Facility, representing $120 million of capital;
- Prince Rupert Terminal Expansion, representing $175 million of capital; and
- Pembina's investment in the integrated propane dehydrogenation plant and polypropylene upgrading facility, representing $2.7 billion of capital, net to Pembina.
In addition to deferring capital spending on these major projects, additional discretionary capital spending has been removed from Pembina's 2020 capital budget.
The impact of these measures results in a reduction of $900 million to $1.1 billion, or approximately 40 to 50 percent, to the Company's previously announced 2020 capital budget of $2.3 billion. Pembina now expects its revised 2020 capital budget to be $1.2 billion to $1.4 billion. These spending reductions will be directed towards reducing Pembina's leverage and enhancing its financial position. Importantly, these measures will have no impact on Pembina's existing base business or its ability to continue to operate safely and reliably.
Pembina will advance its focus on optimization activities, which it believes can create additional incremental pipeline capacity with minimal capital spending and support producers' near-term production growth. Additionally, it will focus remaining capital spending on key constrained segments of the pipelines to ensure maximum flexibility to meet customers' needs and fulfill existing producer volume commitments.
Planning, engineering and regulatory work done to date on the deferred projects will allow Pembina to quickly resume these projects to meet our customers' needs when global energy prices and the broader economic environment support such action. Until then, we will continue to work with our producing customers to evaluate their midstream service needs in light of the current commodity price environment.
Given their advanced stage of construction, Pembina still expects to place approximately $1.3 billion, net to Pembina, of new projects into service during 2020, including the Peace Pipeline Phase VI Expansion, Duvernay III, Empress Fractionation, Hythe Developments and the initial phase of the Prince Rupert Terminal, among others, to support Pembina's growth in 2020 and beyond.
The deferred projects were expected to come into service largely in 2021 through 2023 and therefore will not materially impact Pembina's 2020 adjusted EBITDA. At this time, Pembina believes it has taken action, which will enable the Company to remain within the previously disclosed guidance range, albeit forecasted to be near the lower end thereof.
"Pembina's business is resilient and remains strong in the face of these current challenges. An unwavering commitment to our financial guardrails has been a guiding principle for many years and, as a result, Pembina is well positioned. These guardrails, in addition to actions recently taken, highlight our ability to preserve our already strong balance sheet while funding our ongoing business, including the reduced 2020 capital program," said Scott Burrows, Pembina's Senior Vice President and Chief Financial Officer.
- The underlying business remains highly contracted, with approximately 85 percent of 2019 adjusted EBITDA supported by long-term, fee-based contracts, including approximately 62 percent coming from cost-of-service or take-or-pay contracts with no volume or price risk.
- Direct commodity exposure in Pembina's business is limited to the Marketing & New Ventures Division. The Marketing & New Ventures Division represented approximately 15 percent of Pembina's overall adjusted EBITDA in 2019 and approximately 45 percent was generated by natural gas and natural gas liquids marketing activities and 55 percent by crude oil and condensate marketing activities. In 2020, Pembina has hedged 50 percent of its frac spread exposure, excluding Aux Sable, at average levels for the calendar year which are approximately 70 to 80 percent above the forward strip implied levels as of March 17, 2020.
- Approximately 80 percent of the Company's credit exposure is with investment grade and split-rated counterparties as well as counterparties secured by letters of credit. Further, non-investment grade and split-rated counterparty exposure is diversified across various industries.
- The balance sheet is strong. Pembina is rated BBB with a Stable outlook by Standard & Poor's ("S&P") and BBB with a Stable trend by DBRS Limited. During the last oil price shock in 2014-2016, Pembina's BBB rating remained intact and the Company is fully committed to protecting its BBB rating once again. For the year ended December 31, 2019, Pembina's ratio of adjusted funds from operations to adjusted debt, as defined by S&P's methodology, was 18.4 percent, which is comfortably within the upper end of the agency's stipulated range for a BBB rating for Pembina of 15 to 20 percent. After normalizing for the effect of the acquisition of Kinder Morgan Canada Limited and the U.S. portion of the Cochin Pipeline, namely the December 16, 2019 closing date, 16 days of contribution to our 2019 results and the debt funding incurred, that same ratio was approximately 23 percent - significantly above the BBB range.
- Pembina has ample liquidity, with $1.5 billion of available cash and borrowing capacity on its credit facility as of March 17, 2020, plus an additional $750 million of capacity through an accordion feature (subject to the usual conditions, including consent of the lenders) and this facility does not mature until 2024. The overall weighted average life of Pembina's debt is 12.7 years, with only $73 million of medium-term notes maturing in 2020 and less than 15 percent of Pembina's debt maturities occurring through 2022.
- Pembina's common share dividend of $0.21 per share per month is more than covered by fee-based cash flows, meaning the Company is not reliant on the direct commodity price exposed portion of the business to support the dividend. In 2019, Pembina's common share dividend represented only 73 percent of fee-based distributable cash flow, or an all-in dividend payout ratio of 54 percent. As well, following the $0.01 per share increase to Pembina's monthly dividend that took effect in January 2020, the Company's Board of Directors does not intend to proceed with an additional dividend increase for the remainder of 2020.
- Pembina is continuing to progress work started earlier this year to pursue non-core assets sales in the range of $200 to $500 million.
Pembina's greatest assets are its people and the relationships with customers, investors and the communities in which it has a presence. It will continue to keep stakeholders top of mind and supported as it navigates through these events.