Keyera Corp

TSX:KEY

Earnings Call Transcript 2021-Q1

[Operator]

Good morning. My name is Rebecca, and I will be your conference operator today. At this time, I would like to welcome everyone to Keyera Corp.'s First Quarter 2021 Conference Call. [Operator Instructions] I would now like to turn the call over to Dan Cuthbertson. You may begin.

[Dan Cuthbertson, Director of Investor Relations]

Thank you, and good morning. Joining me today will be Dean Setoguchi, President and CEO; Eileen Marikar, Senior Vice President and CFO; Jamie Urquhart, Senior Vice President and Chief Commercial Officer; and Bradley Lock, Senior Vice President and Chief Operating Officer. We will begin with some prepared remarks, after which we will open the call to questions. I would like to remind listeners that some of the comments and answers that we will provide speak to future events. These forward-looking statements are given as of today's date and reflect events or outcomes that management currently expects. In addition, we will refer to some non-GAAP financial measures. For additional information on non-GAAP measures and forward-looking statements, refer to Keyera's public filings available on SEDAR and on our website. With that, I'll now turn the call over to Dean.

[C. Dean Setoguchi, President, CEO & Director]

Thanks, Dan, and good morning, everyone. I'd first like to take a moment to acknowledge frontline workers and those working to administer vaccines in the fight against COVID. We appreciate your efforts and dedication. I would also like to acknowledge our employees, many still working remotely with the commitment to safety and their continued efforts to keep our assets running safely and reliably for our customers. At Keyera, our top priority continues to be the health and safety of our people and the communities in which we operate. About this time last year, global energy markets faced significant uncertainty. I'm pleased to share that Keyera remained resilient, and in this last quarter, we've seen encouraging signs of recovery. That's reflected in strong performance across all 3 segments of our integrated business and in our first quarter financial results.Volumes in our Gathering and Processing business increased by 7% compared to last quarter, including 5% growth in our South region, leading to strong financial performance from the segment. This result represents a year of hard work and close collaboration with our customers, which aligns with our goal of being #1 in customer recognition.Our Liquids Infrastructure segment delivered record results for the quarter, resulting from continued high demand for oil services, including strong deliveries from our industry-leading condensate system. Our liquids segment provides essential services to a wide range of customers throughout the basin and continues to deliver the best returns in our portfolio with stable, contracted cash flow. These attributes will remain our focus for future growth capital, which includes the KAPS pipeline project. We also had solid performance from our Marketing segment, supported by strong pricing across the commodities we service. Yesterday, we announced a significant increase to our 2021 guidance for this segment, which Jamie will speak to shortly.We're pleased to deliver these first quarter results, but we also continue to focus on our goal of delivering superior shareholder returns over the long term. And that means we must continue to maintain our strong financial position, keep improving our safety and reliability, delivering our efforts to maximize efficiency and prepare for energy transition. A strong balance sheet and financial discipline have long been the hallmarks of our business. Our conservative approach again -- has again served us well through this last commodity price downturn. Today, our balance sheet remains in good shape with low leverage and ample capacity to fund our KAPS pipeline project.We continue to take steps towards improving our safety and reliability performance. We recognize importance of both factors in delivering superior customer recognition and total shareholder returns, and we continue to hold our sales accountable. We continue our pursuit of being the most efficient operator for our customers and growing margins through efficiency gains and reducing costs. Our customers rely on our infrastructure assets as well as our commercial, operational and logistics expertise. This allows them to get their products to the highest-value markets. We also see opportunities to apply technology and innovation to improve safety, reliability and lower emissions. We recognize the world is undergoing a transition towards a low-carbon future. Investor support and government policy are further enabling this transition. We believe the Canadian energy industry has an advantage in its ability to continue to responsibly deliver the energy the world needs. At Keyera, we want to be part of the solution and view this transition as an opportunity. Later this year, we will set emissions targets that will consider a wide range of efforts that we have underway. To close on a more general note, the Canadian energy industry is also showing some positive signs that point to recovery. For the first time in many years, pipeline export capacity for both oil and natural gas will soon be adequate to meet the industry needs. And with growing local demand from the petrochemical industry and better connections to overseas markets, the trend for natural gas liquids such as propane also look encouraging. In addition, recent consolidation amongst producers are also good for our industry as it creates stronger players who are better positioned for the long term. I'll now turn it over to Jamie to provide an update on our commercial activities.

[K. James Urquhart, Senior VP & Chief Commercial Officer]

Thanks, Dean, and good morning. As Dean mentioned, we have increased our 2021 Marketing segment guidance. The higher guidance is based on year-to-date performance, a disciplined hedging program and follows the conclusion of successful negotiations for natural gas liquid supply agreements for the contract year beginning April 1 and ending in March 2022. As a result, we have raised our 2021 realized margin guidance for the Marketing segment to between $260 million and $290 million. This replaces our previous guidance range of between $180 million and $220 million. The Marketing segment continues to contribute to enhance our overall corporate returns and provides funding for investments in more highly contracted infrastructure assets. I'll now take a moment to provide some broader context for our return expectations on KAPS. KAPS is transformative for Keyera. The project is highly desired by industry, and it provides a link in our value chain that fully integrates our business. It brings a much-needed alternative transportation solution for condensate and natural gas liquids from the Montney and Duvernay plays in Northwest Alberta to Keyera's liquids hub in Fort Saskatchewan. Initial capacity remains 70% contracted under long-term transportation agreement with an average term of 14 years. Based on our engagement with new and existing customers and the expected ramp-up in industry activity, we remain confident that we'll be able to secure the additional contracted volumes to meet our return expectations of 10% to 15% by 2025; a reminder that this return is for the project on a stand-alone basis. I'll now turn it over to Brad to provide an update on how preparations are going for the KAPS project and also speak to other operational highlights.

[Bradley W. Lock, Senior VP & COO]

Thanks, Jamie. I'm pleased to share that during the quarter, we've made significant progress on the KAPS project in preparation for mainline construction kickoff this summer. In Q1, we completed clearing almost 150 kilometers of pipeline right away, and pipe fabrication is well underway. The project is a great, made-in-Alberta story. The clearing work involved 5 local indigenous-owned and affiliated contractors who delivered outstanding performance, and pipe fabrication is currently being done in Camrose, Alberta. At the Wildhorse crude oil storage and blending terminal in Cushing, Oklahoma, mechanical completion was declared on January 29, and commissioning activities are underway. Our operations team continues to make steady progress, and we expect that facility will be fully operational this summer. At Wapiti, there's been a lot of great work done by the team. We've had strong safety and reliability performance so far this year, and we continue to grow facility volumes. In the third quarter, we'll have a short planned outage to further ensure the future long-term reliability of this asset. We also have scheduled 10-day turnaround at Zeta Creek in June and the Brazeau River gas plant, which is currently underway. I'll now turn it over to Eileen, who will run through our financial results.

[Eileen Marikar, Senior VP & CFO]

Thanks, Brad. Keyera delivered solid first quarter financial results with strong performance from each business segment. Adjusted EBITDA for the first quarter of 2021 was $225 million, while distributable cash flow was $165 million. Net earnings were $86 million. The Gathering and Processing segment delivered margin of $79 million as we reached new throughput highs at both the Wapiti and Pipestone gas plant. We delivered a record $105 million of realized margin in our Liquids Infrastructure business. This performance can be attributed to the continued high demand for our services, including increased storage activity and strong delivery from our condensate system. And our Marketing segment delivered a realized margin of $61 million. We continue to maintain a solid financial position. We ended the first quarter with a net debt to adjusted EBITDA ratio of 2.7x. This is within our conservative target range of 2.5 to 3x on a covenant basis. The company has $1.5 billion in available liquidity with minimal near-term debt maturities. In addition, we completed a $350 million hybrid note offering in March. This positions us well to fund our 2021 growth capital program of between $400 million and $450 million. The majority of this growth capital will be directed towards the construction of the KAPS pipeline project in the second half of the year. With that, I'll hand it over to Dean for some closing comments.

[C. Dean Setoguchi, President, CEO & Director]

Thanks, Eileen. Keyera's value proposition continues to be the delivery of a sustainable dividend, underpinned by low debt leverage and a deep inventory of investment opportunities aimed at expanded distributable cash flow per share. Looking ahead, Keyera will continue to be a safe, reliable and sustainable operator, dedicated to serving our customers and generating value for our shareholders. We're excited about the future, and we're confident we have the culture, people and assets for continued success. On behalf of Keyera's Board of Directors and our management team, I thank our employees, customers, shareholders and other stakeholders for their continued support. With that, I'll turn it back to our operator for Q&A.

[Operator]

[Operator Instructions] And your first question comes from Rob Hope with Scotiabank.

[Robert Hope, Analyst]

First question is on KAPS. Just given the improving commodity price environment as well as some of the other dynamics that we're seeing in the basin, have discussions for additional contracting capacity accelerated there? And then as well, are you seeing incremental interest from producers in Northeast BC with some potential to get Northeast BC volumes down into Alberta there as well?

[C. Dean Setoguchi, President, CEO & Director]

Maybe I'll just answer your second question first. I mean the announcement and the notification that was filed by NorthRiver Midstream, it's an independent system. That's a BC system, large independent system which is in Canada. Both systems are open access. So we like the whole concept of more competition in our basin. It's just good overall. And so we're happy to see that project continue to develop. Certainly, with more volumes being collected in BC, obviously, that's -- the potential for us being able to capture some of that volume in KAPS is more promising, but again, it's still early days. And maybe on the contracting point, can you touch on that, Jamie?

[K. James Urquhart, Senior VP & Chief Commercial Officer]

Yes. So certainly, as we've finalized and confirmed our commitment to KAPS and, as we shared, starting to clear trees, manufacturing pipe that in our customers' eyes has made the project solidified as real a project. So certainly, we've had more meaningful conversations with respect to incremental volumes. We'd just temper people's expectations around timing of when we might be in a position to make further announcements around additional contracting as most customers really do want to see line of sight as to when that project is going to be complete. And we hope and we will continue to keep our customers apprised of the development of that project to remind everybody that, that project is scheduled to be complete Q1 2023. We certainly expect that's going to be the case. But to reconfirm, yes, much more conversation happening with our customers, more meaningful conversation particularly at the top end of our pipeline up in the Pipestone area.

[C. Dean Setoguchi, President, CEO & Director]

Yes. Rob, I mean overall, obviously, we've seen some pretty robust results from our producers in this basin. And obviously, projections are that the balance sheets are going to be pretty healthy here in another quarter or 2. So it's just a lot more discussion about future drilling plans and growth. And obviously, that only makes it more encouraging for our KAPS pipeline and the rest of our business.

[Robert Hope, Analyst]

Excellent. All right. And that leads me to kind of my next question. Taking a look at the Northern plants, good to see the volumes ticking up there. How are volumes tracking to take or pays? And at what point do you start having discussions about the incremental capacity at Wapiti coming available?

[C. Dean Setoguchi, President, CEO & Director]

Yes, Rob. I mean we've always said that, that fairway of the Montney is -- it's not the most economic. It's certainly top tier within the Montney. And we're actually surprised at how quickly drilling activity has responded based on our sort of some of the communications we had with our producers just in the fall. So we think that's very healthy. But again, this commodity price environment remains, which we feel pretty good about. We think that's only going to increase in the fall. So there are some producers in the area that aren't even delivering to us that are now much more engaged about the potential of reactivating drilling plans and potentially delivering to our gas plant. So again, that's very positive. And again, we've always said we're in the best stretch of the Montney, and we should be able to capture more volumes over time.

[K. James Urquhart, Senior VP & Chief Commercial Officer]

Yes. The only thing I'd add is that there are some new players in the Wapiti area that have made some acquisitions in the Karr-Wapiti area that we are very familiar with in other parts of our business. So we're upbeat, obviously, with respect to the Wapiti gas plant.

[Operator]

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

[Linda Ezergailis, Research Analyst]

I'm wondering if you can elaborate a little bit more on your experiences over the past year with respect to leveraging technology and transforming your -- some of your business processes that way. Clearly, many of us have accelerated our use of technology in many ways during the pandemic. And I'm wondering what practices you might keep as permanent and further evolve the business to realize efficiencies and opportunities beyond what you currently have in your plan.

[C. Dean Setoguchi, President, CEO & Director]

Maybe I'll start with -- first of all, good morning, Linda. Yes. I think the pandemic, there are some benefits that came from that in terms of just us understanding what we could do remotely. We've operated our business very well, especially last year through very, very challenging conditions, and I credit our technology team for enabling us to do that. So as we look forward, we're really thinking about how do we leverage off of that in the future. So we will have some more flexible sort of work environment. We do like to collaborate still together. So we'll make sure that we continue to do that on some basis, but we will add some more flexibility. But overall, as a company, we think that technology and innovation is something that's a big opportunity for our company and something that we want to leverage in a much bigger way in the future. So maybe with that, I can just maybe pass over to Jamie or Brad. You can maybe talk about some things in your areas that you're looking at.

[Bradley W. Lock, Senior VP & COO]

Linda, I think, certainly, from an operations side, utilizing data management and data access to more centralize some of our operations and business process is something that we're spending a lot more time and energy on right now. And I think over the long term, that has a real opportunity to reduce our operating costs and ultimately provide more value-add services to our customers on that line. So...

[K. James Urquhart, Senior VP & Chief Commercial Officer]

Yes. So on the commercial side, Linda, we've got a couple of projects that were in the latter stages of implementing with respect to using some machine learning to allow our people to make better business decisions. We deal with a lot of data and asking people to be able to process that data and make the best business decisions possible. They do a great job. But using machine learning and artificial intelligence just allows our people to make better business decisions. So we've got some applications as it pertains primarily to our commercial marketing team that we're implementing, and we've seen some positive results out of that so far.

[C. Dean Setoguchi, President, CEO & Director]

Yes. Maybe -- and just maybe lastly, Linda. I think from a safety perspective, I think that, again, the technology we've been using just to communicate virtually has been very effective. So -- especially in the cold winter months here in Alberta, I think it's a big benefit if we don't have as many people on the road and we can do things virtually for the safety of our people.

[Linda Ezergailis, Research Analyst]

And on a separate note, another trend that we're seeing is inflationary pressures on many fronts. And I'm wondering how you can comment on whether you're starting to see that in your operating or capital expenses. And if you can specifically comment on what percentage of your costs for KAPS have been locked down both in terms of what's incurred to date but -- as well as more importantly, prospectively? And also confirm that there's no scope change contemplated for KAPS at this point.

[Bradley W. Lock, Senior VP & COO]

So from an operating cost perspective, I think it is fair to see that we're seeing some inflationary pressure. Certainly, power is one of those components. I think we do have -- like all of our other commodities, we do have -- we do actively manage our power price and hedge that out over time to take -- to mitigate some of the impact of that. So that's the benefit to us. Certainly, other commodities like steel and copper and some raw materials are seeing inflationary pressures as well. We're fortunate with KAPS. The fact that we had a 1-year delay allowed us to really lock in some of those opportunities early on. So we had ordered our pipe over a year ago and secured that under a contract. Now it doesn't -- that doesn't take all the inflationary pressure out of there, but it takes a lot of it out. So that's been real positive for us. On KAPS, we've locked down our pipes. We've locked down our mainline contractors. We've locked down another -- a number of key services as well. So I don't have an exact number, but it's going to be -- well north of 50% of our costs are already locked in for that project. So we're feeling pretty good about our confidence in delivering that within the budget that we have contemplated.

[Linda Ezergailis, Research Analyst]

And may I ask what contingency you've got embedded in that budget?

[Bradley W. Lock, Senior VP & COO]

No, we don't usually disclose that. But certainly, we use good project management principles to assess contingency on the basis of thoroughness of engineering today.

[Linda Ezergailis, Research Analyst]

It was worth asking. Maybe on a separate note, your presence in the U.S. has expanded with Wildhorse. It will be operational soon. Has your expectation for the facility changed since it was originally contemplated given that we're going through a pandemic? There was the unfortunate winter storm, Uri. And maybe there is some changes in some of the market dynamics there as a result, among other considerations. Can you comment on, I guess, how Wildhorse fits into your approach to the U.S. and how it might have evolved?

[K. James Urquhart, Senior VP & Chief Commercial Officer]

Yes. Linda, thanks for the question. Nothing has changed as a result of the business thesis of Wildhorse. We're still very encouraged and excited about getting that facility up and running and being part of our vertically integrated value chain and enabling us to find highest value markets for the products that we do market on behalf of our customers. In particular, our U.S. assets, Wildhorse will be very integrated with our OLT asset that's been -- we've been very pleased with since we started owning that asset. And so yes -- no, we're -- there is no change as a result of anything that's happened over the last 12 months.

[Operator]

Your next question comes from the line of Matt Taylor with Tudor, Pickering, Holt & Co.

[Matthew Taylor, Director of Midstream Research]

I wanted to first start on your run rate Marketing guidance. We've now seen 3 consecutive years of guidance revised higher with the major reason being those low butane costs. So can you talk about those assumptions? Do you think they're still relevant? Or do you think the run rate level is actually higher?

[K. James Urquhart, Senior VP & Chief Commercial Officer]

Yes. Well, we will be, likely at the end of the year, looking to revise that base guidance, Matt. I think -- well, I know one of the reasons why we're hesitating to do that is just to get a better line of sight with respect to the contributions that both Galena Park and Wildhorse will make to our Marketing business, but also it's a significant contributor to our Liquids Infrastructure side of our business as well. As it pertains to butane, the contracting year that we just completed, a successful contracting year, but butane prices within North America, we look at it. They're still dynamic with respect to the demand of butane within Western Canada relative to the supply. So those things do play into ultimately how Marketing is going to perform going forward specifically as it pertains to AEF. So we're obviously looking to have visibility to stabilize the Marketing contribution as much as possible but just recognizing that butane pricing is still dynamic and fluctuates year-to-year.

[Matthew Taylor, Director of Midstream Research]

That's great, Jamie. And then I wanted to address -- you mentioned a stand-alone comment on your KAPS returns -- project expectation. So I just wanted to clarify that. So the opportunity to source volumes from the Southern open-access pipeline is not considered in your return guidance? And then maybe more broadly, does this give you an opportunity to pull forward your assumption of earning that return by 2 years after in service?

[K. James Urquhart, Senior VP & Chief Commercial Officer]

Well, our return expectations are based on our forecast with respect to bringing pipe -- volumes into that pipeline. And when we say returns on a stand-alone basis, it's just looking at that pipeline, that investment that we've announced. Obviously, there would be upstream benefits potentially with respect to some of their Gathering and Processing assets that would feed into that pipeline, or some of our downstream assets that ultimately, that pipeline will feed into, and that's what we're referencing when we say stand-alone.

[C. Dean Setoguchi, President, CEO & Director]

Was that your question, Matt?

[Matthew Taylor, Director of Midstream Research]

Yes. And then just to extend a bit further. So then, yes, if you're looking at your own system and integration on the value chain side, if there's more volumes from a separate system coming in, obviously, that's not considered. And so there might be some wiggle room in moving within that range. Is that the right way to be thinking about that?

[C. Dean Setoguchi, President, CEO & Director]

I guess, Matt, when we -- I think we've always been sort of open to say that we have a base level of contracting, 70% of initial capacity. And to get to our 10% to 15% hurdle rate, we still need to secure more volumes, and we have a number of different ways that we can do that. We can capture a larger market share. Our -- we're talking to more producers on the upper side of border about additional volumes that we hope to contract as well. And also, there's a potential for BC volumes. So we're not specifying exactly where it comes from but we think, on a risk basis through those 3 sort of sources, that we're going to get to that 10% to 15% threshold.

[Matthew Taylor, Director of Midstream Research]

That's great. Thanks for that, Dean. And one last one, if I may. We saw an announcement by a competitor this morning on a new NGL system. Does that -- any thoughts there on how this may impact your petchem feedstock strategy or any downstream conversations you're having on new frac capacity? Or just even more broadly, what this means in terms of the Alberta petchem strategy just generally.

[C. Dean Setoguchi, President, CEO & Director]

I think more supplies of NGLs and feedstock are good for our basin. And we know the people that -- presumably, you're referring to Wolf Midstream. We know them very well. And if there's any opportunities for us to work together to increase, enhance the efficiency of NGL extraction and delivery, we're happy to work with them. But overall, it's good for our basin. And the competition is what attracts more business to our province, which is what we want.

[K. James Urquhart, Senior VP & Chief Commercial Officer]

Yes. Matt, I think -- be aware that those are incremental volumes that will be straddled off of the natural gas system. So we don't view those as being competition with respect to our designs to potentially expand KFS in the future.

[C. Dean Setoguchi, President, CEO & Director]

Yes. I was referring to competition in the sense of competing sources of feedstock for petchem.

[Matthew Taylor, Director of Midstream Research]

Yes -- no. Fair point. I was also referencing the fact that they're looking to build out a frac as well. Yes. So yes, thanks for addressing that question there.

[C. Dean Setoguchi, President, CEO & Director]

Thanks, Matt.

[Operator]

Your next question comes from the line of Chris Tillett with Barclays.

[Christopher Paul Tillett, Research Analyst]

I guess the first question, just to sort of follow up on something Matt was asking. Given the return of activity that we're seeing in the basin today, does it make sense at this point in time to sort of contemplate maybe expanding KAPS further west out of Gordondale into Northeast BC? Is that something you guys are actively investigating? Do you think maybe that's something that would make sense to do further down the road? Just curious to hear kind of where your heads are at on that at the moment.

[C. Dean Setoguchi, President, CEO & Director]

Well, our KAPS system is an Alberta-only-based NGL solution, transportation solution. So if there's demand to build it to the border, whether it's the producers that are up in the Gordondale area or whether there is a pipeline system in BC that wants to connect to our system, it has to be underpinned by contracts that justify the incremental capital. So do we think there's potential for that? Absolutely. But we will not make investments unless we have adequate financial support for it.

[Operator]

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

[Patrick Kenny, Managing Director]

Just on the Colonial Pipeline outage here and the impact we're seeing on RBOB, any comment on how the situation is playing into your spot iso-octane margins? And I guess maybe just to confirm if this short-term tailwind for Q2 at least is baked into your new Marketing guidance range for the year.

[K. James Urquhart, Senior VP & Chief Commercial Officer]

Yes. Pat, it's Jamie. Thanks for the question. Yes, as you're aware, RBOB popped a little bit over the weekend and it settled primarily. I know it popped again a little bit this morning. And we expect there's going to be some volatility in the short term. It really will be determined on the extent of that outage. I think it's fair to say, those that can take advantage of optionality tend to benefit from this type of disruption. And we build our business off of the ability to lock in stable cash flows but also be able to take advantage of optionality when it presents itself. So hopefully, that answers your question.

[Patrick Kenny, Managing Director]

It does, Jamie. And then maybe just looking out more on a sustainable basis for the iso-octane business. Perhaps you can just walk us through some of the opportunities around clean fuel standards and what this emerging demand trend could mean for your realized premium going forward relative to historical?

[K. James Urquhart, Senior VP & Chief Commercial Officer]

Yes. Sure, happy to. Yes. Certainly, we're looking at the clean fuel standard at AEF and the opportunities that it does present to us, particularly around some potential efficiencies at that site to get our intensity -- our carbon intensity down at that facility. So a little early days on that, but we certainly see, once again, an opportunity at AEF with respect to that clean fuel standard. Part of that clean fuel standard -- and we look at this, and I think we telegraphed this to the market, is that we are focused on trying to find higher value markets within North America. Traditionally, we've sent a lot of product down to the Gulf of Mexico and sold it out of there, where we've realized higher margins, frankly, if we can find sales points within North America both from a rail cost perspective but also just frankly from a realized premium perspective. So that's going to be a continued focus for us. We've actually hired an individual that's dedicated to AEF and increasing margins out of that facility. So it's obviously really important to us. On a margins perspective, we're still seeing -- we're not back to sort of the levels we were pre-COVID with respect to the octane premium component of pricing of our iso-octane. Certainly, crude and RBOB are at a historic high -- certainly on the RBOB side. But the premiums still are -- they're decent, but they're not back to those levels. And frankly, our view is that they're not going to get back to the historic levels until octane worldwide gets more balanced. We're still seeing a lot of octane coming from the rest of the world into North America because octanes are priced off of RBOB, and RBOB is very, very strong in North America right now. But until we see demand for gasoline in the rest of the world -- catch up to the production capabilities of the rest of the world, we're going to continue to see octanes being pushed into North America and keep those premiums at the current level. So we expect that's going to happen, probably going to happen over the next period of time as the vaccines take hold and we see that global demand get back to normal levels. Hopefully, that helps give some flavor to how we see our iso-octane business.

[Patrick Kenny, Managing Director]

Okay. Yes. That's great color. Last one from me, I guess, for Eileen. Wondering if there could be credit rating updates here on the horizon with S&P just given I believe the downgrade last year was largely related to the lower commodity prices at that time, which, of course, we're now back to pre-pandemic levels. Not sure -- and I guess they would also view the recent hybrid issues being positive to your credit ratio. So just curious on the potential timing for a rating review.

[Eileen Marikar, Senior VP & CFO]

Yes. Thanks, Pat. They're -- S&P is actually currently undergoing their annual review. And based on our discussions so far, everything is significantly more positive certainly than it was a year ago, especially as we show 2020 results much stronger than they always tend to forecast. Overall, we don't expect any significant changes from where we are today, which is the BBB- stable, but overall, very -- really positive in terms of their outlook.

[Operator]

Your next question comes from the line of Andrew Kuske, Credit Suisse.

[Andrew M. Kuske]

I guess it was a big, broad question, where we've got an environment where egress is improving across product spectrum out of Western Canada. Commodity prices have clearly improved. Volumes have improved across the board for producers. So when you start to think about the environment on a go-forward basis, how does your risk management activities either stay the same or change and evolve and adapt in the market that we see now?

[C. Dean Setoguchi, President, CEO & Director]

So overall, I mean we want to remain disciplined, Andrew. And we know that there's always a risk of price shocks. So we want to -- we definitely want to generate upside returns, but we also want to protect our downside, too. And obviously, no one predicted the pandemic last year. And who knows? There could be further waves. OPEC could -- maybe not be as aligned as they are today. Other factors could happen. So we're just trying to be very responsible to our shareholders. So when we look forward, if we see sort of commodity prices that we can lock in better than sort of 5-year averages, we start to take advantage and layer in some of that, recognizing that prices could go even higher but again just securing that base.

[Andrew M. Kuske]

Okay. That's helpful context. And then just maybe a bit of discussion on what you view as being more captive volumes or committed volumes across your portfolio versus areas where you have maybe a bit more of a competitive dynamic.

[C. Dean Setoguchi, President, CEO & Director]

You mean you're asking like a percentage or...

[Andrew M. Kuske]

Rough percentage or whatever way you'd like to characterize it.

[C. Dean Setoguchi, President, CEO & Director]

I mean I think from a G&P perspective, I mean I don't have the exact numbers. Generally, in the North -- in our North facilities where we've made new investments, particularly at Wapiti and also at Pipestone, we have -- it contracted. So we do have some of our producers that are producing above their initial commitment, which is always nice to see. And as we said earlier, there are other players in the area that we're talking to that could be contracted volumes as well. In the South, they're more typically on an evergreen basis. I mean we do -- we have been locking in more the longer term, generally less than 5 years. But once they're captured to your system, in a lot of circumstances, not always though -- as long as we're competitively priced, basically the volumes are pretty sticky. So I know they're just general comments. We could follow up with maybe a bit more specifics after this call if it's important to you.

[Andrew M. Kuske]

That's helpful. And then maybe one final one, if I could just sneak it in, along the lines of just egress improving. What are your thoughts on just baseline expansion with line of sight on Trans Mountain?

[K. James Urquhart, Senior VP & Chief Commercial Officer]

Yes. Andrew, great question. We're talking and we're not the operator of baseline, but we're very connected with the operators of baseline. And obviously, we -- through our condensate system, we have all the major players as customers. So we have great relationships with them, and we love to bring those relationships to our -- 50% ownership in baseline. Baseline is, in our mind, going to have great connectivity to Trans Mountain. And as a result, we see that there's no reason for us not to benefit off of TMX and the expectation of additional storage requirements off of that system.

[C. Dean Setoguchi, President, CEO & Director]

I'd also mention that our baseline terminal, I mean we can add another -- a few million barrels of capacity, about 120 million barrels of capacity. And that capacity is going to -- a lot lower cost than the original base. That's because all the infrastructure like the flanges and the pipes racks and bridges and things like that are already in place. So we think that we can be very competitive as demand increases with Trans Mountain pipeline.

[Operator]

[Operator Instructions] And your next question comes from Robert Kwan with RBC Capital Markets.

[Robert Michael Kwan, MD & Energy Infrastructure Analyst]

Let me start with the G&P segment. In the South region, specifically your guidance, moving utilization from below 50% to roughly 70% by mid-'22. Just as time has progressed, you've done some of the work and the basin recovery continues, like how much of that moved up in utilization? Do you think we'll just be consolidating from your existing plants versus volumes? Do you think it will be produced or be migrating from competitor plants? Particularly, how much of that is locked in from your view?

[C. Dean Setoguchi, President, CEO & Director]

Yes, it's interesting. A lot of it is just by putting -- redirecting volumes from the facilities that we're going to be suspending to our most efficient facilities. Now having said that, last year, where we had basically 3 quarters of virtually no drilling, obviously, volume fell off more than our original expectations. The great thing is that we've seen that volume base sort of stabilize and producers are starting to drill. So the lost volumes, we expect to recover that in the next year or 2 as producers resume drilling. So I look at a player like Spartan, who's one of the more active players in the South. One of the taglines on the release from a research report was their Spirit River wells are paying up in less than 6 months. And that's not surprising to me based on current commodity prices. And the other thing is that we've helped economics a lot with our optimization program and the competitive fees that we offer to our customers. It's really going to incent them to drill. So we're just seeing a little bit of that in the first quarter. Again, producers are strengthening their balance sheet, but I'm really interested to see what happens in the fall here and into 2022.

[Robert Michael Kwan, MD & Energy Infrastructure Analyst]

It sounds like though the vast majority then have moved from 50 to 70 is -- I don't want to say it's locked in, but highly confident just in moving the molecules around?

[C. Dean Setoguchi, President, CEO & Director]

Yes, a lot of it is. Yes, yes. And, again, we have to make up now the declines of last year.

[Robert Michael Kwan, MD & Energy Infrastructure Analyst]

Right. If I can go -- come back to KAPS in contracting and recognizing you don't want to be too granular as to where these additional contracts or volumes are going to come from, but based on your answer, are you expecting anything to come off of Northeast BC connector? Or do you think that's really just gravy and could actually underpin an expansion? Do you think there's enough stuff from the Alberta side to get you full contracting?

[C. Dean Setoguchi, President, CEO & Director]

We think that there's enough volumes on the Alberta side, but again, I mean when we look at our projections, we're just taking a risk view of the basin and what's likely to happen. So it could come from Alberta, but it would certainly enhance the project if we're able to capture volumes from Alberta, BC border from a connecting system there. Again, our system is just the Alberta-based solution.

[Robert Michael Kwan, MD & Energy Infrastructure Analyst]

Right. Understood. And maybe just to finish then, turning to Marketing and specifically for Wildhorse, have you hedged out any of that in the second half or just as a new facility? Are you leaving it open to make sure it runs smoothly up from an operational perspective to give you confidence to deliver product in the future?

[K. James Urquhart, Senior VP & Chief Commercial Officer]

Yes, Robert. No. I can verify we haven't hedged anything out of Wildhorse. And just to remind everybody that the value of Wildhorse, the players that are leasing capacity out of Wildhorse are more traders and blenders, right? So if there's contango in the market, which there isn't right now, they -- certainly, that would be within their toolbox to be able to realize value. But traditionally, that terminal would turn products monthly, and it would be as a result of blending activities. That is the way people make money out of Cushing.

[Operator]

And your next question comes from the line of Elias Foscolos with Industrial Alliance.

[Elias A. Foscolos, Equity Research Analyst]

A little bit of a follow-up, I guess, on Rob's question. I wanted to maybe dive into the G&P segment. We do have -- or you printed an improvement in operating margin, improvement of $20 million to $30 million run rate in the future. I'm wondering -- although you sort of printed the number, how do you feel about that as you are partway -- more than partway through it? Do you think that might be trending towards the upper end, middle end? And would you give an update at some point?

[Eileen Marikar, Senior VP & CFO]

Thanks, Elias, for the question. So far, everything is trending according to plan. As we've said earlier, we are starting to see the benefits as these plants have started to shut down and we're consolidating volume and those operating costs are coming out of our system. So we really expect to see the majority of that benefit by the end of the year and to be well within that range.

[C. Dean Setoguchi, President, CEO & Director]

Yes. I think we're probably...

[Elias A. Foscolos, Equity Research Analyst]

And...

[C. Dean Setoguchi, President, CEO & Director]

Elias, sorry to interrupt. Yes. I think we're probably going to be more towards the lower end of the range. And some of that is because some of our optimization work that's going to be done in 2022. So that savings is going to be ongoing. The other thing I'll mention is we refer to that reduction. It's with controllable costs. So as you heard from Brad earlier, obviously, things like power, there is only so much that we can mitigate exposure to rising costs. So it's just mainly our controllables that we're addressing.

[Elias A. Foscolos, Equity Research Analyst]

Great. Thanks for that color, Dean. I understand increased volumes potentially and all sort of offsets like power, but I was simply trying to use calibration points off the number of plants that are shut down and being the analyst, being very high level, using that as sort of a ratio. But I appreciate the color.

[Operator]

At this time, there are no further questions. Do you have any closing remarks?

[Dan Cuthbertson, Director of Investor Relations]

This is Dan Cuthbertson, and just thank you all again for joining us today. Feel free to reach out to the Investor Relations team if anyone has additional questions or context that they're seeking. Have a great day, everybody.

[Operator]

Thank you for participating. This concludes today's conference call. You may now disconnect.