Good morning. My name is Grant, and I'll be the conference operator today. At this time, I would like to welcome everyone to Keyera Corp's first quarter conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star then the number one on your telephone keypad. If you would like to withdraw your question, please press the pound key. Thank you. I would like to turn the call over to Calvin Locke, Manager of Investor Relations. You may begin.
Thank you and good morning. Joining me today will be Dean Setoguchi, President and CEO, Eileen Marikar, Senior Vice President and CFO, Jamie Urquhart, Senior Vice President and Chief Commercial Officer, and Jarrod Beztilny, Senior Vice President, Operations and Engineering. We will begin with some prepared remarks from Dean and Eileen, after which we will open the call to questions. I 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 refer to some non-GAAP financial measures. For additional information on non-GAAP measures and forward-looking statements, refer to Keyera's public filings available on SEDAR and on our website. With that, I'll turn the call over to Dean.
Thank you, Calvin, and good morning, everyone. As shared at a recent Investor Day, I'd like to start today by reiterating why Keyera is well positioned to generate strong investment returns for decades to come. First, our business is strong and will remain in high demand. We have a fully integrated value chain that plays an essential role in providing the world the energy it needs. Second, our continued focus on financial discipline is core to our success. A fact highlighted by our successful navigation of the past two years of pandemic uncertainty. Third, we have clear visibility on near and long-term growth. We're forecasting a 6%-7% compounded annual EBITDA growth rate from 2022 to 2025 from our fee-for-service business. In the first quarter of 2023, our KAPS project comes online and will provide an additional platform for long-term growth.
Lastly, we are uniquely positioned to create a strong energy transition business. Our low carbon hub strategy will leverage our existing assets and advantage land position, expertise, and collaborative relationships. We aim to decarbonize our business and to help our customers decarbonize theirs. Our business is positioned to produce near and long-term value for shareholders, and our team continues to find opportunities to drive returns in all three business segments. In our Gathering & Processing segment, we continue to increase competitiveness and optimize returns. In the north region, our Pipestone gas plant is effectively full, and we are progressing opportunities to expand its capacity. At Wapiti, we expect to be utilizing our phase II capacity in the second half of this year. In the south region, we're seeing areas of volume growth as producer activity continues to increase.
In our Liquids Infrastructure segment, we see continued high demand for all services, including near record volumes flowing through our industry-leading condensate system during the quarter, supporting stable cash flow and additional marketing margins. Our Fort Saskatchewan fractionation capacity remains fully utilized. With KAPS soon to be online, we believe we're well positioned to expand our fractionation capacity with appropriate contractual support. Our Marketing segment delivered another strong quarter, a result of continued strength in commodity pricing and a 12% year-over-year increase in sales volumes. Eileen will talk about our updated 2022 Marketing guidance in a few minutes. Moving on to capital projects. KAPS is now nearly 70% complete and is progressing on schedule. This project is a game-changer for Keyera and for our customers. It's a long-awaited and much-needed competitive alternative.
On ESG, we'll be releasing our second annual ESG report this fall, and in the fourth quarter, we'll begin supplying 10% of our total power needs via solar energy. We announced in the quarter that we are collaborating with Shell Canada to develop potential low-carbon projects in Alberta's industrial heartland, leveraging our existing assets and adjacent lands. This opportunity supports the collective decarbonization ambitions of Keyera and our many industrial neighbors. We're pleased with the progress we made in the quarter, and we look forward to continue to advance our strategic priorities for the remainder of the year. I'll turn it over to Eileen to provide an update on our first quarter financial performance.
Thanks, Dean. For the quarter, adjusted EBITDA was CAD 257 million, compared with CAD 225 million for the same period in 2021. The year-over-year increase was due to higher contributions from the marketing business. Net earnings were CAD 114 million compared to CAD 86 million for the same quarter in 2021. Our first quarter dividend payout ratio was 59%, and our trailing twelve-month payout ratio was 62%, within our targeted range of 50%-70%. We continue to maintain a strong financial position, ending the quarter with a net debt to adjusted EBITDA ratio of 2.5 times on a covenant basis. This is at the low end of our target range of 2.5-3 times.
Now moving on to segment financial performance, where higher volumes through our integrated value chain contributed to the solid start to the year. The Gathering and Processing segment delivered a realized margin of CAD 77 million, compared to CAD 79 million for the same period last year. These results were offset by 22 days of downtime at our Wapiti gas plant, which impacted margins by approximately CAD 10 million in the quarter. Our Liquids Infrastructure segment delivered realized margin of CAD 105 million, consistent with the same quarter of 2021. The Marketing segment delivered a realized margin of CAD 103 million, compared to CAD 61 million in Q1 of 2021. This strong result was supported by the continued strength in commodity pricing and the benefit of low-cost butane supply from the 2021 contracting year. Moving on to our guidance update.
For 2022, we now expect realized margins for the marketing segment to range between CAD 300 million and CAD 340 million, up from previous guidance of CAD 250 million-CAD 280 million. The increase is due to strengthening motor gasoline and octane demand that benefit our iso-octane margins. As a result of higher marketing contributions, we now expect cash taxes for the year to range between CAD 30 million and CAD 40 million, increased from CAD 15 million- CAD 30 million. All other previously disclosed guidance remains unchanged. I'll now turn it back to Dean.
Thanks, Eileen. In closing, the macro outlook for Canadian energy continues to be positive. Near-term signals include high demand for oil, natural gas, and natural gas liquids, driven by expanded export capacity and fuel source switching. The longer-term outlook is equally positive. LNG Canada's startup in 2025 and petrochemical industry growth puts our basin and company in a very advantageous position. Against this backdrop, I feel confident in saying Keyera is well positioned to drive DCF growth and provide a path to sustainable dividend growth. On behalf of Keyera's board of directors and management team, I'd like to thank our employees, customers, shareholders, and other stakeholders for their continued support. With that, I'll turn it back to the operator for Q&A.
Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. Should you have a question, please press the star followed by the one on your touchtone phone. You will hear a three-tone prompt acknowledging your request, and your questions will be polled in the order that they are received. Should you wish to decline from the polling process, please press the star followed by the two. If you're using a speakerphone, please lift the handset before pressing any keys. Your first question comes from Robert Hope from Scotiabank. Please go ahead.
Morning, everyone. Want to start off on KAPS. Your competitor on that project has seen some contracting wins up in Northeast BC. You know, were these volumes that you were targeting or, you know, how has your contracting outlook changed for KAPS in the recent weeks or, and months, if it has at all?
Good morning, Rob. It's Dean, and thank you for the question. You know, this is not surprising to us at all. I mean, we're talking to the same players. I think sometimes people assume that it's all or nothing. You know, for most producers, they want an alternative. They want to, they want redundancy for their production. They want competition. Our pipeline is a new pipe, so you know, reliability should be very good. Not necessarily they put all of their eggs in one basket, so to say. They split it out. I fully expect for most producers, some will go to our competitor and some will go to us. Again, we're not surprised.
You know, we have signed contracts in BC, and we're gonna continue to forge down that path until we have sufficient volumes to sanction.
I appreciate the color. Then just taking a look at your northern G&P assets, you know, Pipestone was above nameplate capacity in March. Wapiti seems to be trending in the right direction there. You know, how are you thinking about the volume outlook and then how much you could debottleneck at that system, whether it just be at Pipestone or longer term, you know, some other solutions?
Yeah, I mean, the great thing is that we're in a very highly economic location and as a result there's a lot of activity around us from many producers. We see opportunities. As mentioned earlier, we are working on an expansion of our Pipestone gas plant. We do see opportunities to utilize more of the second train of capacity that we have at Wapiti, so we should see more volumes in that second train in the second half of this year. Yeah, I mean, Everything's trending in a positive direction and it's because, you know, economics are just so robust, and we're located in a great area of the Montney.
Thank you. I'll hop back in the queue.
Thank you.
Your next question comes from Patrick Kenny from National Bank Financial. Please go ahead.
Yeah, good morning, everybody. I know it's still early days, but would you have an update on the scope of your involvement in the Atlas CCS hub with Shell? I'm just curious if you've been able to, you know, fine-tune your role in the partnership or if you've been able to identify any specific investments that you'd be looking to undertake over the course of developing the hub.
It's still early days, you know, but as we mentioned, a lot of what we're centering our discussions on is around carbon like CCS and hydrogen. You probably would have saw, Pat, that, you know, Shell was awarded pore space rights last month. That's very positive in terms of, you know, again, carbon capture and also advancing their hydrogen project. We continue to collaborate with them and, but we still have, you know, a ways to go here before we have anything definitive.
Got it. With respect to the balance sheet, any update on your desire to sell some non-core assets over the next year or so? Perhaps the quantum of proceeds you'd be looking to bring in ahead of KAPS coming online? On the flip side, you know, might you be more inclined to hang on to these assets now that you have greater visibility on marketing continuing to generate outsized earnings this year?
Yeah, we don't have any specific guidance on that front, Pat. You know, I think consistent with what we said last quarter is that, you know, our objective is to always continue to high-grade our asset base and be very focused. Some of the assets that, you know, may have made sense historically may not make sense in the future. You know, we're gonna continue to high-grade our asset base and that'll be an ongoing process.
Got it. Last one for me, if I could. Just with respect to the operational challenges at Wapiti, could you just remind us what might differentiate the phase II facility or, you know, what might need to be implemented on the second unit to ensure that you limit the unplanned downtime that you've experienced at the base plant so far?
Thanks for the question, Pat. It's Jarrod here. Yeah, I'd say we've learned a lot at Wapiti in the first few years of operation. You know, we're comfortable that we've put the changes in place on both trains such that when we do bring the second one on here in the back half of the year, that we can be reliable.
Okay, that's great. Thanks, Jarrod. Thanks, Dean.
Thank you.
Your next question comes from Robert Catellier from CIBC Capital Markets. Please go ahead.
Hi. Good morning. I wondered if you could talk a little bit more about the outlook for a Frac expansion. Seems like capacity has been tight for quite a while. Is the Frac expansion contingent on securing Zone 4, or is there something else that's bottlenecked there?
Thanks for the question, Robert. Yeah, I wouldn't say that our frac capacity is contingent on Zone 4. Certainly, Zone 4 would help with respect to contracting volumes. But as you point out, just fundamentally in the basin, you know, there is a tightness right now with respect to frac capacity relative to demand. You know, we continue to talk to our customers with respect to how we might be able to have contractual support to expand the fractionation capabilities of our Fort Saskatchewan asset. That might come in various different forms. You know, obviously, the focus right now is trying to get a Frac three expansion fully contracted and ultimately sanctioned.
There was a decline in the volumes in the north region. I wonder if it's possible to give a comment as to how much of that is due to the outage of Wapiti versus the Blueberry River First Nations issue. Just in general, how are producers viewing the likelihood of a positive resolution on that First Nations issue when looking at their capital plans?
Maybe with respect to, I think the second part of your question is the Blueberry River First Nations. You know, we do follow that, and what we're hearing is that there's just more and more confidence that this is gonna get resolved. You know, I think some producers are thinking in the second half of this year, and you know, I guess nothing's done until it's done, but there seems to be growing you know, positive sentiment that will be resolved. As we said before, I mean, you know, I think that the Blueberry River First Nations community is just one of many on both sides of the border.
It just means that, you know, we should be all as an industry, making sure that we include them in our developments and seek input and build those relationships, which I think our industry's come a long way, and certainly we have as a company as well. You know, I really believe that we're heading down the right path and we'll have resolution, and whether it's second half of this year or next year, I think it's within range.
Okay. Last question.
Any more questions?
Yeah, go ahead.
Go ahead.
No, your turn.
Yeah. Yeah, I think you're just talking about volumes in the north. I would say most of the volume loss in the north would have been at Pipestone, you know, while we're down for
You know, roughly 22 days.
Wapiti.
Sorry, Wapiti. Yes. Wapiti is keeping in mind that, you know, when our plant is down for 22 days, there's a period of time to get the production back up. It's, you know, it's probably over a month where we didn't have sort of steady volumes. That had a significant impact on our volumes in the north.
Okay. Thank you. Then last question from me is just on capital allocation. When you're looking at the possibility of getting back to dividend growth, obviously your KAPS is a big component of that and having that in service. I'm wondering whether you need to see stability in the inflationary environment before you raise the dividend. In other words, if you know, there's still pressure, uncertainty on interest rates and you know, maintenance capital costs and other operating costs, if you need to see that settle down before you make a decision on the future dividend growth.
Yeah. Thanks for the question. You know, I think I would just take it back to a lot of what we said, you know, at Investor Day. Our top priority is to get the balance sheet back to our target range, and we see that in 2023. Given the strength in the marketing guidance that we put out, we see that coming down faster. Then once we get that back in the range, really it's a balance of those priorities, right? Between returning cash to shareholders, which is really important to us, as well as growth. Really, those are the two things that we're gonna continue to balance.
Okay. Thanks very much.
Your next question comes from Andrew Kuske from Credit Suisse. Please go ahead.
Thanks. Good morning. Maybe if you could give us some insight on just what you're seeing on labor availability and also labor productivity on, you know, the projects you have in the queue right now?
Hey, Andrew, it's Jarrod. I can speak to that. Yeah, it's you know, it's certainly a tough environment, I think, across projects and operations in terms of labor availability. But we haven't seen a significant impact to the point that it's you know, put us off schedule or significantly different than what we've seen or we've communicated on the cost front.
Maybe not to put words in your mouth, but I guess this sort of cycle pales into comparison, you know, the past sort of cycle we saw from, say, three through seven, where things got really heated.
I would agree, yes.
Okay, that's helpful. Just maybe if we look at your core business on the storage side, do you anticipate in the future maybe being a bit more dynamic with your storage usage, you know, given some of the competing pulls on NGLs in the marketplace? You know, Heartland coming up and running, you know, some export efforts that are going on by others within the basin. You know, do you think about being a bit more tactical at times with the storage to really support, you know, the other parts of your business on the marketing side, like AEF and others?
We always use our storage strategically. I mean, it's a huge advantage to us and balance every product. Jamie, I don't know if you wanna add anything.
Yeah, no, Dean nailed it. I mean, over the last few years in particular, there's been lots of opportunities to use those caverns for different spec commodity and also from X as well. So, you know, I look at the marketing team and their access to the storage and the flexibility of the storage at KFS. One of the main reasons why we've delivered the results that we have is because the ability to maximize the value of the storage we have available to us.
The follow-on to that would really be, you know, as you expand with KAPS, and then frac into the future, how do you think about the incremental storage that you need for your own account to really help support your expanded operations?
Look, I mean, you know, the way we look at it right now is that and we've said this before. We've telegraphed our return expectations, excluding those downstream benefits. I always wanna remind the market that there's meaningful downstream benefits of having more product running through our system. Right now we've got a cavern that's coming into service later this year. With that cavern, you know, we're well-positioned. We have sufficient storage to be able to execute our anticipated growth as a result of KAPS.
Okay. Thank you. That's very helpful.
Yeah. Just to add on Jamie's comment is that we have been adding storage capacity over the last several years and including the one that's coming on, so we feel that we're very well-positioned.
Okay. Appreciate that, Dean.
Your next question comes from Robert Kwan from RBC Capital Markets. Please go ahead.
Great. Good morning. There's been a lot of talk around expansions, whether that's Pipestone, KFS, not sure if there's anything else material you're looking at, but I'm just wondering, you know, what feedback are you getting from customers right now on their willingness to sign long-term take or pay contracts? You mentioned your target of being fully contracted on Frac III, which is, you know, a nice change in strategy, but it's also a tall order.
Yeah. Good morning, Robert. You know what? It's the laws of supply and demand and, you know, when you get to,
You know, when demand exceeds supply and something has to get built, obviously at that point, your customers are more willing to underpin new investments. I think we're certainly getting very close to that range for frac. The same thing for you know a place like Pipestone where capacity is very tight. You know, I would say that generally the industry is more conservative in terms of how they invest money, including us. We certainly need to have a lot more contractual backing before we're willing to make more investments. I think that you know producers understand that as well.
Yeah. Dean, right, you highlighted exactly the way you've changed your thinking. I guess where the question was going was producers, not necessarily around contracting specifically, but where producers have also, you know, changed the way they're approaching, you know, spending money on the drill bit instead. You know, de-levering.
Yeah.
has been a big theme. Buying back stock and capital returns have been a big theme. Are you sensing, though, a change in the way they're approaching contracting? Or is this just like you said, we're gonna get to a point where something's gonna have to be done and they're gonna have to sign on the bottom line?
Yeah. I, you know, I guess maybe putting it another way, if a producer believes there's risk in the certainty of service in terms of delivering their growth plans, or even existing volumes that are coming up for contract, they are gonna remove that risk. You know, on that basis, with the more robust outlook that we see for the industry, you know, I think especially for core basin infrastructure like fractionation, you know, I think that there's a growing willingness to sign longer term contracts to underpin that.
I think the other contributor to that willingness, Robert, would be access to markets and connectivity. We believe we've got the best connectivity to get access to market of any of the fractionation facilities in Western Canada.
Got it. Do you think then on the contracting that it's going to be a small number of producers doing that? Or do you think it's gonna be, you know, a much larger kind of consortium taking, well, consortium's the wrong word, but a much larger number of producers taking a smaller amount of capacity just to get it done?
Yeah. I mean, I don't think we can comment on that. I would point out that for Frac II, Robert, the same thing, we contracted that in order to build that expansion as well. It's really no different from the last Frac expansion. You know, I do think that producers can see that, you know, that Frac capacity is getting tight and, you know, they need to make sure they have certainty of service as they look at their growth plans.
Great. If I could just finish with a question on marketing. You mentioned the underlying RBOB and butane, and then just mentioned the octane. Obviously we can see the first two on the screens. What can you give some color as to. It sounds like octane premiums have widened. Just some color as to, you know, what you're seeing in that dynamic. And presumably you continue to expect that to be strong, or is there something that was just a little bit more of a blip, whether it's the first quarter or even here in the second quarter?
Yeah, Robert, thanks for the question. Yeah, as you mentioned, you can see the first two components that drive our iso-octane business on the screen. You can see that, you know, based on, you know, that's based on fundamentals, obviously, that we've seen a lift in 2022, but you would have also noticed that we've seen a lift in 2023 and 2024 as well, albeit not at the same levels. And you know, that's the dynamics of not only recovering demand, but also the availability of supply in North America. And that also ties somewhat into octanes that are very much in demand right now in North America, to basically be able to feed that gasoline complex.
In 2022 structurally, you know, we're quite bullish with respect to where octane premiums are gonna be. But you know, like, I mean, I think it's probably premature to think that you know, we'd see a similar lift in 2023, 2024. It's possible, but you know, it's too early to tell really with respect to how the market will fill that space. You know, we could probably take it offline, but you know, there's lots of ability on the planet to be able to feed the North American market from an octane's perspective if the price gets high enough.
Great. Appreciate the color. Thank you.
Your next question comes from Ben Pham from BMO. Please go ahead.
Hi. Thanks. On that last question and answer, I wanted to confirm, was the Marketing revision mostly driven by the iso-octane premiums that you saw? Or was there something else happening in the second half of the year?
Hi, Ben, it's Eileen here. The uplift in the marketing guidance was largely driven by the RBOB to WTI spread, the RBOB crack, as we see that strengthen out into the forward curve. Again, we begin to layer on hedges at that higher level. That was really what was driving the higher marketing guidance.
That and the higher premiums that we're seeing.
Yeah.
Octane premiums.
There's also a comment around risk management benefiting this quarter. It sounds like there's a bit of a benefit in the second half. Was that putting on hedges on RBOB in the quarter? That's what the reference was referring to?
Yeah. I would say generally, you know, our risk management is in place to protect our downside. As we see, you know, we protect our inventory, and then we also have the ability to lock in margins going out 24 months. Assuming the liquidity is there, we have the ability. When we see strong, like the RBOB crack, we will take that, you know, opportunity to lock in strong margins going into next year as well. Again, the comment is more just continuing that disciplined approach and protecting our downside.
Yeah. I would say, Tan, that the great thing about our hedging program is as we've been layering in, you know, when we look back relative to 2021, our hedge floors are at a much higher price threshold in 2022 than they were in 2021. I think a lot of people, when they look at our marketing business, they're always trying to match it up to the commodity price environment that we're in. The other component of it is where our hedge, like our floor priced hedges are in. Again, each year, we're able to put them in at higher levels as we look into 2022 and 2023.
That's certainly gonna help our marketing business going forward.
Can you also comment on how's the composition of marketing? Is it still tilted towards iso-octane? Maybe not specifically just this quarter, but is that still a trend that you're seeing or is propane driving more or other molecules?
Octane is still the majority, but as I mentioned, you know, the volume of NGLs has increased in our system year-over-year. All the products, you know, are generating higher margins overall.
Okay. Maybe to close off, you know, it's all marketing related with the extra modest uplift and cash from marketing, and I mean, maybe there's more to come. How do you think about that excess cash? Does it open up maybe share buybacks? You talked about that at Investor Day. Is it more maybe debt reduction first?
Yeah. As we said at Investor Day, really our first priority is to bring the balance sheet back in line within our target. Really the higher marketing guidance helps to get us there a lot faster.
Okay. That's helpful. Thank you.
Your next question comes from Linda Ezergailis from TD Securities. Please go ahead.
Thank you. Maybe just, following on, looking at your balance sheet. You know, maybe you can just share with us some updated conversations you're having with your debt rating agencies. I recall that early in 2020 S&P downgraded your debt rating due to a decline in commodity prices in the industry outlook. Any sense that they might rethink that and maybe provide some tailwinds and upgrade you in light of that recent development sooner than they might have historically to kind of augment all the progress you're making on yourself in your business?
Hi, Linda. Thanks for the question. At this point, we continue to have conversations with both rating agencies, S&P in particular. The positive commodity price environment are strong. You know, marketing performance, the base business continuing to perform very, very well, certainly protects our investment-grade credit rating. I think once KAPS is in service, and we continue to increase that take or pay on an aggregate absolute basis, I think that continues to help maybe get us back to that BBB mid. That's obviously the goal. Do I expect that change this year? Likely not.
Thank you. Another follow-up, with respect to your discussions with producers, are you sensing any shift in what sort of attributes they're looking at in your commercial agreements with them? Are you seeing a more of a propensity for acreage dedications, a tilt towards maybe full value chain path solutions, versus discrete services? Can you comment on anything beyond price that producers might be looking for differentiated services?
Linda, it's Jamie. Yeah, I think the latter, you hit the nail on the head with respect to, you know, I think what's differentiated Keyera in the past, which and it continues to differentiate us, is that we have the ability to offer a full slate of services in our customer minds. And it's very rare that we would just do one service for a customer. And if it is that that's the case, it's very rare that after we prove the value of our offering that we don't expand that. You know, I think that that's always been the case. You know, I think part of what the producer is looking for right now is our ability to be flexible and nimble in being able to accommodate new volumes coming on.
I think the interconnectivity in our selling facilities is really differentiates us and enables us to be able to do that as our customers grow in the south. You would have seen that result as a result of the significant growth that we've seen in the utilization of our assets in the south as a result of that flexibility. Similarly in the north, you know, we continue to work with our customers to be able to in a timely manner facilitate their requirements. I think that's really a differentiator in light of some of our competitors.
Thank you. Maybe just to help us understand kind of your run rate the next couple of years, any rules of thumb you can provide us for operating leverage in your gathering and processing system in the north and the south, recognizing that, you know, it is filling up, but any sense of the white space currently and what that might mean as it fills up, recognizing that you've got some cost inflationary pressures as well would be helpful.
Largely in the south, I mean, we continue to see volume strengthen. I mean, it's really stabilizing. I think we feel, you know, good with what we've done with the optimization. We've taken out some costs. But certainly there continues to be some inflationary pressure there. But again, it's mainly labor. Power is the other big cost. We do have some, you know, hedges in place, and we do continue to hedge our power. In the north, again.
Mainly flow-through.
Yeah.
Yeah. The op costs are largely flow-through.
Yeah.
-facilities.
Yeah, I'd say, Linda, you know, the thing I'd add to Eileen's comments, which I 100% agree with, is that as we fill up, you know, in the past where we might have done some deals 2-3 years ago when we had available capacity and so did our competitors, as we fill up, our producers are recognizing that in order to, you know, maintain as we do renewals or and/or they look to potentially go off of an IT service to a more priority service to ensure that their volumes continue to flow, that they're going to have to, you know, take any operating cost risk that Keyera may have and bear it themselves.
The market is fundamentally changing with respect to, you know, how we view our business and ultimately how producers, you know, the deals that we are doing with producers, they're fundamentally different, frankly, than a couple years ago.
Yeah. I think it boils down to Jamie's point. It's just supply and demand. As you know, as there's less supply available or capacity available because demand grows, it gives us opportunity to renegotiate some of our contracts on more favorable terms relative to what we've seen in the last couple of years with low commodity pricing, and particularly in the south. I'd say the other thing is that in the south where we've done some fixed-fee deals, we're actually benefiting from the higher utilization of our facilities because the per unit costs now are dropping on the operating cost side.
Thank you. I'll jump back in the queue.
Thank you.
Your next question comes from Matt Taylor from Tudor, Pickering, Holt & Co. Please go ahead.
Hey, thanks everyone for taking my questions here. I wanted to start first with KAPS Zone 4, that extension proposal. I just wanna clarify. Should the market be thinking of this as a distinct project where it's gonna be supported by additional contracting at brownfield economics or is the right way to think about this more of this is gonna help underpin your original investment and maybe help you get to the lower end of your returns guidance sooner?
Yeah, it's sort of both. Certainly to make the investments, Matt, it has to meet our economic thresholds for Zone Four standalone. Clearly, I mean, the volumes that go into Zone Four are gonna go through the rest of the pipe zones one to three, so it's gonna benefit the economics of the base project too. It's a win-win.
I guess then what we should be expecting is, I know you've talked about maybe the later part of this year into next year as kind of a distinct announcement. Then, you know, whether it's more contracting or what have you, and then ultimately getting to a range within your range that's, you know, I think it was 10%-15% return on capital much sooner to your point where it helps the economics of the whole project. Is that the way to think about that?
That's right. I would say that what we're looking to do, commercially, is to underpin enough volume and cash flow to commercially sanction the project. Then it will be subject to sort of CER approval, you know, next year and other items. You know, it's kind of a two-stage approval.
Now will you be dealing directly with customers themselves, or is the opportunity more dependent on NorthRiver finishing their pipe in Northeast BC and then having the optionality to either go into yours or the competitor's pipe? Just wondering if this opportunity is more so just helping filter volumes on a competitor's pipe or you're actually finding more customers in Alberta that might use that competitor's pipe and then contract you on the back half.
Yeah, I mean, I think it's a good question. Clearly we see the largest opportunity in Northeast BC and off of NorthRiver Midstream and their pipeline project. I mean, both projects are independent pipeline systems. Again, you know, it makes logical sense for the volumes that they contract on their pipe to connect into ours at the Alberta border, because their customers will want a competitive alternative. If it goes into our competitor's pipe, there's no reason for NorthRiver to build theirs, because it, you know, doesn't end up being a competitive alternative. You know, we see opportunity in BC, but we also see opportunity in on the Alberta side of the border with Zone 4 as well. There's opportunities on both sides.
I think to add to that is it's a parallel conversation, Matt. It's not like we're waiting for NorthRiver to have their project and then start talking to those customers.
Okay. Okay, that's great. One last thing, if I may. Does the added financial flexibility here, I know, Eileen, you're talking about getting down to your targeted range sooner based on the better marketing outlook here, change your view on either potentially purchasing the other 60% of KAPS or if there's other assets that you're seeing in the basin that might help you get to some of the downstream growth sooner?
Yeah, I mean, you know, as we said at our investor day, Matt, six weeks ago, is that we are the operator of KAPS. So from a commercial perspective, operational, and project execution perspective, we drive this project. This, the other half, isn't a must-have. We would sort of treat it as we would any other acquisition opportunity, which would have to meet our rigorous capital allocation criteria. So would we consider it? Yes, but it's not a must-have.
Right. Okay. Thanks for taking my questions.
Thank you.
Ladies and gentlemen, as a reminder, should you have a question, please press star followed by one. There are no further questions at this time. Please proceed.
Thank you all again for joining us today. Please feel free to reach out to our investor relations team for any additional questions. Thank you.
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.