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. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star then the number one on your telephone keypad. If you would like to withdraw your question, please press the pound key. Thank you. I would now like to turn the call over to Dan Cuthbertson. You may begin.
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 end 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.
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, for their 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, and t hat's reflected in strong performance across all three segments of our integrated business and in our first quarter financial results.
Volumes in our Gathering and Processing segment 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 number one in customer recognition. Our Liquids Infrastructure segment delivered record results for the quarter, resulting from continued high demand for all 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 the 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. That means we must continue to maintain our strong financial position, keep improving our safety and reliability, deliver on 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 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 the importance of both factors in delivering superior customer recognition, and total shareholder returns, and we continue to hold ourselves 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 industry needs. With growing local demand from the petrochemical industry and better connections to overseas markets, the trends 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 activity.
Thanks, Dean, and g ood 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 1st and ending in March 2022. As a result, we have raised our 2021 realized margin guidance for the Marketing segment to between CAD 260 million and CAD 290 million. This replaces our previous guidance range of between CAD 180 million and CAD 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. The initial capacity remains 70% contracted under long-term transportation agreements 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 standalone 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.
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 km of pipeline right-of-way, and pipe fabrication is well underway. The project is a great made-in-Alberta story. The clearing work involved five local indigenous-owned and affiliated contractors who delivered outstanding performance, and pipe fabrication is currently being done in Camrose, Alberta. At the Wildhorse Terminal in Cushing, Oklahoma, mechanical completion was declared on January 29th, and commissioning activities are underway. Our operations team continues to make steady progress, we expect that the 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 turnarounds 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.
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 CAD 225 million, while distributable cash flow was CAD 165 million. Net earnings were CAD 86 million. The Gathering and Processing segment delivered a margin of CAD 79 million as we reached new throughput highs at both the Wapiti and Pipestone gas plants. We delivered a record CAD 105 million of realized margin in our Liquids Infrastructure business. This performance can be attributed to the continued high demand for all services, including increased storage activity and strong deliveries from our condensate system. Our Marketing segment delivered a realized margin of CAD 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 2.5x to 3x on a covenant basis. The company has CAD 1.5 billion in available liquidity with minimal near-term debt maturity. In addition, we completed a CAD 350 million hybrid note offering in March. This positions us well to fund our 2021 growth capital program of between CAD 400 million and CAD 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.
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 expanding 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.
At this time, if you would like to ask a question, please press star one on your telephone keypad. Your first question comes from Rob Hope with Scotiabank.
Yep. Good morning, everyone. First question's on KAPS, just g iven the improving commodity pricing environment as well as some of the other dynamics that we're seeing in the basin, have discussions for additional contracting capacity accelerated there? As well, are you seeing incremental interest from producers in Northeast B.C. with some potential to get Northeast B.C. volumes down into Alberta there as well?
Maybe I'll just answer your second question first. The announcements and the notification that was filed by NorthRiver Midstream, it's an independent system that's a B.C. system. Ours is an independent system, which is in Canada. Both systems are open access. We like the whole concept of more competition in our basin. It's just good overall and so w e're happy to see that project continue to develop. Certainly with more volumes being collected in B.C., obviously, the potential for us being able to capture some of that volume in KAPS is more promising. Again, it's still early days. Maybe on the contracting front, you could touch on that, Jamie.
Yeah. Certainly as we've finalized and confirmed our commitment to KAPS and as we shared, you know, starting to clear trees, you know, manufacturing pipe, that in our customers' eyes has made the project, you know, solidified it as a real project. Certainly we've had more meaningful conversations with respect to incremental volumes. We would just temper people's expectations, though, around timing of when we might be in a position to make further announcements around additional contracting is most customers really do want to see line of sight as to when that project is going to be complete. We hope, and we will continue to keep our customers apprised of the development of that project. To remind everybody, that project is scheduled to be complete Q1 2023. We certainly expect that's going to be the case.
To reconfirm, yeah, much more conversation happening with our customers, more meaningful conversation, particularly at the top end of our pipeline up in the Pipestone area.
Rob, just overall, obviously, we've seen some pretty robust results from our producers in this basin. Obviously, projections are that their balance sheets are going to be pretty healthy here in another quarter or two. There'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.
Excellent. All right, that leads me to my next question. Taking a look at the northern plans, good to see the volumes ticking up there. How are volumes tracking to take or pays? At what point do you start having discussions about the incremental capacity at Wapiti becoming available?
Overall, we've always said that that fairway in the Montney is, if not the most economic, it's certainly top tier within the Montney. 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. Again, if this commodity price environment remains, which we feel pretty good about, we think that's only going to increase in the fall. There's 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 plants. 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.
Yeah, the only thing I'd add is just that there are some new players in the Wapiti area that have made some acquisitions, you know, in the Wapiti area that we are very familiar with in other parts of our business. We're upbeat, obviously, with respect to the Wapiti Gas Plant.
Thank you.
Your next question comes from the line of Linda Ezergailis with TD Securities.
Thank you. 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 some of your business processes that way? Clearly, many of us have accelerated our use of technology in many ways during a 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 plans?
You know, maybe I'll start with first of all, good morning, Linda. Yeah, 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 challenging conditions. I credit our technology team for enabling us to do that. As we look forward, we're really thinking about how do we leverage off of that in the future. 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.
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. Maybe with that, I can just maybe pass it over to Jamie or Brad, and you can maybe talk about some things in your areas that you're looking at.
Hi, Linda. I think, certainly from an operations side, you know, 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. 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.
Yeah, so o n the commercial side, Linda, we've got a couple 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. Using machine learning and artificial intelligence just allows our people to make better business decisions. 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.
Yeah, and j ust 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 e specially in the cold winter months here in Alberta, you know, I think it's a big benefit if we don't have as many people on the roads, and we can do things virtually, and for the safety of our people.
Thank you. On a separate note, another trend that we're seeing is inflationary pressures on many fronts. 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.
From an operating cost perspective, I think it is fair to see that we're seeing some inflationary pressures. Certainly, you know, power is one of those components. I think we do have, like all of our other commodities, we do actively manage our power price and hedge that out over time to mitigate some of the impact of that, so t hat's a 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 one-year delay allowed us to really lock in some of those opportunities early on. We had ordered our pipe over a year ago, and secured that under a contract. Now, that doesn't take all the inflationary pressure out of there, but it takes a lot of it out, so t hat'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 a number of key services as well. 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. We're feeling pretty good about our confidence in delivering that within the budget that we had contemplated.
May I ask what contingency you've got embedded in that budget?
Yeah, we don't usually disclose that, but, c ertainly, we use good project management principles to assess contingency on the basis of thoroughness of engineering to date.
Thank you. 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, you know, we're going through a pandemic, there was the unfortunate Winter Storm Uri, and maybe there's 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?
Yeah, Linda, thanks for the question. Nothing's 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, you know, value chain and enabling us to find the highest value markets for the products that we do market on behalf of our customers, you know, in particular, our U.S. assets. Wildhorse will be very integrated with our OLT asset that we've been very pleased with since we started owning that asset. Yeah, there's no change as a result of anything that's happened over the last 12 months.
Thank you. I'll jump back in the queue.
Your next question comes from the line of Matt Taylor with Tudor, Pickering, Holt & Co.
Yeah. Thanks for taking my questions here. I wanted to first start on your run rate marketing guidance. We've now seen three consecutive years of guidance revised higher, with a major reason being those low butane costs. Can you talk about those assumptions? Do you think they're still relevant, or do you think the run rate level is actually higher?
Well, we will be likely at the end of the year, you know, 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 Terminal will make to two of our marketing business, but also it's a significant contributor to our Liquids Infrastructure segment side of our business as well. As it pertains to butane, you know, 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. Those things do play into ultimately how Marketing's going to perform going forward, specifically as it pertains to AEF.
You know, we're obviously looking to having the ability to stabilize the marketing contribution as much as possible, but just recognizing that butane pricing is still dynamic and fluctuates year- to- year.
That's great, Jamie. Thanks for those comments there. I wanted to address, you mentioned a standalone comment on your KAPS returns projects expectation, and so I just wanted to clarify that. The opportunity to source volumes from this other open access pipeline is not considered in your return guidance? Then maybe more broadly, does this give you an opportunity to pull forward your assumption of earning that return by two years after in-service?
Well, our return expectations are based on our forecast with respect to bringing volumes into that pipeline, and w hen we say return is on a standalone 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 our gathering 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 standalone.
Was that your question, Matt?
Yeah, and then just to extend a bit further. Yeah, 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?
I guess, Matt, I think we've always been sort of open to say that we have a base level for contracting 70% of initial capacity, and t o get to our 10% to 15% hurdle rate, we still need to secure more volumes. We have a number of different ways that we can do that. We can capture a larger market share. We're talking to more producers that are on the Alberta side of the border about additional volumes that we hope to contract as well. Also, there's a potential for B.C. volumes. We're not specifying exactly where it comes from, but we think on a risk basis, through those three sort of sources that we're going to get to that 10% to 15% threshold.
That's great, t hanks for that, Dean, and o ne last one, if I may. We saw an announcement by a competitor this morning on a new NGL system. Any thoughts there on how this may impact your pet chem 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 pet chem strategy, just generally?
I think more supplies of NGL than feedstock are good for our basin. We know the people at, I'm presuming you're referring to Wolf Midstream. We know them very well and, you know, 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. Overall, it's good for our basin. The competition is what attracts more business to our province, which is what we want.
Yeah, Matt, I think you're aware that those are incremental volumes that'll be straddled off of the natural gas system. We don't view those as being competition with respect to our designs to potentially expand KFS in the future.
Yeah, I was referring to competition in the sense of competing sources of feedstock for pet chem players.
Yeah, no, f air point. Thanks, guys. I was also referencing the fact that they're looking to build out a frac as well. Thanks for addressing that question there. I'll jump back in the queue. Thanks.
Thanks, Matt.
Your next question comes from the line of Christopher Tillett with Barclays.
Hey, guys. Good morning. I guess the first question, just to sort of follow up on something Matt was asking. Given the, you know, 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 B.C.? Is that, you know, something you guys are actively investigating? Do you think maybe that's something that would make sense to do further down the road? I'm just curious to hear kind of where your heads are at on that at the moment.
Well, our KAPS system is an Alberta-only based NGL transportation solution. 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's a pipeline system in B.C. that wants to connect to our system, it has to be underpinned by contracts that justify the incremental capital. Do we think there's potential for that? Absolutely. We will not make investments unless we have adequate contractual support for it.
Understood. Okay. The rest of my questions have been asked. Thanks, guys.
Thanks, Chris.
Your next question comes from the line of Patrick Kenny with National Bank Financial.
Yeah, good morning. Just on the Colonial Pipeline outage here and the impact we're seeing on RBOB, any comment on how this situation is playing into your spot iso-octane margins? 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.
Yeah, Pat, it's Jamie. Thanks for the question. Yeah, as you're aware, you know, 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. You know, 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. Hopefully that answers your question.
It does. Thanks, Jamie. 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.
Yeah, sure, h appy to. Yeah, 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 carbon intensity down at that facility. We're on early days on that, but w e 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've 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.
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. It's obviously really important to us. On a margins perspective, 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 on RBOB are at historic highs, certainly on the RBOB side. The premiums, they're decent, but they're not back to those levels. 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 octanes 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.
Until we see demand for gasoline in the rest of the world catch up to the production capabilities of the rest of the world, you know, we're going to continue to see octanes being pushed into North America and keep those premiums at the current levels. 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.
Okay. Thanks, y eah, that's great color. Last one from me, I guess for Eileen. I'm 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, you know, we're now back to pre-pandemic levels. I guess they would also view the recent hybrid issues being positive to your credit ratio, so j ust curious on the potential timing for a rating review.
Yeah. Thanks, Pat. S&P is actually currently undergoing their annual review, and b ased on our discussions so far, everything is significantly more positive certainly than it was a year ago, especially as we showed 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. Overall, really positive in terms of their outlook.
Okay, great. I'll leave it there. Thanks.
Your next question comes from the line of Andrew Kuske with Credit Suisse.
Thank you. Good morning. I guess it's a big broad question where we've got an environment where egress is improving across the product spectrum out of Western Canada. Commodity prices have clearly improved, volumes have improved across the board for producers. 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 to the market that we see now?
Yeah. Overall, you know, we want to remain disciplined, Andrew. We know that there's always a risk of price shocks. We definitely want to generate upside returns, but we also want to protect our downside, too. 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 w e're just trying to be very responsible to our shareholders. When we look forward, if we see sort of, commodity prices that we can lock in better than sort of five-year averages, we start to take advantage and layer in some of that, recognizing that prices could go even higher. Again, just securing that base.
Okay, t hat's helpful context, and then j ust 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.
You mean you're asking, like a percentage or?
A rough percentage or whatever way you'd like to characterize it.
You know, I think from a G&P perspective, 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, it's contracted. You know, we do have some of our producers that are producing above their initial commitments, which is always nice to see. 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. We have been locking up more for longer terms, generally less than five years. Once they're captive to your system in a lot of circumstances, not always though, you know, if volumes are competitively priced, usually the volumes are pretty sticky. I know those are just general comments.
We could follow up with maybe a bit more specifics after this call if it's important to you.
No, that's helpful, and m aybe one final one, if I could just sneak it in. Along the lines of just egress improving, what are your thoughts on just Base Line expansion with line of sight on Trans Mountain?
Yeah. Andrew, great question. We're talking and we're not the operator of Base Line, but we're very connected with the operators of Base Line, and obviously, through our condensate system, we have all the major players as customers, so we have great relationships with them, and we'd love to bring those relationships to our 50% ownership in Base Line. Base Line 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.
Okay, t hat's great. Thank you very much.
I'd also mention that our Base Line Terminal, we can add another, just under 2 million barrels of capacity, about 1.8 million barrels of capacity. That capacity is a lot lower cost than the original phase. That's because all the infrastructure, like the flanges and the pipe racks, and bridges, and things like that are already in place. We think that we can be very competitive as demand increases with Trans Mountain Pipeline.
That's great.
If you would like to ask a question, please press star one on your telephone keypad and y our next question comes from Robert Kwan with RBC Capital Markets.
Thanks. Can you start with the G&P segment in the South Region, specifically your guidance in moving utilization from below 50% to roughly 70% by mid-2022? Just as time has progressed, you know, you've done some of the work and the basin recovery continues. How much of that move up in utilization do you think will just be consolidating some of your existing plants versus volumes do you think will be produced or be migrating from competitor plants differently? How much of that is locked in from your view?
Yeah, i t's interesting. A lot of it is just by 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 three-quarters of virtually no drilling, obviously volume fell off more than our original expectations. The great thing is, is that we've seen that volume base sort of stabilize, and producers are starting to drill. The lost volumes, we expect to recover that in the, you know, next year or two as producers resume drilling. I'll 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 my research report was their Spirit River wells are paying out in less than six months, and that's not surprising to me based on current commodity prices.
The other thing is that we've helped economics a lot with our optimization program and the competitive fees that we've offered to our customers. It's really going to incent them to drill. 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.
It sounds like, though, the vast majority then of that move from 50% to 70% is, I don't want to say it's locked in, but highly confident just in moving the molecules around.
Yeah, a lot of it is, y eah. Again, we have to make up now for the declines from last year.
Right, i f I can 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. 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 on the Alberta side to get you to full contracting?
We think that there's enough volumes on the Alberta side. Again, when we look at our projections, we're just taking a risk view of the basin and what's likely to happen. It could come from Alberta, but it would certainly enhance the project if we're able to capture volumes from the Alberta/BC border from a connecting system there. Again, our system is just an Alberta-based solution.
Right, u nderstood, and then m aybe 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 from an operational perspective to give you confidence to deliver product in the future?
Yeah, Robert, no, I can verify we haven't hedged anything out of Wildhorse, and j ust to remind everybody that the value of Wildhorse, the players that are leasing capacity out of Wildhorse are more traders and blenders, right? If there's contango in the market, which there isn't right now, certainly that would be within their toolbox to be able to realize value. 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.
That's great. Thank you.
Your next question comes from the line of Elias Foscolos with Industrial Alliance.
Good morning and t hanks for taking my call. 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 CAD 20 million to CAD 30 million run rate in the future. I'm wondering, although you've sort of printed the number, how do you feel about that as you are 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?
Thanks, Elias, for the question. You know, 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. We really expect to see the majority of that benefit by the end of the year and to be well within that range.
Yeah, I'd say.
Okay.
Elias, sorry to interrupt. Yeah, I think we're probably going to be more towards the lower end of the range. Some of that is because some of our optimization work is going to be done in 2022. You know, that savings is going to be ongoing. The other thing I'll mention is when we refer to that reduction, it's with controllable costs. As you heard from Brad earlier, obviously things like power, there's only so much that we can mitigate exposure to rising costs. It's just mainly our controllables that we're addressing.
Great, y eah, thanks for that color, Dean. I understand the 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, you know, being the analyst, being very high level, using that as sort of a ratio. I appreciate the color and that's it for me.
At this time, there are no further questions. Do you have any closing remarks?
This is Dan Cuthbertson and just t hank you all again for joining us today. Feel free to reach out to the investor relations team if anyone has additional questions or contacts that they're seeking. Have a great day, everybody.
Thank you for participating. This concludes today's conference call. You may now disconnect.