Pembina Pipeline Corporation (PBA) Q2 2021 Earnings Call Transcript

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Pembina Pipeline Corporation (PBA -0.31%)
Q2 2021 Earnings Call
Aug 6, 2021, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day and thank you for standing by. Welcome to the Pembina Pipeline Corporation 2021 Second Quarter Results Conference Call. [Operator Instructions]

I would now like to hand the conference over to your first speaker today, Cameron Goldade, Vice President of Capital Markets. Thank you Sir, please go ahead.

Cameron Goldade -- Vice President, Capital Markets

Good morning, everyone. And welcome to Pembina's conference call and webcast to review highlights from the second quarter of 2021. On the call with me today are Mick Dilger, President and Chief Executive Officer; Scott Burrows, Senior Vice President and Chief Financial Officer; Harry Andersen, Senior Vice President and Chief Operating Officer, Pipelines; Jaret Sprott, Senior Vice President and Chief Operating Officer, Facilities; Stu Taylor, Senior Vice President, Marketing and New Ventures and Corporate Development Officer; and Janet Loduca, Senior Vice President, External Affairs and Chief Legal and Sustainability 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 Discussion and Analysis dated August 5, 2021 for the period ended June 30, 2021, which is available online at pembina.com and on both SEDAR and EDGAR.

With that, I'll now turn things over to Mick.

Michael (Mick) Dilger -- President and Chief Executive Officer

Thanks, Cam. Good morning, everyone. We're pleased yesterday to announce that based on the year to date results and the outlook for the remainder of the year Pembina has updated its 2021 adjusted EBITDA guidance by raising the low end of the range. Adjusted EBITDA is now expected to be $3.3 billion to $3.4 billion, effectively positioning us in the upper half of our original guidance range. Similar to what we have seen in our year-to-date results, growing confidence in our 2021 outlook reflects stronger than expected full year marketing results, net of significant realize hedging losses, and modestly higher volumes across many of our Pembina pipeline systems and facility. Relative to our original guidance range, these positive factors are being partially offset by stronger than expected Canadian dollar relative to the US dollar, increased operating costs due to higher integrity spending, and higher power costs in the conventional and oil sands pipeline businesses and lower contributions from certain assets. In addition, the revised outlook reflects higher general and administrative expense due to Pembina's rising share price and the resulting increase in the long term incentive compensation costs. While supporting Pembina's 2021 guidance update, stronger commodity prices and rising volumes also mean Pembina's customers are an ever better financial positions, generating significant free cash flow and improving their balance sheet. With many reaching their leverage target earlier than expected. This sets the stage, we believe, for increased drilling activity and increased capital spending by producers into 2022, with positive implications for Pembina's business. Constructive outlook for the WCSB and customer demand for incremental service led to the reactivation of the Peace Phase IX pipeline expansion to supporting customers long term development plans, while further -- furthering product segregation on the peace pipeline system.

Further decisions on the Peace VIII pipeline expansion and the Prince Rupert terminal expansion are expected later this year. The same outlook also supports our confidence in the development of a portfolio of growth projects totaling more than $5 billion. This quarter Pembina announced three significant and transformational and strategic partnerships with compelling ESG attributes. A partnership with the Haisla Nation to develop the Cedar LNG project; a partnership with TC Energy Corporation, which envisions development of the Alberta Carbon Grid and Chinook Pathways, a partnership with the Western Indigenous Pipeline Group to pursue ownership of the Trans Mountain Pipeline once that project is de-risked. Collectively, these partnerships support Pembina's global market access strategy, allow for meaningful indigenous participation in the Canadian Energy Development and provide important large scale infrastructure platform to assist Alberta based industries to manage their greenhouse gas emissions and contribute to a lower carbon economy. We are proud of this work with communities and our role in creating meaningful solutions. Finally, in recent weeks, Pembina announced and ultimately terminated its proposed acquisition of Inter Pipeline. The industrial logic of a combined Pembina-Inter Pipeline remains unparalleled, and the value creation between certain of our assets is impossible to replicate. While we are disappointed with this outcome, we will continue to seek opportunities for growth through focused acquisition. I say that not as a signal for any imminent or specific targets, but as a reminder that such acquisitions have been part of Pembina's success story over many years and will continue to be. The execution of Pembina's long-term strategy is never relied on a single investment. The record continues to show that while acquisitions may be a tool to execute our strategy, we will remain disciplined prioritizing shareholder returns in our financial guardrails. But for now, we are enjoying the receipt of a $350 million termination fee. We're studying the options available to best invest the termination fee; including business reinvestment, debt repayment and share buybacks.

With that, I'll pass it over to Scott to discuss the financial highlights.

Scott Burrows -- Senior Vice President and Chief Financial Officer

Thanks, Mick. Pembina reported adjusted EBITDA of $778 million for the second quarter, 1% lower than the same period last year. Within our core business segments, we saw strong performance from existing assets, along with Prince Rupert Terminal, Empress Infrastructure and Duvernay III being placed into service in facilities and higher interruptible volumes on the Peace Pipeline System. In the marketing business, Pembina benefited from higher margins on NGL and crude oil sales and a positive impact of higher marketed NGL volumes. However, a portion of this improvement and marketing fundamentals was offset by an increase in the realized loss on commodity related derivatives as part of our systematic hedging program, compared to a gain in the same quarter last year. In addition, second quarter marketing results were negatively impacted by approximately a $8 million of rail transportation costs to reposition propane to corona for sale in the fourth quarter of 2020 and the first quarter of 2022 rather than for sale in the second quarter. Further a portion of the period-over-period differences are due to the timing of storage-related margins. As the majority of 2020 storage margins were earned in the second quarter of 2020 compared to 2021 were storage margins are being realized evenly throughout the year. Improved overall results in the marketing business were offset by a lower US dollar exchange rate, higher Power costs, a portion which were not recoverable in revenue and higher general and administrative expenses due to higher long-term incentive costs driven by Pembina's increasing share price. It is worth noting that in 2021, specifically, each $1 move in Pembina's share price impacts compensation related expense by about $2 million.

As well comparatively, the current quarter was impacted by lower revenue at the Edmonton South Rail Terminal due to a onetime $11 million leasing adjustment made in the second quarter of last year that resulted in that quarter being better than it would have otherwise been. In contextualizing our second quarter and year to date results as well as our outlook for the full year. 2021 adjusted EBITDA is worth causing on the impact and changes in foreign exchange rates. Approximately 25% of Pembina's business is exposed to foreign currency, primarily the US dollar. This exposure primarily resides in our transmission assets in the pipeline division, as well as our marketing business with a primary pricing benchmark for the purchase and sale of commodity products occur in US dollars. As part of Pembina frac spread hedging program, we hedge the currency exposure embedded in those hedges. Over the last 12 months, the Canada/US dollar exchange rate has exhibited significant volatility. During the second quarter of 2020, the Canadian dollar average nearly $1.39, while in the second quarter of 2021 it averaged nearly $1.23. for the balance of 2021, for each $0.01 change in the Canadian U.S. exchange rate, it equates to roughly $6 million of adjusted EBITDA with $2 million being attributed to the transmission assets and $4 million attributed to the marketing business. Furthermore, given the seasonal profiles of our marketing business, these sensitivities will vary when applied to quarterly results. Second quarter earnings of $254 million were 2% lower than the same period in the prior year. In addition to the factors impacting EBITDA, earnings were positively impacted by a lower unrealized loss and commodity related derivatives and lower current tax expense, as well as various other factors outlined in our second quarter report.

Total volumes of 3.5 million barrels per day for the second quarter represent approximately a 2% increase over the same period in the prior year. In pipelines, higher interruptible volumes on Peace and Cochin pipeline as well as higher seasonal volumes on Alliance were offset by lower interruptible volumes on Vantage as market conditions exist for end users to source their supply from the Redwater Complex and lower volumes on Ruby pipeline, due to its contract expiry. And facilities increased revenue volumes associated with Duvernay III placed into service in the fourth quarter of 2020 was largely offset by lower supply volumes on the East NGL system, as these assets are now being processed at the Empress NGL extraction facility. Overall, however as Mick highlighted, we have seen strong year to date results in our outlook for the remainder of the year and 2022 remains very positive, reflecting a stronger economic backdrop, robust energy prices and improved outlook for PDUFA activity levels.

I'll now turn things over to Mick for closing comments.

Michael (Mick) Dilger -- President and Chief Executive Officer

Thanks Scott. In closing, what has emerged over the course of an exciting past few months, reflects continued progress toward a clear vision for Pembina's future. Our ambitions are being realized and we look forward to continuing to build out our diversified and integrated value chain, providing an exceptional customer service offering, including global market access for their products. At the same time, we remain committed to providing industry leading total shareholder returns, including a stable and growing dividend and furthering our ESG strategy collectively in service of our employees, communities, customers and investors. We'd once again like to thank all of our stakeholders for their support.

And with that we'll wrap things up. Operator, please open up the line for questions.

Questions and Answers:

Operator

[Operator Instructions] Your first question comes from Ben Pham from BMO.

Ben Pham -- BMO -- Analyst

Hi. Thanks. I wanted to start off covering a grid when you have personnel that project is referenced to time with the Inter Pipeline acquisition, you said that project in your package this morning. So, is that still an opportunity regardless of you're not moving forward in IPL?

Michael (Mick) Dilger -- President and Chief Executive Officer

Yes, it is.

Ben Pham -- BMO -- Analyst

Okay. Okay. So, and then could you then comment on the US dollar effects of strategy, hedging natural hedges, how you think about that going forward?

Michael (Mick) Dilger -- President and Chief Executive Officer

Ben, can you repeat the question? Sorry, we had trouble hearing you.

Ben Pham -- BMO -- Analyst

Yes, I had a question about the US dollar FX strategy or hedging strategy, as you think about the sensitivities -- share sensitivity levels, and how do you think about that next six, 12 months?

Scott Burrows -- Senior Vice President and Chief Financial Officer

Yes, Ben I think as we think about the US dollar, I mean we -- for some time, we've been talking about diversification of currencies as being core to our strategy and through that looking at a global -- a more global enterprise and that naturally occurring. So, part of our strategy there has been, obviously, to hedge the marketing cash flows, because across the board and including the commodities as well as some of the foreign exchange on the frac spread business, knowing that that is some of the more variable cash flows in our business. At the same time, we have been, in the past having a reasonably large US dollar denominated capital spend as well and so we've always been somewhat naturally hedged, a little bit less so in the last couple quarters, which is why we've left the currency unhedged. But as we look forward -- and it's always something that we're thinking about as we execute our strategy.

Ben Pham -- BMO -- Analyst

Okay, great. And maybe to close off on acquisitions. I'm curious, like, what do you think the biggest sources of acquisitions could be for you in the next couple of years even more consolidating the Canadian side, some of those Canadian assets have come up US exposure. But now just look at the landscape, there's just not many names left in Canada. Do you need to go to the US more? There's still a lot of opportunities you see in Canada, tuck-ins, like what's the thought process in the next couple years?

Michael (Mick) Dilger -- President and Chief Executive Officer

Listen, we're focused on -- we've talked about Advantage Canada. We believe that. I think it's playing out very well for us. And the nice thing about Pembina is we're right in the middle of everything, so everything we look to acquire, we have tremendous synergy with. So, -- but I think most importantly, you can only buy things that are for sale. So, we have and continue to look at everything and see what has the biggest strategic importance to us, which generally relates to vertically integrating our value chain and pushing to tidewater on all products. So, things that that help us realize those two goals are most in scope.

Ben Pham -- BMO -- Analyst

Okay, got it. Thank you.

Operator

Your next question is from Shneur Gershuni from UBS.

Shneur Gershuni -- UBS -- Analyst

I'll start off with a discussion about PDH, just following the IPL merger that given the fact that it's no longer proceeding, just kind of thinking, just wondering, actually how we should be thinking about your PDH needs with respect to Pembina? Do you consider potentially pursuing a JV option with Brookfields to build both? Are you looking at the amount of volume that you control? Can you potentially get an equity stake in a project through an MDC, and just kind of wondering what the strategy is on a go forward basis, and how you think we've gotten there? And I truly recognize that you're probably very early in the process right now.

Michael (Mick) Dilger -- President and Chief Executive Officer

Yes, and no, I mean, when we lay down the hammers on PDH, the first time it was really, because of the pandemic and the lump sum turnkey contracts got away from us. But we never said that project was cancel, we said it was suspended, we said LNG and value-added projects remained in strategy. And so if you zoom out from that, for us to get products to Tidewater, sometimes we need to turn them into something different. So we're trying to create demand for customers products. And that might be direct export of propane or turning propane into propylene, or propylene into polypropylene, and then exporting it or, you know, so it's all about the same route to the extent we can build fee-for-service infrastructure and the petrochemical business. That's an avenue for us to create local demand and get our customers products to the highest value markets. And sometimes that's the product in its current form, sometimes you got to liquefy methane to move it. So all that remains in scope for us, but it has the same route, which is we think that hydrocarbon demand long after North America stabilizes, and we don't know when peak demand is in North America. But long after that, there'll be growing demand internationally, and we need to connect our world leading base into that demand.

Shneur Gershuni -- UBS -- Analyst

Okay. So the point is that you're probably still pursuing this option? Is that, kind of, the segue?

Michael (Mick) Dilger -- President and Chief Executive Officer

Yes, we've stated LNG, and value added projects, including production of polypropylene, provided they meet our guardrails, they are petrochemical infrastructure, and not necessarily being in a commodity chemical business, they remain in strategy, yes.

Shneur Gershuni -- UBS -- Analyst

Right, perfect. And maybe just pivot to quick discussion about your guidance that you just laid out. From our perspective to give as a bit of a challenge, but you definitely have raised your guidance for this year, kind of, curious what you're thinking about with respect to your exit rate for 4Q, as we think about what that means as we set up for 2022?

Michael (Mick) Dilger -- President and Chief Executive Officer

Yeah, I mean, we think we're building through the year, I think -- clearly the -- raising the lower end is a good thing. I know, some analysts were hoping we would raise the top end, but it's still pretty early in the year and boy, I sure don't know what I'm going to read in the newspaper next week. And, and so there's still a lot of move pieces. We just didn't think that there was compelling evidence to do more than what we've done. But we're definitely building through the year. Some of the quarterly results, I've read, I think like, CNRL. I think they bump their capital spending for the year. So we're starting to see people drill one extra pad. For example one pad can be 100 million a day a gas and 20,000 barrels a day illiquid. So those things matter. And, people are reaching their debt targets earlier. And they're buying back their shares. I'm talking about our customers. But as the generalists step into this space, and share prices go up at some point there's a tipping point where producers are going to start to drill, because that's a better investment than their shares. When they're trading at three or four times cash so you can't blame for buying back their shares. But lots of wells have 100% rate of return too. So when that tipping point is we don't think it's necessarily now, until debt targets have been reached. But we think for a lot of producers that's going to change. And I'm kind of waiting for 2022 Capital guidance, like a kid waiting for Christmas, because I think it's going to be pretty exciting to see what the basin does next.

Shneur Gershuni -- UBS -- Analyst

So the key takeaway here is that, we should outside of seasonal factors, which are always there. We should on the base business we are seeing sequential improvements, like 3Q versus 2Q, 4Q versus 3Q and its sets up for 2022 if that tipping point that you just articulated comes to fruition? Is that kind of the fair way to think about it?

Michael (Mick) Dilger -- President and Chief Executive Officer

Yeah. That's how I think about it. I mean, you heard the forward looking information waiver a lot can happen in the crazy world we're in right now. But yeah and listen, our second quarter is usually our weakest quarter. Last year was kind of anomalous, because we made all of our storage revenue in one month versus kind of readably through the year. So we feel pretty good about the way the year is going to finish. We're seeing some nice signs, like alliances back in the money. The base is differential. We haven't seen that. The dollar, Canadian dollar actually dropped a little bit. I think, from the end of the second quarter oil prices are stabilizing around $70. So there's some positive things going on that had us raise the low-end of our guidance. But, like I said, it was just a little early, I think given what we're reporting now to go beyond that. I think raising the low end of our guidance was prudent.

Shneur Gershuni -- UBS -- Analyst

Perfect. Thank you very much. Really appreciate the call today. And have a great weekend.

Michael (Mick) Dilger -- President and Chief Executive Officer

You as well

Operator

Your next question is from Robert Kwan from RBC Capital Markets.

Robert Kwan -- RBC Capital Markets -- Analyst

Hi. Good morning. I just come back to how you're approaching or how you approach acquisition. And you had IPL and other corporate deals you have it's a kind of fairly seamless, I know, there is some correction, but seamless where the equity gets placedAs we think about doing discrete asset deals, where let's say the seller doesn't want to take equity. How much does the financing size factor into the magnitude of what need to pursue? Just from that deal size perspective?

Michael (Mick) Dilger -- President and Chief Executive Officer

I'll just give you my layman's perspective. And then I'll turn it over to Cam or Scott, who have a much deeper knowledge, but you know, if you look at the Kinder, I'll give you a real life example. I mean, the bid ask spread with Kinder, after it was close to a year of negotiating was really conquered by the seller taking our equity, that was I think $100 million give or take at that point. And that was the bid ask spread. So those are important dollars to retain between the buyer and the seller. And if you look back at all of our large acquisitions, they've been funded with Pembina equity. And if you look back, things went well for the people who took our equity. They generally got $0.100 on the dollar or maybe at a point of leakage, but often they actually held a little while and made money. Some of the happiest shareholders, I have the privilege of meeting are came in at providence, and they've really, really rung the bell and they have really low ACBs. And I would hazard to say, if we had a close enterprise, bunch of those shareholders would have been very happy as well as synergies unfolded. So it's an important part of value sharing between buyers and sellers. Cam or Scott, do you have anything to add to that?

Cameron Goldade -- Vice President, Capital Markets

Maybe, I'll just jump in here. I mean, obviously, Robert, to the extent that we do anything in the public market, there's pretty significant friction costs that come along with that. So our preference has always been to work directly with sellers and use our shares directly. But backing up a step and I think answering the question more directly as it relates to kind of discrete assets. You know, I think, from our perspective with access to the equity markets, the debt markets, hybrids press, what I can say is that we haven't run across a transaction that's been inhibited by our ability to access capital. We feel pretty comfortable. And not just our own opinion, but advice of our third-party advisors, our ability to raise pretty significant capital. Now, that being said, I think what has evolved over the last couple years is our thinking around capital recycling, so to the extent that we are limited by capital markets or it makes sense, we have options as it relates to capital recycling. And also over the last couple years we've developed some pretty significant relationships and could look at various partnerships or JV opportunities, as well to help bridge financing. So all that to be said is it's certainly something that we think a lot about, but to date haven't run into any major roadblocks as a relates to that.

Robert Kwan -- RBC Capital Markets -- Analyst

Got it. And just as part of the guidance, you had a temporary, what you did just with lower contribution or expected lower contribution from certain assets. Just wondering, you know, which ones are you referring to specifically? And maybe as part of that, can you just give some comments on the ready Ruby situation?

Michael (Mick) Dilger -- President and Chief Executive Officer

Scott, Scott, you want to take that?

Scott Burrows -- Senior Vice President and Chief Financial Officer

Sure. I think as we -- as we looked at Q2, specifically, we had slightly lower contributions, as it relates to Ruby. Alliance volumes were OK, I think the interruptible polls and were slightly lower. Our Tinder tanks had slightly lower revenue this quarter. And as we stated previously, there was some lower interruptible volumes on Advantage. So I wouldn't say, Robert, it was any kind of one specific asset, it was kind of a small amount across a couple of different assets.

Robert Kwan -- RBC Capital Markets -- Analyst

Got it. And, if I can just finished the questions here on hedging, I think the 22 hedges based on your disclosure, were all added either in Q2 or subsequent to the quarter you've had additional activity, can you just frame ESG can -- what that pricing looks like for 22? I don't know, if you can just do it, again, the elimination of the realized losses that you've had on the hedge book today?

Michael (Mick) Dilger -- President and Chief Executive Officer

Scott, maybe I can that I can -- sorry go ahead.

Scott Burrows -- Senior Vice President and Chief Financial Officer

No, you go ahead.

Michael (Mick) Dilger -- President and Chief Executive Officer

I was just going to say, I think, your point is accurate in terms of when those -- these hedges have been added. And, you can look across the frac spreads for Q2 relative to Q1 and recognize that they're -- they've been fairly consistent on a ratable basis. I think that's a good proxy for -- for where the numbers are. And then just, looking forward to the realized losses, I think about your answer, but -- to put into context. The losses from this year have been realized, obviously, for hedges that were put on, sort of throughout the balance of 2020, through till really the end of October of 2020 on a relatively ratable basis. And if you look back, those levels are sort of close to half of where we are today. So I think that gives you a bit of a framework of how the losses might calibrate to what we're seeing currently and looking forward to 2022.

Robert Kwan -- RBC Capital Markets -- Analyst

Got it. Great. Thanks so much.

Operator

Your next question is from Robert Catellier from CIBC Capital Markets.

Robert Catellier -- CIBC Capital Markets -- Analyst

Hey, good morning. Most of these are going to be follow ups. But I wondered, if you can provide a little bit more color on the best use of the break fee. On the one hand, you have a lot of projects you could do internally. Some of the major projects have a long development cycles, so -- at what point does it make more sense to just buyback the stock like you were suggesting, and one of the projects hits then you can always finance later. I just wonder, if you could provide more color on really the best use of the break fee in the next six months?

Michael (Mick) Dilger -- President and Chief Executive Officer

Robert, it's the same debate, we always have internally. The finance guys want to pay-off debt, and I want to invest it in future projects. And, others want to support the stock, because we think it's -- the yield is very high, and it's a little under appreciated. So that debate is alive and well. And I think we -- we are sitting down as a -- as a management team and really assessing -- how and when our business grows, it would be a shame to buyback stock, and then pay a big commission, kind of further to, Robert Kwan's comment, pay a big commission to raise new money. You'd look a little foolish then. On the other hand, it's kind of, a windfall and we weren't counting on that money 90 days ago, and here it is. And so, have some fun with it. So, but we don't know, honestly, every use is a good use that, among the three choices.

Robert Catellier -- CIBC Capital Markets -- Analyst

Yeah. That's a fair answer. A little bit more of a detailed question here, but just on the Alberta Crude Terminal capacity, can that be repurposed, or for example, for bio fuels or anything else, or what's the plan there?

Scott Burrows -- Senior Vice President and Chief Financial Officer

Yeah, great question. It can be repurposed. But I think as we talked about, it's under long-term contract with our partner there. So obviously, that would be subject to negotiated arrangement with our partner.

Michael (Mick) Dilger -- President and Chief Executive Officer

Yeah. I mean, it's way under us, Robert. I mean, you're spot on. It's a shame the rate of under utilization of that asset. So that's on our to do list.

Robert Catellier -- CIBC Capital Markets -- Analyst

Okay, great. And just last question there. Given the change in basis differential, have you seen much improvement in activity on Alliance picking not volumes, but the recontracting efforts?

Scott Burrows -- Senior Vice President and Chief Financial Officer

Yeah. We're seeing really positive signs and even before probably more of the shorter term improvement in the basis, we've seen an uptick in interest. So feeling direction really positive about it Robert.

Michael (Mick) Dilger -- President and Chief Executive Officer

Yeah. It's kind of fitting like -- it's always hard when you got a little pinch, but if you look back over a long period of time, that pipes in the money, particularly when you consider the valuable cargo of NGLs that carries, that's a great pipe, it's unique and things tend to revert to the mean there. So, we'll -- it is nice though to see it come back in the money. I'm not going to lie, but it's doing what we expected.

Scott Burrows -- Senior Vice President and Chief Financial Officer

On a more macro basis, we feel really strong and some of the structural advantages that Alliance has with 10 BCF of LNG facility still being constructed and commissioning. And I think our longer-term perspective we're seeing for the market is that the US is going to be on a net basis with LNG exports short. So we feel like Alliances in a longer term basis really positive structural position.

Robert Catellier -- CIBC Capital Markets -- Analyst

Okay. Thanks, guys. Have a great weekend.

Michael (Mick) Dilger -- President and Chief Executive Officer

Cheers.

Operator

Your next question is from Patrick Kenny from National Bank Financial.

Patrick Kenny -- National Bank financial -- Analyst

Hey, good morning, everybody. Maybe just to start with some of the higher maintenance and integrity costs in the quarter. Just curious, if there were any unforeseen geotechnical issues or any acceleration of activities that might actually reduce integrity expense going forward?

Scott Burrows -- Senior Vice President and Chief Financial Officer

On the geotechnical perspective, Patrick, there have been no surprises. I think, given the relatively dry spring season we had that we could spend good from that perspective. The integrity work was really a rollover of some deferred work for last year that we were working through with our integrity group to get our heads around on when the spend needs to happen. And then on the operating cost side, it's all driven by Alberta power costs, pool prices.

Patrick Kenny -- National Bank financial -- Analyst

Okay. Great. And maybe on that front, so Scott, thanks for the FX sensitivities, but just on the power cost exposure, looks like about two-thirds of your power costs are flow through, if I'm reading that correctly. But maybe just some color on how far you're able to go out and hedge the remaining one-third, how you might be thinking about mitigating your longer-term exposure, perhaps refresh on other co-gen opportunities across the portfolio that'd be great?

Jaret Sprott -- Senior Vice President and Chief Operating Officer, Facilities

Good morning, Pat. Jaret here. With respect to the co-gen, so yes, you're fairly accurate in the two-thirds that is recoverable. The co-gen that's going into the Empress. So that that is a permanent marketing assets. So once that's in service Q4 2022, that'll mitigate as a significant chunk of power there and exposure to those costs. We're also -- well, and we have two other sites that we're actively pursuing the engineering and doing our front-end feed in our gas processing business with co-gens, which will mitigate another pretty big chunk of power. And then I'll Stu talk about the recent PPA that we signed go forward that will help mitigate those costs in the future.

tuart (Stu) Taylor -- Senior Vice President, Marketing and New Ventures and Corporate Development Officer

Hey, Patrick. So yes, we're really pleased, we're working with TransAlta on our first PPA contract, a 100 megawatts of power, We, obviously, really like the pricing. And at the same time the credits and the benefits that will come with that, that power will is being built. We are on some shortcut term benefits and some additional power that are coming in and will grow from 50 megawatts to 100 megawatts over the next two years. So we're excited about the first 100 megawatts. We are active in conversation for additional PPA contracts. We believe it's beneficial to lock those in. We're seeing some positives on the pricing side, particularly in relation to the recent uptick in the power pricing that we've seen. So we're very active on a larger scale power PPA contracts. We're looking at smaller opportunities as well, as we look at some of our assets. And Jaret mentioned some of the co-gens, but there's additional opportunities to pursue what we believe is some cheaper power pricing for Pembina's assets for both the benefit of Pembina itself and our customers.

Patrick Kenny -- National Bank financial -- Analyst

Excellent. That's great color guys. Last one for me, just on the Cedar LNG, just curious how the Coastal GasLink cost overrun might jeopardize the economics? And I guess your chances of reaching a positive FID on the project. I know you still have until 2023 to make the call. But given it's a very fluid situation right now, any color on how sensitive the $3 billion capital cost and overall returns might be to the pipeline project itself. That'd be great.

Michael (Mick) Dilger -- President and Chief Executive Officer

As we went in, obviously, we're aware of the challenges that coastal gas link was experiencing, we'd factored in that into the economics. We still believe the SEDAR LNG project, the benefit of a floating LNG project, our ability to have that built in a -- I'll call it a lump sum environment overseas to bring that here the uniqueness of the size and the great work done by the Haisla in securing that capacity. We take into account Patrick, some cost increase there. We are working closely with obviously LNG Canada, you know, as the major contractor on the coastal gas link pipeline, working -- there'll be many conversations with coastal gas link themselves. But we take that into account the economics and still believe SEDAR is economically advantage from a cost structure perspective of delivering LNG into the Asian markets on a go forward basis. So as you said, we've got lots of work to do. As we work through the feed engineering. There'll be many conversations over the next little while. I believe, those will be intense and accelerated as there's a lot of money on the ground already from many, many people. And so we're anxiously watching, but we do enjoy the benefit of the great work that the Haisla did in securing the capacity and the commercial arrangements on coastal gas link

Patrick Kenny -- National Bank financial -- Analyst

Okay, great. Thanks for that's too and enjoy the rest of the summer, guys.

Michael (Mick) Dilger -- President and Chief Executive Officer

Thanks.

Operator

There are no further questions in queue. I will now like to turn the conference back to Mr. Mick Dilger for closing comments

Michael (Mick) Dilger -- President and Chief Executive Officer

Well, thanks everybody for your support through the con call at the IPL saga. Thanks to all my colleagues here for the great work. It wasn't what we hoped for as I mentioned, but was still a good outcome for us. And I think it was kind of a window into the future for Pembina and all the things we can do and will be focused on over the years to come. So, have a great summer, everybody and hope to see you in person sometime soon. Bye.

Operator

[Operator Closing Remarks]

Duration: 41 minutes

Call participants:

Cameron Goldade -- Vice President, Capital Markets

Michael (Mick) Dilger -- President and Chief Executive Officer

Scott Burrows -- Senior Vice President and Chief Financial Officer

Jaret Sprott -- Senior Vice President and Chief Operating Officer, Facilities

tuart (Stu) Taylor -- Senior Vice President, Marketing and New Ventures and Corporate Development Officer

Ben Pham -- BMO -- Analyst

Shneur Gershuni -- UBS -- Analyst

Robert Kwan -- RBC Capital Markets -- Analyst

Robert Catellier -- CIBC Capital Markets -- Analyst

Patrick Kenny -- National Bank financial -- Analyst

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