Ladies and gentlemen, thank you for standing by and welcome to Keyera first quarter 2020 results conference call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. To ask a question during this time, you will just need to press star and the number one on your telephone keypad. If you require any further assistance, please press star zero. I would now like to turn the conference over to your host today, Lavonne Zdunich, Director of Investor Relations. Please go ahead.
Good morning, everyone, and thank you for joining us for Keyera's first quarter conference call for 2020. Our speakers today will be David Smith, Chief Executive Officer, Dean Setoguchi, President and Chief Commercial Officer, Steven Kroeker, Senior Vice President and CFO, and Brad Lock, Senior Vice President and COO. I would like to remind listeners that some of the comments and answers that we will provide speak to future events. These forward-looking statements are given as of today's date and reflect events or outcomes that management currently expects. In addition, we will also refer to some non-GAAP financial measures. For additional information on non-GAAP measures and forward-looking statements, please refer to our public filings available on SEDAR and our website. With that, I will turn it over to David.
Thank you, Lavonne, and good morning, everyone. Thank you for joining us today. We hope that you and your families are staying safe and healthy during these challenging times. As we navigate these extraordinary circumstances, we are reminded of the fragility of life and the importance of the health, safety, and well-being of our families, coworkers, employees and contractors, our customers, and our stakeholders. It's not just our physical health that's at risk, it's our mental health as well. We are all affected, and we need to take care of each other. From a business standpoint, it is difficult to predict the full scope and extent of the consequences of the COVID-19 pandemic. At Keyera, we are focusing on those things that are within our control, and we have taken prudent steps to address short-term challenges and enhance the long-term success of the company.
Our strong financial position allows us to ensure the stability and continuity of the business during this unprecedented economic situation. We have a strong balance sheet, two investment-grade credit ratings, and over CAD 1.4 billion in undrawn capacity on our committed credit facility. To enhance Keyera's competitive positioning in our Gathering and Processing business, we continue to advance our optimization plan in response to industry conditions. To date, we have announced plans to suspend operations at six of our gas plants. These have been difficult decisions as these plants have been part of the Keyera family for many years. These actions to optimize the portfolio will reduce costs and reduce greenhouse gas emissions, enhancing net backs for our customers and improving profitability for Keyera. To maintain our financial flexibility, we decided to defer construction of the KAPS Pipeline system for approximately one year.
This decision has reduced our 2020 growth capital program by approximately CAD 250 million. In conjunction with our decision to defer KAPS, we suspended the dividend reinvestment program. Finally, in parallel with our gathering and processing optimization plan and our reduced capital expenditure program, we are reviewing alternatives to further reduce our overall cost structure, including both operating costs and general and administrative expenses. With these actions we have taken and are taking, I am confident that we will navigate through this challenging time and emerge stronger, ready to capture opportunities as the industry recovers. Our strong first quarter financial results are an indication of the strength of our business model. We achieved record-adjusted EBITDA of CAD 327 million and record distributable cash flow of CAD 253 million, or CAD 1.16 per share. Our net earnings were CAD 86 million, or CAD 0.39 per share.
I will now turn it over to Brad to discuss our operations.
Thank you, David. At Keyera, we remain committed to the highest standard of health safety performance and have taken the appropriate precautions to support the well-being of our employees and contractors as they continue to operate our facilities reliably. I would like to thank these frontline employees for their commitment to our values and for their diligence in working safely with one another. Overall, our employees continue to work from home where possible, and we have measures in place at our facilities to limit the potential spread of COVID-19 and contingency plans in place to ensure that we can continue to operate safely and reliably. Over the past two months, our organization has risen to that challenge that the COVID-19 pandemic has presented. We have activated our corporate advisory team and have focused our efforts on three areas, pandemic response, business continuity, and critical facility operations.
I have seen exceptional work from our people over the past weeks. I want to recognize the efforts of our information technology team, enabling a smooth transition to our staff working remotely. Our facility operations and maintenance teams have helped ensure no operational interruptions that have occurred as a result of the pandemic. Our human resources and communications teams have been on the front line since day one, supporting our employees and contractors, and doing it with the care and compassion that Keyera is known for. These are just a few areas where we have excelled in our response, and there are many more that I could mention. In the first quarter of 2020, we continued to progress our capital projects that are nearing completion and will begin to generate cash flow later this year.
We have completed phase II of the Wapiti gas plant and expect to commission the plant in the fourth quarter to align with our customers' needs. In Cushing, Oklahoma, construction continues at our Wildhorse crude oil storage and blending terminal, and we remain on track to commission this facility in the second half of the year. With high demand for storage capacity, we look forward to bringing this terminal into service. At our Pipestone gas plant in the liquids-rich Montney area of Alberta, construction is progressing very well. We now expect the plant to be operational and generating cash flows this fall. As a reminder, this gas plant supports Ovintiv's Pipestone development, where they plan on commissioning the facility with existing regional volumes, which will grow as they develop their extensive land position. I will now pass it over to Dean to talk about our business outlooks for 2020.
Thanks, Brad. I want to echo Brad's comments about the exceptional work of our teams over the past few weeks, and in particular, I'd like to highlight the work of our KAPS team. In April, we announced, with the support of our partners and customers, we would be deferring the construction of KAPS by approximately one year. As the COVID-19 situation continues to unfold, deferring KAPS allows us to reduce our 2020 capital program and improve our financial flexibility. This is a testament to the teamwork of all the stakeholders involved, the strong customer relationships, and the strong customer support for this project. At the end of April, we received our full AER regulatory approval for the entire KAPS pipe mainline. With this significant milestone, we are on schedule to start up in the first half of 2023.
As David mentioned, we had a very strong start to the year, with record results in several areas. I want to speak a bit about our expectations looking forward for the remainder of the year. This is an unprecedented time, there are uncertainties that we'll continue to navigate our way through. In our Gathering and Processing business, producers have announced significant reductions to their capital programs, which will result in lower volumes through Keyera's gas plants and lower operating margin than originally expected. We're working with our customers where appropriate to develop mutually beneficial solutions to help keep their volumes flowing in the short term, typically in exchange for another form of value. For our Liquids Infrastructure business, we expect our results to be relatively resilient, as our condensate business is supported by long-term take-or-pay contracts with creditworthy counterparties.
Demand for storage assets has increased as these assets provide valuable flexibility for our customers. Our fractionation utilization and revenue may be lower for the remainder of 2020 if drilling activity is significantly reduced or substantial production is shut in. Within our Marketing segment, we still expect realized margin for 2020 to range between CAD 270 million and CAD 310 million, given the strength of our first quarter, as well as our effective risk management strategy that protected the value of our inventory as commodity prices fell dramatically during the first quarter. With that, I'll turn it over to Steven to talk about our financial results.
Thanks, Dean. Keyera achieved record results in the first quarter of 2020 with adjusted EBITDA of CAD 327 million and distributable cash flow of CAD 253 million, or CAD 1.16 per share. Fee-for-service realized margin for the quarter was slightly ahead of that in the first quarter of 2019, and trailing 12 months fee-for-service realized margin increased slightly to CAD 676 million. For the first quarter of 2020, the Liquids Infrastructure segment generated a record CAD 102 million in operating margin due to increased demand for Condensate transportation and storage. Meanwhile, the Gathering and Processing segment generated CAD 64 million in operating margin in the first quarter, which was CAD 4 million less than the same quarter last year and CAD 16 million lower than the fourth quarter of 2019.
The lower result in Gathering and Processing reflects lower industry activity and select fee relief behind various facilities, as well as increased operating costs and lower throughput due to unscheduled repair work at the Wapiti plant that totaled four weeks. The Marketing segment delivered operating margin of CAD 246 million and realized margin of CAD 165 million, largely due to higher contributions from isooctane sales and an effective risk management strategy. The hedging strategy is aimed at protecting both inventory value and margin. As there is uncertainty as to when a recovery in energy demand and commodity prices may occur, Keyera remains focused on preserving its financial flexibility and maintaining a strong financial position. This includes the following: A strong balance sheet with net debt to adjusted EBITDA of 2.2x as of March 31st, 2020, including 50% of the subordinated hybrid notes as debt.
A conservative payout ratio of 55% for the last 12 months, which is well within our long-term target range of between 50% and 70%. Two investment-grade corporate credit ratings. A CAD 1.5 billion line of credit with only CAD 70 million drawn as of March 31st, 2020, and minimal long-term debt maturities in the next five years. With the decision to defer KAPS one year, we have reduced our growth capital for 2020 to a range of between CAD 475 million and CAD 525 million. Down from a range of CAD 700 million- CAD 800 million. In April, we also suspended the regular and premium components of the dividend reinvestment plan, effective with the May 2020 dividend. We felt this was a prudent step to preserve shareholder value. In 2020, our distributable cash flow per share is expected to benefit from significantly lower cash taxes and maintenance capital.
We now expect a current income tax recovery of between CAD 20 million and CAD 30 million for the year, compared to a CAD 98 million cash tax expense in 2019. We expect our 2020 maintenance capital to be between CAD 30 million and CAD 35 million, which is significantly lower than the CAD 105 million incurred in 2019. With that, I'll turn it over to David.
Thanks, Steven. Looking ahead, Keyera remains committed to operational excellence focused on safe, reliable and responsible operations. With our strong financial position, we will continue to take a disciplined approach in the face of this uncertain business environment. The COVID-19 crisis is unprecedented and the situation remains challenging and unpredictable. We are cautiously optimistic that the worst is behind us. Driving demand appears to have already bottomed out and will be further supported by the gradual relaxation of stay-at-home policies. Significant volumes of oil supply are being shut in around the world, helping to ease the strain on inventory levels and support prices. In Canada, we've seen a recovery in the condensate pricing. Meanwhile, natural gas prices in Alberta have remained firm throughout. I am confident that Keyera will successfully navigate the current challenges and strengthen our foundation to add shareholder value as the industry recovers.
On behalf of Keyera's Board of Directors and management team, I would like to thank again our employees, customers, shareholders, and other stakeholders for your continued support. Please stay safe and healthy, take care of yourself and your loved ones, and stay positive. With that, I'll turn it back to the operator. Please go ahead with questions.
Okay, at this time, if anybody would like to ask a question, please press star one on your telephone keypad. That is star one on your telephone keypad. Your first question comes from Matt Taylor from Tudor, Pickering, Holt. Your line is open.
Yeah, thanks for taking my questions here. Starting off on AEF, you made some comments in the MD&A about weak iso-octane pricing and product premiums for 2020. One of your midstream peers talked about lower utilization expected from their octane enhancement business. As I'm looking at your expected marketing guidance there, I noticed AEF is assumed to continue to operate near capacity. Can you just speak to what market dynamics you're seeing there to keep utilization high while demand is down?
Sure, Matt, it's Dean Setoguchi. We are continuing to run our AEF facility near capacity. We've seen a little bit of a rollercoaster ride over the last six weeks in our bought prices going from - CAD 2 to + CAD 13. That's been very positive and we're seeing driving demand starting to increase as the lockdowns ease across North America and in the world as well. We've seen a steady demand for our product. The premiums aren't as strong as what we saw last year, certainly there's demand for the product and we've been pretty open that we actually sell a lot of our products through Galena Park. The Caribbean market has still been relatively strong for gasoline and, like I say, we're starting to see more demand pick up in North America now too.
Thanks for that, Dean. Just as a follow-up to that, can you frame how you've hedged the AEF business even if there is unexpected downside here for longer?
Well, our hedges are more typically higher in the nearer months and they sort of fall off a bit more in the later months. Again, we do have a bit of uncertainty as we get into the latter half of this year and into 2021. Again, those fundamentals are improving. We're going to be looking to hedge in layers to protect our downside for that business and preserve margin.
Great. Thanks, Dean. One more on the dividend. Leverage and payouts are in good shape here, but as you layer on some downside risks to your G&P business and then start thinking about unhedged marketing in 2021, just, I guess two questions. Do you defer any more dividend growth in the near term here to preserve future financial flexibility? Second, would you be willing to continue deferring CapEx like KAPS to protect the dividend should these market conditions persist?
Hi, Matt, it's Dave here. I'll take that one. I think we continue to monitor the situation, as we always do when we look at our dividend policy and our capital allocation. We have projects underway now that will all be completed— well, the material ones will be completed before the end of this year, and I think so we have a fair bit of flexibility at this point with respect to the timing and degree of capital investment. With respect to the dividend, I think it's fair to say we're going to be cautious in the current environment with respect to any future increases. We have a long track record of gradual growth in the dividend per share. In this environment, I think we're going to be focused on making sure that the dividend is sustainable long-term.
I think it's probably prudent for us to take a pause with respect to growth or growth in the dividend per share. These are things that we monitor quarter to quarter.
Great. Thanks for that answer, David. That's all for me.
Your next question will come from Patrick Kenny, National Bank Financial. Your line is open.
Oh, hey, guys. Just to follow up on AEF here, you previously pushed back the turnaround from this fall into 2021. I was just curious if there was any thoughts to bring that back to 2020, just given the pullback in gasoline demand, or is that just not feasible given some of the hedging positions you have in place?
Hi, Pat. This is Brad. I think we continue to monitor the performance of AEF, and we're happy with how it's performing right now. I think we're going to continue to look at a 2021 turnaround and are actually going to potentially consider pushing that out into future years if we can manage both the risk and the compliance requirements that go with that. I don't think we have any desire to pull that forward into 2020 right now.
Okay. Thanks, Brad. On the G&P side, perhaps maybe a bit more color on the comment around developing solutions with your customers that are mutually beneficial. Just wondering what that means to your processing agreements and near-term cash flow outlook. Also maybe a comment on whether or not the liquidity support being offered to the customers with the EDC loans. Does that not relieve at least some of the pressure on you guys to renegotiate your existing fees?
Yeah, Pat, it's Dean. First of all, I think you have to look at our two different G&P gathering areas and processing areas, and one is our Central Foothills. As David mentioned, when you look at the outlook for natural gas, it's probably been as good as it has been in many years. Certainly, with the reduction of production, both oil and natural gas, and across North America, we also think that NGLs are going to get tighter. From a pricing perspective, we think in our Central Foothills area, in conjunction with some of the operating cost reduction initiatives that we have underway, we think that that is looking more promising when we look out into the future.
When you look at our northern area, which is driven more by condensate economics, you have to remember that several weeks ago, condensate was trading at low single-digit prices, and today they're trading $2, $3 off of WTI, which is in that $23, $24 U.S. range. Much different in a four, five, six-week span. Again, long story short, this crisis is very significant. We try to work with our customers through these short-term, what we believe is shorter-term challenges. We've provided some concessions on a very short-term basis, and we've asked for value in other ways, and that would be confidential that we're not at liberty to share that. That's generally our philosophy. We want to work with our customers so that they're there for the long term.
Pat, it's Dave here. I'll just add a comment or two. I think what we're saying here is I think we're feeling a fair bit more positive about the outlook now than we were probably four or five weeks ago. With respect to your question around liquidity support from the government, I think that will certainly help. It's no secret that some of the companies that are customers of ours in a couple of these areas have balance sheets that are challenged. The other thing that I think is reasonable to expect is that we'll see some consolidation over the course of the next little while among the E&P companies. Specifically, we saw Spartan Delta buying out the assets of Bellatrix. For us, we think that's a positive step because Spartan Delta starts out with a much stronger financial position than Bellatrix had.
I think to the extent that we see other transactions like that'll be positive for our business long-term.
Got it. Thanks for that. If I could just finish off on KAPS. There's a disclaimer in the MD&A on the 10%-15% return, potentially falling below the low end of the range if things don't recover. Wondering if you could just provide maybe a floor return solely based on the take-or-pay obligations, which I believe work out to be just over 50% of the initial capacity of the system. Also just, if things don't recover by, say, the latter half of 2021, would you not just defer KAPS again by another year? In other words, do you not only sanction the project if you see activity levels come back, which would in turn support the 10%-15% return range? Is that not the way to think about it?
Pat, we worked very closely, obviously, to defer KAPS for a year when we announced that a couple of weeks ago. Still tremendous support for the project. Again, our customers believe that competing NGL pipeline system is very, very valuable long-term for this basin and this industry. When we get a year out, I guess we'll have to see what the outlook for our basin looks like and where our customers are. From there, we'll be able to make whatever the best decision is for both of us. I think it's too early to sort of speculate what may or may not happen. Again, we'll work with our customers on that front.
Okay. I'll leave it there. Thanks, guys.
Your next question comes from Linda Ezergailis from TD Securities. Your line is open.
I'm wondering if you can maybe give us some sense of seasonality around your Marketing business. Specifically, you recorded an unrealized mark-to-market gain. Is it reasonable to assume that it'll be booked or realized in Q2 the CAD 81 million?
As Dean pointed out before, in our hedging program, we concentrate on the near months. As you go further out with a little bit less liquidity, we don't hedge as much going further out. On a margin basis from hedging being used to protect margin, for example, the isooctane business, that's the profile you would see. You would see more near-term effects there. It's really just dependent upon where RBOB and WTI and those kind of variables move in the near term. Meanwhile, we also hedge our inventory. Again, a lot of the inventory is hedged on a month-to-month kind of rolling basis. Again, you would see a bit more of a near-term impact on that depending on which way, again, WTI moves and other prices.
Is it reasonable to say that your confidence in reaffirming guidance is based on what you've already locked in, and given that you hedge your inventory substantially, that significant losses are unlikely at this point?
From our point of view, and you've seen it in the past on our side, our hedging strategy with respect to inventory has generally proven to be very successful. You saw that in 2014, you saw that in 2018, and you saw it this past quarter as well in that area.
Okay. I'm wondering the rationale for deferring your plan for the 19th cavern. Was it a function of social distancing, wanting to defer any sort of capital outlay commitments, or market conditions? What factors would be required to resume plans on that?
Linda, it's Dean. Given the uncertainty of where we are, we thought it was prudent to preserve capital at this point, we decided to defer the 19th cavern. Obviously, demand looks relatively strong. We can resume the development of that cavern very easily. It's on our site. We've developed a lot of caverns over the last number of years. For now, we've just deferred it, just given the environment that we're in and the uncertainty that we've seen.
Okay, thank you. Just a cleanup question on your cash tax outlook in 2021 and beyond. Is it reasonable to assume that you won't be paying cash taxes for the foreseeable future or is it possible that you might enjoy some recovery in the next couple of years similar to this year?
We're definitely pleased to see the recovery for this year. We don't generally give guidance on a go-forward basis. I think I would just point you, again, to the disclosure and the fact that we have a continued suite of projects that are coming into service this year, which will, again, provide pools. It leaves us in a pretty strong position.
Okay, thank you. I'll jump back in the queue.
Your next question comes from Robert Catellier with CIBC Capital Markets. Your line is open.
Hi. Good morning, everyone. Just a couple follow-ups here. I wanted to start with a comment on the dividend. Notwithstanding the fact that you don't want to tempt fate, you're in a pretty good financial position. With the capital expense slowing down, the free cash flow position looks pretty good too. My question to you is, what do you need to see to resume dividend growth? Is it just a general level of stability and a reduction of the uncertainty in the environment, or is there something else you're looking to on the financials?
Thanks for the question, Rob. It's Dave here. It's hard to be specific. Every quarter we have a conversation with our board about the dividend, and we take into account a whole bunch of factors, as you can appreciate. Our outlook for cash flow, our outlook for capital requirements, what we think the impact will be on balance sheet, and all those factors weigh into it. I think ultimately, we never want to increase the dividend unless we're confident that we can sustain it at that level.
The tremendous uncertainty that we're dealing with over the coming months, we're probably going to be inclined to be a little bit more cautious. It's hard to be specific about what the conditions would be that would cause us to change that stance. I think, ultimately, it's going to be determined by what we see as the level and the confidence that we have in our cash flows going forward.
Okay. Just a level of prudence appropriate for the current environment.
Absolutely.
Okay, following up on just the cost reductions. I'm not thinking exclusively of the optimization plan, but just the G&A and the other OpEx. What's possible in terms of reducing OpEx and what impacts that might have on G&P margins, for example?
Rob, I don't think we're quite ready to be able to provide any kind of an indication on that question. We are going through further analysis right now on the strategy and the timing around the G&P optimization effort. I think I've suggested in the past that we would probably be in a position to provide a little bit more color on that with our Q2 release in August. We are in the midst right now of reviewing operating costs more generally across the portfolio. It's premature to suggest what that might look like. Similarly, with our G&A focus, I think it's a little bit premature to estimate what that might look like. On the G&A side, keeping in mind that we are reducing the size of the portfolio in the Gathering and Processing world, and we are reducing our activity level in terms of capital projects.
For those two reasons, we expect that the G&A support that's required is going to be reduced as well. As I say, it's a little early to estimate what that looks like.
Sure. Okay, I understand. Just on the Gathering and Processing business, based on what you know today, what do you think is possible in terms of the depth of the decline in terms of operating margin and volumes? What are you looking to in terms of green shoots that might make you more confident that volumes and activity is normalizing? Is it still the condensate price? If so, what levels do you think you need to see for a sustained recovery in volume and drilling activity?
Yeah, Robert, certainly we can't provide guidance in terms of our G&P business. Part of it is, if you look at the customers behind our facilities or other facilities, they're reluctant to provide a lot of future guidance on what the plans are. Certainly in the north portfolio, a lot of the economics there are driven off of condensate prices. Natural gas prices certainly help, but a lot of it's driven off of condensate. To be quite honest, when this all rolled out and the system is not built for a demand shock like we just saw. Taking 25 million barrels of demand offline is just not something that has ever happened before. Obviously it creates a lot of havoc, both physically and financially in the market. What we were concerned about initially was that 225,000 barrels of condensate demand comes offline very, very quickly.
Where does that come from? Does it physically shut in people in the field once storage fills out? With what we're seeing today, a lot of that supply has been cut off from the U.S., and there has been shut-ins in Alberta, in the Montney, but far, far, far less than what we're prepared for. From a shut-in perspective, we think that that risk is much lower because demand for gasoline is building in the mid-continent. Refining capacity utilization's moved up from 65% to 73%, and hopefully we'll see that continuing to grow. Condensate prices have firmed up as we've talked about, so it's in that low 20s in U.S. dollar per barrel.
With that, we know that there's a number of producers that have production where the wells have already been drilled, and they don't want to bring them on until they get a better price environment. We think as condensate prices continue to improve, we'll see some of that production that's shut in ready to flow. Whether that happens in Q3 or Q4 or Q1, we can't determine that at this point. Sorry for the long-winded answer.
No, it's very good detail. I appreciate the nuance of really it's up to the customers at this point. Okay. Thank you.
Your next question comes from Rob Hope from Scotiabank. Your line is open.
Hello, everyone. Just to follow up on that last conversation. Arguably, you probably have the best condensate information in the market, just given your existing assets. When you've seen conde imports decline in April and what you've seen so far in May, just want to confirm that you think the risk of a big condensate shock to the market is behind us, just given that the U.S. imports have come down enough?
We certainly believe the worst is behind us. The estimates that we've seen is that there's roughly 1 million barrels of diluted bitumen offline right now. If you look at WCS diffs, which are $3-ish, at least as of yesterday, I haven't checked this morning. I think that signals that supply-demand has rebalanced and maybe over-balanced. As we see refining runs continue to increase in the Midwest, they're very dependent on their feedstock from Canada. As that demand picks up, we'll see more oil sands come back online, production come online, and it's going to require more diluent. We believe that it's going in the right direction, but we're cautiously optimistic. We don't know if another significant wave of COVID-19 breaks out and everybody has to get locked down for weeks or months.
Those are all the uncertainties that we just have to be aware of.
All right. Thanks for that. Actually another follow-up question. Going back to the OpEx at the G&P business. I appreciate the earlier comments, it was ticking up in Q1 versus Q4 of last year despite lower volume. Are there some one-time severance charges or one-time charges there associated with your rationalization plan and that moving forward, we should see them starting to trend downwards?
Rob, it's Brad. I don't think there was anything significant in the OpEx component. I think certainly, as Wapiti continued to ramp up, that would've contributed to some of the incremental operating cost. certainly, with some of the other activity that's going on out there, we've tried to manage those costs appropriately. I don't think there's anything really significant in it, just more Northern driven than anything else.
Okay. I guess just on Wapiti, the outage costs, would they be flowing through there, or was that mainly a revenue impact?
No, they would flow through there as well. Yeah, the maintenance costs associated with the two outages.
All right. Thank you.
Your next question will come from Robert Kwan from RBC Capital Markets. Your line is open.
Great. Good morning. If I can start with G&P. Operating margin was down about CAD 17 million versus the fourth quarter. You referenced some of the Wapiti OpEx, but just even higher level, are you able to quantify what the Wapiti outage was, both revenue and OpEx? How much was attributable to lower volumes, and how much was attributable to the fee reductions that you put through as of January 1st?
Yeah, we chose not to go through that much detail. I think if you parse out that CAD 16 million into equal buckets, you're probably in the ballpark, in the range for that. Again, not all would be recurring. I would highlight that we do put on our website the supplemental data, which shows you the throughput through Wapiti as well. Again, if you normalize that for no outages, then you can again see continued performance on the Wapiti plant as well.
Okay. Just with the fee reductions that came in as of January 1st, was that delivered to your customers in advance of some of the optimization activities like shutting off the six plants, i.e., have you already delivered the lower fees and revenue, but you haven't been able to strip the cost out yet?
Yes, that's right. We've negotiated maybe different fee structures where we felt we needed to. Again, typically, we're trying to get longer-term commitments out of that as well. Each deal is different. Certainly independent of that, we are aiming to be uber-competitive with our business, and part of that is driving costs down.
Okay, are you able to maybe quantify what that line might look like? Or put differently, just how much OpEx is associated with the six plants that are going to be taken offline through next year?
Yeah. Again, Robert, I don't think we're quite ready to be able to provide any kind of indication of that.
Okay. Just finishing on G&P, are you able to talk about what the volumes going through the facilities are right now versus what was going through in Q1?
Yeah, I think the data's published monthly by the AER. People can look there. I think we've been reasonably satisfied with volumes. They bounce around at times as producers continue to look at pricing. I think we've been reasonably happy with how volumes have kind of stabilized over the last little while.
[crosstalk] Oh, yeah. Go ahead.
Yeah, Robert, maybe just let me jump in just to try and clarify. I think we have been concerned about the possibility of shut-in production, particularly four or five weeks ago when condensate pricing and some of the uncertainty just caused a lot of consternation within the industry. As things have stabilized and recovered, we really haven't seen any material amount of shut-in production. A little bit of gas in the south region, similar to what we saw last year, in fact, which is probably more seasonal than anything else. Otherwise, we really haven't seen any material shut-in production to this point. We're simply being a bit cautious with the tremendous uncertainty that we've seen over the last few weeks.
Call it the 7% sequential decline from Q4, given that obviously we haven't seen any of this data, given the lag, but as we start to see it, we'll probably see that decelerate. Is that fair for Q2?
Yeah, I think that's fair, and I think a significant part of that 7% was the outage at Wapiti.
Got it. Okay. Just turning to Marketing, what would need to happen or unfold versus your expectations to take you out of the guidance range, whether that's the low end or the high end?
Steven here. I'll take a stab at that one. Again, we've tried to provide guidance on marketing just to make it a bit easier for people. There's just a host of variables that go into it. Some of the variables that have a larger impact would be the isooctane premiums. That would include the RBOB over WTI premium, which you can see on the market. Again, we hedge a lot of that in the near term, so we've been very fortunate that way. As well, the isooctane premium above RBOB. Those two elements are key elements to continue to monitor. Butane as a feedstock, again, we believe the market prices today versus long term are still attractive. Definitely not the low market prices we saw last year, but still reasonable.
Again, if you had a big shift in that would be an item there. I think as Dean was pointing to before, to the extent that you had a continued lockdown and nobody driving, then that would have an effect on gasoline demand, which then impacts those premiums that we saw earlier. You have to remember that marketing is that we benefit from diversification across four or five different products and liquids blending. We have a variety of ways to make our guidance. Again, you need those different commodities to all be working well.
[crosstalk] Oh, sorry. Go ahead.
Yeah. Robert, it's a different question in this type of environment because you've seen massive swings and a lot of volatility, obviously, in commodity prices. So it's sometimes tough to say, well, what could happen, and that could affect your marketing book. One extreme case would be there's massive shut-ins and 25% of the NGL volumes disappear overnight. We think that's highly unlikely, but I guess it's theoretically possible. I mentioned that RBOB prices were trading negative. Well, if something happened where RBOB prices stayed trade negative for an extended period, that would hurt. We don't believe that's going to happen, we believe that the front-month strength that we're seeing is going to continue in the back end, which again, that's the trend we've been seeing for the last several weeks.
We believe we're very comfortable with the range that we have based on the hedges we have in place and everything that we see. Again, there's still some uncertainties.
Got it. That's a good color. If I can just finish on hedging. You talked about some of the vol, but first, were there any realized marks in the first quarter that really related to future periods, so anything that was rolling in the inventory, or even just closing positions and rolling them? The second being, it looks like from the disclosures that the book is net short TI. I guess, is that the case? Was there anything that you've been able to do when we've seen some of the craziness in the contract rolls?
I'll try and interpret, I think what you were asking in that first question there. On the hedging side there, again, you saw there was a modest impairment of inventory. That was more than offset by the hedging side. Again, not a bad match, but more than offset. It did its job there. Then, that lower inventory cost does set up for margin on the go-forward basis on the physical side as well. Again, the hedging did what we wanted it to do. Remind me again what your second question was.
It looks like in the hedge book that you're running a hedge short.
Yeah. Again, we try and protect the margin and the inventory. A lot of times, butane, well, most of the time, butane and condensate trade on a WTI basis. We use WTI as the hedging tool because most of the time it is actually priced off of WTI. Secondly, on the margin side of the business, for the isooctane business, we're trying to make sure we hedge that complete margin right from butane feedstock all the way up to as far as we can go on the isooctane sale, which is RBOB. In between is the WTI component, that's why we're selling WTI as well.
Right. Just with some of the volatility, is that something you can actually take advantage of? Like when we saw WTI go negative, is that an opportunity for you?
Well, we are fortunate that we have a skill set internally that does find opportunities in these kind of environments where we do have a volatility. We expect as we go forward, we'll continue to see pockets of opportunities.
I'm not sure where you're getting into with your question, but I guess what I would point out is that we're not traders. We're generally sellers. We'll always be short when it comes to the hedge book because we're generally sellers of WTI and sellers of the RBOB spread, and sellers of the NGL commodities to protect our inventory. Certainly, there's always somebody that says, "Should we take this position off?" When you've got a big unrealized gain, but that's not the approach we take. The hedges are in place to protect the value of our future production and our inventory.
Thank you.
Your next question will come from Praneeth Satish from Wells Fargo. Your line is open.
Hi, thank you. Just one question for me. I was just wondering if you could comment a bit on your contracting on your crude storage assets and whether there is any available capacity there to take advantage of contango in the market.
Our Base Line Terminal is fully contracted. Contracts ranging up to 10 years in length. I guess some of those would be two years off of that, so take eight years, I guess now. Then our Wildhorse Terminal, out of the 4.5 million barrels of storage, 3.5 million barrels of that is contracted to third parties.
But it's not operational?
It's not operational yet, no.
Yeah.
Not till later this year.
Where we have seen an opportunity is on the condensate side. Keyera operates the largest capacity volume of condensate storage with our underground caverns at Fort Saskatchewan. We have seen opportunities to contract more of that capacity with the recent volatility that we've seen.
Got it. Thank you.
Your next question will come from Andrew Kuske from Credit Suisse. Your line is open.
Thank you. Good morning. Needless to say, it was extremely volatile for the year to date in a number of commodity markets. In that kind of context, how did your risk management hold up, in particular in the Marketing? Clearly, the results are impressive, did all your risk management systems behave as you anticipated them to behave or were there tweaks during the quarter?
I would say that it behaved the way we wanted it to behave. Yeah. We were quite happy with how our hedging worked, both on inventory objectives as well as margin in the near term.
And then for the remaining—
Andrew, I would add that as Steven mentioned earlier, it's times like these where the efficacy of our hedging program is really demonstrated. We've had tremendous volatility, but this is what our risk management practice is intended to protect against. I think when you see the realized and unrealized gains that we've seen, it's a reflection of the fact that the system works. As you know and as we've said many times, we have a risk management committee that meets weekly that includes several of the people around this table. We pay close attention to it and we try and be disciplined. I think the results of that were borne out in our Q1 results.
On a go-forward basis for the remainder of the year, does anything change from a risk management basis? When we look at your Marketing margins, you're basically halfway to the top end of your guidance, really just after one quarter of results. Do you lay off risk or does the guidance not change just because the outlook you have on the environment is just more cautious?
I think it's more the latter. I think what we've been trying to convey here is a certain degree of caution and prudence. With the hedges that we have in place and with the fundamentals that we see in the business now, I would suggest that we're pretty confident, certainly in the lower end of the range. I think as things unfold, we could very easily be capturing opportunities over the next three quarters that would take us to the higher end of the range or beyond.
I think our history would demonstrate that our team, it's sometimes difficult to predict, but when we're in uncertain times, our team is really good at finding opportunities to add margin through acquiring, whether it's condensate or propane or butane or isooctane, taking advantage of the facilities that we have and the relationships that we have to add margin to the portfolio. I think with respect to marketing and with respect to the Gathering and Processing comments that you've heard this morning, we're being cautious, I think, because there's still a lot of question marks about how we get through the current crisis. At the same time, I think as we sit here today, the fundamentals are stabilizing and I think we're cautiously optimistic.
That's helpful. One final one for me, and just on the context on storage. How much product storage do you have really for your own purposes beyond operational requirements on a day-to-day basis in caverns, tanks, and really rail cars?
We really don't disclose that. I would say the majority of our storage is contracted out to third parties, but we do have some that we use for internal purposes, but again, we don't disclose that.
Okay, thank you.
Your next question will come from Christopher Tillett from Barclays. Your line is open.
Hi, good morning. Most of my questions have been asked already, just one follow-up here on Wapiti phase two, actually, if you don't mind. Some of the comments in the MD&A mentioned that you're going to go ahead and commission phase two at the end of this year, sort of as originally planned, though you now don't expect to need the capacity necessarily. I guess just curious, strategically, what's behind that decision? Are you just contractually obligated to commission the facility by the end of this year, or is there more to it than that? Second, when do you think you might actually need that capacity?
I think, the good news is at Wapiti, we're basically mechanically complete, and we've mechanically completed that facility on schedule, and it's ready to go. With the outbreak of pandemic, we chose to move everybody off-site. There was no immediate demand for that capacity. We chose to protect the integrity of the operation out there and move any non-required people off-site, which included all the commissioning staff that went with that. As we look out over the rest of this year, we don't see a demand for that facility, but certainly from a reliability and redundancy perspective, there is value to having train 2 available for use. That's really the motivation to get it back up and running or get it commissioned in the back half of this year.
We are able to respond to any market scenarios that might be available to provide additional services to customers in the area beyond what our current contractual obligations are.
Okay. That's very helpful then. That was it for me. Thank you very much.
Again, if anybody has a question, please press star one on your telephone keypad. Your next question comes from Ben Pham from BMO. Your line is open.
Okay, thanks. Good morning. I wanted to go back to some of the commentary on your outlook and volumes and whatnot. I'm wondering with the public disclosures on the Canadian oil sands shut-ins, are you guys able to do a detailed or have you been able to do a detailed bottom-up analysis to stress test your cash flows and be able to figure out impact on your condensate volumes and gas processing volumes? With that range in production, you can figure out the range of outcomes for this year. Is that pretty visible to you guys as you do that, or is that as clear as mud right now?
Yeah, we have done that exercise, Ben, where we've modeled in different scenarios. We do have the benefit of a lot of public data plus what moves on our system. We see the nominations every month, what comes in and out of it. We have pretty good data. Again, there are some uncertainties, and part of that is where the oil sands supply is sold, and most of that is mid-continent. We sort of see that as an advantage today. The mid-continent refiners there have complex refineries, and they can make more gasoline, and that is the highest value product right now. Distillates are weak, and so is jet. Again, we see as the lockdowns ease, we certainly see continued demand picking up for gasoline. Again, that is going to draw more supply from Canada.
We've modeled out three different scenarios just to see what it looks like in our business.
Okay. That's great to hear. Can you remind me, when you decided to turn off your DRIP with the KAPS deferral, are you self-funded then regardless of bringing CapEx up next year, or do you have to bring back the DRIP program as you ramp up KAPS?
Yes, Steven here. The primary reason for turning off the DRIP is obviously the share price level and just the amount of dilution it was causing in that respect there. As well, the deferral of KAPS gave us some flexibility as well on financing. I think, again, because of the situation around us, I think our view is that as we get to next spring and hopefully move forward with KAPS, we'll just evaluate our balance sheet and our operating cash flows and the outlook and make the prudent choice then as to how to fund that project.
At this time, I will turn the call over to the presenters.
Great. Thank you everyone for joining in on our Q1 conference call. That completes it. As David said, please continue to stay healthy and positive during this interesting time. Thank you.
This concludes today's conference call. You may now disconnect.