Keyera Corp

TSX:KEY

Earnings Call Transcript 2022-Q2

[Operator]

Good morning. My name is Grant, and I will be the conference operator today. At this time, I would like to welcome everyone to Keyera Corporation's Second 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 of 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; and 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'd like to remind listeners that some of the comments and answers that we will give you today relate 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]

Thanks, Calvin, and good morning, everyone. We continue to operate in an environment of sustained high energy prices driven by tightened supply and continued strong demand. This has become even more pronounced with the global drive towards energy security. Keyera is well positioned to benefit from these tailwinds. Our fully integrated assets and logistics expertise allow us to efficiently connect customers' NGL production to the highest value end markets. This unique advantage allows us to maximize value for our customers and deliver strong stable returns for shareholders. This quarter saw strong performance from all 3 of our operating segments. As a result of record iso-octane margins, today we increased our Marketing segment guidance. We now expect to deliver realized margin of between USD 380 million and USD 410 million for the year. This is up from the previous guidance of $300 million to $340 million and puts us ahead of the record margin of $373 million achieved in 2019.

The Gathering and Processing segment set a new quarterly record for realized margin as our customers continue to steadily grow production. Contributing to these results were record throughput volumes at our Pipestone and Wapiti gas plants and strong performance across our South region assets. As we continue to see increased demand from producers in the northern region, we're evaluating opportunities to expand the capacity of our Pipestone gas plant. At Wapiti, we recently began utilizing the second processing train to [ combat ] increasing demand for our services. Moving to our Liquids Infrastructure segment. This business delivered another steady quarter backed by continued strong performance from our fractionation, storage and condensate transportation services. We continue to engage with customers to gather support for an expansion for our fractionation business.

We're competitively advantaged to efficiently add fractionation capacity given our existing footprint, including extensive storage and connectivity, to high value NGL markets. Our soon-to-be completed KAPS project provides the next layer of contracted fee-for-service cash flow growth. The project is now over 70% complete and is expected to be operational at the end of the first quarter of 2023. Costs for the projects are now estimated to be approximately $900 million net to Keyera. The increase in costs is mainly driven by weather-related impacts. KAPS is a game changer for Keyera as it is a missing link in our value chain. It will connect NGLs from our Montney G&P business and other third-party facilities to our core Liquids Infrastructure business in Edmonton and Fort Saskatchewan. It also provides meaningful future growth opportunities like our Zone 4 expansion, which would extend the pipeline to the BC border.

Recently, we were pleased to see the Competition Bureau take decisive action to protect competition in our industry and the interest of customers as it relates to our KAPS pipeline project. This decision reinforces the competitive value of KAPS and a strong desire from the industry for an alternative NGL transportation solution.

I'll turn it over to Eileen to provide more information on our second quarter and updated 2022 guidance.

[Eileen Marikar, executive]

Thank you, Dean. In the second quarter, adjusted EBITDA was $316 million compared with $224 million for the second quarter of 2021. The year-over-year increase was largely driven by strong contributions from the Marketing segment where iso-octane margins achieved a new quarterly record. We continued to preserve balance sheet strength ending the quarter with a net debt to adjusted EBITDA ratio of 2.3x, which is below our target range of 2.5x to 3x. This calculation is consistent with our debt covenants, which exclude our outstanding hybrid debt. Moving on to our guidance for the remainder of the year. As Dean mentioned, for 2022 realized margin for the Marketing segment is now expected to range between USD 380 million and USD 410 million, up from the previous range of $300 million to $340 million. The increase takes into account the 6-week planned turnaround of AEF beginning in mid-September and the return of motor gasoline and iso-octane premium to more normalized levels compared to the record pricing achieved in the second quarter.

The strong cash flow being generated in the Marketing segment enables us to fund infrastructure projects like our KAPS pipeline project and enhances our ability to consistently deliver superior return on invested capital. As a result of higher Marketing segment margins, the cash tax expense for 2022 is now expected to range between USD 55 million and USD 65 million, up from the previous forecast of $30 million to $40 million. Maintenance capital expenditures remain unchanged with a range of $100 million to $120 million. Growth capital expenditures for 2022 are now expected to be between $680 million to $720 million. Previously $620 million to $660 million excluding capitalized interest. The increased growth capital guidance is mainly due to the higher estimated cost to complete the KAPS project. The majority of KAPS related costs are forecast to be incurred in 2022. Given strong performance from our business, we now expect to exit the year with net debt to EBITDA within our target range of 2.5x to 3x.

I'll now turn it back to Dean for closing remarks.

[C. Setoguchi, executive]

Thanks, Eileen. Surrounded in financial discipline and with several strategic growth opportunities underway, Keyera is well positioned to continue to generate strong shareholder value for decades to come. On behalf of Keyera's Board of Directors and the 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]

First question is on the G&P business and the record results that you had there despite the fact that you did have some outages. Can you help us better understand where the strength was in Q2, how much of a drag the outages were and kind of what I'd characterize as a run rate number there would be? And I guess secondly there, like are you seeing the ability to move up fees either kind of in the quarter or longer term?

[C. Setoguchi, executive]

Eileen, do you want to just speak to the outages?

[Eileen Marikar, executive]

With regard to the outages, it was approximately 15 days. We estimated around $5 million for Wapiti from an EBITDA impact in the second quarter and then we had the turnaround at Simonette as well, which did go on a little bit longer than expected. I think it was 14 days planned, but it went on for about 23 days.

[K. Urquhart, executive]

So Rob, to your first question with respect to where we're seeing the uplift in volumes. Frankly, it's across our entire asset base. Wapiti and Simonette, we mentioned the second train at Wapiti having clear line of sight that we're seeing some positive growth from the producers behind that facility. At Pipestone, we're full and so obviously we referenced that we're looking at a potential expansion there and having some constructive conversations with producers that would support that.

But really more importantly and well, just as important I think in my mind is in the South. Starting to see the fact that with our integrated facilities getting close to getting to capacity on those facilities as well. Looking at some minor capital cost to debottleneck those facilities that we believe will be required in the near term.

And to your point on fees, yes, definitely as we're filling up and the demand for our services and contracts roll off, which some do early in '23, there is an opportunity to garner higher fees. When we negotiated those deals, there was ample capacity in our facilities and competitors' facilities that drove us to probably offer fees that at this point we would see some opportunity to have those fees go up going forward.

[Robert Hope, analyst]

All right. And a shorter question. Dean, in your message to shareholders, you noted that with the conclusion of the KAPS sales process, you would look to continue your strong track record of collaborating with partners. Does this infer or imply that you're not interested in the second half and you prefer just to maintain your ownership and yield the benefits downstream of the volumes?

[C. Setoguchi, executive]

I guess you get paid to ask questions like that. I mean we're not going to comment on anything related to M&A. But generally we just want to remind everyone that we are the operator of that project from a construction and operation and a commercial perspective and we do have a very strong track record of working with partners. So should we have a different partner on our KAPS project, we would look to work with them as well.

[Operator]

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

[Robert Kwan, analyst]

If I can start with some questions here on KAPS. Just in terms of the new cost, can you kind of just -- I know you broke down some of the reasons, but there was contingency in the old numbers. Is there a contingency in the new numbers? And just at a high level, how would you portray this new cost estimate versus the old one? Is it kind of just realistically where you think you are or do you view this now as a conservative estimate to complete?

[C. Setoguchi, executive]

I'll let Jarrod respond to that. Jarrod?

[Jarrod Beztilny, executive]

There's contingency in the estimate that would be difficult to any project like that. I'd say I would characterize it as what we've learned throughout the project and what we think we have left to go. So when we last spoke to you, we've learned a lot since. Weather has been a challenge for us and continues to be our largest risk and we've been doing everything we can to manage that.

[Robert Kwan, analyst]

Got it. And then I don't know if this is for Eileen and it may be related to KAPS and a bit of the last question. Just the statement you made that you now expect net debt to EBITDA to exit the year in the 2.5x to 3x range. Is that just based on the growth capital plan that you've put forward and no M&A or is that a more absolute statement that you fully intend to exit in that range based on everything that you're planning on executing to the end of the year?

[Eileen Marikar, executive]

I'd say that is an absolute statement, quite confident that we will exit the year with our leverage within our target range just based on the very strong Marketing results again, which help us to fund projects like KAPS and given everything that we've sanctioned to date.

[Robert Kwan, analyst]

Got it. And then I just finish here on Marketing. How much of the remaining margin in the second half has been hedged out? And then just on your statement that mo gas pricing and iso-octane prices are back to historical levels. By historical levels, is that kind of the levels that you would see as being consistent with the prior $180 million to $220 million range or is that something different?

[Eileen Marikar, executive]

So we really don't disclose the percentage that we're hedged. I would say we are well hedged in the second half of the year. The one thing I'll remind you of is we do have the AEF turnaround so that starts mid-September and so that will impact both the third and fourth quarters. As it relates to the motor gasoline, I would say we had updated our base guidance, right, to the $250 million to $280 million. I'd say the motor gasoline pricing is still relatively strong, but certainly not the peak highs that we saw in May and June.

[K. Urquhart, executive]

Sorry. It's at the higher end of the historical range right now, Robert.

[Robert Kwan, analyst]

Okay. So it's consistent with the revised long term not the original long term and as you mentioned, it's the high end of the revised long term is kind of where we're sitting right now?

[K. Urquhart, executive]

Correct.

[Operator]

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

[Robert Catellier, analyst]

I'm just going to go back to KAPS again and I guess reiterate the question. What is the level of confidence in the revised cost figures given there's still about $260 million to Keyera left to spend? And is there anything that we should take away from the fact that the estimate has moved from a range to now a point estimate? Does that imply a higher level of certainty?

[Jarrod Beztilny, executive]

Robert, it's Jarrod again. What I'd suggest with -- one of the things we're trying to characterize here really is that the range that we previously put out there given the experience we've had here through the winter, the spring and the summer is that we don't think that the bottom end of that range is achievable anymore. So it's really guiding folks to the number that we've put out now.

[C. Setoguchi, executive]

The other thing, Bob, is literally by every week and every month that goes by, our confidence increases because there's just less and less of the project to execute on, right? So anybody who lives in Alberta knows that there's just wild weather swings and we had a really wet sort of spring and early summer here. So thankfully, conditions are a lot drier now so hopefully those conditions will continue.

[Robert Catellier, analyst]

And then just how far along are you in your discussions for a Pipestone expansion and do you view that as direct competition to the other expansion that's being discussed in the industry or because of your customer composition, you feel it's a distinct and different project?

[C. Setoguchi, executive]

Our facility is very, very well located and we have lots of interest in capacity at that facility. So we are again advancing opportunities to add capacity in that facility, which we think we can add capacity at a very competitive cost. So we feel very confident on that opportunity.

[Robert Catellier, analyst]

Okay. Last one for me then is just with the high commodity prices and the backwardation, how is that impacting your ability to hedge or is it causing you to tweak the hedging strategy at all?

[Eileen Marikar, executive]

We continue to hedge our inventory. I think that's something that again month to month is typically how we have been managing it largely because of the backwardation. The other pieces are we'll try and lock in the margin especially when we see very strong the RBOB cracks or the WTI pricing. Those are things that our risk management policy allows us to go out 24 months and the liquidity certainly is there. So we have been layering in hedges at pretty strong value.

[C. Setoguchi, executive]

Yes. I would say just to add on to what Eileen said is that we've hedged out -- at this point being midyear, we've hedged out to 2023 at higher levels than we would have historically and we've taken advantage of some very strong pricing. The other thing that we've also modified some of our hedging strategy is to use some collars where again we're protecting our floors, but we're giving us some upside room as well. We've adjusted a bit, but we do still protect our margins.

[Operator]

Your next question comes from Andrew Kuske from Credit Suisse.

[Andrew Kuske, analyst]

I guess it's a question for Dean to start off with. Just how do you think about the frac capacity positioning and prospective developments on a go-forward basis really by yourself and just competitors in the next few years as sort of the chess match gets underway on who builds first? How do you think all that starts to play out?

[C. Setoguchi, executive]

Yes. I mean, well, first of all, frac capacity is very, very tight. We're using every barrel of capacity that we have in the entire system, which is obviously great for our business. So yes, we definitely see demand for future frac capacity to be built. We certainly have -- as I said in my earlier remarks that we have a very competitive footprint because we have a brownfield site. We have all the storage and all the connectivities on that site. We have the people to run it. So we are as advantaged as anybody in the industry to add more capacity. Obviously we have to work with our customers -- continue to work with our customers to get the contracting to back that kind of investment and we certainly have a high level of interest already. So it's something that we continue to work towards and again I think it's a great opportunity for us.

[Andrew Kuske, analyst]

I appreciate that. And then maybe just on a bigger broader basis when you think about the recent agreement between LNG Canada and Coastal GasLink and then just sort of the outlook on a longer-term basis for LNG movements off the coast and I mean obviously we've been sort of talking about this for a decade plus at this stage. But when you think about the near term and then the maybe medium and longer term, what's sort of the outlook for KEY? Do you wind up with a view of maybe prices get sloppy for a little bit or they tighten up and then there's a more robust supply meaning a more robust opportunity set for processing and frac. I guess color on the short term, medium term and longer term would be appreciated.

[C. Setoguchi, executive]

Well, near term, as you heard from Jamie, we're seeing a lot of activity. I'd say near to midterm we're seeing a lot of activity in our basin. That's funny over the last year when everyone kept on telling us that there's going to be no growth in our basin, but that's not what our customers are telling us. And when I'm reading all of our customers' quarterly reports, everybody is projecting some growth and they keep on increasing their targets. So if you look at dry gas in Western Canada, it's increased from about 16 Bcf last year to over 17 Bcf a day today and with expansions on the NGTL system that are going to be in play later this year, which is about 1.5 Bcf day. Canada LNG is licensed for 4 Bcf a day. So I think there's a very strong potential for them to expand and sanction that second -- the third and fourth train at that site. And when you look at what's happening in the world, the demand for LNG obviously is very strong and a lot of it's tied as well to security of supply.

So you know what, I think there's unbelievable opportunity for our responsibly produced gas that's from Western Canada to supply the world with some of that gas. And whether it goes off the West Coast or whether we displace more gas that gets exported from the U.S. Gulf Coast or East Coast, it's all part of a North American system that will export more LNG over time. So what does that translate to? I think in the short and long term I think it translates to a lot of great opportunities for infrastructure and again we're already seeing it already. We're seeing record volumes in a lot of parts of our business on our liquids business and also our G&P business and we think that's going to continue. There might be a slight lull as the producers try to gear up for Canada LNG coming into service and to bring on all that gas ahead of that project being online. But I think that would be very short and obviously very temporary in nature. That would be my sort of view. So again I think that we have a very robust outlook for natural gas.

[Operator]

Your next question comes from Ben Pham from BMO.

[Benjamin Pham, analyst]

I want to first start off with Simonette comments around a potential increase in utilization and maybe even an expansion. Can you talk about will you consider maybe it's more of a large expansion similar to what you did a couple of years ago or is this more potentially a debottleneck?

[C. Setoguchi, executive]

No, just to maybe correct the information. I'm not sure where you've gained that from Ben, but we have ample capacity at Simonette. We have over 200 million a day of unutilized capacity there, and that will be a very well-connected plant, including with our KAPS pipeline system. So we think it's a great opportunity that Whitecap has purchased or is purchasing and closing the purchase of the XTO production reserves and lands in that area, which are in very close proximity to Simonette. And we want to work very closely with Grant Fagerheim and his team to provide an integrated service offering for them to maximize the returns for them and also benefit us as well.

[Benjamin Pham, analyst]

Okay. So the reference to the Simonette produces is Whitecap?

[C. Setoguchi, executive]

Yes. I mean, if you look at the land map and you look at where the XTO lands are, they are in that vicinity and Whitecap has published that in their slide deck.

[Benjamin Pham, analyst]

Okay. Got it. I was thinking about somebody else then. Okay. Maybe going back to KAPS, are you able to comment on progress on contracting efforts over the last quarter?

[C. Setoguchi, executive]

Yes. I mean, our practice is not to provide quarterly updates on our contracting. But I can say that we feel very optimistic with the engagement -- the level of engagement and interest that we have in our pipeline. And we get a lot of questions about some of the announcements that have been made relating to the competing pipeline. And I'd just say that, in general, customers typically want to diversify their service. They do not want to put all their eggs in one basket. And so, they want to have some redundancy. And I think that it's also attractive that we're going to have a brand-new pipeline for -- and I think that obviously has some value from an integrity perspective. So anyway, we feel very confident in terms of our ability to contract KAPS, and we're making some good progress on that side.

[Benjamin Pham, analyst]

Okay. And related to that, you mentioned comments on the Competition Act and limiting Pembina from not sustain ownership. Do you think that's going to limit any other folks out there in Western Canada any more broadly? And at least they can look at KAPS?

[C. Setoguchi, executive]

Well, I mean, first of all, I really commend what the Competition Bureau has done. But I think it really speaks loudly for how all of the customers -- a lot of the customers in our basin really spoke up for the need for this critical piece of infrastructure because it's a basin asset. And in terms of the billions of dollars of developments that are going to occur in the decades to come, this is a key piece of that equation. And again, I think the Competition Bureau spoke up in a big way, but it's because of the feedback that they received from the industry.

[Benjamin Pham, analyst]

Okay. And maybe lastly, I mean, it looks like your marketing upside and delevering down at the lower or 2.3x or below that is basically washing the KAPS increase. I mean, how do you -- like what are your thought about share buybacks into early 2023?

[Eileen Marikar, executive]

Yes. I mean, share buybacks are certainly a tool or an option that we consider, probably more so than in the past. But I think at the end of the day, it'll always compete with growth projects. The way we look at it is, if we have a great infrastructure project with the return and the contract profile that we're looking for, that's where we would likely allocate to first.

[Operator]

Your next question comes from Linda Ezergailis from TD Securities.

[Linda Ezergailis, analyst]

As a follow-up to capital allocation, can you provide us a sense of how you're now recently thinking about a dividend increase and dividend policy, given your confidence in line of sight to completing KAPS?

[Eileen Marikar, executive]

Thanks, Linda, for the question. Yes, I think I'll just keep it pretty general that one of our core financial priorities is to generate cash returns for our shareholders. And we're really proud of that long history of growing the dividend over the long term. As we think about it, the things we try to balance are, of course, maintaining the balance sheet strength and reinvesting in our business and growth and then returning cash to shareholders. So what we're really focused on is growing that DCF on a per share basis and projects like KAPS, as well as continuing to fill the white space in our gathering and processing facilities are going to help us do that and maintaining that conservative payout ratio so that it's sustainable. So again, I think just given the strength of our marketing cash flow when we're set up well from our balance sheet perspective, going into next year, that will be the balance between, again, those other priorities of reinvesting in the business and returning cash. But at the end of the day, the increase in the dividend remains a Board decision.

[Linda Ezergailis, analyst]

And just maybe on a separate note, there's systemic inflation everywhere. Can you give us an update on what you're seeing in the business in your operations? How -- what proportion of your EBITDA or revenues in your G&P and Liquids Infrastructure business have some existing contractual ability to pass through whatever cost to customers? And maybe the nature of where inflation is greatest, including any sort of views on labor availability and productivity contributing to any sort of inflationary pressures?

[C. Setoguchi, executive]

Yes. Maybe just to speak to just general inflation first and operations, I'll just turn that over to Jarrod.

[Jarrod Beztilny, executive]

Yes. Linda, I think we're seeing it like everyone else is, really across all aspects of our business. I'd say, in general, operating costs, it's not really material to us yet. When you speak to labor availability and productivity, again, another issue that we're seeing the same as everyone else. So it is a challenge to find people and keep people, but we're able to manage through it and haven't seen any significant impact outside of -- that's certainly been a contributing factor in the KAPS cost increase.

[C. Setoguchi, executive]

Yes. And just maybe to add to what Jarrod said, as you know, we undertook some significant measures to reduce our cost profile through 2020, 2021. So we feel very happy today that we did that, and it's obviously offsetting some of the effects of inflation that we're seeing today.

In terms of business and contracting, maybe I'll just turn it over to Jamie.

[K. Urquhart, executive]

Yes. So Linda, we do have some fixed fee deals. But we do identify where we would be at risk with respect to some inflationary pressures, particularly on the power side. And so, therefore, we hedge our exposure on that regard. We just view that as risk management across our entire business. Sometimes we focus a lot on risk management, on marketing, but we also look at risk management with respect to other parts of our business when we do fixed fees. We talked a little bit about -- as the market changes and as we go forward, we certainly are focused on having our customer have exposure to inflationary pressures along with us. So that we're not entirely exposed to those pressures. So hopefully, that helps, give some flavor on our future as we look at inflationary pressures.

[Linda Ezergailis, analyst]

Yes. And maybe a bigger picture, another question around value chain, full service offerings. Clearly, KAPS expand the scope of what you can offer along the value chain. What's your latest thinking about further extensions, either getting invested in LPG or potentially expanding AEF or other initiatives to do more along the value chain than you are currently?

[C. Setoguchi, executive]

Yes. I mean, strategically, Linda, we're always looking for opportunities to expand our value chain and also on the downstream side of it. It doesn't mean that we have to own all the downstream facilities, but we want to make sure that we have the most efficient means of connecting to that downstream market. So could there be more opportunities in refined products? And as we look longer-term low-carbon refined products or low-carbon fuels, absolutely. And we have a lot of logistics expertise and marketing expertise and operating expertise in that side of the business. So we want to leverage those skills and advantages, and we think there's opportunities there long term.

[Operator]

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

[Matthew Taylor, analyst]

I want to go back to KAPS. You have the project entering service at the end of Q1 2023 there. Can you give some guidance on the EBITDA ramp in '23 and '24 as it pertains to that slide you have in your deck on the 6% to 7% EBITDA growth through '25?

[Eileen Marikar, executive]

Thanks, Matt. Yes, certainly, there is a ramp. So it would start out smaller in 2023. 2025, we would see more of that cash flow ramp and that was embedded in our 6% to 7% EBITDA growth profile. But not just KAPS, but there was also filling more white space at Wapiti, et cetera, included in that growth.

[Matthew Taylor, analyst]

Maybe just to dig in a little bit deeper there. You had guided to invested capital returns of 10% to 15% or just using multiples of around 10x. So in the first couple of years, are you expecting below that range and then you ramp into that 10% to 15% range over time?

[Eileen Marikar, executive]

Yes, that's correct. It would be something that ramps up into that range. You got it.

[Matthew Taylor, analyst]

Okay. And then on that returns, now that you have an updated stand-alone CapEx estimate. Have you given some thought on updating that 10% to 15% invested capital returns? I guess, what I'm asking is, what's the return profile looking like for that base system with that new stand-alone estimate? And then where could it trend with other expansions like Zone 4?

[Eileen Marikar, executive]

I think maybe just generally speaking, as we look to invest in new investments, we're looking to target towards the higher end of that investment. Again, it's more on that infrastructure. We're looking for that, the longer-term contracts and take-or-pay. Again, just for newer investments as we're looking down the road, what -- whether it's [indiscernible] or Zone 4, or whatever it may be, I think that's how we're thinking about it going forward.

[C. Setoguchi, executive]

Yes, Matt. As it relates to KAPS, I mean, we've been very clear that with the contracting that we have in place today, we aren't in threshold. But as I mentioned earlier, we feel very confident in terms of the outlook for the basin and the discussions that we're having with our customers that -- we believe that we're going to be in that range.

[Matthew Taylor, analyst]

Okay. And then last one for me. I think it was mid last year, you were talking about South region G&P capacity getting up to about 70% by mid this year. Are you still on track to see that? I mean, you've seen some pretty robust volumes in the South region. And are you still tracking to the 70%? Or can we see that getting higher?

[K. Urquhart, executive]

Yes, Matt, it's Jamie. Yes, certainly, we're on track. And as you alluded to, I think we're optimistic that we'll be able to, by the end of the year, be trending ahead of what we would have envisioned a year ago.

[C. Setoguchi, executive]

That's a very robust area. You think about where gas prices -- nat gas prices are today, I know it's been moving around a bit here, but call it $5 plus over the past while, and we look forward as well on the forward strip. Those are very strong economics. And the advantages for the producers in that area is that there's very established infrastructure. And obviously, we own a lot of it. So it's not just gas processing and the ability to get deeper cuts for your NGL liquids extraction. But we also have our Keylink pipeline system, which is tied to our fractionation at Rimbey, which is pipeline connected to our Fort Saskatchewan complex. So producers there can drill wells and get them on stream in a very short period of time and generate a return on their investments in a matter of a couple of months.

[Matthew Taylor, analyst]

And then just to be clear, that tailwind would be incremental, right, to your guidance through '25 if you're starting to see capacity utilization above 70%?

[Eileen Marikar, executive]

That's correct.

[Operator]

Your next question comes from Patrick Kenny from the National Bank.

[Patrick Kenny, analyst]

Just to come back to your commentary around the refining market dynamics out there right now, I guess, both in Europe and North America. Can we get an update just on how Galena Park is performing in this environment maybe relative to your initial expectations? And then also, even though your top priority is executing KAPS, just any thoughts around bolting on additional infrastructure, say, over the near to medium term that might be more directly tied to this increasing global demand for North American exports?

[K. Urquhart, executive]

So Pat, I'll take the first question on the refining market. So Galena Park is -- obviously, we move our iC8 out of that facility, but we also did the butane -- in-line butane blending to gasoline project a couple of years ago. And that project came out of the gates a little slow because of COVID and gasoline demand. We've seen, obviously, as customers understand what our offering is and how sophisticated our blending system is in relation to other options, we've started to see an increased demand. Right now it's summer, so the RVP limits on gasoline limit our ability or anybody else's ability to blend butane into gasolines. But certainly, our expectation as we come out of summer and RVP limits increase on gasoline that we're going to see an increase in demand and get basically to our expectations with respect to when we sanction that project.

In terms of bolt-on investments, I think...

[C. Setoguchi, executive]

With respect to bolt-on opportunities to cap, we still think that Zone 4 is still a very good opportunity. And that Zone 4 would connect to the BC border and connect to independent gathering system there, NGL gathering system there. Obviously, developments in BC have been moderated over the last 1.5 years as we await the Blueberry decision. My understanding is that, they're continuing to make progress on that front. And so, I think some of the developments there have been shelved a little bit or maybe not as aggressive. But we certainly believe that, that's going to happen in the future. And when that does happen, we're going to be well positioned for it.

We also -- I also talked about the downstream part of our business in terms of the whole frac storage, rail logistics side of it. We think that there's going to be continued supply through -- of NGL supply coming through Fort Saskatchewan. And again, we're very well positioned to capture the incremental infrastructure demand associated with those volumes.

[Patrick Kenny, analyst]

Okay. Great. And then just on your carbon hub opportunity with Shell, any update on, say, near-term milestones that we should be keeping an eye on here through the back half of the year with respect to your role in the project?

[C. Setoguchi, executive]

I can say that our teams actively work together very regularly. I mean, they're collaborating on a weekly basis. So we don't have any specific updates at this point. [indiscernible] is tied to all the companies that received poor space in the Industrial Heartland. There's incredible process to work through all the details associated on how that's going to work. So Shell is working with the government on that and also working with us. So we're trying to sort through all these details as they come. But I can tell you that we're both very actively engaged in terms of working together on opportunities in that area.

I would say that our scope of what we envision for our Heartland lands in and around Fort Saskatchewan, near our adjacent to our Josephburg terminal is that, we're also talking to other potential partners, again, to create the industry solution to -- in terms of industrial park in that area for low-carbon developments. So the opportunity with Shell is phenomenal. We continue to work with it, but we're also working with others in terms of opportunities as well.

[K. Urquhart, executive]

The thing I'd add too, Dean, is it's not limited just to low-carbon. We're working on lots of things with the industry with respect to conventional hydrocarbons we see that, that potentially can also create a bridge for then having facilities and infrastructure built that then will transition into a low-carbon offering as well.

[Operator]

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

[Calvin Locke;Manager of Investor Relations, executive]

Thank you all once 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 line.