Good morning. My name is Mark, and I will be your conference operator today. At this time, I would like to welcome everyone to Keyera's 2023 third 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 star and then the number two. Thank you. I would now 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 give you today relate 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, please refer to Keyera's public filings available on SEDAR+ and on our website. With that, I'll turn the call over to Dean.
Thanks, Calvin, and good morning, everyone. Keyera delivered excellent third quarter results. Leveraging our integrated value chain, we continue to execute a strategy that is driving strong performance across our three business segments. By growing our fee for service business, we're improving the quality of our cash flows, which supports sustainable dividend growth. Keyera recently received a corporate credit upgrade to BBB Stable from S&P. This upgrade reflects the company's improved competitive position, quality of cash flows, and strong business outlook. Our G&P segment delivered its second highest quarter ever, with CAD 94 million in realized margin, and our liquids infrastructure segment delivered a third consecutive record quarter with a contribution of CAD 128 million, 27% higher than the same period last year.
Over the last several years, we have invested significantly to create a fully integrated service offering from the Montney and Duvernay plays through our core liquids infrastructure in Edmonton and Fort Saskatchewan. Assets like Wapiti, Pipestone, the KFS Complex, and most recently, KAPS, have all contributed meaningful volume and cash flow growth. As a result, we remain on track to reach our targeted range of 6%-7% annual EBITDA growth from our fee for service business out to 2025. KAPS continues to deliver ahead of our expectations, with higher than forecasted volumes in the third quarter, as customers delivered above their contracted commitments. KAPS has fully integrated our value chain, making us stronger and more competitive. Customers are seeing the value of this much-needed alternative that can support our full suite of NGL services from wellhead to end market.
The additional interest acquired at our KFS Complex is also performing ahead of expectations, with strong fractionation utilization and higher than forecasted demand for storage assets. Today, we announce that our Pipestone expansion project is now expected to be completed ahead of schedule and at the low end of our budgeted CapEx range of CAD 60 million-CAD 70 million. This project adds CAD 40 million per day of processing capacity, driving further fee for service growth starting in the fourth quarter of this year. Our customers are in a strong financial position and have multi-year growth plans that rely on our integrated service offering. This further reinforces the strong outlook for growth. Our marketing segment continues to outperform. We now expect marketing to deliver between CAD 420 million and CAD 450 million of realized margin this year, putting us on track for a record marketing year.
This strong result comes from our ability to leverage our physical assets and logistics expertise to deliver products throughout North America. Our Marketing segment provides Keyera with a distinct competitive advantage as it continues to produce strong cash flows that have enabled us to consistently deliver above average corporate returns. Marketing cash flows are then reinvested into long life infrastructure projects such as KAPS and the Pipestone expansion, in turn, driving growth and high quality fee for service cash flows. With a number of successful strategic investments made over the past few years, Keyera is now delivering sustainably higher levels of discretionary cash flow. Last quarter, we took an important step, returning to our long history of sustainable dividend growth, supported by the strength of our fee for service business. Our capital allocation priorities remain the same.
True to Keyera's DNA, our first priority is to maintain a strong balance sheet. From there, it'll be a balance between disciplined growth, capital investments, and increasing returns to shareholders. In terms of future growth investments, they'll be primarily focused on projects that leverage and enhance our existing core asset position in Western Canada. These could include a debottleneck of existing frac, a new frac expansion, and a potential KAPS Zone Four extension. Any incremental investments need to generate a strong return, underpinned by long-term contracts. I'll now turn over to Eileen to provide an update on Keyera's financial performance for the quarter.
Thank you, Dean. Adjusted EBITDA for the quarter was CAD 288 million, compared to CAD 247 million for the same period last year. Distributable cash flow was CAD 186 million, or CAD 0.81 per share, compared to CAD 162 million or CAD 0.73 per share for the same period in 2022. These results were driven by record performance from our Liquids Infrastructure segment and continued strong performance from our Gathering and Processing and Marketing segments. Net earnings were CAD 78 million, compared to CAD 123 million for the same period last year. Net earnings were impacted by higher finance costs and lower operating margin from the Marketing segment, which includes the effect of unrealized gains and losses from risk management contracts.
Keyera continues to maintain a strong financial position, ending the quarter with net debt to adjusted EBITDA at 2.5x , at the low end of our targeted range of 2.5x-3x . This allows us to retain maximum optionality to advance organic growth projects when they are ready. Moving to our guidance for 2023. As Dean mentioned, we now expect our marketing segment to contribute between CAD 420 million and CAD 450 million of realized margin in 2023. This is up from our previous guidance of CAD 380 million-CAD 410 million. These results are largely due to the continued strength of isooctane premiums and Keyera's ability to access advantaged markets. For a full list of guidance assumptions, please refer to Keyera's third quarter MD&A release this morning.
Growth capital for 2023 is now expected to range between CAD 200 million-CAD 220 million, previously CAD 200 million-CAD 240 million. The decrease is due to factors including the Pipestone expansion project, coming in at the low end of its budgeted cost estimate. Maintenance capital remains unchanged at CAD 95 million-CAD 105 million. Keyera continues to expect cash tax expense to be nil for 2023. I'll now turn it back to Dean.
Thanks, Eileen. Keyera remains well-positioned for the long term, with strategically integrated assets that stand to benefit from decades of expected volume growth in Western Canada. Our basin continues to set new production records, and Canada remains a preferred supplier of energy to the world. With LNG Canada and the Trans Mountain Pipeline expansion project on the horizon, Keyera will continue to play an integral role enabling this growth. On behalf of Keyera's Board of Directors and management team, I want to thank our employees, contractors, customers, shareholders, Indigenous rights holders, and other stakeholders for their continued support. With that, I'll now turn it back to the operator for Q&A.
Thank you. If you wish to ask a question, please dial star one on your telephone keypad now to enter the queue. Once your name is announced, you can ask your question. If you find your question is answered before it's your turn to speak, you can dial star two to cancel. Our first question comes from the line of Robert Hope at Scotiabank. Please go ahead. Your line is open.
Good morning, everyone. I was hoping you could give a bit more of a fulsome update on the Zone Four project, given what appears to be a strengthening volume outlook in the basin, as well as we've seen Northeast BC or the North River Northeast BC Connector Project gain regulatory approval?
Good morning, Rob. It's Dean, and thanks for joining our call. Listen, I think that first of all, the announcements with the recommendation for approval of the Northeast Connector is very, very exciting for our basin. And as you mentioned, you know, we certainly agree with the view that our basin is gonna continue to grow in terms of its natural gas volumes and natural gas liquids. So when we look out to 2027, 2028, we think that there's three to four BCF of growth, which will drive also a lot of liquids production. You know, first of all, I wanna say that, you know, we're very happy that Zones One to Three extend through the richest, liquids-rich part of the Montney Fairway.
So we're gonna capture a lot of that growth there. But we also fully understand that there will also be more growth in Zone Four and also into BC. So we'd love to have the opportunity to connect our pipeline to the BC border to capture some of that growth as well. And just like we see a lot of interest in KAPS, producers want optionality, and they wanna make sure that there's competition for the long term. They also wanna have operational reliability so that when they make billions of CAD in investments, they know that they have, you know, basically two means of transportation. So that's the opportunity that we provide for industry and for our producers. So anyway, we're very excited about the interest that we're seeing in Zone Four.
But I do want to emphasize that we will not continue to proceed ahead with this project unless we have the commercial support from our producers. But again, I do want to reemphasize that this is a really exciting opportunity and we do have a lot of interest in it.
Thank you. And then maybe just going back to the guidance that was announced at the 2022 IR day of 6%-7% fee-based growth. How are you tracking on that? And kind of how have your views changed on that through the year, just given what appears to be a stronger production outlook? And could this be kind of revisited with the December update, and what is the December update?
Yeah. Well, first of all, maybe I'll just make a few comments. Thanks for the question, and you know, we are tracking very well against the 6%-7% fee-for-service EBITDA growth. But I do want to emphasize that cash growth out to the end of 2025 is based on investments that we've largely made already. So, you know, everything that we do from here forward is gonna be incremental to that. So we're very excited about how our business is performing across all three business segments. You know, we had some scheduled maintenance in this quarter, so that created a little bit of noise with our G&P segment. But we're very excited about the volume growth and cash flow growth that we see there.
Liquids Infrastructure, as you saw, was a record this quarter. And as you saw, we just increased our marketing guidance for the year. So we're very, you know, well positioned to deliver on the 6%-7% EBITDA growth. And with that, maybe I'll just turn it over to you, Eileen, if you had any other questions or things you want to say.
Rob, maybe the only thing I would add is, yeah, I think Dean answered that extremely well, and I think, you know, again, we will provide a little more color with our December update.
Thank you.
Thank you. Our next question comes from the line of Robert Kwan at RBC Capital Markets. Please go ahead. Your line is open.
Thank you. Good morning. Just generally, as you're thinking about returns, and you talked about putting your capital to work, having long-term contracts. Your previous target or what you articulated, sorry, articulated was a 10%-15% pre-tax unlevered return? And I guess just with the increase in interest rates, are those targets, you know, higher, particularly, just with that low end actually kind of being less attractive to begin with?
Yes. Thanks for the question, Robert. And, you know, I'll also turn this over to Eileen to comment on as well. But, you know, what I'd say is that we certainly recognize that, you know, our cost of capital, like it is for everyone else, has increased. And so we'd be targeting more to the higher end of that. We haven't revised our guidance, but internally, we've certainly looked at targeting at the higher end of that range. And I do want to emphasize that it's the range that we're targeting on a specific investment. But, you know, especially now that we have a fully integrated system with KAPS, we are also going to capture the integrated benefits of any assets and any investment that we add at any part of our integrated value chain.
So, you know, if that's on the gas plants, well, we're certainly going to be having, you know, contract discussions on KAPS and our frac and our downstream storage, terminalling marketing business. So, you know, that's the advantage of having a fully integrated system. And so when you look at our, our enterprise-level returns, they'll, the expectations will be that they'll be much higher than the, than that 10%-15% range. And we, and we've demonstrated over time that, you know, we've delivered superior return on cap returns at a corporate level. And, and again, that's, that's part of that fully integrated strategy. But, Eileen, do you have anything you want to add?
No, I think you did a great job with that. The main thing, I think, you know, when we look at our investment criteria, very much focused on returns as well as the quality of the cash flows, so the level of take-or-p ay. And I think the Pipestone expansion that is about to come on is a great example of living by that. And absolutely, the returns are at the higher end of that, just given where cost of capital is today.
Got it. If I can just finish with a question on KAPS here. I guess the first part is just specifically around the quarter, you said volumes were higher than you expected, customers delivering above their contracted levels. Were those spot volumes or were customers just delivering within the contract but above the 75% MVCs? And then just generally, can you talk about the prospects for additional contracting for the base KAPS system, or should we just think about filling up the excess capacity being more linked to something like Zone Four?
So, you know, that's a great, great question. I have to tell you, I've never been more optimistic on KAPS contracting. And, you know, first of all, I want to say that, you know, our operational performance has been very good and, keeping in mind, I mean, we've just brought this on stream in June of this year. So the operating performance has been very well, and, you know, when we modeled our forecasts, we're really going a lot off the take-or-pay part of our contract. So, yes, we've been seeing our producers deliver in excess of that. It's still early days, but we're encouraged with what we see.
When we step back and we look from a macro perspective, as I mentioned before, we really believe in basin growth. I mean, our basin has always been blessed with, you know, significant reserves. I think one of the stats I saw, I read was that if you took the cumulative reserves produced out of the Montney today, it would only represent 8% of the total recoverable reserves in that fairway. So we're still in the very early innings of development, and now that we have egress to the West Coast and LNG Canada starting up, this is gonna unlock more of the growth and the productive capacity of our basin. So we're gonna help enable that growth.
So with that, you know, it's helping us with our contracting on KAPS. I'd also say, though, that some of our KAPS contracts or larger contracts that we're working on are more complex because we're integrating multiple services. So, you know, that's what also makes it a bit more complex in some of the things that we're doing, but again, very optimistic in terms of the direction where contracting is going. Jamie, do you wanna add anything to that?
Yeah, Robert, I think towards your first question is that, you know, the delivery of volumes above contract, as noted, yeah, really is a reflection of our existing customers delivering more volumes than we anticipated. I think that's due to a couple factors. Consolidation is one of them. You know, the customers behind KAPS are all of the big players in the basin, and as we see consolidation in the basin, I think we benefited from that. And it's also just a reflection of growth, as Dean pointed out, of our core customers as well. So, you know, at the end of the day, we're the competitive alternative, and I think our customers are speaking with their volumes.
Got it. Sorry, Dean, can you just clarify just around the complexity around potential future KAPS contracts? Is it just complexity because it involves multiple services, or is it complex because some of these services you don't either currently have the capacity or the assets to provide?
No, no. It's anytime you're bundling services. It's just more contracts involved and everything else. So I just say that some are discussions, you know, involves multiple services, so it just makes it more than just one contract, is, I guess, what I'm trying to say.
Okay. Got it. Thank you.
Thank you. Our next question comes from the line of Will Gu at CIBC. Please go ahead. Your line is open.
Hi, good morning. Just wanted to ask about your opinion on the recent Supreme Court's decision on the Impact Assessment Act and its impact on development in Canada?
Well, good morning, Will. That's a great question and something that has been very topical since that was announced. You know what? I'm not a legal policy expert, but I think it's positive overall. I think it emphasizes the authority that the provinces have relative to the federal government. You know, I don't think that it necessarily affects us directly in some of the projects that we would be looking at.
But I think generally for the basin, you know, I think some of the uncertainty that is involved with big investments, like, and certainly the oil sands would be an example where, you know, the federal government always had this overlying, you know, authority to approve or not approve, which took years to come to that decision. I think that might help resolve situations like that, where you have more regulatory certainty because it's gonna be more within the province if this works out the way I understand it. And you know, that should be more positive for investment in Alberta overall, which if that occurs, it's positive for our industry and for our business directly.
Great. And another, if I could just consolidation mean for the development outlook and for some of your other facilities specifically? I know you mentioned previously how the consolidation has impacted KAPS volumes, but just wondering on the other facilities as well?
Consolidation of like within the producers, you mean?
Yeah.
Yeah. Okay, yeah. No, that's a-- I mean, that's a good question, and, you know, we're-- it's a theme that we're, we're seeing on both sides of the border, obviously with some, mega transactions, with, with ExxonMobil and, and also, Chevron's announcement. But, you know, we're seeing that as well in our basin. I, I think overall, it's, it's positive. It usually means that, a more well-heeled, company is, is, you know, acquiring production to create greater efficiencies, and, and a lot of times that can translate to more activity. You know, one of the examples could be, you know, Bonavista in, in our south portfolio, and, you know, I think people would understand their history and, and, how they were taken private, and, they, they had a lot of debt.
Well, you know, that business, as I understand, is looking a lot better now in terms of where they're, you know, they're able to pay off debt and get in a good position and sell. So, but over the last several years, you know, while they're paying down their debt, their activity was relatively low. I would just say in the last year, we started to see them become more active, and, you know, I think those activity levels will likely be more consistent with a player like Tourmaline behind there. So we think overall, you know, consolidation is good. It's it makes the basin more efficient overall.
Great. Thanks. That's it for me.
Thank you. Our next question comes from the line of Linda Ezergailis of TD Cowen. Please go ahead. Your line is open.
Great. Thank you. Maybe you can just give us an update on how we might think of the net effects of some tailwinds and headwinds associated with your marketing business, specifically, isooctane margins? You know, you know, obviously, some of the structural changes and positive fundamentals in the basin are a tailwind, but, there's a lot of moving parts. So maybe you can give us a sense of how some of the global dynamics are looking and how we might think of maybe a discrete shift upwards in the earnings power of your marketing business now that your fundamental physical business has grown as well?
Yeah. Listen, Linda, I think it's a great question, and, you know, I want to emphasize... I mean, I know, sometimes the market doesn't like our marketing business, but I can tell you that it's what helps us generate superior returns at a corporate level. As we discussed earlier, you know, from an infrastructure level, we're aiming to achieve, you know, very strong returns on any infrastructure asset that we make an investment in. But when we flow that through our integrated system, including through our marketing business, you know, that's what helps us generate those superior returns at a corporate level. And, you know, really, I do want to emphasize as well that it's a physical business. We're leveraging our assets and our logistics and marketing expertise to generate a margin at the end.
So we're not making, you know, speculative, you know, financial trades on screens to generate our margins from that part of our business. But with that, maybe I'll just turn it over to Jamie to provide more color.
Yeah. So thanks for that backdrop, Dean. I think that was excellent. And thanks for the question, Linda. You know, yeah, 2023 has been an exceptionally strong year. You know, we've, we've revised our guidance and, and now expecting to deliver between CAD 420-CAD 450 for the year, and that would be a record year for marketing. Really, the factors that's driving that performance in 2023 would be, you know, lower butane supply costs than we've seen over the last couple of years. Strong runtime at AEF and, and our ability to get a little bit more output out of out of AEF over the last couple of years. So always, as Dean says, always thinking about the importance of those physical assets that drive the contributions from marketing.
Continued strength in isooctane premiums and also our ability to deliver to the highest value markets. Eileen touched on that earlier in her comments. You know, we've actually gained some new isooctane customers in advantage markets in 2023 and expect that momentum to continue into 2024 and beyond. So regarding 2024, we will wait until after our NGL contracting season to provide our guidance as we traditionally do. So expect that we'll provide that guidance in Q1 2024. So, you know, overall on track for record 2023, and we continue to see continued strong performance in 2024 and beyond.
That's helpful. Thank you. And just then as a follow-up, if we're getting marketing guidance in Q1, as per you have in recent years, can you give us a sense of, first of all, what day you're looking at for disclosing the December guidance? And is there anything in the outlook beyond your capital budget for 2024?
Hi, Linda. Yes, we do plan to do the guidance update in the second week of December, and we will provide an update on the base marketing guidance, kind of that longer-term view. And as then Jamie said, we will then update again in Q1 with once the supply season is known at that point.
Okay. Anything beyond marketing in terms of the guidance in December? Just trying to understand kind of if your guidance philosophies are shifting.
Yeah, largely, again, the CapEx. And I think we'll provide a little more color and context around that 6%-7% EBITDA growth and, you know, how the quality of our cash flow has changed. I think overall it will just be a more fulsome update than we've done in the past.
Great. Thank you.
Thank you. Our next question comes from the line of Ben Pham of BMO. Please go ahead. Your line is open.
Hi, thanks. On our last question around the business update, do you expect that to be more of the regular annual process on timing, or is it similar to somewhat of a quasi investor day that you look at every few years?
Thanks, Ben. No, I think this is our plan, that we will go forward, be providing an update in December each year.
Yeah, let's go about it then. Next question, maybe high-level thoughts on appetite for acquisitions, whether it's opportunistic or more... maybe strategic in the US, for example? And I say that from the context that you're blessed with a strong balance sheet relative to peers and rising cash flows and ample powder to deploy.
Yeah. Thanks for the question, Ben, and it is a good question, just given what you're seeing in industry today. You're very right that we have a very strong balance sheet, and that provides us optionality. You know, for us as a company, we're trying to provide the most efficient midstream infrastructure services for our customers and for our basin as a whole, and trying to make it more efficient. So, you know, to the extent that there's opportunities to, you know, acquire assets that does not exist already and where we, when combined with our assets, we can make our system more efficient, we'll certainly look at those opportunities. But I do wanna stress that we've been very disciplined with anything that we pursue.
And, you know, a great example would be the acquisition of KFS that we did earlier this year. So, you know, our three... I'm not sure if everyone can hear that static, but, the three criteria is that, you know, we have to make sure that we stay within our financial param- debt parameters, and if we go beyond it, we have to have a plan to bring ourselves back into the 2.5x-3x at the EBITDA range. The second one is that it needs to be on strategy so that, you know, we won't do anything that, you know, would be a surprise to the market. And really, it's about strengthening and extending our existing integrated value chain in Western Canada.
Lastly, it's got to be value accretive, for our, for our shareholders.
Hi, Mark, are you there?
Hello, and good day.
It looks like we lost a couple online there for the questions, so we'll regroup. We'll call the two that we saw didn't get a chance to ask the question after the call today. With that, we'll just wrap it up. Thank you all once again for joining us today. Please feel free to reach out to our investor relations team with any additional questions you may have. 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.