Ladies and gentlemen, thank you for standing by, and welcome to the Keyera 2020 annual conference call webcast. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you may press star one on your telephone. Please be advised that today's call is being recorded. If you require any further assistance, press star zero. I would like to hand the conference over to your speaker today, Mr. Cuthbertson. Thank you. Please go ahead, sir.
Thank you, good morning. Welcome to Keyera's 2020 fourth quarter and year-end conference call. Joining me today will be Dean Setoguchi, whose promotion to Chief Executive Officer took effect on January 1st, 2021, Eileen Marikar, Senior Vice President and Chief Financial Officer, Jamie Urquhart, Senior Vice President and Chief Commercial Officer, and Brad Lock, Senior Vice President and Chief Operating Officer. We'll begin with some prepared remarks from the management team, after which we'll open the call to questions. I'll 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 our public filings available on SEDAR and on our website.
I'll also point out that there's a revised investor presentation available on our website. Please note that any detailed modeling questions can be handled by the investor relations team after the call. With that, I'll turn it over to Dean to kick us off.
Thank you, Dan. Good morning, everyone. I want to start by acknowledging and thanking Keyera's former CEO, David Smith, who retired on December 31st, for his 22 years of service. Jamie, Eileen, Brad, and I want to thank David and our board of directors for the robust executive succession planning, which has set us up for future success. The COVID-19 pandemic brought several challenges to our industry and our company. Our priority continues to be the health and safety of our people and communities. I'm proud of our employees, many who have remained physically at our field locations since the onset of the pandemic. Their dedication and commitment keep our assets running safely and reliably, providing essential services for our customers. Early in the pandemic, Keyera took a series of decisive actions to preserve shareholder value.
These included deferring capital spending, discontinuing the DRIP, maintaining ample liquidity, and implementing cost-reduction programs. In addition, our risk management program protected our product inventories and margins from extreme price swings in what was a volatile year for commodity prices. Keyera's performance throughout 2020 demonstrates the resilience of our company. Despite the year's challenges, EBITDA was down only 7% compared to the prior year, which was a record. Distributable cash flow for the year came in at CAD 718 million, a new record. As a result, we have entered 2021 with a solid financial position and no need to allocate capital to debt repayment. Shifting to our team priorities, Keyera has a long history of delivering returns for our shareholders. We've done this by being disciplined in how we allocate our capital.
Keyera's value proposition will continue to be the delivery of a sustainable dividend underpinned by low debt leverage and an asset base and strategy that allows for steady growth in distributable cash flow. To deliver superior shareholder returns, we'll continue to be focused on the following: safety and reliability, continued financial discipline, driving efficiency through technology and innovation, continued strong ESG performance, and playing an important role in the transition to a low-carbon economy. I'll briefly touch on each. In terms of safety and reliability, we had outages at both our Wapiti Gas Plant and our AEF facility this past year. The combined impact of these outages on adjusted EBITDA was approximately CAD 45 million. Excluding these two outages, our assets ran at an average reliability rate of 98%. We can and will do better, putting more focus around our processes for prevention of unplanned downtime. Moving on to capital discipline.
Our conservative approach has served us well through several commodity price cycles. This will continue to be the hallmark of our company while keeping a clear focus on generating returns for shareholders. This means living within our financial framework and priorities. Eileen will speak more to this in a few minutes. Looking now at technology and innovation. Our goal is to be the most efficient operator, providing a high netback for our customers. Innovation will play a major role in helping us to get there. Turning to ESG and Keyera's role in energy transition, we have long believed that embracing ESG principles reduces our risk and creates value for shareholders over the long term. At Keyera, our board of directors oversees our ESG priority areas, and we've taken the step to link management compensation to ESG performance.
Last year, we released our inaugural ESG report, which is aligned to SASB standards. We have committed to setting emissions reductions targets and aligning to phase I TCFD reporting in 2021. The world's energy mix is undergoing a transition towards a lower carbon future. Keyera is well-positioned to evolve with this change. We continue to look at opportunities that would leverage our existing core competencies and asset base. We see great potential in helping our customers decarbonize with initiatives like supplying and transporting solvents to reduce carbon emissions from the oil sands. To sum up, we've demonstrated our resilience in 2020 across all aspects of our business. We're excited to keep the momentum going into 2021. The commodity markets and the outlook for our customers are improving. We are well-positioned to capture the upside of a recovery in global energy demand.
As we look ahead, we intend to keep our focus on all aspects of ESG performance and transparency. We'll continue to investigate ways that we can play an active and meaningful role in energy transition. I'll now turn it over to Jamie to provide an update on our operations and major projects.
Thanks, Dean. We announced in this morning's news release that we are revising the expected gross cost of the KAPS project to CAD 1.6 billion, up from the original estimate of CAD 1.3 billion. This means Keyera's 50% share of the investment would be CAD 800 million, with the project scheduled for completion in 2023. The returns for the project are largely underpinned by contracts for more than 70% of the initial pipeline capacity, with 75% take-or-pay commitments for an average term of 14 years. This project further integrates our existing value chain by linking our gas plants located in the highly economic Montney fairway to our condensate and NGL infrastructure in Fort Saskatchewan. In addition to generating predictable long-term cash flows, the project unlocks numerous future growth opportunities within our upstream and downstream businesses.
We are excited about this project because of the superior geology in the capture area and how it significantly enhances our competitive position, provides our customers a much-needed alternative for condensate and NGL transportation. We have several catalysts in the near term that are contributing to EBITDA growth. The Gulf Coast Galena Park facility, which is designed to provide fee-for-service in-line butane blending into gasoline, is now complete with full connectivity expected this month. The Wildhorse terminal in Cushing, Oklahoma, was mechanically complete in January. Commissioning activities have begun, and the project is expected to be fully operational in mid-2021. In the Gathering & Processing segment, the Pipestone gas plant was placed into service five months ahead of schedule, with initial throughput surpassing our expectations. We are successfully completing the first phase of our optimization plan with the safe and orderly shutdown of three gas plants in central Alberta.
The optimization program continues with the planned shutdown of three additional central Alberta gas plants over the next couple of years. This program will increase overall utilization rates, drive down per-unit operating costs, reduce overall emissions, and provide competitive netbacks to our customers. Going forward, our priority and focus in our Gathering & Processing business will be to grow earnings by striving to be the most efficient service provider. In this marketing segment, we continue to access the highest-value markets for our customers while maintaining a disciplined risk management strategy. We are excited about the potential opportunities the federal Clean Fuel Standard may present for our isooctane business. This is one of many opportunities that we continue to investigate to increase shareholder value. I'll now turn it over to Eileen, who will run us through our financial priorities and results.
Thanks, Jamie. I want to echo what Dean said earlier about our focus on capital discipline and maximizing total shareholder returns. I'll start off with a refresh of our financial priorities. Our number one financial priority remains preserving the strength of the balance sheet. This means targeting a long-term net debt to EBITDA ratio of between 2.5 and 3 times for covenant test purposes. We believe that this conservative range will also ensure we maintain our investment-grade credit rating. We ended the year with a leverage ratio of 2.9 times. Next is to maintain the current monthly dividend with a focus on growing distributable cash flow on a per-share basis, allowing for further growth in the dividend over time. We target a payout ratio of 50%-70%, and we ended the year with a payout ratio of 59%.
Third, maintain our disciplined capital allocation, which includes evaluating investments based on returns, strategic merit, ESG considerations, and other risk factors. We're particularly focused on continuing to stabilize our cash flow and increasing the level of long-term take-or-pay contracts with strong counterparties. With that said, for 2020, we delivered a return on invested capital of 11.4%, within our targeted range of 10%-15%. This was an exceptional outcome given the unprecedented events of this past year. I'll now run through select highlights from our 2020 results. Adjusted EBITDA for the year was CAD 874 million, while distributable cash flow was a record CAD 718 million, representing an annual increase of 21%. Net earnings were CAD 62 million for the full year, a decrease from 2019. This was largely because of a CAD 371 million impairment expense, stemming mostly from the shutdown of gas plants as part of our asset optimization program.
The Gathering & Processing segment delivered margin of CAD 260 million in 2020, a decrease of 12% compared to the prior year because of lower overall volumes, fee reductions at certain plants in the south region, and unplanned outages at the Wapiti Gas Plant. We delivered yet another record year in our liquids infrastructure business, with realized margins hitting CAD 399 million, representing more than 40% of overall company realized margin. This strong performance can be attributed to the high level of take-or-pay contracting and high-quality customers. Our marketing segment delivered a realized margin of CAD 295 million for the full year, CAD 5 million below the bottom end of the previously provided guidance of CAD 300 million. This was the result of recognizing CAD 12 million in realized hedging losses, for which the inventory remained unsold at year-end.
Higher margins will be realized in Q1 2021 when the product is sold. Turning now to guidance for 2021. We still expect growth capital to be between CAD 400 million and CAD 450 million, with the majority of this amount anticipated to be directed to construction of the KAPS pipeline system. The increase in the cost estimate for the KAPS project does not affect capital guidance for 2021. Keyera's portion of the KAPS project will be funded through a combination of internally generated cash flow and incremental debt. 2021 maintenance capital is expected to be between CAD 25 million and CAD 35 million, and we are guiding cash tax expense to be between CAD 20 million and CAD 30 million. For the marketing segment, we expect to achieve the base realized margin of between CAD 180 million and CAD 220 million.
However, further guidance will be provided with our first quarter results. With that, I'll hand it over to Dean for some closing comments.
Thanks, Eileen. Over the past year, Keyera has demonstrated our resilience. This is a testament to our culture and the dedicated efforts of the people at all levels of our organization, who come to work every day committed to safety and giving their best. Looking ahead, Keyera will continue to be a safe, reliable, and sustainable operator and continue to focus on generating value for our shareholders. We're excited about the future, and we're confident we have the culture, people, and assets to succeed for decades to come. 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 the operator for Q&A.
As a reminder, to ask a question, please press star on your telephone. To withdraw your question, press the pound key. Your first question on the line of Rob Hope with Scotiabank.
Morning, everyone. The first question's on KAPS. A little bit of an echo. Okay. We've seen an increase in the cost estimate, however, you have maintained that 10%-15% return on capital on KAPS, 8.5. What's driving the continued guidance to that return profile? Are you able to pass through higher costs through tolls, or are you seeing better than expected volume and all that given the commodity price environment?
Hi, Rob, it's Dean. Thanks for the question. Overall, we still believe the project is needed for the basin. Again, there's need for competition. If you look at the overall fundamentals of what's happening in the basin, is that I think we get mired sometimes in what just happened in the pandemic. If you look at the bigger macro, certainly we're seeing much better fundamentals, as you can see in the forward markets and the spot markets for both natural gas, crude oil, and we also think that propane is going to be pretty robust in the years to come. When we look at our customers and what their plans are, yes, in the near term, they are repairing their balance sheets. As we look forward, certainly they do plan to expand their programs.
I think part of the bottlenecks that we've historically had in our basin all relates to egress. When you look ahead at the expansions on NGTL, Coastal GasLink being built and in service towards the middle of this decade, which is only another four years out, and then you start thinking about also the expansions for crude oil on TMPL and Line 3 and other small debottlenecks. That really frees up a lot of the reserves that can hit the market, both for crude oil and natural gas. Again, just the way we look at the project, the contracts that we have in place already, when we look at the basin and what's happening, we think that this is a tremendous project.
At the end of the day, we won't be incurring significant expense until the middle of the year, so we expect to have a formal sanctioning before that time.
Your next question coming from Patrick Kenny with National Bank Financial.
Good morning.
Good morning.
It looks like the echo is still there. Dean, just wondering if you could distill the CAD 300 million increase. I know that there was an updated budget for KAPS coming because of the deferral of the project, but CAD 300 million for just a one year pushback during what is obviously a fairly slow time for the industry in general. I know you referenced pipeline construction competition, but the big ones like CGL and TMX, those we would've known for a while. Again, just wondering if you could walk us through how you get to the CAD 300 million increase.
Hi, Pat. Yes. I'm just going to repeat the question, just because it sounds like there's an echo on your end. We can't hear it on our end, but the question was just to provide more details on the CAD 300 million increase associated with the KAPS project. I'll turn that over to Brad Lock.
Sure. I think, as we went through the reforecasting of the cost with the one year delay, certainly a component of the cost increase was related to that delay. Certainly the biggest component of that was the activity that's existing on pipeline construction projects. You talked about TMX and Coastal GasLink. Those are big pieces, and they draw on the same resources that, while they're different contractors, many of them draw on the same resources that we would be using for our project. As we've advanced our contracting strategy, these costs have come to fruition. The nice thing is, we are in the process of securing all of our contractors for the construction activity and making sure that we are ready to hit the numbers that we have landed on right here. We have strong confidence in those numbers to execute through to 2023.
Okay, that's helpful. Thanks, Brad. With respect to the overall health of the customer base, Dean, you pointed out commodity prices moving in the right direction, but the carbon tax is also moving up as well over the coming years. Could you just provide a bit more clarity as to what CAD 170 carbon tax per ton could mean for your gas processing economics? If you have flow-through provisions, how meaningful could this be on your customer net backs? I know it's still early days, but as you look towards energy transition, what are some of the projects you might have in the hopper to help reduce emissions at some of your larger plants?
Great question, Pat, and your question was largely related to what does CAD 170 carbon tax mean to our G&P business, and what does that mean for maybe our overall industry and our customers? Great question. I guess, really what it emphasizes to us is that it's going to drive a lot of efficiency in our basin. It really emphasizes the steps that we're already taking to drive that efficiency. It makes it even more valuable. What we're doing with our optimization program, again, to direct the gas in our sales portfolio to our most efficient facilities and driving higher throughputs, right? Because it's intensity-based sort of calculation. I feel like we're already on the path to achieving that already, and that's what's going to have to happen across our whole industry.
The fact that we have interconnected facilities by pipe gives us an advantage to do that. If you have one-off facilities and you have low utilization, I think that's really going to hurt a lot of those players. Again, it's going to be a lot about efficiency, high utilization, and at those remaining facilities that we have, now we have the scale to now make investments there to continue to reduce our carbon footprint. Maybe, Brad, if you want to elaborate any further on that.
We see lots of opportunities within our Gathering & Processing efficiency efforts right now, with consolidation and certainly from a project execution side, to reduce our carbon intensity. As we advance our strategy and lead towards a target through 2021, a lot of those will become identified and become part of our long-term plan.
Okay, great. Last one for me, if I could, just maybe for Eileen. Looks like the overall decommissioning liability is up CAD 50 million year-over-year to CAD 300 million, and plus you've got the incremental CAD 150 million now to spend on KAPS. Just curious if you've had any recent conversations with S&P just to reaffirm the stable credit rating.
Yeah, good question, Pat. We continue to have conversations with S&P. We actually did. The treasury team met with them last week, and yeah, so far, they're very positive on our story, and we certainly feel confident with that relationship and the rating at this time.
Okay, great. Thanks for that.
Your next question, line of Ben Pham with BMO.
Okay. Thanks. Good morning, everybody. I'm not sure if you answered this earlier, it's a bit of an echo in some of the questioning. I wanted to tie up some loose ends on KAPS that you've reaffirming the 10%-15% return despite the CapEx increase. Is there provisions in the contracts you can recover the CapEx overruns from shippers or are there some other positive deltas you've seen since you've announced the project?
Yeah. It's Jamie . No, our intent is not to pass through the increased capital costs to our shippers. Really, the confidence that we have with respect to hitting that return on capital range is based on our existing contracts and also our forecast with respect to being able to contract additional volumes based on conversations that we've had with producers over the last three to six months.
Okay. A lot of good commentary on energy transition. You had the ESG report you put out, and you announced some of the solar procurements as well. On top of what you said there and your OpEx reductions on the gas processing, reducing emissions, is there anything else you can share at this moment on how you plan to move along with energy transition and reducing carbon emissions broadly?
Yeah. Well, without getting into too much specifics, obviously, as Brad alluded to, we see some meaningful projects at our Gathering & Processing facilities. We've touched before on hydrogen. We're looking at hydrogen in a very meaningful way with respect to the piece of land that we happen to have up in Fort Saskatchewan and a pipeline that we have that is rated for hydrogen service. It's in a different service right now that connects Fort Saskatchewan to the Strathcona area in Edmonton. We have opportunities that we're looking at AEF, with respect to the Clean Fuel Standard that I touched on in our remarks. Those are the big rocks that we're looking at right now.
We should also point out, too.
What about.
Sorry, Ben. We should also point out too that we already do carbon capture and sequestration already with our acid gas injection, which we have at four.
Four facilities.
Yeah, four facilities. That's something that we do already, and I think carbon capture and sequestration obviously will be also a bigger solution in the future.
Okay. My last one, you had some, I think, newish disclosures on take-or-pay exposure, the 40%. I wanted to clarify, you're just taking your face value to debt for 2020 while normalizing for the base marketing?
Hi, Ben. The take-or-pay is based on our overall realized margin, including the actual results for marketing in 2020.
Okay. If you normalize for marketing, then your take-or-pay is probably more north of 50% then?
That's correct.
Okay. All right. Thank you very much.
Your next question to the line of Matthew Taylor with Tudor, Pickering, Holt & Company.
Hey, thanks for taking my questions here. This one's probably for Eileen.
It's for Eileen.
On funding, you talked about your targeted leverage range, previously you've also talked about the potential to exceed here during KAPS. Can you just refresh your thinking on that? Has your funding plan changed at all in light of this CapEx increase? A follow-on to that question, would you be willing to bring on another partner to reduce the financial risks?
Thanks, Matt. Yeah, good question. As we noted, the growth capital for 2021 remained unchanged, so it's still that CAD 400 million- CAD 450 million, even with the increase to the overall cost for KAPS. Yeah, as we've said before, we're okay to go over our conservative target range of 2.5- 3 times for a period of time while we build out KAPS, as long as there is a path down to the target range. There are tools that are available to us, like hybrids or preferred shares, but hybrids in particular that have recently been issued at very attractive rates. That is something that we may consider as well in the future.
On the partner question, is that something that you'd be willing to do, or are you comfortable still being at 50/50?
At this point, we're comfortable with 50/50. Again, partners and our overall portfolio, it's something that we evaluate all the time. There's nothing more to say at this point.
Okay, great. One more on capital allocation. With your dividend yield at 7% today, like I already mentioned, leverage is in good shape, might start tracking up here over the build cycle. How are you thinking about restarting dividend growth versus retaining cash to help fund KAPS as you go through this build cycle? Any thoughts on dividend would be helpful.
As we said, we're committed to the dividend, and given the low payout ratio, maintaining that current dividend is very sustainable. In order to look at increasing the potential dividend, we would need to see some sustained recovery for the industry as well before making that commitment.
Great. Thanks. That's it for me.
Next question, line to Robert Catellier with CIBC Capital Markets.
Robert Catellier, CIBC Capital Markets. I just have a couple quick follow-ups on KAPS. The first one being, I just want to clarify that, in fact, the change in the cost estimate is entirely due to higher costs as opposed to any change in scope. Can you just clarify that first?
Yeah, Robert, that is confirmed. The scope still remains exactly the same as we've been describing all the way along.
Okay. What has to happen then to reach the formal sanctioning decision before, sort of relative to your prior final investment decision and the one year delay?
Yeah, for us, we just look at all factors. All the capital discipline that we've described will go into presenting it back to our board before the summertime to get a final sanctioning decision. We are all teed up for this project, so it is ready to go, but it is subject to a final sanctioning decision prior to the summer.
Right. This is entirely Keyera just being prudent with the capital, as opposed to any customer commitments having run off or anything like that.
That's correct.
Yeah. Okay.
Yeah.
I just want to square some of your comments, your optimism on the volumes that might eventually flow to KAPS, and grow over time, and square that with everything we're hearing from the producers about their intentions to keep production flat. Obviously, the pricing environment and net back environment is better. Is it just a question of what maybe some discipline by the producers in the short term to square up the balance sheet, and then longer term, a little bit more optimism? Maybe in that context, you can comment what a reasonable range of throughput change is for 2021 in that context.
Sorry, I missed the last part of your question. Could you just repeat that please, Rob?
Sure. The last part was, what would a reasonable range of throughput change in 2021 be in light of your view of producer activity?
Are you just talking about KAPS or are you talking about just our G&P or.
No. G&P.
Well, we always say we're cautiously optimistic. After going through a year like 2020, obviously, it was a year where we had virtually no drilling, and you saw what happened, and obviously, we had some volume declines in our base facilities. What we're seeing now is, I would say, stable to slightly growing. Remembering that the price rebound's only been sort of in play for the last two or three months. Producers are obviously gonna be prioritizing just repairing their balance sheets and making sure that's strong first. When you look at the economics from the environment we just came in last year to where they are in a mid to high 50s WTI price, which translates to a high condensate price, upper CAD 2 for AECO, and pretty robust forward strips on both commodities, even though they're backwardated today.
The fundamentals of what's happening, just in a world where everybody, I think, is being more cautious about drilling. I think that's likely to keep supply a bit more in check, especially on the U.S. side of the border. The Biden administration and some of the regulations that he's imposing, I think it levels the playing field a lot more for our Canadian hydrocarbons. Again, I said this before, but you think about the long reserve life, which is measured in the hundreds, 100+ years for both natural gas and crude oil. The issue in Canada has never been our resource base, and I'd argue that it's globally competitive in terms of the marginal cost to produce it as well. I see companies like CNQ that can maintain their dividend and all their maintenance cap at CAD 31-CAD 32 WTI.
I'd like to see another company on the planet that can do that. I think it just speaks to what we can accomplish in this basin. Yes, we have to collectively work together to make it more efficient and decarbonized so that we have the best product, which also means the lowest carbon intensity product. I think we're gonna work collaboratively as an industry to make that happen. When you look at our sort of capture area, especially for G&P, and a lot of the focus is on the south area, where again, we've been hurt in terms of our overall performance. The fundamentals there specifically are much better, again, with the outlook for natural gas, propane in particular. The other thing is that we've made a lot of efforts to make our processing fees a lot more competitive.
When you add all that together, again, our fees relative to commodity prices today, the economics of that area are very, very good. There's a number of private companies in that area, but look at Spartan and what they're doing. Generally, the feedback that we get from our producers is that the results that they're getting from their wells now are better than expectations in both cost and performance. I think that's promising. Even since December, some of our producers are expanding their programs. I'm not suggesting it's in a gigantic way, but they're adding a well here, a couple of wells there. I would say once you get into the next winter, especially if this sort of price range sustains, I think you will see more activity. Again, it's a factor of all the producers having better balance sheets and more free cash flow.
Yeah. That's a very fulsome answer. Thank you very much for that. Last question I just had was on the ability for AEF to benefit from the Clean Fuel Standard and what that might look like. Are we talking about just more local sales or are there blending or capital opportunities available in that vision as well?
Rob, it's Jamie. Not to be flippant, all of the above. It's early days with respect to understanding the Clean Fuel Standard and really the impact that it will have on our business. We are, based on our initial view, discussions with some consultants that we're confident have been involved and are very up to speed on that program. We are going to be involved in reaching out to government here during the review period to understand that more. Yeah, there are opportunities at that facility to increase efficiency. We certainly see as a clean burning fuel additive that there's potential for more blending opportunities. You hit the nail on the head, is if we can find sales that are not down in the Gulf Coast, which has traditionally been one of our bigger markets, we can save significant costs on transportation costs.
We spend over CAD 55 million a year transporting isooctane down to the Gulf, and if we can find a fraction of that to be located to supplement existing relationships or new relationships within Canada, that's a significant value contributor to this organization. We also believe that potentially we can also firm up contracts and extend the duration of contracts that will also create value for our shareholders.
Okay. Excellent. We'll just have to wait and see. It sounds promising. Thank you.
Next question from Robert Kwan with RBC Capital Markets.
Great. Good morning. If I can come back to KAPS, if you're not flowing higher capital costs through to your shippers, I guess just arithmetically, it must mean that you've got a greater outlook for EBITDA to maintain the range. I'm just wondering if you've got additional specifics on how you get there. Are you planning on charging new contracts a higher toll, more uninterruptible, or do you expect just higher volumes than you originally expected on the line, kind of in that 2025 timeframe?
Yeah. Robert, as we said before, our plan is we want to make sure the tolls are competitive. We aren't planning to increase our tolls for this increase. Overall, again, we talk to our customers and again, I think people get mired on what is happening today. It is 2021. This pipe would come into service in 2023. We're talking about a time horizon that extends decades beyond that. Again, I guess it boils down to a point of view. Again, we're basing it also with the discussions that we have with our customers that they don't plan to keep their production flat forever. Some of them have commitments to deliver through the owners of LNG Canada, all the NGTL expansions, if you look at the expansions that are being added for crude oil.
I think that would be a very pessimistic view to think that all that pipe capacity that's getting added is going to be all empty. The other thing I'd point out is that the capacity, if you look at the combined forecast for NGLs in our province, and if you think of the capacity of Peace and you think about the capacity of our pipeline, the KAPS pipeline, our pipeline is going to represent about 25% of the total capacity. When we think about the future, do customers want to diversify their service offering both for commercial reasons but also for operational reasons, and can we capture 25% of that market? We have to obviously take a longer range view on all these things and take all the macro data.
We have to take the feedback we get from shippers and customers, and we have to put all that together, and that's what we're doing to make our final decision.
Got it. I guess I understood, and correct me if I am wrong, that the 10%-15% was a range you put out of the gate at the time, I think it was 2024, but in a sense year, 2024, 2025 is about the same. What has changed between that pre-pandemic guidance and today to offset the CAD 300 million cost increase?
Yeah, we did extend from 2024 to 2025 with our one-year deferral last year. That's the difference between just sort of us hitting our target rate of return. We do have all of our shippers that are still committed to the contracts that were deferred from a year ago. Basically what it boils down to is, there's a wedge that we have to capture that's in addition to our contracts to hit that return. We believe that we can do it, but we're very clear that we do need to contract additional volumes to make that happen.
Can you expect, I guess, more contracting than you previously did?
Yes, that's right.
Okay. I guess just to finish here, recognizing you buy on other indices, is there an impact, though, from the increased butane price that we've seen, particularly at Conway, whether you think about your nearer term results, Q1, or do you see that influencing the NGL year negotiations?
Robert, it's Jamie. Our contract season, it's progressing well. From a macro perspective, as you allude to on the butane side, the butane prices in the Gulf are very strong right now. You're not seeing that same level of strength in Western Canada, frankly. We're at a higher storage level than we would typically see in Western Canada. I caution that we wouldn't expect to be contracting at levels that we might have seen a couple of years ago during the 2019 contracting season. We saw that that market corrected itself very quickly. Barrels found their way out of Western Canada into the U.S. Certainly right now, we're pleased with respect to the results of our contracting season to date.
Got it. Then just in terms of, to finish here, the comment in the MD&A around softness in the isooctane market in the first half of the year, is that just for demand for the product itself, or is that a comment that includes the butane side of the equation?
Well, yeah. It's more the commodity, but there's not a softness in the demand for the product. There's a little bit of an overhang on octane in North America that's causing a little bit of softness that we're seeing get worked through the system. We expect demand to pick up for gasolines, and you're seeing that in the RBOB cracks, that's part of it. I think the fact that Biden got elected and he's revoking some relief from refineries around their obligations to meet renewable standards, that's also putting some upward pressure on RBOB cracks. There's an effective rollout of the vaccine. There's optimism in the market with respect to demand for gasolines. We see even last year, when there was between the first wave and the second wave, there's a pent-up demand for people to get out of their homes.
Frankly, we just see a penchant for people traveling via their vehicles rather than the air. Our expectations in the summer driving season is we're going to see a strong driving season, and that's really what's driving RBOB cracks, but also our view on the demand for octane. That overhang, in our opinion, is already being corrected, but we expect to be more back into a normal environment by Q3.
Got it. Great. Thank you very much.
Next question, line of Praneeth Satish with Wells Fargo.
Hey, thanks. Just one quick question from me. When you signed up for the solar PPA, was there any appetite to maybe build this in-house or enter into a JV? Did you look into the returns? Did they make sense?
Yeah. To be clear, the solar deal is a contract for difference. We basically procured electricity at a certain price and also are granted the environmental attributes. Frankly, that deal that was over a year in the making is a much more attractive deal than it was when we signed it. Very pleased with that deal. Our focus is always to find good partners if they've got expertise where we don't. It's not to say that at some point in the future, we wouldn't, based on partnerships that we've established, look to get into different lines of business if it made sense. Not saying in this case that it would necessarily make sense. We've got a very reputable partner in this project. We feel very good about that partnership. Needless to say that we're continuing to look at opportunities to get involved in renewable power.
I think the leverage off of Samsung's expertise, I think is important. This is not our area of expertise. We're able to capture the economic benefits, including the environmental credits, too, that come with it. Overall, we're very, very pleased with the arrangement that we have with them and the partnership we have.
Got it. Thanks.
Next question, line of Linda Ezergailis with TD Securities.
Thank you. Just want to follow up on the outlook for marketing, recognizing that you'll give more guidance in the first quarter report, recognizing that some of the commentary you gave on the contract season and how it's looking. Can you give us a little bit more of an understanding as to what factors might bring that realized margin to the top of the range versus the bottom, and then what might also prompt you going above that range potentially again in 2021?
I'm not sure what more specifics, frankly, we can share with you. We touched on the fact of our isooctane business and the fact that we've seen a significant run-up in WTI over the last month in particular, that everybody's aware of. We continue to be disciplined on our risk management program. I think one of the things that we caution or for people to think about is that it was highly effective as the market came off, but we've been very disciplined throughout the last six to nine months in layering in sales as the market's improved as well. Just caution people from looking at a prompt month of CAD 58 and thinking that that's where Q1 is going to land us.
Certainly our risk management program has some opportunity to take advantage of those higher prices towards the latter part of this year, and that's positive. RBOB cracks, as we mentioned, have strengthened significantly as well based on the fundamentals that I mentioned and the premiums that we get for the isooctane as a result of the fundamentals of octane continuing to improve as well. Just a positive view for isooctane. Touched on butane a little bit. Propane pricing very strong. That helps our G&P business and the economics of our producers, but also supports our program on the propane side. Then Dean alluded to condensate pricing, very strong as well, and driven off of a slight discount or on occasion, a premium to WTI. Right now, all commodities feeling good.
Our risk management program is going to be, as it has in previous years, helping us to secure a positive outlook for 2021.
Thank you.
Sorry, go ahead.
how you're thinking about the capital allocation possibilities over the next year, recognizing that some of your energy transition opportunities are in the early stages. I'm wondering when you expect to replenish your growth backlog beyond KAPS. You deferred your 19th cavern previously. What factors would need to be in place to resume that? When might you see opportunities related to KAPS manifest themselves, which you touched on as well? Can you talk about where you're seeing the opportunities, if that might potentially include your toehold in the U.S. geographically?
Maybe I'll start, and then we can give it to Jamie after that, Linda. As to capital allocation, certainly, with KAPS, assuming we continue on with the construction in the second half of the year, that is what we would be committing to. Again, keeping in mind the balance sheet and how we've committed to fund it. That would be our focus. As we've said before, we're committed to the dividend, et cetera. Looking at other projects and what we need to see, maybe I'll turn it to Jamie.
Yeah. Yeah, we've never been shy about sharing our vision and the strategic nature of KAPS and the opportunities we see not only downstream but also upstream. On the downstream side, we do continue. The analogy I'd use is that KAPS is like the arteries that are pumping blood to the heart. We just see, and we continue to talk to our customers with respect to what opportunities we can provide to them for their product that's flowing through KAPS, that leverage off our existing infrastructure, and whether that's expanding our infrastructure, contracting in different fashions that would be beneficial to our customer, but also beneficial to Keyera and our shareholders. Just can't get into details, but we certainly continue to be encouraged by the opportunities that we discuss with our customers.
On the U.S. side, I think the U.S., it made sense for us to initiate the U.S. strategy that we have. We're happy with it. It was really to ensure that we continue to have egress for our products. Certainly the projects that we've taken on with Wildhorse and Oklahoma Liquids Terminal, our Galena Park asset, those are all landing spots for commodities out of Western Canada. We continue to see the benefit of that. I would probably telegraph that that's mission accomplished, at least for the time being. We telegraphed at our investor day just over one year ago now that we want to prove those assets out. Once again, to reiterate, we're happy with the business thesis and what we're seeing from those assets. It's not our intention likely to have a focus around capital spend in the U.S.
Let me just expand on Jamie's comments is that our first priority is to maximize the profitability of what we have already. Some of that is including some of the new assets that are coming online. Optimization, things like that, and also capturing new growth in the basin as it happens, because we do have extra capacity. We've talked a lot about, sort of post-KAPS, is that we plan to direct most of our growth capital downstream to our downstream business where we have stronger barriers to entry, and it's obviously a very profitable part of our business. The other thing is, to some of Eileen's points, is that we want to also drive sort of more, like a stronger contracted return, base contracted return, just where our cost of capital is today.
To the extent that we need more frac and storage in the future, we're going to make sure that we have a satisfactory level of long-term underpinning to make those investments. We've talked a lot about just sort of our Heartland lands. Jamie talked about it, and again, I think that this is the best developed land in Industrial Heartland, where it's situated, pipe connectivity, the underground storage rights that we have there, proximity to the Alberta Carbon Trunk Line to do carbon capture sequestration. Again, Jamie described the pipe that we have that's rated for hydrogen. I think in terms of some of the pursuing a hydrogen solution possible there's also some other bio or pet chem opportunities that we could also pursue there. We also talked about AEF and some of the potential there to enhance our profitability.
Those are just some of the highlights of things that we'll be looking for in the future.
Thank you. Maybe as an operational question, wondering which quarters the Brazeau River and Zeta Creek gas plants have their turnarounds this year?
Linda, this is Brad. They're both scheduled for Q2 this year.
Great. Thank you.
Next question, line of Chris Tillett with Barclays.
Hi, guys. My questions have all been asked at this point. Thank you.
Thanks, Chris. That was easy.
Next question, line of Andrew Kuske with Credit Suisse.
Thanks. Good morning. Maybe just focusing on the quarter you just reported, if you could give us some color across your businesses on the beginning volumes and commodity impacts and how the businesses were performing versus the exit rate. Just given some of the risk management comments on this call, are volumes more important to you in the first half of this year and then maybe commodity pricing in the back half of the year?
Yeah. I'll take a first stab at your question. You look at 2020, very unique year. I think we almost forget what we faced last year. When you get a demand shock of the magnitude that we saw over a short period of time, there's obviously a lot of uncertainty in a lot of different ways for the whole energy sector. Obviously that also translates to our basin here in Canada. Overall, from the front end of our business, the G&P business, as I mentioned before, we had very little drilling, like the last three quarters of the year. Obviously, some decline set in, and we saw that in our volumes. We had to provide some short-term relief for some of our customers in the north just to get through, again, a really uncertain time.
We also provided some fee relief to our southern customers, too, to be more competitive. I'll just stick with that business. Now as we exit the year, as I mentioned, we're starting to see stabilization and some growth, okay? That growth, I wouldn't say is robust at this point, but at least the trajectory for the volumes has sort of flattened. I believe that we're going to start to see a bit of growth as we go through the year. Customers are cautious because they want to be careful with their balance sheets. Again, in this price environment, economics are very strong in both our north portfolio and our south G&P portfolio. We're fairly pleased about that. The other thing is obviously we're seeing consolidation amongst the producers. I think that's translating to stronger counterparties.
The needs that they, or what's valuable to them is more optionality. I think with our integrated service offering, we're able to offer them that optionality that they desire. If you look at our liquids business, it performed very well last year. It's really tied to the strength of our long-term contracts with our oil sand services for deal with handling storage. Our fractionation business was very strong with very high utilization rates. Again, it's a core strength of our business with higher barriers to entry. Certainly, we expect that business to continue to perform well in 2021. Finally, our marketing business, and we've talked a lot about the effectiveness of our risk management program. The first quarter of last year, we had a tremendous quarter, the best quarter we've ever had for marketing.
Obviously, throughout the rest of the year with falling commodity prices and the lack of demand, a lot of that related to RBOB or gasoline and octanes, that translated to lower results as we went through the year. Jamie's talked about a little bit about 2021. From a macro perspective, commodity prices are much stronger. Could there be some short-term hiccups or blips to that? Yeah, of course. I think with the higher commodity prices, generally, that's obviously a tailwind for our marketing business. Combined with that, what we see in terms of our recontracting, which we're not complete yet, but we will update that in our May conference call. That looks promising as well. To offset that, though, we've already hedged some of our commodities, especially for the first half of this year.
While commodity prices are much stronger in the first half of this year, we won't get the full benefit because we've hedged a lot of it. I think fundamentally, if you look forward to the second half of this year and into 2022 and beyond, absent another major shock, we think our business is pretty strong.
That's very helpful. Thank you.
Again, if you would like to ask a question, please press star then the number one on your telephone keypad. Your next question comes in from Elias Foscolos with Industrial Alliance Securities. Elias Foscolos , your line is open.
Sorry, I was on mute. I apologize. Just a couple follow-up questions, and maybe they're directed towards Brad. Could you just give us a bit of an update on Wapiti phase II? I know it's complete, but any update you can on that in terms of the volume ramp-up?
Sure. Thanks for the question. We commissioned Wapiti phase II in the back half of 2020. That facility has been up and tested out and is fully functional. At this point, there's not an immediate demand for the volume, so we don't require both trains to run. What it does do is provide us a real enhanced opportunity for reliability in that facility with the redundancy it provides. Certainly as we go through 2021, we see opportunities to secure incremental volumes that will require that plant to occur. It's not required today, but it's certainly a strategic part of our plan through 2021 and onward.
Okay. Thanks for that reminder. The next one, Brad, I'm trying to get a handle on run rate maintenance costs and partially for distributable cash flow, I'll say primarily for distributable cash flow. In 2019, I think we had CAD 105 million, and in 2020, CAD 29, 2021 guidance midpoint is CAD 30. Is there any way we can think about that in terms of a long-term run rate number where we incorporate some AEF in there? I think 2018 was within the CAD 50 range. Comments?
Yeah. It's a great question. I think certainly, through 2020, we made a diligent effort to preserve capital and certainly deferred a number of turnarounds within our world. Zeta Creek was a classic example that was scheduled for deferral. West Pembina was another one that we, in our optimization plan, we elected to shut down as opposed to do the turnaround. We had really no turnarounds in 2020, driven off partially because of the pandemic and trying to reduce exposure to the workers, but certainly also capital preservation. Going into this year, we have a relatively modest turnaround year with only the Brazeau River and Zeta Creek turnaround, so consequently, a small number. As we go into 2022, we are going to see those numbers start to creep up.
AEF outage is planned for 2022, and certainly as we go out in time, some of the larger facilities will start to see turnarounds as you go into the Strachan and Rimbey, et cetera. I think we're in a bit of a valley right here, relative, but it's going to be very difficult to predict a run rate basis because of the lumpiness of the large turnarounds and how they kind of enter into our maintenance capital schedule.
Yeah. Okay.
Clearly, our run rate would be lower than what it was, your point before.
Yeah.
Just given the number of optimizations.
Correct.
That we have right now.
Yeah. That aligns with my thinking. Maybe one last question, and it's not tremendously large in the scheme of things. One of the salt cavern storage facilities was deferred, and I still think it's deferred. Is there any plans to bring that back?
Yeah, again, it just boils back to capital allocation and again, just us being able to contract that and underpin the investment for that next cavern. I would say that our storage services are in still very high demand. We have the largest underground storage position in Alberta, and although maybe a good analogy is, if you look at last year when 1 million barrels of crude oil went offline out of the oil sands, the oil sands producers still have contracts to buy condensate. There's a commercial angle there. Not only operationally do they have to store that condensate somewhere because it doesn't need to go up to the oil sands, but commercially, they really appreciated being able to buy all that cheap condensate at less than CAD 10 and store it in our caverns. That's a big input cost for them.
Even though they may not be flowing or delivering a lot of crude oil, it just explains the value of the storage caverns that we have and why they contract for them. Again, it's a very valuable service. We will be disciplined about any capital investments, including our storage. Again, when we have the demand where we can contract it, we'll start the next cavern.
Great. Thank you very much for that color. I'll turn it back.
No other questions at this time.
Thank you very much, everyone. Enjoy the rest of your day. Bye-bye.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.