Good morning. My name is Karina, and I will be your conference operator today. At this time, we would like to welcome everyone to the Keyera Corp. Second Quarter 2019 Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star, then the number 1 on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. Ms. Lavonne Zdunich, Director, Investor Relations, you may begin your conference.
Thank you, and good morning, everyone. It's my pleasure to welcome you to Keyera's second quarter conference call for 2019. Joining me today is David Smith, President and CEO, Steven Kroeker, Senior Vice President and CFO, Bradley Lock, Senior Vice President and COO, and Dean Setoguchi, Senior Vice President and Chief Commercial Officer. As we released our financial results yesterday, the focus of our call this morning will be on our business strategy, operations, business development opportunities, and financing. After our prepared comments, we will open the call to questions. I would like to remind listeners that some of the comments and answers that we will provide speak to future events. These forward-looking statements are given as of today's date and reflect events or outcomes that management currently expects. In addition, we will also refer to some non-GAAP financial measures.
For additional information on non-GAAP financial measures and forward-looking statements, please refer to our public filings, which are available on SEDAR and our website. With that, I'll turn it over to David.
Thank you, and good morning. Keyera delivered outstanding financial results in the second quarter of 2019. Adjusted EBITDA increased 19% over the same period last year, net earnings doubled. We are on track to deliver another year of strong financial performance. Our midstream services remain in high demand, and our capital projects are on schedule and on budget. Favorable market fundamentals are supporting higher fractionation fees and iso-octane margins that are both expected to extend into the first quarter of 2020. We continue to successfully execute our long-term growth strategy, which is focused on extending and enhancing our integrated value chain. Over the past few years, we have been extending our infrastructure into northwestern Alberta to support the liquids-rich Montney and Duvernay developments. Wapiti Phase 1 was commissioned in the second quarter, and the latest Simonette expansion will be completed this quarter.
Once we complete Phase 1 of the Pipestone gas plant in 2021, Keyera will be one of the largest gas processing and condensate handling companies in the region. To further enhance our integrated value chain, we recently announced that we are proceeding with KAPS in partnership with Cenovus and KKR. This pipeline system will transport growing liquids production from northwestern Alberta to Fort Saskatchewan, where Keyera can offer fractionation, storage, and rail services, as well as access to our industry-leading condensate hub. We remain confident in our long-term business strategy and are committed to providing our shareholders with stable, long-term dividend growth. As a result, we are increasing our monthly dividend by 7% to CAD 0.16 per share per month or CAD 1.92 per share annually. This extends Keyera's long history of steady dividend growth since our IPO in 2003.
I will now turn it over to Brad to discuss our operations.
Thank you, David. During the second quarter, our facilities operated very well, and we continued to advance our capital program. In May, we completed phase 1 of the Wapiti gas plant. In July, the acid gas injection system at our Simonette gas plant began operating as well. We also completed a three-week turnaround at Rimbey, one of our largest and most complex gas plants, both on time and on budget. Even with the activity in the quarter, safety remains a priority with Keyera. We continued our outstanding performance in the second quarter, representing the sixth consecutive quarter without a lost-time incident amongst our employees and the third consecutive quarter without a lost-time incident amongst our contractors.
Keyera also held our annual safety standdown, with each of our executives spending time in the field listening to worker feedback and discussing the importance of safe operations to our workers and our communities. At Keyera, we recognize that providing a safe and healthy work environment is an integral part of being a responsible employer, operator, and good corporate citizen. Looking ahead to the second half of the year, our operations will be affected by planned maintenance turnarounds at our Cynthia and Ricinus gas plants in the third quarter and a planned outage at AEF scheduled for the fourth quarter. This six-week outage at AEF is to perform preventative maintenance, which will ensure optimal performance of the facility through the next two years, allowing the next full turnaround to be deferred until 2021.
This is an exciting time for Keyera as we are beginning to realize the benefits of our capital program and generate incremental cash flow. In addition to Wapiti phase 1, this year, we expect to complete the North Wapiti pipeline system and the Simonette gas plant expansion. Over the next three years, the Wapiti phase 2 and Pipestone gas plants, Wildhorse terminal, and KAPS. These projects will extend our secured growth into 2022. I'll now pass it over to Dean to talk about our business development opportunities.
Thanks, Brad. As David mentioned, we continue to successfully execute our growth strategy with a focus on extending and enhancing our integrated value chain. We're very pleased with the recently announced KAPS project, which will be a very strategic investment. Not only does this pipeline system provide Keyera with strong returns and secure long-term cash flows, it improves the integration of our value chain.
With stronger integration, we expect to attract additional volumes to our gas plants, fractionators, storage caverns, condensate system, and marketing supply book to generate incremental margin. These additional volumes provide Keyera with a foundation for significant future investment opportunities that could include additional gas and condensate processing investments, fractionation, and additional storage caverns. There's no shortage of business development opportunities for Keyera where we can leverage our expertise. In addition to looking at opportunities which provide long-term growth, we will continue to focus on maximizing returns on our existing assets. With that, I'll turn it over to Steven to talk about our financial position and strategy.
Thanks, Dean. Keyera continues to experience strong growth in its fee-for-service realized margin, growing 16% during the second quarter compared to the second quarter of 2018. Our marketing business continues to be a strong contributor to our cash flow, generating a record realized margin this past quarter. For 2019, we still expect realized margins from marketing to be between CAD 280 million and CAD 320 million, even with the planned six-week maintenance shutdown at AEF in the fourth quarter. Maintenance capital is now expected to increase modestly to between CAD 105 million and CAD 115 million, given the planned outage at AEF, partially offset by the deferral of some other maintenance capital. Cash taxes continue to be forecast at between CAD 90 million and CAD 105 million for 2019, and at less than CAD 10 million for 2020, since capital projects like the Wapiti plant have become available for use.
Keyera continues to grow shareholder value through prudent capital investments that are expected to generate attractive returns on capital. We have now invested CAD 1.3 billion of our CAD 2.9 billion multi-year capital program currently underway. We remain committed to a strong financial position, and in June, issued CAD 600 million of senior subordinated hybrid notes. These notes provide us with attractive all-in financing costs, given we receive 50% equity treatment from the credit rating agencies. With hybrid notes being subordinated debt, our net debt-to-EBITDA covenant ratio fell to 2.3 times at June 30th, compared to 3.0 times at the end of the first quarter. We continue to believe the remaining CAD 1.6 billion of our current capital program, which is expected to be incurred over the next three years, can be funded without issuing common equity, apart from the DRIP and premium DRIP.
With our strong balance sheet and financial flexibility, Keyera is well-positioned to take advantage of the right investment opportunities and will continue to focus on delivering attractive returns on our invested capital. With that, I'll turn it over to David for closing remarks.
Thanks, Steven. While our industry continues to have challenges accessing global markets, we are encouraged with the federal government's decision to proceed with the Trans Mountain pipeline expansion and the progress being made on LNG projects on the West Coast of Canada. To help continue this positive momentum, we are working with other energy companies and organizations to spread the word about the importance of our industry, not only to Canada, but to our world. Canada is one of the most responsible energy-producing countries in the world. The world will continue to need Canadian oil and gas for the long term as it makes the transition to cleaner sources of energy. I am proud to lead a team that wants to be part of this important change. We are dedicated to safety, operational excellence, and environmental responsibility while adding value for our customers and our shareholders.
On behalf of Keyera's board of directors and management team, I would like to thank our employees, customers, shareholders, and other stakeholders for their continued support. With that, I'll turn it back over to the operator. Please go ahead with questions.
Thank you. At this time, I would like to remind everyone, in order to ask a question, please press star, then the number 1 on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question is from Linda Ezergailis with TD Securities. Please go ahead.
Thank you. I'm wondering if you could give us some more context around your maintenance activity beyond this year. Is it reasonable to take the prior 2020 maintenance capital guidance, I believe it was CAD 100 million-CAD 110 million, and reduce it by about CAD 50 million to reflect the deferral of the AEF, and then just add it to a run rate for 2021? Are there a few other moving parts?
Yeah, that's probably a fair assumption there on the maintenance capital there. There's a little bit of maintenance capital deferred from this year into 2020. As we had highlighted before, I don't think we actually gave guidance on 2020 before, that would've had an AEF turnaround which would've kept it relatively comparable to 2019 levels. Yeah, it's probably fair to back off that kind of a number or smaller for 2020.
Given some of the accelerated maintenance into this year for AEF, what would be the scope of the 2021 outage? Would it be typical or maybe a little bit shorter? Can you provide some context around how things have shifted around, and if that will continue progressively, or if this is just an opportunistic one-time shift?
Yeah. Linda, this is Brad. I think our 2021 would be of normal size and scope.
We haven't finalized the timeline, but it'll be in that 40-day outage timeline as well. The work that we're getting done this year is really just an opportunity to get ahead of some of this work and take advantage of a deferral that we can get on next year's turnaround into 2021.
Okay, that's helpful. Maybe, given the reduced tax rates in Alberta, are you able to provide any sort of cadence of cash taxes or outlook for 2021 and beyond?
Yeah. We haven't come out with formal guidance for 2021, but in 2020, it largely depends on the capital being brought on stream. In 2020, we indicated it'd be less than CAD 10 million for cash taxes. You can see a pretty good visibility of continued capital and projects coming on in the next couple of years. I would draw my continued conclusions from that.
Okay. That's helpful. Maybe just in terms of a bigger picture strategic question before I jump back in the queue. What is your latest thinking on value chain extension downstream into LPG exports, and your thoughts on the merits of continuing to railcar down to the U.S. versus potentially participate in any sort of West Coast initiative?
Linda, we continue to look at diversification opportunities into areas that we think make sense, leveraging the competitive advantages and capabilities that we have. To this point, particularly with respect to propane, our approach has been to make sure that we have the flexibility with our facilities in Western Canada, along with our facility at Hull, Texas, to be able to move that product to the highest value markets. I think we'll continue to kind of monitor how that develops. We currently have no plans to be an equity participant in that kind of an investment. Having said that, those are the kinds of opportunities that we'll look at all the time.
Great. Thank you. I'll jump back in the queue.
Your next question is from Robert Hope with Scotiabank. Please go ahead.
Morning, everyone. First question is just on your financing outlook. With the strong cash flow performance in 2019, and 2020 should benefit from lower maintenance as well, just want to get a sense of how you're thinking about the DRIP in share count, and the potential to shut down that early, just given your strong balance sheet.
Yeah. No, that's a good question, Robert. Steven here. From our point of view, we just continue to regularly monitor that situation. As you can appreciate, it's still a large capital program, we just want to be careful about when we make any kind of commitments about shutting down a DRIP. Our overall goal is to continue to have a prudent capital structure, continue to have the financial flexibility to look at projects or acquisitions or whatever might come about. I don't see anything imminent in terms of shutting it down. It is a very effective cost for us to raise equity if we are raising equity. There's nothing imminent about that.
When you look at a prudent balance sheet, does that evolve as you add more contracted cash flow?
Yeah. I think we've always been careful over time about committing how we would move that view. The reality is we have a very strong commercial team, and when we get new assets, they continue to think of ways of making money that way. That being said, I would think it's a natural evolution of the company that when there are material shifts in the fee-for-service nature of the business, that you continue to look at what that optimal capital structure is.
That's helpful. Then just finally, just given some share price performance of your customers, how are you looking at credit for some of your counterparty risks?
Well, we've always had a pretty robust way of looking at counterparty risk. We employ various mechanisms, and I think you can see that in our AIF and disclosure, especially around year-end. Really, we try and make sure we have the proper continued due diligence and scrutiny on how receivables are going. Very close monitoring of collecting receivables in that respect. Letters of credit, netting agreements, if we can net NGLs. You have to remember, a lot of times we're buying NGLs off of producers, we get to sometimes net those kind of commitments as well. At the end of the day, over the last five years, we've had a very strong record in terms of doubtful accounts. I think we're at sort of CAD 3 million right now for doubtful accounts. We continue to monitor.
No doubt it is a little bit more tougher in this kind of environment, but we just continue to watch it very closely.
Thank you.
Your next question is from Ben Pham with BMO. Please go ahead.
Okay. Thanks. Good morning. Marking AEF, I know, Brad Lock, you can't really predict that and detain costs. There's just inventory you can manage there. On the utilization, I guess that's something you can manage and control with a bit of maintenance and whatnot. Since beginning of 2018 or so, utilization's been a little above nameplate capacity. Maybe can you refresh us on what's driving that? Is it just a pace of your maintenance downtime more frequently than before? Then just how do you think about utilization on a sustained basis?
I think, certainly AEF, when it's up and running, we get very good utilizations. We normally run it above nameplate capacity, and it likes to run there. That's certainly good from the ability to generate iso-octane and take advantage of that margin. I think it's like any other facility. It's complex in nature, and we've got a really good team out there that pays attention to the forward-looking measures and tries to predict potential upsets. I think our outage that we've got coming up is really just doing that. It's not impacting operations today, but as we look out over time, we think by taking the plant down in the fourth quarter of this year would be prudent to allow a more stable operation through 2020. That also allows us to extend our turnaround into 2021.
It's really a predictive kind of maintenance opportunity that I think is going to play well in terms of the overall value generation for the facility.
Are you finding that rather than this big four-year overhaul, which you got to do anyway, is that you kind of opportunistically put it out for maintenance for a shorter period of time, and you're able then to run at a very high utilization in other periods it's online?
I don't think the utilization that we've seen has impacted the reliability of the facility. I think if you go back before Keyera was an operator of that plant, that plant ran in the 50% to 60% to 70% utilization. Their facility reliability was actually not as good as what we're seeing today. I think when we put all that together, we think continuing to run that plant at nameplate or slightly above nameplate actually gives us the maximum value out of that plant.
Okay. Second question.
Sorry, Ben, it's Dean. The other thing is that every time we do a big maintenance turnaround, our team at AEF looks for opportunities to employ strategies to try to debottleneck the facility each time and also enhance our reliability. That's why our runtimes, if you look at the history of that facility, have improved, and they'll continue to look for opportunities like that.
All right. That's great for that. Second question, Gathering and Processing, I wanted to check in the CAD 70 million. Is that a pretty clean EBITDA? There wasn't any sort of prior capital recoveries from that? Two, I'm just curious, outside of the Montney, you flagged a plant shutting down in a few months. Just how's the volume outlook outside of the Montney?
Yeah, we've been pretty pleased with how the Gathering and Processing business has performed, even in what's a challenging environment. I think certainly we all know the commodity prices that are out there today make natural gas drilling somewhat challenging. We think, certainly over time, that may have some impacts on volumes. As we've seen over the past little while, those impacts tend to be modest, and we continue to find ways to provide additional value add to our customers that allows us to generate incremental margin as well. Things like enhanced liquid recovery, things like Hewan Pipeline and things like that allow us to provide value to both ourselves and our shareholders as well as the customers who flow through our plants.
Yeah. Then maybe just to expand on that, obviously our results this quarter were affected mainly by our Rimbey turnaround. We have a couple turnarounds next quarter as well at Ricinus and Cynthia. I'd say that if you look at the activity in province, certainly it has slowed down in terms of the levels of activity. We certainly see the Montney facilities, being Simonette and now Wapiti that's onstream, being very active areas. Again, those are the most economic areas in the province. We feel pretty good about what's happening there. When you look at our Central Alberta facilities, they've still been fairly resilient. Part of that is because it's a mature production base, so the declines there aren't near as steep as the new production that you see up in the Montney Duvernay. I think we have that benefit.
As Brad mentioned, we're always looking for ways where we can deliver our services more efficiently for our customers to make it more economic for them.
All right. Thanks. You've proven to manage costs quite well during past declines. Thanks, Brad.
Your next question is from Patrick Kenny with National Bank Financial. Please go ahead.
Yeah, good morning, guys. Just with phase 1 of the Pipestone plant now fully contracted out, wondering if we can get an update on the level of demand for a phase 2 expansion, say, versus six to nine months ago, especially now that you're looking forward with KAPS and still have 30% or so white space to potentially bundle with phase 2 commitments?
Pat, We don't sleep. We're always looking for opportunity, obviously.
We like the site. It's a greenfield site. Makes a lot of sense that if there is demand for capacity, if and when that happens, for us to be able to provide that service. I think we don't have any update today, but it's something that we're certainly very well-engaged with the producers in that area to assess when they'll be drilling, and they'll need that demand.
Great. Thanks for that, Dean. Then, maybe just David, back to your comments around the strategy of supplying propane to the West Coast terminals. Just wanted to confirm if this is mainly on a fee-for-service basis or the marketing group looking to take advantage of any pricing arbitrage opportunities on a quarter-by-quarter basis. If so, do you have any hedges in place on Asian propane prices going forward?
Patrick, first of all, these are barrels that we're moving as principals. This would be some of the portfolio of propane supply that we have and what we purchase from the producers in Western Canada. I'm not at liberty to talk about what the pricing basis is for some of the product movements that we have in place to different points. We are managing things prudently and making sure that we have a portfolio of different pricing basis for the propane that we move. We're monitoring that as you know, through our Risk Management Committee on a weekly basis to make sure that the exposures that we have are being managed conservatively.
Okay, great. Then just lastly, it might be a bit early, just on the back of the TMX reapproval, any update on timing or customer interest in fully expanding the Base Line Terminal by another couple million barrels, I believe?
We've certainly been engaged with our customers in that front. I would say it would definitely be a catalyst if Trans Mountain Expansion where there's more certainty around that. We feel pretty confident about it, but again, once we see that moving forward, I think we'd see more demand for above ground storage, and we have a great facility to provide that opportunity, where their Expansion lands at ETT.
Got it. That's it for me. Thanks, guys.
Your next question is from Robert Catellier with CIBC Capital Markets. Please go ahead.
Just one quick question on Nevis. What are the implications of suspending operations there, and does it accelerate or bring forward any environmental remediation obligations?
Yeah. I think certainly from a cash flow perspective, it's going to have no impact on our business. The facility has been a marginal facility for a number of years as we've tried to find opportunities. Certainly, from a reclamation perspective, we will begin the process of deconstruction and reclamation and alignment with the Alberta Energy Regulator, who basically has to approve our reclamation plan. That'll be a long-term project, so it'll be a small investment for a large number of years that'll work towards getting that facility completely deconstruction, decommissioned, and reclaimed back to native state. It'll be an ongoing project, but it'll have minimal impact to our financials.
There's no chance of keeping it up. You're just not going to turn it into a compressor or keeping it running in hopes for a recovery. So you're going to decommission?
That's our plan today. We've explored a number of opportunities out there to try to find ways to keep it viable, and it just wasn't something that we could find a suitable way to do that.
Rob, I would add that at this point, obviously, as we get into the process, we'll learn more, but at this point, we think that the cost of the decommissioning and remediation is pretty much fully covered by the asset retirement obligation that's on our balance sheet. On that basis, you wouldn't expect that it would have any material kind of earnings impact.
Okay. Just on AEF, obviously, you have more control during a planned outage. I think when the facility went offline the last time for an unplanned outage, there was a difficulty with the butane costs, and you were taking butane in and selling it for a loss. What's the outlook for how you manage the outage in Q4? It sounds like you have more access to storage to be able to manage that situation.
Yeah, absolutely. Certainly, with the planned outage that we're scheduling now for the fall, we have made provisions to make sure that we have ample storage capacity to handle the supply volume that we're purchasing. We can put into storage, and again, we're acquiring at a pretty attractive price, so that'll certainly help our margins going forward once the plant comes up and is running again.
Dean, does that advantage last through Q1 and into Q2 of next year, or is that pretty much at the vagaries of your 2021, sorry, your 2020 contracting?
If you recall, our contract season does actually end in March of 2020. For that very nature, it will extend to 2020. The inventory that we build, it will have lasting benefits into 2020 beyond that. It will help us with our margins in 2020 is the bottom line.
Your next question is from Robert Kwan with RBC Capital Markets. Please go ahead.
Maybe just continuing here on the topic of AEF. We're just looking at marketing more broadly. You're holding the guidance and even with the six-week downtime, I'm just wondering, as you think about say, where the original budget was for Q3 and Q4, is there anything else that's moving around? For example, with the downtime, did you or do you need to close off some hedges?
Yes. We do have some hedges that we are unwinding. It wouldn't be significant. I wouldn't consider it to be material in any way. Yeah, we're managing that.
Okay.
I would say the-
Oh, yeah. Go ahead.
With respect to your comment about just our budget and us being able to hold it even with our six-week outage. Part of that as well is, again, the octane premiums have been very strong, and part of that is because of the Philadelphia refinery that is offline now, but it's also because of a lot of the light feedstocks that are going through the refineries, and It's sub-octane, so it requires extra octane to meet gasoline specs. It's been very positive for our business.
Based on expected light production out of the U.S., that should be a structural positive, should that not?
Yeah. There's always other variables at play, but certainly, this season it's been very strong.
Okay. I guess maybe just the last question on this topic. I'm guessing just given how strong Q2 was, it doesn't sound like there's a whole lot impacting Q3, so that should be continued strength. In Q4, though, my understanding is that AEF was not a huge driver of the quarter. That's where propane starts to kick in. I'm just wondering with how the second quarter shaped up and the other factors that seem to be driving above expectations for AEF. Put differently, is the guidance conservative at this point?
I guess, Robert, what I would say is that we're still comfortable with the guidance that we provided. I don't think it would be appropriate to provide any additional color at this point. What I would reiterate is that in planning the outage at AEF, we have the ability to minimize the impact, but six weeks of lost production is still six weeks of lost production. It will be a significant impact, I think. That's being offset by the stronger margins that we're seeing in Q2 and in Q3.
Okay.
Overall, we're comfortable that we're still in the same range.
Okay. Just turning to frac fees, we've seen that come up, and you've talked about that extending into Q1 2020. I guess just with the NGL year, I'm just wondering, though, as we think past that, unless NGL production comes down a bunch in Western Canada, without new capacity being built, is the expectation that fees should stay relatively high past that first quarter?
I think that would be a fair statement, yes.
Okay. Then just maybe to finish, Steven, you made a comment talking about the balance sheet, that you're well-positioned to take advantage of the right investment opportunities. Just more broadly, I'm wondering, is there anything on the front burner, some color you can give as it relates to either brownfield initiatives, greenfield initiatives, and especially interested in any color you have on potential acquisition activity, whether that be from producers or otherwise?
That's a good question, Robert. I would say from our point of view, we've always been pretty good at disclosing what we're working on in projects. I would say we do have a strong plate full of projects that we're focusing on and concentrating on. I would say the observation is that we're seeing is that we are seeing more assets come available or at least people exploring monetization of different assets. I think from our point of view, we just want to continue to be very prudent about how we deploy capital, how do we view returns on a risk-adjusted basis to making sure we get strong returns. Apart from that, as you know, we've said in the past, we don't generally comment on acquisitions, et cetera. I would say on the G&P side, you are seeing more things come about.
I would say we're also pretty focused on our current organic capital program.
Okay. I guess just on the G&P, what's the appetite to take that part of the business higher and just with all the capital in front of you for mostly long-term contracted initiatives?
Yeah, no, I think that's a good question. From our point of view, we look at what's on the plate right now, and so that's a pretty full plate in terms of projects, continued Gathering and Processing exposure. We like increasing that exposure in the Montney and the Duvernay. We also recognize you always have to keep that within balance within the broader portfolio. We obviously concentrate a lot on the liquid infrastructure side and continue to look at projects on that side, as Dean alluded to earlier. As you've seen us in the past, we try and keep a pretty balanced portfolio. Maybe Dave, you have another comment or two there. Yeah. Robert, I guess what I would reiterate is that we've got a pretty well-established set of criteria, both economic criteria and also the strategic nature of the assets. We've been pretty disciplined about that.
We're very encouraged by what we see around Simonette, Wapiti, and Pipestone. Those facilities have and will have the characteristics that we really like in terms of long-term sustainability. As Steven indicated, there are assets for sale. A lot of them don't have those sorts of characteristics that we would look for. As you're probably aware, there have been two transactions announced that come to mind in 2019. We were not the successful acquirer of either of those assets. I think that's an indication that we will continue to be disciplined.
That's great. Thank you very much.
Your next question is from Andrew Kuske with Credit Suisse. Please go ahead.
Thank you. Good morning. There's some commentary in the MD&A about the G&P business where you reduced fees for some of the producers in exchange for long-term volume commitments. Could you just give any incremental color beyond what was in the MD&A?
What I would say is that we try to work with our customers, and we understand the predicament that they're in. When we can create a win-win situation for both them and us, we try to pursue opportunities like that and solutions like that. For us, it just gives us a longer-term commitment from our customer, and we work with them. We're very flexible with them.
Maybe, [audio distortion].
I think the only thing we would add to it is that in aggregate there, it's not a material amount that we're talking about.
Okay. That's helpful. Then I guess the extension on that would be, does that kind of approach provide potential M&A opportunities, in areas where you don't have exposure in the basin where someone might be looking for an integrated solution, or they're lacking it right now, but they have their own plans that they would be willing to transact?
What I would say, the answer to that is that we look very carefully at what the characteristics are of the facilities and where they're located. When we're acquiring assets, when we're building assets, we want to have long-term sustainability and visibility to growth. Those are the kinds of things that we look at. We have discussions around opportunities like that with producers on an ongoing basis. We're pretty disciplined about the criteria that we apply to what we buy.
Finally, could you just give us a quick update as to where you are in cavern development, on what's being washed, and what do you expect coming online in the next few years?
We have a very comprehensive program of cavern washing. We've got two caverns in wash right now. We've got certainly one waiting for wash, and we'll have caverns come online. The way I would think about it is probably a new cavern comes online about every year, and that's the way we try to set it up. Demand continues to be strong. The contracted nature of cavern storage is something that we really like. It'll be something we will continue to develop going forward.
Yeah. That's great. Thank you.
Your last question comes from Matt Taylor with Tudor, Pickering, Holt & Co. Please go ahead.
Hey, thanks for taking my questions here. Following up on marketing, I know you hit on this, but can you just provide a bit more color on what the premium that you're seeing to iso-octane there is versus alkylate and RBOB, and how long you expect that to last?
Matt, we're seeing some pretty strong premiums on our octane, which is again, a premium over the RBOB posted prices. Part of that was triggered by the outage of, or the shutdown of the Philadelphia refinery. I would say that while that facility is not expected to come back up again, the whole octane market will rebalance at some point. Certainly through the summer, it's been very strong. I think longer term structurally, we see octane to be strong, but maybe not as strong as what we're seeing in the summertime because there will be other sources of octane that can be sourced offshore that can be brought into the U.S. to help balance the market a bit more.
Can you give me some sense of what's normal, even on a per gallon basis versus what you're seeing now? Just trying to get a sense of magnitude.
Yeah, we don't disclose that.
It's called the secret sauce.
Yeah. Fair enough. Over to condensate volumes. Noticed there is a 13% year-over-year uptick. I believe Fort Sask has capacity of around 600,000 barrels a day or so. I'm just curious what system utilization was for Q2, and then obviously as you start thinking about expansions and opportunities, especially with that 16-inch KAPS pipe coming into the market there, I'm just wondering how you're thinking about that system.
Well, you might recall, Andrew, that with the South Grand Rapids pipeline coming on stream, we now have a significant amount of additional capacity in addition to the Fort Saskatchewan pipeline between Edmonton and Fort Saskatchewan. We're now connected, I think, to pretty much every outlet for condensate and pretty much every source of condensate. We are the best-connected condensate network within the Edmonton-Fort Saskatchewan hub. We don't really see right now any near-term bottlenecks in terms of transportation capacity. We are, as Brad mentioned, continuing to look at expanding the storage. With the KAPS Pipeline coming on and getting connected in a little over two years' time, that will obviously create more supply. We're constantly monitoring what the next steps are in enhancing the network.
In the short term, we can accommodate a significant growth in volume without having to invest any additional capital in the transportation network itself.
Great. That's helpful. Lastly, can you remind me how much of the storage at Fort Sask is more operational versus longer term? What I mean by that is just to take advantage of contango prices. I'm just wondering, as we sit here, how are you seeing spreads going into this winter versus last year? Just wondering what expectations are in marketing.
We don't specifically disclose the exact allocation of our cavern storage. I would say that the majority of it is in condensate service, and that's tied to long-term contracts with the oil sands customers.
The remainder obviously would be NGLs?
Yes.
Excellent. Thanks for taking my questions, guys.
Again, if you'd like to ask a question, please press star 1 on your telephone keypad. There are currently no further audio questions at this time. I turn the call back over to the presenters.
Thank you very much, everyone, today for listening in on our conference call. If you have any follow-up questions, the investor relations team will be available. Thank you, and have a good day.
This concludes today's call. You may now disconnect.