Keyera Corp

TSX:KEY

Earnings Call Transcript 2022-Q1

[Operator]

Good morning. My name is Grant, and I'll be the conference operator today. At this time, I would like to welcome everyone to Keyera Corp.'s first quarter conference call. [Operator Instructions]

I would like to turn the call over to Calvin Locke, Manager of Investor Relations. You may begin.

[Calvin Locke; Manager, Investor Relations, executive]

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; Jarrod Beztilny, Senior Vice President, Operations and Engineering. We will begin with some prepared remarks from Dean and Eileen, 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 turn the call over to Dean.

[C. Setoguchi, executive]

Thank you, Calvin, and good morning, everyone. As shared at our recent Investor Days, I'd like to start today by reiterating why Keyera is well positioned to generate strong investment returns for decades to come.

First, our business is strong and will remain in high demand. We have a fully integrated value chain that plays an essential role in providing the world the energy it needs.

Second, our continued focus on financial discipline is core to our success, a fact highlighted by our successful navigation of the past 2 years of pandemic uncertainty.

Third, we have clear visibility on near- and long-term growth. We're forecasting a 6% to 7% compounded annual EBITDA growth rate from 2022 to 2025 from our fee-for-service business. In the first quarter of 2023, our KAPS project comes online and will provide an additional platform for long-term growth.

And lastly, we are uniquely positioned to create a strong energy transition business. Our low-carbon hub strategy will leverage our existing assets and advantaged land position, expertise and collaborative relationships. We aim to decarbonize our business and to help our customers decarbonize theirs.

Our business is positioned to produce near- and long-term value for shareholders, and our team continues to find opportunities to drive returns in all 3 business segments.

In our Gathering and Processing segment, we continue to increase competitiveness and optimize returns. In the North region, our Pipestone gas plant is effectively full, and we are progressing opportunities to expand its capacity. At Wapiti, we expect to be utilizing our Phase 2 capacity in the second half of this year. And in the South region, we're seeing areas of volume growth as producer activity continues to increase.

In our Liquids Infrastructure segment, we see continued high demand for all services, including near-record volumes flowing through our industry-leading condensates system during the quarter, supporting a stable cash flow and additional marketing margins. Our Fort Saskatchewan fractionation capacity remains fully utilized. And with KAPS soon to be online, we believe we're well positioned to expand our fractionation capacity with appropriate contractual support.

Our Marketing segment delivered another strong quarter, a result of continued strength in commodity pricing and a 12% year-over-year increase in sales volumes. Eileen will talk about our updated 2022 Marketing guidance in a few minutes.

Moving on to capital projects. KAPS is now nearly 70% complete and is progressing on schedule. This project is a game-changer for Keyera. And for our customers, it's a long awaited and much needed competitive alternative.

On ESG, we'll be releasing our second annual ESG report this fall. And in the fourth quarter, we'll begin supplying 10% of our total power needs via solar energy.

We announced in the quarter that we are collaborating with Shell Canada to develop potential low-carbon projects in Alberta's industrial heartland, leveraging our existing assets and adjacent lands. This opportunity supports the collective decarbonization ambitions of Keyera and our many industrial neighbors.

We're pleased with the progress we made in the quarter, and we look forward to continue to invest our strategic priorities for the remainder of the year.

I'll turn it over to Eileen to provide an update on our first quarter financial performance.

[Eileen Marikar, executive]

Thanks, Dean.

For the quarter, adjusted EBITDA was $257 million, compared with $225 million for the same period in 2021. The year-over-year increase was due to higher contributions from the Marketing business.

Net earnings were $114 million, compared to $86 million for the same quarter in 2021.

Our first quarter dividend payout ratio was 59%, and our trailing 12-month payout ratio was 62%, within our targeted range of 50% to 70%.

We continue to maintain a strong financial position, ending the quarter with a net debt-to-adjusted EBITDA ratio of 2.5x on a covenant basis. This is at the low end of our target range of 2.5x to 3x.

Now moving on to segment financial performance, where higher volumes through our integrated value chain contributed to the solid start to the year. The Gathering and Processing segment delivered a realized margin of $77 million, compared to $79 million for the same period last year. These results were offset by 22 days of downtime at our Wapiti gas plant, which impacted margins by approximately $10 million in the quarter.

Our Liquids Infrastructure segment delivered realized margin of $105 million, consistent with the same quarter of 2021.

The Marketing segment delivered a realized margin of $103 million, compared to $61 million in Q1 of 2021. This strong result was supported by the continued strength in commodity pricing and the benefit of low-cost butane supply from the 2021 contracting year.

Moving on to our guidance update. For 2022, we now expect realized margin for the Marketing segment to range between $300 million and $340 million, up from previous guidance of $250 million to $280 million. The increase is due to strengthening motor gasoline and octane demand that benefit our iso-octane margin.

As a result of higher Marketing contribution, we now expect cash taxes for the year to range between $30 million and $40 million, increased from $15 million to $30 million.

All other previously disclosed guidance remains unchanged.

I'll now turn it back to Dean.

[C. Setoguchi, executive]

Thanks, Eileen.

In closing, the macro outlook for Canadian energy continues to be positive. Near-term signals include high demand for oil, natural gas and natural gas liquids, driven by expanded export capacity and fuel source switching. The longer-term outlook is equally positive. LNG Canada's startup in 2025 and petrochemical industry growth puts our basin and company in a very advantageous position.

Against this backdrop, I feel confident in saying Keyera is well positioned to drive DCF growth and provide a path to sustainable dividend growth.

On behalf of Keyera's board of directors and management team, I'd like to thank our employees, customers, shareholders and other stakeholders for their continued support.

With that, I'll turn it back to the Operator for Q&A.

[Operator]

[Operator Instructions] Your first question comes from Rob Hope from Scotiabank.

[Robert Hope, analyst]

I want to start off on KAPS. Your competitor on that project has seen some contracting wins up in Northeast BC. Were these volumes that you were targeting? Or how has your contracting outlook changed for KAPS in the recent weeks and months, if it has at all?

[C. Setoguchi, executive]

Rob, it's Dean. And thank you for the question. This is not surprising to us at all. I mean, we're talking to the same players. I think sometimes people assume that it's all or nothing. And for most producers, they want an alternative. So they want redundancy for their production. They want competition. Our pipeline is a new pipe. So reliability should be very good. So not necessarily do they put all of their eggs into one basket, so to say. They split it out. And so I fully expect for most producers, some will go to our competitor and some will go to us.

So again, we're not surprised. We have signed contracts in BC, and we're going to continue to forge down that path until we have sufficient volumes to sanction.

[Robert Hope, analyst]

I appreciate the color. And then just taking a look at your Northern G&P assets, Pipestone was above nameplate capacity in March. Wapiti seems to be trending in the right direction there. How are you thinking about the volume outlook and then how much you could debottleneck that system, whether it just be at Pipestone or, longer term, some other solutions?

[C. Setoguchi, executive]

I mean, the great thing is that we're in a very highly economic location. And as a result, there's a lot of activity around us from many producers. So we see opportunities. As mentioned earlier, we are working on the expansion of our Pipestone gas plant. We do see opportunities to utilize more from the second train of capacity that we have at Wapiti. So we should see more volumes in that second train in the second half of this year.

So yes, I mean, all the -- everything is trending in a positive direction, and it's because economics are just so robust and we're located in a great area of the Montney.

[Operator]

Your next question comes from Patrick Kenny from National Bank.

[Patrick Kenny, analyst]

I know it's still early days, but would you have an update on the scope of your involvement in the Atlas CCS Hub with Shell? I'm just curious if you've been able to fine-tune your role in the partnership or if you've been able to identify any specific investments that you'd be looking to undertake over the course of developing the hub.

[C. Setoguchi, executive]

It's still early days. But as we mentioned, a lot of what we're centering our discussions on is around carbon, like CCS, and hydrogen. And you probably would have saw, Pat, that Shell was awarded forest space rights last month. So that's very positive in terms of, again, carbon capture and also advancing their hydrogen project. So again, we continue to collaborate with them, but we still have a ways to go here before we have anything definitive.

[Patrick Kenny, analyst]

Got it. And then with respect to the balance sheet, any update on your desire to sell some noncore assets over the next year or so, perhaps the quantum of proceeds you'd be looking to bring in ahead of KAPS coming online? Or on the flip side, might you be more inclined to hang on to these assets now that you have greater visibility on Marketing continuing to generate outsize earnings this year?

[C. Setoguchi, executive]

We don't have any specific guidance on that front, Pat. But I think consistent with what we said last quarter is that our objective is to always continue to high-grade our asset base and be very focused. So some of the assets that may have made sense historically may not make sense in the future. So we're going to continue to high-grade our asset base, and that will be an ongoing process.

[Patrick Kenny, analyst]

Got it. Last one from me, if I could, just with respect to the operational challenges at Wapiti. Could you just remind us what might differentiate the Phase 2 facility or what might need to be implemented on the second unit to ensure that you limit the unplanned downtime that you've experienced at the base plant so far?

[Jarrod Beztilny, executive]

Thanks for the question, Pat. It's Jarrod here. I'd say we've learned a lot of Wapiti in the first 2 years of operations. So we're comfortable that we've put the changes in place on both trains such that we do bring the second one on here in the back half of the year that we can be reliable.

[Operator]

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

[Robert Catellier, analyst]

I wondered if you could talk a little bit more about the outlook for our frac expansion. It seems like capacity has been tight for quite a while. And so is the frac expansion contingent on securing Zone 4? Or is there something else that's a bottleneck there?

[C. Setoguchi, executive]

So thanks for the question, Robert. I wouldn't say that our frac capacity is contingent on Zone 4. Certainly, Zone 4 would help with respect to contracting volumes. But as you point out, just fundamentally in the basin there is a tightness right now with respect to frac capacity relative to demand. And we continue to talk to our customers with respect to how we might be able to have contractual support to expand the fractionation capabilities of our Fort Saskatchewan asset. That might come in various different forms. But obviously, the focus right now is trying to get a Frac 3 expansion fully contracted and ultimately sanctioned.

[Robert Catellier, analyst]

Okay. There was a decline in the volumes in the North region. I wonder if it's possible to give a comment as to how much of that is due to the outage of Wapiti versus the Blueberry River First Nations issue? And just in general, how are producers viewing the likelihood of a positive resolution on that First Nations issue when looking at their capital plans?

[C. Setoguchi, executive]

Maybe with respect to, I think, the second part of your question is the Blueberry First Nation, we do follow that. And what we're hearing is that there's just more and more confidence that this is going to get resolved. I think some producers are thinking in the second half of this year. And I guess nothing is done until it's done, but there seems to be growing positive sentiment that that will be resolved.

But as we said before, I mean, I think that the Blueberry community is just one of many on both sides of the border. So it just means that we should be all, as an industry, making sure that we include them in our developments and seek input and build those relationships, which I think our industry has come a long way and, certainly, we have as a company as well.

So I really believe that we're heading down the right path, and we'll have a resolution. And whether it's second half of this year or next year, I think it's within range.

And I think you were just talking about volumes in the North. And I would say most of the volume loss in the North would have been at Pipestone while we were down for roughly 22 days. Sorry, Wapiti. At Wapiti, keeping in mind that when our plant is down for 22 days, there is a period of time to get the production back up. So it's probably over a month where we didn't have sort of steady volumes. So that had a significant impact on our volumes in the North.

[Robert Catellier, analyst]

Okay. And then a last question from me is just on capital allocation. And when you're looking at the possibility of getting back to dividend growth, obviously, KAPS is a big component of that and having that in service. But I'm wondering how the -- whether you need to see stability in the inflationary environment before you would raise the dividend. In other words, if there's still pressure, uncertainty on interest rates and maintenance capital costs and other operating costs, if you'd need to see that settle down before you'd make a decision on future dividend growth.

[Eileen Marikar, executive]

Thanks for the question. I think I would just take it back to a lot of what we said at Investor Day. Our top priority is to get the balance sheet back to our target range, and we see that in 2023. And given the strength in the Marketing guidance that we put out, we see that coming down faster.

And then once we get that back in the range, really it's the balance of those priorities, right, between returning cash to shareholders, which is really important to us, as well as growth. So really, those are the 2 things that we're going to continue to balance.

[Operator]

Your next question comes from Andrew Kuske from Credit Suisse.

[Andrew Kuske, analyst]

Maybe if you could give us some insight on just what you're seeing on labor availability and also labor productivity on the projects you have in the queue right now.

[Jarrod Beztilny, executive]

Andrew, it's Jarrod. I can speak to that. It's certainly a tough environment I think across projects and operations in terms of labor availability, but we haven't seen a significant impact to the point that it's put us off schedule or significantly different than what we've seen or we communicated on the cost front.

[Andrew Kuske, analyst]

And maybe not to put words in your mouth, but I guess this sort of cycle pales into comparison the past sort of cycle we saw from, say, '03 through '07, where things got really heated.

[Jarrod Beztilny, executive]

I would agree, yes.

[Andrew Kuske, analyst]

Okay. That's helpful. And just maybe if we look at your core business on the storage side, do you anticipate in the future maybe being a bit more dynamic with your storage usage, given some of the competing pulls on NGLs in the marketplace? So Heartland coming up and running, some export efforts that are going on by others within the basin, do you think about being a bit more tactical at times with the storage to really support the other parts of your business on the Marketing side, like AEF and others?

[C. Setoguchi, executive]

We always use our stores strategically. I mean, it's a huge advantage to us, and balance every product whether it's operationally or commercially. But Jamie, I don't know if you want to add anything?

[K. Urquhart, executive]

Yes. No, Dean nailed it. I mean, over the last few years, in particular, there's been lots of opportunities to use those caverns for different [ spec ] commodity and also from [indiscernible] as well. So I look at the Marketing team and their access to the storage and the flexibility of the storage at KFS. One of the main reasons why we've delivered the results that we have is because of the ability to maximize the value of the storage we have available to us.

[Andrew Kuske, analyst]

So then the follow-on to that would really be, as you expand with KAPS and then frac into the future, how do you think about the incremental storage that you need for your own account to really help support your expanded operations?

[K. Urquhart, executive]

The way we look at it right now is that, and we've said this before, we've telegraphed our return expectations, excluding those downstream benefits. But I always want to remind the market that there's meaningful downstream benefits of having more product running through our system.

Right now, we've got a cavern that's coming in service later this year. And with that cavern, we're well positioned. We have sufficient storage to be able to execute our growth, anticipated growth as a result of KAPS.

[C. Setoguchi, executive]

Just to add to Jamie's comment is that we have been adding storage capacity over the last several years and including the one that's coming on. So we feel that we're very well positioned.

[Operator]

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

[Robert Kwan, analyst]

There's been a lot of talk around expansions, whether that's Pipestone, KFS. I'm not sure if there's anything else material you're looking at. But I'm just wondering what feedback are you getting from customers right now on their willingness to sign long-term take-or-pay contracts? You mentioned your target of being fully contracted on Frac 3, which is a nice change in strategy, but it's also a tall order.

[C. Setoguchi, executive]

Robert, you know what? It's the laws of supply and demand. And when you get to -- when demand exceeds supply and something has to get built, obviously, at that point, your customers are more willing to underpin new investments. And I think we're certainly getting very close to that range for frac. And the same thing for a place like Pipestone, where capacity is very tight.

I would say that, generally, the industry is more conservative in terms of how they invest money, including us. So we certainly need to have a lot more contractual backing before we're willing to make more investments. And I think that producers understand that as well.

[Robert Kwan, analyst]

So Dean, you highlighted exactly the way you've changed your thinking. And I guess, where the question was going was producers, not necessarily around contracting specifically, but producers have also changed the way they're approaching spending money on the drill bit instead. Delevering has been a big theme. Buying back stock and capital returns have been a big theme. So are you sensing, though, a change in the way they're approaching contracting? Or is this just, like you said, we're going to get to a point where something is going to have to be done and they're going to have to sign on the bottom line?

[C. Setoguchi, executive]

I guess maybe putting it another way, if a producer believes there's risk in the certainty of service in terms of delivering their growth plans or even existing volumes that are coming up for contract, they are going to remove that risk. And so on that basis, with the more robust outlook that we see for the industry, I think, especially for core basin infrastructure, like fractionation, I think that there's a growing willingness to sign longer-term contracts to underpin that.

[K. Urquhart, executive]

I think the other contributor to that willingness, Robert, would be access to markets and connectivity. And we believe we've got the best connectivity to get access to market of any of the fractionation facilities in Western Canada.

[Robert Kwan, analyst]

Got it. And do you think then on the contracting that it's going to be a small number of producers doing that? Or do you think it's going to be a much larger kind of consortium taking, well, consortium is the wrong word, but a much larger number of producers taking a smaller amount of capacity just to get it done?

[C. Setoguchi, executive]

I mean, I don't think we can comment on that. But I would point out that for Frac 2, Robert, the same thing. We contracted that in order to build that expansion as well. So it's really no different from the last frac expansion. And I do think that producers can see that that frac capacity is getting tight and they need to make sure they have certainty of service as they look at their growth plans.

[Robert Kwan, analyst]

Great. And if I can just finish with a question on Marketing. You mentioned the underlying RBOB and butane and then just a mention to octane. Obviously, we can see the first 2 on the screens. Can you give us some color as to, it sounds like octane premiums have widened, just some color as to what you're seeing in that dynamic? And presumably, you continue to expect that to be strong? Or is there something that was just a little bit more of a blip, whether it's the first quarter or even here into the second quarter?

[K. Urquhart, executive]

Robert, thanks for the question. As you mentioned, you can see the first 2 components that drive our iso-octane business on the screen. And you can see that based on -- that's based on fundamentals, obviously, that we've seen a lift in '22. But you would have also noticed that we've seen a lift in '23 and '24 as well, albeit not at the same levels.

And that's the dynamics of not only a recovery in demand, but also the availability of supply in North America. And that also ties somewhat into octanes that are very much in demand right now in North America to basically be able to feed that gasoline complex.

And so in '22, structurally, we're quite bullish with respect to where octane premiums are going to be. But I mean, I think it's probably premature to think that we'd see a similar lift in '23, '24. It's possible, but it's too early to tell really with respect to that, how the market will fill that space. We can probably take it offline, but there's lots of ability on the planet to be able to feed the North American market from an octanes perspective if the price gets high enough.

[Operator]

Your next question comes from [ Tan Pham ], from BMO.

[Unknown Analyst]

On that last question and answer, I wanted to confirm, was the Marketing revision mostly driven by the iso-octane premiums that you saw? Or was there something else happening in the second half of the year?

[Eileen Marikar, executive]

Tan, it's Eileen here. The uplift in the Marketing guidance was largely driven by the RBOB-to-WTI spread, the RBOB frac, as we see that strengthen out into the forward curve and again we begin to layer on hedges at that higher level. So that was really what was driving the higher marketing revision.

[C. Setoguchi, executive]

Not in the higher premiums that we're seeing, octane premiums.

[Unknown Analyst]

And can I ask, then there's also a comment around risk management benefiting this quarter, and it sounds like there's a bit of a benefit in the second half. Was that putting on hedges in RBOB in the quarter? That's what the reference was referring to?

[Eileen Marikar, executive]

Yes. I would say, generally, our risk management is in place to protect our downside. And as we see, we protect our inventory, and then we also have the ability to lock in margins going out 24 months. So assuming the liquidity is there, we have the ability. And when we see strong like the RBOB frac, we will take that opportunity to lock in strong margins going into next year. So again, the comment is more just continuing that disciplined approach and protecting [indiscernible].

[C. Setoguchi, executive]

I would say, Tan, that the great thing about our hedging program is as we've been layering in, when we look back relative to 2021, our hedge floors are at a much higher price threshold in 2022 than they were in 2021. So our downside is protected at a higher level. And we're seeing more opportunities like that into 2023.

So I think a lot of people when they look at our Marketing business, they're always trying to match it up to the commodity price environment that we're in. But the other component of it is where our hedge, like our floor price hedges, are in. And again, each year we're able to put them in at higher levels as we're looking at 2022 and 2023, and that's certainly going to help our Marketing business, going forward.

[Unknown Analyst]

And can you also comment how's the composition of Marketing? Is it still tilted towards less octane? Maybe not specifically this quarter, but is that sort of the trend that you're seeing? Or is propane driving more or other molecules?

[C. Setoguchi, executive]

Octane is still the majority. But as I mentioned, the volume of NGLs has increased in our system year-over-year. So all the products are generating higher margins overall.

[Unknown Analyst]

Okay. And maybe to close off on all Marketing related was the extra modest uplift in cash from Marketing. And maybe there's more to come. How do you think about that excess cash? Does it open up maybe share buybacks? You talked about that at Investor Day. Is there more maybe debt reduction first?

[Eileen Marikar, executive]

As we said at Investor Day, really our first priority is to bring the balance sheet back in line within our target. So really, the higher Marketing guidance helps to get us there a lot.

[Operator]

Your next question comes from Linda Ezergailis, from TD Securities.

[Linda Ezergailis, analyst]

Maybe just following on, on looking at your balance sheet. Maybe you can just share with us some updated conversations you're having with your debt rating agencies. I recall that early in 2020, S&P downgraded your debt rating due to a decline in commodity prices and the industry outlook. Any sense that they might rethink that and maybe provide some tailwinds and upgrade you in light of that recent development sooner than they might have historically, to kind of augment all the progress you're making yourself in your business?

[Eileen Marikar, executive]

Linda, thanks for the question. At this point, we continue to have conversations with both rating agencies; S&P, in particular. The positive commodity price environment, our strong Marketing performance, the base business continuing to perform very, very well certainly protects our investment-grade credit rating. I think once KAPS is in service and we continue to increase that take-or-pay on an aggregate, on an absolute basis, I think that continues to help maybe get us back to that BBB bit. That's obviously the goal. But do I expect that change this year? Likely not.

[Linda Ezergailis, analyst]

And another follow-up, with respect to your discussions with producers. Are you sensing any shift in what sort of attributes they're looking at in your commercial agreements with them? Are you seeing more of a propensity for acreage dedications? A tilt towards maybe full value chain path solutions versus discrete services? Can you comment on anything beyond price that producers might be looking for differentiated services?

[K. Urquhart, executive]

Linda, it's Jamie. I think the latter. You hit the nail on the head with respect to, I think, what's differentiated Keyera in the past, and it continues to differentiate us, is that we have the ability to offer a full slate of services in our customer minds. And it's very rare that we would just do one service for a customer. And if it is that that's the case, it's very rare that after we prove the value of our offering that we don't expand that. So I think that's always been the case.

I think part of what the producer is looking for right now is our ability to be flexible and nimble in being able to accommodate new volumes coming on. I think the interconnectivity in our selling facilities really differentiates us and enables us to be able to do that as our customers grow in the South. And you would have seen that result as a result of the significant growth that we've seen in the utilization of our assets in the South as a result of that flexibility.

And similarly, in the North, where we continue to work with our customers to be able to, in a timely manner, be able to facilitate their requirements. And I think that's really a differentiator in light of some of our competitors.

[Linda Ezergailis, analyst]

And maybe just to help us understand kind of your run rate the next couple of years, any rules of thumb you can provide for operating leverage in your Gathering and Processing system in the North and the South, recognizing that it is filling up? But any sense of the white space currently and what that might mean as it fills up, recognizing that you've got some cost inflationary pressures as well, would be helpful.

[Eileen Marikar, executive]

Largely in the South, I mean, we continue to see volumes strengthen. I mean, it's really stabilizing. I think we feel good with what we've done with the optimization. We've taken out the costs. But certainly, there continues to be some inflationary pressure there. But again, it's mainly labor. Power is the other big cost. We do have hedges in place, and we do continue to hedge our power in the North.

[K. Urquhart, executive]

[indiscernible]

[Eileen Marikar, executive]

Yes, the off costs are largely flowed through [indiscernible].

[K. Urquhart, executive]

I'd say, Linda, the thing I'd add to Eileen's comments, which I 100% agree with, is that as we fill up, in the past where we might have done some deals 2, 3 years ago when we had available capacity and so did our competitors, as we fill up, our producers are recognizing that in order to maintain as we do renewals and/or they look to potentially go off of an IT service to a more priority service to ensure that their volumes continue to flow, that they're going to have to take any operating cost risk that Keyera may have and bear it themselves.

The market is fundamentally changing with respect to how we view our business and, ultimately, how producers -- the deals that we are doing with producers, they're fundamentally different, frankly, than a couple of years ago.

[C. Setoguchi, executive]

I think it boils down, to Jamie's point, it's supply/demand. So as there's less supply available or capacity available because demand grows, it gives us opportunity to renegotiate some of our contracts on more favorable terms relative to what we've seen in the last couple of years, with low commodity pricing and particularly the [indiscernible].

I'd say the other thing is that in the [indiscernible] where we've done some fixed-fee deals, we're actually benefiting from the higher utilization of our facilities, because the per-unit costs now are dropping on the operating cost side.

[Operator]

Your next question comes from Matt Taylor from Tudor, Pickering, Holt.

[Matthew Taylor, analyst]

I wanted to start first with the CAP zones for that extension proposal. I just want to clarify, is this -- should the market be thinking of this as a distinct project, where it's going to be supported by additional contracting of brownfield economics? Or is the right way to think about this more of this is going to help underpin the original investment and maybe help you get to the lower end of your returns guidance sooner?

[C. Setoguchi, executive]

It serves both. Certainly, to make the investments, Matt, it has to meet our economic thresholds for Zone 4 stand-alone. But clearly, I mean, the volumes that go into Zone 4 are going to go through the rest of the pipe, Zones 1 to 3. So it's going to benefit the economics of the base project, too. So it's a win-win.

[Matthew Taylor, analyst]

So I guess then what we should be expecting is -- I know you've talked about maybe the later part of this year into next year as kind of a distinct announcement, and then whether it's more contracting or what-have-you and then ultimately getting to a range within your range, I think it was 10% to 15% return on capital, much sooner, to your point, where it helps the economics of the whole project. Is that the way to think about that?

[C. Setoguchi, executive]

That's right. I would say that what we're looking to do commercially is to underpin enough volume and cash flow to commercially sanction the project. And then it will be subject to sort of CER approval next year and other items. So it's kind of a 2-stage approval.

[Matthew Taylor, analyst]

And do you -- will you be dealing directly with customers themselves? Or is the opportunity more dependent on NorthRiver finishing their pipe in Northeast BC and then having the optionality to either go into yours or the competitor's pipe? Just wondering if this opportunity is more so just helping filter volumes on a competitor's pipe or you're actually finding more customers in Alberta that might use that competitor's pipe and then contract you on the back half?

[C. Setoguchi, executive]

I mean, I think it's a good question. Clearly, we see the largest opportunity in Northeast BC and off of NorthRiver Midstream and their pipeline project. I mean, both projects are independent pipeline systems. But again, it makes logical sense for the volumes that they contract in their pipe to connect into ours at the Alberta border, because their customers will want a competitive alternative. If it goes into our competitor's pipe, there's no reason for NorthRiver to build theirs, because it doesn't end up being a competitive alternative.

So we see opportunity in BC, but we also see opportunity on the Alberta side of the border with Zone 4 as well. So there's opportunities in both sides.

[K. Urquhart, executive]

I think to add to that, it's a parallel conversation, Matt. It's not like we're waiting for NorthRiver to have their project and then start talking to those customers.

[Matthew Taylor, analyst]

Okay. Okay. That's great. And then one last one, if I may. Does the added financial flexibility here, I know, Eileen, you're talking about getting down to your targeted range sooner based on the better Marketing outlook here, but does it change your view on either potentially purchasing the other 50% of KAPS or if there's other assets that you're seeing in the basin that might help you get to some of the downstream growth sooner?

[C. Setoguchi, executive]

Yes. I mean, as we said at our Investor Day, Matt, 6 weeks ago, is that we are the operator of KAPS. So from a commercial perspective, operational and project execution perspective, we drive this project. And so the other half isn't a must-have. We would sort of treat it as we would any other acquisition opportunity which would have to meet our rigorous capital allocation criteria. So would we consider it? Yes, but it's not a must-have.

[Operator]

[Operator Instructions] There are no further questions at this time. Please proceed.

[Calvin Locke; Manager, Investor Relations, executive]

Thank you all again for joining us today. Please feel free to reach out to our Investor Relations team for any additional questions. Thank you.

[Operator]

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.